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Forward-Looking Statements
        This Management's Discussion and
        Analysis contains forward-looking information as contemplated by
        Canadian securities regulators' Form 51-102F1 and forward-looking
        statements within the meaning of the United StatesPrivate
        Securities Litigation Reform Act of 1995
        (collectively, "forward-looking
        statements").
        Identifying forward-looking
        statements
        Forward-looking statements are
        included throughout this Management's Discussion and Analysis,
        including among other places, under the headings "Outlook for 2004"
        and "Economic Assumptions". These statements include, among others,
        statements regarding:
        anticipated cash flow and cash
            flow per share;
          estimates of future sales,
            production and operations or financial performance;
          business plans for drilling,
            exploration and development;
          the estimated amounts and timing
            of capital expenditures;
          estimates of operating costs;
          business strategy and plans or
            budgets,
          outlook for oil and gas prices,
          anticipated liquidity, capital
            resources and debt levels;
          royalty rates and exchange rates;
          the merits or anticipated outcome
            of pending litigation; and
          other expectations, beliefs,
            plans, goals, objectives, assumptions, information and statements
            about possible future events, conditions, results of operations or
            performance.Statements concerning oil and gas
        reserves contained in this Management's Discussion and Analysis under
        the headings "Depreciation, Depletion and Amortization Expense", "Reserve
        Replacement", "Asset Impairments", "Outlook for 2004" and
        elsewhere may be deemed to be forward-looking statements as they involve
        the implied assessment that the resources described can be profitably
        produced in the future, based on certain estimates and assumptions.
        Often, but not always,
        forward-looking statements use words or phrases such as: "expects", "does not expect" or
        "is expected", "anticipates" or "does
        not anticipate", "plans" or "planned", "estimates" or "estimated", "projects" or
        "projected", "forecasts" or "forecasted", "believes", "intends", "likely",
        "possible", "probable", "scheduled" or "positioned", or state that certain actions,
        events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved.
      
      Material
        factors that could cause actual results to differ materially from those
        in forward-looking statements
        Forward-looking statements are based
        on current expectations, estimates and projections that involve a number
        of risks and uncertainties, which could cause actual results to differ
        materially from those anticipated by Talisman Energy Inc. ("Talisman"
        or the "Company") and described in the forward-looking statements.
        These risks and uncertainties include:
        the risks of the oil and gas
            industry, such as operational risks in exploring for, developing and
            producing crude oil and natural gas, and market demand;
          risks and uncertainties involving
            geology of oil and gas deposits;
          the uncertainty of reserves
            estimates and reserves life;
          the uncertainty of estimates and
            projections relating to production, costs and expenses;
          potential delays or changes in
            plans with respect to exploration or development projects or capital
            expenditures;
          fluctuations in oil and gas
            prices, foreign currency exchange rates and interest rates;
          health, safety and environmental
            risks;
          uncertainties as to the
            availability and cost of financing;
          uncertainties related to the
            litigation process, such as possible discovery of new evidence or
            acceptance of novel legal theories and the difficulties in
            predicting the decisions of judges and juries;
          risks in conducting foreign
            operations (for example, political and fiscal instability or the
            possibility of civil unrest or military action);
          general economic conditions;
          the effect of acts of, or actions
            against international terrorism; and
          the possibility that government
            policies or laws may change or governmental approvals may be delayed
            or withheld.We caution that the foregoing list
        of risks and uncertainties is not exhaustive. Additional information on
        these and other factors which could affect the Company's operations or
        financial results are included under the headings "Risks and
        Uncertainties" and "Outlook for 2004" and elsewhere in this
        Management's Discussion and Analysis. Additional information may also
        be found in the Company's other reports on file with Canadian
        securities regulatory authorities and the United States Securities and
        Exchange Commission.
        No obligation to update
        forward-looking statements
        Forward-looking statements are based
        on the estimates and opinions of the Company's management at the time
        the statements are made. The Company assumes no obligation to update
        forward-looking statements should circumstances or management's
        estimates or opinions change.




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|Note Regarding Reserves Data and
      Other Oil and Gas Information
      Talisman's disclosure of reserves
      data and other oil and gas information is made in reliance on an exemption
      granted to Talisman by Canadian securities regulatory authorities, which
      permits Talisman to provide disclosure in accordance with US disclosure
      requirements. The information provided by Talisman may differ from the
      corresponding information prepared in accordance with Canadian disclosure
      standards under National Instrument 51-101 ("NI 51-101"). The proved
      reserves referred to in this Management's Discussion and Analysis have
      been calculated using the standards contained in Regulation S-X of the US
      Securities and Exchange Commission ("SEC"). The probable reserves
      referred to |  | in this Management's
      Discussion and Analysis have been calculated using the definition for
      probable reserves set out by the Society of Petroleum Engineers/World
      Petroleum Congress ("SPE/WPC"). Further information on the differences
      between the U.S. requirements and the NI 51-101 requirements is set forth
      under the heading "Note Regarding Reserves Data and Other Oil and Gas
      Information" in Talisman's Annual Information Form dated March 3,
      2004.
      The exemption granted to
      Talisman also permits it to disclose internally evaluated reserves data.
      While Talisman annually obtains an independent audit of a portion of its
      reserves, no independent reserves evaluator or auditor was involved in the
      preparation of the reserves data disclosed in this Management's
      Discussion and Analysis.
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|Highlights                                                                     |        |  |        |  |        | 
|------------------------------------------------------------------------------ | ------ |  | ------ |  | ------ | 
|(millions of Canadian
      dollars, unless otherwise stated)                  | 2003   |  | 2002   |  | 2001   | 
|                                                                               |        |  |        |  |        | 
|Cash flow1                                                                     | 2,729  |  | 2,645  |  | 2,494  | 
|Net income                                                                     | 1,007  |  | 524    |  | 733    | 
|Per share (Canadian
      dollars)                                             |        |  |        |  |        | 
|Cash flow1                                                                     | 21.21  |  | 19.73  |  | 18.48  | 
|Net
      income                                                               | 7.65   |  | 3.73   |  | 5.25   | 
|Dividends                                                                      | 0.70   |  | 0.60   |  | 0.60   | 
|Diluted per share (Canadian
      dollars)                                     |        |  |        |  |        | 
|Cash flow1                                                                     | 20.95  |  | 19.43  |  | 18.15  | 
|Net
      income                                                               | 7.57   |  | 3.67   |  | 5.16   | 
|Gross sales                                                                    | 5,295  |  | 5,299  |  | 5,047  | 
|Exploration and development
      spending                                     | 2,180  |  | 1,848  |  | 1,882  | 
|Total assets                                                                   | 11,365 |  | 11,594 |  | 10,819 | 
|Total long-term financial
      liabilities                                    | 2,203  |  | 2,997  |  | 2,794  | 
|Production (mboe/d)                                                            | 398    |  | 445    |  | 419    | 
|Production per share (boe/share)                                               | 1.13   |  | 1.21   |  | 1.13   | 
|Average sales price ($/boe)                                                    | 37.67  |  | 32.10  |  | 32.91  | 
|Operating costs ($/boe)                                                        | 7.15   |  | 6.48   |  | 5.79   | 
|Proved reserves additions
      (before acquisitions and divestitures) (mmboe) | 143    |  | 157    |  | 336    | 
|Finding and development
      costs2($/boe)                                    | 14.28  |  | 11.03  |  | 5.34   | 
|                                                                               |        |  |        |  |        | 

|1 | Cash flow and cash flow
      per share are non-GAAP financial measures that represent net income before
      exploration costs, DD&A, future taxes and other non-cash expenses. The
      components of cash flow are set out in note 14 of the Consolidated
      Financial Statements. Cash flow for 2003 is cash provided by operating
      activities ($2,616 million) before changes in non-cash working capital
      ($104 million) and the deferred gain on unwound hedges ($9 million). The
      equivalent amounts for 2002 are $2,439 million, $163 million and $43
      million, respectively. In 2001, the amounts are $2,369 million, $177
      million less $52 million for the deferred gain on the unwound hedges.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | See the MD&A section
      entitled Reserves Replacement for method of calculation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|This
      Management's Discussion and Analysis (MD&A) dated March 3, 2004,
      should be read in conjunction with the Consolidated Financial Statements
      of the Company. In particular, note 18 provides segmented financial
      information that forms the basis for much of the following discussion and
      analysis. The Company's Consolidated Financial Statements and the
      financial data included in the MD&A have been prepared in accordance
      with accounting principles generally accepted in Canada. A summary of the
      difference between accounting principles generally accepted in Canada
      (Canadian GAAP) and those generally accepted in the United States (US) is
      contained in note 19 of the Consolidated Financial Statements.
      Reported production represents
      Talisman's working interest share before royalties. Throughout the
      MD&A the calculation of barrels of oil equivalent (boe) is calculated
      at a conversion rate of six thousand cubic feet (mcf) of natural gas for
      one barrel of oil and is based on an energy equivalence conversion method.
      BOEs may be misleading, particularly if used in isolation. A boe
      conversion ratio of 6 mcf:1 bbl is based on an energy equivalence
      conversion method primarily applicable at the burner tip and does not
      represent a value equivalence at the wellhead.
      Dollar amounts included in the
      MD&A are expressed in Canadian dollars unless otherwise indicated. All
      comparative percentages are between the years ended December 31, 2003 and
      December 31, 2002, unless stated otherwise. |  | Included in the
      MD&A are references to financial measures commonly used in the oil and
      gas industry such as cash flow and cash flow per share. These financial
      measures have no standardized meaning and are not defined by accounting
      principles generally accepted in either Canada or the US. Consequently,
      these are referred to as non-GAAP measures. Cash flow, as commonly used,
      appears as a separate caption on the Company's cash flow statement and
      is reconciled to both net income and cash flow from operations. Cash flow
      is used by the Company to assess operating results between years and
      between peer companies with different accounting policies. Our reported
      amounts may not be comparable to similarly titled measures reported by
      other companies. Cash flow should not be considered an alternative to, or
      more meaningful than, cash provided by operating, investing and financing
      activities or net income as determined in accordance with Canadian GAAP as
      an indicator of the Company's performance or liquidity.
      Additional information
      relating to the Company, including the Company's Annual Information
      Form, can be found on the Canadian System for Electronic Document Analysis
      and Retrieval (SEDAR) at www.sedar.com. The Company's annual report on
      Form 40-F may be found in the EDGAR database at www.sec.com.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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|Talisman's Performance
      Highlights in 2003
      Talisman posted record cash flow per
      share of $21.21 ($2.7 billion) and exited 2003 with production of 437 mboe/d
      during December, replacing much of the production from the Sudan
      operations, which were sold in early 2003 for $1.13 billion. Net income
      surpassed $1 billion ($7.65/share) for the first time in the Company's
      history, helped by high commodity prices, the gain on the Sudan
      disposition and tax rate reductions in Canada. During 2003, 3.3 million
      shares were repurchased at an average price of $58.24/share, debt was
      reduced by $794 million and the Company's semi-annual dividend rate
      increased 33% to $0.40/share.
      Operational highlights for the year
      included the startup of the PM-3 CAA development project in
      Malaysia/Vietnam, commencement of production in Algeria, first oil from
      Blake Flank in the North Sea and first natural gas sales from Indonesia to
      Singapore. A number of acquisitions were completed during 2003 for $768
      million including natural gas properties in the US, a producing field in
      Norway and midstream assets in Canada.
      In Appalachia, Talisman drilled
      several successful exploration wells, adding significant productive
      capacity to the region. The North Sea saw three consecutive exploration
      successes, with discoveries at Tartan North, J5 and Affleck. In Malaysia
      and Vietnam, all exploration wells, except one, were either successful
      appraisals or new hydrocarbon discoveries. The Company also achieved good
      success in Trinidad with all four exploration wells discovering
      hydrocarbons. |  | Cash flow and cash flow
      per share increased for the fifth consecutive year to $2.7 billion and
      $21.21, respectively. This represents an 8% increase in cash flow per
      share over last year. Net income nearly doubled to $1 billion
      ($7.65/share) and included the gain on the Sudan sale ($296 million or
      $2.30/share) and tax rate reductions in Canada ($160 million or
      $1.24/share). These items were partially offset by an expense arising from
      amending the Company's stock option plans to include a cash payment
      feature, which resulted in what management believes to be more transparent
      accounting ($185 million, $130 million or $1.01/share net of tax).
      Combined, these added $326 million of net income ($2.53/share).
      Production averaged 398
      mboe/d for the year, within the target range originally set at the
      beginning of 2003. Production per share, after adjusting for the sale of
      the Sudan operations, increased 4%. Talisman spent $2.2 billion on
      exploration and development activities and participated in drilling 651
      successful wells in 2003. Excluding the impacts of the Sudan sale, 210
      mmboe of proved plus probable reserves were added, replacing 150% of
      production.
      Operating costs for 2003
      were as expected and averaged $7.15/boe, compared to $6.48/boe in 2002.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|Cash
      Flow
      (
      m i l l i o n s   o f   d o l l a r s )                                                   |  | Net
      Income
      (
      m i l l i o n s   o f   d o l l a r s )
|----------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------
|Cash
      Flow Per Share1
      (
      d o l l a r s )
      
      
      1 Non-GAAP measure. See inside back cover. |  | Net
      Income Per Share
      (
      d o l l a r s )              





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2003
        Variances
        The significant variances from 2002
        as summarized in the net income and cash flow variance table are:
        Higher commodity prices more than
            offset the impact of the sale of the Sudan operations, lower North
            Sea production, the strengthening of the Canadian dollar and higher
            royalties.
          Higher prices increased hedging
            losses.
          Interest expense fell due to
            lower average debt levels and lower effective borrowing costs, while
            current taxes fell primarily in the UK.
          Stock-based compensation payments
            reduced cash flow by $47 million.
          The gain on the sale of the Sudan
            operations was $296 million.
          The non-cash portion of the
            stock-based compensation expense reduced net income by $138 million
            (before tax).
          Future taxes were lower in 2003
            due to tax rate reductions in Canada. Future tax expense in 2002
            included the impact of a tax rate increase in the UK.2004 Outlook Summary
        Talisman anticipates 4-12%
        production growth in 2004 from existing projects. Cash flow for 2004 is
        anticipated to be $17-22 per share and assumes reduced commodity prices
        as expressed in Canadian dollars compared to 2003. Additional discussion
        of management's estimates and assumptions for 2004 can be found in the
        MD&A section entitled Outlook for 2004.
        Production is expected to average
            415,000-445,000 boe/d.
          Production increases are expected
            in most of the Company's geographic segments with the majority
            coming from international projects.
          Exploration and development
            spending is expected to be $2.35 billion ($1.1 billion in North
            America and $606 million in the North Sea).
          Significant progress on the
            Trinidad development is expected with first oil anticipated in early
            2005.
          Average unit operating costs are
            expected to increase 5-10% reflecting an assumed strengthening of
            the UK pound sterling exchange rate against the Canadian dollar.
          Long-term debt is expected to
            increase partly due to the redemption of a portion of the Company's
            preferred securities.
          Stock-based compensation expense
            is expected to decrease, as 2003 included a catch-up charge due to
            amendments to the Company's stock option plans.
      
