EXHIBIT 99.7

FOR THE YEAR ENDED
DECEMBER 31, 2011

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|CONSOLIDATED FINANCIAL STATEMENTS |  | GRAPHIC
|--------------------------------- |  | -------

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LOGO

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Report of Management

Management is responsible for the Consolidated Financial Statements.

Management
has prepared the Consolidated Financial Statements in accordance with International Financial Reporting Standards. If alternative accounting methods exist, management has chosen those it
deems most appropriate in the circumstances. Financial statements are not precise since they include certain amounts based on estimates and judgments. Management has ensured that the Consolidated
Financial Statements are presented fairly in all material respects.

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

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

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

Management Report on Internal Control over Financial
Reporting

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

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

Based
on management's assessment as at December 31, 2011, the end of the Company's fiscal year, management has concluded that the Company's internal control over financial reporting
is effective.

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

|                                      |  |                                                              
|------------------------------------- |  | -------------------------------------------------------------
|GRAPHIC                               |  | GRAPHIC                                                      
|John A. Manzoni                       |  | L. Scott Thomson                                             
|President and Chief Executive Officer |  | Executive Vice-President, Finance and Chief Financial Officer
|March 1, 2012                         |  |                                                              

1TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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

To the Shareholders ofTalisman Energy Inc.

We
have auditedTalisman Energy Inc.'s internal control over financial reporting as at December 31, 2011, based on criteria established in Internal
Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Talisman Energy Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company's internal control over financial reporting based on our audit.

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

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

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

In
our opinion, Talisman Energy Inc. maintained, in all material respects, effective internal control over financial reporting as at December 31, 2011, based on the COSO criteria.

We
also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the Consolidated
Balance Sheets of Talisman Energy Inc. as at December 31, 2011 and 2010 and January 1, 2010 and the Consolidated Statements of Income, Comprehensive Income, Changes in
Shareholders' Equity and Cash Flows for the years ended December 31, 2011 and 2010, and our report dated March 1, 2012 expressed an unqualified opinion thereon.

LOGO

Chartered
Accountants

Calgary,
Canada
March 1, 2012

2TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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Independent Auditors' Report of Registered Public Accounting
Firm

To
the Shareholders ofTalisman Energy Inc.

We
have audited the accompanying Consolidated Financial Statements ofTalisman Energy Inc., which comprise the Consolidated Balance Sheets as at
December 31, 2011 and 2010, and January 1, 2010, and the Consolidated Statements of Income, Comprehensive Income, Changes in Shareholders' Equity and Cash Flows for the years ended
December 31, 2011 and 2010, and a summary of significant accounting policies and other explanatory information.

MANAGEMENT'S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.

AUDITORS' RESPONSIBILITY

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian
generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

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

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

OPINION

In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of Talisman Energy Inc. as at
December 31, 2011 and 2010, and January 1, 2010, and its financial performance and cash flows for the years ended December 31, 2011 and 2010 in accordance with International
Financial Reporting Standards as issued by the International Accounting Standards Board.

OTHER MATTER

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Talisman Energy Inc.'s
internal control over financial reporting as at December 31, 2011, based on criteria established inInternal Control  Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2012 expressed an unqualified opinion on Talisman
Energy Inc.'s internal control over financial reporting.

LOGO

Chartered
Accountants

Calgary,
Canada
March 1, 2012

3TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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Consolidated Balance Sheets

|                                                 |                                                           |              |       |              |       |            |      
|------------------------------------------------ | --------------------------------------------------------- | ------------ | ----- | ------------ | ----- | ---------- | -----
|                                                 |                                                           | December 31, |       | December 31, |       | January 1, |      
|(millions of US$)                                |                                                           | 2011         |       | 2010         |       | 2010       |      
|                                                
|                                                 |                                                           |              |       | (note 4)     |       | (note 4)   |      
|Assets                                           |                                                           |              |       |              |       |            |      
|Current                                          |                                                           |              |       |              |       |            |      
|                                                 |                                                           |             
|                                                 | Cash and cash equivalents (note 28)                       |              | 474   |              | 1,655 |            | 1,628
|                                                 |                                                           |             
|                                                 | Accounts receivable (note 9)                              |              | 1,550 |              | 1,287 |            | 1,216
|                                                 |                                                           |             
|                                                 | Risk management (note 22)                                 |              | 42    |              | 119   |            | 29   
|                                                 |                                                           |             
|                                                 | Inventories (note 10)                                     |              | 164   |              | 144   |            | 141  
|                                                 |                                                           |             
|                                                 | Prepaid expenses                                          |              | 24    |              | 20    |            | 8    
|                                                 |                                                           |             
|                                                 | Assets held for sale (note 5)                             |              |      |              |      |            | 22   
|                                                
|                                                 |                                                           | 2,254        |       | 3,225        |       | 3,044      |      
|                                                
|Other assets (note 11)                           |                                                           | 101          |       | 667          |       | 74         |      
|                                                 |                                                           |             
|Investments (note 12)                            |                                                           | 395          |       | 121          |       | 34         |      
|                                                 |                                                           |             
|Risk management (note 22)                        |                                                           | 24           |       | 25           |       | 40         |      
|                                                 |                                                           |             
|Goodwill (note 8)                                |                                                           | 1,317        |       | 1,164        |       | 1,183      |      
|                                                 |                                                           |             
|Property, plant and equipment (note 13)          |                                                           | 15,909       |       | 13,266       |       | 13,254     |      
|                                                 |                                                           |             
|Exploration and evaluation assets (note 13)      |                                                           | 3,954        |       | 3,442        |       | 2,212      |      
|                                                 |                                                           |             
|Deferred tax assets (note 26)                    |                                                           | 272          |       | 184          |       | 147        |      
|                                                
|                                                 |                                                           | 21,972       |       | 18,869       |       | 16,944     |      
|                                                
|Total assets                                     |                                                           | 24,226       |       | 22,094       |       | 19,988     |      
|                                                
|Liabilities                                      |                                                           |              |       |              |       |            |      
|Current                                          |                                                           |              |       |              |       |            |      
|                                                 |                                                           |             
|                                                 | Bank indebtedness                                         |              | 60    |              | 2     |            | 35   
|                                                 |                                                           |             
|                                                 | Accounts payable and accrued liabilities                  |              | 2,622 |              | 2,722 |            | 2,040
|                                                 |                                                           |             
|                                                 | Risk management (note 22)                                 |              |      |              | 117   |            | 266  
|                                                 |                                                           |             
|                                                 | Income and other taxes payable                            |              | 371   |              | 513   |            | 341  
|                                                 |                                                           |             
|                                                 | Current portion of long-term debt (note 17)               |              | 410   |              | 359   |            | 10   
|                                                 |                                                           |             
|                                                 | Liabilities associated with assets held for sale (note 5) |              |      |              |      |            | 7    
|                                                
|                                                 |                                                           | 3,463        |       | 3,713        |       | 2,699      |      
|                                                
|Decommissioning liabilities (note 15)            |                                                           | 2,982        |       | 2,580        |       | 2,003      |      
|                                                 |                                                           |             
|Other long-term obligations (note 18)            |                                                           | 346          |       | 326          |       | 316        |      
|                                                 |                                                           |             
|Risk management (note 22)                        |                                                           |             |       |             |       | 6          |      
|                                                 |                                                           |             
|Long-term debt (note 17)                         |                                                           | 4,485        |       | 3,845        |       | 3,601      |      
|                                                 |                                                           |             
|Deferred tax liabilities (note 26)               |                                                           | 2,932        |       | 2,435        |       | 2,516      |      
|                                                
|                                                 |                                                           | 10,745       |       | 9,186        |       | 8,442      |      
|                                                
|Contingencies and commitments (note 23)          |                                                           |              |       |              |       |            |      
|Shareholders' equity                             |                                                           |              |       |              |       |            |      
|                                                 |                                                           |             
|Common shares (note 20)                          |                                                           | 1,561        |       | 1,480        |       | 1,401      |      
|                                                 |                                                           |             
|Preferred shares (note 20)                       |                                                           | 191          |       |             |       |           |      
|                                                 |                                                           |             
|Contributed surplus                              |                                                           | 186          |       | 108          |       | 117        |      
|                                                 |                                                           |             
|Retained earnings                                |                                                           | 7,292        |       | 6,819        |       | 6,135      |      
|                                                 |                                                           |             
|Accumulated other comprehensive income (note 21) |                                                           | 788          |       | 788          |       | 1,194      |      
|                                                
|                                                 |                                                           | 10,018       |       | 9,195        |       | 8,847      |      
|                                                
|Total liabilities and shareholders' equity       |                                                           | 24,226       |       | 22,094       |       | 19,988     |      
|                                                

See accompanying notes.

On
behalf of the Board:

|LOGO                  |  | LOGO                 | 
|--------------------- |  | -------------------- | 
|Charles R. Williamson |  | William R. P. Dalton | 
|Chairman of the Board |  | Director             | 

4TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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Consolidated Statements of Income

|                                                                |                                                                 |       |       |          |       |  
|--------------------------------------------------------------- | --------------------------------------------------------------- | ----- | ----- | -------- | ----- | -
|Years ended December 31(millions of US$)                        |                                                                 | 2011  |       | 2010     |       |  
|                                                               
|                                                                |                                                                 |       |       | (note 4) |       |  
|Revenue                                                         |                                                                 |       |       |          |       |  
|                                                                |                                                                 |      
|                                                                | Sales                                                           |       | 8,194 |          | 6,875 |  
|                                                                |                                                                 |      
|                                                                | Other income (note 24)                                          |       | 78    |          | 107   |  
|                                                               
|Total revenue and other income                                  |                                                                 | 8,272 |       | 6,982    |       |  
|                                                               
|Expenses                                                        |                                                                 |       |       |          |       |  
|                                                                |                                                                 |      
|                                                                | Operating                                                       |       | 2,190 |          | 1,890 |  
|                                                                |                                                                 |      
|                                                                | Transportation                                                  |       | 216   |          | 221   |  
|                                                                |                                                                 |      
|                                                                | General and administrative                                      |       | 431   |          | 371   |  
|                                                                |                                                                 |      
|                                                                | Depreciation, depletion and amortization                        |       | 1,949 |          | 1,788 |  
|                                                                |                                                                 |      
|                                                                | Impairment (note 14)                                            |       | 226   |          | 301   |  
|                                                                |                                                                 |      
|                                                                | Dry hole                                                        |       | 241   |          | 113   |  
|                                                                |                                                                 |      
|                                                                | Exploration                                                     |       | 427   |          | 374   |  
|                                                                |                                                                 |      
|                                                                | Finance costs (note 16)                                         |       | 278   |          | 276   |  
|                                                                |                                                                 |      
|                                                                | Share-based payments expense (recovery) (note 20)               |       | (310  | )        | 212   |  
|                                                                |                                                                 |      
|                                                                | (Gain) loss on held-for-trading financial instruments (note 22) |       | 210   |          | (87   | )
|                                                                |                                                                 |      
|                                                                | Gain on asset disposals (note 5)                                |       | (192  | )        | (520  | )
|                                                                |                                                                 |      
|                                                                | Other, net (note 25)                                            |       | 161   |          | 72    |  
|                                                               
|Total expenses                                                  |                                                                 | 5,827 |       | 5,011    |       |  
|                                                               
|Income before taxes                                             |                                                                 | 2,445 |       | 1,971    |       |  
|                                                               
|Income taxes (note 26)                                          |                                                                 |       |       |          |       |  
|                                                                |                                                                 |      
|                                                                | Current income tax                                              |       | 1,441 |          | 1,136 |  
|                                                                |                                                                 |      
|                                                                | Deferred income tax (recovery)                                  |       | 228   |          | (110  | )
|                                                               
|                                                                |                                                                 | 1,669 |       | 1,026    |       |  
|                                                               
|Net income                                                      |                                                                 | 776   |       | 945      |       |  
|                                                               
|Per common share (US$):                                         |                                                                 |       |       |          |       |  
|                                                                |                                                                 |      
|                                                                | Net income                                                      |       | 0.76  |          | 0.93  |  
|                                                                |                                                                 |      
|                                                                | Diluted net income                                              |       | 0.38  |          | 0.93  |  
|                                                               
|Weighted average number of common shares outstanding (millions) |                                                                 |       |       |          |       |  
|                                                                |                                                                 |      
|                                                                | Basic (note 29)                                                 |       | 1,023 |          | 1,018 |  
|                                                                |                                                                 |      
|                                                                | Diluted (note 29)                                               |       | 1,038 |          | 1,018 |  
|                                                               

See accompanying notes.

5TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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Consolidated Statements of Comprehensive Income

|                                                                         |                                 |      |   |          |     |  
|------------------------------------------------------------------------ | ------------------------------- | ---- | - | -------- | --- | -
|Years ended December 31(millions of US$)                                 |                                 | 2011 |   | 2010     |     |  
|                                                                        
|                                                                         |                                 |      |   | (note 4) |     |  
|Net income                                                               |                                 | 776  |   | 945      |     |  
|                                                                         |                                 |     
|Foreign currency translation1                                            |                                 |     |   | (408     | )   |  
|                                                                         |                                 |     
|Actuarial losses relating to pension and other post-employment benefits2 |                                 | (26  | ) | (12      | )   |  
|                                                                         |                                 |     
|Gains on derivatives designated as cash flow hedges                      |                                 |      |   |          |     |  
|                                                                         |                                 |     
|                                                                         | Gains arising during the year3  |      |  |          | 13  |  
|                                                                         |                                 |     
|                                                                         | Gains recognized in net income4 |      |  |          | (11 | )
|                                                                        
|                                                                         |                                 |     |   | 2        |     |  
|                                                                        
|Other comprehensive loss                                                 |                                 | (26  | ) | (418     | )   |  
|                                                                        
|Comprehensive income                                                     |                                 | 750  |   | 527      |     |  
|                                                                        

See accompanying notes.

6TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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Consolidated Statements of Changes in Shareholders' Equity

|                                                                    |  |       |   |          |   | 
|------------------------------------------------------------------- |  | ----- | - | -------- | - | 
|Years ended December 31(millions of US$)                            |  | 2011  |   | 2010     |   | 
|                                                                   
|                                                                    |  |       |   | (note 4) |   | 
|Common shares                                                       |  |       |   |          |   | 
|                                                                    |  |      
|Balance at beginning of year                                        |  | 1,480 |   | 1,401    |   | 
|                                                                    |  |      
|Issued on exercise of stock options                                 |  | 175   |   | 95       |   | 
|                                                                    |  |      
|Shares purchased and held in trust for long-term PSU plan (note 20) |  | (94   | ) | (81      | ) | 
|                                                                    |  |      
|Shares released from trust for 2008 PSU plan (note 20)              |  |      |   | 65       |   | 
|                                                                   
|Balance at end of year                                              |  | 1,561 |   | 1,480    |   | 
|                                                                   
|Preferred shares                                                    |  |       |   |          |   | 
|                                                                    |  |      
|Balance at beginning of year                                        |  |      |   |         |   | 
|                                                                    |  |      
|Issued (note 20)                                                    |  | 191   |   |         |   | 
|                                                                   
|Balance at end of year                                              |  | 191   |   |         |   | 
|                                                                   
|Contributed surplus                                                 |  |       |   |          |   | 
|                                                                    |  |      
|Balance at beginning of year                                        |  | 108   |   | 117      |   | 
|                                                                    |  |      
|Share-based payments (note 20)                                      |  | 78    |   | (9       | ) | 
|                                                                   
|Balance at end of year                                              |  | 186   |   | 108      |   | 
|                                                                   
|Retained earnings                                                   |  |       |   |          |   | 
|                                                                    |  |      
|Balance at beginning of year                                        |  | 6,819 |   | 6,135    |   | 
|                                                                    |  |      
|Net income                                                          |  | 776   |   | 945      |   | 
|                                                                    |  |      
|Actuarial losses transferred to retained earnings                   |  | (26   | ) | (12      | ) | 
|                                                                    |  |      
|Common share dividends (note 20)                                    |  | (277  | ) | (249     | ) | 
|                                                                   
|Balance at end of year                                              |  | 7,292 |   | 6,819    |   | 
|                                                                   
|Accumulated other comprehensive income                              |  |       |   |          |   | 
|                                                                    |  |      
|Balance at beginning of year                                        |  | 788   |   | 1,194    |   | 
|                                                                    |  |      
|Other comprehensive loss                                            |  | (26   | ) | (418     | ) | 
|                                                                    |  |      
|Actuarial losses transferred to retained earnings                   |  | 26    |   | 12       |   | 
|                                                                   
|Balance at end of year                                              |  | 788   |   | 788      |   | 
|                                                                   

See accompanying notes.

7TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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Consolidated Statements of Cash Flows

|                                                                      |                                                       |        |        |          |        |  
|--------------------------------------------------------------------- | ----------------------------------------------------- | ------ | ------ | -------- | ------ | -
|Years ended December 31(millions of US$)                              |                                                       | 2011   |        | 2010     |        |  
|                                                                     
|                                                                      |                                                       |        |        | (note 4) |        |  
|Operating activities                                                  |                                                       |        |        |          |        |  
|                                                                      |                                                       |       
|Net income                                                            |                                                       | 776    |        | 945      |        |  
|                                                                      |                                                       |       
|Add: Finance costs (cash and non-cash) (note 16)                      |                                                       | 278    |        | 276      |        |  
|                                                                      |                                                       |       
|Dividends from equity investments                                     |                                                       | 9      |        |         |        |  
|                                                                      |                                                       |       
|Items not involving cash (note 27)                                    |                                                       | 2,124  |        | 1,556    |        |  
|                                                                     
|                                                                      |                                                       | 3,187  |        | 2,777    |        |  
|                                                                      |                                                       |       
|Changes in non-cash working capital (note 27)                         |                                                       | (375   | )      | 367      |        |  
|                                                                     
|Cash provided by operating activities                                 |                                                       | 2,812  |        | 3,144    |        |  
|                                                                     
|Investing activities                                                  |                                                       |        |        |          |        |  
|Capital expenditures                                                  |                                                       |        |        |          |        |  
|                                                                      |                                                       |       
|                                                                      | Exploration, development and other                    |        | (4,303 | )        | (3,566 | )
|                                                                      |                                                       |       
|                                                                      | Corporate acquisitions, net of cash acquired (note 7) |        | (156   | )        | (183   | )
|                                                                      |                                                       |       
|                                                                      | Property acquisitions (note 6)                        |        | (737   | )        | (1,340 | )
|                                                                      |                                                       |       
|Proceeds of resource property dispositions (note 5)                   |                                                       | 527    |        | 2,194    |        |  
|                                                                      |                                                       |       
|Repayment of note receivable (note 22)                                |                                                       | 40     |        |         |        |  
|                                                                      |                                                       |       
|Acquisition deposit                                                   |                                                       | 18     |        | (630     | )      |  
|                                                                      |                                                       |       
|Investments                                                           |                                                       | 54     |        |         |        |  
|                                                                      |                                                       |       
|Changes in non-cash working capital                                   |                                                       | 18     |        | 274      |        |  
|                                                                     
|Cash used in investing activities                                     |                                                       | (4,539 | )      | (3,251   | )      |  
|                                                                     
|Financing activities                                                  |                                                       |        |        |          |        |  
|                                                                      |                                                       |       
|Long-term debt repaid (note 17)                                       |                                                       | (313   | )      | (10      | )      |  
|                                                                      |                                                       |       
|Long-term debt issued (note 17)                                       |                                                       | 1,044  |        | 595      |        |  
|                                                                      |                                                       |       
|Common shares issued (note 20)                                        |                                                       | 114    |        | 55       |        |  
|                                                                      |                                                       |       
|Common shares purchased (note 20)                                     |                                                       | (94    | )      | (75      | )      |  
|                                                                      |                                                       |       
|Preferred shares issued (note 20)                                     |                                                       | 191    |        |         |        |  
|                                                                      |                                                       |       
|Finance costs (cash)                                                  |                                                       | (202   | )      | (197     | )      |  
|                                                                      |                                                       |       
|Common share dividends (note 20)                                      |                                                       | (277   | )      | (249     | )      |  
|                                                                      |                                                       |       
|Deferred credits and other                                            |                                                       | (9     | )      | (2       | )      |  
|                                                                      |                                                       |       
|Changes in non-cash working capital                                   |                                                       | 11     |        | (1       | )      |  
|                                                                     
|Cash provided by financing activities                                 |                                                       | 465    |        | 116      |        |  
|                                                                     
|Effect of translation on foreign currency cash and cash equivalents   |                                                       | 23     |        | 51       |        |  
|                                                                     
|Net increase (decrease) in cash and cash equivalents                  |                                                       | (1,239 | )      | 60       |        |  
|                                                                      |                                                       |       
|Cash and cash equivalents net of bank indebtedness, beginning of year |                                                       | 1,653  |        | 1,593    |        |  
|                                                                     
|Cash and cash equivalents net of bank indebtedness, end of year       |                                                       | 414    |        | 1,653    |        |  
|                                                                     
|Cash and cash equivalents (note 28)                                   |                                                       | 474    |        | 1,655    |        |  
|                                                                      |                                                       |       
|Bank indebtedness                                                     |                                                       | (60    | )      | (2       | )      |  
|                                                                     
|Cash and cash equivalents net of bank indebtedness, end of year       |                                                       | 414    |        | 1,653    |        |  
|                                                                     

See accompanying notes.

8TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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Notes to the Consolidated Financial Statements

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

1. CORPORATE INFORMATION

Talisman Energy Inc. ('Talisman' or 'the Company') is a public company incorporated pursuant to the laws of Canada and domiciled in Alberta, Canada, with
common shares listed on the Toronto and New York stock exchanges under the symbol TLM. The registered office is located at Suite 2000,
888  3rd Street SW, Calgary, Alberta, Canada, T2P 5C5.

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

The
Consolidated Financial Statements as at and for the year ended December 31, 2011 were authorized for issuance by the Board of Directors on March 1, 2012.

2. BASIS OF PREPARATION

The Consolidated Financial Statements of Talisman Energy Inc. represent the first annual financial statements of the Company and its subsidiaries
prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial
Reporting Interpretations Committee (IFRIC). Previously, the Company prepared its annual Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles then
applicable to publically accountable enterprises (Canadian GAAP or CGAAP).

Since
this is the Company's initial year presenting its financial position, results of operations and cash flows under IFRS, these Consolidated Financial Statements have been prepared in accordance
with IFRS 1First-Time Adoption of IFRS.

The
preparation of these Consolidated Financial Statements resulted in changes to accounting policies as compared with the most recent annual Consolidated Financial Statements prepared in accordance
with Canadian GAAP. The accounting policies set out below have been applied consistently to all periods presented in these Consolidated Financial Statements and in preparing an opening IFRS balance
sheet as at January 1, 2010, as required by IFRS 1. The impact of the transition from Canadian GAAP to IFRS is presented in note 4.

These
Consolidated Financial Statements were prepared on a going concern basis, under the historical cost convention, except for certain financial assets and financial liabilities measured at fair
value through the Consolidated Statement of Income.

The
preparation of Consolidated Financial Statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the
Company's accounting policies. The areas of accounting that require a high degree of judgment or which are based upon significant estimates are disclosed in note 3(y).

3. SIGNIFICANT ACCOUNTING POLICIES

a) Consolidation

The Consolidated Financial Statements include the accounts of Talisman and its subsidiaries, being those companies over which the
Company, either directly or indirectly, has control through a majority of the voting rights or the right to exercise control or to obtain the majority of the benefits and be exposed to the majority of
the risks. Subsidiaries are consolidated from the date on which control is obtained until the date that such control ceases, using consistent accounting policies. All intercompany balances and
transactions, including unrealized profits arising from such transactions, are eliminated upon consolidation. Unrealized losses are also eliminated unless the transaction provides evidence of an
impairment of the asset transferred. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

b) Joint Ventures and Investments

A jointly controlled asset offers joint ownership by the venturers of the assets contributed to the joint venture, without the
formation of a corporation, partnership or other entity.

9TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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A
jointly controlled entity is a company, partnership or other entity in which each venturer has an interest and jointly controls the assets of the entity, earning its own income and incurring its own
liabilities and expenses. Interests in jointly controlled entities are accounted for using proportionate consolidation.

Substantially
all of Talisman's activities are conducted jointly with others, and the Consolidated Financial Statements reflect only the Company's proportionate interest in such activities.

Interests
in entities over which Talisman has significant influence, but not control or joint control, are accounted for using the equity method. Talisman's share of the income of equity investments
is recorded in the Consolidated Statement of Income. Dividends from equity investments are included in cash provided by operating activities. Interests in entities over which Talisman does not have
significant influence are recorded at cost. Both equity and cost investments are tested for possible impairment whenever events or changes in circumstances indicate that the carrying value of the
investment may not be recoverable.

c) Business Combinations and Goodwill

Business combinations are accounted for using the acquisition method. The cost of an acquisition is the aggregate of the
consideration transferred, measured at acquisition date fair value. Acquisition costs incurred are expensed. When the Company acquires a business, it assesses the financial assets and liabilities
assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the
separation of embedded derivatives in host contracts acquired.

Contingent
consideration to be transferred by the Company is recognized at fair value at the acquisition date. Subsequent changes to the fair value of contingent consideration recorded as a financial
asset or liability are recognized in net income in accordance with IAS 39Financial Instruments: Recognition and Measurement.

Goodwill
represents the excess of the consideration transferred over the fair value of identifiable assets acquired and liabilities assumed in business combinations. Goodwill is not amortized but is
subject to impairment reviews annually, or more frequently as economic events dictate, as described in note 3(i).

Where
goodwill forms part of an operating segment and part of the operation within that segment is disposed of, the goodwill associated with the operation disposed of is included in the carrying
amount of the operation when determining the gain or loss on disposal. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion
of the segment retained.

d) Accounts Receivable

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

e) Inventories

Inventories are valued at the lower of cost and net realizable value. Cost comprises direct purchase costs, cost of production and
taxes, and is determined using the first-in first-out method
for product inventories and by the average cost method for materials and supplies. Net realizable value is determined by reference to prices existing at the balance sheet date less any costs expected
to be incurred to completion and disposal.

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

PP&E, comprising oil and gas development and production properties and corporate assets, is stated at cost less accumulated
depreciation, depletion and amortization and accumulated impairment losses.

Oil
and gas development and production expenditure is generally accounted for using the principles of the successful efforts method of accounting. Expenditure on the construction, installation and
completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells is capitalized within PP&E.

10TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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The
initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of the decommissioning
liability and capitalized borrowing costs for qualifying assets. The capitalized value of a finance lease is also included within PP&E.

Expenditure
on turnarounds comprises the cost of replacement assets or parts of assets and inspection and overhaul costs. Where an asset or part of an asset is replaced and it is probable that future
economic benefits will flow to the Company from the replacement, the expenditure is capitalized and the replaced part is derecognized. Inspection and overhaul costs relating to turnarounds, which
generally occur annually, and all other repairs and maintenance costs are expensed when incurred.

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

Exchanges
of development and production assets are measured at fair value unless the exchange transaction lacks commercial substance or the fair value of neither the asset received nor the asset
exchanged is reliably measurable. The cost of the acquired asset is measured at the fair value of the asset exchanged, unless the fair value of the asset received is more clearly evident. Where fair
value is not used, the cost of the acquired asset is measured at the carrying amount of the asset exchanged. The gain or loss arising is recognized in net income.

The
Company assesses at each reporting date whether there is an indication that its PP&E may be impaired or subject to impairment reversals. If any indication exists, the Company estimates the asset's
recoverable amount using the methodology described in note 3(h).

g) Exploration and Evaluation (E&E) Assets

Exploration well costs are initially capitalized and, if subsequently determined to have not found sufficient reserves to justify
commercial production, are charged to dry hole expense. Exploration well costs that have found sufficient reserves to justify commercial production, but those reserves cannot be classified as proved,
continue to be capitalized as long as sufficient progress is being made to assess the reserves and economic viability of the well and/or related project. All such carried costs are subject to
technical, commercial and management review at each reporting date to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs
are written off. When proved reserves of oil and natural gas are determined and development is sanctioned, the relevant expenditure is tested for potential impairment and then transferred to PP&E
(see note 3(h) for details of the impairment methodology).

Undeveloped
land costs are classified initially as E&E assets and transferred to PP&E as proved reserves are assigned.

All
other exploration costs, including geological and geophysical costs and annual lease rentals, are charged to exploration expense when incurred.

For
exchanges or parts of exchanges that involve principally E&E assets, the exchange is accounted for at the carrying amount of the asset exchanged.

h) Impairment of Assets

The Company tests PP&E and E&E assets for possible impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable, for example, changes in assumptions relating to future prices, future costs and reserves. Individual assets are grouped for impairment assessment purposes at
the lowest level at which there are identifiable cash inflows that are largely independent of the cash inflows of other groups of assets, known as a cash-generating unit (CGU). If any such
indication of impairment exists, an estimate of the CGU's recoverable amount is made. A CGU's recoverable amount is the higher of its fair value less costs to sell and its value in use. These
assessments require the use of estimates and assumptions regarding long-term commodity prices, discount rates, future capital expenditures requirements, reserves determination and life of
field. E&E assets are also tested for possible impairment when transferred to PP&E.

A
previously recognized impairment loss is reversed only if there has been a change in the estimates or assumptions used to determine the CGU's recoverable amount since the impairment loss was
recognized. If that is the case, the carrying amount of the CGU is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have

11TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



been
determined, net of depletion, had no impairment loss been recognized for the CGU in prior periods. Such a reversal is recognized in net income, following which the depletion charge is adjusted in
future periods to allocate the CGU's revised carrying amount on a systematic basis over its remaining useful life.

i) Goodwill

Goodwill is tested for impairment annually and when circumstances indicate that the carrying amount may be impaired. The impairment
test requires that goodwill be allocated to CGUs, which Talisman has determined by aggregating locations having similar economic characteristics and/or which are in similar geographic locations, and
which correspond with the operating segments described in note 31, except for locations within the Other segment, which are generally grouped by country. Impairment is determined for goodwill
by assessing the recoverable amount (based on fair value less costs to sell) of each segment or country, as appropriate, to which the goodwill relates. Where the recoverable amount of the segment is
less than the carrying amount, an impairment loss is recognized. Goodwill impairment losses cannot be reversed.

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

Capitalized costs of proved oil and gas properties are depleted using the unit of production method. For purposes of these
calculations, production and reserves of natural gas are converted to barrels (bbls) on an energy equivalent basis at a ratio of six thousand cubic feet (mcf) of natural gas for one barrel
(bbl) of oil. Depletion and depreciation rates are updated in each reporting period that a significant change in circumstances, including reserves revisions, occurs.

