Exhibit 99.7    CONSOLIDATED FINANCIAL STATEMENTS AND NOTES  March 13, 2006


Report of
Independent Auditors  To the
Shareholders of Talisman Energy Inc. We have audited the
Consolidated Balance Sheets of Talisman Energy Inc. as at December 31,
2005 and 2004 and the Consolidated Statements of Income, Retained Earnings and
Cash Flows for each of the years in the three-year period ended December 31,
2005. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.  We conducted our audits in
accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement.
We were not engaged to perform an audit of the Companys internal control over
financial reporting. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.  In our opinion, these
Consolidated Financial Statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2005 and 2004 and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2005 in conformity with Canadian
generally accepted accounting principles.  As discussed in note 2 to the
Consolidated Financial Statements, in 2005 the Company changed its method of
accounting for preferred securities.   /s/Ernst &
  Young LLPErnst &
  Young LLPChartered Accountants
  Calgary, CanadaFebruary 27, 2006  26


Consolidated Balance Sheets  December 31 (millions of
  Canadian dollars)
  
  2005
  
  2004(restated)
  (note 2)AssetsCurrentCash and cash equivalents
  
  130
  
  38Accounts receivable (note
  11)
  
  1,311
  
  836Inventories (note 4)
  
  170
  
  78Prepaid expenses
  
  20
  
  181,631
  
  970Accrued employee pension
  benefit asset (note 18)
  
  57
  
  61Other assets
  
  74
  
  64Goodwill (note 3)
  
  1,504
  
  466Property, plant and
  equipment (note 5)
  
  15,073
  
  10,84716,708
  
  11,438Total
  assets
  
  18,339
  
  12,408LiabilitiesCurrentAccounts payable and
  accrued liabilities (notes 6, 8 and 9)
  
  2,383
  
  1,302Income and other taxes
  payable
  
  649
  
  3413,032
  
  1,643Deferred credits (note 11)
  
  74
  
  70Asset retirement
  obligations (note 6)
  
  1,320
  
  1,272Other long-term obligations
  (notes 8 and 9)
  
  217
  
  35Long-term debt (note 7)
  
  4,263
  
  2,457Future income taxes (note
  15)
  
  3,638
  
  2,1009,512
  
  5,934Non-controlling
  interest (note 3)
  
  66
  
  Contingencies and
  commitments (notes 11 and 12)Shareholders
  equityCommon shares (note 8)
  
  2,609
  
  2,666Contributed surplus (note
  8)
  
  69
  
  71Cumulative foreign currency
  translation (note 10)
  
  (265
  )
  (76
  )Retained earnings
  
  3,316
  
  2,1705,729
  
  4,831Total
  liabilities and shareholders equity
  
  18,339
  
  12,408  See
accompanying notes.  On behalf of the board:   /s/Douglas D. Baldwin
  
  /s/ Robert
  G. WeltyDouglas D.
  Baldwin
  Robert
  G. WeltyChairman of the Board
  Director  27


Consolidated
Statements of Income  Years
  ended December 31 (millions of Canadian dollars except as otherwise
  noted)
  
  2005
  
  2004
  
  2003(restated)
  (note 2)
  
  (restated)
  (note 2)RevenueGross sales
  
  9,554
  
  6,874
  
  5,610Less hedging loss
  
  77
  
  480
  
  194Gross sales, net of hedging
  
  9,477
  
  6,394
  
  5,416Less royalties
  
  1,595
  
  1,124
  
  894Net sales
  
  7,882
  
  5,270
  
  4,522Other (note 13)
  
  165
  
  85
  
  76Total revenue
  
  8,047
  
  5,355
  
  4,598ExpensesOperating
  
  1,459
  
  1,198
  
  1,039Transportation
  
  206
  
  192
  
  181General and administrative
  
  201
  
  183
  
  152Depreciation, depletion and
  amortization
  
  1,843
  
  1,650
  
  1,435Dry hole
  
  241
  
  311
  
  251Exploration
  
  275
  
  238
  
  213Interest on long-term debt
  
  166
  
  173
  
  178Stock-based compensation
  (note 8)
  
  633
  
  171
  
  185Other (note 14)
  
  39
  
  89
  
  16Total expenses
  
  5,063
  
  4,205
  
  3,650Gain on sale of Sudan
  operations (note 19)
  
  
  
  
  
  296Income before taxes
  
  2,984
  
  1,150
  
  1,244Taxes (note 15)Current income tax
  
  1,058
  
  478
  
  229Future income tax
  (recovery)
  
  176
  
  (111
  )
  (53
  )Petroleum revenue tax
  
  189
  
  129
  
  921,423
  
  496
  
  268Net income
  
  1,561
  
  654
  
  976Per common share (Canadian
  dollars) (note 17)Net income
  
  4.24
  
  1.71
  
  2.53Diluted net income
  
  4.14
  
  1.68
  
  2.50Average number of common
  shares outstanding (millions)
  
  368
  
  383
  
  386Diluted number of common
  shares outstanding (millions)
  
  377
  
  390
  
  391  See
accompanying notes.  Consolidated Statements of Retained Earnings  Years ended December 31
  (millions of Canadian dollars)
  
  2005
  
  2004
  
  2003(restated)
  (note 2)
  
  (restated)
  (note 2)Retained earnings,
  beginning of year
  
  2,170
  
  1,852
  
  1,088Net income
  
  1,561
  
  654
  
  976Common share dividends
  
  (125
  )
  (114
  )
  (90
  )Purchase of common shares
  (note 8)
  
  (290
  )
  (222
  )
  (122
  )Retained
  earnings, end of year
  
  3,316
  
  2,170
  
  1,852  See accompanying notes.  28


Consolidated Statements of Cash Flows  Years ended December 31
  (millions of Canadian dollars)
  
  2005
  
  2004
  
  2003(restated)
  (note 2)
  
  (restated)
  (note 2)OperatingNet income
  
  1,561
  
  654
  
  976Items not involving cash
  (note 16)
  
  2,836
  
  2,024
  
  1,502Exploration
  
  275
  
  238
  
  2134,672
  
  2,916
  
  2,691Deferred gain on unwound
  hedges
  
  
  
  
  
  (9
  )Changes in non-cash working
  capital (note 16)
  
  199
  
  203
  
  (128
  )Cash provided by operating
  activities
  
  4,871
  
  3,119
  
  2,554InvestingCorporate acquisitions
  (note 3)
  
  (2,549
  )
  
  
  Capital expendituresExploration, development
  and corporate
  
  (3,206
  )
  (2,565
  )
  (2,218
  )Acquisitions (note 3)
  
  (544
  )
  (317
  )
  (661
  )Proceeds of resource
  property dispositions (note 19)
  
  17
  
  75
  
  1,075Investments
  
  (4
  )
  
  
  (11
  )Changes in non-cash working
  capital
  
  142
  
  50
  
  105Cash used in investing
  activities
  
  (6,144
  )
  (2,757
  )
  (1,710
  )FinancingLong-term debt repaid
  
  (1,294
  )
  (1,069
  )
  (791
  )Long-term debt issued
  
  3,129
  
  912
  
  292Common shares purchased
  
  (352
  )
  (284
  )
  (184
  )Common share dividends
  
  (125
  )
  (114
  )
  (90
  )Deferred credits and other
  
  (9
  )
  164
  
  28Changes in non-cash working
  capital
  
  (3
  )
  (10
  )
  Cash provided by (used in)
  financing activities
  
  1,346
  
  (401
  )
  (745
  )Effect of translation on
  foreign currency cash and cash equivalents
  
  19
  
  (21
  )
  (28
  )Net increase (decrease) in
  cash and cash equivalents
  
  92
  
  (60
  )
  71Cash and cash equivalents,
  beginning of year
  
  38
  
  98
  
  27Cash and cash equivalents,
  end of year
  
  130
  
  38
  
  98  See accompanying notes.  29


Notes to
the Consolidated Financial Statements (tabular amounts in millions
of Canadian dollars, except as noted)  1.
SIGNIFICANT ACCOUNTING POLICIES  The Consolidated Financial
Statements of Talisman Energy Inc. (Talisman or the Company) have been
prepared by management in accordance with Canadian generally accepted
accounting principles (GAAP). A summary of the differences between accounting
principles generally accepted in Canada and those generally accepted in the
United States (US) is contained in note 21 to these statements.  The Company is in the
business of exploration, development, production and marketing of crude oil,
natural gas and natural gas liquids.  The preparation of
Consolidated Financial Statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.  a)
Consolidation  The Consolidated Financial
Statements include the accounts of Talisman and its subsidiaries. Substantially
all of Talismans activities are conducted jointly with others and the
Consolidated Financial Statements reflect only the Companys proportionate
interest in such activities.  b)
Inventories  Product inventories are
valued at the lower of average cost and market value. Materials and supplies
are valued at the lower of average cost and net realizable value.  c) Property,
Plant and Equipment  The successful efforts method
is used to account for oil and gas exploration and development costs. Under
this method, acquisition costs of oil and gas properties and costs of drilling
and equipping development wells are capitalized. Costs of drilling exploratory
wells are initially capitalized and, if subsequently determined to be
unsuccessful, are charged to dry hole expense. Exploration wells in areas
requiring major capital before production can begin are capitalized as long as
drilling efforts are underway or firmly planned. Exploration wells are assessed
annually, or more frequently as evaluation conditions dictate, for
determination of reserves and, as such, success. All other exploration costs,
including geological and geophysical costs and annual lease rentals, are
charged to exploration expense when incurred. Producing properties and
significant unproved properties are assessed annually, or more frequently as
economic events dictate, for potential impairment. Any impairment loss is the
difference between the carrying value of the asset and its fair value. Fair
value is calculated as the present value of estimated expected future cash flows
from proved and probable reserves.  d)
Depreciation, Depletion and Amortization  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 on an energy equivalent basis at a ratio of six thousand
cubic feet of natural gas for one barrel of oil.  Successful exploratory wells
and development costs are depleted over proved developed reserves while
acquired resource properties with proved reserves, including offshore platform
costs, are depleted over proved reserves. Acquisition costs of probable
reserves are not depleted or amortized while under active evaluation for
commercial reserves. Costs are transferred to depletable costs as proved
reserves are recognized. At the date of acquisition, an evaluation period is
determined after which any remaining probable reserve costs associated with
producing fields are transferred to depletable costs; costs not associated with
producing fields are amortized over a period not exceeding the remaining lease
term.  Costs associated with
significant development projects are not depleted until commercial production
commences. Unproved land acquisition costs that are individually immaterial are
amortized on a straight-line basis over the average lease term until properties
are determined to be productive or impaired. Gas plants, net of estimated
salvage values, are depreciated on a straight-line basis over their estimated
remaining useful lives, not to exceed the estimated remaining productive lives
of related fields. Pipelines and corporate assets are depreciated using the
straight-line method at annual rates of 7% and 4% to 33%, respectively. Gas
plants and pipelines in the North Sea are depreciated using the unit of
production method based on the related fields.  e) Asset
Retirement Obligations  The fair value of the
statutory, contractual or legal liability associated with the retirement and
reclamation of tangible long-lived assets is recorded when the related assets
are put into use, with a corresponding increase to the carrying amount of the
related assets. The increase to capitalized costs is amortized to earnings on a
basis consistent with depreciation, depletion and amortization of the
underlying assets. Subsequent changes in the estimated fair value of the asset
retirement obligations (ARO) are capitalized and amortized over the remaining
useful life of the underlying asset. See note 6 for details.  30