      Net
        Income and Cash Flow Variance(millions
        of dollars)2002
        Net income
      524Favorable
        (unfavorable)Cash
        flow varianceSale
        of the Sudan operations
      (281)Oil
        and liquids volumes
      (117)Natural
        gas volumes
      128Natural
        gas prices
      747Oil
        and liquids prices
      115Hedging
        - Commodities
      (270)Royalties
      (198)Other
        revenue
      8Operating
        expense
      (50)Interest
        expense
      27Current
        taxes (including PRT)
      (3)General
        and administrative
      (9)Stock-based
        compensation payments
      (47)Other
      34Total
        cash flow variance
      84Non-cash
        itemsSale
        of Sudan (including gain of $296 million)
      390Depreciation,
        depletion and amortization expense
      (21)Dry
        hole expense
      (90)Exploration
        expense
      (29)Future
        taxes (including PRT)
      219Stock-based
        compensation (non-cash)
      (138)Other
      68Total
        non-cash items
      3992003
        Net income1
      1,007


| | 1  Net
      income, cash flow and cash flow per share are before preferred security
      charges of $22 million, net of tax ($38 million, before tax). Net income
      per share is after preferred security charges. The components of cash flow
      are set out in note 14 of the Consolidated Financial Statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sale of Sudan Operations

On March 12, 2003, Talisman completed the
sale of an indirectly held subsidiary, which owned an interest in the Greater
Nile Oil Project in Sudan, to ONGC Videsh Limited ("OVL"), a subsidiary of
India's national oil company. The aggregate amount realized by Talisman from
the transaction (including interest and cash received by Talisman between
September 1, 2002 and closing) was $1.13 billion (US$771 million). (See note 17
of the Consolidated Financial Statements.)

The following table has been provided to
assist readers in understanding the Company's results after taking into
account the sale of the Sudan operations. The pro forma amounts presented below
exclude the $296 million gain on sale of the Sudan operations and the Sudan
results of operations during the respective years. These pro forma results have
been derived from the information contained in notes 13 and 18 of the Company's
December 31, 2003 Consolidated Financial Statements.









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|Pro
      Forma Results, Excluding the Sudan Operations and Gain On Sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |  |                 | boe/d, up 2%,
      representing 51% of the Company's total production in 2003. North
      American operating expense increased 11% to $395 million due to increased
      natural gas volumes, higher processing fees and higher power costs.
      DD&A increased to $693 million, up from $614 million due to higher
      production and recent acquisitions while dry hole expense increased to
      $135 million due to the expanded exploration budget. Total exploration and
      development spending for North America in 2003 was $1.1 billion, up 35%
      over 2002.
      North Sea
      The North Sea pre-tax
      segmented income decreased to $435 million and accounted for 27% of the
      Company's segmented income during 2003, down from 38% in 2002. North Sea
      gross sales decreased due to lower liquids production, which also
      contributed to a lower DD&A expense. Production averaged 131,250 boe/d
      or 33% of the Company's total production. Royalty expense decreased due
      to the abolition of government royalties at the start of the year and the
      settlement of outstanding royalty issues. Dry hole expense increased with
      the inclusion of costs associated with the Eta-2 and Dunnottar wells.
      Exploration and development spending for the North Sea was $496 million,
      up 15% from 2002.
      Southeast Asia
      Production from the PM-3
      CAA development project in Malaysia/Vietnam started in 2003 with oil
      production commencing in September and natural gas in the fourth quarter.
      Southeast Asia contributed 12% ($183 million) to the Company's pre-tax
      segmented income in 2003. Gross sales increased 14% to $556 million with
      higher production from PM-3 CAA and Corridor in Indonesia. Southeast Asia
      production averaged 44,000 boe/d and contributed 11% to the Company's
      total production. Total operating expenses were unchanged from 2002, but
      unit costs were down 12% as a result of the 15% increase in production.
      DD&A expense increased with the growth in production. Capital spending
      for Southeast Asia was $316 million, up 17%.
      Algeria
      Sales from Algeria
      commenced in January 2003 with the startup of the Ourhoud field.
      Production increased through 2003 with first oil from the Menzel Lejmat
      North (MLN) field in late June and additional production from MLN
      satellite fields in the fourth quarter. Production for 2003 averaged 6,600
      bbls/d. Operating costs in 2003 included expenses associated with startup
      activities. Capital spending for Algeria was $34 million, down 68% from
      2002 due to the completion of the initial phase of the Greater MLN
      project.
      Other Exploration and
      Development
      Development continued on
      the Angostura oil and gas field located on Block 2(c) offshore Trinidad
      with the Company spending $128 million during 2003. First production is
      expected in early 2005. Talisman spent $21 million in Colombia on seismic
      and exploration drilling which commenced in the third quarter. Talisman
      also acquired a 100% interest in offshore Block 10 in Qatar with
      exploration drilling expected to commence in 2005.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- |  | --------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(millions
      of Canadian dollars,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|unless
      otherwise stated)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |  | Pro
      forma |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 2003  |  | 2002            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Cash
      flow                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 2,653 |  | 2,291           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Net
      income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 666   |  | 298             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Per
      share (Canadian dollars)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Cash
      flow                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 20.61 |  | 17.09           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Net
      income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 5.00  |  | 2.04            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Diluted
      per share (Canadian dollars)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Cash
      flow                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 20.37 |  | 16.82           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Net
      income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 4.94  |  | 2.01            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Exploration
      and development expenditures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 2,178 |  | 1,750           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Production(daily average production)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Oil
      and liquids (mbbls/d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 203.7 |  | 212.6           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Natural
      gas (mmcf/d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 1,090 |  | 1,036           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Total
      mboe/d (6mcf=1boe)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 385   |  | 385             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|The
      pro forma amounts included in the above table do not include any
      adjustment for the assumed use of proceeds received on the sale of the
      Sudan operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |  |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Segmented Results
      Review
      Talisman is an independent
      international upstream oil and gas company whose main business activities
      include exploration, development, production, transporting and marketing
      of crude oil, natural gas and natural gas liquids. The Company's
      operations in 2003 were conducted principally in four geographic segments:
      North America, the North Sea, Southeast Asia and Algeria. The Company is
      also participating in a significant development project in Trinidad.
      Exploration is being conducted in other areas outside the principal
      geographic segments including Colombia and Qatar. The Company's Sudan
      operations were sold on March 12, 2003. The following is a brief summary
      of the financial results of each geographic segment. Additional geographic
      financial results disclosure may be found in note 18 of the Consolidated
      Financial Statements. The Company's pre-tax segmented income as
      discussed below is before the gain on the sale of the Sudan operations,
      corporate general and administration, interest, stock-based compensation,
      taxes and non-segmented foreign exchange gains and losses. More detailed
      analysis on the Company's results can be found after this Segmented
      Results Review.
      North America
      During 2003, the North America
      operations contributed $888 million or 56% of the Company's pre-tax
      segmented income of $1.5 billion, up from $437 million (31% of $1.4
      billion) in 2002. Gross sales in North America increased 34% to $2.7
      billion due principally to higher natural gas prices and production. North
      American production averaged 203,500 |       |  |                

T A
L I S M A N E N E R G Y I N C.

M
a n a g e m e n t ' s    D i s c u s s i o n  
a n d   A n a l y s i s          
7

---

|Corporate Results
      Review Revenue
      Revenues from oil, liquids and natural
      gas sales in 2003 were $5.3 billion, the same as in 2002. Higher natural
      gas prices ($747 million),gas volumes ($128 million) and oil prices ($144
      million) were offset by increased hedging losses ($268 million) and lower
      oil and liquids volumes ($766 million), primarily due to the sale of the
      Sudan operations.                                                                                                                                                                                                                                                                                 |       | gas
      properties in upper New York State. These properties added 60 mmcf/d
      during the year. However, production was constrained by access to
      infrastructure. This issue is being addressed. North America oil and
      liquids production averaged 59,578 bbls/d, down slightly from 2002 as the
      Company's North America exploration and development activities continue
      to focus on natural gas.
      North Sea oil and liquids production
      averaged 113,075 bbls/d, down 11% from 2002, due primarily to natural
      decline. Production in the fourth quarter averaged 128,697 bbls/d, up 15%
      over the third quarter and 4% over the final quarter of 2002. North Sea
      production highlights for 2003 included the startup of the Blake Flank
      development, the acquisition of the Gyda field in Norway in the third
      quarter and the tie in of new wells at Halley, Hannay, Claymore and
      Braemar. The Ross/Blake core area, including Blake Flank, averaged 22,437
      bbls/d during 2003, down from 2002 due to shutdowns to tie in Blake Flank
      and natural decline. Production from Gyda averaged 6,700 bbls/d in the
      fourth quarter. North Sea natural gas production decreased to 109 mmcf/d
      as 2002 production benefited from a temporary increase in access to export
      pipeline capacity at Brae.
      Southeast Asia oil and liquids
      production increased 9% over 2002 to average 24,430 bbls/d in 2003. In the
      fourth quarter, production averaged 31,138 bbls/d, an increase of 39% over
      the final quarter of 2002. The PM-3 CAA development project came on stream
      at the end of September and increased total production in Malaysia/Vietnam
      to 22,738 bbls/d in December (32,506 boe/d including natural gas). Total
      Malaysia/Vietnam oil and liquids production for the year averaged 8,672
      bbls/d. Indonesia oil and liquids production averaged 15,758 bbls/d, down
      slightly from 2002 due to natural decline.
      Southeast Asia natural gas production
      increased 24% to 117 mmcf/d and exited 2003 with production of 196 mmcf/d
      in December. Natural gas production from the PM-3 CAA development project
      started in the fourth quarter and increased to 59 mmcf/d in December.
      First natural gas sales from Corridor in Indonesia to Singapore commenced
      in September under a 20 year contract with Gas Supply Pte Ltd. and
      averaged 13.5 mmcf/d during the fourth quarter. The majority of the
      remainder of the
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Daily
      Production Volumes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 2003  | 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Oil and
      liquids (mbbls/d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|North
      America                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 59.6  | 62.7                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|North Sea                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 113.1 | 127.5                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Southeast
      Asia                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 24.4  | 22.5                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Algeria                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 6.6   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Sudan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 13.0  | 60.0                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 216.7 | 272.7                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Natural gas
      (mmcf/d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|North
      America                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 864   | 820                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|North Sea                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 109   | 122                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Southeast
      Asia                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 117   | 94                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 1,090 | 1,036                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Total
      (mboe/d @ 6:1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 398   | 445                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Production
      per share (boe/share)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 1.13  | 1.21                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|North America
      natural gas production increased 5% to 864 mmcf/d during 2003. This
      production growth is due to Talisman's successful drilling programs, the
      addition of infrastructure which helped alleviate production bottlenecks
      and strategic acquisitions. During 2003, Talisman drilled 625 wells in
      North America with a 93% success rate. The commissioning of the Erith
      pipeline and dehydration project and the acquisition of Vista Midstream
      will allow Talisman to continue to increase production in the Foothills
      and Deep Basin areas. At the end of 2002 and during the first quarter of
      2003, Talisman purchased a number of high netback natural |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



T A
L I S M A N   E N E R G Y   I N C.

M
a n a g e m e n t ' s    D i s c u s s i o n  
a n d   A n a l y s i s          
8

---



|Indonesia
      natural gas production is sold to PT Caltex Pacific Indonesia (Caltex)
      under long-term variable demand contracts with minimum purchase
      requirements.
      