Successful
exploratory wells and development costs are depleted over proved developed reserves. Significant development costs incurred in connection with proved undeveloped reserves are excluded from
depletion until the reserves are developed. In the case of unconventional natural gas developments, land and development costs are depleted over total proved reserves and include future development
costs.

Acquired
resource properties with proved reserves, including offshore platform costs, are depleted over total proved reserves. Acquisition costs of probable reserves are not depleted or amortized
while under active evaluation for commercial reserves. Costs are transferred to depletable costs as proved reserves are recognized.

Costs
associated with significant development projects are not depleted until the asset is substantially complete and ready for its intended use. Unproved land acquisition costs that are individually
material are not amortized, but are assessed for impairment and transferred to depletable costs as proved reserves are recognized. Unproved land acquisition costs that are individually immaterial are
amortized on a straight-line basis over the average lease term. Gas plants are depreciated on a straight-line basis over their estimated remaining useful lives, not to exceed
the estimated remaining productive lives of related fields. Pipelines and corporate assets are depreciated using the straight-line method at annual rates of 4% and
5 - 33%, respectively. Gas plants and pipelines in the North Sea are depleted using the unit of production method based on the related fields.

k) Non-Current Assets Held for Sale

Non-current assets classified as held for sale and associated liabilities are measured at the lower of carrying amount
and fair value less costs to sell, and are presented as current on the Consolidated Balance Sheet.

Non-current
assets are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as
met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected
to qualify for recognition as a completed sale within one year from the date of classification.

PP&E
is not depreciated once classified as held for sale.

l) Decommissioning and Environmental Liabilities

Decommissioning liabilities are recognized when the Company has a legal or constructive obligation as a result of past events, it is
probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount of the

12TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



obligation
can be made. A corresponding amount equivalent to the liability is recognized as part of the cost of the related PP&E or E&E asset.

Decommissioning
liabilities are carried on the Consolidated Balance Sheet at their discounted present value, which is remeasured each reporting period in order to reflect the period end discount rate.
The liabilities are calculated using a weighted average credit adjusted risk free rate, and are accreted over time for the change in their present value, with this accretion expense included in
finance costs on the Consolidated Statement of Income. Actual expenditures incurred are charged against the accumulated obligation. Any difference between the recorded decommissioning liability and
the actual retirement costs incurred is recorded as a gain or loss.

The
increase in capitalized costs is amortized to income on a basis consistent with DD&A of the underlying assets. Subsequent changes in the estimated decommissioning liabilities are capitalized and
amortized over the remaining useful life of the underlying asset.

Liabilities
for environmental costs are recognized when an obligation exists and the associated costs can be reliably estimated. Generally, the timing of recognition of these liabilities coincides
with the commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites. The amount recognized is the best estimate of the expenditure required. Where the
liability will not be settled for a number of years, the amount recognized is the present value of the estimated future expenditure. These estimates are included in decommissioning liabilities.

Initially,
the Company recognizes neither the deferred tax asset relating to the temporary difference on the decommissioning liability nor the corresponding deferred tax liability relating to the
temporary difference on the decommissioning asset.

m) Finance Costs and Long-Term Debt

Finance costs include interest and other costs that Talisman incurs in connection with the borrowing of funds, as well as accretion
expense relating to the Company's decommissioning liabilities.

Finance
costs associated with major development projects are capitalized and included in the carrying amounts of the related assets until they are completed and ready for use. These costs are
subsequently amortized to income with the related assets. The amount of borrowing costs capitalized for the period is determined by applying the weighted average interest rate applicable to
appropriate borrowings outstanding during the period to the average amount of capitalized expenditure for the qualifying assets.

All
other finance costs are recognized on the Consolidated Statement of Income in the period in which they are incurred.

The
classification of debt instruments in the Consolidated Balance Sheet reflects management's intent in respect of the refinancing of those instruments. In particular, the classification of bankers'
acceptances reflects management's intent to refinance a short-term obligation with a committed long-term facility with the same lender.

n) Foreign Currency Translation

Talisman's functional currency is the US$.

Prior
to January 1, 2011 in the UK and prior to January 1, 2010 in Canada and Norway, the Company's operations were translated from UK£, C$ and NOK respectively into US$
using the current rate method whereby assets and liabilities were translated at year-end exchange rates, while revenues and expenses were converted using average rates for the period.
Gains and losses arising on translation from UK£, C$ and NOK to US$ were deferred and included in a separate component of shareholders' equity described as accumulated other comprehensive
income.

As
a result of changes in the composition of revenue and costs and changes in intercompany loan arrangements, management has determined that the functional currency of the Company's UK operation is
more closely linked to the US$. Accordingly, effective January 1, 2011, this operation has been accounted for as a US$ functional currency entity. As a result, foreign currency translation
adjustments remain in accumulated other comprehensive income until Talisman reduces its ownership interest in its UK subsidiary. Following the change in the functional currency of the UK operation on
January 1, 2011, the debt denominated in UK£ was no longer designated as a hedge of Talisman's net investment in the UK and, accordingly, foreign exchange gains and losses are
recorded on the Consolidated Statement of Income.

13TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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The
Company's operations in Canada and Norway are accounted for as US$ functional currency entities. As a result, foreign currency translation adjustments remain in accumulated other comprehensive
income until Talisman reduces its net investment in its Canadian or Norwegian subsidiaries. The reduction of the net investment in a Canadian subsidiary that occurred during 2010 is described in
note 5.

The
remaining foreign operations are translated as follows: monetary assets and liabilities at exchange rates in effect at the balance sheet date, non-monetary assets and liabilities at
rates in effect on the dates the assets were acquired or liabilities were assumed, and revenues and expenses at rates of exchange prevailing on the transaction dates. Gains and losses on translation
are reflected in income when incurred.

Effective
2011, the Company reports its financial position and results of operations in US$. The impact of changing the reporting currency from C$ to US$ is presented in note 4.

o) Employee Benefit Plans

The cost of providing benefits under the Company's defined benefit pension plans and non-pension
post-employment benefit plans is determined using the projected benefit method pro-rated on service and management's best estimate of expected plan investment performance,
salary escalation and employee retirement ages. There is uncertainty relating to the assumptions used to calculate the net benefit expense and accrued benefit obligation, due to their
long-term nature.

The
discount rate used to determine the accrued benefit obligation is determined by reference to market interest rates at the measurement date on high quality debt instruments with cash flows that
match the timing and amount of expected benefit payments. The Company recognizes all actuarial gains and losses immediately in other comprehensive loss and transfers them to retained earnings in the
year recorded.

Payments
to defined contribution plans are expensed as incurred, which is as the related service is rendered.

The
pension benefits of key management personnel represent the attributable amount of the net benefit expense of the plans in which they participate.

p) Financial Instruments

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

In
conducting its business, the Company may use derivative financial instruments in order to manage risks associated with fluctuations in commodity prices, interest rates and foreign currency
exchange rates.

Non-Hedge Financial Instruments

Held-for-trading financial assets and liabilities are subsequently measured at fair value with changes in fair value recognized in net income. Financial
assets available-for-sale are subsequently measured at fair value with changes in fair value recognized in other comprehensive loss, net of tax. Financial assets
held-to-maturity, loans and receivables and other financial liabilities are subsequently measured at amortized cost using the effective interest rate method.

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

Financial
instruments that are derivative contracts are considered held-for-trading unless they are designated as a hedge. The financial derivative contracts outstanding at
December 31, 2011 are disclosed in note 22.

14TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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Derivatives
embedded in other financial instruments and non-financial host contracts are treated as separate derivatives when their risks and characteristics are not closely related to
those of the host contract. Contracts are assessed for embedded derivatives when the Company becomes a party to them, including at the date of a business combination. Embedded derivatives requiring
separation are measured at fair value at each balance sheet date and any gains or losses arising from changes in fair value are recognized in net income.

Hedges

The Company may designate financial instruments as a hedging instrument for accounting purposes. Hedge accounting requires the designation of a hedging relationship, including
a hedged and a hedging item, identification of the risk exposure being hedged and an expectation that the hedging relationship will be highly effective throughout its term. In addition, in the case of
anticipated transactions, it must also be highly probable that the transaction designated as being hedged will occur. The Company assesses, both at the hedge's inception and on an ongoing basis,
whether the derivative financial instruments designated as hedges are highly effective in offsetting changes in fair value or cash flows of the hedged items. If the derivative financial instrument
that has been designated as a hedge is terminated or is no longer designated as part of the hedging relationship, the gain or loss on the hedge at that date is deferred in other comprehensive loss and
recognized in net income concurrently with the anticipated transaction. If the forecast transaction is no longer expected to occur, the gain or loss on the
hedge at that date is recognized immediately in net income. The Company had the following hedges during the periods covered by these Consolidated Financial Statements:



Own Use Exemption

Contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the Company's
expected purchase, sale or usage requirements fall within the exemption from IAS 32 and IAS 39, which is known as the 'own use' exemption. The Company enters into physical commodity
contracts in the normal course of business, including contracts with fixed terms. The Company's production is expected to be sufficient to deliver all required volumes under these contracts. No
amounts are recognized in the Consolidated Financial Statements related to these contracts until such time as the associated volumes are delivered.

q) Comprehensive Income and Equity

The Consolidated Statement of Comprehensive Income reflects net income and items of other comprehensive loss which comprise changes
in the fair value of financial instruments designated as cash flow hedges, to the extent they are effective, gains and losses recovered from other comprehensive loss and recognized in net income and
actuarial gains and losses arising in relation to the Company's employee benefit plans. Until December 31, 2010, foreign currency translation gains or losses arising from the translation of the
Company's foreign operations or reductions in the net investments therein and translation from the Company's functional currency to its presentation currency also gave rise to other comprehensive
loss. See note 3(n) for more details.

15TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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r) Income Taxes

Income taxes comprise current tax, deferred tax and Petroleum Revenue Tax (PRT) and are recognized on the Consolidated Statement of
Income except to the extent they relate to items recognized in other comprehensive loss or directly in equity. PRT is treated as an income tax and deferred PRT is accounted for on a temporary
difference basis.

Interest
and penalties assessed by taxing authorities on any underpayment of income tax are accrued and classified as a component of income taxes on the Consolidated Statement of Income.

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

Current Tax

Current tax is based on estimated taxable income and tax rates which are determined pursuant to the tax laws that are enacted or substantively enacted at the balance
sheet date.

Deferred Tax

Deferred tax is determined using the liability method. Under the liability method, deferred tax is calculated based on the differences between assets and liabilities reported
for financial accounting purposes and those reported for income tax purposes. Deferred tax assets and liabilities are measured using substantively enacted tax rates. The impact of a change in tax rate
is recognized in net income in the period in which the tax rate is substantively enacted. The Company recognizes in its financial statements the best estimate of the impact of a tax position by
determining if the available evidence indicates whether it is more likely than not, based solely on technical merits, that the position will be sustained on audit. The Company estimates the amount to
be recorded by weighting all possible outcomes by their associated probabilities.

Deferred
tax assets and liabilities are offset only when a legally enforceable right of offset exists and the deferred tax assets and liabilities arose in the same tax jurisdiction and relate to the
same taxable entity.

s) Revenue Recognition

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

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

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

16TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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

Sales
as reported represents the Company's share of revenues from the sale of crude oil, natural gas and NGLs and is presented after deduction of royalty payments to governments and other mineral
interest owners.

t) Leases

Leases that transfer substantially all of the benefits and risks of ownership to Talisman are accounted for at the commencement of
the lease term as finance leases and recorded as PP&E at the fair value of the leased asset, or, if lower, at the present value of the minimum lease payments, together with an offsetting liability.
Finance charges are allocated to each period so as to achieve a constant rate of interest on the remaining balance of the liability and are recognized in net income. Capitalized leased assets are
depreciated over the shorter of the estimated useful life of the asset or the lease term.

All
other leases are accounted for as operating leases and the lease costs are expensed as incurred.

u) Share-Based Payments

Talisman has stock option plans, cash unit plans, performance share unit (PSU) plans, a deferred share unit plan and a restricted
share unit plan, under which it receives services from employees and directors as consideration for cash payments or equity instruments of the Company. The long-term PSU plan must be
settled in shares. The cash unit, deferred share unit and restricted share unit plans must be settled in cash. The stock option plans may be settled in cash at the option of the holder. The 2008 PSU
plan was settled in 2010  see note 20.

Equity-Settled Awards

The Company uses the Black-Scholes pricing model to estimate the fair value of equity-settled awards.

For
the PSU plans, the Company determines the fair value of the units on the date of grant and recognizes the fair value over the vesting period as share-based payments expense and contributed
surplus.

Cash-Settled Awards

The Company uses the Black-Scholes pricing model to estimate the fair value of cash-settled awards. Fair value is established initially at the grant date and the
obligation is revalued each reporting period until the awards are settled with any changes in the obligation recognized as share-based payments expense (recovery) on the Consolidated Statement of
Income, except for the changes related to deferred share units, which are included in general and administrative expenses.

The
stock option plans are classified as liability instruments and re-measured at their fair value at the end of each reporting period.

For
plans having vesting conditions, the total expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of
each reporting period, the Company revises its estimates of the number of options and units that are expected to vest based on the vesting conditions and recognizes the impact of the revision to
original estimates, if any, in net income.

v) Net Income and Diluted Net Income Per Share

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

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

17TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



periods
when a share-based payments recovery is reported, net income used in the dilution calculation is reduced by the amount of the recovery.

For
stock options that may be settled in cash or shares at the employees' option, the more dilutive impact of cash settlement and equity settlement is used in calculating diluted net income per share
regardless of how the stock option plan is accounted for. Stock options that are reported as cash-settled for accounting purposes may require an adjustment to the numerator in the diluted
net income per share calculation for any changes in net income that would result if the stock options had been reported as equity instruments.

w) Cash and Cash Equivalents

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

For
the purpose of the Consolidated Statements of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of bank indebtedness.

x) Segmented Information

The Company's reporting segments are established on the basis of having similar economic characteristics and/or which are in similar
geographic locations and those components of the Company that are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

Effective
January 1, 2011, the composition of the Company's segments changed such that the activities in the UK and Norway are reported as a single North Sea segment since, in management's
judgment, the assets in those locations now share similar economic characteristics. Comparative period balances have been restated accordingly. See note 31 for disclosure of segmented
information.

y) Significant Accounting Judgments, Estimates and
Assumptions

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

DD&A,
the fair value of PP&E and E&E assets, amounts recognized for impairment charges and reversals and the recognition of assets acquired and liabilities assumed upon a business combination are
impacted by estimates of oil and natural gas reserves, commodity prices and capital and operating costs required to develop and produce those reserves. By their nature,
estimates of reserves and the related future cash flows are subject to measurement uncertainty, and the impact of differences between actual and estimated amounts on the Consolidated Financial
Statements of future periods could be material. The measurement of impairment charges and reversals is also dependent upon management's judgment in determining CGUs.

Inherent
in the calculation of decommissioning liabilities are numerous assumptions and judgments, including the ultimate settlement amounts, inflation factors, credit-adjusted discount rates, timing
of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to assumptions impact the amount of decommissioning liabilities, a
corresponding adjustment is made to the PP&E and/or E&E assets balance.

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

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

18TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



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

The
fair values of equity-settled and cash-settled share-based payment awards are estimated using the Black-Scholes pricing model. These estimates depend on certain assumptions including
share price volatility, risk free interest rate, the term of the awards, the forfeiture rate and the annual dividend yield which, by their nature, are subject to measurement uncertainty.

The
designation of the Company's functional currency is a management judgment based on the composition of revenue and costs in the locations in which it operates.

Provisions
are recorded when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the
obligation and a reliable estimate can be made of the amount of the obligation. Where appropriate, the future cash flow estimates are adjusted to reflect risks specific to the liability.

Contingent
liabilities are possible obligations whose existence will only be confirmed by future events not wholly within the control of the Company. Contingent liabilities are not recognized in the
financial statements but are disclosed unless the
possibility of an outflow of economic resources is considered remote. The evaluation of the likelihood of the contingent events requires management judgment as to the probability of exposure to
potential loss.

z) Accounting Standards and Interpretations Issued but Not Yet
Effective

The following pronouncements from the IASB are applicable to Talisman and will become effective for future reporting periods, but
have not yet been adopted:

19TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---





Except
as noted above, all of the above pronouncements are effective for annual periods beginning on or after January 1, 2013 with earlier adoption permitted, except for IFRS 9, which is
effective January 1, 2015. The Company is currently assessing the impact of adopting these pronouncements.

4. IFRS FIRST-TIME ADOPTION

The accounting policies described in note 3 have been applied in preparing the Consolidated Financial Statements as at and for the year ended
December 31, 2011, the comparative information as at and for the year ended December 31, 2010 and the opening IFRS balance sheet as at January 1, 2010, the Company's date of
transition to IFRS.

The
adoption of IFRS does not impact the underlying economics of Talisman's operations or its cash flows. The most significant impacts of adoption are from the application of IFRS 1 exemptions
and new accounting policies that reset the Company's balance sheet, in particular, the election to use the IFRS 1 fair value as deemed cost exemption, and changes in the accounting for
impairments, income taxes, decommissioning liabilities and share-based payments.

Retained
earnings at the time of adoption of IFRS decreased by approximately $1.8 billion as a result of the after tax impact of adjustments to the opening balance sheet described below. These
adjustments comprise approximately $1.2 billion for the deemed fair value election, a significant portion of which related to assets sold during 2010, and impairment of E&E assets, and
approximately $0.6 billion relating to derecognition of capitalized borrowing costs, decommissioning liabilities, share-based payments, employee benefits and deferred taxes.

IFRS 1 Exemptions

The general principle to be applied on first-time adoption of IFRS is that standards in force at the first annual
reporting date (December 31, 2011) should be applied as at the date of transition to IFRS (i.e. January 1, 2010) and throughout all periods presented in the first IFRS financial
statements. However, IFRS 1 contains a number of exemptions that companies are permitted to apply. Talisman elected to apply the following exemptions:

Reconciliations from Canadian GAAP to IFRS

In preparing the Consolidated Financial Statements, the Company adjusted amounts reported previously in its Consolidated Financial
Statements prepared under Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRS affected the Company's financial position, results of operations and cash flows is presented in
the following reconciliations (as required by IFRS 1) and explanatory notes, together with the impact of the Company changing its reporting currency from C$ to US$.

20TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Reconciliation of Consolidated Balance Sheet at January 1,
2010

|                                                         |                                                                                         |                  |      | CGAAP  |       | IFRS adjustments
& reclassifications |       | IFRS   |    
|-------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------------- | ---- | ------ | ----- | ------------------------------------ | ----- | ------ | ---
|January 1, 2010(millions of $)                           |                                                                                         | Notes            |      | C$1    |       | US$                                  |       | US$    |    
|                                                        
|Assets                                                   |                                                                                         |                  |      |        |       |                                      |       |        |    
|Current                                                  |                                                                                         |                  |      |        |       |                                      |       |        |    
|                                                         |                                                                                         |                 
|                                                         | Cash and cash equivalents                                                               |                  |      |        | 1,690 |                                      | 1,615 |        | 13 
|                                                         |                                                                                         |                 
|                                                         | Accounts receivable                                                                     |                  |      |        | 1,223 |                                      | 1,168 |        | 48 
|                                                         |                                                                                         |                 
|                                                         | Risk management                                                                         |                  |      |        | 30    |                                      | 29    |        |   
|                                                         |                                                                                         |                 
|                                                         | Inventories                                                                             |                  |      |        | 144   |                                      | 137   |        | 4  
|                                                         |                                                                                         |                 
|                                                         | Prepaid expenses                                                                        |                  |      |        | 9     |                                      | 8     |        |   
|                                                         |                                                                                         |                 
|                                                         | Assets of discontinued operations/Assets held for sale                                  |                  | 4.8  |        | 58    |                                      | 56    |        | (34
|                                                        
|                                                         |                                                                                         |                  |      | 3,154  |       | 3,013                                |       | 31     |    
|                                                        
|Other assets                                             |                                                                                         | 4.7              |      | 128    |       | 122                                  |       | (14    | )  
|                                                         |                                                                                         |                 
|Risk management                                          |                                                                                         |                  |      | 42     |       | 40                                   |       |       |    
|                                                         |                                                                                         |                 
|Goodwill                                                 |                                                                                         |                  |      | 1,176  |       | 1,124                                |       | 59     |    
|                                                         |                                                                                         |                 
|Property, plant and equipment                            |                                                                                         | 4.1-4.4, 4.11-12 |      | 16,431 |       | 15,698                               |       | (2,444 | )  
|                                                         |                                                                                         |                 
|Exploration and evaluation assets                        |                                                                                         | 4.1, 4.12        |      |       |       |                                     |       | 2,212  |    
|                                                         |                                                                                         |                 
|Future income taxes/Deferred tax assets                  |                                                                                         |                  |      | 120    |       | 115                                  |       | 32     |    
|                                                         |                                                                                         |                 
|Assets of discontinued operations                        |                                                                                         | 4.8              |      | 2,567  |       | 2,453                                |       | (2,453 | )  
|                                                        
|                                                         |                                                                                         |                  |      | 20,464 |       | 19,552                               |       | (2,608 | )  
|                                                        
|Total assets                                             |                                                                                         |                  |      | 23,618 |       | 22,565                               |       | (2,577 | )  
|                                                        
|Liabilities                                              |                                                                                         |                  |      |        |       |                                      |       |        |    
|Current                                                  |                                                                                         |                  |      |        |       |                                      |       |        |    
|                                                         |                                                                                         |                 
|                                                         | Bank indebtedness                                                                       |                  |      |        | 36    |                                      | 35    |        |   
|                                                         |                                                                                         |                 
|                                                         | Accounts payable and accrued liabilities                                                |                  | 4.6  |        | 1,845 |                                      | 1,759 |        | 281
|                                                         |                                                                                         |                 
|                                                         | Risk management                                                                         |                  |      |        | 276   |                                      | 266   |        |   
|                                                         |                                                                                         |                 
|                                                         | Income and other taxes payable                                                          |                  |      |        | 357   |                                      | 341   |        |   
|                                                         |                                                                                         |                 
|                                                         | Current portion of long-term debt                                                       |                  |      |        | 10    |                                      | 10    |        |   
|                                                         |                                                                                         |                 
|                                                         | Future income taxes/Deferred tax liabilities                                            |                  | 4.12 |        | 68    |                                      | 65    |        | (65
|                                                         |                                                                                         |                 
|                                                         | Liabilities of discontinued operations/liabilities associated with assets held for sale |                  | 4.8  |        | 9     |                                      | 9     |        | (2 
|                                                        
|                                                         |                                                                                         |                  |      | 2,601  |       | 2,485                                |       | 214    |    
|                                                        
|Deferred credits                                         |                                                                                         |                  |      | 59     |       | 56                                   |       | (9     | )  
|                                                         |                                                                                         |                 
|Asset retirement obligations/Decommissioning liabilities |                                                                                         | 4.4              |      | 2,116  |       | 2,023                                |       | (20    | )  
|                                                         |                                                                                         |                 
|Other long-term obligations                              |                                                                                         | 4.6, 4.7         |      | 161    |       | 155                                  |       | 114    |    
|                                                         |                                                                                         |                 
|Risk management                                          |                                                                                         |                  |      | 7      |       | 6                                    |       |       |    
|                                                         |                                                                                         |                 
|Long-term debt                                           |                                                                                         |                  |      | 3,770  |       | 3,601                                |       |       |    
|                                                         |                                                                                         |                 
|Future income taxes/Deferred tax liabilities             |                                                                                         | 4.3, 4.12        |      | 3,599  |       | 3,437                                |       | (921   | )  
|                                                         |                                                                                         |                 
|Liabilities of discontinued operations                   |                                                                                         | 4.8              |      | 194    |       | 185                                  |       | (185   | )  
|                                                        
|                                                         |                                                                                         |                  |      | 9,906  |       | 9,463                                |       | (1,021 | )  
|                                                        

21TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



|                                              |  |       |  | CGAAP  |   | IFRS adjustments
& reclassifications |  | IFRS   |  
|--------------------------------------------- |  | ----- |  | ------ | - | ------------------------------------ |  | ------ | -
|January 1, 2010(millions of $)                |  | Notes |  | C$1    |   | US$                                  |  | US$    |  
|                                             
|Shareholders' equity                          |  |       |  |        |   |                                      |  |        |  
|                                              |  |      
|Common shares                                 |  |       |  | 2,374  |   | 1,401                                |  |       |  
|                                              |  |      
|Contributed surplus                           |  |       |  | 153    |   | 117                                  |  |       |  
|                                              |  |      
|Retained earnings                             |  |       |  | 9,174  |   | 7,905                                |  | (1,770 | )
|                                              |  |      
|Accumulated other comprehensive income (loss) |  | 4.10  |  | (590   | ) | 1,194                                |  |       |  
|                                             
|                                              |  |       |  | 11,111 |   | 10,617                               |  | (1,770 | )
|                                             
|Total liabilities and shareholders' equity    |  |       |  | 23,618 |   | 22,565                               |  | (2,577 | )
|                                             

|
|

Reconciliation of Shareholders' Equity at January 1,
2010

|(millions of US$)                        |                       | January 1, 2010 |        |  
|---------------------------------------- | --------------------- | --------------- | ------ | -
|                                        
|Shareholders' equity under Canadian GAAP |                       | 10,617          |        |  
|                                         |                       |                
|Adjustments:                             |                       |                 |        |  
|                                         |                       |                
|                                         | Opening balance sheet |                 | (1,770 | )
|                                        
|Shareholders' equity under IFRS          |                       | 8,847           |        |  
|                                        

22TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Reconciliation of Consolidated Balance Sheet at December 31,
2010

|                                                         |                                          |                  |     | CGAAP  |       | IFRS adjustments
& reclassifications |       | IFRS   |    
|-------------------------------------------------------- | ---------------------------------------- | ---------------- | --- | ------ | ----- | ------------------------------------ | ----- | ------ | ---
|December 31, 2010(millions of $)                         |                                          | Notes            |     | C$     |       | US$                                  |       | US$    |    
|                                                        
|Assets                                                   |                                          |                  |     |        |       |                                      |       |        |    
|Current                                                  |                                          |                  |     |        |       |                                      |       |        |    
|                                                         |                                          |                 
|                                                         | Cash and cash equivalents                |                  |     |        | 1,646 |                                      | 1,655 |        |   
|                                                         |                                          |                 
|                                                         | Accounts receivable                      |                  |     |        | 1,281 |                                      | 1,287 |        |   
|                                                         |                                          |                 
|                                                         | Risk management                          |                  |     |        | 118   |                                      | 119   |        |   
|                                                         |                                          |                 
|                                                         | Inventories                              |                  |     |        | 143   |                                      | 144   |        |   
|                                                         |                                          |                 
|                                                         | Prepaid expenses                         |                  |     |        | 20    |                                      | 20    |        |   
|                                                        
|                                                         |                                          |                  |     | 3,208  |       | 3,225                                |       |       |    
|                                                        
|Other assets                                             |                                          | 4.7              |     | 837    |       | 841                                  |       | (53    | )  
|                                                         |                                          |                 
|Risk management                                          |                                          |                  |     | 24     |       | 25                                   |       |       |    
|                                                         |                                          |                 
|Goodwill                                                 |                                          |                  |     | 1,150  |       | 1,157                                |       | 7      |    
|                                                         |                                          |                 
|Property, plant and equipment                            |                                          | 4.1-4.4, 4.11-12 |     | 18,804 |       | 18,906                               |       | (5,640 | )  
|                                                         |                                          |                 
|Exploration and evaluation assets                        |                                          | 4.1, 4.12        |     |       |       |                                     |       | 3,442  |    
|                                                         |                                          |                 
|Future income taxes/Deferred tax assets                  |                                          |                  |     | 170    |       | 171                                  |       | 13     |    
|                                                        
|                                                         |                                          |                  |     | 20,985 |       | 21,100                               |       | (2,231 | )  
|                                                        
|Total assets                                             |                                          |                  |     | 24,193 |       | 24,325                               |       | (2,231 | )  
|                                                        
|Liabilities                                              |                                          |                  |     |        |       |                                      |       |        |    
|Current                                                  |                                          |                  |     |        |       |                                      |       |        |    
|                                                         |                                          |                 
|                                                         | Bank indebtedness                        |                  |     |        | 2     |                                      | 2     |        |   
|                                                         |                                          |                 
|                                                         | Accounts payable and accrued liabilities |                  | 4.6 |        | 2,416 |                                      | 2,433 |        | 289
|                                                         |                                          |                 
|                                                         | Risk management                          |                  |     |        | 116   |                                      | 117   |        |   
|                                                         |                                          |                 
|                                                         | Income and other taxes payable           |                  |     |        | 510   |                                      | 513   |        |   
|                                                         |                                          |                 
|                                                         | Current portion of long-term debt        |                  |     |        | 357   |                                      | 359   |        |   
|                                                        
|                                                         |                                          |                  |     | 3,401  |       | 3,424                                |       | 289    |    
|                                                        
|Deferred credits                                         |                                          |                  |     | 51     |       | 51                                   |       | (5     | )  
|                                                         |                                          |                 
|Asset retirement obligations/Decommissioning liabilities |                                          | 4.4              |     | 2,252  |       | 2,264                                |       | 316    |    
|                                                         |                                          |                 
|Other long-term obligations                              |                                          | 4.6, 4.7         |     | 212    |       | 213                                  |       | 67     |    
|                                                         |                                          |                 
|Long-term debt                                           |                                          |                  |     | 3,824  |       | 3,845                                |       |       |    
|                                                         |                                          |                 
|Future income taxes/Deferred tax liabilities             |                                          | 4.12             |     | 3,974  |       | 3,995                                |       | (1,560 | )  
|                                                        
|                                                         |                                          |                  |     | 10,313 |       | 10,368                               |       | (1,182 | )  
|                                                        
|Shareholders' equity                                     |                                          |                  |     |        |       |                                      |       |        |    
|                                                         |                                          |                 
|Common shares                                            |                                          |                  |     | 2,457  |       | 1,480                                |       |       |    
|                                                         |                                          |                 
|Contributed surplus                                      |                                          |                  |     | 132    |       | 98                                   |       | 10     |    
|                                                         |                                          |                 
|Retained earnings                                        |                                          |                  |     | 9,568  |       | 8,269                                |       | (1,450 | )  
|                                                         |                                          |                 
|Accumulated other comprehensive income (loss)            |                                          | 4.10             |     | (1,678 | )     | 686                                  |       | 102    |    
|                                                        
|                                                         |                                          |                  |     | 10,479 |       | 10,533                               |       | (1,338 | )  
|                                                        
|Total liabilities and shareholders' equity               |                                          |                  |     | 24,193 |       | 24,325                               |       | (2,231 | )  
|                                                        

23TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Reconciliation of Shareholders' Equity at December 31,
2010

|(millions of US$)                        |                                                                                     | December 31, 2010 |        |  
|---------------------------------------- | ----------------------------------------------------------------------------------- | ----------------- | ------ | -
|                                        
|Shareholders' equity under Canadian GAAP |                                                                                     | 10,533            |        |  
|                                         |                                                                                     |                  
|Adjustments:                             |                                                                                     |                   |        |  
|                                         |                                                                                     |                  
|                                         | Opening balance sheet                                                               |                   | (1,770 | )
|                                         |                                                                                     |                  
|                                         | Consolidated Statement of Comprehensive Income for the year ended December 31, 2010 |                   | 422    |  
|                                         |                                                                                     |                  
|                                         | Share-based payments impact on contributed surplus                                  |                   | 10     |  
|                                        
|Shareholders' equity under IFRS          |                                                                                     | 9,195             |        |  
|                                        

Reconciliation of Consolidated Statement of Income for the Year Ended
December 31, 2010

|                                            |                                                       |       |              | CGAAP |        | IFRS adjustments
& reclassifications |        | IFRS |       |      
|------------------------------------------- | ----------------------------------------------------- | ----- | ------------ | ----- | ------ | ------------------------------------ | ------ | ---- | ----- | -----
|Year ended December 31, 2010(millions of $) |                                                       | Notes |              | C$    |        | US$                                  |        | US$  |       | US$  
|                                           
|Revenue                                     |                                                       |       |              |       |        |                                      |        |      |       |      
|                                            |                                                       |      
|                                            | Sales                                                 |       | 4.12         |       | 8,076  |                                      | 7,846  |      | (971  | )    
|                                            |                                                       |      
|                                            | less: Royalties                                       |       | 4.12         |       | (1,274 | )                                    | (1,238 | )    | 1,238 |      
|                                            |                                                       |      
|                                            | Other income                                          |       |              |       | 110    |                                      | 107    |      |      |      
|                                           
|Total revenue and other income              |                                                       |       |              | 6,912 |        | 6,715                                |        | 267  |       | 6,982
|                                           
|Expenses                                    |                                                       |       |              |       |        |                                      |        |      |       |      
|                                            |                                                       |      
|                                            | Operating                                             |       |              |       | 1,867  |                                      | 1,813  |      | 77    |      
|                                            |                                                       |      
|                                            | Transportation                                        |       |              |       | 227    |                                      | 221    |      |      |      
|                                            |                                                       |      
|                                            | General and administrative                            |       | 4.7          |       | 392    |                                      | 381    |      | (10   | )    
|                                            |                                                       |      
|                                            | Depreciation, depletion and amortization              |       | 4.5, 4.12    |       | 2,164  |                                      | 2,099  |      | (311  | )    
|                                            |                                                       |      
|                                            | Impairment                                            |       | 4.1          |       | 118    |                                      | 115    |      | 186   |      
|                                            |                                                       |      
|                                            | Dry hole                                              |       |              |       | 123    |                                      | 121    |      | (8    | )    
|                                            |                                                       |      
|                                            | Exploration                                           |       |              |       | 384    |                                      | 374    |      |      |      
|                                            |                                                       |      
|                                            | Interest on long-term debt                            |       | 4.12         |       | 163    |                                      | 158    |      | (158  | )    
|                                            |                                                       |      
|                                            | Finance costs                                         |       | 4.4, 4.12    |       |       |                                      |       |      | 276   |      
|                                            |                                                       |      
|                                            | Stock-based compensation/share-based payments         |       | 4.6          |       | 201    |                                      | 198    |      | 14    |      
|                                            |                                                       |      
|                                            | (Gain) loss on held-for-trading financial instruments |       |              |       | (102   | )                                    | (92    | )    | 5     |      
|                                            |                                                       |      
|                                            | Gain on asset disposals                               |       | 4.8, 4.9     |       | (59    | )                                    | (57    | )    | (463  | )    
|                                            |                                                       |      
|                                            | Other, net                                            |       | 4.7, 4.11-12 |       | 135    |                                      | 134    |      | (62   | )    
|                                           
|Total expenses                              |                                                       |       |              | 5,613 |        | 5,465                                |        | (454 | )     | 5,011
|                                           
|Income before taxes                         |                                                       |       |              | 1,299 |        | 1,250                                |        | 721  |       | 1,971
|                                           
|Taxes                                       |                                                       |       |              |       |        |                                      |        |      |       |      
|                                            |                                                       |      
|                                            | Current income tax                                    |       |              |       | 1,032  |                                      | 1,006  |      | 130   |      
|                                            |                                                       |      
|                                            | Deferred income tax (recovery)                        |       |              |       | (272   | )                                    | (266   | )    | 156   |      
|                                            |                                                       |      
|                                            | Petroleum revenue tax                                 |       |              |       | 131    |                                      | 128    |      | (128  | )    
|                                           
|                                            |                                                       | 4.3   |              | 891   |        | 868                                  |        | 158  |       | 1,026
|                                           
|Income from continuing operations           |                                                       |       |              | 408   |        | 382                                  |        | 563  |       | 945  
|                                           
|Income from discontinued operations         |                                                       | 4.8   |              | 240   |        | 231                                  |        | (231 | )     |     
|                                           
|Net income                                  |                                                       |       |              | 648   |        | 613                                  |        | 332  |       | 945  
|                                           

24TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Reconciliation of Consolidated Statement of Comprehensive Income (Loss) for the Year
Ended December 31, 2010

|                                                                         |                                |       |  | CGAAP  |     | IFRS adjustments
& reclassifications |     | IFRS |   |     
|------------------------------------------------------------------------ | ------------------------------ | ----- |  | ------ | --- | ------------------------------------ | --- | ---- | - | ----
|Year ended December 31, 2010(millions of $)                              |                                | Notes |  | C$     |     | US$                                  |     | US$  |   | US$ 
|                                                                        
|Net income                                                               |                                |       |  | 648    |     | 613                                  |     | 332  |   | 945 
|                                                                         |                                |      
|Foreign currency translation                                             |                                |       |  | (625   | )   | (46                                  | )   | 5    |   | (41 
|                                                                         |                                |      
|Transfer of accumulated foreign currency gain to net income              |                                | 4.9   |  | (465   | )   | (464                                 | )   | 97   |   | (367
|                                                                         |                                |      
|Actuarial losses relating to pension and other post-employment benefits1 |                                | 4.7   |  |       |     |                                     |     | (12  | ) | (12 
|                                                                         |                                |      
|Gains and losses on derivatives designated as cash flow hedges           |                                |       |  |        |     |                                      |     |      |   |     
|                                                                         |                                |      
|                                                                         | Gains arising during the year  |       |  |        | 14  |                                      | 13  |      |  |     
|                                                                         |                                |      
|                                                                         | Gains recognized in net income |       |  |        | (12 | )                                    | (11 | )    |  |     
|                                                                        
|                                                                         |                                |       |  | 2      |     | 2                                    |     |     |   | 2   
|                                                                        
|Other comprehensive loss                                                 |                                |       |  | (1,088 | )   | (508                                 | )   | 90   |   | (418
|                                                                        
|Comprehensive income (loss)                                              |                                |       |  | (440   | )   | 105                                  |     | 422  |   | 527 
|                                                                        

Reconciliation of Consolidated Statement of Cash Flows for the Year Ended
December 31, 2010

|                                                                      |  |       |  | CGAAP  |   | IFRS adjustments
& reclassifications |   | IFRS |   |       
|--------------------------------------------------------------------- |  | ----- |  | ------ | - | ------------------------------------ | - | ---- | - | ------
|Year ended December 31, 2010 (millions of $)                          |  | Notes |  | C$     |   | US$                                  |   | US$  |   | US$   
|                                                                     
|Cash provided by operating activities                                 |  | 4.12  |  | 3,460  |   | 3,331                                |   | (187 | ) | 3,144 
|                                                                      |  |      
|Cash used in investing activities                                     |  | 4.12  |  | (3,734 | ) | (3,635                               | ) | 384  |   | (3,251
|                                                                      |  |      
|Cash provided by financing activities                                 |  | 4.12  |  | 309    |   | 313                                  |   | (197 | ) | 116   
|                                                                      |  |      
|Effect of translation on foreign currency cash and cash equivalents   |  |       |  | (59    | ) | 51                                   |   |     |   | 51    
|                                                                     
|Net increase (decrease) in cash and cash equivalents                  |  |       |  | (24    | ) | 60                                   |   |     |   | 60    
|                                                                      |  |      
|Cash and cash equivalents net of bank indebtedness, beginning of year |  |       |  | 1,668  |   | 1,593                                |   |     |   | 1,593 
|                                                                     
|Cash and cash equivalents net of bank indebtedness, end of year       |  |       |  | 1,644  |   | 1,653                                |   |     |   | 1,653 
|                                                                     

Notes for Reconciliation from Canadian GAAP to IFRS

4.1) Fair Value as Deemed Cost and Impairments

a) Fair Value as Deemed Cost

The Company elected to use the fair value as deemed cost exemption under IFRS 1 to record certain assets at fair value as at January 1, 2010 as
their deemed cost under IFRS while these assets were measured on a historical cost basis under Canadian GAAP. As a result of the change in accounting, the Company recorded a $1.7 billion
reduction in PP&E at January 1, 2010, of which $463 million related to assets sold during 2010. The aggregate fair value of properties at January 1, 2010 for which the Company
used this exemption was $2.3 billion.

25TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



b) Impairments

Under Canadian GAAP, only if an asset's estimated undiscounted future cash flows was below its carrying value was a determination required of the amount of any
impairment based on discounted cash flows. Under IFRS, impairment assessments are based on the recoverable amount of the asset, which the Company has determined to be fair value calculated using
discounted cash flows.

As
a result of these accounting changes, the Company recorded impairments of $209 million under IFRS at January 1, 2010 relating to E&E assets. The Company recorded additional
impairments of $186 million under IFRS for the year ended December 31, 2010. In the North America segment, $66 million was recorded in respect of natural gas assets primarily as a
result of the decline in natural gas price assumptions. In the North Sea segment, $99 million was recorded as a result of a change in reserves estimates relating to PP&E, a change in the
estimated timing of cash flows relating to oil and gas E&E assets and changes in investment decisions. In the Southeast Asia segment, $21 million was recorded relating to oil assets due to an
increase in estimated future costs. The carrying values of these assets were previously supported under Canadian GAAP on an undiscounted cash flow basis. The impairments are subject to future reversal
if certain criteria are met.

c) Assumptions

In estimating the adjustments to PP&E and E&E assets at the time of adoption of IFRS, management estimated fair value based on market information which
consisted of offers to purchase the asset or comparable assets, independent market surveys and values derived from exchange quoted prices. Where reliable market information was not available, the
recoverable amount was determined using cash flow projections that were based on a long-term view of commodity prices and a post-tax discount rate. The following assumptions
were used in computing discounted cash flows at January 1, 2010 and December 31, 2010, respectively:

|                                |  | December 31,
2010 |  | January 1,
2010 | 
|------------------------------- |  | ----------------- |  | --------------- | 
|                               
|WTI ($/bbl)                     |  | 80.00             |  | 70.00           | 
|                                |  |                  
|Dated Brent ($/bbl)             |  | 78.53             |  | 68.75           | 
|                                |  |                  
|Henry Hub natural gas ($/mmbtu) |  | 5.50              |  | 6.00            | 
|                                |  |                  
|AECO (C$/gj)                    |  | 4.92              |  | 5.60            | 
|                                |  |                  
|US$/C$                          |  | 0.95              |  | 0.90            | 
|                                |  |                  
|US$/UK£                         |  | 1.60              |  | 1.69            | 
|                                |  |                  
|Post-tax discount rate          |  | 10%               |  | 10%             | 
|                               

4.2) Capitalized Borrowing Costs

The Company elected to use the exemption under IFRS 1 to derecognize borrowing costs that had been capitalized under Canadian GAAP, which reduced PP&E by
$218 million at January 1, 2010.

4.3) Income Taxes

Under Canadian GAAP, when the cost of an acquired asset that was recorded as PP&E differed from its tax base, deferred tax was recorded on the difference. Under IFRS, deferred
tax is not recognized on asset acquisitions.

Under
Canadian GAAP, deferred PRT was calculated using the life-of-field method. Under IFRS, a temporary differences basis is used. While PRT was presented separately on the
Consolidated Statement of Income under Canadian GAAP, the Company has chosen to present the current and deferred portions of PRT as components of current and deferred income tax expense, respectively,
under IFRS.

Under
Canadian GAAP, deferred tax was not recognized for temporary differences resulting from differences between the functional currency of accounting for a foreign operation and the currency in
which the taxes are filed. Under IFRS, such temporary tax differences in currencies are recognized.

26TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



As
a result of all measurement differences impacting deferred tax, including the three discussed above, but excluding the impact of discontinued operations and other reclassifications, the Company
recorded a decrease of deferred tax liabilities of $1.1 billion at January 1, 2010 (December 31, 2010  $1.6 billion) under IFRS.
Additional income tax expense of $232 million for the year ended December 31, 2010 was recorded under IFRS.

4.4) Decommissioning

Decommissioning liabilities (formerly asset retirement obligations under Canadian GAAP) are measured based on the estimated cost of abandonment discounted to its net present
value. Under Canadian GAAP, the current discount rate was applied only to new obligations and upward revisions, whereas the entire liability is recalculated using the current discount rate under IFRS.
As a result, the Company recorded a decrease of $83 million, excluding the impact of discontinued operations, at January 1, 2010 (December 31,
2010  $301 million increase) to decommissioning liabilities under IFRS. Under IFRS, the provision has been discounted using a weighted average
credit-adjusted risk free rate of 6.7% at January 1, 2010 (Canadian GAAP  6.6%) and 5.3% at December 31, 2010 (Canadian
GAAP  6.6%).

The
Company elected to apply a modified approach under IFRS 1 in calculating the retrospective cost component of PP&E relating to the Company's decommissioning liabilities, described above in
the 'IFRS Exemptions' section of note 4. As a result, the Company recorded a decrease of $221 million to PP&E at January 1, 2010 under IFRS.

The
measurement difference described above resulted in a lower decommissioning liability under IFRS at January 1, 2010. The Company recorded a reduction in finance costs under IFRS of
$46 million for the year ended December 31, 2010 as a result of lower accretion expense.

4.5) DD&A

The Company recorded a decrease to DD&A of $260 million, excluding the impact of discontinued operations and other reclassifications, for the year ended
December 31, 2010 as a result of the Canadian GAAP and IFRS differences described in these reconciliation notes that reduced PP&E, namely electing to use the fair value as deemed cost exemption
under IFRS 1, impairments, income taxes and decommissioning.

4.6) Share-Based Payments

Under Canadian GAAP, the intrinsic value method was used to measure share-based payments plans having a cash settlement feature. Under IFRS, this method is not permitted and
all share-based payments plans must be measured at fair value using an accepted option pricing model. As a result, the Company recorded an increase of $321 million at January 1, 2010 and
$304 million at December 31, 2010 to the share-based payments liability under IFRS. In addition, the Company elected to not apply IFRS 2Share-Based
Paymentsto equity awards that vested and liability awards that settled prior to January 1, 2010 in determining the adjustment at January 1, 2010.

The
following assumptions are used in the Black-Scholes option pricing model to estimate the fair value of share-based payments plans:

|                               |  | December 31,
2010 |  | January 1,
2010 | 
|------------------------------ |  | ----------------- |  | --------------- | 
|                              
|Expected volatility            |  | 42%               |  | 47%             | 
|                               |  |                  
|Risk-free interest rate        |  | 2.6%              |  | 2.8%            | 
|                               |  |                  
|Expected term (years)          |  | 5                 |  | 5               | 
|                               |  |                  
|Expected forfeiture rate       |  | 3.4%              |  | 4.2%            | 
|                               |  |                  
|Expected annual dividend yield |  | 1.1%              |  | 1.0%            | 
|                              

The Company recorded an additional share-based payments expense of $14 million for the year ended December 31, 2010 under IFRS arising from the
measurement differences described above.

27TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



4.7) Employee Benefits

Under Canadian GAAP, actuarial gains and losses were deferred on the balance sheet and amortized to net income over the average remaining service life of active employees. The
Company elected to recognize cumulative unrecognized net actuarial losses of $49 million in retained earnings at January 1, 2010, which reduced the accrued pension asset by
$22 million and increased the accrued pension liability by $57 million. As a result of this measurement difference, the Company reversed the Canadian GAAP amortization of actuarial gains
and losses of $7 million for the year ended December 31, 2010, and recorded net actuarial losses of $12 million for the year ended December 31, 2010 in other comprehensive
loss under IFRS.

4.8) Discontinued Operations

Under IFRS, only disposals of significant operations such as a separate major line of business or geographical area are presented as discontinued operations. Under Canadian
GAAP, this definition was broader and included a component of an entity. Under both Canadian GAAP and IFRS, assets classified as held for sale and associated liabilities are presented separately on
the balance sheet. However, they are reported as current under IFRS and comparative information is not restated.

Income
from discontinued operations was reported separately in the Consolidated Statement of Income under Canadian GAAP, but is not presented separately under IFRS since the asset disposals occurring
during 2010 did not meet the definition of a discontinued operation under IFRS. The gains and losses arising on such disposals are reported in 'Gain on asset disposals' on the Consolidated Statements
of Income.

4.9) Asset Disposals

Due to Canadian GAAP and IFRS differences described above that reduced PP&E, namely electing to use the fair value as deemed cost exemption under IFRS 1, income taxes
and decommissioning, the gains and losses recorded on asset disposals under IFRS differ from Canadian GAAP. In particular, the transfer of non-taxable foreign exchange gains previously
accumulated in other comprehensive income to net income resulting from the disposal of North American assets was deferred within 2010 under IFRS to coincide with the closing of the transactions.

4.10) Cumulative Translation Differences

Cumulative translation differences arising from translation of foreign operations have been recalculated under IFRS to reflect the impact of other adjustments to the opening
IFRS balance sheet as at January 1, 2010.

4.11) Other Adjustments

Other reconciling items include differences between Canadian GAAP and IFRS related to asset transactions and risk sharing arrangements, embedded derivatives, and derecognition
of replacement parts, none of which are significant.

4.12) Reclassifications

a) Deferred Taxes

Deferred taxes are classified as non-current under IFRS, but were classified as both current and non-current under Canadian GAAP based
on the classification of the underlying assets and liabilities that gave
rise to the differences. As a result, the Company reclassified $65 million of current deferred tax liabilities at January 1, 2010 (December 31,
2010  $nil) to non-current liabilities under IFRS.

b) E&E Assets

E&E assets are presented as a separate line item under IFRS but were reported as part of PP&E under Canadian GAAP. As a result, the Company reclassified PP&E
with a net book value of $2.2 billion at January 1, 2010 (December 31, 2010  $3.4 billion) to E&E assets under IFRS.

28TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



c) Royalties

Under Canadian GAAP, royalties were presented separately from revenue, while revenue is presented net of royalties under IFRS. As a result, the Company
reclassified royalties as a reduction of sales under IFRS of $1.3 billion, excluding the impact of discontinued operations, for the year ended December 31, 2010.

d) Finance Costs

Under Canadian GAAP, interest on long-term debt was presented as a separate item in the Consolidated Statement of Income and accretion expense was
included as part of DD&A. These items are presented as finance costs under IFRS. The Company reclassified interest on long-term debt of $158 million for the year ended
December 31, 2010 and accretion expense of $79 million for the year ended December 31, 2010 to finance costs under IFRS. The remaining reclassification related to
other interest.

e) Statement of Cash Flows

The underlying cash flows of the Company do not change under IFRS. However, the Company reclassified exploration costs of $384 million for the year ended
December 31, 2010 from an investing activity under Canadian GAAP to an operating activity
under IFRS, and reclassified finance costs of $197 million for the year ended December 31, 2010 from an operating activity under Canadian GAAP to a financing activity under IFRS.

5. ASSETS SOLD AND HELD FOR SALE

Sale of Farrell Creek Interests to Sasol Limited (Sasol)

In March 2011, Talisman completed a transaction creating a strategic partnership with Sasol to develop the Farrell Creek
assets in Talisman's Montney shale play in British Columbia. Talisman sold 50% of its working interests in the Farrell Creek assets for approximately $1 billion, comprising $238 million
in cash and approximately $800 million of certain future development costs. The transaction resulted in a pre-tax gain of $89 million, which is included in 'Gain on asset
disposals' on the Consolidated Statement of Income.

Sale of Cypress A Interests to Sasol

In June 2011, Talisman completed an additional transaction with Sasol to develop the Cypress A assets in Talisman's Montney
shale play in British Columbia. Talisman sold 50% of its working interests in the Cypress A assets for approximately $1.1 billion, comprising $257 million in cash and approximately
$800 million of certain future development costs. The transaction resulted in a pre-tax gain of $113 million, which is included in 'Gain on asset disposals' on the
Consolidated Statement of Income.

Asset Sales Completed in 2010

During the year ended December 31, 2010, Talisman completed the sale of oil and gas producing properties in North America with
a carrying value of approximately $2 billion for aggregate proceeds of approximately $2.2 billion. The net investment in the Company's Canadian operations was reduced as a result of the
transactions occurring in 2010 and, accordingly, $367 million of exchange gains previously accumulated in other comprehensive income were included in the gains of $520 million, which are
included in 'Gain on asset disposals' on the Consolidated Statement of Income. Tax of $38 million was recorded in respect of these transactions.

Assets Held for Sale

During 2010, Talisman completed the sale of oil and gas producing assets in Tunisia (included in the Other segment) for proceeds of
$23 million, resulting in a loss of $5 million, net of tax of $nil. The assets held for sale and liabilities associated with assets held for sale included in the Consolidated Balance
Sheet as at January 1, 2010 were $22 million and $7 million, respectively. The operating results related to these assets held for sale were included in net income for the year
ended December 31, 2010 and the loss was included in 'Gain on asset disposals' on the Consolidated Statement of Income.

29TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



6. PROPERTY ACQUISITIONS

During the year ended December 31, 2010, Talisman acquired undeveloped land in the Eagle Ford shale play for approximately $910 million and a 35%
working interest in the PL378 Grosbeak discovery and a 20% interest in the PL375 Beta discovery in Norway for $192 million. During the year ended December 31, 2011,
Talisman acquired additional undeveloped land in the Eagle Ford shale play for approximately $145 million and undeveloped land in the Alberta Duvernay shale play for approximately
$510 million.

7. BUSINESS COMBINATIONS

Equión Energía Limited

On January 24, 2011, Talisman, together with Ecopetrol, completed the acquisition of BP Exploration Company (Colombia)
Limited, renamed Equión Energía Limited (Equión). Talisman acquired a 49% interest in Equión for cash consideration of $785 million.
Since Equión is a jointly controlled entity, the Company is proportionately consolidating its interest, which is reported in the Other segment.

The
recognition of assets acquired and liabilities assumed has been updated as a result of the completion of the Company's process to evaluate the acquired reserves, and reflects additional
market-based information for certain acquired assets.

The
assets acquired through this transaction include interests in producing properties and investments in companies having interests in oil and gas pipelines in Colombia.

This
acquisition, which builds on the Company's acreage position in Colombia, was accounted for using the acquisition method. The fair values of the identifiable assets acquired and liabilities
assumed by Talisman, after working capital and other adjustments, were as follows:

|Fair value of share of net assets acquired  |                           |      |     | 
|------------------------------------------- | ------------------------- | ---- | --- | 
|                                           
|Property, plant and equipment               |                           | 559  |     | 
|                                            |                           |     
|Cash                                        |                           | 16   |     | 
|                                            |                           |     
|Accounts receivable                         |                           | 81   |     | 
|                                            |                           |     
|Inventories                                 |                           | 16   |     | 
|                                            |                           |     
|Investments                                 |                           | 350  |     | 
|                                            |                           |     
|Indemnification asset                       |                           | 52   |     | 
|                                            |                           |     
|Accounts payable                            |                           | (113 | )   | 
|                                            |                           |     
|Other current liabilities                   |                           | (52  | )   | 
|                                            |                           |     
|Decommissioning liability                   |                           | (25  | )   | 
|                                            |                           |     
|Provisions                                  |                           | (52  | )   | 
|                                            |                           |     
|Deferred tax liability                      |                           | (209 | )   | 
|                                           
|Total identifiable net assets at fair value |                           | 623  |     | 
|                                            |                           |     
|Goodwill arising on acquisition (note 8)    |                           | 162  |     | 
|                                           
|Total cost of acquisition                   |                           | 785  |     | 
|                                           
|Satisfied by:                               |                           |      |     | 
|                                            |                           |     
|                                            | Cash deposit paid in 2010 |      | 613 | 
|                                            |                           |     
|                                            | Cash paid in 2011         |      | 172 | 
|                                           
|Total cash paid                             |                           | 785  |     | 
|                                           

The fair value of the acquired accounts receivable approximates the carrying value due to their short-term nature. None of the accounts receivable
were impaired and the full contractual amount was collected.

30TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



The
goodwill arising on acquisition is attributable to the difference between the accounting fair value and the tax basis of the net assets acquired, and is not expected to be deductible for income
tax purposes.

From
the date of acquisition, Equión contributed revenue of $287 million and net income of $110 million to the Company's Consolidated Statement of Income during the year
ended December 31, 2011. Had the transaction closed on January 1, 2011, the incremental revenue and net income reported by Talisman would have been immaterial.

Transaction
costs of $11 million were expensed in 2010 and included in other expenses on the Consolidated Statement of Income and shown as a component of cash provided by operating activities
in the Consolidated Statement of Cash Flows.

As
part of the purchase transaction, Talisman assumed provisions of $52 million for which the vendor has indemnified the Company. Accordingly, a non-current asset was recorded in
the same amount.

No
contingent consideration arose from this transaction.

Jambi Merang

On January 13, 2010, Talisman acquired 100% of the share capital of Hess (Indonesia-Jambi Merang) Limited, a company which
owns a 25% interest in the Jambi Merang PSC, for cash consideration of $183 million.

This
acquisition, which facilitates Talisman's strategy to increase its presence in Indonesia and is being reported in the Southeast Asia segment, was accounted for using the acquisition method. The
fair values of the identifiable assets acquired and liabilities assumed by Talisman were as follows:

|Fair value of net assets acquired           |           |     |     | 
|------------------------------------------- | --------- | --- | --- | 
|                                           
|Property, plant and equipment               |           | 181 |     | 
|                                            |           |    
|Accounts receivable                         |           | 26  |     | 
|                                            |           |    
|Other assets                                |           | 13  |     | 
|                                            |           |    
|Accounts payable                            |           | (20 | )   | 
|                                            |           |    
|Other current liabilities                   |           | (17 | )   | 
|                                            |           |    
|Deferred tax liability                      |           | (43 | )   | 
|                                           
|Total identifiable net assets at fair value |           | 140 |     | 
|                                            |           |    
|Goodwill arising on acquisition (note 8)    |           | 43  |     | 
|                                           
|Total cost of acquisition                   |           | 183 |     | 
|                                           
|Satisfied by:                               |           |     |     | 
|                                            |           |    
|                                            | Cash paid |     | 183 | 
|                                           

The fair value of the acquired accounts receivable approximates the carrying value due to their short-term nature. None of the accounts receivable
acquired were impaired and the full contractual amount was collected.

The
goodwill recognized above is attributable to the difference between the accounting fair value and the tax basis of the net assets acquired and is not expected to be deductible for income
tax purposes.

Revenue
and net income from Jambi Merang did not have a material impact on the Company during 2010, since first production was achieved in April 2011.

Transaction
costs of $1 million were expensed in 2010 and included in other expenses in the Consolidated Statement of Income and shown as a component of cash provided by operating activities in
the Consolidated Statement of Cash Flows.

No
contingent consideration or contingent liabilities arose from this transaction.

31TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



8. GOODWILL

|                             |  |       |   |       |   | 
|---------------------------- |  | ----- | - | ----- | - | 
|Continuity of goodwill       |  | 2011  |   | 2010  |   | 
|                            
|Balance, beginning of year   |  | 1,164 |   | 1,183 |   | 
|                             |  |      
|Acquisitions (note 7)        |  | 162   |   | 43    |   | 
|                             |  |      
|Disposals                    |  | (9    | ) | (57   | ) | 
|                             |  |      
|Foreign currency translation |  |      |   | (5    | ) | 
|                            
|Balance, end of year         |  | 1,317 |   | 1,164 |   | 
|                            

Goodwill has no tax basis. See note 14 for details of the impairment testing of goodwill.

9. ACCOUNTS RECEIVABLE

|                                          |  |                   |   |                   |   |                 |   | 
|----------------------------------------- |  | ----------------- | - | ----------------- | - | --------------- | - | 
|                                          |  | December 31,
2011 |   | December 31,
2010 |   | January 1,
2010 |   | 
|                                         
|Trade receivables                         |  | 1,617             |   | 1,289             |   | 1,218           |   | 
|                                          |  |                  
|Allowance for doubtful accounts (note 25) |  | (67               | ) | (2                | ) | (2              | ) | 
|                                         
|                                          |  | 1,550             |   | 1,287             |   | 1,216           |   | 
|                                         

The fair value of accounts receivable approximates the carrying amount due to their short term to maturity.

Trade
receivables are non-interest bearing and are generally on 30-90 day terms.