The ARO liabilities are
carried on the Consolidated Balance Sheet at their discounted present value and
are accreted over time for the change in their present value, with this
accretion charge included in depreciation, depletion and amortization.  Actual expenditures incurred
are charged against the accumulated obligation with the resulting difference
recognized in income as a gain or loss.  f)
Capitalized Interest  Interest costs associated
with major development projects are capitalized until the necessary facilities
are completed and ready for use. These costs are subsequently amortized to
income with the related assets.  g) Royalties  Certain of the Companys
foreign operations are conducted jointly with the respective national oil companies.
These operations are reflected in the Consolidated Financial Statements based
on Talismans working interest in such activities. All other government stakes,
other than income taxes, are considered to be royalty interests. Royalties on
production from these joint foreign operations represent the entitlement of the
respective governments to a portion of Talismans share of crude oil, liquids
and natural gas production and are recorded using rates in effect under the
terms of contracts at the time of production.  h) Petroleum
Revenue Tax  United Kingdom Petroleum
Revenue Tax (PRT) is accounted for using the life of the field method whereby
total future PRT is estimated using current reserves and anticipated costs and
prices and charged to income based on net operating income as a proportion of
estimated future net operating income. Changes in the estimated total future
PRT are accounted for prospectively.  i) Foreign
Currency Translation  The Companys functional
currency is the US dollar. The Companys financial results have been reported
in Canadian dollars as explained below.  The Companys self-sustaining
operations, which include the Canadian and UK operations, are translated into
US dollars using the current rate method, whereby assets and liabilities are
translated at period-end exchange rates while revenues and expenses are
converted using average rates for the period. Gains and losses on translation
to US dollars relating to self-sustaining operations are deferred and included
in a separate component of shareholders equity described as cumulative foreign
currency translation.  The remaining foreign
operations are not considered self-sustaining and are translated using the
temporal method. Under this method, monetary assets and liabilities denominated
in foreign currencies are translated at exchange rates in effect at the balance
sheet date. Non-monetary assets and liabilities denominated in foreign
currencies are translated at rates in effect on the dates the assets were
acquired or liabilities were assumed. Revenues and expenses are translated at
rates of exchange prevailing on the transaction dates. Gains and losses on
translation are reflected in income when incurred.  The Companys financial
results have been reported in Canadian dollars with amounts translated to
Canadian dollars as follows: assets and liabilities at the rate of exchange in
effect at the applicable balance sheet date and revenues and expenses at the
average exchange rates for the periods. The Companys share capital accounts,
including its common shares and contributed surplus, are translated at rates in
effect at the time of issuance. Unrealized gains and losses resulting from the
translation to Canadian dollars are included in the cumulative foreign currency
translation account.  j) Employee
Benefit Plans  The cost of pensions and
other retirement benefits earned by employees is determined using the projected
benefit method prorated on service and managements best estimate of expected
plan investment performance, salary escalation and retirement ages of
employees. There is uncertainty relating to the assumptions used to calculate
the net benefit plan expense and accrued benefit obligation which are long
term, consistent with the nature of employee future benefits.  The discount rate used to
determine the accrued benefit obligation is determined by reference to market
interest rates at the measurement date on high quality debt instruments with
cash flows that match the timing and amount of expected benefit payments. For
purposes of calculating the expected return on plan assets, those assets are
valued at fair value. The excess of the cumulative unamortized net actuarial
gain or loss over 10% of the greater of the accrued benefit obligation and the
fair value of plan assets at the beginning of the year is amortized over the
average remaining service life of active employees. The unamortized
transitional assets and obligations, and past service costs are being amortized
over the average remaining service period of active employees expected to
receive benefits under the benefit plans.  k)
Derivative Financial Instruments and Commodity Contracts  The Company may enter into
derivative financial instruments to hedge against adverse fluctuations in
foreign exchange rates, electricity rates, interest rates and commodity prices.
Payments or receipts on derivative financial instruments that are designated
and effective as hedges are recognized in income concurrently with the hedged
transaction and are recorded in the Consolidated Statements of Income and Cash
Flows in the line item associated with the hedged transaction. For example,
gains and losses on commodity hedges are included in revenues.  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 and recognized concurrently with the anticipated
transaction. If it is no longer probable that the anticipated transaction will
occur substantially as and when identified at the inception of the hedging
relationship, the gain or loss on the hedge at that date is recognized
immediately. Subsequent changes in the value of the derivative financial
instrument are reflected in income. Any derivative financial instrument that
does not constitute a hedge is recorded at fair value with any resulting gain
or loss reflected in income.  31


All of the Companys
commodity derivative financial instruments outstanding during 2005 met the
hedging requirements under Canadian GAAP. The hedging requirements as amended
by Accounting Guideline 13 require the designation of a hedging relationship,
including a hedged and a hedging item, identification of the risk exposure being
hedged and reasonable assurance that the hedging relationship will be effective
throughout its term. In addition, in the case of anticipated transactions, it
must also be probable that the transaction designated as being hedged will
occur. The Company assesses, both at the hedges inception and on an ongoing
basis, whether the derivative financial instruments that have been designated
as hedges are highly effective in offsetting changes in fair value or cash
flows of the hedged items.  The Company enters into
commodity contracts in the normal course of business including contracts with
fixed terms. The contracts outstanding at December 31, 2005 are disclosed
in notes 11 and 12 to the Consolidated Financial Statements. 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.  l) Income
Taxes  Talisman uses the liability
method to account for income taxes. Under the liability method, future income
taxes are based on the differences between assets and liabilities reported for
financial accounting purposes from those reported for income tax. Future income
tax assets and liabilities are measured using substantively enacted tax rates.
The impact of a change in tax rate is recognized in net income in the period in
which the tax rate is substantively enacted.  Certain of the Companys
contractual arrangements in foreign jurisdictions stipulate that income taxes
are to be paid by the respective national oil company out of its entitlement
share of production. Such amounts are included in income tax expense at the
statutory tax rate in effect at the time of production.  m) Revenue
Recognition  Revenues associated with the
sale of crude oil, natural gas and liquids are recognized when title passes
from the Company to the customer. Crude oil and natural gas produced and sold
by the Company below or above its working interest share in the related
resource properties results in production underliftings or overliftings.
Underliftings are recorded as inventory and overliftings are recorded as
deferred revenue. Amounts received under take-or-pay gas sales contracts in
respect of undelivered volumes are accounted for as deferred income and
recognized as revenue when volumes are delivered. Transportation expenses are
reported as a separate expense and not netted off against revenue.  n)
Stock-based Compensation  Talisman has stock options or
stock appreciation rights, cash unit plans and deferred share units for
employees and directors, which are described in note 8. In 2003, the option
plans were amended to provide holders of stock options the choice upon exercise
to receive a cash payment in exchange for surrendering the option. Commencing
in 2003, as a result of the amendment to the stock option plans, the Company
began to use the intrinsic-value method to recognize compensation expense
associated with its stock appreciation rights. Obligations are accrued on a
graded vesting basis on the difference between the market value of the Companys
common shares and the exercise price of the options. This obligation is
revalued each reporting period based on the changes in the graded vested number
of options outstanding and changes in the market value of the Companys common
shares. Prior to 2003, no amount of compensation expense was recognized in the
Consolidated Financial Statements for stock-based compensation.  o) Goodwill  Goodwill represents the
excess purchase price over the fair value of identifiable assets and
liabilities acquired in business combinations. Goodwill is not amortized but is
subject to ongoing annual impairment reviews, or more frequently as economic
events dictate, based on the fair value of reporting units. The fair value of
each reporting unit is determined and compared to the book value of the
reporting unit. If the fair value of the reporting unit is less than the book
value, then a second test is performed to determine the amount of the goodwill
impairment. The amount of the impairment is determined by deducting the fair
value of the reporting units individual assets and liabilities from the fair
value of the reporting unit to determine the implied fair value of goodwill and
comparing that amount to the book value of the reporting units goodwill. Any
excess of the book value of goodwill over the implied fair value of goodwill is
the impairment amount. The Companys reporting units are consistent with the
geographic segments included in note 20.  p) Net
Income and Diluted Net Income Per Share  Net income per share is
calculated by dividing net income by the weighted-average number of common
shares outstanding. Diluted net income per share is calculated giving effect to
the potential dilution that could occur if stock options were exercised in
exchange for common shares.  The Company uses the treasury
stock method to determine the dilutive impact of options. This method assumes
that any proceeds from the exercise of options would be used to purchase common
shares at the average market price during the period.  q) Cash and
Cash Equivalents  Cash and cash equivalents
include short-term investments with an original maturity of three months or
less. Cash and cash equivalents are stated at cost, which approximates market
value.  r)
Measurement Uncertainty  To facilitate the timely
preparation of the Consolidated Financial Statements, management has made
estimates and assumptions regarding certain assets, liabilities, revenues and
expenses. Such estimates primarily relate to unsettled transactions and events
as of the date of the Consolidated Financial Statements. Accordingly, actual
results may differ from estimated amounts.  32


Amounts recorded for
depreciation, depletion and amortization and amounts used for impairment
calculations are based on estimates of oil and natural gas reserves and
commodity prices and capital costs required to develop those reserves. By their
nature, estimates of reserves and the related future cash flows are subject to
measurement uncertainty, and the impact of differences between actual and
estimated amounts on the Consolidated Financial Statements of future periods
could be material.  Inherent in the fair value
calculation of ARO are numerous assumptions and judgments, including the
ultimate settlement amounts, inflation factors, credit adjusted discount rates,
timing of settlement, and changes in the legal, regulatory, environmental and
political environments. To the extent future revisions to these assumptions
impact the fair value of the existing ARO liability, a corresponding adjustment
is made to the oil and gas property balance.  The values of pension assets
and obligations and the amount of pension costs charged to net income depend on
certain actuarial and economic assumptions which, by their nature, are subject
to material measurement uncertainty.  s)
Reclassification  Certain information provided
for prior years has been reclassified to conform to the presentation adopted in
the current year.  2. CHANGE IN
ACCOUNTING POLICY  Preferred
Securities  Effective January 1,
2005, the Company retroactively adopted certain changes to the Canadian
Institute of Chartered Accountants (CICA) accounting standard for financial
instruments. The change to this standard requires that the Companys preferred
securities, all of which were redeemed in 2004, be treated as debt rather than
equity. Previously preferred securities charges were charged directly to retained
earnings but, under these changes to the accounting standard, they would have
been charged to interest expense. In addition, since the preferred securities
would have been treated as debt, the balance would have been revalued at each
balance sheet date with the offsetting movement reflected in the cumulative
foreign currency translation account. As a result, there would not have been a
gain on the redemption of the preferred securities. There was no impact to the
2005 results as the preferred securities were fully redeemed by the end of the
second quarter in 2004.  The adjustment required to
the December 31, 2004 Consolidated Balance Sheet to implement this change
in accounting is as follows:  As previously reported
  
  Adjustments
  
  As restatedCumulative
  foreign currency translation
  
  (150
  )
  74
  
  (76
  )Retained
  earnings
  
  2,244
  
  (74
  )
  2,170  The adjustment to the Consolidated Statement of Income for the year
ended December 31, 2004 is as follows:  As previously reported
  
  Adjustments
  
  As restatedInterest on
  long-term debt
  
  158
  
  15
  
  173Future
  income tax (recovery)
  
  (105
  )
  (6
  )
  (111
  )Net income
  
  663
  
  (9
  )
  654Preferred
  securities charges, net of tax
  
  (9
  )
  9
  
  Gain on
  redemption of preferred securities, net of tax
  
  23
  
  (23
  )
  Net income
  available to common shareholders
  
  677
  
  (23
  )
  654Per common
  share (Canadian dollars)Net income
  
  1.77
  
  (.06
  )
  1.71Diluted net
  income
  
  1.74
  
  (.06
  )
  1.68  The adjustment to the Consolidated Statement of Income for the year
ended December 31, 2003 is as follows:  As previously reported
  
  Adjustments
  
  As restatedInterest on
  long-term debt
  
  137
  
  41
  
  178Future
  income tax (recovery)
  
  (48
  )
  (5
  )
  (53
  )Net income
  
  1,012
  
  (36
  )
  976Preferred
  securities charges, net of tax
  
  (22
  )
  22
  
  Net income
  available to common shareholders
  
  990
  
  (14
  )
  976Per common
  share (Canadian dollars)Net income
  
  2.56
  
  (.03
  )
  2.53Diluted net
  income
  
  2.53
  
  (.03
  )
  2.50  3.
ACQUISITIONS  The following acquisitions
have been accounted for using the purchase method and the results have been
included in these Consolidated Financial Statements from the dates of
acquisitions.  33


Corporate
Acquisitions  Paladin
Resources plcIn November 2005,
Talisman acquired control (73%) of Paladin Resources plc (Paladin), an oil and
gas exploration and development company. An additional 25% of the shares were
acquired prior to year end resulting in a 98% ownership interest in Paladin at December 31,
2005. The 98% of Paladin was acquired for $2,560 million in cash and $74
million in long-term debt, net of cash acquired ($11 million). The acquisition
has been accounted for using the purchase method and the Paladin results have
been included in the Consolidated Financial Statements of the Company from the
date of acquisition. The remaining 2% of Paladin was acquired in January 2006.
The Companys evaluation of the net assets and liabilities acquired has not yet
been finalized.  Fair value of net assets
  acquired
  
  North Sea
  
  Southeast Asia
  and Australia
  
  North Africa
  
  CombinedProperty,
  plant and equipment
  
  2,956
  
  324
  
  14
  
  3,294Net non-cash
  working capital
  
  (9
  )
  
  
  
  
  (9
  )Goodwill
  
  891
  
  26
  
  4
  
  921Fair value
  of derivatives
  
  (147
  )
  
  
  
  
  (147
  )Future
  income tax
  
  (1,138
  )
  (48
  )
  (5
  )
  (1,191
  )Asset
  retirement obligations
  
  (155
  )
  (13
  )
  
  
  (168
  )Non-controlling
  interest
  
  (66
  )
  
  
  
  
  (66
  )2,332
  
  289
  
  13
  
  2,634  Other Acquisitions  During 2005, Talisman
completed a number of oil and gas property and corporate acquisitions for a
total cost of $536 million, comprised of $544 million in cash, assumed working
capital ($12 million) and $4 million of properties exchanged. Four transactions
accounted for the majority of the acquisitions and were acquired for a total
cost of $515 million. These acquisitions included oil and gas properties in
North America and the North Sea.  Fair value of net assets
  acquired
  
  North America
  
  North Sea
  
  CombinedProperty,
  plant and equipment
  
  218
  
  486
  
  704Goodwill
  
  
  
  177
  
  177Asset
  retirement obligations
  
  
  
  (81
  )
  (81
  )Future
  income tax
  
  (70
  )
  (215
  )
  (285
  )148
  
  367
  
  515  During 2004, Talisman
completed a number of oil and gas property and corporate acquisitions for a
total cost of $330 million, comprised of $317 million in cash, ($1 million) of
assumed working capital and $14 million of properties exchanged. Three of the
transactions account for the majority of the acquisitions and were acquired for
a total cost of $288 million. These three acquisitions included oil and gas
properties in North America and the North Sea.  Fair value of net assets
  acquired
  