      Algeria
      oil production for the year averaged 6,594 bbls/d and increased to 15,287
      bbls/d during the month of December with the startup of the MLN satellite
      fields. |       | World oil prices
      increased in 2003 over 2002 with WTI averaging US $30.99, up 19%. North
      American natural gas prices also increased considerably over 2002 with
      NYMEX averaging US$5.44/mmbtu, up 67%.
      More than 90% of the
      Company's revenues are either received in US dollars or are closely
      referenced to US dollars. The Company converts these revenues to Canadian
      dollars for reporting purposes. The strengthening of the Canadian dollar
      reduced Talisman's reported oil and liquids price by $4.71/bbl. Talisman's
      North America oil and liquids price averaged $35.30/bbl, up 9% from last
      year. The Company's North Sea oil price averaged $39.72/bbl, up 2% over
      2002. The Company's Southeast Asia oil price averaged $41.05/bbl, up 4%
      over 2002.
      Talisman's average
      natural gas price in North America increased 61% to $6.37/mcf. The
      strengthening of the Canadian dollar during 2003 reduced Talisman's
      reported North America natural gas price by $0.70/mcf. The Company's
      North Sea natural gas price increased 17% as a result of a higher
      proportion of the gas being sold under long-term contracts.
      The Company's natural
      gas price in Southeast Asia averaged $4.95/mcf, up 5% from 2002. A
      majority of Corridor gas production, which constituted approximately 90%
      of the Company's 2003 gas sales in Southeast Asia, is exchanged for Duri
      crude oil on an energy equivalent relationship and is sold offshore with
      payment in US dollars. The majority of the Company's other natural gas
      sales in Southeast Asia are referenced to Singapore fuel oil spot market
      prices. A 2002 adjustment to Corridor's gas price, relating to 2001,
      decreased Talisman's average Southeast Asia reported gas price in 2002
      by $0.22/mcf.
      The Company's average
      sales prices are before a net hedging loss of $194 million, comprised of a
      $0.08/mcf loss on gas hedges (2002 -$0.22/mcf gain) and a $2.05/bbl loss
      on oil hedges (2002 - $0.09/bbl loss). The physical and financial
      commodity price contracts for 2004 outstanding at year end are disclosed
      in notes 9 and 10 of the Consolidated Financial Statements with additional
      discussion in the MD&A section entitled Derivative Financial
      Instruments and Commodity Sales Contracts. Additional discussion of the
      expected impact of commodity price contracts on the Company's 2004
      results can be found in the Outlook for 2004 section of this MD&A. The
      Company's accounting policy with respect to derivative financial
      instruments and commodity contracts is disclosed in note 1(k) of the
      Consolidated Financial Statements.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Commodity Prices                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                    |       | 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Oil and liquids ($/bbl)                                                                                                                                                                                                                                                                                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|North
      America                                                                                                                                                                                                                                                                                                                                                                 |       | 35.30                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|North Sea                                                                                                                                                                                                                                                                                                                                                                           |       | 39.72                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Southeast
      Asia                                                                                                                                                                                                                                                                                                                                                                |       | 41.05                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Algeria                                                                                                                                                                                                                                                                                                                                                                             |       | 39.01                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Sudan                                                                                                                                                                                                                                                                                                                                                                               |       | 43.89                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                    |       | 38.93                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Natural gas ($/mcf)                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|North
      America                                                                                                                                                                                                                                                                                                                                                                 |       | 6.37                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|North Sea                                                                                                                                                                                                                                                                                                                                                                           |       | 4.57                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Southeast
      Asia                                                                                                                                                                                                                                                                                                                                                                |       | 4.95                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                    |       | 6.03                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Company $/boe
      (6 mcf=1 boe)                                                                                                                                                                                                                                                                                                                                                   | 37.67 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Hedging loss
      (income)                                                                                                                                                                                                                                                                                                                                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|excluded from
      the above prices                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Oil and liquids
      ($/bbl)                                                                                                                                                                                                                                                                                                                                                       | 2.05  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Natural
      gas ($/mcf)                                                                                                                                                                                                                                                                                                                                                           |       | 0.08                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Total $/boe
      (6mcf=1boe)                                                                                                                                                                                                                                                                                                                                                       |       | 1.34                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Benchmark prices                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|WTI
      (US$/bbl)                                                                                                                                                                                                                                                                                                                                                                 |       | 30.99                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Dated
      Brent (US$/bbl)                                                                                                                                                                                                                                                                                                                                                         |       | 28.83                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|NYMEX
      (US$/mmbtu)                                                                                                                                                                                                                                                                                                                                                             |       | 5.44                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|AECO (C$/gj)                                                                                                                                                                                                                                                                                                                                                                        |       | 6.35                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Prices are
      before hedging activities and do not include synthetic oil.                                                                                                                                                                                                                                                                                                        |      
|                                                                                                                                                                                                                                                                                                                                                                                   



T A
L I S M A N    E N E R G Y    I N C.

M
a n a g e m e n t ' s    D i s c u s s i o n  
a n d   A n a l y s i s          
9

---

Royalties2003
    
    2002
    
    2001Rates
      (%)$millions
    
    Rates
      (%)$millions
    
    Rates
      (%)$millionsOil and
      liquidsNorth America
    21
    
    155
    
    21
    
    149
    
    22
    
    164North Sea
    -
    
    (3)
    
    4
    
    74
    
    5
    
    75Southeast Asia
    39
    
    143
    
    38
    
    122
    
    30
    
    82Algeria
    49
    
    46
    
    -
    
    -
    
    -
    
    -Sudan
    46
    
    97
    
    40
    
    328
    
    39
    
    24814
    
    438
    
    18
    
    673
    
    18
    
    569Natural gasNorth America
    22
    
    432
    
    19
    
    224
    
    25
    
    394North Sea
    6
    
    11
    
    12
    
    21
    
    11
    
    18Southeast Asia
    6
    
    13
    
    5
    
    9
    
    5
    
    819
    
    456
    
    17
    
    254
    
    22
    
    42016
    
    894
    
    18
    
    927
    
    20
    
    989


Royalty rates do not include synthetic oil.

The consolidated royalty expense decreased
to $894 million in 2003, with the sale of the Sudan operations accounting for
most of the drop. In addition, effective January 1, 2003, the UK abolished
government royalties. Agreement was also reached on various outstanding UK
royalties issues in respect of prior years, which also reduced the North Sea
royalty expense for 2003. North Sea royalties are expected to average 2% during
2004 due to non-government royalty interests.

Talisman's North America natural gas
royalties, which are largely determined on a sliding scale based on price,
averaged 22%, up from 19% in 2002. The royalty rate in 2003 on North America
natural gas production did not reach the rate incurred during 2001, when prices
were at similar highs due to increased production being sourced from lower
royalty rate regions such as the Company's Appalachia production, which had a
royalty rate of 14% in 2003.

The Company's royalty rate for oil and
liquids decreased, year-over-year, to 14% due to the reduction in the North Sea
and the sale of the Sudan operations. Without Sudan, the Corporate royalty rate
for oil and liquids would have been 12% in 2003 (2002 - 12%; 2001 - 13%).
Southeast Asia oil and liquids royalties averaged 39% in 2003 and 2002 primarily
due to the depletion of a cost recovery pool at Tanjung during 2002. Oil from
PM-3 CAA in Malaysia/Vietnam has a current royalty rate of 30%, while natural
gas sales have a royalty rate of 25%.

Corridor's natural gas royalty rate
averaged 5% during 2003, consistent with prior years; however, the royalty rate
is expected to increase to approximately 22% in 2004 and 30% in 2005.

Under the terms of the Algerian production
sharing contractual arrangement, Talisman is subject to a 51% royalty rate
during the first five years of production. During the first four years of
production, Talisman receives accelerated production entitlement. At the end of
year five, any accelerated production entitlement received by Talisman during
the first four years in excess of 49% on
a cumulative basis reverts to the government. Accordingly, during the first four
years of production, Talisman will record a deferred royalty expense and
liability for any production entitlement received in excess of 49%. During 2003,
Talisman recorded deferred Algerian royalties of $14 million.

Operating Expenses and Unit Operating Costs

2003
    
    
    2002
    
    
    2001Oil and liquids
    $
    /bbl
    
    $
    millions
    
    $
    /bbl
    
    $
    millions
    
    $
    /bbl
    
    $
    millionsNorth America
    6.28
    
    
    131
    
    5.55
    
    
    121
    
    5.22
    
    
    121North Sea
    12.67
    
    
    523
    
    11.11
    
    
    517
    
    10.06
    
    
    407Southeast Asia
    7.33
    
    
    65
    
    7.93
    
    
    65
    
    7.13
    
    
    54Algeria
    6.84
    
    
    16
    
    
    -
    
    
    -
    
    
    -
    
    
    -Sudan
    3.73
    
    
    18
    
    3.82
    
    
    84
    
    3.40
    
    
    669.63
    
    
    753
    
    7.99
    
    
    787
    
    7.15
    
    
    648Natural gas
    $
    /mcf
    
    $
    millions
    
    $
    /mcf
    
    $
    millions
    
    $
    /mcf
    
    $
    millionsNorth America
    0.75
    
    
    237
    
    0.71
    
    
    212
    
    0.67
    
    
    198North Sea
    0.54
    
    
    21
    
    0.61
    
    
    27
    
    0.46
    
    
    18Southeast Asia
    0.50
    
    
    22
    
    0.59
    
    
    21
    
    0.47
    
    
    160.70
    
    
    280
    
    0.69
    
    
    260
    
    0.63
    
    
    232Company (boe)
    7.15
    
    
    1,033
    
    6.48
    
    
    1,047
    
    5.79
    
    
    880Synthetic oil
    22.63
    
    
    22
    
    18.00
    
    
    19
    
    20.05
    
    
    20Pipeline
    
    -
    
    
    44
    
    
    -
    
    
    49
    
    
    -
    
    
    46-
    
    
    1,099
    
    
    -
    
    
    1,115
    
    
    -
    
    
    946


Total operating expenses for the Company
were $1.1 billion. The reduction due to the sale of the Sudan operations was
largely offset by higher natural gas operating expenses in North America due to
increased volumes and higher processing and power costs and the startup of
Algeria. On a unit basis, oil and liquids costs increased to $9.63/bbl due to
the sale of the Sudan operations and lower North Sea volumes.

Oil and liquids unit operating costs in
North America during 2003 increased to $6.28/bbl, largely due to lower
production and higher power costs. Unit operating costs for natural gas
increased to $0.75/mcf with higher processing and power costs partially offset
by the lower unit operating costs ($0.18/mcf) in Appalachia.

In 2003, North Sea oil and liquids operating
expenses of $523 million in part reflected the weaker pound sterling. However,
unit costs averaged $12.67/bbl on lower volumes. The UK pound sterling
strengthened against the Canadian dollar during 2002 and accounted for over half
of the unit cost increase in 2002 over 2001, with the remainder due to higher
maintenance and well workover costs.

Southeast Asia unit operating costs
decreased 12% to $5.41/boe due to higher sales volumes at Corridor and the
startup of the PM-3 CAA development project. The strengthening of the Canadian
dollar against the US dollar helped keep total operating expenses flat compared
to 2002. Oil and liquids unit costs averaged $7.33/bbl with PM-3 CAA averaging

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$6.14/bbl and the Indonesia blocks averaging
$7.98/bbl. Natural gas unit costs averaged $0.51/mcf at Corridor, down from 2002
on higher volumes.

Algeria unit operating costs averaged
$6.84/bbl and included costs associated with startup activities.

Depreciation, Depletion and Amortization Expense

2003
    
    
    2002
    
    
    2001$
    /boe
    
    $
    millions
    
    $
    /boe
    
    $
    millions
    
    $
    /boe
    
    $
    millionsNorth America
    9.33
    
    
    693
    
    8.44
    
    
    614
    
    7.98
    
    
    585North Sea
    12.91
    
    
    619
    
    12.99
    
    
    701
    
    11.86
    
    
    558Southeast Asia
    5.92
    
    
    95
    
    6.24
    
    
    87
    
    7.00
    
    
    93Algeria
    6.99
    
    
    17
    
    
    -
    
    
    -
    
    
    -
    
    
    -Sudan
    3.98
    
    
    19
    
    4.24
    
    
    93
    
    3.98
    
    
    779.92
    
    
    1,443
    
    9.19
    
    
    1,495
    
    8.58
    
    
    1,313


The Company's depreciation, depletion and
amortization (DD&A) expense decreased $52 million to $1.4 billion due to the
sale of the Sudan operations but was up on a unit basis to $9.92/boe. The
DD&A rate in North America increased with recent acquisitions including the
US property acquisitions at the end of 2002 and the beginning of 2003, Petromet
in 2001 and Vista Midstream in 2003. In the North Sea, the DD&A rate
decreased $0.08/boe. The Southeast Asia rate decreased to $5.92/boe due in part
to the strengthening Canadian dollar and higher Corridor production.

For additional information relating to
DD&A refer to the MD&A section entitled Application of Critical
Accounting Policies and to note 4 of the Consolidated Financial Statements.

|Dry Hole Expense      |      |  |      |  |      | 
|--------------------- | ---- |  | ---- |  | ---- | 
|(millions of dollars) | 2003 |  | 2002 |  | 2001 | 
|                      |      |  |      |  |      | 
|North America         | 135  |  | 128  |  | 54   | 
|North Sea             | 69   |  | 9    |  | 21   | 
|Southeast Asia        | 9    |  | 4    |  | 8    | 
|Algeria               | 1    |  | -    |  | 5    | 
|Sudan                 | -    |  | 13   |  | 16   | 
|Other1                | 37   |  | 20   |  | 9    | 
|                      |      |  |      |  |      | 
|                      | 251  |  | 174  |  | 113  | 
|                      |      |  |      |  |      | 

1 Other
includes Trinidad, Colombia and frontier North America.

A high risk exploration well offshore Nova
Scotia and the Eta-2 and Dunnottar wells in the North Sea contributed to the
increase in dry hole expense in 2003. The increase in North America reflects
increased drilling during 2003. The Company wrote off two wells in Colombia, two
in Indonesia and one in Malaysia. Under the Successful Efforts method of
accounting for oil and gas activities, the costs of unsuccessful exploration
wells are written off to dry hole expense in the year such determination is
made. Until such determination is made, the costs are included in non-depleted
capital. At year end, $283 million of costs relating to exploration wells (2002 -
$353 million; 2001 - $399 million), were included in non-depleted capital
and not subject to DD&A pending final determination.

