Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2008Oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                to


Commission File Number 1-13515

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

New York(State or other jurisdiction of
incorporation or organization)

25-0484900(IRS Employer Identification No.)707 17th Street, Suite 3600 Denver, Colorado 80202(Address of principal executive offices) (Zip Code)


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



Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. ý Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý

Accelerated filer oNon-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

As of October 31, 2008 there were 97,121,170 shares of the registrant's common stock, par value $.10 per share, outstanding.



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Table of Contents

FOREST OIL CORPORATION        INDEX TO FORM 10-Q        September 30, 2008



Part IFINANCIAL INFORMATIONItem 1Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007


1Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and
2007


2Condensed Consolidated Statement of Shareholders' Equity for the Nine Months Ended September 30, 2008


3Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007


4Notes to Condensed Consolidated Financial Statements


5Item 2Management's Discussion and Analysis of Financial Condition and Results of Operations


32Item 3Quantitative and Qualitative Disclosures About Market Risk


46Item 4Controls and Procedures


50Part IIOTHER INFORMATIONItem 1ARisk Factors


51Item 2Unregistered Sales of Equity Securities and Use of Proceeds


56Item 6Exhibits


57Signatures


58


i

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Table of Contents

PART IFINANCIAL INFORMATION

Item 1.    FINANCIAL STATEMENTS

FOREST OIL CORPORATION        CONDENSED CONSOLIDATED BALANCE SHEETS        (Unaudited)        (In Thousands, Except Share Data)

September 30,
2008

December 31,
2007ASSETSCurrent assets:Cash and cash equivalents

$
496


9,685Accounts receivable


205,768


201,617Derivative instruments


60,779


30,006Deferred income taxes


4,384


23,854Other investments


14,302


34,694Inventory


44,810


9,486Other current assets


62,265


52,032Total current assets


392,804


361,374Property and equipment, at cost:Oil and gas properties, full cost method of accounting:Proved, net of accumulated depletion of $3,067,850 and $2,742,539


5,749,523


4,414,710Unproved


1,063,921


568,510Net oil and gas properties


6,813,444


4,983,220Other property and equipment, net of accumulated depreciation and amortization of $35,528 and $30,011


87,303


42,595Net property and equipment


6,900,747


5,025,815Goodwill


265,088


265,618Derivative instruments


7,730


Other assets


40,521


42,741$
7,606,890


5,695,548LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
434,501


361,089Accrued interest


34,146


7,693Derivative instruments


60,690


72,675Current portion of long-term debt





266,002Asset retirement obligations


4,204


2,562Other current liabilities


40,966


28,361Total current liabilities


574,507


738,382Long-term debt


2,672,996


1,503,035Asset retirement obligations


95,912


87,943Derivative instruments


29,167


38,171Deferred income taxes


1,044,485


853,427Other liabilities


65,355


62,779Total liabilities


4,482,422


3,283,737Shareholders' equity:Preferred stock, none issued and outstanding





Common stock, 97,088,219 and 88,379,409 shares issued and outstanding


9,709


8,838Capital surplus


2,361,782


1,966,569Retained earnings


653,287


306,062Accumulated other comprehensive income


99,690


130,342Total shareholders' equity


3,124,468


2,411,811$
7,606,890


5,695,548


See accompanying Notes to Condensed Consolidated Financial Statements.

1

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FOREST OIL CORPORATION        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (Unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,2008

2007

2008

2007(In Thousands, Except Per Share Amounts)Revenues

$
474,160


313,025


1,365,872


750,303Operating expenses:Lease operating expenses


44,912


48,269


120,890


129,336Production and property taxes


23,482


16,112


67,681


36,830Transportation and processing costs


4,874


5,764


14,440


15,216General and administrative (including stock-based compensation)


18,046


16,716


57,166


43,094Depreciation and depletion


136,731


122,005


378,882


268,590Accretion of asset retirement obligations


1,871


1,980


5,622


4,547Gain on sale of assets


(21,063
)