  North America
  
  North Sea
  
  CombinedProperty,
  plant and equipment
  
  93
  
  374
  
  467Asset retirement
  obligations
  
  
  
  (101
  )
  (101
  )Future
  income tax
  
  
  
  (78
  )
  (78
  )93
  
  195
  
  288  Goodwill Continuity  2005
  
  2004Opening
  balance at January 1
  
  466
  
  473Acquired
  during year
  
  1,098
  
  Foreign
  currency translation effect
  
  (60
  )
  (7
  )Closing
  balance at December 31
  
  1,504
  
  466  4. INVENTORIES  December 31
  
  2005
  
  2004Materials
  and supplies
  
  99
  
  75Product
  
  71
  
  3170
  
  78  34


5. PROPERTY, PLANT AND EQUIPMENT  Cost
  
  Accumulated
  DD&A
  
  Net book valueDecember 31, 2005Oil and gas
  properties
  
  13,542
  
  5,662
  
  7,880Gas plants,
  pipelines and production equipment
  
  10,339
  
  3,277
  
  7,062Corporate
  assets
  
  342
  
  211
  
  13124,223
  
  9,150
  
  15,073December 31, 2004Oil and gas properties
  
  9,789
  
  4,730
  
  5,059Gas plants, pipelines and
  production equipment
  
  8,795
  
  3,102
  
  5,693Corporate assets
  
  275
  
  180
  
  9518,859
  
  8,012
  
  10,847  In the year ended December 31, 2005, interest costs of $19 million
(2004  $13 million; 2003  $24 million) were capitalized.  Included in property, plant and equipment are the following costs that
were not subject to depreciation, depletion or amortization (DD&A) as at December 31:  Non-depleted capital at December 31
  
  2005
  
  2004Acquired
  unproved reserve costs (1)North
  America  associated with producing fields
  
  34
  
  38North Sea 
  associated with producing fields
  
  823
  
  Southeast
  Asia and Australia  associated with producing fields
  
  63
  
  North Sea 
  not associated with producing fields
  
  465
  
  54Other  not
  associated with producing fields
  
  164
  
  41Exploration
  costs (2)
  
  450
  
  284Development
  Projects (3)North
  America
  
  30
  
  16Southeast
  Asia and Australia
  
  369
  
  345North Sea
  
  826
  
  117Trinidad and
  Tobago
  
  
  
  2553,224
  
  1,150  
 (1)Acquisition
costs of unproved reserves are not depleted or amortized while under active
evaluation for commercial reserves. (2)Exploration
costs consist of drilling in progress and wells awaiting determination of
proved reserves, approval of development plans or commencement of production. (3)Development
projects are not depleted pending initial production.  Greater thanSummary of exploration costs
  
  Total
  
  Less than 1 year
  
  1 to 3 years
  
  3 yearsNorth
  America
  
  328
  
  276
  
  52
  
  North Sea
  
  16
  
  16
  
  
  
  Southeast
  Asia and Australia
  
  10
  
  4
  
  6
  
  North Africa
  
  23
  
  1
  
  
  
  22Trinidad and
  Tobago
  
  45
  
  27
  
  18
  
  Other
  
  28
  
  22
  
  6
  
  450
  
  346
  
  82
  
  22  In North America, the
non-depleted exploration costs increased by $126 million as $112 million was
reclassified to depletable capital, $38 million expensed to dry hole, and $276
million spent during the year was added to non-depleted exploration capital.
Costs of $52 million relating to 10 wells drilled prior to 2005 continue to be
capitalized, as managements ongoing assessment includes further development
activity planned for 2006.  In the North Sea, the
non-depleted exploration costs decreased by $3 million as $18 million was
reclassified to depletable capital, $1 million expensed to dry hole, and $16
million in additional capital was added to non-depleted exploration capital.  In Southeast Asia and
Australia, the non-depleted exploration costs increased by $2 million as $2
million was reclassified to depletable capital and $4 million spend during the
year was added to non-depleted exploration capital. Costs of $6 million
relating to one well drilled prior to 2005 continue to be capitalized, as
managements ongoing assessment includes further development activity planned
for 2006.  In North Africa, the
non-depleted exploration costs did not change as $1 million in new capital
spending was offset by foreign exchange movements on the previously existing
balances. During the year, the Company approved plans for the Phase 2
development of the MLN fields involving injection of gas and drilled two
additional wells. The EMK unit development plan project sanction is expected in
2006. The costs associated with the MLSE and EMK unit wells continue to be
capitalized as the Company actively pursues development, including drilling
additional wells.  35


In Trinidad and Tobago, the
non-depleted exploration costs increased by $25 million as $1 million was
reclassified to depletable capital, $2 million expensed to dry hole and $26
million spent during the year was added to non-depleted exploration capital,
with the remaining $2 million increase resulting from foreign exchange
movements. Costs of $18 million relating to three wells drilled prior to 2005
continue to be capitalized, as managements ongoing assessment includes further
development activity planned for 2006.  In other exploration areas, the
non-depleted exploration costs increased by $16 million as $5 million was
expensed to dry hole, and $21 million spend during the year was added to
non-depleted exploration capital. Costs of $6 million relating to one well
drilled prior to 2005 continue to be capitalized, as managements ongoing
assessment includes further development activity planned for 2006.  6. ASSET
RETIREMENT OBLIGATIONS  Total accretion for year
ended December 31, 2005 of $76 million (2004  $70 million; 2003  $58
million) has been included in depreciation, depletion and amortization. At December 31,
2005, the estimated total undiscounted asset retirement obligations were $3.1
billion (2004  $2.6 billion). These obligations will be settled based on the
estimated useful lives of the underlying assets, the majority of which are
expected to be settled within the next 30 years. The ARO has been discounted
using credit-adjusted risk free rates of 5.5% in the North Sea and 6.5% in
North America and rest of world. No amount of market risk premium has been
included in the estimate of the Companys ARO liability as management does not
believe there to be sufficient evidence in the oil and gas industry to estimate
any such market premium.  During the years the Companys
asset retirement obligations changed as follows:  2005
  
  2004ARO
  liability at January 1
  
  1,295
  
  1,177Liabilities
  incurred during the year
  
  279
  
  126Liabilities
  settled during the year
  
  (32
  )
  (29
  )Accretion
  expense
  
  76
  
  70Revisions in
  estimated cash flows
  
  (111
  )
  (44
  )Foreign
  currency translation
  
  (159
  )
  (5
  )ARO
  liability at December 31(1)
  
  1,348
  
  1,295  
 (1)Included in December 31, 2004 and December 31,
2005 liabilities are $23 million and $28 million respectively of short-term
reclamation costs recorded in accounts payable on the balance sheet for a net
long-term ARO liability of $1,272 million and $1,320 million, respectively.  7.
LONG-TERM DEBT  December 31
  
  2005
  
  2004Bank Credit
  Facilities (1)5.39% Bank
  Credit Facilities
  
  43
  
  3285.29%
  Acquisition Credit Facility (2)
  
  1,848
  
  Debentures
  and Notes (Unsecured) (3)6.96% notes
  (US$200 million), due 2005
  
  
  
  2416.89% notes (US$50
  million), Series B, due 2006 (2), (4)
  
  58
  
  605.80% medium
  term notes, due 2007
  
  385
  
  3857.125%
  debentures (US$175 million), due 2007
  
  204
  
  2116.68% notes
  (US$100 million), due 2008
  
  117
  
  1208.06% medium
  term notes, due 2009
  
  174
  
  1745.125% notes
  (US$375 million), due 2015 (5)
  
  437
  
  6.625% notes
  (£250 million), due 2017 (6)
  
  501
  
  5777.25%
  debentures (US$300 million), due 2027
  
  350
  
  3615.75% notes
  (US$125 million), due 2035
  
  146
  
  4,263
  
  2,457  
 (1)Rates reflect the weighted-average interest
rate of instruments outstanding at December 31. Rates are floating
rate-based and vary with changes in short-term market interest rates. (2)The amounts outstanding at December 31,
2005 have been classified as long-term debt since the Company has the ability
and intention to replace this debt with long-term borrowings under the
revolving bank credit facilities and through the long-term notes issued
subsequent to year end. At year end, £725 million had been effectively swapped
into US$1,272 million. See note 11 to the Consolidated Financial Statements. (3)Interest on debentures and notes is payable
semi-annually except for interest on the 6.625% notes (£250 million) which is
payable annually, and the 6.68% notes (US$100 million) which is paid quarterly. (4)Repayable in five equal annual instalments
commencing 2006. (5)The interest rate on US$300 million of this
debenture has been swapped to a floating rate obligation bearing interest at
three-month LIBOR plus 0.433% (4.97% at December 31, 2005). See note 11 to
the Consolidated Financial Statements. (6)Prior to January 1, 2004, the £250
million Eurobond was effectively swapped into US$364 million indebtedness.
Effective January 2004 this debt is no longer swapped into US dollars and
is now revalued based on the Canadian dollar to pound sterling exchange rate. See
note 11 to the Consolidated Financial Statements.  36


Bank Credit
Facilities  At December 31, 2005,
Talisman had unsecured credit facilities totaling $1,345 million, consisting of
facilities of $585 million (Facility No. 1), $510 million (Facility No. 2),
$150 million (Facility No. 3), $50 million (Facility No. 4) and $50
million (Facility No. 5). The maturity dates of Facilities No. 1 and
2 are June 30, 2008 and June 30, 2010, respectively and September 30,
2008 for Facilities 3, 4 and 5, although these dates may be extended from time
to time upon agreement between the Company and the respective lenders. Prior to
the maturity date, the Company may borrow, repay and reborrow at its
discretion. All facilities must be repaid on their maturity dates.  Borrowings under Facilities No. 1
and 2 are available in the form of prime loans, Canadian or US dollar bankers
acceptances, US dollar base rate loans or LIBOR-based loans. In addition,
drawings to a total of $548 million are available in the form of letters of
credit. Borrowings under Facility No. 3 are available in the form of prime
loans, Canadian or US dollar bankers acceptances, US dollar base rate loans,
LIBOR-based loans and letters of credit. Borrowings under Facility No. 4
are available in the form of prime loans, Canadian or US dollar guaranteed
notes, US dollar base rate loans and LIBOR-based loans. Borrowings under
Facility No. 5 are available in the form of prime loans, Canadian or US
dollar bankers acceptances, US dollar base rate loans and LIBOR-based loans.
See note 12 for summary of letters of credit.  Subsequent
Event  Subsequent to year end,
Talisman completed a US$500 million offering of 5.85% notes due February 1,
2037 and a $350 million offering of 4.44% notes due January 27, 2011.
Interest on both notes is paid semi-annually. The $350 million offering was
immediately swapped into US$304 million 5.054% debt. The proceeds from these
note offerings were used to repay a portion of the outstanding acquisition
credit facility.  Acquisition
Credit Facility  In connection with the
funding of the acquisition of Paladin, the Company arranged a $2,605 million
(£1,300 million), unsecured non-revolving acquisition credit facility maturing
in October 2006. At December 31, 2005, $1,848 million was drawn on
this facility. Subsequent to year end, the proceeds from the note offerings
were used to repay a portion of the amounts outstanding under the acquisition
credit facility. Following this repayment, the amounts drawn were approximately
US$850 million. Borrowings are available in US dollars or pounds sterling in
the form of bankers acceptances or LIBOR-based loans.  Paladin
Credit Facility  At the time of Talismans
acquisition of Paladin, Paladin was party to a US$600 million senior credit
facility secured by the assets of Paladin. At year end, draws under this
facility were $43 million, and were repaid subsequent to year end. Talisman is
currently in the process of cancelling this credit facility.  Repayment
Schedule  The Companys contractual
minimum repayments of long-term debt are as follows:  Year2006 (1)
  
  122007
  
  6012008
  
  5712009
  
  1862010
  
  521Subsequent
  to 2010
  
  2,372Total
  
  4,263  
 (1)The portion of long-term debt payable in 2006
has been classified as long-term debt since the Company has the ability and
intention to replace this debt with long-term borrowings under the revolving
bank credit facilities.  8. SHARE CAPITAL  Talismans authorized share
capital consists of an unlimited number of common shares without nominal or par
value and first and second preferred shares. No preferred shares have been
issued.  2005
  
  2004
  
  2003Continuity of common shares
  
  Shares
  
  Amount
  
  Shares
  
  Amount
  
  Shares
  
  AmountBalance,
  beginning of year
  
  375,185,290
  
  2,666
  
  383,996,184
  
  2,725
  
  393,118,305
  
  2,785Issued on
  exercise of options
  
  165,125
  
  8
  
  182,900
  
  5
  
  884,679
  
  11Purchased
  during year
  
  (9,089,100
  )
  (65
  )
  (8,987,400
  )
  (64
  )
  (10,006,800
  )
  (71
  )Cancelled
  pursuant to terms of
  plans of arrangements
  
  
  
  
  
  (6,394
  )
  
  
  
  
  Balance, end
  of year
  
  366,261,315
  
  2,609
  
  375,185,290
  
  2,666
  
  383,996,184
  
  2,725  During the year ended December 31,
2005, Talisman repurchased 9,089,100 common shares of the Company pursuant to a
NCIB for a total of $355 million (2004  8,987,400 for $286 million; 2003 
10,006,800 for $194 million). The cost to repurchase common shares in excess of
their average book value has been charged to retained earnings, contributed
surplus and cumulative foreign currency translation.  37


