Advisories

Forward-Looking Statements

This MD&A contains information that constitutes ‘‘forward-looking information’’ or ‘‘forward-looking statements’’ (collectively ‘‘forward-looking information’’) within the meaning of applicable securities legislation. Forward-looking information is included throughout this MD&A, including, among other places, under the headings ‘Outlook for 2010’ and ‘Risk Factors’. This forwardlooking information includes, but is not limited to, statements regarding:

• expected outcomes and events of the elements of the business strategy;
• planned 2011 capital program and sources of funding;
• stock-based compensation expense or recovery in future periods;
• the effects of the hedging program;
• the estimated impact on Talisman’s financial performance from changes in production volume, commodity prices and exchange rates;
• expected future payment commitments and receipts;
• the expectation of having sufficient production to meet all delivery requirements;
• expected production during 2011;
• planned development and shale development pilots and projects;
• planned drilling in the Pennsylvania Marcellus and Montney shale plays;
• timing of first production from UK projects;
• planned UK drilling;
• planned upgrade of Claymore compressors;
• commencement of UK development planning;
• planned Scandinavia first oil production, drilling and development programs;
• planned prospective resource additions and finding cost estimates;
• planned Southeast Asia drilling and development;
• expected timing of first production at Jambi Merang;
• planned wells in Colombia, Peru, the Kurdistan region of northern Iraq, Norway, Malaysia and Indonesia;
• planned drilling in Papua New Guinea;
• planned reprocessing of seismic over the Sabah exploration blocks and in the Nam Con Son basin;
• asset impairment charges;
• anticipated costs associated with abandonment and reclamation activities;
• expected impact of new accounting pronouncements;
• other expectations, beliefs, plans, goals, objectives, assumptions, information and statements about possible future events, conditions, results of operations or performance. Statements concerning oil and gas reserves contained in this MD&A may be deemed to be forward-looking information as they involve the implied assessment that the resources described can be profitably produced in the future.

The following material assumptions were used in drawing the conclusions or making the forecasts and projections included in the forward-looking information contained in this MD&A. Talisman has set its 2011 capital expenditure plans assuming: (1) Talisman’s production in 2011 will be approximately 5-10% greater than 2010, excluding the BP Colombia acquisition; (2) a WTI oil price of approximately US$75/bbl, and (3) a NYMEX natural gas price of approximately US$4/mmbtu. Information regarding business plans generally assumes that the extraction of crude oil, natural gas and natural gas liquids remains economic. Closing of any transactions will be subject to receipt of all necessary regulatory approvals and completion of definitive agreements.

Undue reliance should not be placed on forward-looking information. Forward-looking information is based on current expectations, estimates and projections that involve a number of risks, which could cause actual results to vary and, in some instances, to differ materially from those anticipated by Talisman and described in the forward-looking information contained in this MD&A. The material risk factors include, but are not limited to:

• the risks of the oil and gas industry, such as operational risks in exploring for, developing and producing crude oil and natural gas, market prices and demand and unpredictable facilities outages;
• risks and uncertainties involving geology of oil and gas deposits;
• uncertainty related to securing sufficient egress and markets to meet shale gas production;
• the uncertainty of reserves and resource estimates, reserves life and underlying reservoir risk;
• the uncertainty of estimates and projections relating to production, costs and expenses;
• the impact of the economy on the ability of the counterparties to the Company’s commodity price derivative contracts to meet their obligations under the contracts;
• 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 any future acquisitions and dispositions;
• health, safety and environmental risks, including risks related to the possibility of a major accident;
• uncertainties as to the availability and cost of financing and changes in capital markets;
• risks in conducting foreign operations (for example, political and fiscal instability or the possibility of civil unrest or military action);
• changes in general economic and business conditions;
• the possibility that government policies or laws may change or governmental approvals may be delayed or withheld including with respect to shale gas drilling; and
• results of the Company’s risk mitigation strategies, including insurance and hedging activities.

