Exhibit 99.1

SUPPLEMENTAL FINANCIAL INFORMATION

November 8, 2010

ABOUT THIS DOCUMENT

Talisman Energy Inc. (“Talisman” or the “Company”) prepares its financial statements in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”).  A discussion of the principal differences between the Company’s financial results as calculated under Canadian GAAP and under generally accepted accounting principles in the United States (“U.S. GAAP”) relating to the Company’s comparative audited consolidated financial statements for the year ended December 31, 2009 is contained in note 25 to those financial statements.  This document contains:

·the Company’s comparative unaudited interim consolidated financial statements, including the notes thereto, for the six months ended June 30, 2010 (the “Second Quarter Financial Statements”), which have previously been filed with securities regulatory authorities;

·a discussion of the principal differences between the Company’s financial results as calculated under Canadian GAAP and under U.S. GAAP relating to the Second Quarter Financial Statements”); and

·a discussion of the impact of discontinued operations on the Company’s comparative audited consolidated financial statements for the year ended December 31, 2009 (the “Annual Financial Statements”) and the Second Quarter Financial Statements and a discussion of certain U.S. GAAP reconciliation matters relating to the Company’s comparative unaudited interim financial statements for the nine months ended September 30, 2010 recently filed with securities regulatory authorities,

and is being filed with the appropriate securities regulatory authorities to be available for reference or incorporation by reference in other disclosure documents of Talisman.

1

SECOND QUARTER FINANCIAL STATEMENTS

Talisman Energy Inc.

Consolidated Balance Sheets

(unaudited)

	June 30		December 31
(millions of C$)	2010		2009
			(restated -
			note 2)
Assets
Current
Cash and cash equivalents (note 16)	2,564		1,690
Accounts receivable	1,147		1,265
Inventories	156		144
Prepaid expenses	29		9
Assets of discontinued operations (note 2)	205		46
	4,101		3,154
Other assets (note 5)	411		290
Goodwill (note 4)	1,226		1,194
Property, plant and equipment	17,874		17,111
Assets of discontinued operations (note 2)	—		1,869
	19,511		20,464
Total assets	23,612		23,618
Liabilities
Current
Bank indebtedness	35		36
Accounts payable and accrued liabilities	1,892		2,126
Income and other taxes payable	398		357
Current portion of long-term debt (note 8)	355		10
Future income taxes	7		68
Liabilities of discontinued operations (note 2)	6		7
	2,693		2,604
Deferred credits	57		59
Asset retirement obligations (note 6)	2,098		2,117
Other long-term obligations (note 7)	149		168
Long-term debt (note 8)	3,429		3,770
Future income taxes	3,604		3,646
Liabilities of discontinued operations (note 2)	—		143
	9,337		9,903
Contingencies and commitments (note 15)
Shareholders’ equity
Common shares, no par value (note 9)
Authorized: unlimited
Issued and outstanding:
June 2010 - 1,017,918,708 (December 2009 - 1,014,876,564)	2,426		2,374
Contributed surplus	106		153
Retained earnings	9,878		9,174
Accumulated other comprehensive loss	(828	)	(590	)
	11,582		11,111
Total liabilities and shareholders’ equity	23,612		23,618

See accompanying notes.

2

Talisman Energy Inc.

Consolidated Statements of Income

(unaudited)

	Three months ended June 30				Six months ended June 30
(millions of C$)	2010		2009		2010		2009
			(restated -				(restated -
			note 2)				note 2)
Revenue
Gross sales	1,886		1,692		3,971		3,420
Less royalties	323		204		624		480
Net sales	1,563		1,488		3,347		2,940
Other	27		26		56		60
Total revenue	1,590		1,514		3,403		3,000
Expenses
Operating	460		475		958		967
Transportation	57		50		118		106
General and administrative	86		86		168		167
Depreciation, depletion and amortization	508		609		1,090		1,277
Dry hole	31		52		37		268
Exploration	71		58		167		126
Interest on long-term debt	41		45		82		90
Stock-based compensation (recovery) (note 10)	(14	)	117		(86	)	150
(Gain) loss on held-for-trading financial instruments (note 11)	(76	)	438		(173	)	365
Other, net (note 12)	(69	)	88		44		104
Total expenses	1,095		2,018		2,405		3,620
Income (loss) from continuing operations before taxes	495		(504	)	998		(620	)
Taxes
Current income tax	161		178		396		320
Future income tax recovery	(106	)	(281	)	(113	)	(486	)
Petroleum revenue tax	29		26		56		40
	84		(77	)	339		(126	)
Income (loss) from continuing operations	411		(427	)	659		(494	)
Income from discontinued operations (note 2)	192		490		172		1,012
Net income	603		63		831		518
Per common share (C$):
Income (loss) from continuing operations	0.40		(0.42	)	0.65		(0.49	)
Diluted income (loss) from continuing operations	0.40		(0.42	)	0.64		(0.49	)
Income from discontinued operations	0.19		0.48		0.17		1.00
Diluted income from discontinued operations	0.19		0.48		0.17		1.00
Net income	0.59		0.06		0.82		0.51
Diluted net income	0.59		0.06		0.81		0.51
Average number of common shares outstanding (millions)	1,018		1,015		1,018		1,015
Diluted number of common shares outstanding (millions)	1,037		1,015		1,036		1,015

See accompanying notes.

3

Talisman Energy Inc.

Consolidated Statements of Comprehensive Income

(unaudited)

	Three months ended June 30				Six months ended June 30
(millions of C$)	2010		2009		2010		2009
Net income	603		63		831		518
Foreign currency - translation of self-sustaining foreign operations(1)	(131	)	801		(278	)	622
Foreign currency - translation into reporting currency	552		(842	)	352		(489	)
Transfer of accumulated foreign currency to net income	(156	)	—		(313	)	—
Gains and losses on derivatives designated as cash flow hedges
Unrealized gains (losses) arising during the period(2)	(11	)	22		(2	)	13
Realized losses (gains) recognized in net income(3)	10		(22	)	3		(14	)
	(1	)	—		1		(1	)
Other comprehensive income (loss)	264		(41	)	(238	)	132
Comprehensive income	867		22		593		650

(1)  Includes net investment hedging gain of $9 million and $32 million for the three and six months ended June 30, 2010 respectively (2009 - loss of $76 million and $56 million respectively)

(2)  Three and six months ended June 30, 2010 net of tax of $(4) million and $(1) million respectively (2009 - $8 million and $5 million respectively)

(3)  Three and six months ended June 30, 2010 net of tax of $4 million and $1 million respectively (2009 - $(8) million and $(5) million respectively)

See accompanying notes.

Talisman Energy Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(unaudited)

	Three months ended June 30				Six months ended June 30
(millions of C$)	2010		2009		2010		2009
Common shares
Balance at beginning of period	2,443		2,373		2,374		2,372
Shares released from trust for 2008 PSU plan (note 10)	—		—		68		—
Shares placed in trust for long-term PSU plan (note 10)	(26	)	—		(26	)	—
Issued on exercise of stock options	9		1		10		2
Balance at end of period	2,426		2,374		2,426		2,374
Contributed surplus
Balance at beginning of period	95		96		153		84
Stock-based compensation (note 10)	11		23		(47	)	35
Balance at end of period	106		119		106		119
Retained earnings
Balance at beginning of period	9,402		9,421		9,174		8,966
Net income	603		63		831		518
Common share dividends	(127	)	(115	)	(127	)	(115	)
Balance at end of period	9,878		9,369		9,878		9,369
Accumulated other comprehensive loss
Balance at beginning of period	(1,092	)	(99	)	(590	)	(272	)
Other comprehensive income (loss)	264		(41	)	(238	)	132
Balance at end of period	(828	)	(140	)	(828	)	(140	)

See accompanying notes.

4

Talisman Energy Inc.