(21,063
)

(7,176
)Total operating expenses


208,853


210,846


623,618


490,437Earnings from operations


265,307


102,179


742,254


259,866Other income and expense:Interest expense


30,429


32,567


86,265


86,023Unrealized (gains) losses on derivative instruments, net


(498,182
)

12,415


(36,329
)

35,440Realized losses (gains) on derivative instruments, net


48,842


(30,387
)

110,687


(64,791
)Unrealized foreign currency exchange losses (gains)


4,456


(1,075
)

6,771


(7,395
)Unrealized losses (gains) on other investments, net


14,699


(2,521
)

22,066


(2,521
)Other expense, net


2,114


4,145


1,089


4,379Total other income and expense


(397,642
)

15,144


190,549


51,135Earnings before income taxes


662,949


87,035


551,705


208,731Income tax:Current


2,961


3,320


6,939


6,415Deferred


230,981


25,728


188,509


60,639Total income tax


233,942


29,048


195,448


67,054Net earnings

$
429,007


57,987


356,257


141,677Basic earnings per common share

$
4.88


..67


4.06


1.96Diluted earnings per common share

$
4.77


.65


3.97


1.91


See
accompanying Notes to Condensed Consolidated Financial Statements.

2

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Table of Contents

FOREST OIL CORPORATION        CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY        (Unaudited)

Common Stock





Accumulated
Other
Comprehensive
IncomeCapital
Surplus

Retained
Earnings

Total
Shareholders'
EquityShares

Amount(In Thousands)Balances at December 31, 2007


88,379

$
8,838


1,966,569


306,062


130,342


2,411,811Acquisition of Texas properties


7,250


725


358,875








359,600Exercise of stock options


784


78


16,279








16,357Employee stock purchase plan


26


3


1,115








1,118Restricted stock issued, net of cancellations


667


67


(67
)







Amortization of stock-based compensation








20,100








20,100Adoption of EITF 06-4 and EITF 06-10











(9,032
)




(9,032
)Restricted stock redeemed and other


(18
)

(2
)

(1,089
)







(1,091
)Comprehensive income:Net earnings











356,257





356,257Unfunded postretirement benefits, net of tax














(7
)

(7
)Foreign currency translation














(30,645
)

(30,645
)Total comprehensive income

















325,605Balances at September 30, 2008


97,088

$
9,709


2,361,782


653,287


99,690


3,124,468


See
accompanying Notes to Condensed Consolidated Financial Statements.

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FOREST OIL CORPORATION        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (Unaudited)

Nine Months Ended
September 30,2008

2007(In Thousands)Operating activities:Net earnings

$
356,257


141,677Adjustments to reconcile net earnings to net cash provided by operating activities:Depreciation and depletion


378,882


268,590Accretion of asset retirement obligations


5,622


4,547Stock-based compensation expense


14,093


7,484Unrealized (gains) losses on derivative instruments, net


(36,329
)

35,440Gain on sale of assets


(21,063
)

(7,176
)Deferred income tax


188,509


60,639Unrealized foreign currency exchange losses (gains)


6,771


(7,395
)Unrealized losses (gains) on other investments, net


22,066


(2,521
)Other, net


(2,837
)

2,931Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:Accounts receivable


(1,234
)

36,081Other current assets


(50,275
)

(2,565
)Accounts payable


605


(34,724
)Accrued interest and other current liabilities


21,383


17,781Net cash provided by operating activities


882,450


520,789Investing activities:Capital expenditures for property and equipment:Exploration, development, and acquisition costs


(1,903,413
)

(1,311,212
)Other fixed assets


(50,928
)

(23,847
)Proceeds from sales of assets


99,416


501,734Other, net


13,898


Net cash used by investing activities


(1,841,027
)

(833,325
)Financing activities:Proceeds from bank borrowings


2,609,133


1,208,553Repayments of bank borrowings


(1,674,884
)

(1,104,387
)Issuance of 71/4% senior notes, net of issuance costs


247,188


739,176Redemption of 8% senior notes


(265,000
)