In 2005, Talisman did not
cancel any common shares of the Company (2004  6,394; 2003  nil shares)
pursuant to the terms of the offering agreements of certain past corporate
acquisitions.  a) Stock
Option Plans  Talisman has stock option
plans that grant options to employees and directors. All options issued by the
Company permit the holder to purchase one common share of the Company at the
stated exercise price or, effective July 1, 2003, to receive a cash
payment equal to the appreciated value of the stock option. Options granted
under the plans are generally exercisable after three years and expire 10 years
after the grant date. Option exercise prices approximate the market price for
the common shares on the date the options were granted.  2005
  
  2004
  
  2003Continuity of stock options
  
  Number
  of Options
  
  Average
  Exercise Price ($)
  
  Number
  of Options
  
  Average
  Exercise Price($)
  
  Number
  of Options
  
  Average
  Exercise Price($)Outstanding
  at January 1
  
  20,788,375
  
  19.58
  
  23,599,596
  
  17.55
  
  22,152,162
  
  15.51Granted
  
  5,921,130
  
  42.16
  
  3,695,580
  
  25.68
  
  7,184,097
  
  19.83Exercised
  for common shares
  
  (165,125
  )
  16.57
  
  (182,900
  )
  12.74
  
  (884,679
  )
  11.27Exercised
  for cash payment
  
  (4,832,109
  )
  17.67
  
  (6,023,241
  )
  15.49
  
  (4,260,711
  )
  11.84Forfeited
  
  (217,032
  )
  30.88
  
  (300,660
  )
  21.12
  
  (591,273
  )
  19.60Outstanding
  at December 31
  
  21,495,239
  
  26.14
  
  20,788,375
  
  19.58
  
  23,599,596
  
  17.55Exercisable
  at December 31
  
  5,873,954
  
  17.37
  
  7,731,478
  
  15.73
  
  7,742,865
  
  12.46Options
  available for future grants pursuant to the Companys Stock Option Plans
  
  15,791,886
  
  
  
  16,663,875
  
  
  
  14,035,554  The range of exercise prices
of the Companys outstanding stock options is as follows:  December 31, 2005
  
  Outstanding Options
  
  Exercisable OptionsRange of exercise prices($)
  
  Number
  of options
  
  Weighted-average
  exercise price($)
  
  Weighted-average
  years to expiry
  
  Number
  of options
  
  Weighted-average
  exercise price($)8.59  19.99
  
  10,446,152
  
  18.10
  
  6
  
  4,438,052
  
  15.8120.00 
  29.99
  
  5,203,152
  
  24.32
  
  8
  
  1,399,072
  
  21.6930.00 
  39.99
  
  43,425
  
  32.55
  
  9
  
  
  
  40.00 
  49.99
  
  5,761,260
  
  42.08
  
  9
  
  36,830
  
  42.0650.00 
  57.05
  
  41,250
  
  57.05
  
  10
  
  
  
  8.59  57.05
  
  21,495,239
  
  26.14
  
  7
  
  5,873,954
  
  17.37  The mark-to-market liability for the stock option plans as at December 31,
2005 was $657 million (2004  $214 million).  b) Cash Unit Plan  In addition to the Companys
stock option plans, Talismans subsidiaries issue stock appreciation rights
under the cash unit plans. Cash units are similar to stock options except that
the holder does not have a right to purchase the underlying share of the
Company.  2005
  
  2004
  
  2003Continuity of cash units
  
  Number
  of units
  
  Average
  exercise price ($)
  
  Number
  of units
  
  Average
  exercise price($)
  
  Number
  of units
  
  Average
  exercise price($)Outstanding
  at January 1
  
  1,526,640
  
  21.34
  
  1,153,515
  
  19.83
  
  
  
  Granted
  
  997,310
  
  42.22
  
  399,075
  
  25.63
  
  1,170,165
  
  19.82Exercised
  
  (9,900
  )
  19.80
  
  
  
  
  
  
  
  Forfeited
  
  (63,695
  )
  27.62
  
  (25,950
  )
  19.80
  
  (16,560
  )
  19.80Outstanding
  at December 31
  
  2,450,355
  
  29.68
  
  1,526,640
  
  21.34
  
  1,153,515
  
  19.83Exercisable
  at December 31
  
  
  
  
  
  
  
  
  
  
  
    At December 31, 2005,
the weighted-average years to expiry was eight years and the mark-to-market
liability was $56 million (2004  $9 million).  c) Deferred
Share Units  Talisman also issues deferred
share units to directors in lieu of cash compensation. Each deferred share unit
(DSU) represents the right to receive a cash payment on retirement equal to the
market value of the Companys share at the time of surrender. Dividends are
credited as additional DSUs when paid. As at December 31, 2005, there
were 67,444 (2004  57,275) units outstanding. The mark-to-market liability of
$4 million (2004  $2 million) is included in accrued liabilities on the
balance sheet.  38


d)
Stock-based Compensation  For the year ended December 31,
2005, the Company recorded stock-based compensation expense of $633 million
(2004  $171 million; 2003  $185 million) relating to its stock option and
cash unit plans. Of the total expense, $153 million (2004  $82 million; 2003 
$47 million) relates to options and cash units exercised for cash, the
remaining $480 million (2004  $89 million; 2003  $138 million) is primarily a
result of the 90% (2004  32%; 2003  29%) increase in the Companys share
price during the year. In addition the Company capitalized $15 million (2004 
$nil; 2003  $nil) of stock-based compensation during the year.  Year ended December 31
  
  2005
  
  2004
  
  2003Average
  exercise price
  
  $
  49.22
  
  $
  29.06
  
  $
  22.81Average
  grant price
  
  17.67
  
  15.49
  
  11.84Average gain
  per exercise
  
  $
  31.55
  
  $
  13.57
  
  $
  10.97Number of
  options and cash units exercised
  
  4,842,009
  
  6,023,241
  
  4,260,711Cash expense
  ($millions)
  
  153
  
  82
  
  47  Of the combined
mark-to-market liability for the stock option and cash unit plans of $713
million as at December 31, 2005 (2004  $223 million), $630 million (2004
 $223 million) is included in accrued liabilities on the Consolidated Balance
Sheet.  9. OTHER LONG-TERM
OBLIGATIONS  The balance in other
long-term obligations consists of the following:  2005
  
  2004Pensions and
  other post-retirement benefits
  
  40
  
  33Mark-to-market
  liability for stock-based compensation
  
  83
  
  Fair value
  of commodity price derivatives acquired
  
  47
  
  Discounted
  obligations on capital leases
  
  40
  
  Other
  
  7
  
  2Closing
  balance at December 31
  
  217
  
  35  As a result of the
acquisition of Paladin, Talisman acquired commodity price derivative contracts
which extend to the end of 2008. The mark-to-market liability recorded on
acquisition will be amortized to revenue over the remaining life of the
underlying derivative contracts. Of the total liability acquired, $84 million
is included in accounts payable and accrued liabilities.  During the second quarter of
2005, the Company entered into a leasing arrangement for the modification,
refitting and use of a floating storage and offloading vessel (FSO). This
vessel has been deployed on the South Angsi development in Malaysia.  The modifications to the FSO
have been completed and an element of the leasing arrangement has been defined
by the Company as a capital lease. The future minimum lease payments are US$5
million for each of the next five years and US$28 million for the remainder of
the lease. The imputed rate of interest on the lease is 6% and the lease
expires in 2016. Of the total discounted liability of $46 million, $6 million
is included in accounts payable and accrued liabilities.  10.
CUMULATIVE FOREIGN CURRENCY TRANSLATION  In accordance with the
Companys foreign exchange translation accounting policy, as disclosed in note
1(i), foreign exchange gains or losses on translation of self-sustaining
foreign operations and the translation of the Companys financial results into
Canadian dollars for reporting purposes are included in shareholders equity in
the cumulative foreign currency translation account.  The following components give
rise to the exchange gains or (losses) included in the cumulative foreign
currency translation account as at December 31:  2005
  
  2004(restated) (1)Property,
  plant and equipment
  
  (1,218
  )
  (586
  )Future tax
  liabilities (including PRT)
  
  202
  
  44Asset
  retirement obligations
  
  160
  
  1Long-term
  debt
  
  634
  
  520Working
  capital
  
  49
  
  (23
  )Goodwill
  
  (92
  )
  (32
  )(265
  )
  (76
  )  
 (1)Prior years have been retroactively restated
to reflect the retroactive adoption of the change in accounting policy for
Preferred Securities. See note 2 for details.  11.
FINANCIAL INSTRUMENTS  Commodity
Price Derivative Contracts  The Company enters into crude
oil and natural gas price derivative contracts to reduce the volatility of the
Companys cash flows associated with anticipated sales of these commodities.
The Companys outstanding commodity price derivative contracts have been
designated as hedges of the Companys anticipated future commodity sales and,
as such, gains and losses on these contracts are realized in income over the
terms of the contracts.  39


During the year, the Company
entered into natural gas price derivative contracts and acquired various crude
oil and natural gas derivative contracts as a result of the acquisition of
Paladin. The fair value of derivative contracts acquired was a liability of
$147 million. This amount will be amortized into income over the remaining term
of the contracts. Virtually all of the acquired derivative contracts qualify
for hedge accounting and, as such, subsequent unrealized changes in the fair
value of these contracts are deferred and realized in income over the remaining
term of the contracts. The Company had the following commodity price derivative
contracts outstanding at December 31, 2005.  Crude Oil Derivatives  Fixed
  price swaps
  
  Hedge type
  
  Term
  
  (bbls/d)
  
  US$/bblDated Brent oil index
  
  cash flow
  
  2006
  Jan  Jun
  
  8,287
  
  33.11Dated Brent oil index
  
  cash flow
  
  2006
  Jul  Dec
  
  7,337
  
  32.23Dated Brent oil index
  
  cash flow
  
  2007
  Jan  Jun
  
  6,630
  
  41.65Dated Brent oil index
  
  cash flow
  
  2007
  Jul  Dec
  
  6,522
  
  40.90Dated Brent oil index
  
  cash flow
  
  2008
  Jan  Jun
  
  2,473
  
  59.63Dated Brent oil index
  
  cash flow
  
  2008
  Jul  Dec
  
  815
  
  60.00  Natural Gas Derivatives  Forward
  sales
  
  Hedge type
  
  Term
  
  mcf/d
  
  £/mcfFixed price swaps (IPE/Heron index)
  
  cash flow
  
  2006
  Jan  Mar
  
  4,838
  
  5.88Fixed price swaps (IPE/Heron index)
  
  cash flow
  
  2006
  Apr  Jun
  
  2,419
  
  3.41Fixed price swaps (IPE/Heron index)
  
  cash flow
  
  2006
  Jul  Sep
  
  2,419
  
  3.22  Natural Gas Derivatives  Two-way collars
  
  Hedge type
  
  Term
  
  mcf/d
  
  Floor
  CDN$/mcf
  
  Ceiling
  CDN$/mcfTwo-way collars (IPE/Heron
  index)
  
  cash flow
  
  2006
  Jan  Mar
  
  2,419
  
  6.72 (£/mcf
  )
  9.30 (£/mcf
  )Two-way collars (AECO
  index)
  
  cash flow
  
  2006
  Feb  Mar
  
  36,697
  
  11.69
  
  12.72Two-way collars (AECO
  index)
  
  cash flow
  
  2006
  Apr  Oct
  
  64,220
  
  8.82
  
  10.98Two-way collars (AECO
  index)
  
  cash flow
  
  2006
  Nov  Mar 07
  
  59,633
  
  9.61
  
  11.98Two-way collars (AECO
  index)
  
  cash flow
  
  2007
  Apr  Oct
  
  41,284
  
  7.41
  
  9.71  Interest
Rate and Foreign Exchange Derivative Contracts  In order to hedge a portion
of the fair value risk associated with the US$375 million 5.125% notes due
2015, the Company entered into fixed to floating interest rate swap contracts
with a total notional amount of US$300 million that expire on May 15,
2015. These swap contracts require Talisman to pay interest at a rate of
three-month US$ LIBOR plus 0.433% while receiving payments of 5.125%
semi-annually. These contracts have been designated as a hedge of the fair
value of a portion (US$300 million) of the total US$375 million notes issued in
May 2005.  In order to facilitate the
exchange of the acquisition credit facility from pounds sterling into the
Companys functional currency (USD) the Company entered into forward contracts
to buy UK pounds sterling (GBP) and sell US dollars. At December 31, 2005
foreign currency contracts were in place for £725 million at a rate of
1.7543US$/£; subsequent to year end additional contracts were executed and the
amounts outstanding under the acquisition facility (£938 million) were
exchanged for US$1,646 million resulting in an average exchange rate of 1.7552.  As a result of the
acquisition of Paladin, Talisman acquired a foreign exchange derivative
contract to swap US$15.1 million to NOK at a rate of 6.4475 NOK/US on March 31,
2006. The fair value of the contract acquired was less than $1 million; the
contract is not designated as a hedge and is therefore recorded at fair value.  Effective January 1,
2004, certain US dollar cross currency swap contracts and interest rate swap
contracts were no longer designated as hedges of the Eurobond and the Company
recorded a deferred gain of $17 million, which is being amortized over the
period to 2009, the original term of the contracts.  In December 1994, in
anticipation of issuing the US$175 million 7.125% debentures, Talisman entered
into interest rate swap contracts to hedge against possible adverse interest
rate fluctuations. These contracts required Talisman to pay interest at 8.295%
in exchange for receiving payments at the three-month LIBOR rate on a notional
principal amount of US$100 million. These contracts expired on May 16,
2005.  The Companys operations in
the UK and Canada are largely self-sufficient (self-sustaining) and their
economic exposure is more closely tied to their respective domestic currencies.
Accordingly, these operations are measured in UK pounds sterling and Canadian
dollars, respectively. Currently, the Companys foreign exchange translation
exposure principally relates to US dollar denominated UK and Canadian oil
sales.  As part of the adoption by
the Company as at January 1, 2004, of the new accounting guideline on
Hedging Relationships, AcG 13 and effective January, 2004, the Eurobond debt
denominated in UK pounds sterling, and the Companys Canadian dollar debt were
designated as hedges of the Companys net investments in the UK and Canadian
self-sustaining operations, respectively. As such the unrealized foreign
exchange gains and losses resulting from the translation of this debt are
deferred and included in a separate component of shareholders equity described
as cumulative foreign currency translation.  40


