**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington,D.C. 20549

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**FORM 10-Q**

| **(Mark One)** | ** **                                                                                                   |
|----------------|--------------------------------------------------------------------------------------------------------------|
| **x**          | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**       |
| ** **     | **For the quarterly period ended March 31, 2006**                                                       |
| ** **     | **Or**                                                                                                       |
| **o**          | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**      |
| ** **     | **For the transition period from      to      ** |

 

**CommissionFile Number 1-13515**

**FOREST OIL CORPORATION**(Exact name of registrant as specified in its charter)

| **New York**                    | **25-0484900**       |
|---------------------------------|----------------------|
| (State or other jurisdiction of | (I.R.S. Employer     |
| incorporation or organization)  | Identification  No.) |

 

**70717**th Street, Suite 3600 Denver, Colorado 80202(Address ofprincipal executive offices) (Zip Code)

Registrant’s telephone number, including area code: **(303) 812-1400**

Former name, former address and former fiscal year, if changed sincelast report.

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  x Yes  o No

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

| Large accelerated filer x |   | Accelerated filer  o |   | Non-accelerated  filer o |
|---------------------------|--------|----------------------|--------|--------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  o Yes  x No

As of April 30, 2006there were 62,799,154 shares of theregistrant’s common stock, par value $.10 per share, outstanding.

 

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**FORESTOIL CORPORATIONINDEX TO FORM 10-QMarch  31, 2006**

| Part I—FINANCIAL  INFORMATION                                                                       |   |   |   |
|---------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Item  1—Financial Statements                                                                             |   |   |   |
| Condensed Consolidated Balance Sheets as of  March 31, 2006 and December 31, 2005                   |   | 1      |   |
| Condensed Consolidated Statements of Operations for  the Three Months Ended March 31, 2006 and 2005      |   | 2      |   |
| Condensed Consolidated Statement of Shareholders’  Equity for the Three Months Ended March 31, 2006 |   | 3      |   |
| Condensed Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 2006 and 2005      |   | 4      |   |
| Notes to Condensed Consolidated Financial Statements                                                          |   | 5      |   |
| Item 2—Management’s Discussion and Analysis of  Financial Condition and Results of Operations       |   | 19     |   |
| Item 3—Quantitative and Qualitative Disclosures About  Market Risk                                       |   | 31     |   |
| Item  4—Controls and Procedures                                                                          |   | 33     |   |
| Part II—OTHER  INFORMATION                                                                          |   |   |   |
| Item 6—Exhibits                                                                                          |   | 34     |   |
| Signatures                                                                                                    |   | 35     |   |

 

i

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**PART I—FINANCIALINFORMATION**

**Item1. FINANCIAL STATEMENTS**

**FOREST OIL CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(In Thousands, Except Share Data)**

| ** **                                                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                             | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                             |       |               |       |                  |       |   |   |
| Current assets:                                                                                        |       |               |       |                  |       |   |   |
| Cash and cash  equivalents                                                                             |       | $                  | 6,310      |                  |       | 7,231 |   |   |
| Accounts receivable                                                                                    |       | 159,459            |       |                  | 178,124    |   |   |
| Derivative instruments                                                                                 |       | 7,286              |       |                  | 941        |   |   |
| Deferred tax assets                                                                                    |       | 21,533             |       |                  | 77,346     |   |   |
| Other current assets                                                                                   |       | 39,803             |       |                  | 52,283     |   |   |
| Total current assets                                                                                   |       | 234,391            |       |                  | 315,925    |   |   |
| Property and equipment, at cost:                                                                       |       |               |       |                  |       |   |   |
| Oil and gas  properties, full cost method of accounting:                                               |       |               |       |                  |       |   |   |
| Proved, net of accumulated depletion of $2,078,900  and $3,059,031                                     |       | 2,205,335          |       |                  | 2,898,774  |   |   |
| Unproved                                                                                               |       | 255,909            |       |                  | 275,684    |   |   |
| Net oil and gas properties                                                                             |       | 2,461,244          |       |                  | 3,174,458  |   |   |
| Other property and equipment, net of accumulated  depreciation and amortization of $28,803 and $32,527 |       | 26,873             |       |                  | 25,560     |   |   |
| Net property and equipment                                                                             |       | 2,488,117          |       |                  | 3,200,018  |   |   |
| Derivative instruments                                                                                 |       | 1,410              |       |                  | —     |   |   |
| Goodwill                                                                                               |       | 86,984             |       |                  | 87,072     |   |   |
| Other assets                                                                                           |       | 30,987             |       |                  | 42,531     |   |   |
|                                                                                                   |       | $                  | 2,841,889  |                  |       | 3,645,546 |   |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                         |       |               |       |                  |       |   |   |
| Current liabilities:                                                                                   |       |               |       |                  |       |   |   |
| Accounts payable                                                                                       |       | $                  | 217,716    |                  |       | 312,076 |   |   |
| Accrued interest                                                                                       |       | 18,016             |       |                  | 4,260      |   |   |
| Derivative instruments                                                                                 |       | 58,858             |       |                  | 151,678    |   |   |
| Asset retirement  obligations                                                                          |       | 1,497              |       |                  | 33,329     |   |   |
| Other current  liabilities                                                                             |       | 19,883             |       |                  | 21,573     |   |   |
| Total current  liabilities                                                                             |       | 315,970            |       |                  | 522,916    |   |   |
| Long-term debt                                                                                         |       | 1,056,363          |       |                  | 884,807    |   |   |
| Asset retirement  obligations                                                                          |       | 59,502             |       |                  | 178,225    |   |   |
| Other liabilities                                                                                      |       | 44,596             |       |                  | 45,691     |   |   |
| Deferred income taxes                                                                                  |       | 146,444            |       |                  | 329,385    |   |   |
| Total liabilities                                                                                      |       | 1,622,875          |       |                  | 1,961,024  |   |   |
| Shareholders’ equity:                                                                             |       |               |       |                  |       |   |   |
| Preferred stock, none issued                                                                           |       | —             |       |                  | —     |   |   |
| Common stock, 64,645,608  and 64,548,229 shares issued and outstanding                                 |       | 6,465              |       |                  | 6,455      |   |   |
| Capital surplus                                                                                        |       | 1,225,109          |       |                  | 1,529,102  |   |   |
| (Accumulated deficit)  retained earnings                                                               |       | (27,035            | )          |                  | 217,293    |   |   |
| Accumulated other  comprehensive income (loss)                                                         |       | 64,556             |       |                  | (18,220    | ) |   |
| Treasury stock, at cost,  1,860,143 and 1,861,143 shares held                                          |       | (50,081            | )          |                  | (50,108    | ) |   |
| Total shareholders’  equity                                                                       |       | 1,219,014          |       |                  | 1,684,522  |   |   |
|                                                                                                   |       | $                  | 2,841,889  |                  |       | 3,654,546 |   |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements.

1

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**FOREST OIL CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

| ** **                                                                                                          | ** ** | **Three Months Ended  March 31,**                  | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                                                                                                          | ** ** | **(In Thousands, Except  Per Share Amounts)** | ** ** |
| Revenue:                                                                                                            |       |                                                              |       |   |   |
| Oil and gas sales:                                                                                                  |       |                                                              |       |   |   |
| Natural gas                                                                                                         |       | $                                                                 | 127,053    |   | 154,526 |   |
| Oil, condensate, and  natural gas liquids                                                                           |       | 92,043                                                            |       | 104,344 |   |
| Total oil and gas sales                                                                                             |       | 219,096                                                           |       | 258,870 |   |
| Marketing, processing,  and other                                                                                   |       | 2,350                                                             |       | 1,421 |   |
| Total revenue                                                                                                       |       | 221,446                                                           |       | 260,291 |   |
| Operating expenses:                                                                                                 |       |                                                              |       |   |   |
| Lease operating expenses                                                                                            |       | 45,331                                                            |       | 47,860 |   |
| Production and property  taxes                                                                                      |       | 10,728                                                            |       | 9,897 |   |
| Transportation costs                                                                                                |       | 4,729                                                             |       | 5,172 |   |
| General and  administrative (including stock-based compensation of $7,854 and $128 in 2006  and 2005, respectively) |       | 17,136                                                            |       | 10,756 |   |
| Depreciation and  depletion                                                                                         |       | 77,668                                                            |       | 96,276 |   |
| Accretion of asset  retirement obligations                                                                          |       | 3,352                                                             |       | 4,277 |   |
| Impairments                                                                                                         |       | —                                                            |       | 2,924 |   |
| Spin-off and merger  costs                                                                                          |       | 5,416                                                             |       | — |   |
| Total operating expenses                                                                                            |       | 164,360                                                           |       | 177,162 |   |
| Earnings from operations                                                                                            |       | 57,086                                                            |       | 83,129 |   |
| Other income and expense:                                                                                           |       |                                                              |       |   |   |
| Interest expense                                                                                                    |       | 15,151                                                            |       | 14,499 |   |
| Unrealized losses on derivative instruments, net                                                                    |       | 24,114                                                            |       | 6,580 |   |
| Realized losses on derivative instruments, net                                                                      |       | 3,915                                                             |       | 532 |   |
| Other expense, net                                                                                                  |       | 860                                                               |       | 1,401 |   |
| Total other income and  expense                                                                                     |       | 44,040                                                            |       | 23,012 |   |
| Earnings before income  taxes and discontinued operations                                                           |       | 13,046                                                            |       | 60,117 |   |
| Income tax expense:                                                                                                 |       |                                                              |       |   |   |
| Current                                                                                                             |       | 1,002                                                             |       | 1,557 |   |
| Deferred                                                                                                            |       | 10,795                                                            |       | 19,689 |   |
| Total income tax expense                                                                                            |       | 11,797                                                            |       | 21,246 |   |
| Earnings from continuing  operations                                                                                |       | 1,249                                                             |       | 38,871 |   |
| Income from discontinued  operations, net of tax                                                                    |       | 2,422                                                             |       | — |   |
| Net earnings                                                                                                        |       | $                                                                 | 3,671      |   | 38,871 |   |
| Basic earnings per common share:                                                                                    |       |                                                              |       |   |   |
| Earnings from continuing  operations                                                                                |       | $                                                                 | .02        |   | .65 |   |
| Income from discontinued  operations, net of tax                                                                    |       | .04                                                               |       | — |   |
| Net earnings per common  share                                                                                      |       | $                                                                 | .06        |   | .65 |   |
| Diluted earnings per common share:                                                                                  |       |                                                              |       |   |   |
| Earnings from continuing  operations                                                                                |       | $                                                                 | .02        |   | .63 |   |
| Income from discontinued  operations, net of tax                                                                    |       | .04                                                               |       | — |   |
| Net earnings per common share                                                                                       |       | $                                                                 | .06        |   | .63 |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements.

2

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**FOREST OIL CORPORATIONCONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY(Unaudited)**

| ** **                                                           | ** ** | **CommonStock**         | ** ** | **Capital  Surplus** | ** ** | **Retained  Earnings  (Accumulated  Deficit)** | ** ** | **Accumulated  Other  Comprehensive  (Loss) Income** | ** ** | **Treasury  Stock** | ** ** | **Total  Shareholders’  Equity** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|----------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
| ** **                                                           | ** ** | **(In Thousands)** | ** ** |
| Balances at January 1, 2006                                     |       |                    | 64,548     |                 |       | $                                              | 6,455      |                                                 | 1,529,102  |                |       | 217,293                               |       |   |   | (18,220 | ) |   |   | (50,108 | ) |   |   | 1,684,522 |   |   |
| Exercise of stock options                                            |       |                    | 80         |                 |       | 8                                              |       | 2,050                                                |       |                | (8         | )                                     |       |   | — |   |   |   | 27 |   |   |   | 2,077 |   |   |
| Tax benefit of stock options exercised                               |       |                    | —     |                 |       | —                                         |       | 12                                                   |       |                | —     |                                  |       |   | — |   |   |   | — |   |   |   | 12 |   |   |
| Employee stock purchase plan                                         |       |                    | 6          |                 |       | 1                                              |       | 173                                                  |       |                | —     |                                  |       |   | — |   |   |   | — |   |   |   | 174 |   |   |
| Restricted stock issued, net of forfeitures                          |       |                    | 12         |                 |       | 1                                              |       | (1                                                   | )          |                | —     |                                  |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortization of stock-based compensation                             |       |                    | —     |                 |       | —                                         |       | 11,440                                               |       |                | —     |                                  |       |   | — |   |   |   | — |   |   |   | 11,440 |   |   |
| Pro rata distribution of FERI common stock to  shareholders (Note 2) |       |                    | —     |                 |       | —                                         |       | (317,667                                             | )          |                | (247,991   | )                                     |       |   | 7,549 |   |   |   | — |   |   |   | (558,109 | ) |   |
| Comprehensive earnings:                                              |       |                    |       |                 |       |                                           |       |                                                 |       |                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                                         |       |                    | —     |                 |       | —                                         |       | —                                               |       |                | 3,671      |                                  |       |   | — |   |   |   | — |   |   |   | 3,671 |   |   |
| Unrealized gain on effective derivative instruments,  net of tax     |       |                    | —     |                 |       | —                                         |       | —                                               |       |                | —     |                                  |       |   | 77,074 |   |   |   | — |   |   |   | 77,074 |   |   |
| Decrease in unfunded pension liability, net of tax                   |       |                    | —     |                 |       | —                                         |       | —                                               |       |                | —     |                                  |       |   | 83 |   |   |   | — |   |   |   | 83 |   |   |
| Foreign currency translation                                         |       |                    | —     |                 |       | —                                         |       | —                                               |       |                | —     |                                  |       |   | (1,930 | ) |   |   | — |   |   |   | (1,930 | ) |   |
| Total comprehensive earnings                                         |       |                    |       |                 |       |                                           |       |                                                 |       |                |       |                                  |       |   |   |   |   |   |   |   |   |   | 78,898 |   |   |
| Balances at  March 31, 2006                                     |       |                    | 64,646     |                 |       | $                                              | 6,465      |                                                 | 1,225,109  |                |       | (27,035                               | )          |   |   | 64,556 |   |   |   | (50,081 | ) |   |   | 1,219,014 |   |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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**FOREST OIL CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