Consolidated Statements of Cash Flows

(unaudited)

	Three months ended June 30				Six months ended June 30
(millions of C$)	2010		2009		2010		2009
			(restated -				(restated -
			see note 2)				see note 2)
Operating
Income (loss) from continuing operations	411		(427	)	659		(494	)
Items not involving cash (note 14)	289		1,167		711		2,386
Exploration	71		58		167		126
	771		798		1,537		2,018
Changes in non-cash working capital	91		253		383		30
Cash provided by continuing operations	862		1,051		1,920		2,048
Cash provided by discontinued operations	41		99		112		188
Cash provided by operating activities	903		1,150		2,032		2,236
Investing
Capital expenditures
Exploration, development and other	(951	)	(793	)	(1,701	)	(1,504	)
Corporate acquisitions (note 3)	—		—		(189	)	—
Property acquisitions	(360	)	(28	)	(385	)	(56	)
Proceeds of resource property dispositions	8		27		115		60
Changes in non-cash working capital	(28	)	(101	)	(84	)	(355	)
Discontinued operations, net of capital expenditures	1,223		1,240		1,240		1,591
Cash provided by (used in) investing activities	(108	)	345		(1,004	)	(264	)
Financing
Long-term debt repaid	(11	)	(106	)	(11	)	(796	)
Long-term debt issued	—		879		—		1,249
Common shares issued	3		—		8		1
Common shares purchased	(26	)	(1	)	(26	)	(1	)
Common share dividends	(127	)	(115	)	(127	)	(115	)
Deferred credits and other	(3	)	3		(10	)	7
Changes in non-cash working capital	1		1		(1	)	2
Cash provided by (used in) financing activities	(163	)	661		(167	)	347
Effect of translation on foreign currency cash and cash equivalents	38		(6	)	—		(22	)
Net increase in cash and cash equivalents	670		2,150		861		2,297
Cash and cash equivalents net of bank indebtedness, beginning of period	1,859		159		1,668		12
Cash and cash equivalents net of bank indebtedness, end of period	2,529		2,309		2,529		2,309
Cash and cash equivalents (note 16)	2,564		2,307		2,564		2,307
Cash and cash equivalents reclassified to discontinued operations	—		4		—		4
Bank indebtedness	(35	)	(2	)	(35	)	(2	)
Cash and cash equivalents net of bank indebtedness, end of period	2,529		2,309		2,529		2,309

See accompanying notes.

5

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

The Interim Consolidated Financial Statements of Talisman Energy Inc. (“Talisman” or “the Company”) have been prepared by management in accordance with Canadian generally accepted accounting principles.  Certain information and disclosures required to be included in notes to Annual Consolidated Financial Statements have been condensed or omitted.  The Interim Consolidated Financial Statements should be read in conjunction with the audited Annual Consolidated Financial Statements and the notes thereto in Talisman’s Annual Report as at and for the year ended December 31, 2009.

Certain comparative information provided has been reclassified to conform to the presentation adopted in the current year.

1.SIGNIFICANT ACCOUNTING POLICIES

a) Change in Accounting Policy

The Interim Consolidated Financial Statements have been prepared following the same accounting policies and methods of computation as the 2009 Annual Consolidated Financial Statements, except for the following:

Foreign Currency Translation

As a result of a reorganization of the Company’s operations and changes in the composition of revenue and costs, management has determined that the functional currency of both the Canadian and Norwegian self-sustaining operations is more closely linked to the US$ than to the respective domestic currencies.  Accordingly, effective January 1, 2010, these self-sustaining operations have been accounted for as US$ functional currency entities.

b) Accounting Pronouncements Adopted

Extractive Activities — Oil and Gas

In the fourth quarter of 2009, Talisman adopted prospectively the US standard Extractive Activities — Oil and Gas whereby yearly average commodity prices are used for purposes of calculating reserves.   Previously, reserves had been calculated by reference to year-end commodity prices.   Since 2009 yearly average commodity prices were higher than 2008 year-end prices, Talisman recorded an upward price revision of 77.1 million barrels of oil equivalent to its reserves in the fourth quarter of 2009 and revised its DD&A rates accordingly.   Had year-end prices been used to calculate reserves, this would not have had a significant impact on the income from continuing operations in the three and six month periods ended June 30, 2010.

c) Accounting Pronouncements Not Yet Adopted

Consolidated Financial Statements

In 2009, the CICA issued section 1601, Consolidated Financial Statements, which establishes standards for the preparation of consolidated financial statements that will be effective for Talisman’s 2011 reporting.  The adoption of these recommendations is not expected to have a material impact on Talisman.

Business Combinations

In 2009, the CICA issued section 1582, Business Combinations, which prospectively establishes principles and requirements of the acquisition method for business combinations and related disclosures that will be effective for Talisman’s 2011 reporting.  The adoption of these recommendations is not expected to have a material impact on Talisman due to the adoption of IFRS discussed below.

6

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

International Financial Reporting Standards (IFRS)

In February 2008, the Accounting Standards Board confirmed that IFRS will be required for interim and annual reporting by publicly accountable enterprises effective for January 1, 2011, including 2010 comparative information.  The Company has developed a changeover plan to complete the transition to IFRS by January 1, 2011 and has established a dedicated IFRS project team to address the conversion to IFRS.  This team reports regularly to a steering committee, senior management and the Audit Committee.

Based on work completed to date, management has determined that IFRS may have a significant impact on the Company’s accounting for PP&E and income taxes.  Areas impacting accounting for PP&E include impairments, ARO, taxes and other minor adjustments. Other areas of impact include employee future benefits, share-based payments and discontinued operations.

The areas impacted by IFRS discussed above should not be regarded as a comprehensive list of changes that will result from the transition to IFRS.  Talisman continues to monitor the development of standards, which are expected to change prior to 2011.

The impact of IFRS on the Consolidated Financial Statements is not quantifiable at this time.

2.DISCONTINUED OPERATIONS

The assets and liabilities related to discontinued operations have been reclassified as assets or liabilities of discontinued operations on the Consolidated Balance Sheets. Operating results related to these assets and liabilities have been included in net income from discontinued operations on the Consolidated Statements of Income. Comparative period balances have been restated.

	As at June 30, 2010 and December 31, 2009
	NorthAmerica		UK		Scandinavia		Other		Total
	2010	2009	2010	2009	2010	2009	2010	2009	2010	2009
Assets
Current assets	3	28	—	—	—	—	—	18	3	46
Property, plant and equipment, net	196	1,803	—	—	—	—	—	19	196	1,822
Goodwill	6	44	—	—	—	—	—	3	6	47
Total assets	205	1,875	—	—	—	—	—	40	205	1,915
Liabilities
Current liabilities	—	7	—	—	—	—	—	—	—	7
Asset retirement obligations	2	64	—	—	—	—	—	1	2	65
Future income taxes	4	73	—	—	—	—	—	5	4	78
Total liabilities	6	144	—	—	—	—	—	6	6	150

7

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

	Three months ended June 30
	North America		UK		Scandinavia		Other		Total
	2010	2009	2010	2009	2010	2009	2010	2009	2010	2009
Revenue
Gross sales	65	139	—	—	—	—	—	26	65	165
Royalties	12	24	—	—	—	—	—	4	12	28
Revenues, net of royalties	53	115	—	—	—	—	—	22	53	137
Expenses
Operating, marketing and general	12	33	—	—	—	—	—	6	12	39
Depreciation, depletion and amortization	1	70	—	—	—	—	—	2	1	72
Income from discontinued operations before income taxes	40	12	—	—	—	—	—	14	40	26
Taxes	10	2	—	—	—	—	—	11	10	13
Gain on disposition, net of tax	162	376	—	—	—	—	—	101	162	477
Income from discontinued operations	192	386	—	—	—	—	—	104	192	490

	Six months ended June 30
	North America			UK		Scandinavia			Other			Total
	2010	2009		2010	2009	2010	2009		2010		2009	2010	2009
Revenue
Gross sales	167	294		—	—	—	—		7		45	174	339
Royalties	24	52		—	—	—	—		1		2	25	54
Revenues, net of royalties	143	242		—	—	—	—		6		43	149	285
Expenses
Operating, marketing and general	33	73		—	—	—	—		4		5	37	78
Dry hole	—	29		—	—	—	—		—		2	—	31
Depreciation, depletion and amortization	43	144		—	—	—	—		—		6	43	150
Income (loss) from discontinued operations before income taxes	67	(4	)	—	—	—	—		2		30	69	26
Taxes	17	(2	)	—	—	—	(1	)	3		13	20	10
Gain (loss) on disposition, net of tax	128	433		—	471	—	(9	)	(5	)	101	123	996
Income (loss) from discontinued operations	178	431		—	471	—	(8	)	(6	)	118	172	1,012

North America

In the second quarter of 2010, Talisman completed the sale of oil and gas producing properties in North America for proceeds of $1.3 billion, resulting in a gain of $162 million, net of tax of $nil.  One property remained classified as held for sale at June 30, 2010 and this disposition closed in July 2010 for proceeds of approximately $200 million.  The net investment in the Company’s Canadian self-sustaining operations has been reduced as a result of these asset transactions and, accordingly, $295 million of exchange gains previously accumulated in other comprehensive income were included in the carrying value of the assets used to determine the gain on disposal.

8

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

In the second quarter of 2009, Talisman completed the sale of oil and gas producing assets in Southeast Saskatchewan for proceeds of $710 million, resulting in a gain of $321 million, net of tax of $109 million.