Carrying Amounts and Estimated Fair Values of Financial
Instruments  2005
  
  2004Asset (liability) at December 31
  
  Carrying Value
  
  Fair Value
  
  Unrecognized
  
  Carrying Value
  
  Fair Value
  
  UnrecognizedLong-term
  debt
  
  (4,263
  )
  (4,423
  )
  (160
  )
  (2,457
  )
  (2,659
  )
  (202
  )Cross
  currency and interest rate swaps
  
  (1
  )
  (7
  )
  (6
  )
  (3
  )
  (3
  )
  Natural gas
  derivatives
  
  (4
  )
  9
  
  13
  
  
  
  
  
  Crude oil
  derivatives
  
  (126
  )
  (163
  )
  (37
  )
  
  
  (41
  )
  (41
  )  Borrowings under bank credit
facilities are for short terms and are market rate based, thus, carrying value
approximates fair value. The fair value of debentures and notes is based on
market quotations, which reflect the discounted present value of the principal
and interest payments using the effective yield at December 31 for
instruments having the same term and risk characteristics. Fair values for
interest rate derivative instruments are determined based on the estimated cash
payment or receipt necessary to settle the contract at December 31. Cash
payments or receipts are based on discounted cash flow analysis using current
market rates and prices. Fair values for commodity and foreign exchange
derivatives are based on forward pricing curves as at December 31.  The fair values of other
financial instruments, including cash and cash equivalents, accounts receivable
and accounts payable approximate their carrying values.  Interest
Rate Risk  Drawings under the Companys
bank credit facilities are at floating interest rates and expose the Company to
interest rate risk. The Company is also exposed to interest rate risk on
maturity and refinancing of its fixed rate debt.  Credit Risk  A significant portion of the
Companys accounts receivable is due from entities in the oil and gas industry.
Concentration of credit risk is mitigated by having a broad domestic and
international customer base, which includes a significant number of companies
engaged in joint operations with Talisman. The Company routinely assesses the
financial strength of its partners and customers, including parties involved in
marketing or other commodity arrangements. At December 31, 2005, the
Companys largest credit exposure to a single party was approximately $154
million.  The Company is exposed to
credit risk associated with possible non-performance by derivative instrument
counterparties. The Company actively limits the total exposure to individual
counterparties.  12.
CONTINGENCIES AND COMMITMENTS  From time to time, Talisman
is the subject of litigation arising out of the Companys operations. Damages
claimed under such litigation, including the litigation discussed below, may be
material or may be indeterminate and the outcome of such litigation may
materially impact the Companys financial condition or results of operations.
While Talisman assesses the merits of each lawsuit and defends itself
accordingly, the Company may be required to incur significant expenses or
devote significant resources to defending itself against such litigation. These
claims are not currently expected to have a material impact on the Companys
financial position.  Talisman continues to be
subject to a lawsuit brought by the Presbyterian Church of Sudan and others
commenced in November 2001 under the Alien Tort Claims Act in the United
States District Court for the Southern District of New York (the Court). The
lawsuit, which is seeking class action status, alleges that the Company
conspired with, or aided and abetted, the Government of Sudan to commit
violations of international law in connection with the Companys now disposed
of interest in oil operations in Sudan. On August 30, 2005, the Court
denied Talismans motion for Court approval to appeal the Courts prior denial
of Talismans motion for judgment on the pleadings, which sought dismissal of
the lawsuit. Also on August 30, 2005, the Court declined to dismiss the
lawsuit in response to the filing of a Statement of Interest by the US
Department of Justice, expressing the US governments view that the lawsuit
interferes with US-Canada relations. On September 20, 2005, the Court
denied, for the second time, the plaintiffs motion to certify the lawsuit as a
class action. On October 5, 2005, the plaintiffs filed papers to appeal
the decision denying class action status. The Company has filed papers opposing
the plaintiffs appeal. Talisman believes the lawsuit is entirely without merit
and is continuing to vigorously defend itself. Talisman does not expect the
lawsuit to have a material adverse effect on it.  Talismans estimated total
undiscounted future ARO at December 31, 2005 was $3.1 billion (2004  $2.6
billion), approximately 66% of which is denominated in UK pounds sterling. At December 31,
2005, Talisman had accrued $1,348 million (2004  $1,295 million) of this
liability. The Company has provided letters of credit, effective January 1,
2006 in an amount of $467 million of which majorities were provided as security
for the costs of future dismantlement, site restoration and abandonment
obligations in the North Sea ($336 million). The remaining outstanding letters
of credit primarily relate to a retirement compensation arrangement, guarantees
of minimum work commitments and abandonment obligations in other areas. In
addition, the Company has issued guarantees as security for certain minimum
work, future dismantlement, site restoration and abandonment obligations in
lieu of letters of credit.  Talisman leases certain of
its ocean-going vessels and corporate offices, all of which, with the exception
of the leasing arrangement as described in note 9 to the Consolidated Financial
Statements, are accounted for as operating leases. In addition to the minimum
lease payments, Talisman has ongoing operating commitments associated with the
vessels. The term of the Ross Floating Production, Storage and Offloading
vessel (FPSO) lease depends on the expected life of the Ross and Blake fields.  41


Estimated Future Minimum Commitments (1)  2006
  
  2007
  
  2008
  
  2009
  
  2010
  
  Subsequent
  to 2010
  
  TotalOffice leases
  
  28
  
  26
  
  22
  
  21
  
  23
  
  87
  
  207Vessel leases (2)
  
  59
  
  14
  
  6
  
  6
  
  6
  
  33
  
  124Transportation and
  processing commitments (3)
  
  155
  
  106
  
  87
  
  71
  
  68
  
  557
  
  1,044Minimum work commitments
  
  319
  
  53
  
  
  
  19
  
  
  
  
  
  391Abandonment obligations
  
  40
  
  28
  
  28
  
  16
  
  18
  
  2,984
  
  3,114Other service contracts (4)
  
  311
  
  364
  
  226
  
  93
  
  23
  
  26
  
  1,043Total
  
  912
  
  591
  
  369
  
  226
  
  138
  
  3,687
  
  5,923  
 (1)Future minimum payments denominated in foreign
currencies have been translated into Canadian dollars based on the December 31,
2005 exchange rate.  (2)Includes the future minimum lease payments of the FSO
under capital lease.  (3)Certain of the Companys transportation commitments
are tied to firm gas sales contracts.  (4)Other service contracts consist primarily of
drilling rig commitments to meet a portion of the Companys future drilling
requirements.  During 2004, the Company
signed a long-term contract to sell 810 bcf of Corridor natural gas to West
Java, over a 17-year period with gas sales commencing in 2007, at a price of
US$1.91/mcf, with no associated transportation costs. The Company anticipates
having sufficient production to meet all future delivery commitments.  Talisman has firm commitments
for gathering, processing and transportation services that require the Company
to pay tariffs to third parties for processing or shipment of certain minimum
quantities of crude oil and liquids and natural gas. The Company anticipates
having sufficient production to meet these commitments.  The Company has also entered
into sales contracts for a portion of its future North American natural gas
production. The following are the average volumes under contract and the
weighted-average contract price in each of the years shown. The company has
sufficient future production to meet these fixed price sales contracts as the
volumes represent less than 2% of the anticipated future North American
production.  Natural Gas
(North America)  Fixed price sales
  
  2006
  
  2007
  
  2008
  
  2009
  
  2010
  
  2011Volumes
  (mcf/d)
  
  14,650
  
  12,208
  
  3,552
  
  3,552
  
  3,552
  
  3,552Weighted-average
  price ($/mcf)
  
  3.82
  
  3.96
  
  3.31
  
  3.41
  
  3.51
  
  3.62  13. OTHER REVENUE  Years
  ended December 31
  
  2005
  
  2004
  
  2003Pipeline and custom treating tariffs
  
  141
  
  73
  
  63Investment income
  
  14
  
  9
  
  9Marketing income
  
  10
  
  3
  
  4165
  
  85
  
  76  14. OTHER EXPENSES  Years
  ended December 31
  
  2005
  
  2004
  
  2003Net (gain) loss on asset disposals
  
  (3
  )
  30
  
  (14
  )Foreign exchange (gain) loss
  
  (7
  )
  30
  
  7Property impairments
  
  31
  
  31
  
  30Gain on derivatives settlement
  
  
  
  (15
  )
  Other expense (income)
  
  18
  
  13
  
  (7
  )39
  
  89
  
  16   42


15. TAXES  Income Taxes The current and future income taxes for each of the three years ended December 31
are as follows:  2005
  
  2004
  
  2003(restated) (1)
  
  (restated) (1)Current
  income taxesNorth
  America (2)
  
  95
  
  43
  
  21North Sea
  
  558
  
  266
  
  99Southeast
  Asia and Australia
  
  291
  
  134
  
  84North Africa
  
  47
  
  33
  
  Trinidad and
  Tobago
  
  64
  
  
  
  Sudan
  
  
  
  
  
  17Other
  
  3
  
  2
  
  81,058
  
  478
  
  229Future
  income taxes (recovery)North
  America
  
  160
  
  (64
  )
  (52
  )North Sea
  
  72
  
  (28
  )
  23Southeast
  Asia and Australia
  
  (34
  )
  9
  
  (13
  )North Africa
  
  8
  
  8
  
  4Trinidad and
  Tobago
  
  2
  
  (1
  )
  (10
  )Sudan
  
  
  
  
  
  9Other
  
  (32
  )
  (35
  )
  (14
  )176
  
  (111
  )
  (53
  )Income taxes
  
  1,234
  
  367
  
  176  
 (1)Prior years have been retroactively restated
to reflect the retroactive adoption of the change in accounting policy for
Preferred Securities. See note 2 for details. (2)Current North America income taxes include the
Canadian federal tax on large corporations, net of Alberta royalty tax credits.  The components of the net future tax liability at December 31 are
as follows:  2005
  
  2004Future tax
  liabilitiesProperty,
  plant and equipment
  
  4,156
  
  2,531Pension
  assets
  
  19
  
  21Other
  
  169
  
  1464,344
  
  2,698Future tax
  assetsProvision
  for asset retirement obligations
  
  578
  
  517Other
  
  128
  
  81706
  
  598Net future
  tax liability
  
  3,638
  
  2,100  Future distribution taxes
associated with operations in the UK have not been recorded because, based on
current plans, repatriation of funds in excess of foreign reinvestment will not
result in material amounts of tax expense. Unremitted earnings in other foreign
jurisdictions are not material.  Income taxes vary from the
amount that would be computed by applying the Canadian statutory income tax
rate of 34.13% for the year ended December 31, 2005 (2004  34.13%; 2003 
35.36%) as follows:  Years ended December 31
  
  2005
  
  2004
  
  2003(restated) (1)
  
  (restated) (1)Income taxes calculated at
  the Canadian statutory rate
  
  1,018
  
  392
  
  449Increase (decrease) in
  income taxes resulting from:Non-deductible royalties,
  mineral taxes and expenses
  
  84
  
  104
  
  158Resource allowances
  
  (63
  )
  (84
  )
  (122
  )Change in statutory tax
  rates
  
  
  
  (50
  )
  (160
  )Non-taxable expense
  (income)
  
  22
  
  17
  
  (80
  )Deductible PRT expense
  
  (27
  )
  (43
  )
  (32
  )Higher (lower) foreign tax
  rates (net)
  
  173
  
  26
  
  (2
  )Provincial rebates and
  credits
  
  (7
  )
  1
  
  (12
  )Federal tax on large
  corporations
  
  9
  
  9
  
  10Other
  
  25
  
  (5
  )
  (33
  )Income taxes
  
  1,234
  
  367
  
  176  
 (1)Prior years have been retroactively restated
to reflect the retroactive adoption of the change in accounting policy for
Preferred Securities. See note 2 for details.  43


Petroleum Revenue
Taxes  Petroleum Revenue Tax (PRT)
expense primarily relates to the UK and is comprised of current tax expense of
$150 million (2004  $124 million; 2003  $72 million) and deferred tax expense
of $39 million (2004  $5 million; 2003  $20 million). The measurement of PRT
expense and the related provision in the Consolidated Financial Statements is
subject to uncertainty associated with future recovery of oil and gas reserves,
commodity prices and the timing of future events, which could result in material
changes to deferred amounts.  16.
CONSOLIDATED STATEMENTS OF CASH FLOWS  Selected cash flow
information:  Years ended December 31
  