Exploration Expense(millions of dollars)
    2003
    
    2002
    
    2001North America
    87
    
    66
    
    69North Sea
    21
    
    20
    
    30Southeast Asia
    17
    
    19
    
    8Algeria
    -
    
    5
    
    2Sudan
    5
    
    6
    
    11Other
    83
    
    69
    
    27213
    
    185
    
    147


Exploration expense consists of geological
and geophysical costs, seismic, land lease rentals and indirect exploration
expenses. These costs are expensed as incurred under Successful Efforts
accounting. There has been a steady increase in the Company's exploration
spending since 1999. Exploration expense is closely tied to the total amount of
exploration capital spent in a year. Expenses constituting "Other" in 2003
and 2002 relate mostly to activities in Trinidad, East Coast offshore North
America and Colombia.

Corporate(millions of dollars)
    2003
    
    2002
    
    2001G&A expense
    152
    
    138
    
    108Interest expense
    137
    
    164
    
    139Capitalized interest
    24
    
    25
    
    19Stock-based compensation
    185
    
    -
    
    -Preferred securities
      charges, net of tax
    22
    
    24
    
    24Other revenue
    76
    
    80
    
    82Other expense
    16
    
    113
    
    78


General and administrative
(G&A) expense increased due to additional documentation requirements
associated with recently implemented corporate governance initiatives, higher
legal and pension costs, salary increases and additional personnel due to
expanding investment and operations. On a unit basis, G&A was $1.05/boe and
increased in part due to lower oil and liquids production (2002 - $0.85/boe;
2001 - $0.71/boe).

As a result of lower average
debt levels and lower effective interest rates during the year, interest on
long-term debt, including capitalized interest, decreased to $161 million.
Interest capitalized over the last three years is primarily associated with the
Malaysia/Vietnam PM-3 CAA development, which came on production during 2003.
Capitalized interest in 2003 also included interest associated with the
Angostura development in Trinidad.

Preferred securities charges,
net of taxes, of $22 million have been charged directly to retained earnings and
are deducted from net income to determine net income per share. Preferred
security charges, before tax, totalled $38 million.

Other revenue includes
pipeline and custom treating revenues and miscellaneous income. Other expense
for 2003 included foreign exchange losses of $7 million and property impairment
in the North

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Sea of $30 million due to unsuccessful
development drilling at Ivanhoe and was partially offset by gains on property
dispositions of $14 million. Other expense for 2002 included the Kildrummy and
Beechnut write-offs ($74 million),foreign exchange losses ($28 million) and
losses on property dispositions ($10 million).

Stock-Based Compensation

The Company's stock option plans were
amended during 2003 to provide employees and directors who hold stock options
with the choice upon exercise to purchase a share of the Company at the stated
exercise price or to receive a cash payment in exchange for surrendering the
option. The cash payment is equal to the appreciated value of the stock option
as determined based on the difference between the option's exercise price and
the Company's share price at the time of surrender. The cash payment
alternative is expected to result in reduced shareholder dilution in the future
as it is anticipated that most holders of the stock options (now and in the
future) will elect to take a cash payment. Such cash payments made by the
Company to stock option holders are deductible by the Company for income tax
purposes, making these plans more cost effective.

As a result of the Company's decision to
start expensing stock options, the Company's second quarter results included a
$105 million ($74 million, or $0.57/share, net of tax) stock-based compensation
expense relating to the appreciated value of the Company's outstanding stock
options and cash units at June 30, 2003. The total stock-based compensation
expense for the year was $185 million ($130 million, net of tax) including $80
million during the second half of 2003 due to the appreciation of the Company's
stock price during the period July 1 to December 31. Additional stock-based
compensation expense or recoveries in future periods is dependent on the
movement of the Company's share price and the number of outstanding options
and cash units.

Income Taxes

The Company's effective tax rate for 2003,
after deducting Production Revenue Tax (PRT), was 15% compared to 44% in 2002
and 36% in 2001. A number of events in the past two years have significantly
impacted the Company's effective tax rates including the 2003 tax rate
reductions in Canada, the sale of the Sudan operations and a supplemental oil
and gas tax enacted in the UK in 2002.

Effective Income Tax
      Rate(millions of dollars)
    2003
    
    2002
    
    2001Income before tax
    1,277
    
    1,068
    
    1,296Less PRT
    92
    
    124
    
    1491,185
    
    944
    
    1,147Income tax expense
      (recovery)Current
    229
    
    258
    
    342Future
    (51)
    
    162
    
    72178
    
    420
    
    414Effective income tax rate
      (%)
    15
    
    44
    
    36


In 2003, the Company recorded a future tax
recovery of $160 million due to a reduction in Canadian federal and provincial
tax rates. A similar rate reduction in the Alberta corporate tax rate in 2002
resulted in a future tax recovery of $12 million. Effective April 17, 2002, the
UK increased its corporate income tax rate applicable to North Sea oil and gas
profits by enacting a 10% supplementary charge. This increased the Company's
future tax expense for 2002 by $128 million. Partially offsetting this tax
increase was the acceleration of tax allowances for capital expenditures
incurred after April 17, 2002.

A normalized effective tax rate after
removing the impact of the Canadian and UK tax rate changes and the impact of
the gain on disposal of the Sudan operations would have been 38% in 2003, 32% in
2002 and 36% in 2001. See note 13 of the Consolidated Financial Statements for
additional information on the Company's income taxes.

Current income tax expense decreased to $229
million in 2003, primarily due to the sale of the Sudan operations. An increase
in current taxes in Canada due to higher natural gas prices was partially offset
by lower current taxes in the North Sea.

The UK Government levies PRT on North Sea
fields which received development approval before April 1993, based on gross
profit after deducting allowable expenditures, a cost uplift, a portion of
losses from certain other fields, abandonment costs and government royalties.
PRT is deductible for purposes of calculating corporate income tax.

Capital Spending(millions of dollars)
    2003
    
    2002
    
    2001North America
    1,580
    
    939
    
    976North Sea
    693
    
    518
    
    664Southeast Asia
    316
    
    269
    
    149Algeria
    34
    
    107
    
    63Sudan
    2
    
    98
    
    117Other
    223
    
    121
    
    52Non-segmented
    38
    
    26
    
    302,886
    
    2,078
    
    2,051


Includes exploration, development and net
asset acquisitions expenditures but excludes the Sudan disposition in 2003 and
the Lundin and Petromet acquisitions in 2001.

Natural gas continues to be the focus of the
Company's capital investment activities in North America, supplemented by low
risk oil projects and strategic acquisitions. Of the $1.6 billion of capital
spending in North America, $453 million related to exploration activities while
development accounted for $656 million. The Company participated in 378 gas
wells and 204 oil wells in North America and had a success rate of 93%.
Development spending was concentrated in the predominantly gas producing core
area in the Alberta Foothills, Greater Arch, Deep Basin, Monkman and Edson area
and included the Erith pipeline and dehydration project which was commissioned
in the fourth quarter. In addition, the Company spent $471 million on
acquisitions, net of dispositions, including US properties ($385 million) and
Vista Midstream Solutions Ltd. ($130

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million). The Company's US properties
located in New York State, including those purchased at the end of 2002,
contributed 60 mmcf/d of production during 2003. The Vista acquisition provides
Talisman access to infrastructure and midstream revenues in the Deep Basin area
of Alberta, one of Talisman's key natural gas growth areas.

Total capital spending in the North Sea of
$693 million included $99 million for exploration and $397 million for
development with the remaining $197 million for net property acquisitions.
Development expenditures included Blake Flank and drilling within the Clyde,
Buchan, Ross, Tartan and Claymore core areas. A total of 14 successful
development wells were drilled during 2003 in the North Sea. Exploration
drilling included the successful Tartan North, J5 and Affleck (Clyde)
exploration wells. The Eta-2 and Dunnottar exploration wells were written off to
dry hole expense. During 2003, the Company completed the purchase of a 61%
operating interest in the Norwegian offshore Gyda field, associated facilities
and adjacent acreage for $112 million, including $21 million of assumed working
capital deficiency. Goodwill of $31 million was recorded related to this
acquisition. The Company also acquired additional minor working interests in
eight North Sea fields and exploration blocks.

The PM-3 CAA development in Malaysia/Vietnam
accounted for a majority of the $316 million (including $22 million of
capitalized interest) of total capital spending in Southeast Asia. Talisman
participated in drilling 21 successful development wells in Malaysia/Vietnam
during 2003. In addition, two successful exploration wells were drilled in PM-3
CAA and one in each of Block PM 305, Block 46-Cai Nuoc and Block 46/02. A total
of $41 million was spent in Indonesia with over half going to develop Corridor
in order to support gas sales to Singapore and possible future sales to West
Java. Talisman participated in drilling seven successful oil and gas wells in
Indonesia during 2003.

Capital spending in Algeria totaled $34
million in 2003 and the Company participated in 12 successful wells during the
year.

Other areas accounted for $223 million of
the 2003 capital spending. Talisman spent $130 million in Trinidad to advance
the Angostura development on offshore Block 2(c) with first oil anticipated in
early 2005. Four exploration wells were drilled offshore Trinidad during 2003
and all four encountered hydrocarbons, including the one drilling over year end.
The Company spent $21 million in Colombia on seismic and to participate in
drilling two exploration wells, which were drilling at year end but have
subsequently been abandoned.

Reserves Replacement

Talisman drilled 651 successful wells in
2003, adding 143 mmboe of proved reserves and replacing 99% of conventional
production at a cost of $14.28/boe before acquisitions and dispositions. The
Company's total proved reserves decreased 8% to 1,362 mmboe, primarily due to
the sale of the Sudan operations (156 mmboe). Excluding the impacts of the Sudan
sale, both proved and probable reserves increased by approximately 3% each and,
in total, production replacement from all sources (including proved
and probable discoveries, revisions and net acquisitions excluding Sudan) was
150%.

Over the last three years, the
Company has replaced approximately 139% of production before acquisitions and
divestitures at a cost of $8.76/boe on a proved reserves basis. Net revisions
and transfers over the past three years, which are included in the above
replacement rate, have resulted in a cumulative reduction of 8 mmboe or less
than 1% of the Company's proved reserves.

Finding, Development and
Acquisition Costs(gross before
royalties)

| | Proved F&D costs
($/boe)     |       |  |       |  |      |  | 3-year  |  | 5-year  | 
| | ---------------------------- | ----- |  | ----- |  | ---- |  | ------- |  | ------- | 
| |                              | 2003  |  | 2002  |  | 2001 |  | Average |  | Average | 
| |                              |       |  |       |  |      |  |         |  |         | 
| | F&D1                         | 14.28 |  | 11.03 |  | 5.34 |  | 8.76    |  | 7.89    | 
| |                              |       |  |       |  |      |  |         |  |         | 
| | FD&A2(excluding Sudan sale3) | 14.67 |  | 12.15 |  | 7.08 |  | 9.79    |  | 8.64    | 
| |                              |       |  |       |  |      |  |         |  |         | 

|1 | F&D costs have been
      calculated by dividing finding and development costs (excluding net
      acquisition costs), as reconciled in the table below, by proved gross
      before royalties reserves additions including revisions but excluding net
      acquired proved gross before royalties reserves.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | FD&A costs have been
      calculated by dividing finding and development costs (including net
      acquisition costs), as reconciled in the table below, by proved gross
      before royalties reserves additions including revisions and net acquired
      proved gross before royalties reserves.         
|3 | FD&A including the
      impacts of the Sudan sale for 2003 is $72.84/boe.                                                                                                                                                                                                                                      

The finding and development
costs have been calculated based on current year's exploration and development
spending excluding synthetic oil operations capital, midstream expenditures,
indirect exploration costs, enhanced oil recovery and capitalized interest
divided by current year proved reserves additions. No amount of future capital
has been included in the above calculation, which is consistent with
calculations performed in prior years. The costs used in the above calculation
has been reconciled to exploration and development expenditures as set out in
the notes to the Consolidated Financial Statements.

Reconciliation of Costs
Included in F&D Calculations

(gross before royalties)(millions of dollars)
    2003
    
    2002
    
    2001Exploration and development
      expenditures
    2,180
    
    1,848
    
    1,882Less:Midstream
      capital
    27
    
    21
    
    27Indirect
      costs
    52
    
    41
    
    34Capitalized
      interest
    24
    
    25
    
    19Synthetic
      oil operations capital
    30
    
    24
    
    8Enhanced
      recovery expenditures
    4
    
    2
    
    22,043
    
    1,735
    
    1,792


The following finding and
development costs have been calculated in US dollars in a manner consistent with
US practice which is calculated based on current additions to proved reserves
net after royalties. Costs used in the US$/boe, net of royalties F&D
calculations have been reconciled in the table below to the property
acquisition, exploration and development costs as set out in the Supplementary
Oil and Gas Information under the heading Costs Incurred in Oil and Gas
Activities.

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Finding, Development and Acquisition
Costs(net after royalties)

US$/boe
    
    
    
    
    
    
    3-year
    
    5-yearProved F&D costs, net
    2003
    
    2002
    
    2001
    
    Average
    
    AverageF&D1,
      net
    11.71
    
    11.80
    
    4.40
    
    7.72
    
    7.33FD&A2,
      net (excludingSudan
      sale)
    12.12
    
    12.24
    
    6.04
    
    8.62
    
    7.76


|1 | F&D net costs have
      been calculated by dividing finding and development costs (excluding
      acquisition costs) in US dollars, as reconciled in the table below, by
      proved net after royalties reserves additions including revisions but
      excluding acquired proved net after royalties reserves.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | FD&A net costs have
      been calculated by dividing finding and development costs (including
      acquisition costs) in US dollars, as reconciled in the table below, by
      proved net after royalties reserves additions including revisions and
      acquired proved net after royalties reserves.         