| ** **                                                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                                                      | ** ** | **(In Thousands)**                          | ** ** |
| Operating activities:                                                                           |       |                                             |       |   |   |
| Net earnings                                                                                    |       | $                                                | 3,671      |   | 38,871 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:            |       |                                             |       |   |   |
| Depreciation and depletion                                                                      |       | 77,668                                           |       | 96,276 |   |
| Accretion of asset retirement obligations                                                       |       | 3,352                                            |       | 4,277 |   |
| Stock-based compensation                                                                        |       | 7,315                                            |       | 128 |   |
| Impairment of oil  and gas properties                                                           |       | —                                           |       | 2,924 |   |
| Unrealized losses on derivative instruments, net                                                |       | 24,114                                           |       | 6,580 |   |
| Amortization of deferred derivative losses                                                      |       | 15,204                                           |       | — |   |
| Deferred income tax expense                                                                     |       | 12,022                                           |       | 19,689 |   |
| Other, net                                                                                      |       | 886                                              |       | (1,262 | ) |
| Changes in  operating assets and liabilities, net of effects of acquisitions and  divestitures: |       |                                             |       |   |   |
| Accounts receivable                                                                             |       | (13,988                                          | )          | (6,243 | ) |
| Other current assets                                                                            |       | (20,716                                          | )          | (1,599 | ) |
| Accounts payable                                                                                |       | (6,499                                           | )          | (35,543 | ) |
| Accrued interest and other current liabilities                                                  |       | 11,506                                           |       | 11,985 |   |
| Net cash provided  by operating activities                                                      |       | 114,535                                          |       | 136,083 |   |
| Investing activities:                                                                           |       |                                             |       |   |   |
| Capital  expenditures for property and equipment:                                               |       |                                             |       |   |   |
| Exploration, development, and acquisition costs                                                 |       | (465,175                                         | )          | (96,603 | ) |
| Other fixed assets                                                                              |       | (2,643                                           | )          | (693 | ) |
| Proceeds from sales of assets                                                                   |       | 1,018                                            |       | 6,867 |   |
| Other, net                                                                                      |       | 106                                              |       | (6,217 | ) |
| Net cash used by  investing activities                                                          |       | (466,694                                         | )          | (96,646 | ) |
| Financing activities:                                                                           |       |                                             |       |   |   |
| Proceeds from bank borrowings                                                                   |       | 876,818                                          |       | 363,953 |   |
| Repayments of bank borrowings                                                                   |       | (527,415                                         | )          | (477,000 | ) |
| Proceeds from the exercise of options and warrants  and employee stock purchases                |       | 2,250                                            |       | 24,383 |   |
| Other, net                                                                                      |       | (24                                              | )          | 1,079 |   |
| Net cash provided  (used) by financing activities                                               |       | 351,629                                          |       | (87,585 | ) |
| Effect of  exchange rate changes on cash                                                        |       | (391                                             | )          | (1,295 | ) |
| Net decrease in  cash and cash equivalents                                                      |       | (921                                             | )          | (49,443 | ) |
| Cash and cash  equivalents at beginning of period                                               |       | 7,231                                            |       | 55,251 |   |
| Cash and cash  equivalents at end of period                                                     |       | $                                                | 6,310      |   | 5,808 |   |
| Cash paid during the  period for:                                                               |       |                                             |       |   |   |
| Interest                                                                                        |       | $                                                | 3,080      |   | 1,583 |   |
| Income taxes                                                                                    |       | 1,969                                            |       | 2,473 |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4

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**FOREST OIL CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**(1) BASIS OFPRESENTATION**

The Condensed Consolidated Financial Statementsincluded herein are unaudited and include the accounts of Forest OilCorporation and its consolidated subsidiaries (collectively, “Forest” or the “Company”).In the opinion of management, all adjustments, consisting of normal recurringaccruals, have been made which are necessary for a fair presentation of thefinancial position of Forest at March 31, 2006, the results of itsoperations for the three months ended March 31, 2006 and 2005, and itscash flows for the three months ended March 31, 2006 and 2005. Quarterlyresults are not necessarily indicative of expected annual results because ofthe impact of fluctuations in prices received for liquids (oil, condensate, andnatural gas liquids) and natural gas and other factors.

In the course of preparing the Condensed ConsolidatedFinancial Statements, management makes various assumptions, judgments, andestimates to determine the reported amount of assets, liabilities, revenue, andexpenses, and in the disclosures of commitments and contingencies. Changes inthese assumptions, judgments, and estimates will occur as a result of thepassage of time and the occurrence of future events and, accordingly, actualresults could differ from amounts initially established.

The more significant areas requiring the use ofassumptions, judgments, and estimates relate to volumes of oil and gas reservesused in calculating depletion, the amount of future net revenues used incomputing the ceiling test limitations, and the amount of future capital costsand abandonment obligations used in such calculations. Assumptions, judgments,and estimates are also required in determining impairments of undevelopedproperties, valuing deferred tax assets, and estimating fair values ofderivative instruments.

Certain amounts in the prior year financial statementshave been reclassified to conform to the 2006 financial statement presentation.

For a more completeunderstanding of Forest’s operations, financial position, and accountingpolicies, reference is made to the consolidated financial statements of Forest,and related notes thereto, filed with Forest’s annual report on Form 10-Kfor the year ended December 31, 2005, previously filed with the Securitiesand Exchange Commission.

**(2) ACQUISITIONS ANDDIVESTITURES**

***Acquisitions***

On March 31, 2006,Forest completed the acquisition of oil and gas properties located primarily inthe Cotton Valley trend in East Texas. Forest paid approximately $255 million,as adjusted to reflect an economic effective date of February 1, 2006, forproperties with an estimated 110 Bcfe of estimated proved reserves at the timethe acquisition was announced and production that averaged 13 MMcfe per day in January 2006.Forest acquired approximately 26,000 net acres in the fields, of whichapproximately 14,000 net acres are undeveloped. Forest funded this acquisitionutilizing its bank credit facilities.

***Divestitures***

*Spin-off and Mergerof Offshore Gulf of Mexico Operations*

On March 2, 2006, Forest completed the spin-offof its offshore Gulf of Mexico operations by means of a special dividend, whichconsisted of a pro rata spin-off (the “Spin-off”) of all outstanding shares ofForest Energy Resources, Inc. (“FERI”), a total of 50,637,010 shares ofcommon stock, to holders of 

5

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**(2) ACQUISITIONSAND DIVESTITURES (Continued)**

record of Forest commonstock as of the close of business on February 21, 2006. Immediatelyfollowing the Spin-off, FERI was merged with a subsidiary of Mariner in a stockfor stock transaction (the “Merger”). Mariner’s common stock commenced tradingon the New York Stock Exchange on March 3, 2006.

The Spin-off was a tax-free transaction for federalincome tax purposes. Prior to the Merger, as part of the Spin-off, FERI paidForest approximately $176.1 million. The $176.1 million was drawn on a newlycreated bank credit facility established by FERI immediately prior to theSpin-off. This credit facility and associated liability was included in theSpin-off. Subsequent to March 31, 2006, Forest received an additional$21.7 million from FERI for total proceeds of $197.8 million. The cash amount issubject to further potential adjustment to reflect an economic effective dateof July 1, 2005.

Thetable below sets forth the effect of the Spin-off on the Company’s balancesheet at the time of the Spin-off:

| ** **                                                          | ** ** | **Change in Balance  Sheet Accounts** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                          | ** ** | **(In Thousands)**                              | ** ** |
| **Assets**(Increase/(Decrease))                                     | ** ** |                                                 | ** ** | ** ** |   |
| Cash                                                                |       |                                                 | $          | (10 | ) |   |
| Accounts receivable—Due from FERI                              |       |                                                 | 21,525     |   |   |
| Accounts receivable—third parties                              |       |                                                 | (54,078    | ) |   |
| Other current assets                                                |       |                                                 | (44,837    | ) |   |
| Proved oil and gas properties, net of accumulated  depletion        |       |                                                 | (1,065,992 | ) |   |
| Unproved oil and gas properties                                     |       |                                                 | (38,523    | ) |   |
| Other assets                                                        |       |                                                 | (7,919     | ) |   |
| **Liabilities  and Shareholders’ Equity**((Increase)/Decrease) |       |                                                 |       |   |   |
| Current liabilities                                                 |       |                                                 | 96,142     |   |   |
| Derivative instruments                                              |       |                                                 | 17,087     |   |   |
| FERI credit facility                                                |       |                                                 | 176,102    |   |   |
| Asset retirement obligations                                        |       |                                                 | 150,182    |   |   |
| Deferred income taxes                                               |       |                                                 | 192,212    |   |   |
| Accumulated other comprehensive income                              |       |                                                 | (7,549     | ) |   |
| Net decrease to capital  surplus and retained earnings              |       |                                                 | $          | (565,658 | ) |   |

 

Thefollowing table presents the revenues and direct operating expenses of theoffshore Gulf of Mexico operations reported in the Condensed ConsolidatedStatements of Operations. The 2006 period includes only two months of theoffshore Gulf of Mexico operations, through February 28, 2006, whereas the2005 period includes all three months of activity.

| ** **                                                   | ** ** | **Period Ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | **(In Thousands)**               | ** ** |
| Oil and gas  revenues                                        |       | $                                     | 46,289     |   | 120,843 |   |
| Oil and gas  production expense:                             |       |                                  |       |   |   |
| Lease operating expenses                                     |       | 18,296                                |       | 16,622 |   |
| Transportation costs                                         |       | 344                                   |       | 842 |   |
| Production and property taxes                                |       | 151                                   |       | 593 |   |
| Oil and gas revenues in  excess of direct operating expenses |       | $                                     | 27,498     |   | 102,786 |   |

 

6

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**(2) ACQUISITIONSAND DIVESTITURES (Continued)**

*Sale of ProMark—DiscontinuedOperations*

On March 1, 2004, theCompany sold the assets and business operations of ProducersMarketing, Ltd. (“ProMark”) to Cinergy Canada, Inc. (“Cinergy”) for$11.2 million CDN. As a result of the sale, ProMark’s results ofoperations were reported as discontinued operations in the historical financialstatements. Under the terms of the purchase and sale agreement, Forest mayreceive additional contingent consideration over a period of five years throughFebruary 2009. During the quarter ended March 31, 2006, Forestrecognized an additional $3.6 million contingent payment ($2.4 million net oftax), which has been reflected as income from discontinued operations in theCondensed Consolidated Statements of Operations.

**(3) EARNINGS PERSHARE AND COMPREHENSIVE EARNINGS (LOSS)**

***Earnings per Share***

Basic earnings per share is computed by dividing netearnings attributable to common stock by the weighted average number of commonshares outstanding during each period, excluding treasury shares.

Dilutedearnings per share is computed by adjusting the average number of common sharesoutstanding for the dilutive effect, if any, of stock options, unvestedrestricted stock grants, unvested phantom stock units, and warrants. Thefollowing sets forth the calculation of basic and diluted earnings per share:

| ** **                                                                                                 | ** ** | **Three Months Ended  March 31,**                  | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                                                                                                 | ** ** | **(In Thousands, Except  Per Share Amounts)** | ** ** |
| Earnings from  continuing operations                                                                       |       | $                                                                 | 1,249      |   | 38,871 |   |
| Income from  discontinued operations, net of tax                                                           |       | 2,422                                                             |       | — |   |
| Net earnings                                                                                               |       | $                                                                 | 3,671      |   | 38,871 |   |
| Weighted average common shares outstanding during  the period                                              |       | 62,115                                                            |       | 60,209 |   |
| Add dilutive  effects of stock options, unvested restricted stock grants, and unvested phantom stock units |       | 1,055                                                             |       | 947 |   |
| Add dilutive  effects of warrants                                                                          |       | —                                                            |       | 932 |   |
| Weighted average  common shares outstanding, including the effects of dilutive securities                  |       | 63,170                                                            |       | 62,088 |   |
| Basic earnings per share:                                                                                  |       |                                                              |       |   |   |
| From continuing operations                                                                                 |       | $                                                                 | .02        |   | .65 |   |
| From discontinued operations                                                                               |       | .04                                                               |       | — |   |
| Basic earnings per share                                                                                   |       | $                                                                 | .06        |   | .65 |   |
| Diluted earnings  per share:                                                                               |       |                                                              |       |   |   |
| From continuing operations                                                                                 |       | $                                                                 | .02        |   | .63 |   |
| From discontinued operations                                                                               |       | .04                                                               |       | — |   |
| Diluted earnings  per share                                                                                |       | $                                                                 | .06        |   | .63 |   |

 

***Comprehensive Earnings (Loss):***

Comprehensive earnings (loss) is a term used to referto net earnings (loss) plus other comprehensive income (loss). Othercomprehensive income (loss) is comprised of revenues, expenses, gains, andlosses that under generally accepted accounting principles are reported asseparate components of shareholders’ 

7

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**(3) EARNINGSPER SHARE AND COMPREHENSIVE EARNINGS (LOSS) (Continued)**

equity instead of netearnings (loss). Items included in Forest’s other comprehensive income (loss) forthe three months ended March 31, 2006 and 2005 are foreign currency gainsrelated to the translation of the assets and liabilities of Forest’s Canadianoperations, changes in the unfunded pension liability, and changes in hedginglosses related to the change in fair value of derivative instruments eligiblefor cash flow hedge accounting.

Thecomponents of comprehensive earnings (loss) are as follows:

| ** **                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(In Thousands)**                          | ** ** |
| Net earnings                                                  |       | $                                                | 3,671      |   | 38,871 |   |
| Other  comprehensive income (loss):                           |       |                                             |       |   |   |
| Foreign currency translation losses                           |       | (1,930                                           | )          | (2,879 | ) |
| Unfunded pension liability, net of tax                        |       | 83                                               |       | (149 | ) |
| Unrealized gain (loss) on derivative instruments,  net of tax |       | 77,074                                           |       | (75,509 | ) |
| Total comprehensive  earnings (loss)                          |       | $                                                | 78,898     |   | (39,666 | ) |

 

**(4) STOCK-BASEDCOMPENSATION**

Prior to January 1, 2006, the Company accountedfor stock-based compensation using the intrinsic value method prescribed inAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations. Under APB Opinion No. 25,no compensation expense was recognized for stock options issued to employees ifthe grant price equaled or was above the market price on the date of the optiongrant. Effective January 1, 2006, the Company adopted the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 123 (Revised), “Share-BasedPayment” (“SFAS 123(R)”) using the modified prospective method. Under thismethod, compensation cost is recorded forall unvested stock options, restricted stock, and phantom stock units beginningin the period of adoption and prior period financial statements are notrestated. Under the fair value recognition provisions of SFAS 123(R),stock-based compensation is measured at the grant date based on the value ofthe awards and the value is recognized on a straight-line basis over therequisite service period (usually the vesting period).

