advisories

forward-looking statements

This Annual Report Summary contains statements that constitute forward-looking statements or forward-looking information (collectively ‘forward-looking statements’) within the meaning of applicable securities legislation.

Forward-looking statements are included throughout this Annual Report Summary, including among other places, under the headings ‘2006 Year in Review’, ‘2007 Outlook’, ‘Discussion with Dr. Jim Buckee’, ‘North America’, ‘North Sea’, ‘Southeast Asia’ and ‘Other International Areas’. These statements include, among others, statements regarding:

anticipated cash flow and cash flow per share;
estimates of future sales, production, production growth, production per share and operations or financial performance;
business plans for drilling, exploration and development;
the estimated amounts and timing of capital expenditures;
estimates of operating costs;
business strategy and plans or budgets;
outlook for oil and gas prices;
anticipated liquidity, capital resources and debt levels;
the estimated timing of and results of new development, including new production;
the anticipated schedule for completion of pipelines;
planned asset dispositions;
royalty rates and exchange rates; and
other expectations, beliefs, plans, goals, objectives, assumptions, information and statements about possible future events, conditions, results of operations or performance.

Often, but not always, forward-looking statements use words or phrases such as: ‘expects’, ‘does not expect’ or ‘is expected’, ‘anticipates’ or ‘does not anticipate’, ‘plans’ or ‘planned’, ‘estimates’ or ‘estimated’, ‘projects’ or ‘projected’, ‘forecasts’ or ‘forecasted’, ‘believes’, ‘intends’, ‘likely’, ‘possible’, ‘probable’, ‘scheduled’, ‘positioned’, ‘goal’, ‘objective’ or state that certain actions, events or results ‘may’, ‘could’, ‘would’, ‘might’ or ‘will’ be taken, occur or be achieved.

Various assumptions were used in drawing the conclusions or making the forecasts and projections contained in the forward-looking statements throughout this Annual Report Summary. Statements that discuss business plans for drilling, exploration and development in 2007 assume that the extraction of crude oil, natural gas and natural gas liquids remains economic. For the purposes of preparing this Annual Report Summary, Talisman assumed a US$65/bbl West Texas Intermediate oil price, a US$7.50/mmbtu NYMEX natural gas price, a US$/C$ exchange rate of $0.90 and a C$/£ exchange rate of $2.05 in 2007.

This Annual Report Summary also discusses anticipated cash flow (both on an aggregate and per share basis). The material assumptions used in determining estimates of cash flow are the anticipated production volumes; estimates of realized sales prices, which are, in turn, driven by benchmark prices, quality differentials and the impact of exchange rates; estimated royalty rates; estimated operating expenses; estimated transportation expenses; estimated general and administrative expenses; estimated interest expense, including the level of capitalized interest; anticipated cash payments made by the Company upon surrender of outstanding stock options using the cash payment feature, which, in turn, are dependent on the trading level of the Company’s common shares and the number of stock options surrendered or exercised; and the anticipated amount of cash income tax and petroleum revenue tax.

Forecast production volumes are based on the midpoint of the estimated production range. Statements regarding estimated future production and production growth, as well as estimated financial results that are derived from or depend upon future production estimates (such as cash flow and cash provided by operating activities), incorporate the estimated impact of the sale of the Company’s indirect Syncrude interest which was completed on January 2, 2007, the anticipated completion of the UK Brae asset sale and the non-core asset disposition program in Canada. The completion of any contemplated asset acquisitions or dispositions is contingent on various factors, including favourable market conditions, the ability of the Company to negotiate acceptable terms of sale and receipt of any required approvals for such dispositions. The amount of taxes and cash payments made upon surrender of existing stock options is inherently difficult to predict.

Forward-looking statements are based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated by Talisman and described in the forward-looking statements. These risks and uncertainties include:

the risks of the oil and gas industry, such as operational risks in exploring for, developing and producing crude oil and natural gas, and market demand, including unpredictable facilities outages;
risks and uncertainties involving geology of oil and gas deposits;
the uncertainty of reserves estimates and reserves life and underlying reservoir risk;
the uncertainty of estimates and projections relating to production, costs and expenses;
potential delays or changes in plans with respect to exploration or development projects or capital expenditures;
fluctuations in oil and gas prices, foreign currency exchange rates and interest rates;
the outcome and effects of completed acquisitions, as well as any future acquisitions and dispositions;
the ability of the Company to integrate any assets it has acquired or may acquire or the performance of those assets;
health, safety and environmental risks;
uncertainties as to the availability and cost of financing and changes in capital markets;
uncertainties related to the litigation process, such as possible discovery of new evidence or acceptance of novel legal theories and difficulties in predicting the decisions of judges and juries;
risks in conducting foreign operations (for example, political and fiscal instability or the possibility of civil unrest or military action);
competitive actions of other companies, including increased competition from other oil and gas companies and companies providing alternative sources of energy;
changes in general economic and business conditions;
the effect of acts of, or actions against, international terrorism;
the possibility that government policies or laws may change or governmental approvals may be delayed or withheld;
results of the Company’s risk mitigation strategies, including insurance and any hedging programs; and
the Company’s ability to implement its business strategy.

We caution that the foregoing list of risks and uncertainties is not exhaustive. Additional information on these and other factors that could affect the Company’s operations or financial results are included: (1) under the heading ‘Risk Factors’ in the Company’s Annual Information Form; and (2) under the headings ‘Risk Factors’, ‘Segmented Results Review of Continuing Operations’ and ‘Sensitivities’ in the Management’s Discussion and Analysis and elsewhere in the Company’s 2006 Annual Financial Report. Additional information may also be found in the Company’s other reports on file with Canadian securities regulatory authorities and the US Securities and Exchange Commission (SEC).

Forward-looking statements are based on the estimates and opinions of the Company’s management at the time the statements are made. The Company assumes no obligation to update forward-looking statements should circumstances or management’s estimates or opinions change, except as required by law.

reserves data and other oil and gas information

Talisman’s disclosure of reserves data and other oil and gas information is made in reliance on an exemption granted to Talisman by Canadian securities regulatory authorities, which permits Talisman to provide disclosure in accordance with US disclosure requirements. The information provided by Talisman may differ from the corresponding information prepared in accordance with Canadian disclosure standards under National Instrument 51-101 (NI 51-101). Talisman’s proved reserves have been calculated using the standards contained in Regulation S-X of the SEC. US practice is to disclose net proved reserves after deduction of estimated royalty burdens, including net profits interests. Talisman makes additional voluntary disclosure of gross proved reserves. Probable reserves, which Talisman also discloses voluntarily, have been

calculated using the definition of probable reserves set out by the Society of Petroleum Engineers/World Petroleum Congress (‘SFE/WPC’). Talisman’s estimates of proved reserves and probable reserves are based on the same price assumptions. Further information on the differences between the US requirements and the NI 51-101 requirements is set forth under the heading ‘Note Regarding Reserves Data and Other Oil and Gas Information’ in Talisman’s Annual Information Form.

The exemption granted to Talisman also permits it to disclose internally evaluated reserves data. Any reserves data in this Annual Report Summary reflects Talisman’s estimates of its reserves. While Talisman annually obtains an independent audit of a portion of its reserves, no independent qualified reserves evaluator or auditor was involved in the preparation of the reserves data disclosed in this Annual Report Summary.

Throughout this Annual Report Summary, the calculation of barrels of oil equivalent (boe) is at a conversion rate of six thousand cubic feet (mcf) of natural gas for one barrel of oil and is based on an energy equivalence conversion method. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalence conversion method primarily applicable at the burner tip and does not represent a value equivalence at the wellhead.

Talisman makes reference to production volumes throughout this Annual Report Summary. Where not otherwise indicated, such production volumes are stated on a gross basis, which means they are stated prior to the deduction of royalties and similar payments. In the US, net production volumes are reported after the deduction of these amounts.

The reserves replacement ratio of 116% (before acquisitions and dispositions) was calculated by dividing the sum of changes (revisions of estimates and discoveries) to estimated proved oil and gas reserves during 2006 by the Company’s 2006 conventional production. The reserves replacement ratio of 116% was calculated by dividing the sum of changes (revisions of estimates, discoveries, acquisitions and dispositions) to estimated proved oil and gas reserves during 2006 by the Company’s 2006 conventional production.

The Company’s management uses reserve replacement ratios, as described above, as an indicator of the Company’s ability to replenish annual production volumes and grow its reserves. It should be noted that a reserve replacement ratio is a statistical indicator that has limitations. As an annual measure, the ratio is limited because it typically varies widely based on the extent and timing of new discoveries, project sanctioning and property acquisitions. Its predictive and comparative value is also limited for the same reasons. In addition, since the ratio does not include the cost, value or timing of future production of new reserves, it cannot be used as a measure of value creation.