  2005
  
  2004
  
  2003(restated) (1)
  
  (restated) (1)Net income
  
  1,561
  
  654
  
  976Items not involving cashDepreciation, depletion and
  amortization
  
  1,843
  
  1,650
  
  1,435Property impairments
  
  31
  
  31
  
  30Dry hole
  
  241
  
  311
  
  251Net (gain) loss on asset
  disposals
  
  (3
  )
  30
  
  (14
  )Gain on sale of Sudan
  operations
  
  
  
  
  
  (296
  )Stock-based compensation
  
  480
  
  89
  
  138Future taxes and deferred
  petroleum revenue tax (recovery)
  
  215
  
  (106
  )
  (33
  )Other
  
  29
  
  19
  
  (9
  )2,836
  
  2,024
  
  1,502Exploration
  
  275
  
  238
  
  2134,672
  
  2,916
  
  2,691Deferred gain on unwound
  hedges
  
  
  
  
  
  (9
  )Changes in non-cash working
  capital
  
  199
  
  203
  
  (128
  )Cash provided by operating
  activities
  
  4,871
  
  3,119
  
  2,554Cash interest paid (net of
  capitalized interest)
  
  171
  
  165
  
  177Cash income taxes paid
  
  757
  
  289
  
  168  
 (1)Prior
years have been retroactively restated to reflect the retroactive adoption of
the change in accounting policy for Preferred Securities. See note 2 for
details. Changes in operating non-cash
working capital consisted of the following:  Years ended December 31
  
  2005
  
  2004
  
  2003Accounts receivable
  
  (175
  )
  (72
  )
  (32
  )Inventories
  
  (64
  )
  19
  
  32Prepaid expenses
  
  (2
  )
  
  
  4Asset retirement
  obligations expenditures
  
  (32
  )
  (29
  )
  (24
  )Accounts payable and
  accrued liabilities
  
  254
  
  103
  
  (63
  )Income and other taxes
  payable
  
  218
  
  182
  
  (45
  )Net source (use) of cash
  
  199
  
  203
  
  (128
  )  17. NET INCOME AND DILUTED NET INCOME PER SHARE  The
following table summarizes the calculation of basic net income and diluted net
income per share.  2005
  
  2004
  
  2003(restated) (1)
  
  (restated) (1)Net income available to
  common shareholders
  
  1,561
  
  654
  
  976Weighted-average number of
  common shares outstanding (millions)  basic
  
  368
  
  383
  
  386Dilution effect of stock
  options (millions)
  
  9
  
  7
  
  5Weighted-average number of
  commons shares outstanding (millions)  diluted
  
  377
  
  390
  
  391Net income per share
  ($/share)Basic
  
  4.24
  
  1.71
  
  2.53Diluted
  
  4.14
  
  1.68
  
  2.50  
 (1)Prior
years have been retroactively restated to reflect the adoption of the change in
accounting policy for Preferred Securities. See note 2 for details.  Outstanding stock options are
the only instruments that are currently dilutive to earnings per share. For
2005, 1,796,624 stock options that were antidilutive have been excluded from
the computation of diluted earnings per share (2004  29,100; 2003 
3,504,630).  44


18. EMPLOYEE
BENEFITS  The Company sponsors both
defined benefit and defined contribution pension arrangements covering
substantially all employees. Defined benefit pension plans are based on years
of service and final average salary. The defined pension benefits in the UK and
Norway, which account for 30% of the accrued benefit obligation as at December 31,
2005, will increase at the rate of inflation. Although the Company has no
commitment to provide for increases related to inflation on the remainder of
its defined benefit pension plans, the benefits have increased annually by one-half
of the rate of inflation.  The Company uses actuarial
reports prepared by independent actuaries for funding and accounting purposes.
The Company uses a December 31 measurement date for the majority of its
defined benefit pension plans. The most recent actuarial valuation of the
benefit plans for funding purposes was as of December 31, 2004, with the
next valuation as of December 31, 2005, planned for the second quarter of
2006. The following significant actuarial assumptions were employed to determine
the periodic pension expense and the accrued benefit obligations:  2005
  
  2004
  
  2003Accrued
  benefit obligationDiscount
  rate (%)
  
  4.9
  
  5.6
  
  6.1Rate of
  compensation increase (%)
  
  4.3
  
  4.3
  
  4.5Benefit
  expenseDiscount
  rate (%)
  
  5.6
  
  5.9
  
  6.4Expected
  long-term rate of return on plan assets (%)
  
  7.0
  
  7.0
  
  7.5Assumed
  health care cost trend ratesInitial
  health care cost trend rate (%)
  
  10.0
  
  10.0
  
  10.0Health care
  cost trend rate declines to (%)
  
  5.0
  
  5.0
  
  5.0Year that
  the cost trend rate reaches final rate
  
  2018
  
  2018
  
  2018  The Companys net benefit plan expense is as follows:  2005
  
  2004
  
  2003Current
  service cost  defined benefit
  
  10
  
  10
  
  7Current
  service cost  defined contribution
  
  8
  
  8
  
  7Interest
  cost
  
  10
  
  10
  
  8Plan
  amendments
  
  
  
  3
  
  Actual
  return on plan assets
  
  (16
  )
  (17
  )
  (17
  )Actuarial
  loss on accrued benefit obligation
  
  19
  
  6
  
  15Costs
  arising in the period
  
  31
  
  20
  
  20Differences
  between costs arising in the period and net benefit plan expenseReturn on
  plan assets
  
  4
  
  6
  
  8Plan
  amendments
  
  
  
  (3
  )
  Actuarial
  (gain) loss
  
  (14
  )
  7
  
  (13
  )Amortization
  of net transitional asset
  
  (2
  )
  (2
  )
  (1
  )Net
  benefit plan expense
  
  19
  
  28
  
  14   45


Information about the Companys defined pension benefit plans is as
follows:  2005
  Pension plans grouped
  by funded status
  
  2004
  Pension plans grouped
  by funded statusSurplus
  
  Deficit (1)
  
  Surplus
  
  Deficit (1)Accrued
  benefit obligationAccrued
  benefit obligation, beginning of year (2)
  
  95
  
  80
  
  93
  
  47Current
  service cost
  
  6
  
  4
  
  6
  
  4Interest
  cost
  
  5
  
  5
  
  6
  
  4Actuarial
  losses (gains)
  
  10
  
  9
  
  (2
  )
  8Plan
  participants contributions
  
  1
  
  
  
  1
  
  Benefits
  paid
  
  (3
  )
  (2
  )
  (4
  )
  (1
  )Plan
  amendments
  
  
  
  
  
  
  
  3Other
  
  
  
  (1
  )
  
  
  10Accrued
  benefit obligation, end of year (2)
  
  114
  
  95
  
  100
  
  75Plan
  assetsFair value
  of plan assets, beginning of year (2)
  
  152
  
  29
  
  136
  
  10Actual gain
  on plan assets
  
  16
  
  1
  
  16
  
  2Employer
  contributions
  
  6
  
  4
  
  17
  
  4Plan
  participants contributions
  
  1
  
  
  
  1
  
  Surplus
  applied to defined contribution plan
  
  (8
  )
  
  
  (8
  )
  Benefits
  paid
  
  (3
  )
  (2
  )
  (4
  )
  (1
  )Expenses
  
  (1
  )
  
  
  (1
  )
  Other
  
  
  
  (3
  )
  
  
  9Fair value
  of plan assets, end of year (2)
  
  163
  
  29
  
  157
  
  24Funded
  status  surplus (deficit) (3)
  
  49
  
  (66
  )
  57
  
  (51
  )Unamortized
  net actuarial losses
  
  14
  
  30
  
  12
  
  17Unamortized
  prior service cost
  
  
  
  3
  
  
  
  5Unamortized
  net transitional (asset) obligation
  
  (6
  )
  3
  
  (8
  )
  4Net accrued
  benefit asset (liability)
  
  57
  
  (30
  )
  61
  
  (25
  )  
 (1)The
net accrued benefit liability for pension plans with a deficit funding status
is included in other long-term obligations on the Consolidated Balance Sheet. (2)During
2005, the executive pension plan changed from a surplus to a deficit status. As
a result, the 2005 opening balances have been adjusted to give effect to this
reclassification as follows: accrued benefit obligation increased by $5 million
and fair value of plan assets increased by $5 million. At December 31,
2004, the plan was in a surplus status and, accordingly, the 2004 balances have
not been reclassified. (3)The
funding deficit on the retirement compensation agreement is secured by letters
of credit.  The net benefit plan expense of $19 million
for the year ended December 31, 2005 (2004  $28 million; 2003  $14 million)
is determined by using actuarial assumptions including expected return on plan
assets and includes the amortization of net actuarial losses and net
transitional assets and obligations as described in note 1(j).  The composition of the plan assets as a percentage of fair value is as
follows:  2005
  
  2004
  
  2003Equity
  securities (%)
  
  76
  
  76
  
  70Fixed income
  (%)
  
  24
  
  23
  
  30Cash (%)
  
  
  
  1
  
  100
  
  100
  
  100  The approximate target allocation percentage for the
Canadian employee and executive plans that account for 58% of total plan assets
is 70% equities, 30% bonds and expected return on assets is 8.2% equities and
4.8% bonds. The Companys plan assets do not include any common shares of
Talisman.  The projected
future benefit payments are as follows:  2006
  
  2007
  
  2008
  
  2009
  
  2010
  
  2011  20156
  
  7
  
  7
  
  8
  
  8
  
  52  At December 31, 2005, the actuarial net present value of the
accrued benefit obligation for other post-retirement benefit plans was $13
million (2004  $12 million; 2003  $8 million). The other post-retirement
benefit plans provide medical, dental and life benefits for active and retired
employees. The effect of a one-percentage point change in the assumed health
care cost trend rates on accrued benefit obligations and benefit costs would be
immaterial.  46


19. SALE OF
SUDAN OPERATIONS  On March 12, 2003, the
Company completed the sale of its 25% indirectly held interest in the Greater
Nile Oil Project in Sudan. Total gross proceeds were $1.13 billion (US$771
million), including interest and cash received by Talisman during the interim
period between September 1, 2002 and closing on March 12, 2003. The
gain on sale is as follows:  Gross proceeds on sale of Sudan operations (US$ 771 million)
  
  1,135Less interim
  adjustments
  
  (123
  )1,012Property,
  plant and equipment
  
  687Working
  capital and other assets
  
  72Future
  income tax liability
  
  (59
  )Net carrying
  value at March 12, 2003
  
  700Closing
  costs
  
  16Gain on
  disposal
  
  296  20.
SEGMENTED INFORMATION  Talismans activities are
conducted in six geographic segments: North America, the North Sea, Southeast
Asia and Australia, North Africa, Trinidad and Tobago and other international
locations.  The Sudan operations were
sold in 2003.  North America includes
operations in Canada and the US. The North Sea includes operations in the
United Kingdom, the Netherlands, Norway and Denmark. The Southeast Asia and
Australia segment includes operations in Indonesia, Malaysia, Vietnam and
Australia. The North Africa segment includes operations in Algeria and Tunisia.
All activities relate to the exploration, development, production and
transportation of oil, liquids and natural gas.  47


North America (2)
  
  North Sea (3)
  
  Southeast Asia and Australia (4)
  
  North Africa (5)2005
  
  2004
  
  2003
  
  2005
  
  2004
  
  2003
  
  2005
  
  2004
  
  2003
  
  2005
  
  2004
  
  2003RevenueGross salesOil and liquids
  
  1,029
  
  838
  
  744
  
  3,049
  
  2,154
  
  1,639
  
  865
  
  669
  
  369
  
  349
  
  254
  
  94Natural gas
  
  3,021
  
  2,213
  
  2,073
  
  271
  
  231
  
  190
  
  662
  
  451
  
  244
  
  
  
  
  
  Synthetic oil
  
  69
  
  57
  
  42
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Sulphur
  
  10
  
  7
  
  6
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Total gross sales
  
  4,129
  
  3,115
  
  2,865
  
  3,320
  
  2,385
  
  1,829
  
  1,527
  
  1,120
  
  613
  
  349
  
  254
  
  94Hedging
  
  78
  
  151
  
  85
  
  (1
  )
  329
  
  83
  
  
  
  
  
  21
  
  
  
  
  
  5Royalties
  
  816
  
  599
  
  587
  
  56
  
  37
  
  8
  
  553
  
  391
  
  156
  
  135
  
  97
  
  46Net sales
  
  3,235
  
  2,365
  
  2,193
  
  3,265
  
  2,019
  
  1,738
  
  974
  
  729
  
  436
  
  214
  
  157
  
  43Other
  
  76
  
  62
  
  54
  
  88
  
  23
  
  23
  
  1
  
  
  
  
  
  
  
  
  
  Total revenue
  
  3,311
  
  2,427
  
  2,247
  
  3,353
  
  2,042
  
  1,761
  
  975
  
  729
  
  436
  
  214
  
  157
  
  43Segmented expensesOperatingOil and liquids
  
  142
  
  135
  
  131
  
  808
  
  627
  
  498
  
  56
  
  73
  
  64
  
  24
  
  17
  
  12Natural gas
  
  300
  
  257
  
  237
  
  36
  
  23
  
  14
  
  31
  
  25
  
  22
  
  
  
  
  
  Synthetic oil
  
  30
  
  23
  
  22
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Pipeline
  
  6
  
  6
  
  5
  
  15
  
  12
  
  16
  
  
  