In the second quarter of 2009, Talisman completed the sale of certain of its midstream assets in Western Canada for proceeds of $297 million, resulting in a gain of $55 million, net of tax of $19 million.

In the first quarter of 2009, Talisman completed the sale of oil and gas producing assets in Western Canada for proceeds of $90 million, resulting in a gain of $57 million, net of tax of $19 million.

UK

In the first quarter of 2009, Talisman completed the sale of its assets in the Netherlands for proceeds of $596 million, resulting in a gain of $471 million, net of tax of $nil.

Scandinavia

In the first quarter of 2009, Talisman recorded an after-tax writedown of $9 million in respect of the sale of a 10% share in the Yme field offshore development and three exploration licences.

Other

In the first quarter of 2010, Talisman completed the sale of assets in Tunisia for proceeds of $23 million, resulting in a loss of $5 million, net of tax of $nil.

In the second quarter of 2009, Talisman completed the sale of assets in Trinidad and Tobago for proceeds of $278 million, resulting in a gain of $101 million, net of tax of $nil.

3.ACQUISITION

In January 2010, Talisman acquired 100% of the share capital of Hess (Indonesia-Jambi Merang) Limited, a company which owns a 25% interest in the Jambi Merang Petroleum Sharing Contract, for consideration of $189 million in cash. This acquisition, which facilitates Talisman’s strategy to increase its presence in Indonesia, was accounted for using the purchase method and the revised preliminary allocation of the purchase price to the assets and liabilities acquired is as follows:

Fair value of net assets acquired	Southeast Asia
Property, plant and equipment	170
Goodwill	37
Working capital	19
Future income tax	(37	)
	189

9

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

4.GOODWILL

Changes in the carrying amount of the Company’s goodwill are as follows:

	Six months ended		Year ended
	June 30, 2010		December 31, 2009
Opening balance	1,194		1,206
Acquisition (note 3)	37		—
Foreign currency translation effect	(5	)	(12	)
Closing balance(1)	1,226		1,194

(1)At June 30, 2010, $6 million (December 31, 2009 - $47 million; January 1, 2009 - $155 million) has been reclassified to assets of discontinued operations.

Goodwill has no tax basis.

5.OTHER ASSETS

	June 30, 2010	December 31, 2009
Accrued pension asset	24	29
Fair value of derivative contracts (note 11)	63	42
Investments	81	36
Future tax assets	174	120
Note receivable (note 11)	38	43
Asset retirement sinking fund	27	15
Other	4	5
	411	290

6.ASSET RETIREMENT OBLIGATIONS (ARO)

Changes in carrying amounts of the Company’s ARO associated with its property, plant and equipment are as follows:

	Six months ended		Year ended
	June 30, 2010		December 31, 2009
ARO liability, beginning of period	2,147		1,907
Liabilities incurred during period	—		50
Liabilities settled during period	(4	)	(50	)
Accretion expense	63		117
Revisions in estimated future cash flows	2		218
Foreign currency translation	(81	)	(95	)
ARO liability, end of period(1), (2)	2,127		2,147

(1)Included in June 30, 2010 and December 31, 2009 liabilities are $29 million and $30 million respectively of short-term reclamation costs recorded in accounts payable on the balance sheet for a net long-term ARO liability of $2,098 million and $2,117 million respectively.

(2)At June 30, 2010, $2 million (December 31, 2009 - $65 million; January 1, 2009 - $123 million) has been reclassified to liabilities of discontinued operations.

10

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

7.OTHER LONG-TERM OBLIGATIONS

	June 30, 2010	December 31, 2009
Accrued pension and other post-employment benefits liability	34	28
Fair value of derivative contracts (note 11)	—	7
Discounted obligations on capital leases(1)	92	94
Long-term portion of stock-based compensation liability (note 10)	11	27
Other	12	12
	149	168

(1)Of the total discounted liability of $111 million (December 31, 2009 - $113 million), $19 million (December 31, 2009 - $19 million) is included in accounts payable and accrued liabilities.

8.LONG-TERM DEBT

	June 30, 2010		December 31, 2009
Tangguh project financing	108		106
Debentures and notes (unsecured):
US$ denominated (US$2,800 million)	2,969		2,941
C$ denominated	350		350
UK£ denominated (UK£250 million)	396		423
Gross debt	3,823		3,820
Prepaid financing costs	(39	)	(40	)
	3,784		3,780
Less: current portion	(355	)	(10	)
	3,429		3,770

9.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.

	Six months ended				Year ended
	June 30, 2010				December 31, 2009
Continuity of common shares	Shares		Amount		Shares	Amount
Balance, beginning of period	1,014,876,564		2,374		1,014,708,249	2,372
Issued on exercise of options	480,544		10		168,315	2
Shares purchased for long-term PSU plan (note 10)	(1,500,400	)	(26	)	—	—
Shares released from trust for 2008 PSU plan (note 10)	4,062,000		68		—	—
Balance, end of period	1,017,918,708		2,426		1,014,876,564	2,374

On May 5, 2010, Talisman declared a dividend of $0.125 per share (2009 — $0.1125 per share) for an aggregate dividend of $127 million (2009 — $115 million) which was paid on June 30, 2010.

Subsequent to June 30, 2010, 42,068 stock options were exercised for shares.

11

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

10.STOCK-BASED COMPENSATION

Stock Option Plans

Talisman has stock option plans in place that allow for the granting of options to employees and directors. All options issued by the Company permit the holder to purchase one common share of the Company at the stated exercise price or to receive a cash payment equal to the appreciated value of the stock option.

	Six months ended			Year ended
	June 30, 2010			December 31, 2009
	Number of		Weighted-average	Number of		Weighted-average
Continuity of stock options	Options		exercise price ($)	Options		exercise price ($)
Outstanding, beginning of period	69,489,526		15.22	64,877,521		15.14
Granted	7,293,805		17.34	12,023,390		13.37
Exercised for common shares	(480,544	)	9.86	(168,315	)	5.87
Surrendered for cash payment	(1,905,864	)	10.25	(4,887,191	)	9.00
Cancelled/forfeited	(1,206,747	)	17.54	(2,355,879	)	17.03
Outstanding, end of period	73,190,176		15.56	69,489,526		15.22
Exercisable, end of period	43,562,403		15.07	33,825,777		13.28

The mark-to-market liability for the stock option plans at June 30, 2010 was $139 million (December 31, 2009 - $268 million).

Subsequent to June 30, 2010, 435 stock options were surrendered for cash, 42,068 were exercised for shares, no options were granted and 288,187 were cancelled, with 72,859,486 outstanding at July 23, 2010.

Cash Unit Plans

In addition to the Company’s stock option plans, various subsidiaries of the Company issue stock appreciation rights under 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.

	Six months ended			Year ended
	June 30, 2010			December 31, 2009
	Number of		Weighted-average	Number of		Weighted-average
Continuity of cash units	Units		exercise price ($)	units		exercise price ($)
Outstanding, beginning of period	10,078,102		16.42	9,723,082		16.52
Granted	937,680		17.36	1,403,650		13.23
Exercised	(203,879	)	11.56	(732,565	)	9.72
Cancelled/forfeited	(101,678	)	17.50	(316,065	)	18.94
Outstanding, end of period	10,710,225		16.59	10,078,102		16.42
Exercisable, end of period	6,711,191		16.76	4,806,867		15.09

The mark-to-market liability for the cash unit plans at June 30, 2010 was $13 million (December 31, 2009 - $28 million).

Subsequent to June 30, 2010, 637 cash units were exercised, no cash units were granted and 68,419 were cancelled with 10,641,169 outstanding at July 23, 2010.

12

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

Long-Term PSU Plan

In 2009, the Company implemented a long-term PSU plan that allows for the granting of PSUs to employees and vesting to varying degrees (0—150%) subject to predetermined performance measures being achieved.  Each PSU represents the right, subject to performance, to receive one common share of the Company.

	Six months ended		Year ended
	June 30, 2010		December 31, 2009
Continuity of long-term PSU plan	Number of units		Number of units
Outstanding, beginning of period	5,520,158		—
Granted	3,456,428		5,791,165
Cancelled/forfeited	(839,768	)	(271,007	)
Outstanding, end of period	8,136,818		5,520,158

To satisfy the Company’s obligations to deliver common shares to settle the PSUs, Talisman has arranged for a third party trustee to hold common shares which were purchased on the open market.  During the three month period ended June 30, 2010, the Company purchased 1,500,400 common shares on the open market for $26 million.  For accounting purposes, the cost of the purchase of the common shares held in trust has been accounted for as a reduction in outstanding common shares and the trust has been consolidated in accordance with Accounting Guideline 15 since it met the definition of a variable interest entity and the Company was the primary beneficiary of the trust.  The Company is not exposed to fluctuations in the stock price in respect of the shares held in trust.  Additional purchases of common shares to satisfy the Company’s obligations are contemplated.