The foregoing list of risk factors is not exhaustive. Additional information on these and other factors which could affect the Company’s operations or financial results are included in the Company’s most recent Annual Information Form. In addition, information is available in the Company’s other reports on file with Canadian securities regulatory authorities and the SEC. Forward-looking information is based on the estimates and opinions of the Company’s management at the time the information is presented. The Company assumes no obligation to update forward-looking information 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 the exemptions granted to Talisman by Canadian securities regulatory authorities, which permit Talisman to provide certain disclosure in accordance with US disclosure standards in order to provide comparability of oil and gas disclosures with that provided by US and other peers. The primary differences between the US disclosure standards and the Canadian disclosure mandated under NI 51-101 are that:

1. NI 51-101 requires disclosure of gross and net reserves using forecast prices, whereas the SEC rules require the disclosure of net reserves estimated using a historical 12-month average price;
2. NI 51-101 requires the disclosure of the net present value of future net revenue attributable to all of the disclosed reserve categories, estimated using forecast prices and costs, before and after deducting future income tax expenses, calculated without discount and using discount rates of 5%, 10%, 15% and 20%, whereas the SEC rules require disclosure of the present value of future net cash flows attributable to proved reserves only, estimated using a constant price (the historical 12-month average price) and a 10% discount rate;
3. NI 51-101 requires a one year reconciliation of gross proved reserves, gross probable reserves and gross proved plus probable reserves, based on forecast prices and costs, for various product types, whereas the SEC rules require three year reconciliation of net proved reserves, based on constant prices and costs, for less specific product types;
4. NI 51-101 requires reserves to show a hurdle rate of return, whereas the SEC rules require reserves to be only cash flow positive on an undiscounted basis.

Further information on the differences between the US standards and NI 51-101 requirements is set forth under the heading ‘Note Regarding Reserves Data and Other Oil and Gas Information’ in Talisman’s most recent Annual Information Form.

The information provided by Talisman in this MD&A may differ from the corresponding information prepared in accordance with NI 51-101 standards. Talisman’s proved and probable reserves, using SEC annual average pricing methodology, have been estimated using the standards contained in Regulation S-X of the SEC which requires that proved and probable reserves be estimated using existing economic and operating conditions.

An exemption granted to Talisman also permits it to disclose internally evaluated reserves data. Any reserves data contained in this MD&A reflects Talisman’s estimates of its reserves. No independent qualified reserves evaluator or auditor was involved in the preparation of the reserves data disclosed in this MD&A.

Reserves Replacement Ratio

The reserves replacement ratios before net acquisitions and dispositions were calculated by dividing the sum of changes (revisions of estimates and discoveries) to estimated gross proved oil and gas reserves during 2010 by the Company’s 2010 gross production. The Company’s management uses reserves replacement ratios as an indicator of the Company’s ability to replenish annual production volumes and grow its reserves. It should be noted that a reserves 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 cost, value or timing of future production of new reserves, it cannot be used as a measure of value creation.

Replacement Costs

In this MD&A, Talisman discloses a reduction in replacement costs. Replacement costs are used by the Company to determine the cost of reserves additions in a period. Talisman’s reported replacement costs may not be comparable to similarly titled measures used by other companies. Replacement costs may not reflect full cycle replacement costs. Replacement costs’ predictive and comparative value is limited for the aforementioned reasons. Replacement costs are calculated by dividing exploration and development capital spending of $4 billion (including discontinued operations, but excluding midstream) by gross proved reserve additions of 249 mmboe.

Gross Production

Throughout this MD&A, Talisman makes reference to production volumes. 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. US readers may refer to the table headed ‘Net Production After Royalties’ in Talisman’s most recent Annual Information Form for a statement of Talisman’s net production volumes by reporting segment that are comparable to those made by US companies subject to SEC reporting and disclosure requirements.

Netbacks

Talisman discloses its Company netbacks in this MD&A. Netbacks per boe are calculated by deducting from sales price associated royalties, operating and transportation costs.

Canadian Dollars and GAAP

Dollar amounts are presented in C$, except where otherwise indicated. Unless otherwise indicated, the financial information is set out in accordance with Canadian GAAP which may differ from US GAAP. See note 25 to the Consolidated Financial Statements for the significant differences between Canadian and US GAAP.

Financial Outlook

Included in this MD&A is the Company’s financial outlook. Its purpose is to enrich management’s discussion and analysis. This information may not be appropriate for other purposes.