  
  
  
  
  
  
  
  
  Total operating expenses
  
  478
  
  421
  
  395
  
  859
  
  662
  
  528
  
  87
  
  98
  
  86
  
  24
  
  17
  
  12Transportation
  
  75
  
  75
  
  78
  
  79
  
  66
  
  63
  
  43
  
  42
  
  36
  
  9
  
  9
  
  4DD&A
  
  946
  
  785
  
  688
  
  670
  
  661
  
  616
  
  144
  
  174
  
  95
  
  36
  
  30
  
  17Dry hole
  
  122
  
  128
  
  135
  
  53
  
  109
  
  69
  
  11
  
  25
  
  9
  
  
  
  4
  
  1Exploration
  
  128
  
  123
  
  87
  
  53
  
  28
  
  21
  
  40
  
  20
  
  17
  
  
  
  
  
  Other
  
  (10
  )
  18
  
  (28
  )
  54
  
  30
  
  26
  
  1
  
  (9
  )
  9
  
  
  
  
  
  Total segmented expenses
  
  1,739
  
  1,550
  
  1,355
  
  1,768
  
  1,556
  
  1,323
  
  326
  
  350
  
  252
  
  69
  
  60
  
  34Segmented income (loss) before taxes
  
  1,572
  
  877
  
  892
  
  1,585
  
  486
  
  438
  
  649
  
  379
  
  184
  
  145
  
  97
  
  9Non-segmented expensesGeneral and administrativeInterest on long-term debtGain on sale of Sudan operationsStock-based compensationCurrency translationTotal non-segmented expensesIncome before taxesCapital expendituresExploration
  
  658
  
  590
  
  453
  
  165
  
  150
  
  99
  
  74
  
  54
  
  70
  
  2
  
  
  
  4Development
  
  879
  
  821
  
  629
  
  867
  
  357
  
  397
  
  231
  
  201
  
  246
  
  25
  
  8
  
  30Midstream
  
  72
  
  41
  
  27
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Exploration and development
  
  1,609
  
  1,452
  
  1,109
  
  1,032
  
  507
  
  496
  
  305
  
  255
  
  316
  
  27
  
  8
  
  34Property acquisitions (1)Midstream acquisitionsProceeds on dispositionsOther non-segmentedNet capital expendituresProperty, plant and equipment
  
  6,985
  
  6,214
  
  5,767
  
  6,072
  
  3,074
  
  2,995
  
  1,465
  
  1,050
  
  1,084
  
  177
  
  178
  
  202Goodwill
  
  291
  
  291
  
  291
  
  1,086
  
  75
  
  74
  
  123
  
  100
  
  108
  
  4
  
  
  
  Other
  
  663
  
  419
  
  403
  
  614
  
  347
  
  386
  
  348
  
  221
  
  217
  
  43
  
  36
  
  27Segmented assets
  
  7,939
  
  6,924
  
  6,461
  
  7,772
  
  3,496
  
  3,455
  
  1,936
  
  1,371
  
  1,409
  
  224
  
  214
  
  229Non-segmented assetsTotal assets  
 (1) Excluding corporate acquisitions.  (2) North America  2005
  
  2004
  
  2003Revenues
  
  Canada
  
  2,965
  
  2,199
  
  2,095US
  
  346
  
  228
  
  1523,311
  
  2,427
  
  2,247Property,
  plant and equipment
  
  Canada
  
  6,551
  
  5,738
  
  5,356US
  
  434
  
  476
  
  4116,985
  
  6,214
  
  5,767  (3) North Sea  2005
  
  2004
  
  2003Revenues
  
  United Kingdom
  
  2,683
  
  1,897
  
  1,699Netherlands
  
  56
  
  36
  
  26Norway
  
  604
  
  109
  
  36Denmark
  
  10
  
  
  
  3,353
  
  2,042
  
  1,761Property,
  plant and equipment
  
  United Kingdom
  
  4,620
  
  2,858
  
  2,777Netherlands
  
  45
  
  41
  
  40Norway
  
  1,149
  
  175
  
  178Denmark
  
  258
  
  
  
  6,072
  
  3,074
  
  2,995  48


Trinidad and Tobago
  
  Sudan
  
  Other
  
  Total2005
  
  2004
  
  2003
  
  2005
  
  2004
  
  2003
  
  2005
  
  2004
  
  2003
  
  2005
  
  2004
  
  2003RevenueGross salesOil and liquids
  
  229
  
  
  
  
  
  
  
  
  
  209
  
  
  
  
  
  
  
  5,521
  
  3,915
  
  3,055Natural gas
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  3,954
  
  2,895
  
  2,507Synthetic oil
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  69
  
  57
  
  42Sulphur
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  10
  
  7
  
  6Total gross sales
  
  229
  
  
  
  
  
  
  
  
  
  209
  
  
  
  
  
  
  
  9,554
  
  6,874
  
  5,610Hedging
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  77
  
  480
  
  194Royalties
  
  35
  
  
  
  
  
  
  
  
  
  97
  
  
  
  
  
  
  
  1,595
  
  1,124
  
  894Net sales
  
  194
  
  
  
  
  
  
  
  
  
  112
  
  
  
  
  
  
  
  7,882
  
  5,270
  
  4,522Other
  
  
  
  
  
  
  
  
  
  
  
  (1
  )
  
  
  
  
  
  
  165
  
  85
  
  76Total revenue
  
  194
  
  
  
  
  
  
  
  
  
  111
  
  
  
  
  
  
  
  8,047
  
  5,355
  
  4,598Segmented expensesOperatingOil and liquids
  
  11
  
  
  
  
  
  
  
  
  
  18
  
  
  
  
  
  
  
  1,041
  
  852
  
  723Natural gas
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  367
  
  305
  
  273Synthetic oil
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  30
  
  23
  
  22Pipeline
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  21
  
  18
  
  21Total operating expenses
  
  11
  
  
  
  
  
  
  
  
  
  18
  
  
  
  
  
  
  
  1,459
  
  1,198
  
  1,039Transportation
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  206
  
  192
  
  181DD&A
  
  47
  
  
  
  
  
  
  
  
  
  19
  
  
  
  
  
  
  
  1,843
  
  1,650
  
  1,435Dry hole
  
  21
  
  12
  
  
  
  
  
  
  
  
  
  34
  
  33
  
  37
  
  241
  
  311
  
  251Exploration
  
  5
  
  21
  
  35
  
  
  
  
  
  5
  
  49
  
  46
  
  48
  
  275
  
  238
  
  213Other
  
  
  
  1
  
  
  
  
  
  
  
  
  
  1
  
  19
  
  2
  
  46
  
  59
  
  9Total segmented expenses
  
  84
  
  34
  
  35
  
  
  
  
  
  42
  
  84
  
  98
  
  87
  
  4,070
  
  3,648
  
  3,128Segmented income (loss) before taxes
  
  110
  
  (34
  )
  (35
  )
  
  
  
  
  69
  
  (84
  )
  (98
  )
  (87
  )
  3,977
  
  1,707
  
  1,470Non-segmented expensesGeneral and administrative
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  201
  
  183
  
  152Interest on long-term debt
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  166
  
  173
  
  178Gain on sale of Sudan operations
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  (296
  )Stock-based compensation
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  633
  
  171
  
  185Currency translation
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  (7
  )
  30
  
  7Total non-segmented expenses
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  993
  
  557
  
  226Income before taxes
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  2,984
  
  1,150
  
  1,244Capital expendituresExploration
  
  51
  
  33
  
  58
  
  
  
  
  
  7
  
  134
  
  125
  
  93
  
  1,084
  
  952
  
  784Development
  
  21
  
  158
  
  72
  
  
  
  
  
  (5
  )
  
  
  
  
  
  
  2,023
  
  1,545
  
  1,369Midstream
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  72
  
  41
  
  27Exploration and development
  
  72
  
  191
  
  130
  
  
  
  
  
  2
  
  134
  
  125
  
  93
  
  3,179
  
  2,538
  
  2,180Property acquisitions (1)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  536
  
  330
  
  638Midstream acquisitions
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  130Proceeds on dispositions
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  (22
  )
  (88
  )
  (1,112
  )Other non-segmented
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  28
  
  26
  
  38Net capital expenditures
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  3,721
  
  2,806
  
  1,874Property, plant and equipment
  
  275
  
  182
  
  137
  
  
  
  
  
  
  
  99
  
  149
  
  8
  
  15,073
  
  10,847
  
  10,193Goodwill
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  1,504
  
  466
  
  473Other
  
  24
  
  11
  
  11
  
  
  
  
  
  
  
  13
  
  
  
  7
  
  1,705
  
  1,034
  
  1,051Segmented assets
  
  299
  
  193
  
  148
  
  
  
  
  
  
  
  112
  
  149
  
  15
  
  18,282
  
  12,347
  
  11,717Non-segmented assets
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  57
  
  61
  
  63Total assets
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  18,339
  
  12,408
  
  11,780  
 (4) Southeast Asia and Australia  2005
  
  2004
  
  2003Revenues
  
  Indonesia
  
  408
  
  346
  
  340Malaysia
  
  539
  
  363
  
  85Vietnam
  
  28
  
  20
  
  11Australia
  
  
  
  
  
  975
  
  729
  
  436Property,
  plant and equipment
  
  Indonesia
  
  371
  
  327
  
  384Malaysia
  
  818
  
  701
  
  677Vietnam
  
  23
  
  22
  
  23Australia
  
  253
  
  
  
  1,465
  
  1,050
  
  1,084  (5) North Africa  2005
  
  2004
  
  2003Revenues
  
  Algeria
  
  212
  
  157
  
  43Tunisia
  
  2
  
  
  
  214
  
  157
  
  43Property,
  plant and equipment
  
  Algeria
  
  162
  
  178
  
  202Tunisia
  
  15
  
  
  
  177
  
  178
  
  202  49


21.
INFORMATION REGARDING UNITED STATES GAAP DIFFERENCES  Accounting
Principles Generally Accepted in the United States  The Consolidated Financial
Statements have been prepared in accordance with accounting principles
generally accepted in Canada (Canadian GAAP) which, in most respects, conform
to accounting principles generally accepted in the United States (US GAAP).
Significant differences between Canadian and US GAAP follows:  Net Income in Accordance with US
GAAP  Years ended December 31 (millions of Canadian dollars)
  
  Notes
  
  2005
  
  2004
  
  2003(restated) (1)
  
  (restated) (1)Net income  Canadian GAAP
  
  
  
  1,561
  
  654
  
  976Foreign exchange loss
  
  4
  
  
  
  
  
  (62
  )Depreciation, depletion and
  amortization
  
  1,2,3,7
  
  (41
  )
  (35
  )
  (19
  )(Loss) gain on derivative
  instruments
  
  4
  
  (19
  )
  85
  
  (17
  )Deferred income taxes
  
  2
  
  (6
  )
  (16
  )
  14Gain on sale of Sudan
  operations
  
  7
  
  
  
  (296
  )Interest on long-term debt
  
  4
  
  1
  
  6
  
  Results of discontinued
  operations, net of tax
  
  7
  
  
  
  
  
  (57
  )(65
  )
  40
  
  (437
  )Income
  from continuing operations
  
  
  
  1,496
  
  694
  
  539Results of discontinued
  operations, net of tax
  
  7
  
  
  
  
  
  330Income
  before cumulative effect of changes in accounting principles
  
  
  
  1,496
  
  694
  
  869Cumulative effect of
  changes in accounting principles, net of tax
  
  8
  
  
  
  
  
  53Net income
   US GAAP
  
  
  
  1,496
  
  694
  
  922Income per common share(Canadian
  dollars)BasicContinuing operations
  
  
  
  4.07
  
  1.81
  
  1.40Discontinued operations
  
  
  
  
  
  
  
  0.85Before cumulative effect of
  changes in accounting principles
  
  
  
  4.07
  
  1.81
  
  2.25Cumulative effect of
  changes in accounting principles, net of tax
  
  
  
  
  
  
  
  0.14Net income
  
  
  
  4.07
  
  1.81
  
  2.39DilutedContinuing operations
  
  
  
  3.97
  
  1.78
  
  1.38Discontinued operations
  
  
  
  
  
  
  
  0.84Before cumulative effect of
  changes in accounting principles
  
  
  
  3.97
  
  1.78
  
  2.22Cumulative effect of
  changes in accounting principles, net of tax
  
  
  
  
  
  
  
  0.14Net income
  
  
  
  3.97
  
  1.78
  
  2.36  
 (1)Prior
years have been retroactively restated to reflect the adoption of the change in
accounting policy for Preferred Securities. See note 2 for details.  Comprehensive Income in Accordance with US GAAP  Years ended December 31 (millions of
  Canadian dollars)
  
  Notes
  
  2005
  
  2004
  
  2003Net income
   US GAAP
  
  
  
  1,496
  
  694
  
  922Other comprehensive incomeForeign exchange gain on
  translation unrealized of self-sustaining operations
  
  6
  
  40
  
  288
  
  650Minimum pension liability,
  net of tax
  
  10
  
  (8
  )
  
  
  Unrealized change in fair
  value of financial instruments, net of tax
  
  4
  
  (20
  )
  (40
  )
  Comprehensive
  income  US GAAP
  
  
  
  1,508
  
  942
  
  1,572  50


Statement of Cash Flow Items in Accordance
with US GAAP follows:  Years ended December 31
  (millions of Canadian dollars)
  