During the three months ended June 30, 2010, the Company recorded stock-based compensation of $11 million (2009 - $5 million) relating to its long-term PSU plan, with a corresponding increase in contributed surplus.

During the six months ended June 30, 2010, the Company recorded stock-based compensation of $15 million (2009 - $5 million) relating to its long-term PSU plan, with a corresponding increase in contributed surplus.

Subsequent to June 30, 2010, no long-term PSUs were granted and 58,052 were cancelled, with 8,078,766 outstanding at July 23, 2010.  During this period, the Company funded the purchase of 312,000 common shares on the open market for $5 million to settle the PSUs.

2008 PSU Plan

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

To satisfy the Company’s obligation to deliver common shares to settle the PSUs, the Company established a trust that purchased 4,062,000 common shares on the open market for $68 million.  These shares were released from trust when the PSUs vested.

During the three months ended June 30, 2010, the Company recorded stock-based compensation expense of $nil (2009 — $12 million) relating to its 2008 PSU plan, with a corresponding change in contributed surplus.

During the six months ended June 30, 2010, the Company recorded stock-based compensation recovery of $1 million (2009 — $24 million expense) relating to its 2008 PSU plan, with a corresponding change in contributed surplus.

13

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

Deferred Share Unit (DSU) Plan

Talisman issues DSUs to directors in lieu of cash compensation. Each DSU represents the right to receive a cash payment on retirement equal to the market value of the Company’s shares at the time of surrender. Dividends are credited as additional DSUs when paid.  At June 30, 2010, there were 467,042 DSUs outstanding (December 31, 2009 — 396,550) and the mark-to-market liability was $8 million (December 31, 2009 — $8 million).  Expense related to the DSUs is recognized in general and administrative expense on the Consolidated Statements of Income.

Restricted Share Unit (RSU) Plan

Talisman has a RSU plan that grants RSUs to eligible employees. All RSUs issued by the Company permit the holder to receive a cash payment equal to the market value of the stock. Typically, RSUs granted under the plan are paid three years after the grant date. At June 30, 2010, there were 437,203 RSUs outstanding, including dividend equivalent RSUs (December 31, 2009 — 342,730) and the mark-to-market liability was $4 million (December 31, 2009 — $3 million).

Stock-based compensation (Recovery)

For the three months ended June 30, 2010, the Company recorded stock-based compensation recovery of $14 million (2009 — $117 million expense) in respect of the plans described above as follows: stock options - $21 million recovery, cash units - $3 million recovery and long-term PSUs - $10 million expense.  The stock-based compensation recovery includes a cash payment of $3 million (2009 - $13 million) to employees in settlement of fully accrued stock-based compensation liabilities for options and cash units exercised in the period.

For the six months ended June 30, 2010, the Company recorded stock-based compensation recovery of $86 million (2009 — $150 million expense) in respect of the plans described above as follows: stock options - $89 million recovery, cash units - $11 million recovery, 2008 PSUs - $1 million recovery and long-term PSUs - $15 million expense.

Of the combined mark-to-market liability for the stock option, cash unit, DSU and RSU plans of $164 million (December 31, 2009 - $307 million), $153 million (December 31, 2009 - $280 million) is included in accounts payable and accrued liabilities and $11 million (December 31, 2009 - $27 million) is included in other long-term obligations.

11.FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Talisman’s financial assets and liabilities at June 30, 2010 comprised cash and cash equivalents, accounts receivable, note receivable, investments, bank indebtedness, accounts payable and accrued liabilities, long-term debt, discounted obligations under capital leases and risk management assets and liabilities arising from the use of derivative financial instruments.

Fair value of Financial Assets and Liabilities

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 for instruments having the same term and risk characteristics.  The fair value of Talisman’s long-term debt at June 30 was $4.3 billion, while the carrying value was $3.8 billion.  The fair values of all other financial assets and liabilities approximate their carrying values.

14

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

Talisman’s processes for estimating and classifying the fair value of financial instruments are consistent with those in place at December 31, 2009.  The following table presents the Company’s material assets and liabilities measured at fair value for each hierarchy level as at June 30, 2010:

	Fair value measurements using
	Level 1 inputs	Level 2 inputs	Level 3 inputs	Total fair value
Assets
Interest rate swaps	—	42	—	42
Cross currency swaps	—	25	—	25
Commodity swaps	—	4	—	4
Commodity collars	—	58	—	58
Note receivable	—	—	38	38
	—	129	38	167
Liabilities
Commodity swaps	—	14	—	14
Commodity collars	—	91	—	91
	—	105	—	105

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

	Three monthsended June 30			Six monthsended June 30
	2010		2009	2010		2009
Balance at beginning of period	44		33	43		31
Realized and unrealized gains (losses)	(6	)	1	(5	)	3
Balance at end of period	38		34	38		34

Unobservable inputs utilized to determine the fair value of the note receivable include the volatility of the counterparty’s common shares.

Risk Management Position

Derivative instrument	Balance sheet caption	June 30, 2010	December 31, 2009
Assets
Interest rate swaps	Accounts receivable	13	13
Interest rate swaps	Other assets	29	14
Cross currency swaps	Other assets	25	28
Commodity contracts	Accounts receivable	53	17
Commodity contracts	Other assets	9	—
Risk management assets		129	72
Liabilities
Cross currency swaps	Accounts payable and accrued liabilities	—	1
Commodity contracts	Accounts payable and accrued liabilities	105	275
Commodity contracts	Other long-term obligations	—	7
Risk management liabilities		105	283

For the three months ended June 30, 2010, the Company recorded a gain on held-for-trading financial instruments of $76 million (2009 — loss of $438 million).

15

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

For the six months ended June 30, 2010, the Company recorded a gain on held-for-trading financial instruments of $173 million (2009 — loss of $365 million).

Currency Risk

Talisman operates internationally and is therefore exposed to foreign exchange risk. Talisman’s primary exposures are from fluctuations in the US$ relative to the C$, UK£ and NOK. Although Talisman’s reporting currency is C$, its functional currency is US$, since most of its revenues are closely tied to the US$.

Talisman manages its foreign exchange exposure in a number of ways.  By denominating most of its borrowings in US$, the Company is able to reduce some of its economic exposure to currency fluctuations.  Talisman also manages its translation exposure by generally matching internal borrowings with its subsidiaries’ functional currency.  The Company purchases foreign currencies, mostly at spot value, to meet its current foreign currency obligations as they come due.  Talisman had no material outstanding foreign exchange forward contracts at June 30, 2010.

In respect of financial instruments existing at June 30, 2010, a 1% strengthening of the US$ against the other currencies to which the Company is exposed (C$, UK£ and NOK), with all other variables assumed constant, would have resulted in a decrease of $3 million in net income and an increase of $17 million in other comprehensive income for the three month period ended June 30, 2010.  A similar weakening of the US$ would have had the opposite impact.

Interest Rate Risk

Talisman is exposed to interest rate risk principally by virtue of its borrowings.  Borrowing in floating rates exposes Talisman to short-term movements in interest rates.  Borrowing in fixed rates exposes Talisman to mark-to-market interest rate risk as well as reset risk (i.e. at debt maturity).  The Company’s interest rate risk policy reflects guidelines approved by the Board of Directors.  Risk management activities aim to manage the mix of fixed-to-floating debt to best manage the tradeoff between longer term interest rate reset risk and shorter term volatility in interest rates.

In order to mitigate its exposure to interest rate changes, Talisman enters into interest rate swaps from time to time to manage the ratio of fixed rate debt to floating rate debt.  At June 30, 2010, the Company had fixed-to-floating interest rate swap contracts with a total notional amount of US$300 million that expire on May 15, 2015.  During the six month period ended June 30, 2010, the fair value of the fixed-to-floating interest rate swaps increased by $15 million.  Starting in the fourth quarter of 2008, the Company no longer designated the swap as a hedge.

In respect of financial instruments existing at June 30, 2010, a 1% increase in interest rates would have resulted in a $7 million decrease in net income, principally related to the fair value of the interest rate swap, for the three month period ended June 30, 2010.  A similar decrease in interest rates would have had the opposite effect.

Credit Risk

A significant proportion of Talisman’s accounts receivable balance is with customers in the oil and gas industry and is subject to normal industry credit risks.  At June 30, 2010, approximately 87% of the Company’s trade accounts receivable were current.  Talisman had no customers with individually significant outstanding balances at June 30, 2010.  Concentration of credit risk is mitigated by having a broad domestic and international customer base.  The maximum credit exposure associated with accounts receivable is the carrying value.