Reconciliation of Costs Included in
F&D Calculations(net of
royalties)

US$ millions
    2003
    
    2002
    
    2001Exploration and development
      costs (FAS 69)
    1,430
    
    1,111
    
    1,152Less: Capitalized interest
    (17)
    
    (16)
    
    (12)Exploration and development
      costs
    1,413
    
    1,095
    
    1,140Acquisition costs (FAS 69)
    533
    
    212
    
    1,080Total exploration,
      development andacquisition
      costs
    1,946
    
    1,307
    
    2,220


Liquidity and Capital Resources

Talisman's long-term debt at year end was
$2.2 billion ($2.1 billion, net of cash and cash equivalents), down from $3
billion at the end of last year. At year end, the Company had not drawn on any
of its available $1,135 million bank lines of credit. The Company maintains a
shelf prospectus under which it may issue up to $500 million of medium term
notes in aggregate in the Canadian public debt market. The shelf prospectus
expires in April 2004. In December 2003, the Company filed a debt shelf
prospectus in the US under the Multi-jurisdictional Disclosure System (MJDS)
under which it may issue up to US$1 billion of debt securities in the US public
debt market.

In 2003, the Company received approximately
$1 billion in net proceeds from the sale of its Sudan operations. Use of these
proceeds to repay debt accounted for the majority of the decrease in long-term
debt during the year, along with the impact of a stronger Canadian dollar on US
dollar denominated debt, which reduced long-term debt by $349 million. The
Company generated $2.7 billion of cash flow and spent $2.2 billion on
exploration and development and a net $600 million on acquisitions.

In 2004, $107 million ($75 million and US$25
million) of long-term debt matures and will be repaid. None of the long-term
debt has been classified as a current liability as the Company has the ability
and intention to refinance amounts due within one year with existing bank
facilities. At year end, the Company had outstanding two issues of preferred
securities totaling US$300 million. The preferred securities are carried on the
Company's balance sheet as equity at $431 million, which is based on the
historical exchange rate at the time of their issuance. These securities are
callable, in whole or in part, at par by Talisman starting in 2004. Subsequent
to year end, the Company redeemed

US$150 million of these securities. The
difference between the carrying value of the redeemed preferred securities ($215
million) and the cost of redemption ($197 million) will be credited directly to
retained earnings.

The Company repurchased 3,335,600 of its
common shares under its normal course issuer bid (NCIB) during 2003 for a total
of $194 million ($58.24/share). The NCIB expires in March 2004 and is expected
to be renewed, which will allow the Company to repurchase up to 5% of the
Company's outstanding common shares.

Two common share dividends were paid in 2003
(total dividends were $0.70/share). The Company's dividend is determined
semi-annually by the Board of Directors. Commencing with the December 2003
payment, the semi-annual dividend was increased to $0.40/share ($0.80/share
annually). At year end, there were 128 million common shares outstanding.

Talisman targets long-term debt of less than
2:1 on a debt to cash flow basis and 45% on a debt to debt-plus-equity basis.
These targets incorporate the debt refinancing of the Company's preferred
securities during 2004. At the end of 2003, Talisman met the debt targets with
ratios of 0.8:1 for debt to cash flow and 31% for debt to debt-plus-equity. For
purposes of these calculations the Company's preferred securities have been
classified as equity.

For additional information regarding the
Company's liquidity and capital resources, refer to note 5 of the Consolidated
Financial Statements. In addition, refer to the Sensitivities table included in
the Outlook Section of this MD&A for possible 2004 impacts of various
factors on the Company's estimated 2004 net income and cash flows.

Talisman's investment grade corporate
credit and senior unsecured long-term debt credit ratings remain unchanged with
Dominion Bond Rating Service ("DBRS"), Moody's Investor Service, Inc. ("Moody's")
and Standard & Poor's ("S&P") at BBB (high), Baa1 and BBB+
respectively. Due to the subordinated nature of the preferred securities, they
have a lower rating. DBRS, Moody's and S&P have rated the preferred
securities as Pfd-3(high)y, Baa3 and BBB-, respectively.

Commitments and Off Balance Sheet Arrangements

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

Additional disclosure of the Company's
debt repayment obligations and significant commitments can be found in notes 5
and 10 of the Consolidated Financial Statements. A discussion of the Company's
derivative financial instruments and commodity sales contracts can be found in
the next section of this MD&A.

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Derivative Financial Instruments and Commodity
Sales Contracts

The Company may manage its exposure to
fluctuations in foreign exchange rates, interest rates, electricity costs and
commodity prices in part through the use of derivative financial instruments and
commodity sales contracts. The accounting policy with respect to derivative
financial instruments is set out in note 1(k) of the Consolidated Financial
Statements. Derivative financial instruments outstanding at December 31, 2003,
including their respective fair values, are detailed in note 9 of the
Consolidated Financial Statements.

During 2003, the Company's commodity price
derivative financial instruments resulted in a net decrease to recorded sales of
$194 million (2002 -$75 million increase; 2001 - $8 million increase). At
December 31, 2003, the Company had outstanding commodity price derivative
contracts that cover approximately 55 mmcf/d (6%) of the Company's anticipated
2004 North American natural gas production and 79,000 bbls/d (37%) of the
Company's anticipated 2004 worldwide oil and liquids production. An additional
56 mmcf/d (6%) of anticipated 2004 North American natural gas production has
been committed under fixed price and three-way collar commodity sales contracts.
See notes 9 and 10 of the Consolidated Financial Statements for additional
details regarding the contracts outstanding at year end.

In order to support the
Company's investments in natural gas projects outside North America and the
North Sea, Talisman has entered into a number of long-term sales contracts. In
conjunction with the PM-3 CAA development project the Company has entered into a
long-term firm supply contract for approximately 100 mmcf/d at prices referenced
to the Singapore fuel oil spot market. Natural gas production from the
development commenced during the fourth quarter. The majority of Talisman's
Corridor natural gas production in Indonesia is sold to Caltex under long-term
sales agreements and is exchanged for crude oil on an energy equivalent
relationship. The crude oil received from Caltex is then sold offshore. Sales to
Singapore from Corridor are also under long-term sales agreements referenced to
the spot price of fuel oil in Singapore. The Company anticipates having
sufficient production to meet all future delivery commitments.

During 2003, the Company had 250 million of US dollar cross currency swap contracts and interest rate swap
contracts outstanding. These contracts were designated as hedges of the 250
million Eurobond, which in effect converted this indebtedness into US dollars
with a floating interest rate based on three month US LIBOR. The cross currency
and interest rate swap contracts reduced the Company's 2003 interest expense
by $27 million (2002 - $15 million) and the year end Canadian dollar reported
debt by $106 million. As discussed in the MD&A section entitled Change in
Accounting Policies, effective

The following table includes the Company's
expected future payment commitments and estimated timing of such payments.

|                             |                                          |       |  | Payments
      expected 1,2 
      (millions of dollars) | 
|---------------------------- | ---------------------------------------- | ----- |  | -------------------------------------------------------- | 
|                             |                                          |       |  |                                                          | 
|                             | Recognized in
      financial statements |       |  | Due within
      1 year                                  | 
|Commitments                  | Total                                    |       |  |                                                          | 
|                             |                                          |       |  |                                                          | 
|Long-term debt               | Yes - Liability                          | 2,203 |  | 107                                                      | 
|                             |                                          |       |  |                                                          | 
|Abandonment obligations3     | Yes - Partially                          |       |  |                                                          | 
|                             | accrued as liability                     | 2,018 |  | 9                                                        | 
|Preferred securities4        | Yes - Equity                             | 388   |  | 194                                                      | 
|Office leases                | No                                       | 196   |  | 19                                                       | 
|Ocean-going                  |                                          |       |  |                                                          | 
|vessel
      leases          | No                                       | 95    |  | 95                                                       | 
|Transportation and           |                                          |       |  |                                                          | 
|processing
      commitments | No                                       | 1,079 |  | 135                                                      | 
|Min. work commitments5       | No                                       | 308   |  | 203                                                      | 
|Other service contracts      | No                                       | 131   |  | 19                                                       | 
|Stock options and            | Yes - Liability                          |       |  |                                                          | 
|cash
      units6            |                                          | 164   |  | 123                                                      | 
|                             |                                          |       |  |                                                          | 
|Total                        |                                          | 6,582 |  | 904                                                      | 
|                             |                                          |       |  |                                                          | 

|1 | Payments exclude ongoing
      operating costs related to certain leases, interest on long-term debt,
      preferred securities charges and payments made to settle derivative
      contracts.                                                                                                                                                                                                                                                                             
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | Payments denominated in
      foreign currencies have been translated at the December 31, 2003 exchange
      rate.                                                                                                                                                                                                                                                                                                                                                          
|3 | The abandonment obligation
      represents management's probability weighted, undiscounted best estimate
      of the cost and timing of future dismantlement, site restoration and
      abandonment obligations based on engineering estimates and in accordance
      with existing legislation and industry practice.                                                                                                                                                   
|4 | Subsequent to year end,
      US$150 million were redeemed.                                                                                                                                                                                                                                                                                                                                                                                                                  
|5 | Minimum work commitments
      include contracts awarded for capital projects and those commitments
      related to exploration or drilling obligations.                                                                                                                                                                                                                                                                                                                    
|6 | The liability for stock
      options and cash units recognized on the balance sheet is based on the
      Company's year end stock price and the number of options and cash units
      outstanding, adjusted for vesting terms. The amount included in this table
      includes the full value of unvested options and cash units. Timing of
      payments is based on vesting. Actual payments are dependent on the Company's
      stock price at the time of exercise.



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January 1, 2004, these contracts are no
longer designated hedges of the Eurobond. Subsequent to year end, the Company
terminated approximately three-quarters of these contract positions for cash
proceeds, before tax, of $108 million.

The Company has established a system of
internal controls to minimize risks associated with its derivatives program and
credit risk associated with derivatives counterparties. Management believes its
commodity derivatives and fixed priced sales program to be prudent in that it
provides a degree of price support during periods of falling commodity prices
while providing the ability to participate in price increases and, in the case
of certain fixed price sales contracts, guaranteed market access.

Application of Critical Accounting Policies and
the Use of Estimates

The preparation of financial statements
requires management to make estimates and assumptions that affect reported
assets and liabilities, disclosures of contingencies and revenues and expenses.
Management is also required to adopt accounting policies that require the use of
significant estimates. Actual results could differ from those estimates. A
summary of significant accounting policies adopted by Talisman can be found in
note 1 to the December 31, 2003, Consolidated Financial Statements. In assisting
the Company's Audit Committee to fulfill its financial statement oversight
role, management regularly meets and reviews with the Committee the Company's
significant accounting policies, estimates and any significant changes thereto
including those discussed below.

Management believes the most critical
accounting policies, including judgments in their application, that may have an
impact on the Company's financial results relate to the accounting for
property, plant and equipment, abandonment and goodwill. The rate at which the
Company's assets are depreciated or otherwise written off and the abandonment
liability provided for are subject to a number of judgments about future events,
many of which are beyond management's control. Reserves recognition is central
to much of the accounting for an oil and gas company as described below.

Reserves Recognition

Underpinning Talisman's oil and gas assets
and goodwill are its oil and gas reserves. Detailed rules and industry practice,
to which Talisman adheres, have been developed to provide uniform reserves
recognition criteria. However, the process of estimating oil and gas reserves is
inherently judgmental. There are two principle sources of uncertainty; technical
and commercial. Technical reserves estimates are made using all available
geological and reservoir data as well as production performance data. As new
data becomes available, including actual reservoir performance, reserves
estimates may change. Reserves can be classified as proved or probable with
decreasing levels of certainty as to the likelihood that the reserves will be
ultimately produced.

Reserves recognition is also impacted by
economic considerations. In order for reserves to be recognized they must be
reasonably certain of being produced under existing economic and operating
conditions, which  is viewed as being at year end commodity
prices with a cost profile based on current operations. In particular, in
international operations consideration includes the status of field development
planning and gas sales contracts. As economic conditions change, primarily as a
result of changes in commodity prices and, to a lesser extent, operating and
capital costs, marginally profitable production, typically experienced in the
later years of a field's life cycle, may be added to reserves or conversely
may no longer qualify for reserves recognition.

The Company's reserves and revisions to
those reserves, though not separately reported on the Company's balance sheet
or income statement, impact the Company's reported net income through the
amortization of the Company's property, plant and equipment (PP&E), asset
and goodwill impairments and the provision for future abandonment and
reclamation costs.

During 2003, Talisman's Board of Directors
established a Board committee to review the Company's reserves booking process
and related public disclosures and has established the position of an internal
qualified reserves evaluator (IQRE). The IQRE provides a report to the Reserves
Committee and delivers a regulatory certificate regarding reserves and their
related cash flows. The primary responsibilities of the Reserves Committee of
the Board of Directors include, amongst other things, reviewing the Company's
reserves booking process and recommending to the Board of Directors of Talisman
the Company's annual statement of reserves data and other oil and gas
information.

Depreciation, Depletion and Amortization
Expense (DD&A)

A significant portion of the Company's
property, plant and equipment is amortized based on the unit of production
method with the remaining assets being amortized equally over their expected
useful lives. The unit of production method attempts to amortize the asset's
cost over its proved oil and gas reserves base. Accordingly, revisions to
reserves or changes to management's view as to the operational life span of an
asset will impact the Company's future DD&A expense.