  Notes
  
  2005
  
  2004
  
  2003(restated) (1)
  
  (restated) (1)OperatingCash provided by operating
  activities
  
  9
  
  4,596
  
  2,881
  
  2,341InvestingCash used in investing
  activities
  
  9
  
  (5,869
  )
  (2,519
  )
  (1,497
  )FinancingCash provided by (used in)
  financing activities
  
  
  
  1,346
  
  (401
  )
  (745
  )Effect of translation on
  foreign currency cash
  
  
  
  19
  
  (21
  )
  (28
  )Net increase (decrease) in
  cash and cash equivalents
  
  
  
  92
  
  (60
  )
  71Cash and cash equivalents
  beginning of year
  
  
  
  38
  
  98
  
  27Cash and cash equivalents
  end of year
  
  
  
  130
  
  38
  
  98  
 (1)Prior years have been retroactively restated
to reflect the adoption of the change in accounting policy for Preferred
Securities. See note 2 for details.  Balance Sheet Items in Accordance with US
GAAP follows:  2005
  
  2004December 31 (millions of Canadian dollars)
  
  Notes
  
  Canadian
  GAAP
  
  US
  GAAP
  
  Canadian
  GAAP
  
  US
  GAAP(restated) (1)Current assets
  
  
  
  1,631
  
  1,631
  
  970
  
  970Property, plant and
  equipment
  
  1-3
  
  15,073
  
  15,343
  
  10,847
  
  11,158Other non-current assets
  
  4,10
  
  1,635
  
  1,562
  
  591
  
  52118,339
  
  18,536
  
  12,408
  
  12,649Current liabilities
  
  
  
  3,032
  
  3,032
  
  1,643
  
  1,643Long-term debt
  
  
  
  4,263
  
  4,263
  
  2,457
  
  2,457Future income taxes
  
  2
  
  3,638
  
  3,574
  
  2,100
  
  2,045Other non-current
  liabilities
  
  4,10
  
  1,611
  
  1,616
  
  1,377
  
  1,36612,544
  
  12,485
  
  7,577
  
  7,511Non-controlling interest
  
  
  
  66
  
  66
  
  
  
  Shareholders equityCommon shares
  
  
  
  2,609
  
  2,609
  
  2,666
  
  2,666Contributed surplus
  
  5
  
  69
  
  86
  
  71
  
  88Cumulative foreign currency
  translation
  
  4,6
  
  (265
  )
  (1,397
  )
  (76
  )
  (1,169
  )Accumulative other
  comprehensive income
  
  4,6,10
  
  
  
  1,121
  
  
  
  1,068Retained earnings
  
  1-7
  
  3,316
  
  3,566
  
  2,170
  
  2,485Total liabilities and
  shareholders equity
  
  
  
  18,339
  
  18,536
  
  12,408
  
  12,649  
 (1)Prior years have been retroactively restated
to reflect the adoption of the change in accounting policy for Preferred Securities.
See note 2 for details.  21.1 Gains
on Property ExchangesUnder
both US and Canadian GAAP, property exchanges are recorded at the carrying
value of the assets given up unless the exchange transaction includes
significant cash consideration, in which case it is recorded at fair value.
Under US GAAP, asset exchange transactions are recorded at fair value if cash
consideration is greater than 25% (10% under Canadian GAAP) of the fair value
of total consideration given or received. The resulting differences in the
recorded carrying values of these properties result in differences in
depreciation, depletion and amortization expense in subsequent years. During
2005, the Company early adopted the new standards for Canadian GAAP which were
effective January 1, 2006, to coincide with the new US standards, as
effective in the third quarter of 2005. The new standard will eliminate this US
GAAP difference on a go forward basis. There was no impact in 2005.  21.2 Income
Taxes and Depreciation, Depletion and Amortization ExpenseIn 2000, the Company adopted the liability
method to account for income taxes. The change to the liability method has
eliminated a difference between Canadian and US GAAP, however, in accordance
with the recommendations of the CICA, the effect of the adoption under Canadian
GAAP resulted in a charge to retained earnings, whereas, under US GAAP, the
future tax costs that gave rise to the Canadian GAAP adjustment have already
been reflected in property, plant and equipment. As a result of the implementation
method, further differences in depreciation, depletion and amortization expense
result in subsequent years. Other adjustments to the Canadian GAAP net income
required under US GAAP, as disclosed in this note, have been tax effected as
necessary.  21.3
ImpairmentsIn 2004,
the Company adopted a new standard that eliminated a US GAAP reconciling item
in respect to impairments on a go forward basis. Under both US and Canadian
GAAP, property, plant and equipment must be assessed for potential impairments.
Under US GAAP, and effective in 2004 Canadian GAAP as disclosed in note 1(c),
if the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, then an impairment loss
(the amount by which the carrying amount of the asset exceeds the fair value of
the asset) should be recognized. Fair value is calculated as the present value
of estimated expected future cash flows. Prior to 2004, under Canadian GAAP,
the impairment loss was the difference between the carrying value of the asset
and its net recoverable amount (undiscounted). Previous impairment charges not
required under Canadian GAAP have resulted in differences in depreciation,
depletion and amortization expense in subsequent years.  51


21.4 Forward
Foreign Exchange Contracts and Other Financial InstrumentsThe Company has designated, for Canadian GAAP
purposes, its derivative financial instruments as hedges, as described in note
11. In accordance with Canadian GAAP, payments or receipts on these contracts
are recognized in income concurrently with the hedged transaction. The fair
values of the contracts deemed to be hedges are not reflected in the
Consolidated Financial Statements.  Effective January 1,
2001, for US GAAP purposes, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, as amended, Accounting for Derivative
Instruments and Hedging Activities. Effective with the adoption of this
standard, every derivative instrument, including certain derivative instruments
embedded in other contracts, is recognized on the balance sheet at fair value.
The statement requires that changes in the derivative instruments fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met.  Prior to January 1,
2004, management had not designated any of the currently held derivative
instruments as hedges for US GAAP purposes and, accordingly, these derivatives
were recognized on the balance sheet at their fair value with the change in
their fair value recognized in earnings. Subsequent to January 1, 2004,
management has designated its commodity derivative financial instruments as
hedges for US GAAP purposes and, accordingly, the changes in their fair value
are now recognized in other comprehensive income (OCI) with any ineffective
portion recognized in earnings. The ineffective portion was not significant in
2005 (2004  $1 million). In 2005 the change in the fair value of derivative
financial instruments decreased OCI by $20 million, net of income tax of $10
million. For fair value hedges, such as cross currency and interest rate swaps,
both the derivative instrument and the underlying commitment are recognized on
the balance sheet at their fair value. The change in fair value of both is
reflected in income.  21.5
Appropriation of Contributed SurplusIn 1992, concurrent with a change in control of the Company, $17 million
of contributed surplus was appropriated to retained earnings to eliminate the
deficit at June 30, 1992. This restatement of retained earnings is not
permitted under US GAAP as the events that precipitated it did not constitute a
quasi-reorganization.  21.6 Foreign
Exchange Gains and Losses on Translation of Self-sustaining Foreign OperationsUnder US GAAP, foreign exchange gains and
losses on translation of self-sustaining foreign operations are added to or
deducted from net income, net of tax, in determining comprehensive income.
Under Canadian GAAP, such gains and losses are included as a separate component
of shareholders equity referred to as cumulative translation adjustment.  21.7
Discontinued OperationsUnder
US GAAP, effective November 1, 2002, the Sudan assets were classified as
Assets Held For Sale with the Sudan operating results, net of tax, classified
on the Statement of Income as results of operations held for sale. No
depreciation, depletion or amortization has been recorded commencing November 1,
2002 related to these assets. The sale closed March 12, 2003.  21.8 Asset
Retirement ObligationsEffective
January 1, 2003, for US GAAP purposes, and January 1, 2004, for
Canadian GAAP purposes, the Company adopted SFAS No. 143 and CICA 3110,
respectively, which changes the method of accruing for costs associated with
the retirement of fixed assets which an entity is legally obligated to incur.
These standards require entities to record the fair value of a liability for an
asset retirement obligation in the period it is incurred with a corresponding
increase in the carrying amount of the related long-lived asset. The adoption
of the new standard in Canada in 2004 eliminated a US GAAP reconciling item in
respect to accounting for these obligations, however, a difference is created
in how the transition amounts are recorded.  US GAAP requires the
cumulative impact of a change in an accounting policy to be presented in the
current year Statement of Earnings in the year of adoption, 2003, and prior
periods are not to be restated. Canadian GAAP requires retroactive restatement
of prior year financial statements.  The following table presents
the pro forma effects of the retroactive application of this change in
accounting principle. There was no pro forma effect on income from discontinued
operations.  2005
  
  2004
  
  2003Pro forma
  net income (1)
  
  1,496
  
  694
  
  869Pro forma
  per common shareBasic
  
  4.07
  
  1.81
  
  2.25Diluted
  
  3.97
  
  1.78
  
  2.22  
 (1)Pro forma net income for 2003 has been
adjusted to remove the $53 million cumulative effect of a change in accounting
principle attributable to SFAS No. 143.  21.9 Cash
Provided by Operating Activities PresentationUnder US GAAP, exploration expense is treated
as an operating item.  21.10
Additional minimum benefit obligation Under US GAAP, the amount by which the accumulated benefit obligation
exceeds the fair value of the plan assets, must be recognized as an additional
minimum liability. In addition, an intangible asset is recognized equal to the
lesser of the additional minimum liability and the unrecognized prior service
costs. The excess of the additional minimum liability over the unrecognized
prior service costs is reported in comprehensive income, net of tax. As a
result, other non-current liabilities are higher by $16 million and other
assets are higher by $4 million. In 2005, OCI decreased by $8 million net of $4
million of income tax.  52


Newly Issued
US Accounting Standards  Share-based
Payments  The Financial Accounting
Standards Board (FASB) issued a revised Statement No. 123, Share-based
Payment. FAS 123(R) establishes a standard for the accounting for transactions
in which an entity exchanges its equity instruments for goods or services. FAS
123(R) requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award 
usually the vesting period. FAS 123(R) eliminates the alternative to use the
intrinsic value method of accounting that was provided in Statement 123 as
originally issued. The Company will continue to record expense in its
Consolidated Financial Statements as described in note 1(n) but in addition to
those expense items there will be a need for an additional expense amount,
under the FAS 123(R), relating to the fair value of the options as at the grant
date. The impact of this additional expense amount on the Companys financial
position, operating results or cash flow is uncertain given the volatility of
the assumptions needed to determine the new fair value amount. FAS 123(R) is
effective for public companies as of the beginning of 2006.  Conditional
Asset Retirement Obligations  During 2005, the FASB issued
Financial Interpretation 47, Accounting for Conditional Asset Retirement
Obligations (FIN 47). FIN 47 clarifies that the term conditional asset
retirement obligations as used in the FASB Statement No. 143, Accounting
for Asset Retirement Obligations, refers to a legal obligation to perform an
asset retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing and (or) method
of settlement. Thus, the timing and (or) method of settlement may be
conditional on a future event. Accordingly, an entity is required to recognize
a liability for the fair value of a conditional asset retirement obligation if
the fair value of the liability can be reasonably estimated. FIN 47 also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 is effective
no later than the end of fiscal years ending after December 15, 2005. The
adoption of this statement has not had a material impact on the Companys
results of operations or financial position.  Accounting
Changes and Error Corrections  In June 2005, the FASB
issued Statement 154, Accounting Changes and Error Corrections which replaces
APB Opinion 20 and FASB Statement 3. Statement 154 changes the requirements for
the accounting and reporting of a change in accounting principle. Opinion 20
previously required that most voluntary changes in accounting principles be
recognized by including the cumulative effect of the new accounting principle
in net income of the period of the change. In the absence of explicit
transition provisions provided for in new or existing accounting
pronouncements, Statement 154 now requires retrospective application of changes
in accounting principle to prior period financial statements, unless it is
impracticable to do so. The Statement is effective for fiscal years beginning
after December 15, 2005. The Company does not expect the adoption of this
statement will have a material impact on its results of operations or financial
position.  Summary US
Dollar Information  Unless otherwise noted, all
amounts in the Consolidated Financial Statements, including Accounting
Principles Generally Accepted in the United States above, are reported in
millions of Canadian dollars. The following information reflects summary
financial information prepared in accordance with US GAAP translated from
Canadian dollars to US dollars at the average exchange rate prevailing in the
respective year.  US$ million (except as noted)
  
  2005
  
  2004
  
  2003Total revenue
  
  6,642
  
  4,116
  
  3,281Net income
  
  1,235
  
  533
  
  658Net income per common share
  (US$/share)
  
  3.36
  
  1.39
  
  1.71Average exchange rate
  (US$/C$)
  
  0.8258
  
  0.7686
  
  0.7135  53


CONSOLIDATED
FINANCIAL RATIOS  The following financial
ratios are provided in connection with the Companys shelf prospectus, filed
with Canadian and US securities regulatory authorities, and are based on the
Companys Consolidated Financial Statements that are prepared in accordance
with accounting principles generally accepted in Canada.  The interest coverage ratio
is for the 12 month period ended December 31, 2005.  December 31, 2005
  (unaudited)Interest coverage (times)Income (1)
  
  16.00  
 (1)Net income plus income taxes and interest
expense; divided by the sum of interest expense and capitalized interest.  54