The reserves life index of 9.5 years for proved reserves was calculated by dividing the year-end proved reserves by the Company’s 2006 conventional production. The reserves life index of 15.2 years for proved and probable reserves was calculated by dividing the year-end proved and probable reserves by the Company’s 2006 conventional production.

The SEC normally permits oil and gas companies to disclose in their filings with the SEC only proved reserves that have been demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. Any probable reserves, contingent and prospective resources and the calculations with respect thereto included in this news release do not meet the SEC’s standards for inclusion in documents filed with the SEC.

Notwithstanding that Talisman is not required to disclose contingent and prospective resources, it has done so using the definition for contingent and prospective resources set out by the SPE/WPC. There is essentially no material difference between the SPE/WPC definitions for contingent and prospective resources and the definitions set out in the Canadian Oil and Gas Handbook.

Contingent resources are those quantities of oil and/or gas which are estimated, on a given date, to be potentially recoverable from known accumulations, but which are not currently considered to be commercially recoverable.

Prospective resources are those quantities of oil and/or gas which are estimated, on a given date, to be potentially recoverable from undiscovered accumulations. There is no certainty that prospective resources will be discovered. Talisman’s estimate for its international exploration portfolio, including Alaska and the Northwest Territories, of 5 billion boe of prospective resources, is calculated on the basis of the P50 estimate of such prospective resources without reduction for the probability of exploration success or failure.

non-gaap financial measures

Included in this Annual Report Summary are references to financial measures commonly used in the oil and gas industry, such as cash flow, cash flow per share and earnings from continuing operations. These terms are not defined by GAAP in either Canada or the US. Consequently, these are referred to as non-GAAP measures. Talisman’s reported results of cash flow, cash flow per share and earnings from continuing operations may not be comparable to similarly titled measures by other companies. Cash flow, as commonly used in the oil and gas industry, represents net income before exploration costs, DD&A, future taxes and other non-cash expenses. Cash flow is used by the Company to assess operating results between years and between peer companies that use different accounting policies. Cash flow should not be considered an alternative to, or more meaningful than, cash provided by operating, investing and financing activities or net income as determined in accordance with Canadian GAAP as an indicator of the Company’s performance or liquidity. A reconciliation of cash provided by operating activities to cash flow follows.

Years Ended December 31 ($ millions)	2006	2005	2004
Cash provided by operating activities	4,374	4,871	3,119
Changes in non-cash working capital	374	(199)	(203)
Cash flow	4,748	4,672	2,916

Net surplus cash flow is equal to revenue less royalties, operating costs and exploration and development spending. This term is not defined by GAAP in either Canada or the US. Consequently, it is referred to as a non-GAAP measure. The Company uses this information as an indicator of the amount of surplus funds in a particular operating segment which are available for other purposes.

Earnings from continuing operations is calculated by adjusting the Company’s net income per the financial statements, for certain items of a non-operational nature, on an aftertax basis. This term is not defined by GAAP in either Canada or the US. Consequently, it is referred to as a non-GAAP measure. The Company uses this information to evaluate performance of core operational activities on a comparable basis between periods. Talisman’s reported results of cash flow and earnings from continuing operations may not be comparable to similarly titled measures reported by other companies. A reconciliation of net income to earnings from operations follows.

Years Ended December 31 ($ millions, except per share amounts)	2006	2005	2004
Net Income	2,005	1,561	654
Operating income from discontinued operations	197	207	135
Gain on disposition of discontinued operations	356	-	-
Net income from discontinued operations	553	207	135
Net income from continuing operations	1,452	1,354	519
Insurance expenses	10	2	-
Stock-based compensation (tax adjusted) 1,2	32	447	119
Tax effects of unrealized foreign exchange gains on foreign denominated debt 2	(27)	50	37
Tax rate reductions and other 2	116	-	(46)
Earnings from continuing operations 3	1,583	1,853	629
Per Share 2	1.45	1.68	0.55

1 Stock-based compensation expense relates to the closing value of the Company’s share price and the relationship to its outstanding stock options and cash units as at December 31, 2006. The Company’s stock-based compensation expense or recovery is based on the difference between the Company’s share price and the exercise price of its stock options and cash units.
2 Tax adjustments include the impact of Canadian corporate tax rate reductions and a 10% supplemental tax increase in the UK in 2006, as well as future taxes relating in part to unrealized foreign exchange gains associated with the impact of a stronger Canadian dollar on foreign denominated debt and insurance expenses.
3 This is a non-GAAP measure.