16

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

Liquidity Risk

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

Talisman maintains appropriate undrawn capacity in its revolving credit facilities to meet short-term fluctuations from forecasted results. Talisman manages its liquidity requirements by use of both short-term and long-term cash forecasts, and by maintaining appropriate undrawn capacity under committed bank lines.

The majority of the Company’s debt matures subsequent to 2011, with $355 million maturing in 2011.

At June 30, 2010, the Company had not drawn against its available $2.8 billion of bank lines of credit, which are all fully committed through 2012.  These maturity dates may be extended from time to time by agreement between the Company and the respective lenders.

Commodity Price Risk

The Company had the following commodity price derivative contracts outstanding at September 30, 2009:

Fixed price swaps	Term	mcf/d	C$/mcf	Fair value
ICE index	Jul-Sep 2010	20,638	5.60	(2	)
ICE index	Oct-Dec 2010	17,824	6.59	(3	)
ICE index	Jan-Mar 2011	17,824	6.59	(5	)
ICE index	Apr-Jun 2011	16,886	6.01	(4	)
				(14	)

Fixed price swaps	Term	mcf/d	US$/mcf	Fair value
NYMEX index	Jan-Dec 2011	23,734	6.12	4

			Floor/ceiling
Two-way collars	Term	bbls/d	US$/bbl	Fair value
Dated Brent oil index	Jul-Dec 2010	5,000	49.00/57.79	(16	)
Dated Brent oil index	Jul-Dec 2010	23,000	55.35/85.00	(5	)
Dated Brent oil index	Jul-Dec 2010	25,000	71.72/90.00	9
WTI	Jul-Dec 2010	22,000	50.20/60.87	(70	)
				(82	)

			Floor/ceiling
Two-way collars	Term	mcf/d	C$/mcf	Fair value
AECO index	Jul-Dec 2010	47,410	5.78/7.39	13

17

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

			Floor/ceiling
Two-way collars	Term	mcf/d	US$/mcf	Fair value
NYMEX index	Jul-Dec 2010	95,000	5.90/7.03	16
NYMEX index	Jan-Jun 2011	95,000	5.27/6.66	4
NYMEX index	Jan-Dec 2011	71,200	6.14/6.59	16
				36

In respect of outstanding financial instruments and assuming forward commodity prices in existence at June 30, 2010, an increase of US$1/bbl in the price of oil and $0.10/mcf in the price of natural gas would have reduced the net fair value of commodity derivatives thereby resulting in a decrease in net income of approximately $13 million for the three month period ended June 30, 2010.  A similar decrease in commodity prices would result in an increase in net income of approximately $15 million for the three month period ended June 30, 2010.

The Company may hedge a portion of its future production to protect cash flows to allow the Company to meet its strategic objectives.

Physical Commodity Contracts

The Company enters into fixed price sales contracts for the physical delivery of commodities. These contracts are entered into in the regular course of business and are intended to be settled by delivering the product. As such, the fair value of these contracts is not recognized in the Consolidated Financial Statements and future revenues are recognized in net income as earned over the term of the contract.  The Company anticipates having sufficient future production to meet these fixed price sales contract commitments.

The Company had the following physical commodity contracts outstanding at June 30, 2010:

Contract	Term	Average volume	Average price or floor/ceiling
AECO natural gas swaps	Jul-Dec 2010	14,223 mcf/d	C$6.33/mcf
AECO natural gas collars	Jul-Dec 2010	175,417 mcf/d	C$6.33/7.55/mcf
AECO natural gas swaps	Jul 2010-Dec 2011	3,671 mcf/d	C$3.15/mcf

12.OTHER EXPENSES, NET

	Three months ended June 30				Six monthsended June 30
	2010		2009		2010		2009
Foreign exchange (gains) losses	(89	)	104		(38	)	101
Net (gain) loss on asset disposals	10		(4	)	(41	)	4
Property impairments	27		—		118		—
Other	(17	)	(12	)	5		(1	)
	(69	)	88		44		104

During the six month period ended June 30, 2010, the Company wrote-off exploration acquisition costs in North America, Scandinavia and Rest of the World of $27 million, $66 million and $25 million respectively.

18

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

13.EMPLOYEE BENEFITS

	Three monthsended June 30				Six monthsended June 30
	2010		2009		2010		2009
Current service cost - defined benefit	8		4		14		8
Current service cost - defined contribution	5		5		8		8
Interest cost	4		4		9		9
Expected return on plan assets	(3	)	(2	)	(6	)	(4	)
Actuarial gain (loss)	(1	)	1		(1	)	1
	13		12		24		22

14.SELECTED CASH FLOW INFORMATION

	Three monthsended June 30				Six monthsended June 30
	2010		2009		2010		2009
Items not involving cash:
Depreciation, depletion and amortization	508		609		1,090		1,277
Dry hole	31		52		37		268
Net (gain) loss on asset disposals	10		(4	)	(41	)	4
Property impairments	27		—		118		—
Stock-based compensation (recovery)	(17	)	104		(105	)	132
Future taxes and deferred petroleum revenue tax (recovery)	(102	)	(258	)	(119	)	(466	)
Mark-to-market change of held-for-trading financial instruments	(106	)	632		(257	)	1,137
Other	(62	)	32		(12	)	34
	289		1,167		711		2,386
Interest paid	43		32		80		83
Income taxes paid	183		14		346		383

15.CONTINGENCIES AND COMMITMENTS

Contingencies

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.

In September 2006, the United States District Court for the Southern District of New York (the “Court”) granted Talisman’s Motion for Summary Judgment, dismissing the lawsuit brought against Talisman by the Presbyterian Church of Sudan and others under the Alien Tort Claims Act. The lawsuit alleged 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. The plaintiffs have twice attempted to certify the lawsuit as a class action. In March 2005 and in September 2005, the Court rejected the plaintiffs’ effort to certify two different classes (or groups) of plaintiffs. In October 2009, the Second Circuit Court of Appeals

19

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

dismissed the plaintiff’s appeal of the Court’s decision granting Talisman’s Motion for Summary Judgment, denying class certification and refusing to consider the plaintiff’s proposed third amended complaint.  On April 15, 2010 the plaintiffs requested the United States Supreme Court to permit an appeal by the plaintiffs of the Second Circuit Court of Appeals decision that dismissed their appeal.  Talisman believes the lawsuit is entirely without merit.

Commitments

There were no material changes in the Company’s commitments between January 1 and June 30, 2010.

16.CASH AND CASH EQUIVALENTS

Of the cash and cash equivalents balance of $2.6 billion, arising largely from the disposition of assets during 2009 and 2010, $158 million has been invested in bank deposits and the remainder in highly rated marketable securities with maturities of less than three months.

20

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

17.  SEGMENTED INFORMATION

	North America (1)								UK						Scandinavia
	Three months ended June 30				Six months ended June 30				Three months ended June 30			Six months ended June 30			Three months ended June 30			Six months ended June 30
(millions of C$)	2010		2009		2010		2009		2010	2009		2010	2009		2010		2009	2010	2009
Revenue
Gross sales	425		378		899		807		458	593		1,064	1,122		279		212	651	454
Royalties	24		38		91		99		2	2		4	3		—		—	—	—
Net sales	401		340		808		708		456	591		1,060	1,119		279		212	651	454
Other	23		21		46		47		3	4		8	11		—		1	1	2
Total revenue	424		361		854		755		459	595		1,068	1,130		279		213	652	456
Segmented expenses
Operating	122		126		233		247		202	217		435	428		64		62	150	136
Transportation	15		14		34		26		8	11		18	24		16		13	32	25
DD&A	208		213		403		419		117	218		278	454		97		87	242	190
Dry hole	(15	)	1		(14	)	101		39	(1	)	39	30		6		35	5	63
Exploration	2		12		34		34		4	5		9	7		4		6	15	12
Other	18		(11	)	(1	)	(7	)	2	(11	)	—	(7	)	(2	)	4	64	5
Total segmented expenses	350		355		689		820		372	439		779	936		185		207	508	431
Segmented income (loss) before taxes	74		6		165		(65	)	87	156		289	194		94		6	144	25
Non-segmented expenses
General and administrative
Interest on long-term debt
Stock-based compensation (recovery)
Currency translation
(Gain) loss on held-for-trading financial instruments
Total non-segmented expenses
Income (loss) from continuing operations before taxes
Capital expenditures
Exploration	52		105		151		186		34	44		40	90		40		69	53	128
Development	333		76		512		72		133	160		243	291		117		133	280	248
Midstream	2		(5	)	1		30		—	—		—	—		—		—	—	—
Exploration and development	387		176		664		288		167	204		283	381		157		202	333	376
Property acquisitions
Proceeds on dispositions
Other non-segmented
Net capital expenditures (4)
Property, plant and equipment					7,457		6,835					4,265	4,549					2,077	2,040
Goodwill					168		167					271	289					637	628
Other					2,968		1,253					195	386					305	226
Discontinued operations					205		1,875					—	—					—	—
Segmented assets					10,798		10,130					4,731	5,224					3,019	2,894
Non-segmented assets
Total assets (5)
									(1) North America						2010		2009	2010	2009
									Canada						352		336	726	696
									US						72		25	128	59
									Total revenue						424		361	854	755
									Canada									5,599	5,673
									US									1,858	1,162
									Property, plant and equipment (5)									7,457	6,835

(4) Excluding corporate acquisitions.