In accordance with theprovisions of SFAS 123(R), total stock-based compensation cost in the amount of$12.9 million was recorded in the three months ended March 31, 2006. Ofthis amount, $7.9 million was recorded as compensation expense and $5.0 millionwas capitalized to oil and gas properties in accordance with the full costmethod of accounting. As discussed in more detail below, approximately $9.7million of the $12.9 million of total stock-based compensation for the quarterended March 31, 2006 was attributable to a partial settlement of theCompany’s restricted stock awards and phantom stock unit awards in connectionwith the Spin-off. SFAS 123(R) requires the Company to estimateforfeitures in calculating the cost related to stock-based compensation asopposed to recognizing these forfeitures and the corresponding reduction in expenseas they occur. The cumulative adjustment to include estimated forfeitures inthe calculation was less than $.1 million. This amount was recorded as areduction in general and administrative expense and capitalized oil and gasproperties in 2006 and was not presented separately in the CondensedConsolidated Statement of Operations. The impact of adopting SFAS 123(R) asof January 1, 2006 resulted in a decrease to net income of approximately$.5 million, or $.01 per basic and diluted share.

8

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**(4)**                               STOCK-BASEDCOMPENSATION (Continued)

***Equity Incentive Plans***

In 2001, the Company adopted the Forest OilCorporation 2001 Stock Incentive Plan (the “2001 Plan”) under which non-qualifiedstock options, incentive stock options, restricted stock, phantom stock units, andother awards may be granted to employees, consultants, and non-employeedirectors. In 2003, the Company amended the 2001 Plan to increase the number ofshares reserved for issuance. The aggregate number of shares of Common Stockthat the Company may issue under the 2001 Plan may not exceed5,012,074 million shares, which amount reflects an adjustment to theamount of shares available for grant to reflect the Spin-off. Options aregranted at a price equal to the fair market value of one share of Common Stockon the date of grant. Options granted to employees under the 2001 Plangenerally vest in increments of 25% on each of the first four anniversary datesof the date of grant and have a term of ten years. Options granted tonon-employee directors vest immediately and have a term of ten years. Inconnection with the Spin-off, the shares available for grant and outstandingstock options under the 2001 Plan were adjusted to reflect the economic effectof the Spin-off by reducing the exercise price and increasing the number of underlyingshares. As of March 31, 2006, the Company had 620,339 shares available forissuance under the 2001 Plan.

The Company also had a Stock Incentive Plan (the “1996Plan”) that expired on March 5, 2002 under which non-qualified stockoptions and restricted stock were granted to employees and director stockawards were granted to non-employee directors. Options granted under the 1996Plan generally vested in increments of 20% commencing on the date of grant andon each of the first four anniversaries of the date of the grant and generallyhad a term of ten years.

The Company hashistorically issued new shares of common stock or treasury stock to settle itsequity based awards.

*Stock Options*

Thefollowing table summarizes stock option activity in the Company’s stock-basedcompensation plans for the quarter ended March 31, 2006. The number ofshares and the exercise price of the outstanding stock options were adjusted sothat the fair value of each award was the same immediately before and after theSpin-off, in accordance with the anti-dilution provisions in the 2001 Plan and1996 Plan.

| ** **                             | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** | **Aggregate  Intrinsic Value**(In Thousands)(1) | ** ** | **Number of  Shares  Exercisable** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------|------------|
| Outstanding at  January 1, 2006   |       | 2,578,235                   |       |                                                       | $          | 27.78                                                     |       |                                    |       | $ | 45,889 |   |   | 1,348,599 |   |
| Granted                                |       | —                      |       |                                                       | —     |                                                      |       |                                    |       |   |   |   |   |
| Exercised                              |       | (58,337                     | )          |                                                       | 28.71      |                                                      |       |                                    | 1,255      |   |   |   |   |
| Cancelled                              |       | (98,587                     | )          |                                                       | 30.91      |                                                      |       |                                    |       |   |   |   |   |
| Outstanding at  March 2, 2006     |       | 2,421,311                   |       |                                                       | 27.63      |                                                      |       |                                    | 55,723     |   |   |   |   |
| Adjustment to  give effect to Spin-off |       | 1,176,804                   |       |                                                       | —     |                                                      |       |                                    |       |   |   |   |   |
| Granted                                |       | —                      |       |                                                       | —     |                                                      |       |                                    |       |   |   |   |   |
| Exercised                              |       | (21,742                     | )          |                                                       | 18.35      |                                                      |       |                                    | 370        |   |   |   |   |
| Cancelled                              |       | (2,878                      | )          |                                                       | 25.44      |                                                      |       |                                    |       |   |   |   |   |
| Outstanding at  March 31, 2006    |       | 3,573,495                   |       |                                                       | 18.59      |                                                      |       |                                    | 65,620     |   |   | 2,177,224 |   |

----

(1)                 The intrinsic value of a stock option isthe amount by which the current market value of the underlying stock exceedsthe exercise price of the option.

9

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**(4)          STOCK-BASED COMPENSATION (Continued)**

Stock options aregranted at the fair market value of one share of Common Stock on the date ofgrant. Options granted to non-employee directors vest immediately and optionsgranted to officers and other employees vest ratably over four years and have aterm of ten years. No stock options weregranted during the first quarter ended March 31, 2006.

Thefair value of stock options granted in the first quarter of 2005 was estimatedusing the Black-Scholes option pricing model. The following assumptionswere used to compute the weighted average fair market value of stock optionsgranted in the first quarter of 2005:

| ** **                                                             | ** ** | **Three Months Ended  March 31, 2005** | ** **    |
|------------------------------------------------------------------------|------------|------------------------------------------------------------|---------------|
| Expected life of  options                                              |       |                                                       | 5  years      |   |   |
| Risk free  interest rates                                              |       |                                                       | 3.64%  - 4.20 | % |   |
| Estimated  volatility                                                  |       |                                                       | 35%           |   |   |
| Dividend yield                                                         |       |                                                       | 0.0%          |   |   |
| Weighted average fair  market value of options granted during the year |       |                                                       | $13.05        |   |   |

 

The expected life of the options is based, in part, onhistorical exercise patterns of the holders of options with similar terms withconsideration given to how historical patterns may differ from future exercisepatterns based on current or expected market conditions and employee turnover. Therisk free interest rate was based on the U.S. Treasury yield curve in effect atthe time of grant. The expected volatility was based on the historicalvolatility of the Company’s stock for the past five years.

As of March 31, 2006, there was $10 million oftotal unrecognized compensation cost related to stock options which is expectedto be amortized over a weighted-average period of 1.7 years.

Thefollowing table summarizes information about options outstanding at March 31,2006:

| ** **                              | ** ** | **Stock Options Outstanding** | ** ** | **Stock Options Exercisable**                          | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  of Options**             | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value(In Thousands)** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value(In Thousands)** | ** ** |
| $8.41 - 16.75                           |       | 750,543                                 |       |                                                             | 6.55       |   |   |   | $14.93 |   |   |   | $16,527 |   |   | 533,531 |   |   | $14.78 |   |   |   | $11,828 |   |   |
| 16.82 - 16.85                           |       | 812,905                                 |       |                                                             | 7.32       |   |   |   | 16.84 |   |   |   | 16,346 |   |   | 506,446 |   |   | 16.84 |   |   |   | 10,186 |   |   |
| 16.88 - 20.02                           |       | 768,604                                 |       |                                                             | 5.09       |   |   |   | 18.91 |   |   |   | 13,864 |   |   | 712,886 |   |   | 19.00 |   |   |   | 12,798 |   |   |
| 20.19 - 20.47                           |       | 34,550                                  |       |                                                             | 8.14       |   |   |   | 20.31 |   |   |   | 575 |   |   | 10,589 |   |   | 20.37 |   |   |   | 176 |   |   |
| 20.60 - 35.23                           |       | 1,206,893                               |       |                                                             | 8.41       |   |   |   | 21.78 |   |   |   | 18,308 |   |   | 413,772 |   |   | 21.63 |   |   |   | 6,341 |   |   |
| $8.41 - 35.23                           |       | 3,573,495                               |       |                                                             | 7.06       |   |   |   | 18.59 |   |   |   | $65,620 |   |   | 2,177,224 |   |   | 17.97 |   |   |   | $41,329 |   |   |

 

10

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**(4)          STOCK-BASED COMPENSATION (Continued)**

*Restricted Stockand Phantom Stock Units*

Thefollowing summarizes restricted stock and phantom stock unit activity duringthe first quarter of 2006. The grant date fair value of the restricted commonstock and phantom stock units was determined by reference to the average of thehigh and low stock price as published by the NYSE on the date of grant.

| ** **                        | ** ** | **Restricted Stock**  | ** ** | **Phantom Stock Units**                          | ** ** |
|-----------------------------------|------------|----------------------------|------------|------------------------------------------------------------|------------|
| ** **                        | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value**(1) | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value**(1) | ** ** |
| Unvested at  January 1, 2006 |       |                       | 634,000    |                                                       |       |   | $43.72 |   |   |   | 72,350 |   |   |   | $46.07 |   |   |
| Granted                           |       |                       | 16,200     |                                                       |       |   | 48.54 |   |   |   | 1,500 |   |   |   | 46.72 |   |   |
| Vested                            |       |                       | (100       | )                                                          |       |   | 46.07 |   |   |   | — |   |   |   |   |   |   |
| Forfeited                         |       |                       | (4,300     | )                                                          |       |   | 46.07 |   |   |   | — |   |   |   |   |   |   |
| Unvested at  March 31, 2006  |       |                       | 645,800    |                                                       |       |   | $43.83 |   |   |   | 73,850 |   |   |   | $46.08 |   |   |

----

(1)                 These per-share fair values represent theactual grant date fair value and have not been adjusted to give effect to theSpin-off.

The restricted stock and phantom stock units generallyvest on the third anniversary of the date of the award, but may vest earlierupon a qualifying disability, death, retirement, or a change in control of theCompany in accordance with the terms of the underlying agreement. The phantomstock units may be settled in cash, shares of Common Stock, or a combination ofboth, at the Company’s discretion.

Concurrent with the special dividend on March 2,2006, employees who held unvested restricted stock awards received .8093unrestricted shares of FERI for each share of restricted stock. Accordingly,compensation cost of approximately $8.4 million was recognized during the firstquarter of 2006 for the partial settlement of the outstanding restricted stockawards. In addition, cash bonuses totaling $1.2 million were paid to Canadianemployees who held phantom stock units on that date, representing the per-sharevalue of the FERI shares received by each holder of restricted stock.

The Company recordedamortization of deferred stock-based compensation for restricted stock andphantom stock unit awards of $2.0 million and $.2 million during the threemonths ended March 31, 2006 and 2005, respectively. As of March 31,2006 there was $14.9 million of total unrecognized compensation cost related torestricted stock and phantom stock unit awards which is expected to berecognized over a weighted-average period of approximately 2.6 years. As of March 31,2006, approximately $.2 million of compensation was accrued related to thephantom stock units.

*Employee StockPurchase Plan*

The Company has a 1999 Employee Stock Purchase Plan(the “ESPP”), under which it is authorized to issue up to 300,000 shares ofCommon Stock. Employees who are regularly scheduled to work more than20 hours per week and more than five months in any calendar year mayparticipate in the ESPP. Under the terms of the ESPP, employees may elect eachquarter to have up to 15% of their annual base earnings withheld to purchaseshares of Common Stock, up to a limit of $25,000 of Common Stock per calendaryear. The ESPP currently provides for four offering periods during the year whichcoincide with the calendar quarters. The purchase price of the Common Stockpurchased under the ESPP is equal to 85% of the lower of thebeginning-of-quarter or end-of-quarter market price. ESPP participants arerestricted from selling the shares of Common Stock purchased under the ESPP fora period of six months after purchase. As of March 31, 2006, the Companyhad 182,864 shares available for issuance under the ESPP.

11

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**(4)          STOCK-BASED COMPENSATION (Continued)**

The fair value of eachstock purchase right granted under the ESPP during the quarters ended March 31,2006 and 2005 was estimated using the Black-Scholes option pricing model.The following assumptions were used to compute the weighted average fair marketvalue of purchase rights granted during the periods presented:

| ** **                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Expected option  life                                          |       | 3  months                                        |       | 3  months |   |
| Risk free  interest rates                                      |       | 4.16%                                            |       | 2.32% |   |
| Estimated  volatility                                          |       | 36%                                              |       | 23% |   |
| Dividend yield                                                 |       | 0.0%                                             |       | 0.0% |   |
| Weighted average fair  market value of purchase rights granted |       | $9.50                                            |       | $8.65 |   |

 

The risk free rate wasbased on the U.S. Treasury yield curve in effect at the time of grant and theaverage expected life was the term of the quarterly look-back option. Theexpected volatility was based on the historical volatility of the Company’s CommonStock for the quarter. For purposes of the ESPP offering that closed on March 31,2006, the beginning stock price was adjusted to reflect the economic effect ofthe Spin-off. Compensation cost of $.1 million was recorded under theprovisions of SFAS 123(R) related to purchase rights granted under theESPP plan for the quarter ended March 31, 2006. Pro forma compensationcost associated with the purchase rights granted under the ESPP for the quarterended March 31, 2005 was $.1 million.

*Pro Forma Effects*

Had Forestrecognized compensation expense for all stock-based awards based upon theestimated fair value on the grant date under the fair value methodologyprescribed by SFAS 123, as amended by SFAS 148 and SFAS 123(R), its pro formanet earnings and earnings per common sharefor the three months ended March 31, 2005 would have been as follows:

| ** **                                                                                                                    | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **(In  Thousands)**                                        | ** ** |
| Net earnings, as  reported                                                                                                    |       |                                                       | $          | 38,871 |   |   |
| Add: Stock-based  employee compensation included in reported net income, net of tax                                           |       |                                                       | 75         |   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of tax |       |                                                       | (736       | ) |   |
| Pro forma net  earnings                                                                                                       |       |                                                       | $          | 38,210 |   |   |
| Basic earnings  per common share:                                                                                             |       |                                                       |       |   |   |
| As reported                                                                                                                   |       |                                                       | $          | .65 |   |   |
| Pro forma                                                                                                                     |       |                                                       | $          | .63 |   |   |
| Diluted earnings  per common share:                                                                                           |       |                                                       |       |   |   |
| As reported                                                                                                                   |       |                                                       | $          | .63 |   |   |
| Pro forma                                                                                                                     |       |                                                       | $          | .62 |   |   |

 

12

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**(5)**                               LONG-TERMDEBT

Componentsof long-term debt are as follows:

| ** **                             | ** ** | **March 31, 2006** | ** ** | **December 31, 2005**  | ** ** |         |
|----------------------------------------|------------|------------------------------|------------|----------------------------------|------------|--------------|
| ** **                             | ** ** | **Principal**                | ** ** | **UnamortizedPremium(Discount)** | ** ** | **Other**(1) | ** ** | **Total** | ** ** | **Principal** | ** ** | **UnamortizedPremium(Discount)** | ** ** | **Other**(1) | ** ** | **Total** | ** ** |   |
| ** **                             | ** ** | **(In Thousands)**      | ** ** |                             |
| U.S. Credit Facility                   |       | $                            | 259,000    |                             |       | —       |   |   |   | — |   |   | 259,000 |   |   | 97,000 |   |   |   | — |   |   |   | — |   |   | 97,000 |   |
| Canadian Credit Facility               |       | 67,813                       |       |                             | —     |         |   |   | — |   |   | 67,813 |   |   | 56,806 |   |   |   | — |   |   |   | — |   |   | 56,806 |   |
| 8% Senior Notes Due 2008               |       | 265,000                      |       |                             | (219       | )            |   |   | 5,085 |   |   | 269,866 |   |   | 265,000 |   |   |   | (244 | ) |   |   | 5,652 |   |   | 270,408 |   |
| 8% Senior Notes Due 2011               |       | 285,000                      |       |                             | 7,427      |         |   |   | 4,785 |   |   | 297,212 |   |   | 285,000 |   |   |   | 7,750 |   |   |   | 4,992 |   |   | 297,742 |   |
| 7 3¤4% Senior Notes Due 2014 |       | 150,000                      |       |                             | (1,930     | )            |   |   | 14,402 |   |   | 162,472 |   |   | 150,000 |   |   |   | (1,990 | ) |   |   | 14,841 |   |   | 162,851 |   |
|                                   |       | $                            | 1,026,813  |                             |       | 5,278        |   |   |   | 24,272 |   |   | 1,056,363 |   |   | 853,806 |   |   |   | 5,516 |   |   |   | 25,485 |   |   | 884,807 |   |

----

(1)                 Represents the unamortized portion ofgains realized upon termination of interest rate swaps that were accounted foras fair value hedges. The gains are being amortized as a reduction of interestexpense over the terms of the notes.