As outlined in the Company's DD&A
accounting policy and PP&E note (notes 1(d) and 4 of the Consolidated
Financial Statements), $866 million (2002 - $1.2 billion) of the Company's
Property, Plant and Equipment is not currently subject to DD&A. Half of
these costs ($429 million) relate to development projects such as Angostura and
PM-305 that are expected to be on production by 2005, at which time amortization
will commence. The remaining half of the $866 million of non-depleted capital
relates to the costs of acquired probable reserves ($154 million) and incomplete
drilling activities, including those wells under evaluation or awaiting
production to commence ($283 million). Uncertainty exists with these costs. For
example, if the evaluation of the acquired probable reserves or recently drilled
exploration wells were determined to be unsuccessful, the associated capitalized
costs would be expensed in the year such determination is made, except that in
the case of acquired probable reserves associated with producing fields, these
costs would be amortized over the reserve base of the associated producing
field. Accordingly, the rate at which these costs are written off depends on
management's view of the likelihood of the existence of economically
producible reserves.

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Asset Impairments

The Company's oil and gas assets and
goodwill are subject to impairment tests. An impairment charge is recorded in
the year an asset is determined to be impaired. Individual oil and gas assets
are considered impaired under the Successful Efforts method if their
undiscounted future cash flows fall below their carrying value. Goodwill is
considered to be impaired if its fair value, principally determined based on
discounted cash flows, falls below its carrying value. Both tests require
management to make assumptions regarding cash flows well into the distant future
that are subject to revisions due to changes in commodity prices, costs,
recoverable reserves, production profiles and in the case of goodwill, discount
rates. During the past three years, isolated asset impairments have occurred
(2003 - $30 million; 2002 - $74 million) however, it is possible that future
impairments may be material.

Purchase Price Allocations

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

Future Abandonment and Site Restoration
Activities

Upon retirement of its oil and gas assets,
the Company anticipates incurring substantial costs associated with abandonment
and reclamation activities. Estimates of the associated costs are subject to
uncertainty associated with the method, timing and extent of future retirement
activities. A liability for these costs is accrued on a unit of production basis
over the associated reserves base. Accordingly, the annual expense associated
with future abandonment and reclamation activities is impacted by changes in the
estimates of the expected costs and reserves. During 2003, the abandonment
expense included in DD&A was $132 million. The total abandonment liability
is currently estimated at $2 billion, which is based on management's
probability weighted estimate of costs and in accordance with existing
legislation and industry practice. If this liability had been estimated to be
10% higher, an additional $13 million may have been recorded as DD&A during
2003. Past revisions to the abandonment estimate have not been significant.

As indicated in the MD&A section
entitled New Accounting Pronouncements, the accounting for Future Abandonment
and Site Restoration Activities has changed effective January 1, 2004. A similar
change occurred for US GAAP effective January 1, 2003. Under the new accounting
requirements, the fair value of the Company's Asset Retirement Obligations (ARO)
is to  be recorded as a liability on
the Company's balance sheet. In determining the fair value of the Company's
ARO liability management develops a number of possible abandonment scenarios to
which probabilities are judgmentally assigned. At December 31, 2003, the fair
value of the Company's ARO liability is estimated to be $1.2 billion. As an
indication of possible future changes in the estimated liability, if all of the
Company's abandonment obligations could be deferred by one additional year,
the fair value of the liability would have decreased by approximately $60
million.

Foreign Exchange Accounting

Talisman's worldwide
operations expose the Company to transactions denominated in a number of
different currencies which are required to be translated into one currency for
financial statement reporting purposes. Talisman's foreign currency
translation policy, as detailed in note 1(i) of the Consolidated Financial
Statements, is designed to reflect the economic exposure of the Company's
operations to the various currencies. The adoption of the US dollar, effective
for 2002, as the Company's functional currency is a reflection of Talisman's
overall exposure to US dollar denominated transactions, assets and liabilities;
oil prices are largely denominated in US dollars as is much of the Company's
corporate debt and international capital spending and operating costs. However,
the Company's operations in the UK and Canada are largely self-sufficient
(self-sustaining) and their economic exposure is more closely tied to their
respective domestic currencies. Accordingly, these operations are measured in UK
pound sterling and Canadian dollars, respectively. Currently, the Company's
foreign exchange exposure principally relates to US dollar denominated UK and
Canadian oil sales.

During 2003, the Company's
debt was denominated in US dollars, Canadian dollars and UK pound sterling with
the UK pound sterling debt effectively swapped into US dollars through the use
of cross currency and interest rate swap contracts. During 2003, a portion of
the Company's debt (net of cash) was allocated to the self-sustaining Canadian
operations based on the Company's net investment in Canada. Foreign exchange
gains resulted from the debt allocation as the total amount of net debt
allocated exceeded the Company's total Canadian dollar denominated debt.

Production Sharing
Contractual Arrangements

A significant portion of the
Company's operations outside North America and the North Sea are governed by
production sharing contracts (PSCs). Under PSCs, Talisman, along with its
working interest partners, typically bears all risk and costs for exploration,
development and production. In return, if exploration is successful, Talisman is
given the opportunity to recover its investment and operating costs from the
production and sale of the associated hydrocarbons ('cost oil'). Talisman is
also entitled to receive a share of the 'profit oil', the sharing of which
varies from contract to contract. Profit oil is that production in excess of
what is required to recover the Company's investment and operating costs. The
cost oil, together with the Company's share of profit oil represents Talisman's
hydrocarbon entitlement. Talisman records production, sales and reserves based
on its working interest ownership. The difference between the Company's
working interest ownership and its annual entitlement is accounted for as a
royalty expense. In addition, certain of the Company's

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

The amount of cost oil required to recover
Talisman's investment and costs in a PSC is dependent on commodity prices
while Talisman's share of profit oil is also impacted by commodity prices and
the profit oil sharing terms. Accordingly, the amount of royalty paid by
Talisman over the term of a PSC and the corresponding net after royalty oil and
gas reserves booked by the Company is dependent on the amount of initial
investment and past costs yet to be recovered and anticipated future costs,
commodity prices and production.

Fair Value of Derivative Financial
Instruments under US GAAP

As disclosed in note 1(k) of the
Consolidated Financial Statements, during 2003, all of the Company's
derivative financial instruments were treated as hedges for Canadian GAAP.
Accordingly, gains and losses on these instruments are not recorded in the
income statement until the hedged transaction occurs. These instruments are
carried at cost. For US GAAP purposes, these instruments are not treated as
hedges and are recorded on the balance sheet at fair value with changes in fair
value being recorded as either income or an expense. The fair value of certain
commodity based instruments are highly volatile. The determination of fair value
for certain non-market traded instruments requires management to make
significant estimates. In addition, the meaningfulness of an instrument's fair
value on December 31, 2003 and the appropriateness of recognizing income based
on such daily values should be viewed with caution. In determining the fair
value of its commodity based instruments, the Company uses an options pricing
model based on market determined price forecasts. For other fair values such as
those for its interest rate swaps, forward currency contracts and preferred
securities, the Company obtains multiple price quotes from external sources.

Oil and Gas Drilling Rights

Talisman has classified all of its mineral
drilling rights as oil and gas properties under the heading property, plant and
equipment. We believe this treatment is consistent with industry practice and
our understanding of the relevant accounting standards. It is our understanding
that the Staff of the Securities and Exchange Commission (SEC) is questioning
certain SEC registrants regarding the appropriateness of this accounting
treatment, specifically as to whether these costs should be classified as
intangible assets on the balance sheet separate from other property, plant and
equipment. Further, it is our understanding that this issue is being considered
by the US Financial Accounting Standards Board (FASB). We believe resolution of
this issue will not materially affect the Company's results of operations.

New Canadian Accounting Pronouncements

The Canadian Institute of Chartered
Accountants (CICA) has issued a number of accounting pronouncements, some of
which may impact the Company's reported results and financial position in
future periods.

Disposal of Long-Lived Assets and
Discontinued Operations

Effective for disposition activities
initiated after May 1, 2003, this pronouncement expands the scope of what assets
or operations are to be reclassified as Discontinued Operations and the
conditions required to reclassify them as such. This eliminates a difference
between US and Canadian GAAP.

Asset Retirement Obligations (future site
restoration and abandonment liabilities)

Effective January 1, 2004, the CICA has
adopted a new accounting standard that will change the method of accruing for
costs associated with the retirement of fixed assets which an entity is legally
obligated to incur. The standard will require entities to record the fair value
of a liability for an asset retirement obligation in the period it is incurred
and a corresponding increase in the carrying amount of the related long-lived
asset. Currently, these obligations are provided for using the unit of
production method or, for certain assets, using the straight-line method over
the estimated remaining lives of the assets. The US has adopted a similar rule
commencing January 1, 2003.

The accounting standard requires the
retroactive restatement of the Company's financial statements upon adoption in
2004. The adjustment required to the December 31, 2003 balance sheet and income
statement to implement this change in accounting would be as follows:

AdjustmentAs Reported
    
    upon adoption
    
    Restated(millions
      of dollars,
    December 31,
    
    of AR0
      standard
    
    December 31,except per share amounts)
    2003
    
    in 2004
    
    2003Property, plant and
      equipment
    9,778
    
    407
    
    10,185Provision for future site
      restoration
    840
    
    311
    
    1,151Future income taxes
    2,088
    
    37
    
    2,125Retained Earnings
    1,844
    
    59
    
    1,903DD&A expense
    1,443
    
    (67)
    
    1,376Other expenses
    16
    
    58
    
    74Future income tax
      (recovery)
    (51)
    
    3
    
    (48)Net income
    1,007
    
    6
    
    1,013Net income per share
      ($/share)
    7.65
    
    0.05
    
    7.70Diluted net income pershare
      ($/share)
    7.57
    
    0.05
    
    7.62Impairments of
      Long-Lived Assets


The CICA issued a new accounting standard on
Impairment of Long-Lived Assets. The new standard is effective for 2004. Under
this standard, if a long-term asset is identified as being impaired, as
determined by its undiscounted future cash flows, the amount of impairment is to
be calculated based on the asset's fair value (present value of expected
future cash flows). This is consistent with the US GAAP methodology. Prior to
this standard, the impairment as calculated under Canadian GAAP was based on the
asset's undiscounted future cash flows.

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Hedge Accounting

The CICA has issued a new accounting
guideline on Hedging Relationships (AcG 13),which is effective for 2004. This
guideline, in addition to supplementing and interpreting existing hedging
requirements under Canadian GAAP, establishes certain other conditions required
before hedge accounting may be applied. Effective January 1, 2004, the Company's
US dollar cross currency swap contracts and interest rate swap contracts are no
longer designated as hedges of the Eurobond. As a result, on January 1, 2004, in
accordance with the Company's accounting policy as detailed in note 1(k) of
the December 31, 2003 Consolidated Financial Statements, the Company will record
these contracts as an asset on the balance sheet at their fair value of $123
million, record a deferred gain of $17 million and an increase to long-term debt
of $106 million, based on the year end exchange rate. The unrealized gain of $17
million on these contracts at year end will be deferred and amortized over the
period to 2009, the original term of the contracts. Starting in January 1, 2004,
these contracts will be revalued at the end of each period with changes in their
fair value being recorded in other income as a gain or loss. Approximately
three-quarters of the swap contracts were terminated in early 2004 for cash
proceeds of $108 million. The termination of these contracts does not accelerate
the recognition of the deferred gain into income.

The Company's long-term debts denominated
in UK pound sterling and Canadian dollars have been designated as hedges of the
Company's net investments in the UK and Canadian self-sustaining operations.
Unrealized foreign exchange gains and losses resulting from the translation of
these debts are deferred and included in a separate component of shareholders'
equity described as cumulative foreign currency translation. Had the Company not
designated these debts as hedges of the Company's net investments in its
self-sustaining operations, the Company's net income could have been subject
to increased volatility in the future upon revaluation into US dollars of the UK
pound sterling and Canadian dollar denominated debts.

Variable Interest Entities

In 2003, the CICA issued a new accounting
guideline on Consolidation of Variable Interest Entities (AcG 15), which is
effective January 1, 2004. AcG 15 provides guidance as to when a company should
consolidate another entity into its Consolidated Financial Statements. Simply
put, a variable interest entity (VIE) is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (i) does not
have equity investors with voting rights or (ii) has equity investors that do
not provide sufficient financial resources for the entity to support its
activities. AcG 15 requires a VIE to be consolidated by a company if that
company is subject to a majority of the risk of loss from the VIE's
activities, is entitled to receive a majority of the VIE's residual returns,
or both. If a company has previously consolidated a VIE but is not subject to a
majority of the risk of loss of its activities nor entitled to receive a
majority of its residual returns, such a VIE is required to be deconsolidated.
Management is currently evaluating the potential impact of this guideline but
does not expect its application would have a significant impact on the Company's
financial position, operating results or cash flows.

Risks and Uncertainties

Talisman is exposed to a
number of risks inherent in exploring for, developing and producing crude oil
and natural gas. The process of estimating oil and gas reserves is complex and
involves a significant number of decisions and assumptions in evaluating
available geological, geophysical, engineering and economic data; therefore,
reserves estimates are inherently uncertain. The Company may adjust estimates of
proved reserves based on production history, results of exploration and
development drilling, prevailing oil and gas prices and other factors, many of
which are beyond the Company's control. In addition, there are numerous
uncertainties in forecasting the amounts and timing of future production, costs,
expenses and the results of exploration and development projects.

The Company's future success
depends largely on its ability to find, develop or acquire additional oil and
gas reserves that are economically recoverable. Exploration and development
drilling may not result in commercially productive reserves. Successful
acquisitions require an assessment of a number of factors, many of which are
uncertain. These factors include recoverable reserves, exploration potential,
future oil and gas prices, operating costs and potential environmental and other
liabilities. Such assessments are inexact and their accuracy is inherently
uncertain.