(5) Current year represents balances as at June 30, prior year represents balances as at December 31.

21

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)

	Southeast Asia (2)					Other (3)								Total
	Three months ended June 30		Six months ended June 30			Three months ended June 30				Six months ended June 30				Three months ended June 30				Six months ended June 30
(millions of C$)	2010	2009	2010		2009	2010		2009		2010		2009		2010		2009		2010		2009
Revenue
Gross sales	605	430	1,173		820	119		79		184		217		1,886		1,692		3,971		3,420
Royalties	235	132	429		277	62		32		100		101		323		204		624		480
Net sales	370	298	744		543	57		47		84		116		1,563		1,488		3,347		2,940
Other	1	—	1		—	—		—		—		—		27		26		56		60
Total revenue	371	298	745		543	57		47		84		116		1,590		1,514		3,403		3,000
Segmented expenses
Operating	64	63	127		131	8		7		13		25		460		475		958		967
Transportation	16	10	30		27	2		2		4		4		57		50		118		106
DD&A	77	82	153		191	9		9		14		23		508		609		1,090		1,277
Dry hole	1	—	(7	)	51	—		17		14		23		31		52		37		268
Exploration	21	15	45		30	40		20		64		43		71		58		167		126
Other	9	2	19		—	(7	)	—		—		12		20		(16	)	82		3
Total segmented expenses	188	172	367		430	52		55		109		130		1,147		1,228		2,452		2,747
Segmented income (loss) before taxes	183	126	378		113	5		(8	)	(25	)	(14	)	443		286		951		253
Non-segmented expenses
General and administrative														86		86		168		167
Interest on long-term debt														41		45		82		90
Stock-based compensation (recovery)														(14	)	117		(86	)	150
Currency translation														(89	)	104		(38	)	101
(Gain) loss on held-for-trading financial instruments														(76	)	438		(173	)	365
Total non-segmented expenses														(52	)	790		(47	)	873
Income (loss) from continuing operations before taxes														495		(504	)	998		(620	)
Capital expenditures
Exploration	32	45	77		126	50		54		109		117		208		317		430		647
Development	111	90	153		286	30		11		50		12		724		470		1,238		909
Midstream	—	—	—		—	—		—		—		—		2		(5	)	1		30
Exploration and development	143	135	230		412	80		65		159		129		934		782		1,669		1,586
Property acquisitions														364		28		591		94
Proceeds on dispositions														(8	)	(27	)	(151	)	(98	)
Other non-segmented														19		13		29		23
Net capital expenditures (4)														1,309		796		2,138		1,605
Property, plant and equipment			3,158		2,864					917		823						17,874		17,111
Goodwill			150		110					—		—						1,226		1,194
Other			487		427					198		155						4,153		2,447
Discontinued operations			—		—					—		40						205		1,915
Segmented assets			3,795		3,401					1,115		1,018						23,458		22,667
Non-segmented assets																		154		951
Total assets (5)																		23,612		23,618
						(2) Southeast Asia								2010		2009		2010		2009
						Indonesia								225		166		442		303
						Malaysia								122		84		240		151
						Vietnam								16		24		31		53
						Australia								8		24		32		36
						Total revenue								371		298		745		543
						Indonesia												1,491		1,243
						Malaysia												1,171		1,171
						Vietnam												274		241
						Australia												222		209
						Property, plant and equipment (5)												3,158		2,864
						(3) Other								2010		2009		2010		2009
						Algeria								57		47		84		116
						Total revenue								57		47		84		116
						Algeria												234		193
						Other												683		630
						Property, plant and equipment (5)												917		823

22

SECOND QUARTER U.S. GAAP RECONCILIATION

Accounting Principles Generally Accepted in the United States

The Second Quarter 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). Differences between Canadian and US GAAP are identified below. Comparative US GAAP amounts have been restated as a result of the restatement of comparative Canadian GAAP amounts for operations classified as discontinued (see footnotes).

Balance Sheet Items in Accordance with US GAAP

		June 30, 2010				December 31, 2009
(millions of C$)	Notes	CanadianGAAP		USGAAP		CanadianGAAP		USGAAP
						(restated)*		(restated)*
Current Assets		4,101		4,101		3,154		3,154
Property, plant and equipment	1, 2, 3	17,874		18,000		17,111		17,257
Other non-current assets	4, 8, 9	1,637		1,618		3,353		3,305
		23,612		23,719		23,618		23,716
Current liabilities	8, 9	2,693		2,984		2,604		2,884
Long-term debt		3,429		3,429		3,770		3,770
Deferred income taxes	2	3,604		3,494		3,646		3,523
Other non-current liabilities	8, 9	2,304		2,380		2,487		2,595
		12,030		12,287		12,507		12,772
Shareholders’ equity
Common shares		2,426		2,426		2,374		2,374
Contributed surplus	5	106		123		153		170
Retained earnings		9,878		9,439		9,174		9,044
Accumulated other comprehensive loss	8, 10	(828	)	(556	)	(590	)	(644	)
Total liabilities and shareholders’ equity		23,612		23,719		23,618		23,716

* Restated for operations classified as discontinued operations in the first 6 months of 2010.

Net Income in Accordance with US GAAP

		Three months ended June 30				Six months ended June 30
(millions of C$)	Notes	2010		2009		2010		2009
				(restated)+				(restated)+
Net Income — Canadian GAAP		603		63		831		518
Depreciation, depletion and amortization	1, 2, 3	(3	)	(4	)	(7	)	(8	)
(Loss) gain on derivative instruments	4	—		(2	)	23		(2	)
Deferred income taxes	2	(6	)	35		(10	)	32
Interest on long-term debt		—		—		—		(1	)
Stock-based compensation	9	39		(128	)	11		(119	)
Net gain (loss) on disposition of discontinued operations	2, 10	(160	)	(7	)	(325	)	(19	)
		(130	)	(106	)	(308	)	(117	)
Net income (loss) — US GAAP		473		(43	)	523		401
Per common share amounts US GAAP (C$)
Basic
Income (loss) from continuing operations		0.43		(0.52	)	0.66		(0.58	)
Income (loss) from discontinued operations		0.03		0.48		(0.15	)	0.98
Net income (loss)		0.46		(0.04	)	0.51		0.40
Diluted
Income (loss) from continuing operations		0.43		(0.52	)	0.65		(0.58	)
Income (loss) from discontinued operations		0.03		0.48		(0.15	)	0.98
Net income (loss)		0.46		(0.04	)	0.50		0.40

+ Restated for operations classified as discontinued operations since June 30, 2009.

23

Comprehensive Income in Accordance with US GAAP

		Three months ended June 30				Six months ended June 30
(millions of C$)	Notes	2010		2009		2010		2009
Net income/(loss) — US GAAP		473		(43	)	523		401
Foreign currency — translation of self-sustaining operations		(131	)	801		(276	)	622
Foreign currency — translation into reporting currency		552		(842	)	352		(489	)
Employee benefits, net of tax		8		—		11		(4	)
Change in fair value of cash flow hedges, net of tax		(1	)	—		1		(1	)
Other comprehensive (loss) — US GAAP		428		(41	)	88		128
Comprehensive income (loss) — US GAAP		901		(84	)	611		529

Statement of Cash Flow Items in Accordance with US GAAP

		Three months ended June 30				Six months ended June 30
(millions of C$)	Notes	2010		2009		2010		2009
Operating
Cash provided by operating activities	6	832		1,092		1,865		2,110
Investing
Cash provided by (used in) investing activities	6	(37	)	403		(837	)	(138	)
Financing
Cash provided by (used in) financing activities	7	(143	)	641		(168	)	268
Effect of translation on foreign currency cash		38		(6	)	—		(22	)
Net increase in cash and cash equivalents		690		2,130		860		2,218
Cash and cash equivalents, beginning of period	7	1,874		181		1,704		93
Cash and cash equivalents, end of period	7	2,564		2,311		2,564		2,311

GAAP Differences

1) Gains on Property Exchanges:  In 2005, the Company early adopted a new Canadian standard that eliminated a US GAAP reconciling item on a go forward basis. Under both US and Canadian GAAP, non-monetary property exchanges are recorded at fair value unless the transaction lacks commercial substance. Prior to 2005 under both US and Canadian GAAP, property exchanges were recorded at the carrying value of the assets given up unless the exchange transaction included significant cash consideration, in which case it was recorded at fair value. Previous differences in the definition of significant cash consideration under Canadian GAAP have created differences in the carrying value of these properties and results in differences in DD&A in subsequent years.