**(6)**                               PROPERTYAND EQUIPMENT

Forest uses the full cost method of accounting for oiland gas properties. Separate cost centers are maintained for each country inwhich Forest has operations. During the periods presented, Forest’s primary oiland gas operations were conducted in the United States and Canada. All costsincurred in the acquisition, exploration, and development of properties(including costs of surrendered and abandoned leaseholds, delay lease rentals,dry holes, and overhead related to exploration and development activities) andthe fair value of estimated future costs of site restoration, dismantlement,and abandonment activities are capitalized.

Investments in unproved properties, including relatedcapitalized interest costs, are not depleted pending determination of theexistence of proved reserves. Unproved properties are assessed periodically toascertain whether impairment has occurred. Unproved properties whose costs areindividually significant are assessed individually by considering the primarylease terms of the properties, the holding period of the properties, andgeographic and geologic data obtained relating to the properties. Where it isnot practicable to assess individually the amount of impairment of propertiesfor which costs are not individually significant, such properties are groupedfor purposes of assessing impairment. The amount of impairment assessed isadded to the costs to be amortized, or is reported as a period expense, asappropriate.

Pursuant to full cost accounting rules, capitalizedcosts less related accumulated depletion and deferred income taxes for eachcost center may not exceed the sum of (1) the present value of future netrevenue from estimated production of proved oil and gas reserves using currentprices, including the effects of derivative instruments but excluding thefuture cash outflows associated with settling asset retirement obligations thathave been accrued on the balance sheet, and a discount factor of 10%; plus (2) thecost of properties not being amortized, if any; plus (3) the lower of costor estimated fair value of unproved properties included in the costs beingamortized, if any; less (4) income tax effects related to differences inthe book and tax basis of oil and gas properties. There were no such provisionsfor impairment of oil and gas properties in the periods presented. Gain or lossis not recognized on the sale of oil and gas properties unless the salesignificantly alters the relationship between capitalized costs and estimatedproved oil and gas reserves attributable to a cost center.

13

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**(6)          PROPERTY AND EQUIPMENT(Continued)**

Depletion of proved oiland gas properties is computed on the units-of-production method, wherebycapitalized costs, as adjusted for future development costs and assetretirement obligations, are amortized over the total estimated proved reserves.Furniture and fixtures, computer hardware and software, and other equipment aredepreciated on the straight-line or declining balance method, based uponestimated useful lives of the assets ranging from three to 12 years.

**(7)**                               ASSETRETIREMENT OBLIGATIONS

Forest records estimated future asset retirementobligations pursuant to the provisions of Statement of Financial AccountingStandards No. 143, *Accounting for AssetRetirement Obligations* (“SFAS No. 143”). SFAS No. 143requires entities to record the fair value of a liability for an assetretirement obligation in the period in which it is incurred with a correspondingincrease in the carrying amount of the related long-lived asset. Subsequent toinitial measurement, the asset retirement liability is required to be accretedeach period to its present value. Capitalized costs are depleted as a componentof the full cost pool using the units-of-production method. Forest’s assetretirement obligations consist of costs related to the plugging of wells, theremoval of facilities and equipment, and site restoration on oil and gasproperties.

Thefollowing table summarizes the activity for Forest’s asset retirementobligations for the three months ended March 31, 2006 and 2005:

| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(In Thousands)**                          | ** ** |
| Asset retirement  obligations at beginning of period |       | $                                                | 211,554    |   | 210,176 |   |
| Accretion expense                                    |       | 3,352                                            |       | 4,277 |   |
| Liabilities  incurred                                |       | 202                                              |       | 2,146 |   |
| Liabilities  assumed                                 |       | 1,009                                            |       | — |   |
| Liabilities  included in the Spin-off                |       | (150,182                                         | )          | — |   |
| Liabilities  settled                                 |       | (4,379                                           | )          | (1,462 | ) |
| Revisions of  estimated liabilities                  |       | (484                                             | )          | 4,240 |   |
| Impact of foreign  currency exchange rate            |       | (73                                              | )          | (81 | ) |
| Asset retirement  obligations at end of period       |       | 60,999                                           |       | 219,296 |   |
| Less: current  asset retirement obligations          |       | (1,497                                           | )          | (29,229 | ) |
| Long-term asset  retirement obligations              |       | $                                                | 59,502     |   | 190,067 |   |

** **

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**(8)**                               EMPLOYEEBENEFITS

The following table setsforth the components of the net periodic cost of Forest’s defined benefitpension plans and postretirement benefits in the United States for the threemonths ended March 31, 2006 and 2005:

| ** **                      | ** ** | **Pension  Benefits**                            | ** ** | **Postretirement  Benefits**                     | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                      | ** ** | **Three Months  Ended March 31,** | ** ** | **Three Months  Ended March 31,** | ** ** |
| ** **                      | ** ** | **2006**                                         | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(In Thousands)**                          | ** ** |
| Service cost                    |       | $                                                | —     |                                             | —     |   | 169 |   |   | 167 |   |   |
| Interest cost                   |       | 548                                              |       | 581                                              |       | 118 |   |   | 113 |   |   |
| **Curtailment gain****(****1)** |       | —                                           |       | —                                           |       | (1,851 | ) |   | — |   |   |
| Expected return on plan  assets |       | (608                                             | )          | (586                                             | )          | — |   |   | — |   |   |
| Recognized actuarial  loss      |       | 227                                              |       | 188                                              |       | — |   |   | — |   |   |
| Total net periodic  expense     |       | $                                                | 167        |                                             | 183        |   | (1,564 | ) |   | 280 |   |   |

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(1)                 Forest recognized a $1.9 million curtailment gain inconnection with the Spin-off on March 2, 2006. This gain was recorded as areduction in general and administrative expense for the three months ended March 31,2006.

**(9)**                               FINANCIALINSTRUMENTS

Forestperiodically enters into derivative instruments such as swap, basis swap, andcollar agreements in order provide a measure of stability to Forest’s cashflows in an environment of volatile oil and gas prices and to manage theexposure to commodity price risk. Forest’s commodity derivative instrumentsgenerally serve as effective economic hedges of commodity price exposure;however, various circumstances can cause commodity hedges to not qualify forcash flow hedge accounting either at the inception of the hedge or during theterm of the hedge. When the criteria for cash flow hedge accounting are notmet, realized gains and losses (i.e., cash settlements) are recorded in otherincome and expense in the Condensed Consolidated Statements of Operations.Similarly, changes in the fair value of the derivative instruments are recordedas unrealized gains or losses in the Condensed Consolidated Statements ofOperations. In contrast, cash settlements for derivative instruments thatqualify for hedge accounting are recorded as additions to or reductions of oiland gas revenues while changes in fair value of cash flow hedges arerecognized, to the extent the hedge is effective, in other comprehensive incomeuntil the hedged item is recognized in earnings.

*Discontinuance ofHedge Accounting*

As a result of production deferrals experienced in theGulf of Mexico related to hurricanes Katrina and Rita, Forest was required todiscontinue cash flow hedge accounting on many of the Company’s natural gas andoil hedges during the third and fourth quarters of 2005. Additionally, as aresult of the Spin-off on March 2, 2006, additional commodity swaps andcollars formerly designated as cash flow hedges of offshore Gulf of Mexicoproduction also no longer qualified for hedge accounting.

Because a significant portion of the Company’sderivatives no longer qualified for hedge accounting and to increase clarity inits financial statements, the Company elected to discontinue hedge accountingprospectively for all of its remaining commodity derivatives beginning in March 2006.This change in reportingwill have no impact on the Company’s reported cash flows, although futureresults of operations will be affected by mark-to-market gains and losses whichfluctuate with volatile oil and gas prices. The Company will recognize allprospective mark-to-market gains and losses in earnings, rather than deferringsuch amounts in accumulated other comprehensive income included in shareholders’equity.

15

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**(9)          FINANCIAL INSTRUMENTS(Continued)**

The net mark-to-marketloss on the Company’s remaining swaps and collars that qualified for cash flowhedge accounting at the date the decision was made to discontinue hedgeaccounting are deferred in accumulated other comprehensive income and will beamortized into oil and gas revenues as the original forecasted hedged oil andgas production occurs in 2006. Amortization of the net deferred losses will berecorded in 2006 as follows:

| ** **           | ** ** | **(In Thousands)** | ** ** |
|----------------------|------------|-------------------------|------------|
| Second Quarter  2006 |       |                    | $          | 1,677 |   |   |
| Third Quarter  2006  |       |                    | 2,250      |   |   |
| Fourth Quarter  2006 |       |                    | 3,207      |   |   |
|                 |       |                    | $          | 7,134 |   |   |

 

Thetable below summarizes the realized and unrealized losses Forest incurredrelated to its derivative instruments for the periods indicated.

| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                                   | ** ** | **(In Thousands)**                          | ** ** |
| Realized losses  on derivatives designated as cash flow hedges(1)            |       | $                                                | 36,680     |   | 20,809 |   |
| Realized losses  on derivatives not designated as cash flow hedges(2)        |       | 3,915                                            |       | 532 |   |
| Ineffectiveness  recognized on derivatives designated as cash flow hedges(2) |       | (5,573                                           | )          | 1,389 |   |
| Unrealized losses  on derivatives not designated as cash flow hedges(2)      |       | 29,687                                           |       | 5,191 |   |
| Total realized and  unrealized losses recorded                               |       | $                                                | 64,709     |   | 27,921 |   |

----

(1)                 Included in oil and gas sales in theCondensed Consolidated Statements of Operations.

(2)                 Included in other income and expense inthe Condensed Consolidated Statements of Operations.

Thetables below set forth Forest’s outstanding commodity swaps and collars as ofMarch 31, 2006:

| ** **           | ** ** | **Swaps**                                 | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **Natural Gas (NYMEX HH)** | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **           | ** ** | **Bbtu  Per Day**                    | ** ** | **Weighted Average  Hedged Price  per MMBtu** | ** ** | **Barrels  Per Day** | ** ** | **Weighted Average  Hedged Price  per Bbl** | ** ** |
| Second Quarter 2006  |       |                                      | 10.0       |   |   |   | $ | 5.51 |   |   |   | 4,000 |   |   |   | $ | 31.58 |   |   |
| Third Quarter 2006   |       |                                      | 10.0       |   |   |   | 5.51 |   |   |   | 4,000 |   |   |   | 31.58 |   |   |
| Fourth Quarter  2006 |       |                                      | 10.0       |   |   |   | 5.51 |   |   |   | 4,000 |   |   |   | 31.58 |   |   |

 

| ** **           | ** ** | **Costless Collars**                 | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **Natural Gas (NYMEX HH)** | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **           | ** ** | **Bbtu  Per Day**                    | ** ** | **Weighted Average  Hedged Floor and  Ceiling Price  per MMBtu** | ** ** | **Barrels  Per Day** | ** ** | **Weighted Average  Hedged Floor and  Ceiling Price  per Bbl** | ** ** |
| Second Quarter  2006 |       |                                      | 50.0       |   |   |   | $ | 7.43/11.88 |   |   |   | 5,500 |   |   |   | $ | 46.73/65.87 |   |   |
| Third Quarter  2006  |       |                                      | 50.0       |   |   |   | 7.43/11.88 |   |   |   | 5,500 |   |   |   | 46.73/65.87 |   |   |
| Fourth Quarter  2006 |       |                                      | 50.0       |   |   |   | 7.43/11.88 |   |   |   | 5,500 |   |   |   | 46.73/65.87 |   |   |
| Fiscal 2007          |       |                                      | 10.0       |   |   |   | 9.60/10.25 |   |   |   | — |   |   |   | — |   |   |

 

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**(9) FINANCIALINSTRUMENTS (Continued)**

At March 31, 2006, the fair value of Forest’scommodity derivative contracts was a current liability of $58.9 million and aderivative asset of $8.7 million (of which $7.3 million was classified ascurrent). Forest is exposed to risks associated with swap and collar agreementsarising from movements in the prices of oil and natural gas and from theunlikely event of non-performance by the counterparties to the swap and collaragreements.

In April 2006,the Company entered into additional costless collar agreements. The table belowsets forth the weighted average terms of these costless collar agreements.

| ** **  | ** ** | **Costless Collars**                 | ** ** |
|-------------|------------|-------------------------------------------|------------|
| ** **  | ** ** | **Natural Gas (NYMEX HH)** | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **  | ** ** | **Bbtu  Per Day**                    | ** ** | **Weighted Average  Hedged Floor and  Ceiling Price  per MMBtu** | ** ** | **Barrels  Per Day** | ** ** | **Weighted Average  Hedged Floor and  Ceiling Price  per Bbl** | ** ** |
| Fiscal 2007 |       |                                      | 5.0        |   |   |   | $ | 9.60/12.05 |   |   |   | 1,000 |   |   |   | $ | 65.00/85.00 |   |   |
|             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**(10) BUSINESS ANDGEOGRAPHICAL SEGMENTS**

Segment information hasbeen prepared in accordance with Statement of Financial Accounting Standards No. 131,*Disclosures About Segments of an Enterpriseand Related Information*. At March 31, 2006, Forest had fivereportable segments consisting of oil and gas operations in five business units(Southern (formerly Gulf Coast), Western, Alaska, Canada, and International). Forest’sremaining marketing and processing activities are not significant and thereforeare not reported as a separate segment, but are included as a reconciling itemin the information below. The segments were determined based upon the type ofoperations in each business unit and the geographical location of each. Thesegment data presented below was prepared on the same basis as the CondensedConsolidated Financial Statements. Effective in the first quarter of 2006,general and administrative expenses are no longer allocated to the Company’sbusiness units to correspond with the Company’s decision to monitor andevaluate general and administrative expenses at the corporate level. Additionally,the Company modified the method utilized in allocating depletion expensebetween its business units effective in the first quarter of 2006 such that thedepletion rate per Mcfe is consistent among those business units within theU.S. cost center. Segment information previously reported has been modified toconform with the current presentation.