At
December 31, the analysis of trade receivables that were due or past due, but not impaired, was as follows:

|     |  |       |  |                               |  |                           |  |            | 
|---- |  | ----- |  | ----------------------------- |  | ------------------------- |  | ---------- | 
|     |  |       |  |                               |  | Past due but not impaired | 
|     |  | Total |  | Neither past due
nor impaired |  | 91-120 days               |  | > 120 days | 
|    
|2011 |  | 1,550 |  | 1,483                         |  | 12                        |  | 55         | 
|    
|2010 |  | 1,287 |  | 1,221                         |  | 14                        |  | 52         | 
|    

10. INVENTORIES

|                       |  |                   |  |                   |  |                 | 
|---------------------- |  | ----------------- |  | ----------------- |  | --------------- | 
|                       |  | December 31,
2011 |  | December 31,
2010 |  | January 1,
2010 | 
|                      
|Materials and supplies |  | 56                |  | 69                |  | 75              | 
|                       |  |                  
|Product                |  | 108               |  | 75                |  | 66              | 
|                      
|                       |  | 164               |  | 144               |  | 141             | 
|                      

32TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



11. OTHER ASSETS

|                                       |  |                   |  |                   |  |                 | 
|-------------------------------------- |  | ----------------- |  | ----------------- |  | --------------- | 
|                                       |  | December 31,
2011 |  | December 31,
2010 |  | January 1,
2010 | 
|                                      
|Accrued pension asset (note 30)        |  | 1                 |  | 5                 |  | 4               | 
|                                       |  |                  
|Note receivable (note 22)              |  |                  |  |                  |  | 40              | 
|                                       |  |                  
|Decommissioning sinking fund (note 15) |  | 38                |  | 30                |  | 22              | 
|                                       |  |                  
|Acquisition deposits                   |  |                  |  | 630               |  |                | 
|                                       |  |                  
|Indemnification asset (note 7)         |  | 52                |  |                  |  |                | 
|                                       |  |                  
|Other                                  |  | 10                |  | 2                 |  | 8               | 
|                                      
|                                       |  | 101               |  | 667               |  | 74              | 
|                                      

12. INVESTMENTS

|                                                                                |  |                   |  |                   |  |                 | 
|------------------------------------------------------------------------------- |  | ----------------- |  | ----------------- |  | --------------- | 
|                                                                                |  | December 31,
2011 |  | December 31,
2010 |  | January 1,
2010 | 
|                                                                               
|Investment in Oleoducto Central S.A (Ocensa) (note 7)                           |  | 325               |  |                  |  |                | 
|                                                                                |  |                  
|Other investments acquired pursuant to the Equión business combination (note 7) |  | 25                |  |                  |  |                | 
|                                                                                |  |                  
|Investment acquired pursuant to a property disposition                          |  |                  |  | 54                |  |                | 
|                                                                                |  |                  
|Investment in Transasia Pipeline Company Pvt. Ltd.                              |  | 34                |  | 34                |  | 34              | 
|                                                                                |  |                  
|Other                                                                           |  | 11                |  | 33                |  |                | 
|                                                                               
|                                                                                |  | 395               |  | 121               |  | 34              | 
|                                                                               

Investments comprise Talisman's interests accounted for using the equity method and the cost method.

The
investment in Ocensa was acquired as part of the Equión business combination described in note 7 and is accounted for using the equity method. Ocensa has an interest
in a pipeline in Colombia. The equity income recorded by Talisman in respect of this investment during the year ended December 31, 2011 was not material.

Three
other investments were acquired pursuant to the Equión business combination, one of which is accounted for using the equity method and two using the cost method.

In
2010, Talisman acquired shares in a Canadian private company as part of the consideration for one of the North American property dispositions described in note 5. This private company
completed an initial public offering later in 2010. These shares were subsequently sold on the open market in January 2011 for cash proceeds of $54 million.

The
investment in Transasia Pipeline Company Pvt. Ltd. is accounted for using the cost method.

33TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



13. OIL AND GAS ASSETS

Cost and Accumulated DD&A

The cost and accumulated DD&A of the Company's PP&E (including corporate assets) and E&E assets are as follows:

|                                                    |  |        |   |            |   |        |   | 
|--------------------------------------------------- |  | ------ | - | ---------- | - | ------ | - | 
|                                                    |  | PP&E   |   | E&E assets |   | Total  |   | 
|                                                   
|Cost                                                |  |        |   |            |   |        |   | 
|                                                    |  |       
|At January 1, 2010                                  |  | 25,726 |   | 2,212      |   | 27,938 |   | 
|                                                    |  |       
|Acquisitions through business combinations (note 7) |  | 181    |   |           |   | 181    |   | 
|                                                    |  |       
|Other additions                                     |  | 3,044  |   | 1,856      |   | 4,900  |   | 
|                                                    |  |       
|Disposals and derecognition                         |  | (3,982 | ) | (229       | ) | (4,211 | ) | 
|                                                    |  |       
|Transfers from E&E assets to PP&E                   |  | 168    |   | (168       | ) |       |   | 
|                                                    |  |       
|Change in decommissioning liabilities               |  | 596    |   |           |   | 596    |   | 
|                                                    |  |       
|Expensed to dry hole                                |  |       |   | (113       | ) | (113   | ) | 
|                                                    |  |       
|Foreign exchange                                    |  | (273   | ) | (4         | ) | (277   | ) | 
|                                                   
|At December 31, 2010                                |  | 25,460 |   | 3,554      |   | 29,014 |   | 
|                                                    |  |       
|Acquisitions through business combinations (note 7) |  | 559    |   |           |   | 559    |   | 
|                                                    |  |       
|Other additions                                     |  | 3,491  |   | 1,527      |   | 5,018  |   | 
|                                                    |  |       
|Disposals and derecognition                         |  | (384   | ) | (73        | ) | (457   | ) | 
|                                                    |  |       
|Transfers from E&E assets to PP&E                   |  | 654    |   | (654       | ) |       |   | 
|                                                    |  |       
|Change in decommissioning liabilities               |  | 363    |   |           |   | 363    |   | 
|                                                    |  |       
|Expensed to dry hole                                |  |       |   | (241       | ) | (241   | ) | 
|                                                   
|At December 31, 2011                                |  | 30,143 |   | 4,113      |   | 34,256 |   | 
|                                                   
|Accumulated DD&A                                    |  |        |   |            |   |        |   | 
|                                                    |  |       
|At January 1, 2010                                  |  | 12,472 |   |           |   | 12,472 |   | 
|                                                    |  |       
|Charge for the year                                 |  | 1,788  |   |           |   | 1,788  |   | 
|                                                    |  |       
|Disposals and derecognition                         |  | (2,119 | ) |           |   | (2,119 | ) | 
|                                                    |  |       
|Impairment losses                                   |  | 189    |   | 112        |   | 301    |   | 
|                                                    |  |       
|Foreign exchange                                    |  | (136   | ) |           |   | (136   | ) | 
|                                                   
|At December 31, 2010                                |  | 12,194 |   | 112        |   | 12,306 |   | 
|                                                    |  |       
|Charge for the year                                 |  | 1,949  |   |           |   | 1,949  |   | 
|                                                    |  |       
|Disposals and derecognition                         |  | (88    | ) |           |   | (88    | ) | 
|                                                    |  |       
|Impairment losses                                   |  | 313    |   | 47         |   | 360    |   | 
|                                                    |  |       
|Impairment reversals                                |  | (134   | ) |           |   | (134   | ) | 
|                                                   
|At December 31, 2011                                |  | 14,234 |   | 159        |   | 14,393 |   | 
|                                                   
|Net book value                                      |  |        |   |            |   |        |   | 
|                                                    |  |       
|At December 31, 2011                                |  | 15,909 |   | 3,954      |   | 19,863 |   | 
|                                                   
|At December 31, 2010                                |  | 13,266 |   | 3,442      |   | 16,708 |   | 
|                                                   
|At January 1, 2010                                  |  | 13,254 |   | 2,212      |   | 15,466 |   | 
|                                                   

Included in PP&E are capitalized interest costs of $161 million (December 31, 2010  $81 million;
January 1, 2010  $nil) relating to projects under construction and development. During the year ended December 31, 2011, interest costs of
$85 million (2010  $81 million) were capitalized.

34TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



An
incremental DD&A expense of $24 million was booked in the fourth quarter of 2011 to reflect an adjustment to reserves. For 2010, the impact of adjusting the DD&A expense in the fourth
quarter for reserves revisions was a reduction of $47 million.

Non-Depleted Capital

PP&E and E&E assets include the following costs that were not subject to DD&A:

|                                                                      |                |       |       |       |      
|--------------------------------------------------------------------- | -------------- | ----- | ----- | ----- | -----
|December 31                                                           |                | 2011  |       | 2010  |      
|                                                                     
|Undeveloped land                                                      |                |       |       |       |      
|                                                                      |                |      
|                                                                      | North America  |       | 2,240 |       | 1,763
|                                                                      |                |      
|                                                                      | Southeast Asia |       | 304   |       | 287  
|                                                                      |                |      
|                                                                      | Other          |       | 219   |       | 201  
|                                                                      |                |      
|Acquired unproved reserve costs not associated with producing fields1 |                |       |       |       |      
|                                                                      |                |      
|                                                                      | North Sea      |       | 224   |       | 235  
|                                                                      |                |      
|                                                                      | Other          |       | 9     |       | 9    
|                                                                      |                |      
|Exploration costs2                                                    |                |       |       |       |      
|                                                                      |                |      
|                                                                      | North America  |       | 130   |       | 123  
|                                                                      |                |      
|                                                                      | North Sea      |       | 314   |       | 305  
|                                                                      |                |      
|                                                                      | Southeast Asia |       | 194   |       | 340  
|                                                                      |                |      
|                                                                      | Other          |       | 320   |       | 179  
|                                                                     
|E&E assets                                                            |                | 3,954 |       | 3,442 |      
|                                                                      |                |      
|Development projects3                                                 |                |       |       |       |      
|                                                                      |                |      
|                                                                      | North America  |       |      |       | 58   
|                                                                      |                |      
|                                                                      | North Sea      |       | 1,714 |       | 1,144
|                                                                      |                |      
|                                                                      | Southeast Asia |       | 486   |       | 482  
|                                                                      |                |      
|                                                                      | Other          |       | 362   |       | 117  
|                                                                     
|                                                                      |                | 6,516 |       | 5,243 |      
|                                                                     

Costs relating to wells drilled prior to 2011 continue to be capitalized, since management's ongoing assessment includes further planned activity. The number of
wells drilled prior to 2011 and related costs are as follows:

|               |  | Years     |  | Number of
wells |  | Cost | 
|-------------- |  | --------- |  | --------------- |  | ---- | 
|              
|North America  |  | 2008-2010 |  | 12              |  | 103  | 
|               |  |          
|North Sea      |  | 2007-2010 |  | 10              |  | 513  | 
|               |  |          
|Southeast Asia |  | 2007-2010 |  | 8               |  | 26   | 
|               |  |          
|Other          |  | 2008-2010 |  | 11              |  | 202  | 
|              
|               |  |           |  | 41              |  | 844  | 
|              

North America wells drilled prior to 2011 are in the process of being evaluated or are awaiting completion of the construction of infrastructure. The remaining
wells relate to fields where either further appraisal drilling is ongoing or development options are being assessed.

35TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



North
Sea and other international wells relate to projects that are in the process of being evaluated, including the drilling of additional appraisal wells and the completion of additional seismic
analysis. Some of these projects are in the final stages of project sanction.

14. IMPAIRMENT

Impairment of Assets

|                        |            |      |     |      |    
|----------------------- | ---------- | ---- | --- | ---- | ---
|Years ended December 31 |            | 2011 |     | 2010 |    
|                       
|Impairment losses       |            |      |     |      |    
|                        |            |     
|                        | E&E assets |      | 47  |      | 112
|                        |            |     
|                        | PP&E       |      | 313 |      | 189
|                       
|                        |            | 360  |     | 301  |    
|                       
|Impairment reversals    |            |      |     |      |    
|                        |            |     
|                        | E&E assets |      |    |      |   
|                        |            |     
|                        | PP&E       |      | 134 |      |   
|                       
|                        |            | 134  |     |     |    
|                       
|Net impairment          |            | 226  |     | 301  |    
|                       

At December 31, 2011, the Company assessed the carrying amount of its oil and gas assets for indicators of impairment such as changes in future prices,
futures costs and reserves. The Company generally calculates the recoverable amount as the fair value less costs to sell using a discounted cash flow model. The discount rate is derived from the
Company's post-tax weighted average cost of capital. Any country-specific risks are adjusted for within the cash flows. The rate to be applied is reassessed each year. The calculation is
sensitive to the following assumptions which have been based on a long-term view of global oil and gas supply and demand as well as extensive industry experience:

The
following assumptions were used in developing the cash flow model for each cash-generating unit:

|                                |  | 2012  |  | 2013 and
beyond | 
|------------------------------- |  | ----- |  | --------------- | 
|                               
|WTI ($/bbl)                     |  | 90.00 |  | 86.69           | 
|                                |  |      
|Dated Brent ($/bbl)             |  | 95.00 |  | 85.77           | 
|                                |  |      
|Henry Hub natural gas ($/mmbtu) |  | 5.00  |  | 5.50            | 
|                                |  |      
|AECO (C$/gj)                    |  | 4.17  |  | 4.54            | 
|                                |  |      
|US$/C$                          |  | 1.00  |  | 1.00            | 
|                                |  |      
|US$/UK£                         |  | 1.63  |  | 1.63            | 
|                                |  |      
|Post-tax discount rate          |  | 10%   |  | 10%             | 
|                               

36TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



During the year ended December 31, 2011, the Company recorded impairment of $129 million in North America due principally to reduced third party
tariffs in the Company's midstream operations and lower conventional natural gas reserves. Impairments of $231 million in the North Sea were recorded in respect of oil and gas PP&E
($184 million) and E&E assets ($47 million). Of the $231 million, $102 million was as a result of a change in legislation announced by the UK government in
March 2011 that raises the combined corporation tax and supplementary charge rate from 50% to 62% for oil and gas companies with fields not subject to PRT, and 75% to 81% with fields subject to
PRT. See note 26 for further details. Additional impairment expense of $129 million in the North Sea arose due to a reduction in year-end reserves in a field
in Norway.

Also
during 2011, an impairment reversal of $134 million (2010  $nil) resulted from price increases and an increase in estimated reserves for oil and gas
assets that were previously impaired in the North Sea and Southeast Asia.

During
the year ended December 31, 2010, the Company recorded $301 million of impairments, of which $189 million related to PP&E and $112 million to E&E assets. In North
America, natural gas assets of $92 million were written down due to the decline
in natural gas price assumptions and $24 million of exploration acreage was relinquished. In the North Sea, oil and gas assets of $76 million and E&E assets of $23 million were
written down due to a change in reserves estimates, a change in the estimated timing of cash flows and changes in investment decisions. In addition, $65 million of exploration acreage was
relinquished. In Southeast Asia, $21 million was recorded relating to oil assets due to an increase in estimated future costs.

The
Yme project in Norway has experienced significant delays and cost overruns. The project is subject to arbitration with the contractor. Management has assessed the project's recoverability based on
the above assumptions and a range of possible start up dates, arbitration outcomes and completion costs. No impairment writedown of the Yme project was recorded during the year ended
December 31, 2011. Management will continue to assess the project's recoverability as new information becomes available. The net carrying value of Yme is approximately $800 million. The
net after tax exposure is significantly less than the net carrying value of the project.

Impairment of Goodwill

No impairment of goodwill was recorded during the year ended December 31, 2011
(2010  $nil), and there were no accumulated impairment losses at January 1, 2010. No reasonably possible change in assumptions would cause goodwill to
become impaired.

37TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



15. DECOMMISSIONING LIABILITIES

|                                             |  |       |   |       |   | 
|-------------------------------------------- |  | ----- | - | ----- | - | 
|Continuity of decommissioning liabilities    |  | 2011  |   | 2010  |   | 
|                                            
|Balance, beginning of year                   |  | 2,610 |   | 2,031 |   | 
|                                             |  |      
|Liabilities incurred during the year         |  | 115   |   | 50    |   | 
|                                             |  |      
|Liabilities settled during the year          |  | (44   | ) | (76   | ) | 
|                                             |  |      
|Accretion expense (note 16)                  |  | 76    |   | 79    |   | 
|                                             |  |      
|Revisions in estimated cash flows            |  | 204   |   | 89    |   | 
|                                             |  |      
|Change in discount rate                      |  | 74    |   | 437   |   | 
|                                            
|Balance, end of year                         |  | 3,035 |   | 2,610 |   | 
|                                            
|Expected to be settled within one year       |  | 53    |   | 30    |   | 
|                                             |  |      
|Expected to be settled in more than one year |  | 2,982 |   | 2,580 |   | 
|                                            
|                                             |  | 3,035 |   | 2,610 |   | 
|                                            

Revisions in estimated cash flows occurring in 2011 related to cost increases in the North Sea as well as cost increases and a revision of the expected timing
of settlement of liabilities in North America. The liabilities incurred during the year related principally to new wells and facilities in North America and Southeast Asia, as well as the addition of
the decommissioning liabilities of Equión.

The
Company provides for the future cost of decommissioning oil and natural gas properties and facilities on a discounted basis. At December 31, 2011, the estimated undiscounted decommissioning
liabilities associated with oil and gas properties and facilities were $5.0 billion (December 31, 2010  $4.5 billion; January 1,
2010  $4.6 billion). The majority of the payments to settle this provision will occur over a period of 35 years and will be funded from the general
resources of the Company as they arise. The provision for the costs of decommissioning production facilities and pipelines at the end of their economic lives has been estimated using existing
technology, at current prices or long-term assumptions and based upon the expected timing of the activity. The provision has been discounted using a weighted average credit-adjusted risk
free rate of 5.1% (2010  5.3%). Total accretion expense for the year ended December 31, 2011 of $76 million
(2010  $79 million) has been included in finance costs on the Consolidated Statements of Income.

While
the provision is based on the best estimate of future costs and the economic lives of the facilities and pipelines, there is uncertainty regarding both the amount and timing of the costs to
be incurred.

The
Company provided letters of credit at January 1, 2012 in an amount of $1.1 billion as security for the costs of decommissioning obligations in the UK.

The
Company has established a decommissioning sinking fund of $38 million at December 31, 2011 (December 31, 2010  $30 million;
January 1, 2010  $22 million) that represents secured funding for its decommissioning obligations in Southeast Asia.

16. FINANCE COSTS

|                                              |  |      |   |      |   | 
|--------------------------------------------- |  | ---- | - | ---- | - | 
|Years ended December 31                       |  | 2011 |   | 2010 |   | 
|                                             
|Interest on long-term debt                    |  | 240  |   | 235  |   | 
|                                              |  |     
|Miscellaneous interest expense and other fees |  | 47   |   | 43   |   | 
|                                              |  |     
|Accretion expense (note 15)                   |  | 76   |   | 79   |   | 
|                                              |  |     
|Less: interest capitalized                    |  | (85  | ) | (81  | ) | 
|                                             
|                                              |  | 278  |   | 276  |   | 
|                                             

The interest rate applied in determining the amount of interest capitalized in 2011 was approximately 6.1% (2010  6.4%).

38TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



17. LONG-TERM DEBT

|                                  |                                                    |                   |     |                   |     |                 |     | 
|--------------------------------- | -------------------------------------------------- | ----------------- | --- | ----------------- | --- | --------------- | --- | 
|                                  |                                                    | December 31,
2011 |     | December 31,
2010 |     | January 1,
2010 |     | 
|                                 
|Bank Credit Facilities            |                                                    | 648               |     |                  |     |                |     | 
|                                  |                                                    |                  
|Commercial Paper                  |                                                    | 402               |     |                  |     |                |     | 
|                                  |                                                    |                  
|Tangguh Project Financing         |                                                    | 97                |     | 105               |     | 101             |     | 
|                                  |                                                    |                  
|Debentures and Notes (Unsecured)1 |                                                    |                   |     |                   |     |                 |     | 
|                                  |                                                    |                  
|                                  | 6.89% notes (US$10 million), Series B, due 2010    |                   |    |                   |    |                 | 10  | 
|                                  |                                                    |                  
|                                  | 4.44% medium term notes (C$350 million), due 20112 |                   |    |                   | 352 |                 | 334 | 
|                                  |                                                    |                  
|                                  | 8.25% notes (US$50 million), due 2014              |                   | 50  |                   | 50  |                 | 50  | 
|                                  |                                                    |                  
|                                  | 5.125% notes (US$375 million), due 20153           |                   | 374 |                   | 374 |                 | 373 | 
|                                  |                                                    |                  
|                                  | 8.50% notes (US$150 million), due 2016             |                   | 150 |                   | 150 |                 | 150 | 
|                                  |                                                    |                  
|                                  | 6.625% notes (UK£250 million), due 2017            |                   | 385 |                   | 386 |                 | 399 | 
|                                  |                                                    |                  
|                                  | 7.75% notes (US$700 million), due 2019             |                   | 694 |                   | 693 |                 | 692 | 
|                                  |                                                    |                  
|                                  | 3.75% notes (US$600 million), due 2021             |                   | 592 |                   | 592 |                 |    | 
|                                  |                                                    |                  
|                                  | 7.25% debentures (US$300 million), due 2027        |                   | 300 |                   | 300 |                 | 300 | 
|                                  |                                                    |                  
|                                  | 5.75% notes (US$125 million), due 2035             |                   | 123 |                   | 123 |                 | 123 | 
|                                  |                                                    |                  
|                                  | 5.85% notes (US$500 million), due 2037             |                   | 493 |                   | 493 |                 | 493 | 
|                                  |                                                    |                  
|                                  | 6.25% notes (US$600 million), due 2038             |                   | 587 |                   | 586 |                 | 586 | 
|                                 
|Gross debt4                       |                                                    | 4,895             |     | 4,204             |     | 3,611           |     | 
|                                  |                                                    |                  
|Less: current portion             |                                                    | (410              | )   | (359              | )   | (10             | )   | 
|                                 
|Long-term debt                    |                                                    | 4,485             |     | 3,845             |     | 3,601           |     | 
|                                 

During the year ended December 31, 2011, Talisman repaid $313 million of debt from cash on hand, and settled the cross-currency swap which was
designated as a cash flow hedge.

Bank Credit Facilities and Commercial Paper

At December 31, 2011, Talisman had unsecured credit facilities totaling $4 billion, consisting of facilities of
$3.8 billion (Facility No. 1) and $200 million (Facility No. 2). These facilities mature in November 2014, although the maturity date may be extended from
time to time upon agreement between the Company and the respective lenders. Prior to the maturity date, the Company may borrow, repay and reborrow at its discretion. All facilities must be repaid on
the maturity date.

Borrowings
under Facility No. 1 are available in the form of prime loans, C$ or US$ bankers' acceptances, US$ base rate loans or LIBOR-based loans. In addition, drawings to a total of
$1 billion are available in the form of letters of credit. Borrowings under Facility No. 2 are available in the form of prime loans, C$ or US$ guaranteed notes, US$ base rate loans and
LIBOR-based loans. At December 31, 2011, $648 million in the form of bankers' acceptances (C$410 million and US$245 million) was drawn on the Company's facilities and
$30 million was supporting letters of credit. The average rate on the outstanding bankers' acceptances was 2.88%, which reflects the weighted average interest rate of instruments outstanding at
December 31, 2011. The rate is floating rate-based and varies with changes in short-term market interest rates.

39TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



The
Company established a US commercial paper program in November 2011. The authorized amount under this program is $1 billion. The amount available under the commercial paper program is
limited to the availability of backup funds under the Company's bank credit facilities. At December 31, 2011, the amount of commercial paper outstanding was $402 million and the average
interest rate on outstanding commercial paper was 0.6%.

At
December 31, 2011, available borrowing capacity under the bank credit facilities was $3 billion.

Tangguh Project Financing

In connection with the acquisition of its interest in the Tangguh LNG Project, Talisman became a participant in a series of project
financing facilities, the Company's share of which is up to $105 million. Approximately $97 million was outstanding under these facilities at December 31, 2011
(December 31, 2010  $105 million; January 1, 2010  $101 million), of which $8 million
is due for repayment in 2012. The amount outstanding is secured by Talisman's interest in the Tangguh LNG Project, having a net book value of $223 million. Draws under these facilities bear
interest at LIBOR plus 0.19% through to LIBOR plus 0.33% per annum and will mature in 2021.

Debentures and Notes

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

Other

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

Repayment Schedule

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

|Year               |  |       | 
|------------------ |  | ----- | 
|                  
|20121              |  | 410   | 
|                   |  |      
|2013               |  | 8     | 
|                   |  |      
|2014               |  | 707   | 
|                   |  |      
|2015               |  | 384   | 
|                   |  |      
|2016               |  | 161   | 
|                   |  |      
|Subsequent to 2016 |  | 3,225 | 
|                  
|Gross debt         |  | 4,895 | 
|                  

40TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



18. OTHER LONG-TERM OBLIGATIONS

|                                                                       |  |                   |  |                   |  |                 | 
|---------------------------------------------------------------------- |  | ----------------- |  | ----------------- |  | --------------- | 
|                                                                       |  | December 31,
2011 |  | December 31,
2010 |  | January 1,
2010 | 
|                                                                      
|Accrued pension and other post-employment benefits liability (note 30) |  | 163               |  | 107               |  | 92              | 
|                                                                       |  |                  
|Deferred credits                                                       |  | 25                |  | 46                |  | 47              | 
|                                                                       |  |                  
|Long-term portion of discounted obligations under finance leases       |  | 66                |  | 76                |  | 90              | 
|                                                                       |  |                  
|Long-term portion of share-based payments liability (note 20)          |  | 14                |  | 66                |  | 75              | 
|                                                                       |  |                  
|Acquired provisions (note 7)                                           |  | 52                |  |                  |  |                | 
|                                                                       |  |                  
|Other                                                                  |  | 26                |  | 31                |  | 12              | 
|                                                                      
|                                                                       |  | 346               |  | 326               |  | 316             | 
|                                                                      

The fair value of financial liabilities included above approximates the carrying amount.

Finance Leases

The Company has entered into two leasing arrangements for the modification, refitting and use of Floating Storage Offloading (FSO)
vessels for use in its operations. Elements of the leasing arrangements have been defined by the Company as finance leases. The imputed rates of interest on these leases, which expire in 2016 and
2019, are 6% and 10%, respectively. Of the total discounted liability of $84 million (December 31, 2010  $94 million; January 1,
2010  $108 million), $18 million (December 31, 2010  $18 million; January 1,
2010  $18 million) is included in accounts payable and accrued liabilities.

The
future minimum lease payments for finance leases and the present value of minimum finance lease payments by payment date are as follows:

|                                            |  |                   |   |                           |  |                  |   |                           |  |                  |   |                           | 
|------------------------------------------- |  | ----------------- | - | ------------------------- |  | ---------------- | - | ------------------------- |  | ---------------- | - | ------------------------- | 
|                                            |  | December 31, 2011 |   | December 31, 2010         |  | January 1, 2010  |  
|                                           
|                                            |  | Minimum
payments  |   | Present
value of
payments |  | Minimum
payments |   | Present
value of
payments |  | Minimum
payments |   | Present
value of
payments | 
|                                           
|Within one year                             |  | 18                |   | 18                        |  | 18               |   | 18                        |  | 18               |   | 18                        | 
|                                            |  |                  
|After one year but not more than five years |  | 68                |   | 51                        |  | 71               |   | 53                        |  | 76               |   | 55                        | 
|                                            |  |                  
|More than five years                        |  | 28                |   | 15                        |  | 43               |   | 23                        |  | 66               |   | 35                        | 
|                                           
|Total minimum lease payments                |  | 114               |   | 84                        |  | 132              |   | 94                        |  | 160              |   | 108                       | 
|                                            |  |                  
|Less amounts representing accretion         |  | (30               | ) |                          |  | (38              | ) |                          |  | (52              | ) |                          | 
|                                           
|Present value of minimum lease payments     |  | 84                |   | 84                        |  | 94               |   | 94                        |  | 108              |   | 108                       | 
|                                           

19. CAPITAL DISCLOSURES

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

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

41TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Talisman
manages its balance sheet with reference to its liquidity and a debt-to-cash flow ratio. The main factors in assessing the Company's liquidity are cash flow (defined
below), cash provided by and used in investing activities and available bank credit facilities. The debt-to-cash flow ratio at December 31, 2011 and 2010 was
as follows:

|                  |  |        |  |        | 
|----------------- |  | ------ |  | ------ | 
|                  |  | 2011   |  | 2010   | 
|                 
|Debt              |  | 4,967  |  | 4,226  | 
|                  |  |       
|Cash flow         |  | 3,572  |  | 3,140  | 
|                 
|Debt-to-cash flow |  | 1.39:1 |  | 1.35:1 | 
|                 

The calculation of debt is as follows:

|                                            |  |       |   |       |   | 
|------------------------------------------- |  | ----- | - | ----- | - | 
|                                            |  | 2011  |   | 2010  |   | 
|                                           
|Gross debt and bank indebtedness            |  | 4,955 |   | 4,206 |   | 
|                                            |  |      
|Add: Production payments and finance leases |  | 109   |   | 125   |   | 
|                                            |  |      
|Less: Non-recourse debt                     |  | (97   | ) | (105  | ) | 
|                                           
|Debt                                        |  | 4,967 |   | 4,226 |   | 
|                                           

The calculation of cash flow is as follows:

|                                                                  |  |       |   |       |   | 
|----------------------------------------------------------------- |  | ----- | - | ----- | - | 
|                                                                  |  | 2011  |   | 2010  |   | 
|                                                                 
|Cash provided by operating activities                             |  | 2,812 |   | 3,144 |   | 
|                                                                  |  |      
|Changes in non-cash operating working capital                     |  | 375   |   | (367  | ) | 
|                                                                  |  |      
|Add: Exploration expenditure                                      |  | 427   |   | 374   |   | 
|                                                                  |  |      
|Less: Amounts attributable to assets subject to non-recourse debt |  | (42   | ) | (11   | ) | 
|                                                                 
|Cash flow                                                         |  | 3,572 |   | 3,140 |   | 
|                                                                 

Talisman is in compliance with all of its debt covenants. The Company's principal financial covenant under its primary bank credit facility is a
debt-to-cash flow ratio of less than 3.5:1, calculated quarterly on a trailing 12-month basis as of the last day of each fiscal quarter.

20. SHARE CAPITAL AND SHARE-BASED PAYMENTS1

Authorized

Talisman's authorized share capital consists of an unlimited number of common shares without nominal or par value and an unlimited
number of first and second preferred shares.

42TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Common Shares Issued

|                                                                      |  |               |   |        |   |               |   |        |   | 
|--------------------------------------------------------------------- |  | ------------- | - | ------ | - | ------------- | - | ------ | - | 
|Continuity of common shares                                           |  | 2011          |   | 2010   |   |              
|                                                                     
|                                                                      |  | Shares        |   | Amount |   | Shares        |   | Amount |   | 
|                                                                     
|Balance, beginning of year                                            |  | 1,019,290,939 |   | 1,480  |   | 1,014,876,564 |   | 1,401  |   | 
|                                                                      |  |              
|Issued on exercise of stock options                                   |  | 7,500,131     |   | 175    |   | 4,835,056     |   | 95     |   | 
|                                                                      |  |              
|Shares purchased and held in trust for long-term PSU plan (see below) |  | (5,368,600    | ) | (94    | ) | (4,482,681    | ) | (81    | ) | 
|                                                                      |  |              
|Shares released from trust for 2008 PSU plan (see below)              |  |              |   |       |   | 4,062,000     |   | 65     |   | 
|                                                                     
|Balance, end of year                                                  |  | 1,021,422,470 |   | 1,561  |   | 1,019,290,939 |   | 1,480  |   | 
|                                                                     

During 2011, Talisman declared dividends of $0.27 per share (2010  C$0.25 per share) for an aggregate dividend of
$277 million (2010  $249 million).