2) Income Taxes and DD&A Expense:  In 2000, the Company adopted the liability method to account for income taxes. The change to the liability method 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 PP&E. As a result of the implementation method, further differences in DD&A expense and the net gain on dispositions of discontinued operations 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.

3) Impairments:  In 2004, the Company adopted a new Canadian 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 under Canadian GAAP in 2004, 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

24

impairment charges not required under Canadian GAAP have resulted in differences in DD&A expense in subsequent years.

4) Forward Foreign Exchange Contracts and Other Financial Instruments:  The Company has designated, for Canadian GAAP purposes, some of its derivative financial instruments as hedges. In accordance with Canadian GAAP, payments or receipts on these contracts are recognized in income concurrently with the hedged transaction.

Effective January 1, 2001, the Company adopted a new US standard, 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 sheets at fair value. The standard requires that changes in the derivative instrument’s fair value be recognized currently in net income unless specific hedge accounting criteria are met.

Prior to January 1, 2004, management did not designate any derivative instruments as hedges for US GAAP purposes and, accordingly, these derivative instruments were recognized on the balance sheets at their fair value with the change in their fair value recognized in net income. Subsequent to January 1, 2004 and prior to January 1, 2007, management designated commodity derivative financial instruments as hedges for US GAAP purposes and, accordingly, the changes in their fair value are recognized in other comprehensive income with any ineffective portion recognized in net income. For fair value hedges, both the financial instrument designated as the hedging item and the portion of the underlying hedged asset or liability attributable to the hedged risk are measured at fair value.  Changes in the fair value of the financial instrument designated as the hedging item and changes in the fair value of the hedged item attributable to the hedged risk are reflected in net income immediately.

Effective January 1, 2007, the Company adopted the new Canadian standards that effectively harmonize with US GAAP and, consequently, no GAAP differences arose after that date.

5) Appropriation of Contributed Surplus:  In 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.

6) Cash Provided by Operating Activities Presentation:  Under US GAAP, exploration expense is treated as an operating item.  It is an investing item under Canadian GAAP.

7) Cash and Cash Equivalents:  Under US GAAP, the movement in bank indebtedness is treated as a financing activity.  Under Canadian GAAP, bank indebtedness is treated as a component of cash and cash equivalents.

8) Employee Future Benefits:  In 2006, the Company adopted recognition and disclosure provisions of a new US standard, Employers Accounting for Defined Benefit Pension and Other Post Retirement Plans. This standard requires the recognition of the net funded status of pension and other post-retirement plans on the balance sheet and recognition of changes in the funded status through comprehensive income.  Deferred actuarial losses, past service costs and transitional assets are now presented on the balance sheet in accumulated other comprehensive income and charged to net income. Also under this Statement, a company is required to measure defined benefit plan assets and obligations as of the balance sheet date; this is consistent with Talisman’s current practice and has not resulted in a GAAP difference.

Amounts in accumulated other comprehensive income are as follows:

25

	Surplus		Deficit		Total
Amounts not yet reflected in the net periodic benefit cost
Transitional asset (obligation)	—		(1	)	(1	)
Past service costs	—		(5	)	(5	)
Net actuarial loss	(21	)	(51	)	(72	)
Future tax assets	5		15		20
Included in accumulated other comprehensive income	(16	)	(42	)	(58	)

The accumulated benefit obligation, which includes no allowance for future salary levels, was $244 million at June 30, 2010 (December 31, 2009 - $233 million).

The amounts in accumulated other comprehensive income that are expected to be recognized as components of net periodic benefit expense over the next fiscal year are as follows: net transitional asset $nil, net actuarial losses of $12 million and past service costs of $1 million.

Had the pension liability been recorded in accordance with US GAAP, current liabilities would increase by $4 million and other long-term liabilities would decrease by $4 million.

9) Stock-Based Compensation:  Effective January 1, 2006, the Company adopted a new US standard, as amended, Share Based Payments, subsequent to which its stock-based compensation plans are classified as liability instruments under US GAAP. Prior to 2006, there was no GAAP difference and stock-based compensation was accounted for using the intrinsic value method, whereby obligations were accrued over the vesting period and represented the difference between the market value of the Company’s common shares and the exercise price of the options. Under the new standard, as amended, obligations for liability-based stock compensation plans are measured at their fair value, and re-measured at fair value in each reporting date with the change in the obligation charged as stock-based compensation.  A description of the Company’s stock-based compensation plans and additional information is available in note 10 to the June 30, 2010 interim Consolidated Financial Statements.

Under US GAAP, the Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based compensation plans, with the following assumptions:

	June 30, 2010		June 30, 2009
Expected volatility	47	%	47	%
Risk free interest rate	2.3	%	2.5	%
Expected term (years)	5.0		5.0
Expected forfeiture rate	8.2	%	7.6	%
Expected annual dividend yield	1.0	%	1.0	%

The expected volatility is based on the historical volatility of the Company’s common shares over an historical period that matches the expected term of the stock-based compensation plans. The risk free rate is based on Government of Canada bond yields for terms that match the expected term of the stock-based compensation plans. The expected term is based on the experienced historical holding period for stock-based compensation instruments. Under liability accounting, the expected life used to determine fair value is reduced as options approach their expected life, such that options that are still outstanding beyond their expected life have no remaining time value and, accordingly, are recorded at their intrinsic value. The expected dividend rate takes into account historical dividend payments and the Company’s expectation for future payments.

For the three month period ended June 30, 2010, the total stock-based compensation recovery was $53 million (2009 - $245 million expense), of which $23 million (2009 - $57 million expense) is allocated to operating expenses, $22 million (2009 - $101 million expense) is allocated to general and administrative expenses and $8

26

million (2009 - $87 million expense) is allocated to exploration expenses. The stock-based compensation net of tax was $37 million recovery (2009 — $179 million).

For the six month period ended June 30, 2010, the total stock-based compensation recovery was $97 million (2009 — $269 million expense), of which $41 million (2009 - $63 million expense) is allocated to operating expenses, $41 million (2009 - $111 million expense) is allocated to general and administrative expenses and $15 million (2009 - $95 million expense) is allocated to exploration expenses. The stock-based compensation net of tax was $70 million recovery (2009 — $196 million).

The total number of options and cash units expected to vest as at June 30, 2010 was 78.6 million, with a weighted average remaining contractual life of 7.4 years, a weighted average exercise price of $15.56 and an aggregate intrinsic value of $169 million.

The following is a summary of unvested stock-based compensation activity:

	Stock Options		Weighted Average Grant Date Fair Value	Cash Units		Weighted Average Grant Date Fair Value
Unvested at December 31, 2008	34,742,032		18.90	6,227,221		19.39
Granted	12,023,390		13.37	1,403,650		13.23
Vested	(9,364,247	)	19.31	(2,161,929	)	19.50
Forfeited	(1,737,426	)	16.20	(197,707	)	18.44
Unvested at December 31, 2009	35,663,749		17.06	5,271,235		17.63
Granted	7,293,805		17.34	937,680		17.36
Vested	(12,591,058	)	19.10	(2,150,394	)	20.03
Forfeited	(832,859	)	16.21	(59,487	)	16.63
Unvested at June 30, 2010	29,533,637		16.29	3,99,034		16.30

At June 30, 2010, there was unrecognized compensation expense of $62 million (2009 — $146 million) which the Company expects to recognize over a weighted average period of 2.9 years (2009 — 2.2 years).

10) Accumulated Other Comprehensive Income (Loss):  Accumulated other comprehensive income (loss) refers to revenues, expenses, gains and losses that are recorded as an element of shareholders’ equity but are excluded from net income.  The Company’s accumulated other comprehensive income (loss) is comprised of: (a) adjustments that result from translation of the Company’s foreign entity financial statements from their functional currencies to US dollars and the translation of US dollars to the Company’s presentation currency of C$; (b) eligible gains and losses on derivative financial instruments that are part of qualifying cash flow hedges; and (c) minimum pension liability adjustments and adjustments related to the funded status of the Company’s benefit plans.