**Three Months Ended March 31, 2006**

| ** **                                | ** ** | **Oil and Gas Operations** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **Southern**                              | ** ** | **Western** | ** ** | **Alaska** | ** ** | **Total U.S.** | ** ** | **Canada** | ** ** | **International** | ** ** | **Total  Company** | ** ** |
| ** **                                | ** ** | **(In Thousands)**                   | ** ** |
| Revenue                                   |       | $                                         | 70,845     |   |   | 80,224 |   |   | 23,521 |   |   | 174,590 |   |   | 44,506 |   |   | — |   |   |   | 219,096 |   |   |
| Expenses:                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lease operating expenses                  |       | 22,491                                    |       |   | 9,763 |   |   | 6,765 |   |   | 39,019 |   |   | 6,312 |   |   | — |   |   |   | 45,331 |   |   |
| Production and property taxes             |       | 2,209                                     |       |   | 7,207 |   |   | 600 |   |   | 10,016 |   |   | 712 |   |   | — |   |   |   | 10,728 |   |   |
| Transportation costs                      |       | 660                                       |       |   | 593 |   |   | 1,603 |   |   | 2,856 |   |   | 1,873 |   |   | — |   |   |   | 4,729 |   |   |
| Depletion                                 |       | 26,077                                    |       |   | 25,192 |   |   | 6,648 |   |   | 57,917 |   |   | 18,939 |   |   | — |   |   |   | 76,856 |   |   |
| Accretion of asset retirement obligations |       | 2,454                                     |       |   | 222 |   |   | 416 |   |   | 3,092 |   |   | 249 |   |   | 11 |   |   |   | 3,352 |   |   |
| Earnings (loss)  from operations          |       | $                                         | 16,954     |   |   | 37,247 |   |   | 7,489 |   |   | 61,690 |   |   | 16,421 |   |   | (11 | ) |   |   | 78,100 |   |   |
| Capital  expenditures                     |       | $                                         | 331,543    |   |   | 82,988 |   |   | 9,302 |   |   | 423,833 |   |   | 49,687 |   |   | 874 |   |   |   | 474,394 |   |   |
| Goodwill                                  |       | $                                         | 15,003     |   |   | 56,374 |   |   | — |   |   | 71,377 |   |   | 15,607 |   |   | — |   |   |   | 86,984 |   |   |

 

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**(10) BUSINESSAND GEOGRAPHICAL SEGMENTS (Continued)**

A reconciliation ofsegment earnings (loss) from operations to consolidated earnings before incometaxes and discontinued operations is as follows:

| ** **                                                               | ** ** | **(In Thousands)** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|
| Earnings from  operations for reportable segments                        |       |                    | $          | 78,100 |   |   |
| Marketing,  processing, and other                                        |       |                    | 2,350      |   |   |
| General and  administrative expense (including stock-based compensation) |       |                    | (17,136    | ) |   |
| Administrative  asset depreciation                                       |       |                    | (812       | ) |   |
| Spin-off and  merger costs                                               |       |                    | (5,416     | ) |   |
| Interest expense                                                         |       |                    | (15,151    | ) |   |
| Unrealized losses  on derivative instruments, net                        |       |                    | (24,114    | ) |   |
| Realized losses  on derivative instruments, net                          |       |                    | (3,915     | ) |   |
| Other expense,  net                                                      |       |                    | (860       | ) |   |
| Earnings before income  taxes and discontinued operations                |       |                    | $          | 13,046 |   |   |

 

**Three Months Ended March 31, 2005**

| ** **                                | ** ** | **Oil and Gas Operations** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **Gulf Coast**                       | ** ** | **Western** | ** ** | **Alaska** | ** ** | **Total U.S.** | ** ** | **Canada** | ** ** | **International** | ** ** | **Total  Company** | ** ** |
| ** **                                | ** ** | **(In Thousands)**                   | ** ** |
| Revenue                                   |       | $                                         | 148,028    |   |   | 51,407 |   |   | 26,402 |   |   | 225,837 |   |   | 33,033 |   |   | — |   |   |   | 258,870 |   |   |
| Expenses:                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lease operating expenses                  |       | 20,062                                    |       |   | 8,351 |   |   | 14,225 |   |   | 42,638 |   |   | 5,222 |   |   | — |   |   |   | 47,860 |   |   |
| Production and  property taxes            |       | 3,562                                     |       |   | 4,596 |   |   | 563 |   |   | 8,721 |   |   | 1,176 |   |   | — |   |   |   | 9,897 |   |   |
| Transportation  costs                     |       | 949                                       |       |   | 459 |   |   | 1,837 |   |   | 3,245 |   |   | 1,927 |   |   | — |   |   |   | 5,172 |   |   |
| Depletion                                 |       | 55,062                                    |       |   | 18,716 |   |   | 7,011 |   |   | 80,789 |   |   | 14,656 |   |   | — |   |   |   | 95,445 |   |   |
| Impairment                                |       | —                                    |       |   | — |   |   | — |   |   | — |   |   | — |   |   | 2,924 |   |   |   | 2,924 |   |   |
| Accretion of asset retirement obligations |       | 3,389                                     |       |   | 293 |   |   | 359 |   |   | 4,041 |   |   | 236 |   |   | — |   |   |   | 4,277 |   |   |
| Earnings (loss)  from operations          |       | $                                         | 65,004     |   |   | 18,992 |   |   | 2,407 |   |   | 86,403 |   |   | 9,816 |   |   | (2,924 | ) |   |   | 93,295 |   |   |
| Capital  expenditures                     |       | $                                         | 37,165     |   |   | 23,519 |   |   | 1,723 |   |   | 62,407 |   |   | 33,929 |   |   | 267 |   |   |   | 96,603 |   |   |
| Goodwill                                  |       | $                                         | 16,772     |   |   | 37,331 |   |   | — |   |   | 54,103 |   |   | 13,443 |   |   | — |   |   |   | 67,546 |   |   |

 

A reconciliationof segment earnings (loss) from operations to consolidated earnings beforeincome taxes and discontinued operations is as follows:

| ** **                                                               | ** ** | **(In Thousands)** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|
| Earnings from  operations for reportable segments                        |       |                    | $          | 93,295 |   |   |
| Marketing,  processing, and other                                        |       |                    | 1,421      |   |   |
| General and  administrative expense (including stock-based compensation) |       |                    | (10,756    | ) |   |
| Administrative  asset depreciation                                       |       |                    | (831       | ) |   |
| Interest expense                                                         |       |                    | (14,499    | ) |   |
| Unrealized losses  on derivative instruments, net                        |       |                    | (6,580     | ) |   |
| Realized losses  on derivative instruments, net                          |       |                    | (532       | ) |   |
| Other expense,  net                                                      |       |                    | (1,401     | ) |   |
| Earnings before income  taxes and discontinued operations                |       |                    | $          | 60,117 |   |   |

 

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**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Forest is an independent oil and gas company engagedin the acquisition, exploration, development, and production of natural gas andliquids in North America and selected international locations. Forest wasincorporated in New York in 1924, as the successor to a company formed in 1916,and has been a publicly held company since 1969.

The following discussionand analysis should be read in conjunction with Forest’s Condensed ConsolidatedFinancial Statements and Notes thereto, the information under the heading “Forward-LookingStatements” below, and the information included in Forest’s 2005 Annual Reporton Form 10-K under the heading “Risk Factors”, and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—CriticalAccounting Policies, Estimates, Judgments, and Assumptions.”  Unless the context otherwise indicates,references in this quarterly report on Form 10-Q to “Forest,”  “we,” “ours,” “us,” or like terms refer toForest Oil Corporation and its subsidiaries.

**Overview of FirstQuarter 2006**

***Spin-off of Offshore Gulf of Mexico Operations***

On March 2, 2006, Forest completed the spin-offof its offshore Gulf of Mexico operations by means of a stock dividend, whichconsisted of a pro rata spin-off (the “Spin-off”) of all outstanding shares ofForest Energy Resources, Inc. (“FERI”), a total of 50,637,010 shares ofcommon stock, to holders of record of Forest common stock as of the close ofbusiness on February 21, 2006. Immediately following the Spin-off, FERIwas merged with a subsidiary of Mariner Energy, Inc. (“Mariner”) in astock for stock transaction (the “Merger”). Mariner’s common stock commencedtrading on the New York Stock Exchange on March 3, 2006.

The Spin-off was completedwithout the payment of consideration by Forest shareholders and consisted of aspecial dividend of 0.8093 shares of FERI for each outstanding share of Forestcommon stock. The Merger was accomplished by the exchange of all issued andoutstanding shares of FERI for shares of common stock of Mariner, with eachwhole share of FERI exchanged for one share of Mariner common stock. TheSpin-off was a tax-free transaction for federal income tax purposes. Prior to theMerger, as part of the Spin-off, FERI paid Forest an initial cash amount equalto approximately $176.1 million andsubsequent to March 31, 2006, Forest received an additional $21.7 millionfor total proceeds of $197.8 million. The cash amount is subject tofurther potential adjustment to reflect an economic effective date for thetransaction of July 1, 2005.

***Cotton Valley Acquisition***

On March 31, 2006,Forest completed the acquisition of oil and gas properties located primarily inthe Cotton Valley trend in East Texas. Forest paid approximately $255 million,as adjusted to reflect an economic effective date of February 1, 2006, forproperties with an estimated 110 Bcfe of estimated proved reserves at the timethe acquisition was announced and production that averaged 13 MMcfe per day in January 2006.Forest obtained approximately 26,000 net acres in the fields, of whichapproximately 14,000 net acres are undeveloped. This acquisition is expected toprovide another core area of growth and add significant onshore activity to theSouthern business unit. Forest funded this acquisition utilizing its bankcredit facilities.

**Results ofOperations**

The results of operations for the three months ended March 31,2006 only include the revenues and expenses of the oil and gas propertiesincluded in the Spin-off through February 28, 2006. As a result, the 

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operational results forthe first quarter of 2006 are not comparable to the first quarter of 2005. Inthe following discussion, revenues and expenses associated with the propertiesincluded in the Spin-off (the “Spin-off Properties”) and those retained (the “RetainedProperties”) are discussed separately.

Our reported earnings of$3.7 million for the first quarter of 2006, or $.06 per diluted share, were$35.2 million lower than net income of $38.9 million, or $.63 per dilutedshare, for the same period in 2005. The quarter-over-quarter net income changewas primarily caused by lower oil and gas production volumes from the Spin-offProperties as a result of the shut-in production volumes in the first quarterof 2006 due to hurricanes Katrina and Rita as well as the fact that the firstquarter of 2006 reflects only two months of the Spin-off Properties’operations. Unrealized losses on derivative instruments of $24.1 million in thefirst quarter of 2006 compared to $6.6 million in the corresponding period inthe prior year also contributed to the reduction in net income compared to thefirst quarter of 2005. In addition, we incurred approximately $5.4 millionof  costs in connection with the Spin-offand Merger in 2006 and we incurred $7.7 million of additional stock-basedcompensation in 2006 compared to the same period in 2005.

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***Oil and Gas Production and Sales***

Salesvolumes, oil and gas sales revenue, and average sales prices for the threemonths ended March 31, 2006 and 2005 were as follows:

| ** **                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **Gas**                                              | ** ** | **Oil** | ** ** | **NGLs** | ** ** | **Total** | ** ** | **Gas** | ** ** | **Oil** | ** ** | **NGLs** | ** ** | **Total** | ** ** |
| ** **                         | ** ** | **(MMcf)**                                           | ** ** | **(MBbls)** | ** ** | **(MBbls)** | ** ** | **(MMcfe)** | ** ** | **(MMcf)** | ** ** | **(MBbls)** | ** ** | **(MBbls)** | ** ** | **(MMcfe)** | ** ** |
| Production volumes:                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Retained  Properties:              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States                      |       | 9,291                                                |       |   | 1,143 |   |   |   | 336 |   |   | 18,165 |   | 7,610 |   | 1,391 |   |   | 181 |   |   | 17,042 |   |
| Canada                             |       | 5,729                                                |       |   | 191 |   |   |   | 97 |   |   | 7,457 |   | 4,407 |   | 219 |   |   | 114 |   |   | 6,405 |   |
| Total Retained Properties          |       | 15,020                                               |       |   | 1,334 |   |   |   | 433 |   |   | 25,622 |   | 12,017 |   | 1,610 |   |   | 295 |   |   | 23,447 |   |
| Spin-off Properties                |       | 6,378                                                |       |   | 193 |   |   |   | 82 |   |   | 8,028 |   | 15,673 |   | 687 |   |   | 268 |   |   | 21,403 |   |
| Totals                             |       | 21,398                                               |       |   | 1,527 |   |   |   | 515 |   |   | 33,650 |   | 27,690 |   | 2,297 |   |   | 563 |   |   | 44,850 |   |
| Revenues (in  thousands):          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Retained  Properties:              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States                      |       | $                                                    | 65,379     |   |   | 67,481 |   |   |   | 9,801 |   |   | 142,661 |   | 41,897 |   | 62,667 |   |   | 4,436 |   |   | 109,000 |   |
| United States hedging losses       |       | (7,707                                               | )          |   | (6,653 | ) |   |   | — |   |   | (14,360 | ) | (1,143 | ) | (2,863 | ) |   | — |   |   | (4,006 | ) |
| Canada                             |       | 32,332                                               |       |   | 8,077 |   |   |   | 4,097 |   |   | 44,506 |   | 21,449 |   | 7,961 |   |   | 3,623 |   |   | 33,033 |   |
| Total Retained Properties          |       | 90,004                                               |       |   | 68,905 |   |   |   | 13,898 |   |   | 172,807 |   | 62,203 |   | 67,765 |   |   | 8,059 |   |   | 138,027 |   |
| Spin-off Properties                |       | 53,975                                               |       |   | 11,614 |   |   |   | 3,020 |   |   | 68,609 |   | 97,857 |   | 32,315 |   |   | 7,474 |   |   | 137,646 |   |
| Spin-off Properties hedging losses |       | (16,926                                              | )          |   | (5,394 | ) |   |   | — |   |   | (22,320 | ) | (5,534 | ) | (11,269 | ) |   | — |   |   | (16,803 | ) |
| Total Spin-off Properties          |       | 37,049                                               |       |   | 6,220 |   |   |   | 3,020 |   |   | 46,289 |   | 92,323 |   | 21,046 |   |   | 7,474 |   |   | 120,843 |   |
| Totals                             |       | $                                                    | 127,053    |   |   | 75,125 |   |   |   | 16,918 |   |   | 219,096 |   | 154,526 |   | 88,811 |   |   | 15,533 |   |   | 258,870 |   |
| Average sales  price:              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Retained  Properties:              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States                      |       | $                                                    | 7.04       |   |   | 59.04 |   |   |   | 29.17 |   |   | 7.85 |   | 5.51 |   | 45.05 |   |   | 24.51 |   |   | 6.40 |   |
| United States hedging losses       |       | (0.83                                                | )          |   | (5.82 | ) |   |   | — |   |   | (0.79 | ) | (0.15 | ) | (2.06 | ) |   | — |   |   | (.24 | ) |
| Canada                             |       | 5.64                                                 |       |   | 42.29 |   |   |   | 42.24 |   |   | 5.97 |   | 4.87 |   | 36.35 |   |   | 31.78 |   |   | 5.16 |   |
| Total Retained Properties          |       | $                                                    | 5.99       |   |   | 51.65 |   |   |   | 32.10 |   |   | 6.74 |   | 5.18 |   | 42.09 |   |   | 27.32 |   |   | 5.89 |   |
| Spin-off Properties                |       | $                                                    | 8.46       |   |   | 60.18 |   |   |   | 36.83 |   |   | 8.55 |   | 6.24 |   | 47.04 |   |   | 27.89 |   |   | 6.43 |   |
| Spin-off Properties hedging losses |       | (2.65                                                | )          |   | (27.95 | ) |   |   | — |   |   | (2.78 | ) | (0.35 | ) | (16.40 | ) |   | — |   |   | (.79 | ) |
| Total Spin-off Properties          |       | $                                                    | 5.81       |   |   | 32.23 |   |   |   | 36.83 |   |   | 5.77 |   | 5.89 |   | 30.64 |   |   | 27.89 |   |   | 5.64 |   |
| Totals                             |       | $                                                    | 5.94       |   |   | 49.20 |   |   |   | 32.85 |   |   | 6.51 |   | 5.58 |   | 38.66 |   |   | 27.59 |   |   | 5.77 |   |