Subsequent
to December 31, 2011, 296,153 stock options were exercised for shares and a further 80,000 common shares were purchased and held in trust for the long-term
PSU plan. There were 1,021,638,623 common shares outstanding at February 28, 2012.

Holders
of common shares are entitled to receive notice of and to attend all meetings of shareholders. Each common share carries with it the right to one vote. Subject to the rights of holders of
other classes of shares who are entitled to receive dividends in priority to or rateably with the common shares, the Board of Directors may declare dividends on the common shares to the exclusion of
any other class of shares of the Company. In the event of liquidation, dissolution or winding up of the Company or any other distribution of assets of the Company among its shareholders for the
purpose of winding up its affairs, and subject to the rights of other classes of shares on a priority basis, the holders of common shares are entitled to participate rateably in any distribution of
any assets of the Company.

Normal Course Issuer Bid

Talisman's normal course issuer bid expired on December 14, 2011. During the years ended December 31, 2011 and 2010,
Talisman did not repurchase any common shares of the Company under its normal course issuer bid.

Preferred Shares Issued

|                                                         |                |           |  |        |  |        |  |        | 
|-------------------------------------------------------- | -------------- | --------- |  | ------ |  | ------ |  | ------ | 
|Continuity of preferred shares                           |                | 2011      |  | 2010   | 
|                                                        
|                                                         |                | Shares    |  | Amount |  | Shares |  | Amount | 
|                                                        
|Cumulative Redeemable Rate Reset First Preferred Shares, |                |           |  |        |  |        |  |        | 
|                                                         |                |          
|                                                         | 4.2% Series 1: |           |  |        |  |        |  |        | 
|                                                         |                |          
|Balance, beginning of year                               |                |          |  |       |  |       |  |       | 
|                                                         |                |          
|Issued                                                   |                | 8,000,000 |  | 191    |  |       |  |       | 
|                                                        
|Balance, end of year                                     |                | 8,000,000 |  | 191    |  |       |  |       | 
|                                                        

On December 5, 2011, Talisman issued 8,000,000 Cumulative Redeemable Rate Reset First Preferred Shares, Series 1 ("Series 1
preferred shares") at a price of C$25 per share for aggregate gross proceeds of C$200 million. Net proceeds, after deducting underwriting fees, were C$194 million ($191 million).

Holders
of Series 1 preferred shares are entitled to receive a cumulative quarterly fixed dividend of 4.2% annually for the initial period ending December 31, 2016, as and when declared
by the Board of Directors. Thereafter, the dividend rate will be reset every five years at a rate equal to the five-year Government of Canada bond yield plus 2.77%.

43TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



The
Company may redeem all or a portion of the outstanding Series 1 preferred shares for C$25 per share plus accrued and unpaid dividends, on December 31, 2016 and on December 31
every five years thereafter. Holders of Series 1 preferred shares will have the right to convert their shares into Cumulative Rate Reset First Preferred Shares, Series 2
("Series 2 preferred shares"), subject to certain conditions, on December 31, 2016 and on December 31 every five years thereafter. Holders of Series 2 preferred shares will
be entitled to receive cumulative quarterly floating rate dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 2.77%.

In
the event of the liquidation, dissolution or winding up of the Company, the holders of Series 1 preferred shares will be entitled to receive C$25 per share together with all dividends
accrued and unpaid to the date of payment before any amount will be paid or any assets of the Company distributed to the holders of any shares ranking junior to the Series 1 preferred shares.
The holders of Series 1 preferred shares will not be entitled to share in any further distribution of the assets of the Company.

Holders
of Series 1 preferred shares are not entitled to voting rights or to receive notice of or to attend shareholders' meetings unless dividends on the Series 1 preferred shares are
in arrears to the extent of eight quarterly dividends, whether or not consecutive.

Stock Option Plans

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

|Continuity of stock options                                        |  | 2011                                |   | 2010                                 | 
|------------------------------------------------------------------ |  | ----------------------------------- | - | ------------------------------------ | 
|                                                                  
|                                                                   |  | Number
of shares underlying options |   | Weighted average exercise price (C$) | 
|                                                                  
|Outstanding, beginning of year                                     |  | 62,959,223                          |   | 15.89                                | 
|                                                                   |  |                                    
|Granted                                                            |  | 6,686,170                           |   | 23.29                                | 
|                                                                   |  |                                    
|Exercised for common shares                                        |  | (7,500,131                          | ) | 14.54                                | 
|                                                                   |  |                                    
|Surrendered for cash                                               |  | (642,889                            | ) | 15.62                                | 
|                                                                   |  |                                    
|Forfeited                                                          |  | (2,410,329                          | ) | 17.40                                | 
|                                                                  
|Outstanding, end of year                                           |  | 59,092,044                          |   | 16.82                                | 
|                                                                  
|Exercisable, end of year                                           |  | 39,242,566                          |   | 16.33                                | 
|                                                                  
|Options available for future grants pursuant to Stock Option Plans |  | 39,523,835                          |   |                                      | 
|                                                                  

44TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



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

|December 31, 2011             |  |                                     |  |                                      |  | Outstanding options              |  | Exercisable options                 | 
|----------------------------- |  | ----------------------------------- |  | ------------------------------------ |  | -------------------------------- |  | ----------------------------------- | 
|                             
|Range of exercise prices (C$) |  | Number
of shares underlying options |  | Weighted average exercise price (C$) |  | Weighted average years to expiry |  | Number
of shares underlying options | 
|                             
|6.34 - 9.99                   |  | 4,813,660                           |  | 7.42                                 |  | 1                                |  | 4,813,660                           | 
|                              |  |                                    
|10.00 - 12.99                 |  | 1,697,995                           |  | 11.69                                |  | 7                                |  | 1,332,554                           | 
|                              |  |                                    
|13.00 - 15.99                 |  | 15,050,150                          |  | 13.64                                |  | 5                                |  | 7,963,961                           | 
|                              |  |                                    
|16.00 - 18.99                 |  | 18,812,911                          |  | 17.76                                |  | 7                                |  | 12,506,360                          | 
|                              |  |                                    
|19.00 - 21.99                 |  | 12,485,108                          |  | 20.04                                |  | 5                                |  | 12,247,551                          | 
|                              |  |                                    
|22.00 - 23.92                 |  | 6,232,220                           |  | 23.84                                |  | 9                                |  | 378,480                             | 
|                             
|6.34 - 23.92                  |  | 59,092,044                          |  | 16.82                                |  | 6                                |  | 39,242,566                          | 
|                             

The fair value of the liability for the stock option plans at December 31, 2011 was $209 million (December 31,
2010  $596 million; January 1, 2010  $529 million), of which $196 million (December 31,
2010  $540 million; January 1, 2010  $462 million) is included in accounts payable and accrued
liabilities on the Consolidated Balance Sheets.

Subsequent
to December 31, 2011, 3,033 stock options were surrendered for cash, 296,153 were exercised for shares, 61,520 were granted and 943,909 were forfeited, with
57,910,469 stock options outstanding at February 28, 2012.

Cash Unit Plan

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

|Continuity of cash units       |  | 2011            |   | 2010                                 | 
|------------------------------ |  | --------------- | - | ------------------------------------ | 
|                              
|                               |  | Number
of units |   | Weighted average exercise price (C$) | 
|                              
|Outstanding, beginning of year |  | 10,112,792      |   | 16.64                                | 
|                               |  |                
|Granted                        |  | 1,547,670       |   | 22.34                                | 
|                               |  |                
|Exercised                      |  | (1,636,458      | ) | 17.42                                | 
|                               |  |                
|Forfeited                      |  | (562,840        | ) | 18.33                                | 
|                              
|Outstanding, end of year       |  | 9,461,164       |   | 17.35                                | 
|                              
|Exercisable, end of year       |  | 6,234,650       |   | 16.90                                | 
|                              

45TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



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

|December 31, 2011             |  |                 |  |                                      |  | Outstanding units                |  | Exercisable units | 
|----------------------------- |  | --------------- |  | ------------------------------------ |  | -------------------------------- |  | ----------------- | 
|                             
|Range of exercise prices (C$) |  | Number
of units |  | Weighted average exercise price (C$) |  | Weighted average years to expiry |  | Number
of units   | 
|                             
|6.60 - 9.99                   |  | 754,840         |  | 7.64                                 |  | 2                                |  | 754,840           | 
|                              |  |                
|10.00 - 12.99                 |  | 101,427         |  | 10.96                                |  | 7                                |  | 35,144            | 
|                              |  |                
|13.00 - 15.99                 |  | 2,209,111       |  | 13.70                                |  | 6                                |  | 1,090,826         | 
|                              |  |                
|16.00 - 18.99                 |  | 2,467,694       |  | 17.67                                |  | 7                                |  | 1,570,903         | 
|                              |  |                
|19.00 - 21.99                 |  | 2,790,482       |  | 20.02                                |  | 5                                |  | 2,739,077         | 
|                              |  |                
|22.00 - 25.19                 |  | 1,137,610       |  | 24.21                                |  | 9                                |  | 43,860            | 
|                             
|6.60 - 25.19                  |  | 9,461,164       |  | 17.35                                |  | 6                                |  | 6,234,650         | 
|                             

The fair value of the liability for the cash unit plan at December 31, 2011 was $28 million (December 31,
2010  $95 million; January 1, 2010  $74 million), of which $27 million (December 31,
2010  $85 million; January 1, 2010  $66 million) is included in accounts payable and accrued
liabilities on the Consolidated Balance Sheets.

Subsequent
to December 31, 2011, 6,531 cash units were exercised, 92,240 were granted and 70,913 were forfeited, with 9,475,960 cash units outstanding at
February 28, 2012.

Long-Term Performance Share Unit (PSU) Plan

In 2009, the Company implemented a long-term PSU plan that allows for the granting of PSUs to employees, vesting after
three years to varying degrees (0-150%) subject to predetermined performance measures being achieved. Each PSU represents the right, subject to performance, to receive one common share of
the Company. Participants in the PSU plan are credited with additional PSUs corresponding to any associated dividend payments (referred to as 'dividend equivalent PSUs').

|                                 |  |                 |   |                 |   | 
|-------------------------------- |  | --------------- | - | --------------- | - | 
|Continuity of long-term PSU plan |  | 2011            |   | 2010            |   | 
|                                
|                                 |  | Number
of units |   | Number
of units |   | 
|                                
|Outstanding, beginning of year   |  | 8,173,762       |   | 5,520,158       |   | 
|                                 |  |                
|Granted                          |  | 3,450,930       |   | 3,768,840       |   | 
|                                 |  |                
|Forfeited                        |  | (605,949        | ) | (1,221,258      | ) | 
|                                 |  |                
|Dividend equivalent PSUs         |  | 200,284         |   | 106,022         |   | 
|                                
|Outstanding, end of year         |  | 11,219,027      |   | 8,173,762       |   | 
|                                

To satisfy the Company's obligations to deliver common shares to settle the PSUs, Talisman has arranged for a third party trustee to hold common shares which
were purchased on the open market. During 2011, the Company purchased 5,368,600 common shares on the open market for $94 million. For accounting purposes, the cost of the purchase of the
common shares held in trust has been accounted for as a reduction in outstanding common shares and the trust has been consolidated since it is a special purpose entity controlled by the Company. The
Company is not exposed to fluctuations in the stock price in respect of the shares held in trust. Additional purchases of common shares to satisfy the Company's obligations are contemplated.

The
2009 long-term PSU grant vested on December 31, 2011 and settlement is expected to occur during the first quarter of 2012. Based on the Company's performance relative to the
predetermined performance measures, the Board of Directors approved the vesting of 104% of the PSUs granted.

Subsequent
to December 31, 2011, 64,453 PSUs were granted and 137,326 were forfeited with 11,146,154 outstanding at February 28, 2012. Between January 1 and
February 28, 2012, a further 80,000 common shares were purchased on the open market for $1 million.

46TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



2008 PSU Plan

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

To
satisfy the Company's obligation to deliver common shares to settle the PSUs, the Company established a trust that purchased 4,062,000 common shares on the open market for
$65 million. These shares were released from trust when the PSUs vested.

Deferred Share Unit (DSU) Plan

Talisman issues DSUs to directors in lieu of cash compensation. Each DSU represents the right to receive a cash payment on retirement
equal to the market value of the Company's shares at the time of surrender. Dividends are credited as additional DSUs when paid. At December 31, 2011, there were 394,655 (December 31,
2010  330,448; January 1, 2010  396,550) units outstanding and the fair value of the liability was
$5 million (December 31, 2010  $7 million; January 1, 2010  $7 million), which is
included in accounts payable and accrued liabilities on the Consolidated Balance Sheets. Recovery of $1 million (2010  $3 million expense) related
to the DSUs is recognized in general and administrative expenses on the Consolidated Statements of Income.

Restricted Share Unit (RSU) Plan

Talisman has a RSU plan that grants RSUs to eligible employees. All RSUs issued by the Company permit the holder to receive a cash
payment equal to the market value of the stock. Participants are also credited with additional RSUs corresponding to any associated notional dividend payments (referred to as 'dividend equivalent
RSUs'). Typically, RSUs granted under the plan are paid three years after the grant date. At December 31, 2011, there were 404,863 (December 31,
2010  462,133; January 1, 2010  342,730) units outstanding (including dividend equivalent RSUs) and the fair value
of the liability was $2 million (December 31, 2010  $5 million; January 1,
2010  $3 million), which is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets.

Share-Based Payments Expense

The Company uses the Black-Scholes option pricing model to estimate the fair value of equity-settled share-based payment plans, with
the following assumptions:

|                               |  |                   |  |                   | 
|------------------------------ |  | ----------------- |  | ----------------- | 
|                               |  | December 31,
2011 |  | December 31,
2010 | 
|                              
|Expected volatility            |  | 45%               |  | 42%               | 
|                               |  |                  
|Risk free interest rate        |  | 1.3%              |  | 2.6%              | 
|                               |  |                  
|Expected term (years)          |  | 5                 |  | 5                 | 
|                               |  |                  
|Expected forfeiture rate       |  | 3.5%              |  | 3.4%              | 
|                               |  |                  
|Expected annual dividend yield |  | 1.2%              |  | 1.1%              | 
|                              

The expected volatility is based on the historical volatility of the Company's common shares over a historical period that matches the expected term of the
share-based payment plans. The risk-free rate is based on Government of Canada bond yields for terms that match the expected term of the share-based payment plans. The expected term for
each option tranche is estimated at the end of each reporting period. The expected dividend rate takes into account historical dividend payments and the Company's expectation for future payments.

During
the year ended December 31, 2011, the Company recorded share-based payments recovery of $310 million (2010  $212 million expense) in
respect of the plans described above as follows: stock options  $332 million recovery (2010 

47TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



$146 million
expense), cash units  $56 million recovery (2010  $18 million expense), 2008 PSU
plan  $nil (2010  $3 million recovery), long-term PSU
plan  $78 million expense (2010  $51 million expense) and RSUs  $nil
(2010  $nil).

During
the year ended December 31, 2011, the Company recorded a net increase in contributed surplus of $78 million relating to its long-term PSU plan, compared to a net
decrease of $9 million for the year ended December 31, 2010 which related to the settlement of the 2008 PSU plan.

During
the year ended December 31, 2011, the Company paid cash of $14 million (2010  $54 million) to employees in settlement of fully
accrued option liabilities for options exercised. In addition, the Company capitalized share-based payments expense of $9 million
(2010  $3 million).

Of
the combined liability for cash-settled stock option, cash unit, DSU and RSU plans of $244 million (December 31,
2010  $703 million; January 1, 2010  $613 million), $230 million (December 31,
2010  $637 million; January 1, 2010  $538 million) is included in accounts payable and accrued
liabilities on the Consolidated Balance Sheets and $14 million (December 31, 2010  $66 million; January 1,
2010  $75 million) is included in other long-term obligations.

The
total number of options and cash units expected to vest as at December 31, 2011 was 68 million, with a weighted average remaining contractual life of six years, a weighted average
exercise price of $16.84 and an aggregate intrinsic value of $33 million.

21. ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income are as follows:

|                                                                        |                                |      |   |       |     |  
|----------------------------------------------------------------------- | ------------------------------ | ---- | - | ----- | --- | -
|                                                                        |                                | 2011 |   | 2010  |     |  
|                                                                       
|Balance, beginning of year                                              |                                |      |   |       |     |  
|                                                                        |                                |     
|Derivative financial instruments designated as cash flow hedges         |                                | 2    |   |      |     |  
|                                                                        |                                |     
|Foreign currency translation adjustments                                |                                | 786  |   | 1,194 |     |  
|                                                                       
|                                                                        |                                | 788  |   | 1,194 |     |  
|                                                                       
|Other comprehensive income (loss) for the year                          |                                |      |   |       |     |  
|                                                                        |                                |     
|Derivative financial instruments designated as cash flow hedges         |                                |      |   |       |     |  
|                                                                        |                                |     
|                                                                        | Gains arising during the year  |      |  |       | 13  |  
|                                                                        |                                |     
|                                                                        | Gains recognized in net income |      |  |       | (11 | )
|                                                                        |                                |     
|Foreign currency translation adjustments                                |                                |     |   | (408  | )   |  
|                                                                        |                                |     
|Actuarial losses relating to pension and other post-employment benefits |                                | (26  | ) | (12   | )   |  
|                                                                       
|                                                                        |                                | (26  | ) | (418  | )   |  
|                                                                       
|Actuarial losses transferred to retained earnings                       |                                | 26   |   | 12    |     |  
|                                                                       
|Balance, end of year                                                    |                                |      |   |       |     |  
|                                                                        |                                |     
|Derivative financial instruments designated as cash flow hedges         |                                | 2    |   | 2     |     |  
|                                                                        |                                |     
|Foreign currency translation adjustments                                |                                | 786  |   | 786   |     |  
|                                                                       
|                                                                        |                                | 788  |   | 788   |     |  
|                                                                       

22. FINANCIAL INSTRUMENTS

Talisman's financial assets and liabilities at December 31, 2011 consisted of cash and cash equivalents, accounts receivable, investments, bank
indebtedness, accounts payable and accrued liabilities, long-term debt (including the current portion) and risk management assets and liabilities arising from the use of derivative
financial instruments.

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

48TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Fair Value of Financial Assets and Liabilities

The fair values of cash and cash equivalents, accounts receivable, bank indebtedness, and accounts payable and accrued liabilities
approximate their carrying values due to the short-term maturity of those instruments. The note receivable, which settled in 2011, was classified as a financial asset at fair value through
the Consolidated Statement of Income and presented at fair value calculated using discounted cash flows.

Borrowings
under bank credit facilities are short-term in nature and are market rate-based, thus, carrying value approximates fair value. The fair value of public debentures
and notes is based on market quotations, which reflect the discounted present value of the principal and interest payments using the effective yield for instruments having the same term and risk
characteristics. The fair values of private notes are based on estimations provided by third parties. The fair value of Talisman's floating rate debt is determined by discounting future estimated
coupon payments at the current market interest rate. The fair value of Talisman's long-term debt at December 31, 2011 was $5.1 billion (December 31,
2010  $4.6 billion; January 1, 2010  $3.9 billion), while the carrying value was $4.9 billion
(December 31, 2010  $4.2 billion; January 1, 2010  $3.6 billion).

The
fair values of all other financial assets and liabilities approximate their carrying values.

Risk
management assets and liabilities are recorded at their estimated fair values. To estimate fair value, the Company uses quoted market prices when available, or models that utilize observable
market data. In addition to market information, the Company incorporates transaction-specific details that market participants would utilize in a fair value measurement, including the impact of
non-performance risk. The Company's non-performance risk is determined based on third party quotes for the Company's debt instruments with maturity dates that are similar, or
in close approximation, to the maturity dates of the corresponding financial instrument. The Company's risk management assets decreased by $3 million as a result of incorporating
non-performance risk. The Company characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs depending on the degree to which they are observable. The
three levels of the fair value hierarchy are as follows:

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

Fair
values for cross currency and interest rate derivative instruments are determined based on the estimated cash payment or receipt necessary to settle the contract. Cash payments or receipts are
based on discounted cash flow analysis using current market rates and prices. Fair values for commodity price derivatives are based on discounted cash flow analysis using current
market rates and prices and option pricing models using forward pricing curves and implied volatility, as appropriate, which are compared to quotes received from financial institutions for
reasonability.

49TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



The
following table presents the Company's risk management assets measured at fair value for each hierarchy level at December 31, 2011:

|                       |  | Level 1 inputs |  | Level 2 inputs |  | Level 3 inputs |  | Total fair value | 
|---------------------- |  | -------------- |  | -------------- |  | -------------- |  | ---------------- | 
|                      
|Interest rate swaps    |  |               |  | 36             |  |               |  | 36               | 
|                       |  |               
|Commodity collars      |  |               |  | 30             |  |               |  | 30               | 
|                      
|Risk management assets |  |               |  | 66             |  |               |  | 66               | 
|                      

The following table sets forth a reconciliation of changes in the fair value of the assets classified as level 3 in the fair value hierarchy
during 2011:

|                                       |  |      |   |      | 
|-------------------------------------- |  | ---- | - | ---- | 
|                                       |  | 2011 |   | 2010 | 
|                                      
|Balance, beginning of year             |  | 42   |   | 40   | 
|                                       |  |     
|Realized and unrealized gains (losses) |  | (2   | ) | 2    | 
|                                       |  |     
|Cash received                          |  | (40  | ) |     | 
|                                      
|Balance, end of year                   |  |     |   | 42   | 
|                                      

At December 31, 2010, a note receivable relating to a 2008 asset disposition was classified as level 3 in the fair value hierarchy. During the
year ended December 31, 2011, this note receivable was settled for $40 million and a deferred gain of $15 million was recognized, which is included in 'Gain on asset disposals' on
the Consolidated Statement of Income. No other transfers in or out of level 3 occurred during 2011.

Unobservable
inputs utilized to determine the fair value of the note receivable included the weighted average cost of capital and volatility of the common shares of the counterparty.

Risk Management Assets, Liabilities, Gains and Losses

|                            |  |                            |  |              |  |              |  |            | 
|--------------------------- |  | -------------------------- |  | ------------ |  | ------------ |  | ---------- | 
|                            |  |                            |  | December 31, |  | December 31, |  | January 1, | 
|Derivative instrument       |  | Balance sheet presentation |  | 2011         |  | 2010         |  | 2010       | 
|                           
|Interest rate swaps         |  | Current assets             |  | 12           |  | 13           |  | 13         | 
|                            |  |                            |  |             
|Interest rate swaps         |  | Non-current assets         |  | 24           |  | 25           |  | 13         | 
|                            |  |                            |  |             
|Cross-currency swaps        |  | Current assets             |  |             |  | 46           |  |           | 
|                            |  |                            |  |             
|Cross-currency swaps        |  | Non-current assets         |  |             |  |             |  | 27         | 
|                            |  |                            |  |             
|Commodity contracts         |  | Current assets             |  | 30           |  | 60           |  | 16         | 
|                           
|Risk management assets      |  |                            |  | 66           |  | 144          |  | 69         | 
|                           
|Cross-currency swaps        |  | Current liabilities        |  |             |  |             |  | 1          | 
|                            |  |                            |  |             
|Commodity contracts         |  | Current liabilities        |  |             |  | 117          |  | 265        | 
|                            |  |                            |  |             
|Commodity contracts         |  | Non-current liabilities    |  |             |  |             |  | 6          | 
|                           
|Risk management liabilities |  |                            |  |             |  | 117          |  | 272        | 
|                           

During the year ended December 31, 2011, the Company recorded a loss on held-for-trading financial instruments of
$210 million (2010  $87 million gain).

Currency Risk

Talisman operates internationally and is therefore exposed to foreign exchange risk. Talisman's primary exposure is from fluctuations
in the US$ relative to the C$, UK£, and NOK.

50TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



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

Prior
to 2011, the Company designated loans denominated in UK£ as an effective net investment hedge of its UK operations. During the year ended December 31, 2010, losses of
$14 million were included in other comprehensive loss. These losses are attributable to the translation of Talisman's UK£250 million denominated debt. Following a change in
the functional currency of the UK operations on January 1, 2011, foreign exchange gains of $2 million were recorded as a reduction of other expenses during the year ended
December 31, 2011.

In
respect of financial instruments existing at December 31, 2011, a 1% strengthening of the US$ against the other currencies noted above, with all other variables assumed constant, would have
resulted in an increase of $15 million in net income and a $nil impact on other comprehensive loss during the year ended December 31, 2011. A similar weakening of the US$ would have had
the opposite impact.

In
conjunction with the issuance of the C$350 million 4.44% medium-term notes in January 2006, the Company entered into a cross-currency swap in order to hedge the foreign
exchange exposure on this C$ denominated liability. As a result, the Company was effectively paying interest semi-annually in US$ at a rate of 5.054% on a notional
amount of $304 million. The cross-currency swap was designated as a cash flow hedge. The notes were repaid in January 2011 and the hedge was settled.

Interest Rate Risk

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

In
order to mitigate its exposure to interest rate changes, Talisman enters into interest rate swaps from time to time to manage the ratio of fixed rate debt to floating rate debt. At
December 31, 2011, the Company had fixed-to-floating interest rate swap contracts with a total notional amount of $300 million that expire on May 15, 2015.
During the year ended December 31, 2011, the fair value of the fixed-to-floating interest rate swaps decreased by $1 million.

In
respect of financial instruments existing at December 31, 2011, a 1% increase in interest rates would have resulted in a $14 million decrease in net income and a $nil impact on other
comprehensive loss during the year ended December 31, 2011.

Credit Risk

Talisman is exposed to credit risk, which is the risk that a customer or counterparty will fail to perform an obligation or settle a
liability, resulting in financial loss to the Company. Talisman manages exposure to credit risk by adopting credit risk guidelines approved by the Board of Directors that limit transactions according
to counterparty creditworthiness. The Company routinely assesses the financial strength of its joint participants and customers, in accordance with the credit risk guidelines. Talisman's credit policy
requires collateral to be obtained from counterparties considered to present a material risk of non-payment, which would include entities internally assessed as high risk or those with
ratings below investment grade. Collateral received from customers at December 31, 2011 included $30 million of letters of credit. At December 31, 2011, an allowance of
$65 million ($22 million, net of tax) for a doubtful account was recorded in respect of a balance owing by a counterparty that had filed for bankruptcy.

A
significant proportion of Talisman's accounts receivable balance is with customers in the oil and gas industry and is subject to normal industry credit risks. At December 31, 2011,
approximately 96% of the Company's trade accounts receivable was current and the largest single counterparty exposure, accounting for 17% of the total, was with a very highly rated counterparty.
Concentration of credit risk is mitigated by having a broad domestic and international customer base of highly rated counterparties.

51TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



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

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

Liquidity Risk

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

Talisman
maintains appropriate undrawn capacity in its revolving credit facilities to meet short-term fluctuations from forecasted results. Talisman manages its liquidity requirements by
use of both short-term and long-term cash forecasts, and by maintaining appropriate undrawn capacity under committed bank credit facilities. The Company has in place facilities
totaling $4 billion that are fully committed through 2014. At December 31, 2011, $402 million of commercial paper and $648 million in the form of bankers' acceptances
(C$410 million and US$245 million) was drawn and $30 million was supporting letters of credit. Available borrowing capacity was $3 billion at
December 31, 2011.

In
addition, the Company utilizes letters of credit pursuant to letter of credit facilities, most of which are uncommitted. At January 1, 2012, letters of credit totaling $1.6 billion
had been issued under these facilities, of which $1.1 billion were provided as security for the costs of decommissioning obligations in the UK. The remaining outstanding letters of
credit relate primarily to a retirement compensation arrangement, guarantees of minimum work commitments and decommissioning obligations in other areas.

With
the exception of the US commercial paper program described in note 17, the Company has no significant debt maturities until 2014.

Except
for commodity price derivative contracts that mature as noted below, long-term debt that matures as outlined in note 17 and other long-term obligations
detailed in note 18, all of the Company's financial liabilities are due within one year.

Commodity Price Risk

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

The
Company had the following commodity price derivative contracts outstanding at December 31, 2011, none of which are designated as hedges:

|Two-way collars       |  | Term         |  | bbls/d |  | Floor/ceiling
$/bbl |  | Fair value | 
|--------------------- |  | ------------ |  | ------ |  | ------------------- |  | ---------- | 
|                     
|Dated Brent oil index |  | Jan-Dec 2012 |  | 20,000 |  | 90.00/148.36        |  | 24         | 
|                      |  |             
|Dated Brent oil index |  | Jan-Jun 2012 |  | 9,000  |  | 90.00/126.93        |  | 1          | 
|                      |  |             
|Dated Brent oil index |  | Jan-Jun 2012 |  | 11,000 |  | 90.00/155.16        |  | 4          | 
|                      |  |             
|Dated Brent oil index |  | Jan-Jun 2012 |  | 10,000 |  | 90.00/123.08        |  | 1          | 
|                      |  |             
|Dated Brent oil index |  | Jul-Dec 2012 |  | 7,000  |  | 90.00/119.26        |  |           | 
|                     
|                      |  |              |  |        |  |                     |  | 30         | 
|                     

Subsequent to December 31, 2011, the Company entered into a Dated Brent two-way collar of 3,000 bbls/d for the second half of 2012
with a floor of $90/bbl and a ceiling of $121.35/bbl.

In
respect of outstanding financial instruments and assuming forward commodity prices in existence at December 31, 2011, an increase of $1/bbl in the price of oil would have reduced the net
fair value of commodity derivatives, thereby resulting in a decrease in net income of $3 million during the year ended December 31, 2011. A similar decrease in the price of oil would
have had the opposite impact.

52TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



23. CONTINGENCIES AND COMMITMENTS

Provisions and Contingencies

Talisman's provision for decommissioning is presented in note 15. With the exception of the provisions acquired as part of the
Equión acquisition described in note 7, the other provisions recorded by the Company are not material.

From
time to time, Talisman is the subject of litigation arising out of the Company's operations. Damages claimed under such litigation 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 defend itself against such litigation. These claims are not currently expected to have a material impact on the Company's
financial position.

The
New York Attorney General has commenced an investigation, pursuant to theMartin Act, into the disclosure practices of companies engaged in
hydraulic fracturing in the New York state area. TheMartin Actprovides broad authority to commence and conduct investigations, whether upon
receipt of a complaint, or on the Attorney General's own initiative. Subpoenas have been issued to a number of companies, including Talisman. The Company has been cooperating with the New York
Attorney General in the investigation. No enforcement action has been taken against Talisman, nor has the Company been advised that any enforcement action is imminent.