In 2010, Talisman completed the sale of oil and gas producing properties in North America.  Under Canadian GAAP, the net investment in the Company’s Canadian self-sustaining operations has been reduced permanently as a result of the disposal transactions and the parent company’s reduction in the net investment in the corresponding subsidiaries that have occurred in 2010 and, accordingly, $313 million of exchange gains previously accumulated in other comprehensive income were included in the carrying value of the assets used to determine the gain on disposal.  US GAAP permits this accounting treatment only in the event of a complete or substantially complete liquidation of the investment in the foreign entity.  Since the disposal of assets did not constitute a substantially complete liquidation of the net investment in the Company’s Canadian self-sustaining operations, no exchange gains were included in the carrying value of the assets to determine the gain on disposal.

The components of accumulated other comprehensive income (loss) for the periods ended June 30, 2010 and December 31, 2009 are as follows:

27

	Foreign Currency Translation Adjustment		Fair Value of Derivatives		Pension and Post- Retirement Benefit Plans		Total
Balance at January 1, 2009	(273	)	16		(48	)	(305	)
Change in foreign currency translation adjustment	(317	)	—		—		(317	)
Change in fair value of derivatives (net of tax of $1 million)	—		(1	)	—		(1	)
Employee benefits (net of tax of $7 million)	—		—		(21	)	(21	)
Balance at December 31, 2009	(590	)	15		(69	)	(644	)
Change in foreign currency translation adjustment, net	76		—		—		76
Change in fair value of derivatives (net of tax of nil)	—		1		—		1
Employee benefits (net of tax of $4 million)	—		—		11		11
Balance at June 30, 2010	(514	)	16		(58	)	(556	)

Newly Issued or Adopted US Accounting Standards

a) Extractive Activities — Oil and Gas

In 2010, the FASB issued Extractive Activities — Oil and Gas, to align the reserve calculation and disclosure requirements with the requirements in the SEC Rule, Modernization of Oil and Gas Reporting Requirements.  In the fourth quarter of 2009, Talisman adopted this standard prospectively whereby yearly average commodity prices are used for purposes of calculating reserves.   Previously, reserves had been calculated by reference to year-end commodity prices.   Since 2009 yearly average commodity prices were higher than 2008 year-end prices, Talisman recorded an upward price revision of 77.1 mmboe to its reserves in the fourth quarter of 2009 and revised its DD&A rates accordingly.

The new standard permits companies to disclose information on probable and possible reserves. The new rules require companies to report their oil and gas reserves based on annual average prices determined by the prices in effect on the first day of each month, rather than year-end prices.  In addition, the new standard adds, subject to certain exemptions, a 15% test to use as a minimum guideline for reporting “significant” reserves by geographic area, subject to various exemptions.

b) Subsequent Events

In 2009, the FASB issued Subsequent Events. The new standard reflects the existing principles of current subsequent event accounting guidance.  The adoption of this standard did not have a material impact on the Company’s results or financial position.

c) Fair Value Measurement

In January 2010, the FASB issued an amendment to Fair Value Measurement and Disclosure. The new standard requires entities to disclose separately significant transfers in and out of level 1 and level 2 fair value measurements.  Additionally, entities are required to present separately information about purchases, sales, issuances and settlements of level 3 fair value measurements. This amendment will be effective for Talisman’s 2010 reporting and is not expected to have a material impact on the Company’s results or financial position.

In 2008, Talisman adopted Fair Value Measurements, which defines fair value and establishes a framework for measuring fair value and increases disclosure concerning fair value measurements.  The adoption of Fair Value Measurements did not have a material impact on Talisman’s results or financial position.  The disclosure required by this standard is provided in note 11 to the Company’s 2009 annual Consolidated Financial Statements.

In 2009, FASB issued recommendations, which amend Fair Value Measurements by providing additional guidance clarifying the measurement of liabilities at fair value. When a quoted price in an active market for the identical liability is not available, the amendments require that the fair value of the liability be measured using one

28

or more of the listed valuation techniques that should maximize use of relevant observable inputs, and minimize the use of unobservable inputs. The adoption of this amendment did not have a material impact on Talisman’s results or financial position.

d) Derivative Instruments and Hedging Activities

In 2008, the FASB issued Disclosures about Derivative Instruments and Hedging Activities, which requires enhanced disclosure about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items The disclosure required by this standard is provided in note 11 to the Company’s 2009 annual Consolidated Financial Statements.

e) Employee Benefits

Effective December 31, 2006, Talisman adopted the recognition and disclosure provisions of Employers’ Accounting for Defined Benefit Pension and Other Post-Retirement Plans.  The adoption of the measurement provisions of this standard during 2008 did not have an impact on the Company’s results or financial position.

In 2008, the FASB issued Employers’ Disclosures about Post-Retirement Benefit Plans Assets, which requires additional disclosures explaining how investment allocation decisions are made, the major categories of plan assets, inputs and valuation techniques used to measure fair value of plan assets and significant concentrations of risk within the plan assets.  The disclosure required by this standard is provided in note 23 to the Company’s 2009 annual Consolidated Financial Statements.

f) Business Combinations

In 2007, the FASB issued Business Combinations, which requires recognition of the assets acquired, liabilities assumed and non-controlling interest arising in a business combination at their fair values as of the acquisition date.  In addition, the costs of acquisition must be recognized separately from the business combination.

On January 1, 2009, Talisman adopted this standard prospectively, which did not materially impact the Company’s results of operations or financial position.

g) Accounting Standards Codification

In 2009, the FASB issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which establishes the FASB Accounting Standards Codification as the sole source of authoritative US GAAP.  Since the codification was not intended to change existing US GAAP, its adoption did not have an impact on Talisman’s Consolidated Financial Statements prepared in accordance with US GAAP.

29

DISCONTINUED OPERATIONS

During 2010, Talisman has entered into transactions to dispose of certain non-core oil and gas producing assets and, accordingly, those assets have been classified as discontinued operations. The Annual Financial Statements have not been restated for asset dispositions which have occurred in the nine month period ended September 30, 2010 and the Second Quarter Financial Statements have not been restated for asset dispositions which have occurred in the three month period ended September 30, 2010. Had those financial statements been restated for asset dispositions occurring in those periods, the principal impacts would have been as follows:

Annual Financial Statements

·Property, plant and equipment would have decreased by $2,484 million, assets of discontinued operations would have increased by $2,587 million, asset retirement obligations would have decreased by $72 million, future income taxes would have decreased by $73 million and liabilities of discontinued operations would have increased by $154 million.

·Loss from continuing operations and income from discontinued operations would have decreased by $49 million.

·Cash provided by continuing operations would have decreased and cash provided by discontinued operations would have increased by $302 million.

Second Quarter Financial Statements

·Property, plant and equipment would have decreased by $650 million, assets of discontinued operations would have increased by $681 million, asset retirement obligations would have decreased by $9 million and liabilities of discontinued operations would have increased by $13 million.

·Income from continuing operations would have increased by $1 million and decreased by $7 million for the three and six month periods ended June 30, 2010, respectively, and income from discontinued operations would have decreased by $1 million and increased by $7 million for the three and six month periods ended June 30, 2010, respectively.

·Cash provided by continuing operations would have decreased by $23 million and $52 million for the three and six month periods ended June 30, 2010, respectively, and cash provided by discontinued operations would have increased by $23 million and $52 million for the three and six month periods ended June 30, 2010, respectively.

A US GAAP reconciliation for those periods would not result in any additional adjustments as a result of discontinued operations.

With respect to the asset dispositions occurring between July 1 and September 30, 2010, under Canadian GAAP, the net investment in the Company’s Canadian self-sustaining operations reduced as a result of the disposal transactions and the parent company’s reduction in the net investment in the corresponding subsidiaries that have occurred in 2010 and, accordingly, $152 million of exchange gains previously accumulated in other comprehensive income were included in the carrying value of the assets used to

30

determine the gain on disposition in the three month period ended September 30, 2010.  US GAAP permits this accounting treatment only in the event of a complete or substantially complete liquidation of the investment in the foreign entity.  Since the disposition of assets did not constitute a substantially complete liquidation of the net investment in the Company’s Canadian self-sustaining operations, no exchange gains would be included in the carrying value of the assets to determine the gain on disposition under US GAAP. As a result, the gain on disposition recorded in the three month period ended September 30, 2010 under US GAAP would be $152 million lower than the gain recorded under Canadian GAAP.

31