 

Net oil and gas production from the RetainedProperties in the first quarter of 2006 increased to 25.6 Bcfe or an average of284.7 MMcfe per day, a 9% increase from 23.4 Bcfe or an average of 260.5 MMcfeper day in the first quarter of 2005. In addition, due to inclement weather andmechanical problems, the scheduled tanker shipment of Forest’s Alaska oilproduction at the end of March 2006 was delayed until 

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April 2, 2006. Theeffect of this delay caused reported oil sales volumes to be lower thanproduction volumes by approximately 123,000 barrels or 8 MMcfe per day for thethree months ended March 31, 2006. Oil and natural gas revenues from theRetained Properties were $172.8 million during the three months ended March 31,2006, a 25% increase as compared to $138.0 million for the same period in theprior year. The increase in oil and natural gas revenues for the three monthperiod was primarily due to a 9% increase in production as well as a 14%increase in the average realized sales price per Mcfe from $5.89 in 2005 to$6.74 in 2006.

Net oil and gas production from the Spin-offProperties in the first quarter of 2006 decreased to 8.0 Bcfe or an average of89.2 MMcfe per day, from 21.4 Bcfe or an average of 237.8 MMcfe per day in thefirst quarter of 2005. The decrease in average daily production was primarilydue to properties that remain shut-in due to hurricanes Katrina and Rita, andthe fact that the first quarter of 2006 only includes two months of productioncompared to 2005’s full quarter of production. Oil and natural gas revenuesfrom the Spin-off Properties were $46.3 million during the three months ended March 31,2006, as compared to $120.8 million for the same period in the prior year. Thedecrease in oil and natural gas revenues for the three month period wasprimarily due to the 62% decrease in production as discussed above.

The average realized sales prices for the periodspresented include losses that we recognized on our derivative instrumentsdesignated as cash flow hedges. For the three months ended March 31, 2006,Forest recognized hedging losses of $36.7 million compared to hedging losses of$20.8 million during the same period in the prior year. The recognized losses in the first quarter of 2006 include$15.2 million in hedge losses settled in the fourth quarter of 2005 butrecognized in the first quarter of 2006 to correspond with the timing of theproduction that was deferred by hurricanes Katrina and Rita. See *Realized and Unrealized Losses on Derivative Instruments*below for information on losses recognized on derivative instruments notdesignated as cash flow hedges.

***Oil and Gas Production Expense***

Thetable below sets forth the detail of lease operating expenses (“LOE”), theprimary component of oil and gas production expense, for the three months endedMarch 31, 2006 and 2005:

| ** **                                   | ** ** | **Three Months Ended March 31,**              | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **Retained  Properties**                                          | ** ** | **Spin-off  Properties** | ** ** | **Total** | ** ** | **Retained  Properties** | ** ** | **Spin-off  Properties** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(In Thousands, Except per Mcfe Data)** | ** ** |
| Lease operating expenses  (“LOE”): | ** ** |                                                              | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Direct operating expense and overhead        |       |                                                              | $          | 24,919 | ** ** |   |   | 9,535 | ** ** |   | 34,454 |   |   | 26,053 | ** ** |   |   | 14,758 | ** ** |   | 40,811 |   |
| Workover expense                             |       |                                                              | 2,116      | ** ** |   |   | 8,761 | ** ** |   | 10,877 |   |   | 5,185 | ** ** |   |   | 1,864 | ** ** |   | 7,049 |   |
| Total LOE                                    |       |                                                              | $          | 27,035 | ** ** |   |   | 18,296 | ** ** |   | 45,331 |   |   | 31,238 | ** ** |   |   | 16,622 | ** ** |   | 47,860 |   |
| LOE per Mcfe                                 |       |                                                              | $          | 1.06 | ** ** |   |   | 2.28 | ** ** |   | 1.35 |   |   | 1.33 | ** ** |   |   | 0.78 | ** ** |   | 1.07 |   |
| Production and property taxes                |       |                                                              | $          | 10,577 | ** ** |   |   | 151 | ** ** |   | 10,728 |   |   | 9,304 | ** ** |   |   | 593 | ** ** |   | 9,897 |   |
| Production and  property taxes per Mcfe      |       |                                                              | $          | 0.41 | ** ** |   |   | .02 | ** ** |   | .32 |   |   | .40 | ** ** |   |   | .03 | ** ** |   | .22 |   |
| Transportation costs                         |       |                                                              | $          | 4,385 | ** ** |   |   | 344 | ** ** |   | 4,729 |   |   | 4,330 | ** ** |   |   | 842 | ** ** |   | 5,172 |   |
| Transportation costs per  Mcfe               |       |                                                              | $          | .17 | ** ** |   |   | .04 | ** ** |   | .14 |   |   | .18 | ** ** |   |   | .04 | ** ** |   | .12 |   |

 

*Lease OperatingExpenses*

Lease operating expenses for the Retained Propertiesdecreased 13%, or $4.2 million, to $27.0 million in the first quarter of 2006from $31.2 million in the first quarter of 2005. On a per-Mcfe basis, LOEdecreased 20% to $1.06 per Mcfe in 2006 from $1.33 per Mcfe in 2005. Thedecrease on a per-unit basis is 

22

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primarily attributable tocost reduction initiatives and a higher percentage of production derived fromnewly developed gas properties which have lower operating costs.

Lease operating expensesfor the Spin-off Properties increased $1.7 million to $18.3 million in thefirst quarter of 2006 from $16.6 million in the first quarter of 2005. On aper-Mcfe basis, LOE increased $1.50 per Mcfe in 2006 to $2.28 per Mcfe in thefirst quarter of 2006 from $.78 per Mcfe in 2005. The primary reason for increasein LOE for the Spin-off Properties was due to a significant increase inworkover expense due primarily to repair water channeling in a highlyproductive well. Direct operating expenses on the Spin-off Properties declined35% principally due to the fact that the 2006 quarter only includes two monthsof activity.

*Production andProperty Taxes*

Production and propertytaxes on the Retained Properties increased by 14% or $1.3 million during thefirst quarter of 2006 as compared to the prior year’s first quarter. Theincrease was a result of the higher realized oil and gas revenues and higherassessed property valuations offset by severance tax incentives. Production andproperty taxes on the Spin-off Properties decreased by 75% or $.4 millionduring the first quarter of 2006 as compared to the prior year’s first quarter.The decrease inthe Spin-off Properties’ production and property taxes was due to lower dailyproduction volumes after the hurricanes and due to the fact that the 2006quarter includes two months of activity.

*TransportationCosts*

Transportation costs forthe Retained Properties increased slightly to $4.4 million in the three monthsended March 31, 2006 from $4.3 million for the corresponding 2005 period. Transportationcosts for the Retained Properties on a per-Mcfe basis were $.17 per Mcfe and$.18 per Mcfe, for the quarters ended March 31, 2006 and 2005,respectively.  Transportation costs forthe Spin-off Properties on a per-Mcfe basis were $.04 per Mcfe for each of thequarters ended March 31, 2006 and 2005.

***General and Administrative Expense; EquityCompensation***

Thefollowing table summarizes the components of total overhead costs incurredduring the periods presented:

| ** **                                                               | ** ** | **Three Months  Ended March 31,**             | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                                     | ** ** | **2005** | ** ** |
| ** **                                                               | ** ** | **(In Thousands,  Except Per  Mcfe Amounts)** | ** ** |
| Total general and  administrative costs                                  |       | $                                                            | 15,344     |   | 16,765 |   |
| General and  administrative costs capitalized                            |       | (6,062                                                       | )          | (6,137 | ) |
| General and  administrative expense                                      |       | $                                                            | 9,282      |   | 10,628 |   |
| General and  administrative expense per Mcfe                             |       | $                                                            | .28        |   | .24 |   |
| Total stock-based compensation costs                                     |       | $                                                            | 12,853     |   | 213 |   |
| Stock-based  compensation costs capitalized                              |       | (4,999                                                       | )          | (85 | ) |
| Stock-based  compensation expense                                        |       | $                                                            | 7,854      |   | 128 |   |
| Stock-based  compensation expense per Mcfe                               |       | $                                                            | .23        |   | — |   |
| Total general  administrative expense including stock-based compensation |       | $                                                            | 17,136     |   | 10,756 |   |

 

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***General and Administrative Expenses***

The decrease in totaloverhead costs and overhead costs expensed in the three month period wasprimarily related to a $1.9 million reduction in our post-retiree medicalbenefit liability caused by a curtailment in the post retiree medical benefitplan as a result of the Spin-off. We also realized additional salary andbenefit savings related to 107 employees that terminated their employment withForest and joined Mariner after the Spin-off. These decreases were offset byincreases in other post-retirement benefit costs.

***Stock-Based Compensation***

Prior to January 1, 2006, we accounted forstock-based compensation using the intrinsic value method prescribed inAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations. Under APB Opinion No. 25,no compensation expense was recognized for stock options issued to employeesbecause the grant price equaled or was above the market price on the date ofthe option grant. Effective January 1, 2006, we adopted the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 123 (Revised), “Share-BasedPayment” (“SFAS 123(R)”) using the modified prospective method. Under thismethod, compensation cost is recorded forall unvested stock options, restricted stock, and phantom stock units beginningin the period of adoption and prior financial statements are not restated. Underthe fair value recognition provisions of SFAS 123(R), stock-based compensationis measured at the grant date based on the value of the awards and isrecognized over the requisite service period (usually the vesting period).

In accordance with theprovisions of SFAS 123(R), total stock-based compensation cost in the amount of$12.9 million was recorded in the three months ended March 31, 2006. Ofthis amount, $7.9 million was recorded as compensation expense and $5.0 millionwas capitalized to oil and gas properties in accordance with the full costmethod of accounting. As discussed in Note 4 to the Condensed ConsolidatedFinancial Statements, approximately $9.7 million of the $12.9 million of totalstock-based compensation for the quarter ended March 31, 2006 wasattributable to a partial settlement of our restricted stock awards and phantomstock unit awards in connection with the Spin-off.

***Depreciation and Depletion***

Depreciation, depletionand amortization expense (“DD&A”) for the three months ended March 31,2006 was $77.7 million compared to $96.3 million for the same period in 2005. Onan equivalent Mcf basis, DD&A expense was $2.31 per Mcfe for the threemonths ended March 31, 2006 compared to $2.15 per Mcfe for the same periodin the prior year. The increase of $.16 per Mcfe for the three months ended March 31,2006, as compared to the corresponding period in the prior year, is primarilydue to a higher proportion of Canadian production, which has higher per-unitdepletion rates, to total consolidated production. DD&A of $2.31 per Mcfein the first quarter of 2006 includes two months of depletion expenseassociated with the offshore Gulf of Mexico properties included in the Spin-off.Subsequent to the Spin-off, after the $1.1 billion adjustment to our net oiland gas properties, depletion expense was reduced to approximately $2.17 perMcfe at March 31, 2006.

***Impairments***

During the three monthsended March 31, 2005, Forest recorded an impairment of $2.9 millionrelated to certain international properties, principally related to itsleaseholds in Romania. The Romania impairment was recorded in the first quarterof 2005 in connection with our decision to exit the country as we rationalizedour international assets to concentrate on fewer areas.

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***Interest Expense***

Interest expense in thefirst quarter of 2006 totaled $15.2 million compared to $14.5 million in thefirst quarter of 2005. The increase in interest expense for the first quarterof 2006 compared to the first quarter of 2005 was due primarily to acombination of higher interest rates and increased average debt balances.

***Realized and Unrealized Losses on DerivativeInstruments***

Realized and unrealized gains and losses on derivativeinstruments are primarily related to various derivatives that did not qualifyfor cash flow hedge accounting either at their inception or where hedgeaccounting was discontinued during their term. When the criteria for cash flowhedge accounting are not met, realized gains and losses (i.e., cashsettlements) are recorded in other income and expense in the CondensedConsolidated Statements of Operations. Similarly, changes in the fair value ofthe derivative instruments are recorded as unrealized gains or losses in theCondensed Consolidated Statements of Operations. In contrast, cash settlementsfor derivative instruments that qualify for hedge accounting are recorded asadditions to or reductions of oil and gas revenues while changes in fair valueof cash flow hedges are recognized, to the extent the hedge is effective, in othercomprehensive income until the hedged item is recognized in earnings.