Estimated Future Minimum Commitments1

Estimated future commitments for 2012 and beyond are as follows:

|                                           |  | 2012  |  | 2013 |  | 2014 |  | 2015 |  | 2016 |  | Subsequent
to 2016 |  | Total | 
|------------------------------------------ |  | ----- |  | ---- |  | ---- |  | ---- |  | ---- |  | ------------------ |  | ----- | 
|                                          
|Office leases                              |  | 52    |  | 48   |  | 44   |  | 19   |  | 15   |  | 79                 |  | 257   | 
|                                           |  |      
|Vessel leases                              |  | 243   |  | 132  |  | 84   |  | 83   |  | 76   |  | 49                 |  | 667   | 
|                                           |  |      
|Transportation and processing commitments2 |  | 260   |  | 155  |  | 144  |  | 142  |  | 136  |  | 727                |  | 1,564 | 
|                                           |  |      
|Decommissioning liabilities                |  | 53    |  | 72   |  | 81   |  | 160  |  | 179  |  | 4,490              |  | 5,035 | 
|                                           |  |      
|PP&E and E&E assets3                       |  | 991   |  | 330  |  | 98   |  | 45   |  | 11   |  |                   |  | 1,475 | 
|                                           |  |      
|Other service contracts                    |  | 204   |  | 89   |  | 101  |  | 65   |  | 19   |  | 42                 |  | 520   | 
|                                          
|                                           |  | 1,803 |  | 826  |  | 552  |  | 514  |  | 436  |  | 5,387              |  | 9,518 | 
|                                          

There have been no significant changes in the Company's expected future payment commitments, and the timing of those payments, since December 31, 2011.

Talisman's
estimated undiscounted decommissioning liabilities at December 31, 2011 were $5.0 billion (December 31,
2010  $4.5 billion; January 1, 2010  $4.6 billion), approximately 60% of which relates to Talisman's
UK operations. At December 31, 2011, Talisman had accrued $3.0 billion (December 31, 2010  $2.6 billion; January 1,
2010  $2.0 billion), representing the discounted amount of this liability. The Company had provided letters of credit at January 1, 2012 in an
amount of $1.1 billion as security for the costs of decommissioning obligations in the UK. In addition, the Company has issued guarantees as security for certain minimum work, future
dismantlement, site restoration and abandonment obligations in lieu of letters of credit. Talisman has $254 million of abandonment letters of credit in place from January 1, 2012 until
December 31, 2012 in respect of assets held by third parties.

Talisman
leases certain of its ocean-going vessels and corporate offices, all of which, with the exception of the leasing arrangements described in note 18, are accounted for as operating
leases. In addition to the minimum lease payments, Talisman has ongoing operating commitments associated with the vessels. The majority of the vessel leases have an average

53TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



life
of five years, the office leases have an average life of 10 years and the transportation commitment contracts have average lives of between 10 and 15 years.

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

In
the case of an operating lease entered into by Talisman as the operator of a jointly controlled asset, the amounts reported represent the net operating lease expense and net future minimum lease
payments. These net amounts are after deducting amounts reimbursed, or to be reimbursed, by joint venture partners, whether the joint venture partners have co-signed the lease or not.
Where Talisman is not the operator of a jointly controlled asset, Talisman's share of the lease expense and future minimum lease payments is included in the amounts shown, whether Talisman has
co-signed the lease or not. Where lease rentals are dependent on a variable factor, the future minimum lease payments are based on the factor as at the inception of the lease.

During
the year ended December 31, 2011, Talisman incurred net rental expense of $461 million (2010  $578 million) in respect of its
operating leases.

Long-Term Sales Contracts

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

The
majority of Talisman's Corridor natural gas production in Indonesia is currently sold under long-term sales agreements with PT Chevron Pacific Indonesia (Chevron), Singapore Power and
PGN (West Java). Under two sales agreements with Chevron, natural gas sales are at a price equal to 76% of the equivalent value of the Indonesia Crude Price for Duri crude oil. The minimum volume
commitment under this contract is approximately 346 bcf over the remaining 10-year life of the contract. Under the agreement with Singapore Power, sales to Singapore from Corridor
are referenced to the spot price of high sulphur fuel oil in Singapore. The minimum volume commitment is approximately 190 bcf over the remaining 12-year life of the contract. Sales
from Corridor to PGN for their markets in West Java are under long-term contract at a price of approximately $1.91/mcf, with no associated transportation costs. The minimum volume
commitment is approximately 650 bcf over the remaining 12-year life of the contract.

The
Company is subject to volume delivery requirements for approximately 100 mmcf/d at prices referenced to the Singapore high sulphur fuel oil spot market in relation to a
long-term sales contract in Malaysia, currently scheduled to end in 2018. In the event these delivery requirements are not met in a contract year, volumes delivered in the subsequent
contract year are subject to a 25% price discount for the equivalent volume of unexcused shortage that was not delivered in the prior year.

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

24. OTHER INCOME

|                                       |  |      |  |      | 
|-------------------------------------- |  | ---- |  | ---- | 
|Years ended December 31                |  | 2011 |  | 2010 | 
|                                      
|Pipeline and customer treating tariffs |  | 53   |  | 75   | 
|                                       |  |     
|Investment income                      |  | 6    |  | 11   | 
|                                       |  |     
|Marketing income                       |  | 19   |  | 21   | 
|                                      
|                                       |  | 78   |  | 107  | 
|                                      

54TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



25. OTHER EXPENSES, NET

|                                |  |      |   |      |   | 
|------------------------------- |  | ---- | - | ---- | - | 
|Years ended December 31         |  | 2011 |   | 2010 |   | 
|                               
|Foreign exchange gain           |  | (12  | ) | (15  | ) | 
|                                |  |     
|PP&E derecognition              |  | 26   |   | 28   |   | 
|                                |  |     
|Taxes, interest and penalties   |  | 18   |   | 5    |   | 
|                                |  |     
|Inventory writedowns            |  | 8    |   | 1    |   | 
|                                |  |     
|Allowance for doubtful accounts |  | 65   |   |     |   | 
|                                |  |     
|Other miscellaneous             |  | 56   |   | 53   |   | 
|                               
|                                |  | 161  |   | 72   |   | 
|                               

26. INCOME TAXES

Significant components of the Company's income tax expense (recovery) are as follows:

Current Tax Expense

|                                   |  |               |  |           |   |                |   |       |   |       |   | 
|---------------------------------- |  | ------------- |  | --------- | - | -------------- | - | ----- | - | ----- | - | 
|                                   |  | North America |  | North Sea |   | Southeast Asia |   | Other |   | Total |   | 
|                                  
|Year ended December 31, 2011       |  |               |  |           |   |                |   |       |   |       |   | 
|                                   |  |              
|Current tax                        |  | 6             |  | 769       |   | 402            |   | 149   |   | 1,326 |   | 
|                                   |  |              
|Adjustments related to prior years |  | 11            |  | (4        | ) | (10            | ) | (3    | ) | (6    | ) | 
|                                   |  |              
|Petroleum Revenue Tax              |  |              |  | 69        |   | 52             |   |      |   | 121   |   | 
|                                  
|                                   |  | 17            |  | 834       |   | 444            |   | 146   |   | 1,441 |   | 
|                                  
|Year ended December 31, 2010       |  |               |  |           |   |                |   |       |   |       |   | 
|                                   |  |              
|Current tax                        |  | 13            |  | 624       |   | 292            |   | 69    |   | 998   |   | 
|                                   |  |              
|Adjustments related to prior years |  |              |  | 20        |   | 5              |   | (11   | ) | 14    |   | 
|                                   |  |              
|Petroleum Revenue Tax              |  |              |  | 85        |   | 39             |   |      |   | 124   |   | 
|                                  
|                                   |  | 13            |  | 729       |   | 336            |   | 58    |   | 1,136 |   | 
|                                  

Deferred Tax Expense (Recovery)

|                                                |  |               |  |           |   |                |   |       |   |       |   | 
|----------------------------------------------- |  | ------------- |  | --------- | - | -------------- | - | ----- | - | ----- | - | 
|                                                |  | North America |  | North Sea |   | Southeast Asia |   | Other |   | Total |   | 
|                                               
|Year ended December 31, 2011                    |  |               |  |           |   |                |   |       |   |       |   | 
|                                                |  |              
|Origination (reversal) of temporary differences |  | (206)         |  | 202       |   | 34             |   | (73   | ) | (43   | ) | 
|                                                |  |              
|Adjustments related to prior years              |  | (15)          |  |          |   | 10             |   | 3     |   | (2    | ) | 
|                                                |  |              
|Petroleum Revenue Tax                           |  |              |  | 40        |   | 12             |   |      |   | 52    |   | 
|                                                |  |              
|Changes in tax rates                            |  | (4)           |  | 225       |   |               |   |      |   | 221   |   | 
|                                               
|                                                |  | (225)         |  | 467       |   | 56             |   | (70   | ) | 228   |   | 
|                                               
|Year ended December 31, 2010                    |  |               |  |           |   |                |   |       |   |       |   | 
|                                                |  |              
|Origination (reversal) of temporary differences |  | 40            |  | (39       | ) | (19            | ) | (30   | ) | (48   | ) | 
|                                                |  |              
|Adjustments related to prior years              |  | (48)          |  |          |   | (5             | ) | 11    |   | (42   | ) | 
|                                                |  |              
|Petroleum Revenue Tax                           |  |              |  | (8        | ) | (12            | ) |      |   | (20   | ) | 
|                                               
|                                                |  | (8)           |  | (47       | ) | (36            | ) | (19   | ) | (110  | ) | 
|                                               

During 2011, the Company made elections for its Canadian subsidiaries to file tax returns in US$ with effect from the beginning of their 2011/12 tax
years. Tax on foreign exchange on tax pools has not been recorded since the effective dates of these elections.

55TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Deferred Tax Assets and Liabilities

The most significant components of the net deferred tax liability are as follows:

|                                       |  |                     |  |                             |   |                       |   |       |   |       |   | 
|-------------------------------------- |  | ------------------- |  | --------------------------- | - | --------------------- | - | ----- | - | ----- | - | 
|                                       |  | PP&E and
E&E assets |  | Decommissioning liabilities |   | Tax loss carryforward |   | Other |   | Total |   | 
|                                      
|At January 1, 2010                     |  | 3,687               |  | (1,024                      | ) | (116                  | ) | (178  | ) | 2,369 |   | 
|                                       |  |                    
|Charged (credited) to tax expense, net |  | 409                 |  | (293                        | ) | (314                  | ) | 88    |   | (110  | ) | 
|                                       |  |                    
|Acquisition adjustments                |  | 29                  |  |                            |   |                      |   |      |   | 29    |   | 
|                                       |  |                    
|Other                                  |  |                    |  |                            |   |                      |   | (37   | ) | (37   | ) | 
|                                      
|At December 31, 2010                   |  | 4,125               |  | (1,317                      | ) | (430                  | ) | (127  | ) | 2,251 |   | 
|                                       |  |                    
|Charged (credited) to tax expense, net |  | 1,017               |  | (418                        | ) | (517                  | ) | 146   |   | 228   |   | 
|                                       |  |                    
|Credited to equity                     |  |                    |  |                            |   |                      |   | (15   | ) | (15   | ) | 
|                                       |  |                    
|Acquisition adjustments                |  | 219                 |  | (8                          | ) |                      |   |      |   | 211   |   | 
|                                       |  |                    
|Other                                  |  |                    |  |                            |   |                      |   | (15   | ) | (15   | ) | 
|                                      
|At December 31, 2011                   |  | 5,361               |  | (1,743                      | ) | (947                  | ) | (11   | ) | 2,660 |   | 
|                                      

Other movements in the net deferred tax liability relate mostly to reclassifications between assets and liabilities, and currency adjustments and risk
management assets and liabilities.

At
December 31, 2011, Talisman had unused non-capital tax losses of $2.6 billion (December 31, 2010  $1 billion;
January 1, 2010  $408 million) in respect of which a deferred tax asset was recorded. These losses arose in the US and Canada and expire between
2028 and 2031. Income projections based upon discounted cash flow models, using assumptions consistent with those presented in note 14, show sufficient taxable income to utilize these losses
within the carryforward period.

The
majority of the $480 million (2010  $294 million) of unused non-capital tax losses in respect of which no deferred tax asset has
been recognized arose in Southeast Asia and South America and will not expire.

No
deferred tax liability has been recognized for temporary differences associated with investments in subsidiaries, associates, branches and joint ventures since the Company is in a position to
control or jointly control the entity and it is considered probable that these temporary differences will not reverse in the foreseeable future.

Effective Tax Rate

The following provides a reconciliation of the Canadian statutory tax rate of 26.76%
(2010  28.26%) to the effective tax rate on the Company's total income before income taxes.

|                                                       |                                    |        |     |        |      |  
|------------------------------------------------------ | ---------------------------------- | ------ | --- | ------ | ---- | -
|Years ended December 31                                |                                    | 2011   |     | 2010   |      |  
|                                                      
|Income before taxes                                    |                                    | 2,445  |     | 1,971  |      |  
|                                                       |                                    |       
|Statutory income tax rate (%)                          |                                    | 26.76% |     | 28.26% |      |  
|                                                       |                                    |       
|Income taxes calculated at the Canadian statutory rate |                                    | 654    |     | 557    |      |  
|                                                       |                                    |       
|Increase (decrease) in income taxes resulting from:    |                                    |        |     |        |      |  
|                                                       |                                    |       
|                                                       | Change in statutory tax rates, net |        | 221 |        |     |  
|                                                       |                                    |       
|                                                       | Non-taxable income                 |        | (54 | )      | (187 | )
|                                                       |                                    |       
|                                                       | Deductible PRT expense             |        | (81 | )      | (46  | )
|                                                       |                                    |       
|                                                       | Higher foreign tax rates           |        | 799 |        | 533  |  
|                                                       |                                    |       
|                                                       | Share-based payments               |        | (72 | )      | 163  |  
|                                                       |                                    |       
|                                                       | Uplift                             |        | (74 | )      | (72  | )
|                                                       |                                    |       
|                                                       | Other                              |        | 103 |        | (26  | )
|                                                      
|Income tax expense (excluding PRT)                     |                                    | 1,496  |     | 922    |      |  
|                                                      

56TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



In March 2011, the UK government announced that, from March 24, 2011, the rate of supplementary charge levied on ring fence profits increased from
20% to 32%. Supplementary charge is levied on ring fence profits in addition to the ring fence corporation tax rate of 30%, which remains unchanged. Consequently, there is now a combined UK
corporation tax and supplementary charge rate of 62% for oil and gas companies with fields not subject to PRT and 75% to 81% with fields subject to PRT. If the price of oil falls below a certain level
(currently expected to be $75/bbl) for a sustained period of time, the UK government has indicated that it will reduce the supplementary charge rate back towards 20% on a "staged and affordable
basis" while prices remain low. As a result of this legislative change, the Company recorded additional current income tax expense of $101 million and additional deferred tax expense of
$225 million during the year ended December 31, 2011.

In
2010, changes in Canadian and foreign statutory tax rates did not materially impact the Company's income tax expense.

Unrecognized Tax Benefit

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

|                                                     |  |      |   |      |   | 
|---------------------------------------------------- |  | ---- | - | ---- | - | 
|                                                     |  | 2011 |   | 2010 |   | 
|                                                    
|Unrecognized tax benefit, beginning of year          |  | 49   |   | 33   |   | 
|                                                     |  |     
|Increase due to prior period tax positions           |  | 22   |   | 30   |   | 
|                                                     |  |     
|Decrease due to prior period tax positions           |  | (7   | ) |     |   | 
|                                                     |  |     
|Decrease due to settlement with taxation authorities |  | (18  | ) | (14  | ) | 
|                                                    
|Unrecognized tax benefit, end of year                |  | 46   |   | 49   |   | 
|                                                    

Talisman's entire unrecognized tax benefit as at December 31, 2011 and December 31, 2010, if recognized, would affect the Company's effective
tax rate.

The
settlement with taxation authorities occurring in 2011 was the result of the Company settling a tax position in Norway regarding the deductibility of insurance premiums.

No
significant change in the total unrecognized tax benefit is expected in 2012.

27. SUPPLEMENTAL CASH FLOW INFORMATION

Items Not Involving Cash

|                                                          |  |       |   |       |   | 
|--------------------------------------------------------- |  | ----- | - | ----- | - | 
|Years ended December 31                                   |  | 2011  |   | 2010  |   | 
|                                                         
|Depreciation, depletion and amortization                  |  | 1,949 |   | 1,788 |   | 
|                                                          |  |      
|Impairment, net of reversals                              |  | 226   |   | 301   |   | 
|                                                          |  |      
|Dry hole                                                  |  | 241   |   | 113   |   | 
|                                                          |  |      
|Share-based payments expense (recovery)                   |  | (324  | ) | 158   |   | 
|                                                          |  |      
|Gain on asset disposals                                   |  | (192  | ) | (520  | ) | 
|                                                          |  |      
|Unrealized gain on held-for-trading financial instruments |  | (61   | ) | (258  | ) | 
|                                                          |  |      
|Deferred income tax (recovery)                            |  | 228   |   | (110  | ) | 
|                                                          |  |      
|Foreign exchange                                          |  | (11   | ) | 3     |   | 
|                                                          |  |      
|PP&E derecognition                                        |  | 26    |   | 28    |   | 
|                                                          |  |      
|Other                                                     |  | 42    |   | 53    |   | 
|                                                         
|                                                          |  | 2,124 |   | 1,556 |   | 
|                                                         

57TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Changes in Non-Cash Operating Working Capital

|                                         |  |      |   |      |   | 
|---------------------------------------- |  | ---- | - | ---- | - | 
|Years ended December 31                  |  | 2011 |   | 2010 |   | 
|                                        
|Accounts receivable                      |  | (292 | ) | (47  | ) | 
|                                         |  |     
|Inventories                              |  | (26  | ) | (14  | ) | 
|                                         |  |     
|Prepaid expenses                         |  | (4   | ) | (12  | ) | 
|                                         |  |     
|Decommissioning expenditures1            |  | (34  | ) | (17  | ) | 
|                                         |  |     
|Accounts payable and accrued liabilities |  | 142  |   | 294  |   | 
|                                         |  |     
|Income and other taxes payable           |  | (161 | ) | 163  |   | 
|                                        
|                                         |  | (375 | ) | 367  |   | 
|                                        

Other Cash Flow Information

|                        |  |       |  |      | 
|----------------------- |  | ----- |  | ---- | 
|Years ended December 31 |  | 2011  |  | 2010 | 
|                       
|Cash interest paid      |  | 254   |  | 240  | 
|                       
|Cash interest received  |  | 5     |  | 11   | 
|                       
|Cash income taxes paid  |  | 1,592 |  | 974  | 
|                       

In respect of its exploration and evaluation activities, the Company has included exploration expenditure of $427 million within cash provided by
operating activities, and exploration capital expenditure and acquisitions of $750 million and $737 million, respectively, within cash used in investing activities.

28. CASH AND CASH EQUIVALENTS

Of the cash and cash equivalents balance of $474 million, $286 million has been invested in bank deposits and the remainder in highly rated
investments with original maturities of less than three months.

Cash
and cash equivalents at December 31, 2011 includes $nil (2010  $63 million) that is restricted and subject to currency controls and other
legal restrictions.

29. NET INCOME PER SHARE  BASIC AND DILUTED

|                                                               |  |       |  |       | 
|-------------------------------------------------------------- |  | ----- |  | ----- | 
|(millions)                                                     |  | 2011  |  | 2010  | 
|                                                              
|Weighted average number of common shares outstanding  basic   |  | 1,023 |  | 1,018 | 
|                                                               |  |      
|Dilution effect of stock options and PSUs                      |  | 15    |  |      | 
|                                                              
|Weighted average number of common shares outstanding  diluted |  | 1,038 |  | 1,018 | 
|                                                              

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

Basic
net income per share is calculated by dividing the net income for the year by the weighted average number of common shares outstanding during the year, excluding shares held in trust to settle
long-term PSU plan obligations.

For
the diluted net income per share calculation, the net income is adjusted for the change in the fair value of stock options. The weighted average number of shares outstanding during the year is
adjusted for options expected to be exercised and management's best estimate of shares expected to be issued in settlement of the Company's obligations pursuant to the long-term
PSU plan.

58TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



30. EMPLOYEE BENEFITS

The Company sponsors both defined benefit and defined contribution pension arrangements covering substantially all employees. The Company also provides
non-pension post-employment benefits to its Canadian retirees.

Defined
benefit pension plans are based on years of service and final average salary. The defined benefit pensions in the UK and Norway, which account for 36% of the accrued benefit obligation at
December 31, 2011, will increase at the rate of
inflation. Although the Company has no commitment to provide for increases related to inflation on its Canadian defined benefit pension plans, the benefits have generally been increased annually by
one-half of the rate of inflation since 2003.

Talisman
uses actuarial reports prepared by independent actuaries on the defined benefit pension plans for funding and accounting purposes. The Company uses a December 31 measurement date to
value its benefit plan assets and obligations. The most recent actuarial valuation of the Canadian employee and executive pension plans for funding purposes was at December 31, 2010, with the
next valuation no later than December 31, 2013. The most recent actuarial valuation of the UK pension scheme for funding purposes was at March 31, 2009, with the next valuation at
March 31, 2012.

Actuarial Assumptions

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

|                                                     |  |      |  |      | 
|---------------------------------------------------- |  | ---- |  | ---- | 
|                                                     |  | 2011 |  | 2010 | 
|                                                    
|Accrued benefit obligation                           |  |      |  |      | 
|                                                     |  |     
|Discount rate (%)                                    |  | 4.3  |  | 5.2  | 
|                                                     |  |     
|Rate of compensation increase (%)                    |  | 4.7  |  | 4.8  | 
|                                                     |  |     
|Benefit expense                                      |  |      |  |      | 
|                                                     |  |     
|Discount rate (%)                                    |  | 5.2  |  | 5.8  | 
|                                                     |  |     
|Expected long-term rate of return on plan assets (%) |  | 5.9  |  | 6.1  | 
|                                                     |  |     
|Assumed health care cost trend rates                 |  |      |  |      | 
|                                                     |  |     
|Initial health care cost trend rate (%)              |  | 10   |  | 10   | 
|                                                     |  |     
|Health care cost trend rate declines to (%)          |  | 5    |  | 5    | 
|                                                     |  |     
|Year that cost trend reaches final rate              |  | 2036 |  | 2036 | 
|                                                    

The discount rate assumptions reflect the prevailing rates available on high quality, fixed-income debt instruments.

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

Investment Policies

The Canadian defined benefit pension plans' investment policy provides a framework for managing the plan assets, without undue risk
of capital loss and with a reasonable expectation of a rate of return or appreciation in value. Investment managers must manage the plan assets to reasonably track the return of the appropriate index.
Equity investments are passively managed to replicate the S&P/TSX Index, the S&P 500 Index and the MSCI EAFE Index. Foreign equity investments are hedged to the Canadian dollar. Investments in
bonds and debentures are managed passively to replicate the DEX Long Term Bond Index and are limited to those meeting minimum credit ratings.

The
UK defined benefit pension plan's investment policy is designed to spread risks across a range of different sources. This is achieved through asset diversification so as to limit the impact of any
single risk. Asset classes considered for the UK pension plan's investments are UK government and corporate bonds, UK and global equities and diversified growth funds. Most plan

59TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



assets
are actively managed, with assets re-balanced to the target asset allocation, described below, within a 5% tolerance range.

Plan Assets

The approximate target allocation percentage for the Canadian defined benefit pension plans that account for 29% of total plan assets
is 50% equities and 50% bonds. The approximate target allocation for the UK pension plan that accounts for 58% of total plan assets is 45% UK equities, 35% global equities and 20% UK bonds. In late
2011, a new target allocation of 10% UK equities, 35% global equities, 35% diversified growth funds and 20% UK bonds was adopted for the UK pension plan and is gradually being implemented. Plan assets
do not include any common shares of Talisman, other than through Canadian equity pooled funds, or any assets used by the Company.

The
allocation of the assets of the defined benefit plans is as follows:

|                      |  |                   |  |                   |  |                 | 
|--------------------- |  | ----------------- |  | ----------------- |  | --------------- | 
|                      |  | December 31,
2011 |  | December 31,
2010 |  | January 1,
2010 | 
|                     
|Equity securities (%) |  | 61                |  | 64                |  | 60              | 
|                      |  |                  
|Fixed income (%)      |  | 31                |  | 30                |  | 32              | 
|                      |  |                  
|Cash (%)              |  | 6                 |  | 4                 |  | 6               | 
|                      |  |                  
|Real estate (%)       |  | 2                 |  | 2                 |  | 2               | 
|                     
|                      |  | 100               |  | 100               |  | 100             | 
|                     

The Company characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs depending on the degree to which they are observable.
Refer to note 22 for details concerning the three levels of the fair value hierarchy.

The
fair values of defined benefit plan assets at December 31, 2011 by asset category were as follows:

|              |                                     | Level 1 inputs |   | Level 2 inputs |     | Level 3 inputs |   | Total fair value |    
|------------- | ----------------------------------- | -------------- | - | -------------- | --- | -------------- | - | ---------------- | ---
|             
|Cash          |                                     | 16             |   |               |     |               |   | 16               |    
|              |                                     |               
|Pooled Funds: |                                     |                |   |                |     |                |   |                  |    
|              |                                     |               
|              | Canadian companies                  |                |  |                | 7   |                |  |                  | 7  
|              |                                     |               
|              | US companies                        |                |  |                | 14  |                |  |                  | 14 
|              |                                     |               
|              | International companies             |                |  |                | 142 |                |  |                  | 142
|              |                                     |               
|              | Bonds                               |                |  |                | 72  |                |  |                  | 72 
|              |                                     |               
|              | International government securities |                |  |                | 12  |                |  |                  | 12 
|              |                                     |               
|              | Real estate                         |                |  |                |    |                | 6 |                  | 6  
|             
|              |                                     | 16             |   | 247            |     | 6              |   | 269              |    
|             

60TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Obligation, Assets and Funded Status

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

|                                                         |  |                                        |   |                                        |   |         |   |         |   | 
|-------------------------------------------------------- |  | -------------------------------------- | - | -------------------------------------- | - | ------- | - | ------- | - | 
|                                                         |  | 2011                                   |   | 2010                                   |   |        
|                                                         |  | Pension plans grouped
by funded status |   | Pension plans grouped
by funded status |   |        
|                                                         |  |                                       
|                                                         |  | Surplus                                |   | Deficit                                |   | Surplus |   | Deficit |   | 
|                                                        
|Accrued benefit obligation                               |  |                                        |   |                                        |   |         |   |         |   | 
|                                                         |  |                                       
|Accrued benefit obligation, beginning of year            |  | 209                                    |   | 139                                    |   | 58      |   | 228     |   | 
|                                                         |  |                                       
|Transition of plans from a surplus to a deficit position |  | (145                                   | ) | 145                                    |   |        |   |        |   | 
|                                                         |  |                                       
|Transition of plans from a deficit to a surplus position |  |                                       |   |                                       |   | 121     |   | (121    | ) | 
|                                                         |  |                                       
|Current service cost                                     |  |                                       |   | 28                                     |   | 14      |   | 10      |   | 
|                                                         |  |                                       
|Interest cost                                            |  | 3                                      |   | 15                                     |   | 11      |   | 6       |   | 
|                                                         |  |                                       
|Actuarial loss                                           |  | 2                                      |   | 39                                     |   | 12      |   | 16      |   | 
|                                                         |  |                                       
|Plan participants' contributions                         |  |                                       |   | 1                                      |   | 1       |   |        |   | 
|                                                         |  |                                       
|Benefits paid                                            |  | (5                                     | ) | (8                                     | ) | (6      | ) | (5      | ) | 
|                                                         |  |                                       
|Foreign currency translation                             |  | (1                                     | ) | (4                                     | ) | (2      | ) | 4       |   | 
|                                                         |  |                                       
|Other                                                    |  |                                       |   |                                       |   |        |   | 1       |   | 
|                                                        
|Accrued benefit obligation, end of year                  |  | 63                                     |   | 355                                    |   | 209     |   | 139     |   | 
|                                                        
|Plan assets                                              |  |                                        |   |                                        |   |         |   |         |   | 
|                                                         |  |                                       
|Fair value of plan assets, beginning of year             |  | 214                                    |   | 43                                     |   | 62      |   | 147     |   | 
|                                                         |  |                                       
|Transition of plans from a surplus to a deficit position |  | (146                                   | ) | 146                                    |   |        |   |        |   | 
|                                                         |  |                                       
|Transition of plans from a deficit to a surplus position |  |                                       |   |                                       |   | 112     |   | (112    | ) | 
|                                                         |  |                                       
|Expected return on plan assets                           |  | 4                                      |   | 12                                     |   | 12      |   | 1       |   | 
|                                                         |  |                                       
|Actuarial gain (loss) on plan assets                     |  |                                       |   | (15                                    | ) | 15      |   |        |   | 
|                                                         |  |                                       
|Employer contributions                                   |  |                                       |   | 26                                     |   | 19      |   | 12      |   | 
|                                                         |  |                                       
|Plan participants' contributions                         |  |                                       |   | 1                                      |   | 1       |   |        |   | 
|                                                         |  |                                       
|Benefits paid                                            |  | (5                                     | ) | (8                                     | ) | (6      | ) | (5      | ) | 
|                                                         |  |                                       
|Foreign currency translation                             |  | (3                                     | ) |                                       |   | (1      | ) |        |   | 
|                                                        
|Fair value of plan assets, end of year                   |  | 64                                     |   | 205                                    |   | 214     |   | 43      |   | 
|                                                        
|Funded status  surplus (deficit)1                       |  | 1                                      |   | (150                                   | ) | 5       |   | (96     | ) | 
|                                                        

During 2012, the Company expects to make contributions of $27 million to its defined benefit pension plans.

At
December 31, 2011, the actuarial net present value of the accrued benefit obligation for non-pension post-employment benefits was $13 million (December 31,
2010  $11 million; January 1, 2010  $11 million). Non-pension post-employment benefits include
medical, dental and life insurance benefits for current and future Canadian retired employees.

Of
the aggregate accrued benefit obligation of $355 million at December 31, 2011, $99 million related to plans that are unfunded. The $78 million deficit of one unfunded
plan is secured by letters of credit in the amount of $110 million.

61TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



History of Deficit and Experience Gains and Losses

|                                                  |  |      |   |      |   | 
|------------------------------------------------- |  | ---- | - | ---- | - | 
|Years ended December 31                           |  | 2011 |   | 2010 |   | 
|                                                 
|Accrued benefit obligation at December 31         |  | 418  |   | 348  |   | 
|                                                  |  |     
|Fair value of plan assets at December 31          |  | 269  |   | 257  |   | 
|                                                 
|Net deficit                                       |  | (149 | ) | (91  | ) | 
|                                                 
|Experience loss on plan liabilities               |  | (41  | ) | (28  | ) | 
|                                                  |  |     
|Actual return less expected return on plan assets |  | (16  | ) | 16   |   | 
|                                                 

Net Benefit Expense

The net benefit expense for the pension plans recognized in the Consolidated Statements of Income is as follows:

|                                       |  |      |   |      |   | 
|-------------------------------------- |  | ---- | - | ---- | - | 
|Years ended December 31                |  | 2011 |   | 2010 |   | 
|                                      
|Current service cost  defined benefit |  | 28   |   | 24   |   | 
|                                       |  |     
|Interest cost                          |  | 18   |   | 17   |   | 
|                                       |  |     
|Expected return on plan assets         |  | (16  | ) | (13  | ) | 
|                                       |  |     
|Other                                  |  | 2    |   | 1    |   | 
|                                      
|Defined benefit plan expense           |  | 32   |   | 29   |   | 
|                                       |  |     
|Defined contribution plan expense      |  | 14   |   | 13   |   | 
|                                      
|Net benefit expense                    |  | 46   |   | 42   |   | 
|                                      

The actual return on plan assets in 2011 was $nil (2010  $29 million).

During
the year ended December 31, 2011, the net benefit expense for non-pension post-employment benefits was $1 million
(2010  $1 million).

The
pension and non-pension post-employment benefits of key management personnel are disclosed in note 32.

Sensitivity Information

A 1% increase or decrease in the assumed medical cost trend rate would have an immaterial impact on both the accrued benefit at
December 31, 2011 and the aggregate of service and interest costs during the year ended December 31, 2011.

62TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



31. SEGMENTED INFORMATION

Talisman's activities are conducted in four geographic segments: North America, the North Sea, Southeast Asia and Other. The North America segment includes
operations in Canada and the US. The North Sea segment includes operations and exploration activities in the UK and Norway. The Southeast Asia segment includes operations and exploration activities in
Indonesia, Malaysia, Vietnam and Papua New Guinea and operations in Australia/Timor-Leste. The Company also conducts operations in Algeria, operations and exploration activities in Colombia,
and exploration activities in Peru, Poland, Sierra Leone and the Kurdistan region of northern Iraq. For ease of reference, the activities in Algeria, Colombia, Peru, Poland, Sierra Leone and
the Kurdistan region of northern Iraq are referred to collectively as the Other geographic segment.

All
activities relate to the exploration, development, production and transportation of oil, liquids and natural gas. Effective January 1, 2011, the composition of the Company's segments
changed such that the activities in the UK and Norway are reported as a single North Sea segment since, in management's judgment, the assets in those locations now share similar economic
characteristics. Comparative period balances have been restated accordingly.

|                                                      |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  |        |   |        |   | 
|----------------------------------------------------- |  | -------------- | - | ---------- | - | --------------- |  | ------ |  | ----- | - | ----- |  | ----- | - | ----- |  | ------ | - | ------ | - | 
|                                                      |  | North America1 |   | North Sea2 |   | Southeast Asia3 |  | Other4 |  | Total
|(millions of US$)                                     |  | 2011           |   | 2010       |   | 2011            |  | 2010   |  | 2011  |   | 2010  |  | 2011  |   | 2010  |  | 2011   |   | 2010   |   | 
|                                                     
|Revenue                                               |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  |        |   |        |   | 
|                                                      |  |               
|Sales                                                 |  | 1,695          |   | 1,679      |   | 4,074           |  | 3,526  |  | 1,882 |   | 1,476 |  | 543   |   | 194   |  | 8,194  |   | 6,875  |   | 
|                                                      |  |               
|Other income                                          |  | 63             |   | 85         |   | 14              |  | 21     |  | 1     |   | 1     |  |      |   |      |  | 78     |   | 107    |   | 
|                                                     
|Total revenue and other income                        |  | 1,758          |   | 1,764      |   | 4,088           |  | 3,547  |  | 1,883 |   | 1,477 |  | 543   |   | 194   |  | 8,272  |   | 6,982  |   | 
|                                                     
|Segmented expenses                                    |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  |        |   |        |   | 
|                                                      |  |               
|Operating                                             |  | 454            |   | 487        |   | 1,292           |  | 1,096  |  | 372   |   | 280   |  | 72    |   | 27    |  | 2,190  |   | 1,890  |   | 
|                                                      |  |               
|Transportation                                        |  | 68             |   | 59         |   | 84              |  | 95     |  | 55    |   | 60    |  | 9     |   | 7     |  | 216    |   | 221    |   | 
|                                                      |  |               
|DD&A                                                  |  | 852            |   | 717        |   | 671             |  | 766    |  | 305   |   | 277   |  | 121   |   | 28    |  | 1,949  |   | 1,788  |   | 
|                                                      |  |               
|Impairment                                            |  | 129            |   | 116        |   | 113             |  | 164    |  | (16   | ) | 21    |  |      |   |      |  | 226    |   | 301    |   | 
|                                                      |  |               
|Dry hole                                              |  | 6              |   | (11        | ) | 106             |  | 70     |  | 127   |   | 31    |  | 2     |   | 23    |  | 241    |   | 113    |   | 
|                                                      |  |               
|Exploration                                           |  | 70             |   | 52         |   | 40              |  | 47     |  | 208   |   | 116   |  | 109   |   | 159   |  | 427    |   | 374    |   | 
|                                                      |  |               
|Other                                                 |  | 22             |   | (25        | ) | 105             |  | 91     |  | 17    |   | 16    |  | 29    |   | 5     |  | 173    |   | 87     |   | 
|                                                     
|Total segmented expenses                              |  | 1,601          |   | 1,395      |   | 2,411           |  | 2,329  |  | 1,068 |   | 801   |  | 342   |   | 249   |  | 5,422  |   | 4,774  |   | 
|                                                     
|Segmented income (loss) before taxes157               |  | 369            |   | 1,677      |   | 1,218           |  | 815    |  | 676   |   | 201   |  | (55   | ) | 2,850 |  | 2,208  |   |       
|                                                     
|Non-segmented expenses                                |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  |        |   |        |   | 
|                                                      |  |               
|General and administrative                            |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | 431    |   | 371    |   | 
|                                                      |  |               
|Finance costs                                         |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | 278    |   | 276    |   | 
|                                                      |  |               
|Share-based payments (recovery) expense               |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | (310   | ) | 212    |   | 
|                                                      |  |               
|Currency translation                                  |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | (12    | ) | (15    | ) | 
|                                                      |  |               
|(Gain) loss on held-for-trading financial instruments |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | 210    |   | (87    | ) | 
|                                                      |  |               
|Gain on asset disposals                               |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | (192   | ) | (520   | ) | 
|                                                     
|Total non-segmented expenses                          |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | 405    |   | 237    |   | 
|                                                     
|Income before taxes                                   |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | 2,445  |   | 1,971  |   | 
|                                                     
|Capital expenditures                                  |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  |        |   |        |   | 
|                                                      |  |               
|Exploration                                           |  | 198            |   | 216        |   | 128             |  | 133    |  | 257   |   | 125   |  | 138   |   | 119   |  | 721    |   | 593    |   | 
|                                                      |  |               
|Development                                           |  | 1,960          |   | 1,481      |   | 1,077           |  | 984    |  | 230   |   | 317   |  | 157   |   | 95    |  | 3,424  |   | 2,877  |   | 
|                                                      |  |               
|Midstream                                             |  | (3             | ) | 3          |   |                |  |       |  |      |   |      |  |      |   |      |  | (3     | ) | 3      |   | 
|                                                     
|Exploration and development                           |  | 2,155          |   | 1,700      |   | 1,205           |  | 1,117  |  | 487   |   | 442   |  | 295   |   | 214   |  | 4,142  |   | 3,473  |   | 
|                                                     
|Acquisitions                                          |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | 1,319  |   | 1,530  |   | 
|                                                      |  |               
|Proceeds on dispositions                              |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | (569   | ) | (2,273 | ) | 
|                                                      |  |               
|Other non-segmented                                   |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | 159    |   | 78     |   | 
|                                                     
|Net capital expenditures                              |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | 5,051  |   | 2,808  |   | 
|                                                     
|Property, plant and equipment                         |  | 6,740          |   | 5,351      |   | 5,809           |  | 5,368  |  | 2,501 |   | 2,296 |  | 859   |   | 251   |  | 15,909 |   | 13,266 |   | 
|                                                      |  |               
|Exploration and evaluation assets                     |  | 2,370          |   | 1,886      |   | 538             |  | 540    |  | 498   |   | 627   |  | 548   |   | 389   |  | 3,954  |   | 3,442  |   | 
|                                                      |  |               
|Goodwill                                              |  | 140            |   | 149        |   | 866             |  | 866    |  | 149   |   | 149   |  | 162   |   |      |  | 1,317  |   | 1,164  |   | 
|                                                      |  |               
|Other                                                 |  | 987            |   | 2,389      |   | 645             |  | 920    |  | 560   |   | 628   |  | 788   |   | 141   |  | 2,980  |   | 4,078  |   | 
|                                                     
|Segmented assets                                      |  | 10,237         |   | 9,775      |   | 7,858           |  | 7,694  |  | 3,708 |   | 3,700 |  | 2,357 |   | 781   |  | 24,160 |   | 21,950 |   | 
|                                                      |  |               
|Non-segmented assets                                  |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | 66     |   | 144    |   | 
|                                                     
|Total assets                                          |  |                |   |            |   |                 |  |        |  |       |   |       |  |       |   |       |  | 24,226 |   | 22,094 |   | 
|                                                     
|Decommissioning liabilities                           |  | 394            |   | 210        |   | 2,390           |  | 2,196  |  | 208   |   | 189   |  | 43    |   | 15    |  | 3,035  |   | 2,610  |   | 
|                                                     

|
|

63TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



1
North America

2011

2010Canada

1,127

1,454US

631

310Total revenue and other income

1,758

1,764Canada

3,937

3,920US

2,803

1,431Property, plant and equipment

6,740

5,351Canada

1,207

685US

1,163

1,201Exploration and evaluation assets

2,370

1,886


|
|

2
North Sea

2011

2010UK

2,835

2,190Norway

1,253

1,357Total revenue and other income

4,088

3,547UK

3,927

3,763Norway

1,882

1,605Property, plant and equipment

5,809

5,368UK

210

260Norway

328

280Exploration and evaluation assets

538

540


|
|

3
Southeast Asia

2011

2010Indonesia

974

839Malaysia

565

481Vietnam

183

52Australia

161

105Total revenue and other income

1,883

1,477Indonesia

1,023

986Malaysia

883

1,053Vietnam

297

19Papua New Guinea

47

26Australia

251

212Property, plant and equipment

2,501

2,296Indonesia

12

27Malaysia

41

29Vietnam

5

253Papua New Guinea

440

318Exploration and evaluation assets

498

627


|
|

4
Other

2011

2010Algeria

256

194Colombia

287

Total revenue and other income

543

194Algeria

284

251Colombia

575

Property, plant and equipment

859

251Colombia

75

49Kurdistan

303

239Peru

133

98Other

37

3Exploration and evaluation assets

548

389


64TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



32. RELATED PARTY DISCLOSURES

Corporate Structure

The Consolidated Financial Statements include the financial statements of Talisman Energy Inc. and the directly or indirectly
wholly owned subsidiaries (unless otherwise noted) listed in the following table. Transactions between subsidiaries are eliminated on consolidation. There were no related party transactions with
entities or other parties outside the consolidated group during the years ended December 31, 2011 and 2010.

|Company Name                                             |  | Jurisdiction           | 
|-------------------------------------------------------- |  | ---------------------- | 
|                                                        
|504744 Alberta Ltd.                                      |  | Alberta                | 
|7308051 Canada Ltd.                                      |  | Canada                 | 
|Amulet Maritime Limited                                  |  | England                | 
|Equión Energía Limited (49%)                             |  | England                | 
|FEI Shale GP Inc.                                        |  | Delaware               | 
|FEI Shale L.P.                                           |  | Delaware               | 
|FEX GP Inc.                                              |  | Delaware               | 
|FEX L.P.                                                 |  | Delaware               | 
|Foreland Oil Limited                                     |  | British Virgin Islands | 
|Fortuna (US) Investments Limited                         |  | Delaware               | 
|Fortuna (US) L.P.                                        |  | Delaware               | 
|Fortuna Energy Holding Inc.                              |  | Delaware               | 
|Fortuna Finance Corporation                              |  | Barbados               | 
|Fortuna International (Barbados) Inc.                    |  | Barbados               | 
|Fortuna International Petroleum Corporation              |  | Barbados               | 
|Fortuna Resources (Sunda) Limited                        |  | British Virgin Islands | 
|FUSI GP Inc.                                             |  | Delaware               | 
|Honner Limited                                           |  | Papua New Guinea       | 
|International Petroleum Corporation                      |  | Canada                 | 
|Keelwood Limited                                         |  | England                | 
|Oleum Insurance Company Limited                          |  | Barbados               | 
|Paladin Resources Limited                                |  | Scotland               | 
|Papua Petroleum Pty Ltd.                                 |  | Australia              | 
|Papua Petroleum (PNG) Ltd.                               |  | Papua New Guinea       | 
|Pittencrieff America Inc.                                |  | Nevada                 | 
|Pittencrieff Resources Inc.                              |  | Nevada                 | 
|Potts Limited                                            |  | Papua New Guinea       | 
|Red Sea Oil Corporation                                  |  | Canada                 | 
|Rigel Petroleum (NI) Limited                             |  | Northern Ireland       | 
|Rift Oil Limited                                         |  | England                | 
|Rigel Petroleum UK Limited                               |  | England                | 
|Rowell Limited                                           |  | Papua New Guinea       | 
|Talisman (Algeria) B.V.                                  |  | Netherlands            | 
|Talisman (Asia) Ltd.                                     |  | Alberta                | 
|Talisman (Block K 39) B.V.                               |  | Netherlands            | 
|Talisman (Block K 44) B.V.                               |  | Netherlands            | 
|Talisman (Block K 9) B.V.                                |  | Netherlands            | 
|Talisman (Colombia) Oil & Gas Ltd.                       |  | Canada                 | 
|Talisman (Corridor) Ltd.                                 |  | Barbados               | 
|Talisman (Jambi) Ltd.                                    |  | Alberta                | 
|Talisman (Jambi Merang) Limited                          |  | England                | 
|Talisman (Masalima) Ltd.                                 |  | Alberta                | 
|Talisman (Ogan Komering) Ltd.                            |  | Alberta                | 
|Talisman (Pasangkayu) Ltd.                               |  | Alberta                | 
|Talisman (Sageri) Ltd.                                   |  | Alberta                | 
|Talisman (Sumatra) Ltd.                                  |  | Canada                 | 
|Talisman (Tunisia) Inc.                                  |  | Alberta                | 
|Talisman (Vietnam 133 & 134) Ltd.                        |  | Alberta                | 
|Talisman (Vietnam 15-2/01) Ltd.                          |  | Alberta                | 
|Talisman (Vietnam 46/02) Ltd.                            |  | Alberta                | 
|Talisman Andaman B.V.                                    |  | Netherlands            | 
|Talisman Australasia Pty Ltd.                            |  | Australia              | 
|Talisman Caño Sur B.V.                                   |  | Netherlands            | 
|Talisman Colombia Holdco Limited                         |  | England                | 
|Talisman Energia Brasil Ltda                             |  | Brazil                 | 
|Talisman Energy (Sahara) B.V.                            |  | Netherlands            | 
|Talisman Energy (UK) Limited                             |  | England                | 
|Talisman Energy (UK) Pension & Life Scheme Ltd.          |  | England                | 
|Talisman Energy Alpha Limited                            |  | England                | 
|Talisman Energy Beta Limited                             |  | England                | 
|Talisman Energy Canada                                   |  | Alberta                | 
|Talisman Energy Danmark AS                               |  | Norway                 | 
|Talisman Energy DL Limited                               |  | England                | 
|Talisman Energy Holdings Ltd.                            |  | Alberta                | 
|Talisman Energy Investments Norge AS                     |  | Norway                 | 
|Talisman Energy Kimu Alpha Pty Ltd.                      |  | Australia              | 
|Talisman Energy Kimu Beta Pty Limited                    |  | Papua New Guinea       | 
|Talisman Energy Niugini Limited                          |  | Papua New Guinea       | 
|Talisman Energy Norge AS                                 |  | Norway                 | 
|Talisman Energy NS Limited                               |  | England                | 
|Talisman Energy Poland B.V.                              |  | Netherlands            | 
|Talisman Energy Polska sp. z o.o.                        |  | Poland                 | 
|Talisman Energy Services Inc.                            |  | Delaware               | 
|Talisman Energy Tangguh B.V.                             |  | Netherlands            | 
|Talisman Energy USA Inc.                                 |  | Delaware               | 
|Talisman Finance (UK) Limited                            |  | England                | 
|Talisman Indonesia Ltd.                                  |  | Alberta                | 
|Talisman International (Barbados) Inc.                   |  | Barbados               | 
|Talisman International Business Corporation              |  | Barbados               | 
|Talisman International Holdings B.V.                     |  | Netherlands            | 
|Talisman K Holdings B.V.                                 |  | Netherlands            | 
|Talisman LNS Limited                                     |  | England                | 
|Talisman Malaysia (PM3) Limited                          |  | Barbados               | 
|Talisman Malaysia Holdings Limited                       |  | Barbados               | 
|Talisman Malaysia Limited                                |  | Barbados               | 
|Talisman Niugini Pty Ltd                                 |  | Australia              | 
|Talisman North Sea Limited                               |  | England                | 
|Talisman Oil & Gas (Australia) Pty Limited               |  | Australia              | 
|Talisman Oil Limited                                     |  | Barbados               | 
|Talisman Oil Trading Limited                             |  | England                | 
|Talisman Peru B.V.                                       |  | Netherlands            | 
|Talisman Production Norge AS                             |  | Norway                 | 
|Talisman Resources (Bahamas) Limited                     |  | Bahamas                | 
|Talisman Resources (JPDA 06-105) Pty Limited             |  | Australia              | 
|Talisman Resources Norge AS                              |  | Norway                 | 
|Talisman Resources (North West Java) Limited             |  | England                | 
|Talisman RTC Sdn.Bhd.                                    |  | Malaysia               | 
|Talisman Sadang B.V.                                     |  | Netherlands            | 
|Talisman Sasol Montney Partnership (50%)                 |  | British Columbia       | 
|Talisman SEA Pte. Ltd.                                   |  | Singapore              | 
|Talisman Sierra Leone B.V.                               |  | Netherlands            | 
|Talisman South Mandar B.V.                               |  | Netherlands            | 
|Talisman South Sageri B.V.                               |  | Netherlands            | 
|Talisman Transgasindo Ltd.                               |  | Barbados               | 
|Talisman Transportation (UT) Limited                     |  | England                | 
|Talisman Trustees (UK) Limited                           |  | England                | 
|Talisman UK (South East Sumatra) Limited                 |  | England                | 
|Talisman Vietnam Limited                                 |  | Barbados               | 
|Talisman Vietnam 05-2/10 B.V.                            |  | Netherlands            | 
|Talisman Vietnam 135-136 B.V.                            |  | Netherlands            | 
|Talisman Wiriagar Overseas Limited                       |  | British Virgin Islands | 
|Teakan Investments Limited                               |  | Bermuda                | 
|TE Capital S.ar.l                                        |  | Luxembourg             | 
|TE Finance S.ar.l                                        |  | Luxembourg             | 
|TE Global Services Inc.                                  |  | Delaware               | 
|TE Holding S.ar.l                                        |  | Luxembourg             | 
|TE NOK S.ar.l.                                           |  | Luxembourg             | 
|TE Resources S.ar.l                                      |  | Luxembourg             | 
|TE Transworld S.ar.l                                     |  | Luxembourg             | 
|TEGSI (UK) Limited                                       |  | England                | 
|Thang Long Joint Operating Company (60%)                 |  | Vietnam                | 
|TLM Capital Finance ULC                                  |  | Nova Scotia            | 
|TLM Capital Management Hungary Limited Liability Company |  | Hungary                | 
|TLM Finance Corp.                                        |  | Alberta                | 
|Transasia Pipeline Company Pvt. Ltd. (15%)               |  | Mauritius              | 
|Trans Mediterranean Oil Company Ltd.                     |  | British Columbia       | 
|Transworld Petroleum (U.K.) Limited                      |  | England                | 
|Triad Minerals Inc.                                      |  | Canada                 | 
|Triad Oil Manitoba Ltd.                                  |  | Manitoba               | 
|Truong Son Joint Operating Company (30%)                 |  | Vietnam                | 
|TV 05-2/10 Holdings B.V.                                 |  | Netherlands            | 
|TV 135-136 Holdings B.V.                                 |  | Netherlands            | 

65TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Key Management Personnel Compensation

The compensation of key management personnel, consisting of the Company's directors and executive officers, is as follows:

|                                           |  |      |  |      | 
|------------------------------------------ |  | ---- |  | ---- | 
|Years ended December 31                    |  | 2011 |  | 2010 | 
|                                          
|Short-term benefits                        |  | 15   |  | 14   | 
|                                           |  |     
|Pension and other post-employment benefits |  | 5    |  | 4    | 
|                                           |  |     
|Termination benefits                       |  | 4    |  |     | 
|                                           |  |     
|Share-based payments                       |  | 11   |  | 15   | 
|                                          
|                                           |  | 35   |  | 33   | 
|                                          

Short-term benefits comprise salaries and fees, annual bonuses, cash, vehicle and other benefits.

The
amount of pension benefits reported represents the attributable amount of the net benefit expense of the plans in which the key management personnel participate.

Termination
benefits comprise amounts paid and accrued.

The
share-based payments amount reported represents the cost to the Company of key management's participation in share-based payment plans, as measured by the fair value that the individual received
based on the value of the shares exercised in the current period.

66TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Supplementary Oil and Gas Information

(unaudited)

The supplemental data on the Company's oil and gas activities was prepared in accordance with the FASB standardExtractive
Activities  Oil & Gas. Activities not directly associated with conventional crude oil and natural gas production are excluded from
all aspects of this supplementary oil and gas information. Comparable information prepared in accordance with Canadian disclosure requirements (National Instrument 51-101 of the Canadian Securities
Administrators) is contained in Appendix A of Talisman's Annual Information Form.

Results of Operations from Oil and Gas Producing Activities

|                                                      |  |                                          |   |           |   |                |   |        |  |           |  |            |   |        |   |       |  |       | 
|----------------------------------------------------- |  | ---------------------------------------- | - | --------- | - | -------------- | - | ------ |  | --------- |  | ---------- | - | ------ | - | ----- |  | ----- | 
|                                                      |  | North America                            |   | North Sea |   | Southeast Asia |   |        |  |           | 
|Years ended December 31
(millions of $)               |  | Canada                                   |   | US        |   | UK             |   | Norway |  | Indonesia |  | Other SEA2 |   | Other3 |   | Total | 
|                                                     
|2011                                                  |  |                                          |   |           |   |                |   |        |  |           |  |            |   |        |   |       | 
|Net oil and gas revenue derived from proved reserves1 |  | 1,040                                    |   | 633       |   | 2,823          |   | 1,252  |  | 1,126     |  | 756        |   | 543    |   | 8,173 | 
|                                                      |  |                                          |   |          
|Less:                                                 |  | Production costs                         |   | 328       |   | 121            |   | 921    |  | 367       |  | 146        |   | 226    |   | 72    |  | 2,181 | 
|                                                      |  |                                          |   |          
|                                                      |  | Transportation                           |   | 35        |   | 33             |   | 37     |  | 47        |  | 55         |   |       |   | 9     |  | 216   | 
|                                                      |  |                                          |   |          
|                                                      |  | Exploration and dry hole expense         |   | 54        |   | 29             |   | 64     |  | 81        |  | 114        |   | 218    |   | 107   |  | 667   | 
|                                                      |  |                                          |   |          
|                                                      |  | Depreciation, depletion and amortization |   | 581       |   | 352            |   | 492    |  | 354       |  | 73         |   | 217    |   | 120   |  | 2,189 | 
|                                                      |  |                                          |   |          
|                                                      |  | Tax expense                              |   | 12        |   | 38             |   | 847    |  | 329       |  | 365        |   | 100    |   | 91    |  | 1,782 | 
|                                                     
|Results of operations                                 |  | 30                                       |   | 60        |   | 462            |   | 74     |  | 373       |  | (5         | ) | 144    |   | 1,138 | 
|                                                     
|2010                                                  |  |                                          |   |           |   |                |   |        |  |           |  |            |   |        |   |       | 
|Net oil and gas revenue derived from proved reserves1 |  | 1,365                                    |   | 304       |   | 2,172          |   | 1,354  |  | 852       |  | 624        |   | 194    |   | 6,865 | 
|                                                      |  |                                          |   |          
|Less:                                                 |  | Production costs                         |   | 421       |   | 59             |   | 793    |  | 296       |  | 127        |   | 153    |   | 27    |  | 1,876 | 
|                                                      |  |                                          |   |          
|                                                      |  | Transportation                           |   | 48        |   | 11             |   | 33     |  | 62        |  | 60         |   |       |   | 7     |  | 221   | 
|                                                      |  |                                          |   |          
|                                                      |  | Exploration and dry hole expense         |   | 43        |   | 2              |   | 76     |  | 41        |  | 55         |   | 90     |   | 179   |  | 486   | 
|                                                      |  |                                          |   |          
|                                                      |  | Depreciation, depletion and amortization |   | 562       |   | 221            |   | 553    |  | 440       |  | 50         |   | 247    |   | 29    |  | 2,102 | 
|                                                      |  |                                          |   |          
|                                                      |  | Tax expense                              |   | 75        |   | 4              |   | 396    |  | 401       |  | 269        |   | 80     |   | 15    |  | 1,240 | 
|                                                     
|Results of operations                                 |  | 216                                      |   | 7         |   | 321            |   | 114    |  | 291       |  | 54         |   | (63    | ) | 940   | 
|                                                     
|20094                                                 |  |                                          |   |           |   |                |   |        |  |           |  |            |   |        |   |       | 
|Net oil and gas revenue derived from proved reserves1 |  | 1,667                                    |   | 126       |   | 2,183          |   | 986    |  | 700       |  | 620        |   | 265    |   | 6,547 | 
|                                                      |  |                                          |   |          
|Less:                                                 |  | Production costs                         |   | 555       |   | 30             |   | 872    |  | 285       |  | 104        |   | 151    |   | 48    |  | 2,045 | 
|                                                      |  |                                          |   |          
|                                                      |  | Transportation                           |   | 55        |   | 4              |   | 46     |  | 54        |  | 55         |   |       |   | 8     |  | 222   | 
|                                                      |  |                                          |   |          
|                                                      |  | Exploration and dry hole expense         |   | 222       |   | 53             |   | 48     |  | 92        |  | 26         |   | 302    |   | 142   |  | 885   | 
|                                                      |  |                                          |   |          
|                                                      |  | Depreciation, depletion and amortization |   | 894       |   | 151            |   | 837    |  | 411       |  | 51         |   | 331    |   | 48    |  | 2,723 | 
|                                                      |  |                                          |   |          
|                                                      |  | Tax expense (recovery)                   |   | (15       | ) | (43            | ) | 255    |  | 112       |  | 219        |   |       |   | 33    |  | 561   | 
|                                                     
|Results of operations                                 |  | (44                                      | ) | (69       | ) | 125            |   | 32     |  | 245       |  | (164       | ) | (14    | ) | 111   | 
|                                                     

67TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Capitalized Costs Relating to Oil and Gas Activities

|                                        |  |                                                      |  |           |  |                |  |        |  |           |  |            |  |        |  |        |  |        | 
|--------------------------------------- |  | ---------------------------------------------------- |  | --------- |  | -------------- |  | ------ |  | --------- |  | ---------- |  | ------ |  | ------ |  | ------ | 
|                                        |  | North America                                        |  | North Sea |  | Southeast Asia |  |        |  |           | 
|Years ended December 31
(millions of $) |  | Canada                                               |  | US        |  | UK             |  | Norway |  | Indonesia |  | Other SEA1 |  | Other2 |  | Total  | 
|                                       
|2011                                    |  |                                                      |  |           |  |                |  |        |  |           |  |            |  |        |  |        | 
|Proved properties                       |  | 7,037                                                |  | 3,798     |  | 8,730          |  | 3,890  |  | 1,415     |  | 3,110      |  | 1,323  |  | 29,303 | 
|                                        |  |                                                      |  |          
|Unproved properties                     |  | 1,196                                                |  | 1,165     |  | 195            |  | 276    |  | 192       |  | 259        |  | 389    |  | 3,672  | 
|                                        |  |                                                      |  |          
|Incomplete wells and facilities         |  | 8                                                    |  |          |  | 15             |  | 52     |  | 1         |  | 45         |  | 161    |  | 282    | 
|                                       
|                                        |  |                                                      |  | 8,241     |  | 4,963          |  | 8,940  |  | 4,218     |  | 1,608      |  | 3,414  |  | 1,873  |  | 33,257 | 
|                                        |  |                                                      |  |          
|Less:                                   |  | Accumulated depreciation, depletion and amortization |  | 3,660     |  | 1,040          |  | 4,806  |  | 2,012     |  | 577        |  | 1,463  |  | 476    |  | 14,034 | 
|                                       
|Net capitalized costs                   |  | 4,581                                                |  | 3,923     |  | 4,134          |  | 2,206  |  | 1,031     |  | 1,951      |  | 1,397  |  | 19,223 | 
|                                       
|2010                                    |  |                                                      |  |           |  |                |  |        |  |           |  |            |  |        |  |        | 
|Proved properties                       |  | 6,554                                                |  | 2,113     |  | 8,092          |  | 3,280  |  | 1,358     |  | 2,556      |  | 611    |  | 24,564 | 
|                                        |  |                                                      |  |          
|Unproved properties                     |  | 669                                                  |  | 1,202     |  | 253            |  | 258    |  | 137       |  | 574        |  | 346    |  | 3,439  | 
|                                        |  |                                                      |  |          
|Incomplete wells and facilities         |  | 15                                                   |  |          |  | 28             |  | 16     |  | 16        |  | 27         |  | 43     |  | 145    | 
|                                       
|                                        |  |                                                      |  | 7,238     |  | 3,315          |  | 8,373  |  | 3,554     |  | 1,511      |  | 3,157  |  | 1,000  |  | 28,148 | 
|                                        |  |                                                      |  |          
|Less:                                   |  | Accumulated depreciation, depletion and amortization |  | 3,152     |  | 693            |  | 4,347  |  | 1,669     |  | 499        |  | 1,251  |  | 364    |  | 11,975 | 
|                                       
|Net capitalized costs                   |  | 4,086                                                |  | 2,622     |  | 4,026          |  | 1,885  |  | 1,012     |  | 1,906      |  | 636    |  | 16,173 | 
|                                       
|20093                                   |  |                                                      |  |           |  |                |  |        |  |           |  |            |  |        |  |        | 
|Proved properties                       |  | 10,933                                               |  | 1,351     |  | 8,603          |  | 3,313  |  | 1,275     |  | 2,635      |  | 410    |  | 28,520 | 
|                                        |  |                                                      |  |          
|Unproved properties                     |  | 856                                                  |  | 410       |  | 435            |  | 136    |  | 70        |  | 490        |  | 552    |  | 2,949  | 
|                                        |  |                                                      |  |          
|Incomplete wells and facilities         |  | 30                                                   |  | 10        |  | 9              |  | 7      |  | 2         |  | 56         |  | 78     |  | 192    | 
|                                       
|                                        |  |                                                      |  | 11,819    |  | 1,771          |  | 9,047  |  | 3,456     |  | 1,347      |  | 3,181  |  | 1,040  |  | 31,661 | 
|                                        |  |                                                      |  |          
|Less:                                   |  | Accumulated depreciation, depletion and amortization |  | 4,891     |  | 608            |  | 4,498  |  | 1,414     |  | 488        |  | 1,176  |  | 203    |  | 13,278 | 
|                                       
|Net capitalized costs                   |  | 6,928                                                |  | 1,163     |  | 4,549          |  | 2,042  |  | 859       |  | 2,005      |  | 837    |  | 18,383 | 
|                                       

68TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Costs Incurred in Oil and Gas Activities

|                                        |  |                     |   |           |   |                |  |        |  |           |  |            |  |        |   |       |  |       | 
|--------------------------------------- |  | ------------------- | - | --------- | - | -------------- |  | ------ |  | --------- |  | ---------- |  | ------ | - | ----- |  | ----- | 
|                                        |  | North America       |   | North Sea |   | Southeast Asia |  |        |  |           | 
|Years ended December 31
(millions of $) |  | Canada              |   | US        |   | UK             |  | Norway |  | Indonesia |  | Other SEA1 |  | Other2 |   | Total | 
|                                       
|2011                                    |  |                     |   |           |   |                |  |        |  |           |  |            |  |        |   |       | 
|Property acquisition costs              |  |                     |   |           |   |                |  |        |  |           |  |            |  |        |   |       | 
|                                        |  | Proved properties   |   | 3         |   | 208            |  |       |  | 15        |  |           |  | 11     |   | 570   |  | 807   | 
|                                        |  |                     |   |          
|                                        |  | Unproved properties |   | 590       |   | 51             |  |       |  |          |  |           |  | 26     |   | 17    |  | 684   | 
|                                        |  |                     |   |          
|Exploration costs                       |  | 93                  |   | 14        |   | 52             |  | 116    |  | 105       |  | 349        |  | 248    |   | 977   | 
|                                        |  |                     |   |          
|Development costs                       |  | 528                 |   | 1,427     |   | 554            |  | 520    |  | 129       |  | 96         |  | 157    |   | 3,411 | 
|                                        |  |                     |   |          
|Decommissioning costs                   |  | 177                 |   | 35        |   | 34             |  | 95     |  | 13        |  | 3          |  | (2     | ) | 355   | 
|                                       
|Total costs incurred                    |  | 1,391               |   | 1,735     |   | 640            |  | 746    |  | 247       |  | 485        |  | 990    |   | 6,234 | 
|                                       
|2010                                    |  |                     |   |           |   |                |  |        |  |           |  |            |  |        |   |       | 
|Property acquisition costs              |  |                     |   |           |   |                |  |        |  |           |  |            |  |        |   |       | 
|                                        |  | Proved              |   | 5         |   | 133            |  |       |  |          |  | 117        |  |       |   |      |  | 255   | 
|                                        |  |                     |   |          
|                                        |  | Unproved            |   | 3         |   | 1,029          |  |       |  | 191       |  | 54         |  | 39     |   | 52    |  | 1,368 | 
|                                        |  |                     |   |          
|Exploration costs                       |  | 199                 |   | 19        |   | 93             |  | 87     |  | 72        |  | 163        |  | 234    |   | 867   | 
|                                        |  |                     |   |          
|Development costs                       |  | 581                 |   | 909       |   | 497            |  | 485    |  | 74        |  | 250        |  | 100    |   | 2,896 | 
|                                        |  |                     |   |          
|Decommissioning costs                   |  | 66                  |   | (11       | ) | 470            |  | 18     |  | 6         |  | 17         |  | 7      |   | 573   | 
|                                       
|Total costs incurred                    |  | 854                 |   | 2,079     |   | 1,060          |  | 781    |  | 323       |  | 469        |  | 393    |   | 5,959 | 
|                                       
|20093                                   |  |                     |   |           |   |                |  |        |  |           |  |            |  |        |   |       | 
|Property acquisition costs              |  |                     |   |           |   |                |  |        |  |           |  |            |  |        |   |       | 
|                                        |  | Proved              |   | 147       |   | 1              |  |       |  |          |  | 2          |  |       |   |      |  | 150   | 
|                                        |  |                     |   |          
|                                        |  | Unproved            |   | 394       |   | 392            |  |       |  |          |  | 8          |  | 343    |   | 47    |  | 1,184 | 
|                                        |  |                     |   |          
|Exploration costs                       |  | 339                 |   | 188       |   | 149            |  | 157    |  | 28        |  | 195        |  | 217    |   | 1,273 | 
|                                        |  |                     |   |          
|Development costs                       |  | 436                 |   | 120       |   | 523            |  | 578    |  | 43        |  | 385        |  | 59     |   | 2,144 | 
|                                        |  |                     |   |          
|Decommissioning costs                   |  | (17                 | ) | 4         |   | 208            |  | 41     |  | 10        |  | 5          |  | 4      |   | 255   | 
|                                       
|Total costs incurred                    |  | 1,299               |   | 705       |   | 880            |  | 776    |  | 91        |  | 928        |  | 327    |   | 5,006 | 
|                                       

69TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Standardized Measure of Discounted Future Net Cash Flows from Proved
Reserves

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

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

70TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



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

|                       |  |        |  |       |  |       | 
|---------------------- |  | ------ |  | ----- |  | ----- | 
|                       |  | 2011   |  | 2010  |  | 2009  | 
|                      
|Oil and Liquids($/bbl) |  |        |  |       |  |       | 
|                       |  |       
|Canada1                |  | 76.79  |  | 62.25 |  | 48.43 | 
|                       |  |       
|US                     |  | 74.91  |  | 57.66 |  |      | 
|                       |  |       
|UK                     |  | 111.01 |  | 78.97 |  | 60.18 | 
|                       |  |       
|Norway                 |  | 108.34 |  | 78.21 |  | 59.61 | 
|                       |  |       
|Indonesia              |  | 111.89 |  | 78.71 |  | 61.09 | 
|                       |  |       
|Other Southeast Asia2  |  | 112.11 |  | 75.83 |  | 59.56 | 
|                       |  |       
|Other3                 |  | 108.69 |  | 78.10 |  | 59.30 | 
|                      
|Total                  |  | 104.26 |  | 75.79 |  | 57.82 | 
|                      
|Natural Gas($/mcf)     |  |        |  |       |  |       | 
|                       |  |       
|Canada                 |  | 3.92   |  | 4.05  |  | 3.53  | 
|                       |  |       
|US                     |  | 4.19   |  | 4.63  |  | 3.94  | 
|                       |  |       
|UK                     |  | 6.51   |  | 4.57  |  | 3.68  | 
|                       |  |       
|Norway                 |  | 7.25   |  | 4.95  |  | 5.18  | 
|                       |  |       
|Indonesia              |  | 7.64   |  | 6.61  |  | 4.78  | 
|                       |  |       
|Other Southeast Asia2  |  | 7.61   |  | 5.65  |  | 4.44  | 
|                       |  |       
|Other3                 |  | 3.65   |  |      |  | 6.34  | 
|                      
|Total                  |  | 5.27   |  | 5.22  |  | 4.12  | 
|                      

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

|                    |  |        |  |       |  |       | 
|------------------- |  | ------ |  | ----- |  | ----- | 
|                    |  | 2011   |  | 2010  |  | 2009  | 
|                   
|WTI ($/bbl)         |  | 96.19  |  | 79.42 |  | 61.18 | 
|                    |  |       
|Dated Brent ($/bbl) |  | 110.96 |  | 79.02 |  | 59.91 | 
|                    |  |       
|HH gas ($/mmbtu)    |  | 4.12   |  | 4.37  |  | 3.82  | 
|                    |  |       
|AECO-C (C$/gj)      |  | 3.57   |  | 3.82  |  | 3.58  | 
|                    |  |       
|US$/C$              |  | 1.01   |  | 0.97  |  | 0.87  | 
|                    |  |       
|US$/UK£             |  | 1.61   |  | 1.60  |  | 1.79  | 
|                   

71TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Discounted Future Net Cash Flows from Proved Reserves

|                                                            |                                  |               |        |           |        |                |         |        |        |           |        |            |        |        |      |         |         |  
|----------------------------------------------------------- | -------------------------------- | ------------- | ------ | --------- | ------ | -------------- | ------- | ------ | ------ | --------- | ------ | ---------- | ------ | ------ | ---- | ------- | ------- | -
|                                                            |                                  | North America |        | North Sea |        | Southeast Asia |         |        |        |           |        |           
|Years ended December 31
(millions of $)                     |                                  | Canada        |        | US        |        | UK             |         | Norway |        | Indonesia |        | Other SEA2 |        | Other3 |      | Total   |         |  
|                                                           
|2011                                                        |                                  |               |        |           |        |                |         |        |        |           |        |            |        |        |      |         |         |  
|                                                            |                                  |              
|Future cash inflows1                                        |                                  | 9,951         |        | 9,775     |        | 27,326         |         | 6,195  |        | 9,864     |        | 4,711      |        | 3,320  |      | 71,142  |         |  
|                                                            |                                  |              
|Future costs                                                |                                  |               |        |           |        |                |         |        |        |           |        |            |        |        |      |         |         |  
|                                                            |                                  |              
|                                                            | Transportation                   |               | (315   | )         | (480   | )              | (414    | )      | (150   | )         | (540   | )          |       |        | (75  | )       | (1,974  | )
|                                                            |                                  |              
|                                                            | Production                       |               | (3,576 | )         | (1,984 | )              | (14,327 | )      | (2,811 | )         | (1,207 | )          | (1,526 | )      | (479 | )       | (25,910 | )
|                                                            |                                  |              
|                                                            | Development and site restoration |               | (1,490 | )         | (2,336 | )              | (6,491  | )      | (1,276 | )         | (805   | )          | (779   | )      | (364 | )       | (13,541 | )
|                                                           
|Future costs                                                |                                  | (5,381        | )      | (4,800    | )      | (21,232        | )       | (4,237 | )      | (2,552    | )      | (2,305     | )      | (918   | )    | (41,425 | )       |  
|                                                           
|Future inflows before income taxes                          |                                  | 4,570         |        | 4,975     |        | 6,094          |         | 1,958  |        | 7,312     |        | 2,406      |        | 2,402  |      | 29,717  |         |  
|                                                            |                                  |              
|Future income & production revenue taxes                    |                                  | (809          | )      | (358      | )      | (4,447         | )       | (342   | )      | (3,061    | )      | (784       | )      | (764   | )    | (10,565 | )       |  
|                                                           
|Net cash flows                                              |                                  | 3,761         |        | 4,617     |        | 1,647          |         | 1,616  |        | 4,251     |        | 1,622      |        | 1,638  |      | 19,152  |         |  
|                                                           
|Less 10% annual discount for estimated timing of cash flows |                                  | (1,516        | )      | (2,144    | )      | (236           | )       | (318   | )      | (1,551    | )      | (365       | )      | (448   | )    | (6,578  | )       |  
|                                                           
|Discounted cash flows                                       |                                  | 2,245         |        | 2,473     |        | 1,411          |         | 1,298  |        | 2,700     |        | 1,257      |        | 1,190  |      | 12,574  |         |  
|                                                           
|2010                                                        |                                  |               |        |           |        |                |         |        |        |           |        |            |        |        |      |         |         |  
|                                                            |                                  |              
|Future cash inflows1                                        |                                  | 10,027        |        | 6,029     |        | 20,952         |         | 4,551  |        | 9,612     |        | 3,165      |        | 1,479  |      | 55,815  |         |  
|                                                            |                                  |              
|Future costs                                                |                                  |               |        |           |        |                |         |        |        |           |        |            |        |        |      |         |         |  
|                                                            |                                  |              
|                                                            | Transportation                   |               | (381   | )         | (189   | )              | (398    | )      | (166   | )         | (794   | )          |       |        | (48  | )       | (1,976  | )
|                                                            |                                  |              
|                                                            | Production                       |               | (3,801 | )         | (1,014 | )              | (11,037 | )      | (2,123 | )         | (1,103 | )          | (1,143 | )      | (268 | )       | (20,489 | )
|                                                            |                                  |              
|                                                            | Development and site restoration |               | (1,697 | )         | (1,289 | )              | (4,970  | )      | (852   | )         | (830   | )          | (474   | )      | (121 | )       | (10,233 | )
|                                                           
|Future costs                                                |                                  | (5,879        | )      | (2,492    | )      | (16,405        | )       | (3,141 | )      | (2,727    | )      | (1,617     | )      | (437   | )    | (32,698 | )       |  
|                                                           
|Future inflows before income taxes                          |                                  | 4,148         |        | 3,537     |        | 4,547          |         | 1,410  |        | 6,885     |        | 1,548      |        | 1,042  |      | 23,117  |         |  
|                                                            |                                  |              
|Future income & production revenue taxes                    |                                  | (1,003        | )      | (437      | )      | (2,787         | )       | (45    | )      | (2,845    | )      | (329       | )      | (347   | )    | (7,793  | )       |  
|                                                           
|Net cash flows                                              |                                  | 3,145         |        | 3,100     |        | 1,760          |         | 1,365  |        | 4,040     |        | 1,219      |        | 695    |      | 15,324  |         |  
|                                                           
|Less 10% annual discount for estimated timing of cash flows |                                  | (1,258        | )      | (1,588    | )      | (18            | )       | (202   | )      | (1,709    | )      | (222       | )      | (219   | )    | (5,216  | )       |  
|                                                           
|Discounted cash flows                                       |                                  | 1,887         |        | 1,512     |        | 1,742          |         | 1,163  |        | 2,331     |        | 997        |        | 476    |      | 10,108  |         |  
|                                                           
|2009                                                        |                                  |               |        |           |        |                |         |        |        |           |        |            |        |        |      |         |         |  
|                                                            |                                  |              
|Future cash inflows1                                        |                                  | 11,604        |        | 2,242     |        | 16,101         |         | 3,814  |        | 7,230     |        | 2,807      |        | 1,265  |      | 45,063  |         |  
|                                                            |                                  |              
|Future costs                                                |                                  |               |        |           |        |                |         |        |        |           |        |            |        |        |      |         |         |  
|                                                            |                                  |              
|                                                            | Transportation                   |               | (410   | )         | (8     | )              | (322    | )      | (87    | )         | (727   | )          |       |        | (53  | )       | (1,607  | )
|                                                            |                                  |              
|                                                            | Production                       |               | (4,432 | )         | (489   | )              | (10,031 | )      | (1,858 | )         | (1,068 | )          | (1,052 | )      | (307 | )       | (19,237 | )
|                                                            |                                  |              
|                                                            | Development and site restoration |               | (2,033 | )         | (630   | )              | (4,767  | )      | (947   | )         | (572   | )          | (666   | )      | (199 | )       | (9,814  | )
|                                                           
|Future costs                                                |                                  | (6,875        | )      | (1,127    | )      | (15,120        | )       | (2,892 | )      | (2,367    | )      | (1,718     | )      | (559   | )    | (30,658 | )       |  
|                                                           
|Future inflows before income taxes                          |                                  | 4,729         |        | 1,115     |        | 981            |         | 922    |        | 4,863     |        | 1,089      |        | 706    |      | 14,405  |         |  
|                                                            |                                  |              
|Future income & production revenue taxes                    |                                  | (873          | )      |          |        | (444           | )       | 273    |        | (2,011    | )      | (133       | )      | (240   | )    | (3,428  | )       |  
|                                                           
|Net cash flows                                              |                                  | 3,856         |        | 1,115     |        | 537            |         | 1,195  |        | 2,852     |        | 956        |        | 466    |      | 10,977  |         |  
|                                                           
|Less 10% annual discount for estimated timing of cash flows |                                  | (1,671        | )      | (730      | )      | 377            |         | (221   | )      | (1,251    | )      | (195       | )      | (173   | )    | (3,864  | )       |  
|                                                           
|Discounted cash flows                                       |                                  | 2,185         |        | 385       |        | 914            |         | 974    |        | 1,601     |        | 761        |        | 293    |      | 7,113   |         |  
|                                                           

72TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

---



Principal Sources of Changes in Discounted Cash Flows

|                                                           |  |        |   |        |   |        |   | 
|---------------------------------------------------------- |  | ------ | - | ------ | - | ------ | - | 
|Years ended December 31 (millions of $)                    |  | 2011   |   | 2010   |   | 2009   |   | 
|                                                          
|Sales of oil & gas produced net of production costs        |  | (5,776 | ) | (4,768 | ) | (3,748 | ) | 
|                                                           |  |       
|Net change in prices                                       |  | 8,351  |   | 5,416  |   | 4,292  |   | 
|                                                           |  |       
|Net change in transportation costs                         |  | 62     |   | (197   | ) | 195    |   | 
|                                                           |  |       
|Net changes in production costs                            |  | (2,755 | ) | 391    |   | (619   | ) | 
|                                                           |  |       
|Net changes in future development & site restoration costs |  | (2,052 | ) | (27    | ) | (622   | ) | 
|                                                           |  |       
|Development costs incurred during year                     |  | 1,560  |   | 1,603  |   | 1,468  |   | 
|                                                           |  |       
|Extensions, discoveries and improved recovery              |  | 2,132  |   | 1,990  |   | 930    |   | 
|                                                           |  |       
|Revisions of previous reserve estimates                    |  | 513    |   | 679    |   | 356    |   | 
|                                                           |  |       
|Net purchases                                              |  | 1,039  |   | 189    |   | 15     |   | 
|                                                           |  |       
|Net sales of reserves in place                             |  | (75    | ) | (893   | ) | (707   | ) | 
|                                                           |  |       
|Accretion of discount                                      |  | 1,556  |   | 1,099  |   | 729    |   | 
|                                                           |  |       
|Net change in taxes                                        |  | (1,847 | ) | (2,453 | ) | (1,278 | ) | 
|                                                           |  |       
|Other                                                      |  | (242   | ) | (34    | ) | 292    |   | 
|                                                          
|Net change                                                 |  | 2,466  |   | (2,995 | ) | 1,303  |   | 
|                                                          

Continuity of Net Proved Reserves1

|                                      |  |        |   |      |   |       |   |        |   |           |   |                      |   |               |   |       |   |       |   | 
|------------------------------------- |  | ------ | - | ---- | - | ----- | - | ------ | - | --------- | - | -------------------- | - | ------------- | - | ----- | - | ----- | - | 
|                                      |  | Canada |   | US   |   | UK    |   | Norway |   | Indonesia |   | Other
Southeast
Asia |   | Latin
America |   | Other |   | Total |   | 
|                                     
|Oil and Liquids(mmbbls)               |  |        |   |      |   |       |   |        |   |           |   |                      |   |               |   |       |   |       |   | 
|Total Proved                          |  |        |   |      |   |       |   |        |   |           |   |                      |   |               |   |       |   |       |   | 
|                                      |  |       
|Proved reserves at December 31, 2008  |  | 131.5  |   |     |   | 215.4 |   | 56.6   |   | 16.1      |   | 27.1                 |   |              |   | 26.3  |   | 473.0 |   | 
|                                      |  |       
|Discoveries, additions and extensions |  | 4.0    |   |     |   | 5.2   |   | 1.1    |   | (0.5      | ) | 5.3                  |   |              |   | 6.5   |   | 21.6  |   | 
|                                      |  |       
|Purchase of reserves                  |  | 0.1    |   |     |   |      |   |       |   | 0.7       |   |                     |   |              |   |      |   | 0.8   |   | 
|                                      |  |       
|Sale of reserves                      |  | (39.0  | ) |     |   | (0.2  | ) | (4.0   | ) |          |   |                     |   |              |   | (3.7  | ) | (46.9 | ) | 
|                                      |  |       
|Net revisions and transfers           |  | 2.7    |   |     |   | 76.8  |   | 14.5   |   | (1.8      | ) | 3.8                  |   |              |   | (4.7  | ) | 91.3  |   | 
|                                      |  |       
|2009 Production                       |  | (9.9   | ) |     |   | (31.1 | ) | (12.3  | ) | (1.8      | ) | (7.6                 | ) |              |   | (3.4  | ) | (66.1 | ) | 
|                                     
|Proved reserves at December 31, 2009  |  | 89.4   |   |     |   | 266.1 |   | 55.9   |   | 12.7      |   | 28.6                 |   |              |   | 21.0  |   | 473.7 |   | 
|                                      |  |       
|Discoveries, additions and extensions |  | 4.7    |   | 2.5  |   | 6.8   |   | 9.7    |   | 1.4       |   | 2.5                  |   |              |   | 1.0   |   | 28.6  |   | 
|                                      |  |       
|Purchase of reserves                  |  |       |   | 0.9  |   |      |   |       |   | 1.5       |   |                     |   |              |   |      |   | 2.4   |   | 
|                                      |  |       
|Sale of reserves                      |  | (15.1  | ) | (0.2 | ) |      |   |       |   |          |   |                     |   |              |   | (0.5  | ) | (15.8 | ) | 
|                                      |  |       
|Net revisions and transfers           |  | (2.4   | ) | 0.1  |   | 18.0  |   | 1.8    |   | (0.8      | ) | 0.6                  |   |              |   | (0.2  | ) | 17.1  |   | 
|                                      |  |       
|2010 Production                       |  | (6.6   | ) | (0.1 | ) | (27.0 | ) | (14.2  | ) | (2.0      | ) | (6.1                 | ) |              |   | (2.4  | ) | (58.4 | ) | 
|                                     
|Proved reserves at December 31, 2010  |  | 70.0   |   | 3.2  |   | 263.9 |   | 53.2   |   | 12.8      |   | 25.6                 |   |              |   | 18.9  |   | 447.6 |   | 
|                                      |  |       
|Discoveries, additions and extensions |  | 2.1    |   | 13.7 |   | (4.1  | ) | 2.3    |   | 0.4       |   | 9.7                  |   |              |   | (0.9  | ) | 23.2  |   | 
|                                      |  |       
|Purchase of reserves                  |  |       |   | 0.6  |   |      |   |       |   |          |   |                     |   | 15.1          |   |      |   | 15.7  |   | 
|                                      |  |       
|Sale of reserves                      |  | (0.3   | ) |     |   |      |   |       |   |          |   |                     |   |              |   |      |   | (0.3  | ) | 
|                                      |  |       
|Net revisions and transfers           |  | (3.5   | ) | 0.3  |   | 10.4  |   | 7.2    |   | 4.1       |   | 0.5                  |   |              |   | (0.1  | ) | 18.9  |   | 
|                                      |  |       
|2011 Production                       |  | (6.3   | ) | (0.5 | ) | (25.2 | ) | (10.0  | ) | (1.8      | ) | (5.5                 | ) | (2.3          | ) | (2.4  | ) | (54.0 | ) | 
|                                     
|Proved reserves at December 31, 2011  |  | 62.0   |   | 17.3 |   | 245.0 |   | 52.7   |   | 15.5      |   | 30.3                 |   | 12.8          |   | 15.5  |   | 451.1 |   | 
|                                     

73TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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|Proved developed                      |  |         |   |         |   |       |   |       |   |         |   |       |   |       |   |        |   |         |   | 
|------------------------------------- |  | ------- | - | ------- | - | ----- | - | ----- | - | ------- | - | ----- | - | ----- | - | ------ | - | ------- | - | 
|                                      |  |        
|December 31, 2008                     |  | 122.0   |   |        |   | 172.0 |   | 24.8  |   | 13.5    |   | 17.7  |   |      |   | 20.2   |   | 370.2   |   | 
|                                      |  |        
|December 31, 2009                     |  | 82.1    |   |        |   | 196.0 |   | 26.1  |   | 11.0    |   | 21.2  |   |      |   | 13.0   |   | 349.4   |   | 
|                                      |  |        
|December 31, 2010                     |  | 65.6    |   | 0.7     |   | 210.6 |   | 21.6  |   | 8.6     |   | 18.6  |   |      |   | 9.8    |   | 335.5   |   | 
|                                      |  |        
|December 31, 2011                     |  | 59.9    |   | 7.3     |   | 201.9 |   | 17.0  |   | 9.9     |   | 19.0  |   | 6.7   |   | 9.0    |   | 330.7   |   | 
|                                     
|Natural Gas(bcf)                      |  |         |   |         |   |       |   |       |   |         |   |       |   |       |   |        |   |         |   | 
|                                      |  |        
|Total Proved                          |  |         |   |         |   |       |   |       |   |         |   |       |   |       |   |        |   |         |   | 
|                                      |  |        
|Proved reserves at December 31, 2008  |  | 2,169.2 |   | 119.2   |   | 95.6  |   | 101.9 |   | 1,407.7 |   | 289.7 |   |      |   | 222.8  |   | 4,406.1 |   | 
|                                      |  |        
|Discoveries, additions and extensions |  | 185.6   |   | 474.6   |   |      |   | (0.5  | ) | 62.8    |   | 25.3  |   |      |   |       |   | 747.8   |   | 
|                                      |  |        
|Purchase of reserves                  |  | 14.2    |   |        |   |      |   |      |   | 7.5     |   |      |   |      |   |       |   | 21.7    |   | 
|                                      |  |        
|Sale of reserves                      |  | (115.8  | ) | (1.4    | ) | (67.0 | ) |      |   |        |   |      |   |      |   | (220.0 | ) | (404.2  | ) | 
|                                      |  |        
|Net revisions and transfers           |  | 28.2    |   |        |   | 2.9   |   | 12.7  |   | (19.5   | ) | (33.3 | ) |      |   | (1.0   | ) | (10.0   | ) | 
|                                      |  |        
|2009 Production                       |  | (238.4  | ) | (26.2   | ) | (7.0  | ) | (21.1 | ) | (84.4   | ) | (20.3 | ) |      |   | (0.1   | ) | (397.5  | ) | 
|                                     
|Proved reserves at December 31, 2009  |  | 2,043.0 |   | 566.2   |   | 24.5  |   | 93.0  |   | 1,374.1 |   | 261.4 |   |      |   | 1.7    |   | 4,363.9 |   | 
|                                      |  |        
|Discoveries, additions and extensions |  | 263.7   |   | 738.6   |   | 0.1   |   | 6.7   |   | 8.1     |   | (22.6 | ) |      |   |       |   | 994.6   |   | 
|                                      |  |        
|Purchase of reserves                  |  |        |   | 17.5    |   |      |   |      |   | 42.4    |   |      |   |      |   |       |   | 59.9    |   | 
|                                      |  |        
|Sale of reserves                      |  | (772.5  | ) | (5.8    | ) |      |   |      |   |        |   |      |   |      |   | (1.6   | ) | (779.9  | ) | 
|                                      |  |        
|Net revisions and transfers           |  | 11.2    |   | 10.3    |   | 4.9   |   | 12.1  |   | (57.2   | ) | 14.3  |   |      |   | (0.1   | ) | (4.5    | ) | 
|                                      |  |        
|2010 Production                       |  | (190.9  | ) | (68.9   | ) | (5.7  | ) | (32.2 | ) | (98.2   | ) | (27.3 | ) |      |   |       |   | (423.2  | ) | 
|                                     
|Proved reserves at December 31, 2010  |  | 1,354.5 |   | 1,257.9 |   | 23.8  |   | 79.6  |   | 1,269.2 |   | 225.8 |   |      |   |       |   | 4,210.8 |   | 
|                                      |  |        
|Discoveries, additions and extensions |  | 251.1   |   | 799.4   |   | (0.2  | ) | 4.6   |   | 36.1    |   | 9.2   |   |      |   |       |   | 1,100.2 |   | 
|                                      |  |        
|Purchase of reserves                  |  |        |   | 3.6     |   |      |   |      |   |        |   |      |   | 93.5  |   |       |   | 97.1    |   | 
|                                      |  |        
|Sale of reserves                      |  | (165.5  | ) |        |   |      |   |      |   |        |   |      |   |      |   |       |   | (165.5  | ) | 
|                                      |  |        
|Net revisions and transfers           |  | 3.5     |   | 66.8    |   | (1.4  | ) | (1.3  | ) | (94.1   | ) | (13.0 | ) | 0.2   |   |       |   | (39.3   | ) | 
|                                      |  |        
|2011 Production                       |  | (150.9  | ) | (141.9  | ) | (3.5  | ) | (15.3 | ) | (104.0  | ) | (33.2 | ) | (10.2 | ) |       |   | (459.0  | ) | 
|                                     
|Proved reserves at December 31, 2011  |  | 1,292.7 |   | 1,985.8 |   | 18.7  |   | 67.6  |   | 1,107.2 |   | 188.8 |   | 83.5  |   |       |   | 4,744.3 |   | 
|                                     
|Proved developed                      |  |         |   |         |   |       |   |       |   |         |   |       |   |       |   |        |   |         |   | 
|                                      |  |        
|December 31, 2008                     |  | 1,785.8 |   | 101.8   |   | 65.5  |   | 99.0  |   | 1,022.2 |   | 149.0 |   |      |   | 1.2    |   | 3,224.5 |   | 
|                                      |  |        
|December 31, 2009                     |  | 1,663.5 |   | 171.1   |   | 22.4  |   | 91.2  |   | 915.2   |   | 225.5 |   |      |   | 0.8    |   | 3,089.7 |   | 
|                                      |  |        
|December 31, 2010                     |  | 1,011.4 |   | 584.9   |   | 22.0  |   | 73.3  |   | 763.7   |   | 187.2 |   |      |   |       |   | 2,642.5 |   | 
|                                      |  |        
|December 31, 2011                     |  | 936.5   |   | 814.7   |   | 18.2  |   | 63.1  |   | 688.5   |   | 149.7 |   | 62.3  |   |       |   | 2,733.0 |   | 
|                                     

74TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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