Oil and gas drilling and
producing operations are subject to many risks including the possibility of
fire, explosions, mechanical failure, pipe failure, chemical spills, accidental
flows of oil, natural gas or well fluids, sour gas releases, and other
occurrences or accidents which could result in personal injury or loss of life,
damage or destruction of properties, environmental damage, interruption of
business, regulatory investigations and penalties and liability to third
parties. The Company mitigates insurable risks to protect against significant
losses by maintaining a comprehensive insurance program, while maintaining
levels and amounts of risk within the Company which management believes to be
acceptable. Talisman believes its liability, property and business interruption
insurance is appropriate to its business and consistent with common industry
practice, although such insurance will not provide coverage in all
circumstances.

The Company's operations may
be adversely affected by changes in governmental policies and legislation or
social instability or other political or economic developments which are not
within the control of Talisman including, among other things, a change in crude
oil or natural gas pricing policy, the risks of war, terrorism, abduction,
expropriation, nationalization, renegotiation or nullification of existing
concessions and contracts, taxation policies, economic sanctions, the imposition
of specific drilling obligations, the development and abandonment of fields,
fluctuating exchange rates and currency controls. In addition, both Indonesia
and Algeria are members of the Organization of Petroleum Exporting Countries.
Accordingly, Talisman's operations in these countries may be impacted by the
application of production quotas. Indonesia, Algeria and Colombia have been
subject to recent economic or political instability and social unrest, military
or rebel hostilities.

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Talisman's financial performance is highly
sensitive to prevailing prices of crude oil and natural gas. Fluctuations in
crude oil or natural gas prices could have a material adverse effect on the
Company's operations and financial condition and the value of its oil and
natural gas reserves. Prices for crude oil and natural gas fluctuate in response
to changes in the supply of and demand for crude oil and natural gas, market
uncertainty and a variety of additional factors that are largely beyond the
Company's control. A substantial and extended decline in the prices of crude
oil or natural gas could result in delay or cancellation of drilling,
development or construction programs, or curtailment in production or result in
unutilized long-term transportation commitments all of which could have a
material adverse impact on the Company. Talisman conducts an annual assessment
of the carrying value of its assets in accordance with Canadian GAAP. If oil and
natural gas prices decline, the carrying value of the Company's assets could
be subject to downward revisions, which could adversely affect Talisman's
reported income for the periods in which the revisions are made. However,
Talisman believes that estimates of forward-looking prices it uses in its
planning process are realistic.

Talisman's Consolidated Financial
Statements are presented in Canadian dollars. Results of operations are affected
primarily by the exchange rates between the Canadian dollar, the US dollar and
the UK pound sterling. These exchange rates have varied substantially in the
last five years. Most of the Company's revenue is received in or is referenced
to US dollar denominated prices, while the majority of Talisman's expenditures
are denominated in Canadian dollars, US dollars and UK pound sterling. A change
in the relative value of the Canadian dollar against the US dollar would also
result in an increase or decrease in our US dollar denominated debt, as
expressed in Canadian dollars and the related interest expense.

All phases of the oil and natural gas
business are subject to environmental regulation pursuant to a variety of laws
and regulations in Canada, the UK, the US and other countries in which Talisman
does business. These regulatory regimes are laws of general application that
apply to the Company's business in the same manner as they apply to other
companies or enterprises in the energy industry. Environmental legislation
imposes, among other things, restrictions, liabilities and obligations in
connection with the generation, handling, storage, transportation, treatment and
disposal of hazardous substances and waste and in connection with spills,
releases and emissions of various substances to the environment. Environmental
legislation also requires that pipelines, wells, facility sites and other
properties associated with our operations be operated, maintained, abandoned and
reclaimed to the satisfaction of applicable regulatory authorities. In addition,
certain types of operations, including exploration and development projects, may
require the submission and approval of environmental impact assessments or
permit applications. Compliance with environmental legislation can require
significant expenditures and failure to comply with environmental legislation
may result in the imposition of fines and penalties and liability for clean up
costs and damages. Additionally, the Company's business is  subject to the trend toward increased civil
liability for environmental matters. Although Talisman currently believes that
the costs of complying with environmental legislation and dealing with
environmental civil liabilities will not have a material adverse effect on the
Company's financial condition or results of operations, there can be no
assurance that such costs in the future will not have such an effect. Talisman
expects to incur site restoration costs over a prolonged period as existing
fields are depleted. The Company provides for future abandonment and reclamation
costs in its Consolidated Financial Statements in accordance with Canadian GAAP.
Additional information regarding future abandonment and reclamation costs is set
forth in the notes to the annual Consolidated Financial Statements.

In 1994, the United Nations' Framework
Convention on Climate Change came into force and three years later led to the
Kyoto Protocol (the "Protocol") which requires, upon ratification, certain
nations to reduce their emissions of carbon dioxide and other greenhouse gases.
In December 2002, the Canadian federal government ratified the Protocol. If
certain conditions are met and the Protocol enters into force internationally,
Canada will be required to reduce its greenhouse gas (GHG) emissions to 6% below
1990 levels over the period beginning in 2008 and ending in 2012. Currently,
Canadian oil and gas producers are in discussions with the provincial and
federal levels of government regarding implementation mechanisms for the
industry. It is premature to predict what impact implementation could have on
Canadian oil and gas producers but it is likely that any mandated reduction in
GHG emissions will result in increased costs. The federal government has stated
that these costs would not be expected to exceed $15/tonne of carbon dioxide
emissions reduced and that producers would not be required to reduce GHG
emissions per unit of production by more than 15%. The federal government has
also indicated its support for several important principles that are intended to
protect the competitiveness of the oil and gas industry beyond 2012, including a
10-year emissions target lock-in period for all new projects and additional
flexibility mechanisms for achieving compliance.

The UK has also ratified the Kyoto Protocol,
with a reduction commitment of 12.5% below 1990 levels by 2008 - 2012. The UK
Government, however, has set a more aggressive national goal of moving towards a
20% reduction in carbon dioxide emissions by 2010. Talisman's UK installations
will participate in the first phase of the European Union Emission Trading
Scheme ("EU ETS"), which runs from 2005 to 2007, inclusive. The UK
Government's draft National Allocation Plan ("NAP") for the first phase of
the EU ETS was published for broad consultation in January 2004. When finalized
in September 2004, the NAP will dictate the total cap on carbon dioxide
emissions for the covered sectors, the methods for allocating emission
allowances to covered installations and the number of emission allowances to be
allocated to each covered installation. Cost of compliance will vary with a
number of factors including the final allocation numbers and liquidity of the
carbon markets.

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From time to time, Talisman is the subject
of litigation arising out of the Company's operations. Damages claimed under
such litigation, including the litigation discussed below, may be material or
may be indeterminate and the outcome of such litigation may materially impact
the Company's financial condition or results of operations. While Talisman
assesses the merits of each lawsuit and defends itself accordingly, the Company
may be required to incur significant expenses or devote significant resources to
defending itself against such litigation. These claims are not currently
expected to have a material impact on the Company's financial position.

Talisman continues to be subject to a
lawsuit brought by the Presbyterian Church of Sudan and others under the Alien
Tort Claims Act in the United

States District Court for the
Southern District of New York. The lawsuit, which is seeking class action
status, alleges 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 indirect interest in oil operations in Sudan. In
July 2003, Talisman filed a motion to dismiss the lawsuit for lack of personal
jurisdiction of the Court over Talisman. In August 2003, the plaintiffs filed a
motion seeking certification of the case as a class action. Talisman is in the
process of challenging this certification. No decision is expected on either of
these motions prior to the third quarter of 2004. Talisman believes these claims
to be entirely without merit and is continuing to vigorously defend itself
against this lawsuit and does not expect this to have a material adverse effect.

|Outlook for 2004                                                      |                |  |                      |  |                          |                       |             |   |                   |                 |       | 
|--------------------------------------------------------------------- | -------------- |  | -------------------- |  | ------------------------ | --------------------- | ----------- | - | ----------------- | --------------- | ----- | 
|                                                                      |                |  |                      |  | Estimated for
      2004 |                       | Actual 2003 |  
|                                                                      |                |  |                      |  |                          |                       |             |  
|Cash flow1                                                            |                |  |                      |  | $                        | 2.2-2.8
      billion |             | $ | 2.7
      billion |                
|Cash flow per share1                                                  |                |  |                      |  |                          | $                     | 17-22       |   |                   | $               | 21.21 | 
|                                                                      |                |  |                      |  |                          |                       |             |   |                   |                 |       | 
|Exploration and
      development spending(millions
      of dollars) | Exploration    |  | Development          |  |                          |                       | Total       |   |                   | Total
      E&D |      
|                                                                      |                |  |                      |  |                          |                       |             |   |                   |                 |      
|North
      America                                                   | 431            |  | 704                  |  |                          |                       | 1,135       |   |                   |                 | 1,109 | 
|North Sea                                                             | 119            |  | 487                  |  |                          |                       | 606         |   |                   |                 | 496   | 
|Southeast
      Asia                                                  | 62             |  | 253                  |  |                          |                       | 315         |   |                   |                 | 316   | 
|Algeria                                                               | -              |  | 44                   |  |                          |                       | 44          |   |                   |                 | 34    | 
|Trinidad                                                              | 40             |  | 130                  |  |                          |                       | 170         |   |                   |                 | 130   | 
|Other                                                                 | 85             |  | -                    |  |                          |                       | 85          |   |                   |                 | 95    | 
|                                                                      |                |  |                      |  |                          |                       |             |   |                   |                 |       | 
|                                                                      | 737            |  | 1,618                |  |                          |                       | 2,355       |   |                   |                 | 2,180 | 
|                                                                      |                |  |                      |  |                          |                       |             |   |                   |                 |       | 
|Production(daily
      average)                                       | Lower estimate |  | Upper
      estimate |  | Actual
      2003        |                      
|                                                                      |                |  |                      |  |                          |                      
|Oil and liquids (bbls/d)                                              |                |  |                      |  |                          |                       |             |   |                   |                 |       | 
|North
      America                                                   |                |  | 54,000               |  |                          | 56,000                |             |   | 59,578            |                
|North Sea                                                             |                |  | 109,000              |  |                          | 122,000               |             |   | 113,075           |                
|Southeast
      Asia                                                  |                |  | 33,000               |  |                          | 38,000                |             |   | 24,430            |                
|Algeria                                                               |                |  | 14,000               |  |                          | 16,000                |             |   |                   | 6,594           |      
|Sudan                                                                 |                |  | -                    |  |                          |                       | -           |   |                   | 13,039          |      
|                                                                      |                |  |                      |  |                          |                       |             |   |                   |                 |      
|                                                                      |                |  | 210,000              |  |                          | 232,000               |             |   | 216,716           |                
|                                                                      |                |  |                      |  |                          |                       |             |   |                   |                
|Natural gas (mmcf/d)                                                  |                |  |                      |  |                          |                       |             |   |                   |                 |       | 
|North
      America                                                   |                |  | 885                  |  |                          |                       | 905         |   |                   |                 | 864   | 
|North Sea                                                             |                |  | 120                  |  |                          |                       | 130         |   |                   |                 | 109   | 
|Southeast
      Asia                                                  |                |  | 225                  |  |                          |                       | 240         |   |                   |                 | 117   | 
|                                                                      |                |  |                      |  |                          |                       |             |   |                   |                 |       | 
|                                                                      |                |  | 1,230                |  |                          |                       | 1,275       |   |                   |                 | 1,090 | 
|                                                                      |                |  |                      |  |                          |                       |             |   |                   |                 |       | 
|Barrel of oil equivalent (mboe/d)                                     |                |  | 415                  |  |                          |                       | 445         |   |                   |                 | 398   | 
|                                                                      |                |  |                      |  |                          |                       |             |   |                   |                 |       | 
|Commodity price and
      exchange rate assumptions                   |                |  |                      |  |                          |                       |             |   |                   |                 |       | 
|US$/bbl
      WTI oil price                                           |                |  | 25                   |  |                          |                       | 30          |   |                   |                 | 30.99 | 
|US$/mmbtu
      NYMEX                                                 |                |  | 4.75                 |  |                          |                       | 5.50        |   |                   |                 | 5.44  | 
|C$/US$
      exchange rate                                            |                |  | 0.77                 |  |                          |                       | 0.73        |   |                   |                 | 0.71  | 
|C$/
      exchange rate                                               |                |  | 2.50                 |  |                          |                       | 2.25        |   |                   |                 | 2.29  | 
|                                                                      |                |  |                      |  |                          |                       |             |   |                   |                 |       | 

|1 | Cash flow and cash flow
      per share are considered to be non-GAAP financial measures. The estimate
      for 2004 is calculated using the same method as in 2003. A 2004 estimate
      of net income and net income per share has not been provided due to the
      inherent difficulties of estimating certain non-cash expenses, such as dry
      hole, property impairments and non-cash stock based compensation.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Talisman expects to increase production
4-12% in 2004. Production for 2004 is expected to average approximately
415,000-445,000 boe/d with a full year's production from the PM-3 CAA
development and Algeria and increased North America natural gas production
resulting from increased exploration and development spending and the impact of
the recently completed infrastructure projects.

The Company expects cash flow per share of
$17-22 in 2004

($2.2-2.8 billion), assuming US$25-30/bbl
WTI oil, US$4.75-5.50/mmbtu NYMEX gas and C$1=US$0.73-0.77. Unit operating costs
are expected to increase by 5-10% largely due to an anticipated strengthening of
the UK pound sterling against the Canadian dollar. However, unit production
costs, in addition to being impacted by currency exchange rates are dependent on
achieving expected production levels. Net capital spending is expected to be
$2.35 billion and excludes significant corporate and asset acquisitions. The
Company anticipates participating in the drilling of 640 North American and 118
international wells during 2004. Cash flow is expected to be sufficient to fund
budgeted capital spending during 2004.