Thetable below sets forth realized and unrealized losses recognized under “Otherincome and expense” in our Condensed Consolidated Statements of Operationsprincipally related to our derivatives that did not qualify for hedgeaccounting for the periods indicated.

| ** **        | ** ** | **Three Months  Ended March 31,** | ** ** |
|-------------------|------------|--------------------------------------------------|------------|
| ** **        | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **        | ** ** | **(In Thousands)**                          | ** ** |
| Realized losses   |       | $                                                | (3,915     | ) | (532 | ) |
| Unrealized losses |       | (24,114                                          | )          | (6,580 | ) |
|                   |            |                                                  |            |  |  |  |

 

The significant increases in realized and unrealizedlosses on derivative instruments in 2006 are primarily related to thediscontinuance of hedge accounting on many of our commodity derivatives due tohurricanes Rita and Katrina in 2005 and due to the Spin-off in March 2006.

For comparativepurposes, the following table sets forth, for the periods indicated, realizedlosses on derivative instruments that met the criteria for hedge accounting,which were recorded as reductions of oil and gas revenues.

| ** **                                       | ** ** | **Three Months  Ended March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(In Thousands)**                          | ** ** |
| Realized losses  included in oil and gas revenue |       | $                                                | (36,680    | ) | (20,809 | ) |
|                                                  |            |                                                  |            |  |  |  |

 

***Discontinuance of Hedge Accounting***

Because a significantportion of our derivatives no longer qualified for hedge accounting and toincrease clarity in our financial statements, we elected to discontinue hedgeaccounting prospectively for all of our commodity derivatives beginning in March 2006.Consequently, from that date forward, we will recognize mark-to-market gainsand losses in earnings currently, rather than deferring such amounts inaccumulated other comprehensive income included in shareholders’ equity. Thenet mark-to-market losses on our outstanding derivatives at the time wediscontinued hedge accounting are deferred in accumulated other comprehensiveincome, and are amortized to earnings as the original hedged transactions occurin 2006. This change in reporting will have no impact on our reported cashflows, although future results of 

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operationswill be affected by mark-to-market gains and losses which fluctuate withvolatile oil and gas prices.

***Current and Deferred Income Tax Expense***

Forestrecorded income tax expense of $11.8 million in the three months ended March 31,2006, compared to $21.2 million in the comparable period of 2005. The decreasein income tax expense for the three month period ended March 31, 2006 wasattributable to a decrease in earnings before income taxes. Our effective taxrates for the three months ended March 31, 2006 and 2005 were 90.4% and35.3%, respectively. The significant increase in the effective tax rate was dueto non-deductible spin-off and merger costs and an increase in our estimatedcombined state income tax rates related to the Spin-off. Together, these costsand rate adjustments added approximately $6.9 million to our total tax expenseduring the first quarter of 2006.  The table below sets forth the components of ourincome tax provision for the first quarter ended March 31, 2006:

| ** **                                                                                               | ** ** | **(In Thousands)** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| Federal, state  and provincial tax at statutory rates                                                    |       |                    | $          | 4,558 |   |   |
| Effect of  increased estimated combined state income rates on accumulated deferred  income tax liability |       |                    | 4,794      |   |   |
| Non-deductible  spin-off and merger costs                                                                |       |                    | 2,090      |   |   |
| Other, net                                                                                               |       |                    | 355        |   |   |
| Total income tax expense                                                                                 |       |                    | $          | 11,797 |   |   |

 

***Discontinued Operations***

On March 1, 2004,Forest sold the assets and business operations of ProducersMarketing, Ltd. (“ProMark”) to Cinergy Canada, Inc. (“Cinergy”) for$11.2 million CDN. As a result of the sale, ProMark’s results ofoperations were reported as discontinued operations in the historical financialstatements. Under the terms of the purchase and sale agreement, Forest mayreceive additional contingent consideration over a period of five years throughFebruary 2009. During the quarter ended March 31, 2006, Forestrecognized an additional $3.6 million contingent payment ($2.4 million net oftax) due under the agreement, which has been reflected as income fromdiscontinued operations in the Condensed Consolidated Statements of Operations.

***Liquidity and Capital Resources***

In 2006, as in 2005, we expect our cash flow fromoperations to be our primary source of liquidity to meet operating expenses andfund capital expenditures other than large acquisitions. Any remaining cashflow from operations will be available for acquisitions, in whole or in part,or other corporate purposes, including the repayment of indebtedness.

The prices we receive for our oil and natural gasproduction have a significant impact on operating cash flows. While significantprice declines in 2006 would adversely affect the amount of cash flow generatedfrom operations, we utilize a hedging program to partially mitigate that risk.As of May 1, 2006, Forest has hedged approximately 43 Bcfe of itsestimated 2006 onshore North American and offshore Alaskan production. Thislevel of hedging provides certainty of the cash flow we will receive for alarge portion of our expected 2006 production. Depending on changes in oil andgas futures markets and management’s view of underlying oil and natural gassupply and demand trends, we may increase or decrease our current hedgingpositions. For further information concerning our 2006 hedging contracts, seeItem 3—“Quantitative and Qualitative Disclosures about Market Risk—CommodityPrice Risk,” below.

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Our $600 million revolving bank creditfacilities, which we entered into in September 2004, provide anothersource of liquidity. These credit facilities, which mature in September 2009,are used to fund daily operating activities and acquisitions in the UnitedStates and Canada as needed. We used our credit facilities to fund our recent$255 million Cotton Valley acquisition on March 31, 2006. At April 30,2006, we had approximately $307 million of outstanding borrowings and lettersof credit under the bank credit facilities, and an unused borrowing base of $293million.

On March 2, 2006, we completed the Spin-off ofour offshore Gulf of Mexico operations. These operations accounted forapproximately 24% of our total oil and gas production in the first quarter of2006 and 21% of our consolidated oil and gas revenues for the three monthsended March 31, 2006. As a result of the Spin-off, we expect future cashflows from operations to be significantly lower; however, we also expect asignificant decrease in capital expenditures and payments for asset retirementobligations. Prior to the Merger, as part of the Spin-off, we receivedapproximately $176.1 million from FERI, which we used to pay down ourcredit facilities. FERI obtained these funds from a bank credit facility itestablished immediately prior to the Spin-off. Subsequent to March 31,2006, we received an additional $21.7 million from FERI for total proceeds of$197.8 million. The total cash received is subject to further potentialadjustment to reflect the economic effective date of July 1, 2005. We donot believe the Spin-off will have a material effect on our liquidity andcapital resources nor do we believe it will materially adversely affect ourability to access the capital markets.

The public capital markets have been our principalsource of funds to finance large acquisitions. We have sold debt and equitysecurities in both public and private offerings in the past, and we expect thatthese sources of capital will continue to be available to us in the future foracquisitions. In July 2004, we filed a shelf registration statement thatallows Forest to issue equity and debt securities of up to $600 million,all of which is still available. Nevertheless, ready access to capital onreasonable terms can be impacted by our debt ratings assigned by independentrating agencies and are subject to many uncertainties, including restrictionscontained in our bank credit facilities and indentures for our senior notes,macroeconomic factors outside of our control, and other risks as explained in Part 1,Item 1A—“Risk Factors” of our 2005 Annual Report on Form 10-K.

We believe that ouravailable cash, cash provided by operating activities, and funds availableunder our bank credit facilities will be sufficient to fund our operating,interest, and general and administrative expenses, our capital expenditurebudget, and our short-term contractual obligations at current levels for theforeseeable future.

***Bank Credit Facilities***

We currently have credit facilities totaling$600 million, consisting of a $500 million U.S. credit facilitythrough a syndicate of banks led by JPMorgan Chase and a $100 millionCanadian credit facility through a syndicate of banks led by JPMorgan ChaseBank, Toronto Branch. The credit facilities mature in September 2009.Subject to the agreement of Forest and the applicable lenders, the size of thecredit facilities may be increased by $200 million in the aggregate.

Availability under the credit facilities will be basedeither on certain financial covenants included in the credit facilities or onthe loan value assigned to Forest’s oil and gas properties. If Forest’scorporate credit rating by Moody’s is “Ba1” or higher and “BB+” or higher byS&P, the credit facilities may be governed by certain financial covenants.Alternatively, if Forest’s corporate credit rating is “Ba2” or lower by Moody’sor “BB” or lower by S&P, availability under the credit facilities will begoverned by a borrowing base (“Global Borrowing Base”). Currently, the amountavailable under the credit facilities is determined by the Global BorrowingBase. Effective October 19, 2005, the credit facilities were amended topermit Forest to complete the Spin-off and the Global Borrowing Base wasincreased to $900 million. On March 2, 2006, concurrent with thecompletion of the Spin-off, the Global Borrowing Base was 

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reduced to$600 million, with $500 million allocated to the U.S. credit facilityand $100 million allocated to the Canadian facility. We expect that theGlobal Borrowing Base will be increased to $850 million in the second quarter;however, we do not plan to seek an increase in the size of the commitments and,as a result, the allocations would remain unchanged with $500 million allocatedto the U.S. credit facility and $100 million allocated to the Canadianfacility.

At March 31, 2006, there were outstandingborrowings of $259.0 million under the U.S. credit facility at a weightedaverage interest rate of 6.2%, and there were outstanding borrowings of $67.8 millionunder the Canadian credit facility at a weighted average interest rate of 5.2%.We also had used the credit facilities for approximately $6.9 million inletters of credit, leaving an unused borrowing amount under the Global BorrowingBase of approximately $266.3 million at March 31, 2006.

The determination of the Global Borrowing Base is madeby the lenders taking into consideration the estimated value of Forest’s oiland gas properties in accordance with the lenders’ customary practices for oiland gas loans. This process involves reviewing Forest’s estimated provedreserves and their valuation. While the Global Borrowing Base is in effect, itis redetermined semi-annually, and the available borrowing amount could beincreased or decreased as a result of such redeterminations. In addition,Forest and the lenders each have discretion at any time, but not more oftenthan once during any calendar year, to have the Global Borrowing Baseredetermined. A revision to Forest’s reserves may prompt such a request on thepart of the lenders, which could possibly result in a reduction in the GlobalBorrowing Base and availability under the credit facilities. As describedabove, in connection with the Spin-off, the Global Borrowing Base was reducedto $600 million. If outstanding borrowings under either of the creditfacilities exceed the applicable portion of the Global Borrowing Base, Forestwould be required to repay the excess amount within a prescribed period. If weare unable to pay the excess amount, it would cause an event of default.

The credit facilities include terms and covenants thatplace limitations on certain types of activities, including restrictions orrequirements with respect to additional debt, liens, asset sales, hedgingactivities, investments, dividends, mergers, and acquisitions. The creditfacilities also include several financial covenants. Availability, interestrates, security requirements, and other terms of borrowing under the creditfacilities will vary based on Forest’s credit ratings and financial condition,as determined by certain financial tests. In particular, any time thatavailability is not determined by the Global Borrowing Base, the amountavailable and our ability to borrow under the credit facilities is determined bycertain financial covenants. Also, even when availability is determined by theGlobal Borrowing Base, certain financial covenants may affect the amountavailable and Forest’s ability to borrow amounts under the credit facilities.

The credit facilities are collateralizedby a portion of our assets. We are required to mortgage, and grant a securityinterest in, 75% of the present value of our consolidated proved oil and gasproperties. We have also pledged the stock of several subsidiaries to thelenders to secure the credit facilities. Under certain circumstances, we couldbe obligated to pledge additional assets as collateral. If our corporate creditratings by Moody’s and S&P improve and meet pre-established levels, thecollateral requirements would not apply and, at our request, the banks wouldrelease their liens and security interests on our properties.

 

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***Cash Flow***

Netcash provided by operating activities, net cash used by investing activities,and net cash provided (used) by financing activities for the three months endedMarch 31, 2006 and 2005 were as follows:

| ** **                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **(In Thousands)**                          | ** ** |
| Net cash provided  by operating activities        |       | $                                                | 114,535    |   | 136,083 |   |
| Net cash used by  investing activities            |       | (466,694                                         | )          | (96,646 | ) |
| Net cash provided (used)  by financing activities |       | 351,629                                          |       | (87,585 | ) |
|                                                   |            |                                                  |            |  |  |  |

 

The decrease in net cashprovided by operating activities in the three months ended March 31, 2006compared to the same period of 2005 was due primarily to lower oil and gasrevenues. The increase in cash used by investing activities in the three monthsended March 31, 2006 was due primarily to the acquisition of oil and gasassets in the Cotton Valley trend in East Texas for approximately $255 millionas well as higher capital expenditures for exploration and development in thefirst quarter of 2006 compared to the same period in 2005. Net cash used byfinancing activities in the three months ended March 31, 2006 included netbank proceeds of $349.4 million and proceeds from the exercise of stockoptions and employee stock purchases of $2.3 million. Of the $349.4 million innet bank proceeds in the first quarter of 2006, $176.1 million was drawn on anewly created bank credit facility established by FERI immediately prior to theSpin-off. This credit facility and associated liability was included in theSpin-off. The 2005 period included net bank debt repayments of $113.0 millionoffset by proceeds from the exercise of stock options and warrants and employeestock purchases of approximately $24.4 million.

***Capital Expenditures***

Expendituresfor property acquisition, exploration, and development were as follows:

| ** **                                                                               | ** ** | **Three Months  Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                               | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| ** **                                                                               | ** ** | **(In Thousands)**                      | ** ** |
| Property  acquisition costs(1):                                                          |       |                                         |       |   |   |
| Proved properties                                                                        |       | $                                            | 233,886    |   | 7,637 |   |
| Unproved properties                                                                      |       | 51,400                                       |       | 125 |   |
|                                                                                     |       | 285,286                                      |       | 7,762 |   |
| Exploration  costs:                                                                      |       |                                         |       |   |   |
| Direct costs                                                                             |       | 74,145                                       |       | 35,343 |   |
| Overhead capitalized                                                                     |       | 4,548                                        |       | 3,392 |   |
|                                                                                     |       | 78,693                                       |       | 38,735 |   |
| Development  costs:                                                                      |       |                                         |       |   |   |
| Direct costs                                                                             |       | 103,902                                      |       | 47,276 |   |
| Overhead capitalized                                                                     |       | 6,513                                        |       | 2,830 |   |
|                                                                                     |       | 110,415                                      |       | 50,106 |   |
| Total capital  expenditures for property acquisition, exploration, and development(1)(2) |       | $                                            | 474,394    |   | 96,603 |   |

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(1)                 Total capital expenditures include bothcash expenditures and accrued expenditures.

(2)                 Does not include estimated discountedasset retirement obligations of $.7 million and $6.4 million related to assets placedin service during the three months ended March 31, 2006 and 2005,respectively.

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Forest anticipatesexpenditures for exploration and development activities in 2006 will range from$450 million to $500 million. Some of the factors impacting the levelof capital expenditures in 2006 include crude oil and natural gas prices, thevolatility in these prices, the cost and availability of oil field services,and weather disruptions.

***Forward-Looking Statements***

The information in this Form 10-Q includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934. Allstatements, other than statements of historical facts or present facts, thataddress activities, events, outcomes, and other matters that Forest plans,expects, intends, assumes, believes, budgets, predicts, forecasts, projects,estimates, or anticipates (and other similar expressions) will, should, or mayoccur in the future are forward-looking statements. These forward-lookingstatements are based on our current expectations and assumptions about futureevents and are based on currently available information as to the outcome andtiming of future events. When considering forward-looking statements, youshould keep in mind the risk factors and other cautionary statements describedunder the heading “Risk Factors” included in Part I of our 2005 AnnualReport on Form 10-K

These forward-lookingstatements appear in a number of places and include statements with respect to,among other things:

·       estimatesof our oil and gas reserves;

·       estimatesof our future natural gas and liquids production, including estimates of anyincreases in oil and gas production;

·       theamount, nature and timing of capital expenditures, including future developmentcosts, and availability of capital resources to fund capital expenditures;

·       ouroutlook on oil and gas prices;

·       theimpact of political and regulatory developments;

·       ourfuture financial condition or results of operations and our future revenues andexpenses; and

·       ourbusiness strategy and other plans and objectives for future operations.

We caution you that these forward-lookingstatements are subject to all of the risks and uncertainties, most of which aredifficult to predict and many of which are beyond our control, incident to theexploration for and development, production, and sale of oil and gas. Theserisks include, but are not limited to, commodity price volatility, inflation,lack of availability of drilling and production equipment and services,environmental risks, drilling and other operating risks, regulatory changes,the uncertainty inherent in estimating proved oil and natural gas reserves andin projecting future rates of production, cash flow and access to capital, thetiming of development expenditures, and the other risks described in the Form 10-Kunder the caption “Risk Factors.” The financial results of our foreignoperations are also subject to currency exchange rate risks.

Reserve engineering is a process of estimatingunderground accumulations of oil and natural gas that cannot be measured in anexact way. The accuracy of any reserve estimate depends on the quality ofavailable data, the interpretation of such data, and price and cost assumptionsmade by our reservoir engineers. In addition, the results of drilling, testing,and production activities may justify revisions of estimates that were madepreviously. If significant, such revisions would change the schedule of anyfurther production and development drilling. Accordingly, reserve estimates maydiffer significantly from the quantities of oil and natural gas that areultimately recovered.

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Should one or more of the risks or uncertaintiesdescribed above or elsewhere in this Form 10-Q occur, or shouldunderlying assumptions prove incorrect, our actual results and plans coulddiffer materially from those expressed in any forward-looking statements.

All forward-looking statements, expressed or implied,included in this Form 10-Q and attributable to Forest are expresslyqualified in their entirety by this cautionary statement. This cautionarystatement should also be considered in connection with any subsequent writtenor oral forward-looking statements that Forest or persons acting on its behalfmay issue. Forest does not undertake to update any forward-looking statementsto reflect events or circumstances after the date of filing this Form 10-Qwith the Securities and Exchange Commission, except as required by law.

**Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We are exposed to marketrisk, including the effects of adverse changes in commodity prices, foreigncurrency exchange rates, and interest rates as discussed below. 

***Commodity Price Risk***

We produce and sellnatural gas, crude oil, and natural gas liquids for our own account in theUnited States and Canada. As a result, our financial results are affected whenprices for these commodities fluctuate. Such effects can be significant. Inorder to reduce the impact of fluctuations in prices on our revenues, or toprotect the economics of property acquisitions, we make use of an oil and gashedging strategy. Under our hedging strategy, we enter into commodity swaps,collars, and other financial instruments with counterparties who, in general,are participants in our credit facilities. These arrangements, which are basedon prices available in the financial markets at the time the contracts areentered into, are settled in cash and do not require physical deliveries ofhydrocarbons.

***Swaps***

In atypical commodity swap agreement, we receive the difference between a fixedprice per unit of production and a price based on an agreed upon published,third-party index if the index price is lower than the fixed price. Ifthe index price is higher, we pay the difference. By entering into swapagreements, we effectively fix the price that we will receive in the future forthe hedged production. Our current swaps are settled in cash on a monthlybasis. As of March 31, 2006, we had entered into the following swaps:

| ** **           | ** ** | **Swaps**                                 | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **Natural Gas (NYMEX HH)** | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **           | ** ** | **Bbtu  Per Day**                    | ** ** | **Weighted  Average Hedged  Price per  MMBtu** | ** ** | **Fair Value  (In Thousands)** | ** ** | **Barrels   Per Day** | ** ** | **Weighted  Average Hedged  Price per Bbl** | ** ** | **Fair Value  (In Thousands)** | ** ** |
| Second Quarter  2006 |       |                                      | 10.0       |   |   |   | $ | 5.51 |   |   |   | $ | (1,610 | ) |   |   | 4,000 |   |   |   | $ | 31.58 |   |   |   | $ | (13,141 | ) |   |
| Third Quarter  2006  |       |                                      | 10.0       |   |   |   | 5.51 |   |   |   | (2,035 | ) |   |   | 4,000 |   |   |   | 31.58 |   |   |   | (13,598 | ) |   |
| Fourth Quarter 2006  |       |                                      | 10.0       |   |   |   | 5.51 |   |   |   | (3,186 | ) |   |   | 4,000 |   |   |   | 31.58 |   |   |   | (13,539 | ) |   |

 

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***Collars***

Forestalso enters into collar agreements with third parties. A collar agreement issimilar to a swap agreement, except that we receive the difference between thefloor price and the index price only if the index price is below the floorprice; and we pay the difference between the ceiling price and the index priceonly if the index price is above the ceiling price. As of March 31, 2006,we had entered into the following collars:

| ** **           | ** ** | **Collars**                               | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **Natural Gas (NYMEX HH)** | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **           | ** ** | **Bbtu Per  Day**                    | ** ** | **Weighted  Average Hedged  Floor and  Ceiling Price  per MMBtu** | ** ** | **Fair Value  (In Thousands)** | ** ** | **Barrels  Per Day** | ** ** | **Weighted  Average  Hedged Floor  and Ceiling  Price per Bbl** | ** ** | **Fair Value  (In Thousands)** | ** ** |
| Second Quarter  2006 |       |                                      | 50.0       |   |   |   | $ | 7.43/11.88 |   |   |   | $ | 3,206 |   |   |   | 5,500 |   |   | $ | 46.73/65.87 |   |   | $ | (2,531 | ) |   |
| Third Quarter  2006  |       |                                      | 50.0       |   |   |   | 7.43/11.88 |   |   |   | 3,219 |   |   |   | 5,500 |   |   | 46.73/65.87 |   |   | (3,661 | ) |   |
| Fourth Quarter  2006 |       |                                      | 50.0       |   |   |   | 7.43/11.88 |   |   |   | 89 |   |   |   | 5,500 |   |   | 46.73/65.87 |   |   | (4,124 | ) |   |
| Fiscal 2007          |       |                                      | 10.0       |   |   |   | 9.60/10.25 |   |   |   | 749 |   |   |   | — |   |   | — |   |   | — |   |   |
|                      |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The fair value of our derivative instruments based onthe futures prices quoted on March 31, 2006 was a net liability ofapproximately $50.2 million.

In April 2006,we entered into additional costless collar agreements. The table below setsforth the terms of these costless collar agreements. 

| ** **  | ** ** | **Collars**                               | ** ** |
|-------------|------------|-------------------------------------------|------------|
| ** **  | ** ** | **Natural Gas (NYMEX HH)** | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **  | ** ** | **Bbtu Per Day**                | ** ** | **Weighted Average  Hedged Floor and Ceiling  Price per MMBtu** | ** ** | **Barrels Per  Day** | ** ** | **Weighted Average  Hedged Floor and  Ceiling Price per Bbl** | ** ** |
| Fiscal 2007 |       |                                      | 5.0        |   |   |   | $ | 9.60/12.05 |   |   |   | 1,000 |   |   |   | $ | 65.00/85.00 |   |   |
|             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table reconciles the changes that occurred in the fair values of ouropen derivative contracts during the first quarter of 2006, beginning with thefair value of our commodity contracts on December 31, 2005: 

| ** **                                                              | ** ** | **Fair Value of  Derivative Contracts** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                              | ** ** | **(In Thousands)**                                | ** ** |
| Unrealized losses  on derivative contracts as of December 31, 2005 |       |                                                   | $          | (150,737 | ) |   |
| Net increase in  fair value                                             |       |                                                   | 42,893     |   |   |
| Fair value of  derivatives transferred in Spin-off                      |       |                                                   | 17,087     |   |   |
| Net contract  losses recognized                                         |       |                                                   | 40,595     |   |   |
| Unrealized losses on  derivative contracts of as March 31, 2006    |       |                                                   | $          | (50,162 | ) |   |

 

**Foreign CurrencyExchange Risk**

We conduct business inseveral foreign currencies and thus are subject to foreign currency exchangerate risk on cash flows related to sales, expenses, financing, and investingtransactions. In the past, we have not entered into any foreign currencyforward contracts or other similar financial instruments to manage this risk. Expendituresincurred relative to the foreign concessions held by Forest outside of NorthAmerica have been primarily United States dollar-denominated, as have cashproceeds related to property sales and farmout arrangements. Substantially allof our Canadian revenues and costs are denominated in Canadian dollars. Whilethe value of the Canadian dollar does fluctuate in relation to the U.S. dollar,we 

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believethat any currency risk associated with our Canadian operations would not have amaterial impact on our results of operations.

**Interest Rate Risk**

Thefollowing table presents principal amounts and related weighted average fixedinterest rates by year of maturity for Forest’s debt obligations and the fairvalue of our debt obligations at March 31, 2006: 

| ** **                  | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2011** | ** ** | **2014** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|---------------------|------------|
| ** **                  | ** ** | **(Dollar Amounts in Thousands)** | ** ** |
| Bank credit  facilities:    |       |                                             |       |     |       |     |       |     |       |      |       |                |       |   |   |
| Variable rate               |       | $                                                | —     |     | 326,813    |     | —     |     | —     |      | 326,813    |                |       | 326,813 |   |   |
| Average interest rate(1)    |       | —                                           |       | 6.03     | %          | —   |       | —   |       | 6.03      | %          |                |       |   |   |
| Long-term  debt:            |       |                                             |       |     |       |     |       |     |       |      |       |                |       |   |   |
| Fixed rate                  |       | $                                                | 265,000    |     | —     |     | 285,000    |     | 150,000    |      | 700,000    |                |       | 736,188 |   |   |
| Coupon interest rate        |       | 8.00                                             | %          | —   |       | 8.00     | %          | 7.75     | %          | 7.95      | %          |                |       |   |   |
| Effective  interest rate(2) |       | 7.13                                             | %          | —   |       | 7.71     | %          | 6.56     | %          | 7.24      | %          |                |       |   |   |

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(1)                 As of March 31, 2006.

(2)                 The effective interest rates on the 8%Senior Notes due 2008, the 8% Senior Notes due 2011, and the 73¤4% Senior Notes due 2014 are reduced fromthe coupon rate as a result of amortization of the gains related to terminationof the related interest rate swaps, and amortization of premiums and discounts.

**Item 4. CONTROLSAND PROCEDURES**

***Evaluation of Disclosure Controls and Procedures***

We have established disclosure controls and proceduresto ensure that material information relating to Forest and its consolidatedsubsidiaries is made known to the Officers who certify Forest’s financialreports and the Board of Directors.

Our Chief ExecutiveOfficer, H. Craig Clark, and our Chief Financial Officer, David H.Keyte, evaluated the effectiveness of our disclosure controls and procedures,as defined in Rules 13a - 15(e) and 15d - 15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), as of the endof the quarterly period ended March 31, 2006 (the “Evaluation Date”). Basedon this evaluation, they believe that as of the Evaluation Date our disclosurecontrols and procedures were effective to ensure that information required tobe disclosed by us in the reports we file or submit under the Securities ExchangeAct of 1934 is recorded, processed, summarized, and reported within the timeperiods specified in the SEC’s rules and forms.

***Changes in Internal Control Over Financial Reporting***

There has not been any change in our internal controlover financial reporting that occurred during our quarterly period ended March 31,2006 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

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**PART II—OTHERINFORMATION**

**Item 6.   EXHIBITS**

(a)   Exhibits.
| 31.1* |   | Certification of  Principal Executive Officer of Forest Oil Corporation as required by  Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2* |   | Certification of  Principal Financial Officer of Forest Oil Corporation as required by  Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
| 32.1+ |   | Certification of  Chief Executive Officer of Forest Oil Corporation pursuant to 18 U.S.C.  §1350.                                                          |
| 32.2+ |   | Certification of  Chief Financial Officer of Forest Oil Corporation pursuant to 18 U.S.C.  §1350.                                                          |

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*                     Filed herewith.

+                  Not considered to be “filed” for purposes of Section 18of the Securities Exchange Act of 1934 or otherwise subject to the liabilitiesof that section.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

|                   | FOREST  OIL CORPORATION |
|-------------------|-------------------------|
|              | (Registrant)            |
| May 10, 2006 | By:                     |   |
|              |                    |   | /s/ DAVID  H. KEYTE |
|              |                    | David H. Keyte |
|              |                    | *Executive Vice President and* |
|              |                    | *Chief Financial Officer* |
|              |                    | *(on behalf of the Registrant and as Principal* |
|              |                    | *Financial Officer)* |
| * *          | By:                     |   |
| * *          | * *                |   | /s/ VICTOR  A. WIND |
| * *          | * *                | Victor A. Wind |
| * *          | * *                | *Corporate Controller* |
| * *          | * *                | *(Principal Accounting Officer)* |

 

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**Exhibit Index**
| Exhibit Number | ** ** | **Description** | ** ** |
|---------------------|------------|-----------------|------------|
|                | 31.1       |            |       | Certification  of Principal Executive Officer of Forest Oil Corporation as required by  Rule 13a-14(a) of the Securities Exchange Act of 1934, as  amended. |   |
|                | 31.2       |            |       | Certification of  Principal Financial Officer of Forest Oil Corporation as required by  Rule 13a-14(a) of the Securities Exchange Act of 1934, as  amended. |   |
|                | 32.1       |            |       | Certification of  Chief Executive Officer of Forest Oil Corporation, pursuant to 18 U.S.C. §1350. |   |
|                | 32.2       |            |       | Certification of Chief  Financial Officer of Forest Oil Corporation, pursuant to  18 U.S.C. §1350. |   |

 

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