North America

Natural gas continues to be the focus of the
Company's exploration activities in North America with a shift towards the
remaining underdeveloped parts of the Western Canadian Sedimentary Basin
supplemented by low risk oil projects. North American natural gas production in
2004 is expected to increase between 2-5% to average between 885-905 mmcf/d,
while oil and liquids is expected to average 54,000-56,000 bbls/d, with the
Company spending less than 30% of the North America budget on oil exploration
and development. The Company expects to spend $1.1 billion on capital projects
and drilling in 2004, up 2% from 2003. The Company plans to participate in
approximately 640 wells in 2004, including 11 in Appalachia. Unit operating
costs are expected to increase to slightly over $5/boe due to industry wide cost
issues such as higher power and water handling charges.

North Sea

North Sea production is expected to average
109,000-122,000 bbls/d and 120-130 mmcf/d in 2004. The Company's North Sea
strategy is to focus on development projects and adjacent exploration
opportunities around core operated properties and infrastructure. Of the $606
million of planned capital spending, a 22% increase over 2003, 80% is related to
development projects. Eight exploration and 25 development wells are planned for
2004. Total North Sea operating expenses are expected to increase in 2004 with
the addition of Gyda and a strengthening of the pound sterling against the
Canadian dollar. At current exchange rates (approximately 1=C$2.50) unit
operating costs could be in the $14/boe range.

Southeast Asia

Natural gas sales in Indonesia have recently
increased with new sales to Singapore and increased demand from Caltex.
Indonesian natural gas sales are expected to average 135-140 mmcf/d in 2004.
Discussions are currently underway to secure additional long-term gas sales in
Southeast Asia to monetize Corridor's large existing natural gas reserves. An
expansion of the gas plant facilities at Corridor PSC from 300-700 mmcf/d over
the next three years is planned in order to accommodate additional anticipated
gas sales. This plant expansion accounts for a majority of the planned capital
spending of $65 million in Indonesia during 2004. Oil and liquids production in
the Indonesian blocks is expected to average 12,000-13,000 bbls/d with natural
decline.

With the startup of the PM-3 CAA development
project, Talisman's oil and liquids production in Malaysia/Vietnam is expected
to average between 21,000-25,000 bbls/d. Natural gas production from the project
is expected to average 90-100 mmcf/d during 2004. Total Malaysia/Vietnam daily
average production in 2004 is expected to exceed 36,000 boe/d, with an upper
range of 42,000 boe/d.

Talisman's capital requirements in
Malaysia/Vietnam are expected to fall in 2004 due to the commissioning of the
PM-3 CAA development project in 2003. Total forecasted capital spending in
Malaysia/Vietnam is expected to be $250 million and will be primarily focused on
drilling 32 development wells in PM-3 CAA. Five exploration wells are also
planned for 2004: three on PM-3 CAA and Block PM-305 and two on Block 46-02
offshore Vietnam. Development of the South Angsi discovery in Block PM-305, with
first oil expected in 2005, will begin in 2004 with the drilling of two
development wells and facilities fabrication.

Operating costs in Southeast Asia are
expected to decrease to approximately $3/boe in 2004 with the higher anticipated
volumes from PM-3 CAA and additional anticipated natural gas sales in Indonesia.

Algeria

Production from the Ourhoud and MLN fields
in Algeria is expected to average 14,000-16,000 bbls/d. Operating costs are
expected to fall to below $6/boe due to higher forecasted production. A capital
budget of $44 million is estimated and includes drilling six wells in the
Greater MLN area, 10 wells at Ourhoud and an expansion of the Greater MLN
facility to increase production capacity.

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Trinidad

Capital spending in Trinidad is budgeted at
$170 million with the majority related to the completion of the Angostura oil
and gas development project on offshore Block 2(c),including facilities
construction and participation in drilling 15 development wells. First
production is expected in early 2005. Talisman expects to participate in
drilling four offshore exploration and appraisal wells, two each on Blocks 2(c)
and 3(a). The Company expects to complete an onshore seismic program in the
Eastern Block prior to drilling in 2005.

Other

The Company is actively exploring in
Colombia where it expects to spend $28 million in 2004 to participate in one
exploration well and acquire seismic. The Company drilled its first prospect in
Alaska in early 2004 with a $15 million budget. The Company also plans to
conduct a seismic program in Block 10 in Qatar and to continue technical
evaluation of its acreage offshore East Coast Canada.

Economic Assumptions

Talisman's 2004 business plan was
formulated on the assumption of US$25-30/bbl WTI oil and US$4.75-5.50/mmbtu
NYMEX gas prices. The 2004 business plan also incorporates exchange rate
assumptions of C$1=US$0.73-0.77 and 1=C$2.25-2.50.

Currently, Talisman has committed
approximately 12% of its anticipated 2004 North American natural gas production
under both commodity sales contracts and commodity price derivative contracts at
an average price of $5/mcf. In addition, approximately 37% of the Company's
2004 anticipated oil and liquids production has been hedged with 56,000 bbls/d
using collars with floor and ceiling prices averaging US$24-29/bbl and 23,000
bbls/d fixed at an average price of US$28/bbl.

A summary of the contracts outstanding at
year end can be found in notes 9 and 10 of the Consolidated Financial
Statements. Additional discussion of the Company's commodity price hedging
program can be found in the MD&A section entitled 'Derivative Financial
Instruments and Commodity Sales Contracts'.

Liquidity

An increase in the Company's
2004 year end net debt position is anticipated due to an expected softening of
commodity prices, the debt refinancing of the redeemed US$150 million of
preferred securities and an increase in planned capital spending. Significant
acquisitions or dispositions, a change from expected commodity prices or the
continuation of share repurchases would impact the Company's projected 2004
year end net debt position.

Sensitivities

Talisman's financial
performance is affected by factors such as changes in production volumes,
commodity prices and exchange rates. The estimated impact of these factors on
the Company's 2004 financial performance is summarized in the following table
and is based on a WTI oil price of US$30/bbl, a NYMEX natural gas price of US$5/mmbtu
and exchange rates of C$1=US$0.76 and 1=C$2.50.

|Approximate impact in
      2004              |            |     |            |    | 
|--------------------------------------------- | ---------- | --- | ---------- | -- | 
|(millions of dollars)                         | Net Income |     | Cash Flow1 |   
|                                              |            |     |            |   
|Volume changes                                |            |     |            |    | 
|Oil - 1,000 bbls/d                            |            | 4   |            | 7  | 
|Natural
      gas - 10 mmcf/d                 |            | 6   |            | 13 | 
|                                              |            |     |            |    | 
|Price changes2                                |            |     |            |    | 
|Oil - US$1.00/bbl                             |            | 35  |            | 36 | 
|Natural
      gas (North America)3-C$0.10/mcf | 15         |     | 21         |   
|                                              |            |     |            |    | 
|Exchange rate changes                         |            |     |            |    | 
|US$
      increased by US$0.01                |            | 24  |            | 38 | 
|increase by C$0.031                           |            | (8) |            | 1  | 
|                                              |            |     |            |    | 

|1 | Cash flow is a non-GAAP
      measure, the components of which are set out in note 14 of the
      Consolidated Financial Statements.                                                                                                                                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2 | The impact of commodity
      contracts outstanding for 2004 has been included.                                                                                                                                                                                                                                                                                                                                                  
|3 | Price sensitivity on
      natural gas relates to North American natural gas only. The Company's
      exposure to changes in North Sea and Malaysia/Vietnam natural gas prices
      is not material. Most of the Indonesia natural gas price is based on the
      price of crude oil and accordingly has been included in the price
      sensitivity for oil except for a small portion which is sold at a fixed
      price.



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Summary of Quarterly Results

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

|                                                              |                                                   |            |         |         |         |          |         |         |         | Three months
      ended |        
|------------------------------------------------------------- | ------------------------------------------------- | ---------- | ------- | ------- | ------- | -------- | ------- | ------- | ------- | ------------------------ | -------
|(millions of
      Canadian dollars, unless otherwise stated) |                                                   | Total Year |         | Dec. 31 |         | Sept. 30 |         | June 30 |         | March 31                 |        
|                                                              |                                                   |            |         |         |         |          |         |         |         |                          |        
|2003                                                          | Total revenue                                     |            |         |         |         |          |         | 4,477   |         | 1,097                    |        
|                                                              | Net income1                                       |            |         |         |         |          |         | 1,007   |         | 107                      |        
|                                                              | Net income
      available to common shareholders |            |         |         | 985     |          | 102     |         | 120     |                          | 196    
|                                                              | Cash flow                                         |            |         |         |         |          |         | 2,729   |         | 644                      |        
|                                                              | Total assets                                      |            |         |         |         |          |         | 11,365  |         | 11,365                   |        
|                                                              | Total long-term liabilities                       |            |         |         |         |          |         | 5,188   |         | 5,188                    |        
|                                                              |                                                   |            |         |         |         |          |         |         |         |                          |        
|                                                              | Capital expenditures                              |            |         |         |         |          |         |         |         |                          |        
|                                                              | Exploration                                       |            |         |         |         |          |         | 784     |         | 221                      |        
|                                                              | Development                                       |            |         |         |         |          |         | 1,396   |         | 437                      |        
|                                                              |                                                   |            |         |         |         |          |         |         |         |                          |        
|                                                              | Per common share (dollars)                        |            |         |         |         |          |         |         |         |                          |        
|                                                              | Net income1                                       |            |         |         |         |          |         | 7.65    |         | 0.80                     |        
|                                                              | Diluted net income                                |            |         |         |         |          |         | 7.57    |         | 0.78                     |        
|                                                              | Cash flow                                         |            |         |         |         |          |         | 21.21   |         | 5.03                     |        
|                                                              |                                                   |            |         |         |         |          |         |         |         |                          |        
|                                                              | Daily average
      production                    |            |         |         |         |          |         |         |         |                          |        
|                                                              | Oil and
      liquids (bbls/d)                    |            |         |         |         |          | 216,716 |         | 229,166 |                          | 202,008
|                                                              | Natural gas
      (mmcf/d)                        |            |         |         |         |          | 1,090   |         | 1,138   |                          | 1,064  
|                                                              |                                                   |            |         |         |         |          |         |         |         |                          |        
|                                                              | Total (mboe/d)                                    |            |         |         |         |          |         | 398     |         | 419                      |        
|                                                              |                                                   |            |         |         |         |          |         |         |         |                          |        
|2002                                                          | Total revenue                                     |            |         |         |         |          |         | 4,452   |         | 1,242                    |        
|                                                              | Net income1                                       |            |         |         |         |          |         | 524     |         | 182                      |        
|                                                              | Net income
      available to common shareholders |            |         |         | 500     |          | 176     |         | 145     |                          | 84     
|                                                              | Cash flow                                         |            |         |         |         |          |         | 2,645   |         | 759                      |        
|                                                              | Total assets                                      |            |         |         |         |          |         | 11,594  |         | 11,594                   |        
|                                                              | Total long-term liabilities                       |            |         |         |         |          | 6,103   |         | 6,103   |                          | 5,763  
|                                                              |                                                   |            |         |         |         |          |         |         |         |                          |        
|                                                              | Capital expenditures                              |            |         |         |         |          |         |         |         |                          |        
|                                                              | Exploration                                       |            |         |         |         |          |         | 628     |         | 174                      |        
|                                                              | Development                                       |            |         |         |         |          |         | 1,220   |         | 283                      |        
|                                                              |                                                   |            |         |         |         |          |         |         |         |                          |        
|                                                              | Per common share (dollars)                        |            |         |         |         |          |         |         |         |                          |        
|                                                              | Net income1                                       |            |         |         |         |          |         | 3.73    |         | 1.33                     |        
|                                                              | Diluted net income                                |            |         |         |         |          |         | 3.67    |         | 1.31                     |        
|                                                              | Cash flow                                         |            |         |         |         |          |         | 19.73   |         | 5.72                     |        
|                                                              |                                                   |            |         |         |         |          |         |         |         |                          |        
|                                                              | Daily average
      production                    |            |         |         |         |          |         |         |         |                          |        
|                                                              | Oil and liquids
      (bbls/d)272,740             |            | 270,582 |         | 267,393 |          | 275,157 |         | 277,971 |                          |        
|                                                              | Natural gas (mmcf/d)                              |            |         |         |         |          | 1,036   |         | 1,028   |                          | 1,024  
|                                                              |                                                   |            |         |         |         |          |         |         |         |                          |        
|                                                              | Total (mboe/d)445                                 | 442        |         | 438     |         | 450      |         | 452     |         |                          |        
|                                                              |                                                   |            |         |         |         |          |         |         |         |                          |        

1 Net
income and net income before discontinued operations and extraordinary items are
the same.

The following discussion highlights some of
the more significant factors that impacted the net income in the eight most
recently completed quarters.

In the first quarter of 2003, the gain on
the sale of the Sudan operations increased net income by $296 million. The sale
of these operations contributed to the drop in revenues during the following
three quarters of 2003, which was partially offset by production increases in
other areas and continued high commodity prices. Net income during the second
quarter of 2003 was increased $160 million due to a reduction in the Canadian
federal and provincial tax rates. The Company began recording stock-based
 compensation in the second quarter of 2003.
The second quarter's net income was reduced by a $105 million ($70 million
after tax) catch-up expense relating to outstanding stock options. The third and
fourth quarters of 2003 included an additional $80 million ($50 million after
tax) of stock-based compensation expense.

During the second quarter of 2002 the
Company recorded a $128 million future tax expense related to an increase in UK
corporate tax rates. Total revenue generally increased throughout the four
quarters of 2002. A decrease in production primarily due to scheduled
maintenance and other operational issues during the third and fourth quarters of
2002 was more than offset by higher commodity prices.

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