Repurchases of 7% senior subordinated notes


(4,710
)

Repayments of term loans





(375,000
)Repayments of bank debt assumed in acquisition





(176,885
)Proceeds from the exercise of options and from employee stock purchase plan


17,475


8,125Other, net


20,289


(13,054
)Net cash provided by financing activities


949,491


286,528Effect of exchange rate changes on cash


(103
)

1,658Net decrease in cash and cash equivalents


(9,189
)

(24,350
)Cash and cash equivalents at beginning of period


9,685


33,164Cash and cash equivalents at end of period

$
496


8,814Cash paid during the period for:Interest

$
74,802


63,924Income taxes


6,957


3,401


See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

FOREST OIL CORPORATION        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        (Unaudited)

(1) BASIS OF PRESENTATION

The Condensed Consolidated Financial Statements included herein are unaudited and include the accounts of Forest Oil Corporation and its consolidated subsidiaries (collectively, "Forest"
or the "Company"). In the opinion of management, all adjustments, consisting of normal recurring accruals, have been made which are necessary for a fair presentation of the financial position of
Forest at September 30, 2008, the results of its operations for the three and nine months ended September 30, 2008 and 2007, and its cash flows for the nine months ended
September 30, 2008 and 2007. Interim results are not necessarily indicative of expected annual results because of the impact of fluctuations in prices received for liquids (oil, condensate, and
natural gas liquids) and natural gas and other factors.

In
the course of preparing the Condensed Consolidated Financial Statements, management makes various assumptions, judgments, and estimates to determine the reported amounts of assets,
liabilities, revenues, and expenses, and in the disclosures of commitments and contingencies. Changes in these assumptions, judgments, and estimates will occur as a result of the passage of time and
the occurrence of future events and, accordingly, actual results could differ from amounts previously established.

The
more significant areas requiring the use of assumptions, judgments, and estimates relate to volumes of oil and gas reserves used in calculating depletion, the amount of future net
revenues used in computing the ceiling test limitations, and the amount of future capital costs and abandonment obligations used in such calculations. Assumptions, judgments, and estimates are also
required in
determining impairments of undeveloped properties, valuing deferred tax assets, and estimating fair values of financial instruments, including derivative instruments.

Certain
amounts in the prior year financial statements have been reclassified to conform to the 2008 financial statement presentation.

For
a more complete understanding of Forest's operations, financial position, and accounting policies, reference is made to the consolidated financial statements of Forest, and related
notes thereto, filed with Forest's Annual Report on Form 10-K for the year ended December 31, 2007, previously filed with the Securities and Exchange Commission.

(2) ACQUISITIONS AND DIVESTITURES

Acquisitions

Texas Properties Acquisition

On September 30, 2008, Forest acquired producing oil and natural gas properties located in its Greater Buffalo Wallow and East
Texas/North Louisiana core areas from
Cordillera Texas, L.P. Forest paid approximately $570 million in cash, subject to customary post-closing adjustments, to reflect an economic effective date of July 1,
2008, and issued 7.25 million shares of Forest's common stock, valued at approximately $360 million (based on a September 30, 2008 closing price), to the seller for the acquired
assets. Forest funded the cash component of the purchase price primarily using advances under its credit facilities. Approximately 45% of the purchase price has been preliminarily allocated to
unproved properties.

5

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FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(2) ACQUISITIONS AND DIVESTITURES (Continued)

Ark-La-Tex Properties Acquisition

On May 2, 2008, Forest acquired producing oil and natural gas properties located primarily in its core
Ark-La-Tex region in East Texas and North Louisiana. Forest paid approximately $284 million, as adjusted to reflect an economic effective date of April 1, 2008,
for the assets using funds advanced under its credit facilities.

Acquisition of Houston Exploration

On June 6, 2007, Forest completed the acquisition of The Houston Exploration Company ("Houston Exploration") in a cash and stock
transaction totaling approximately $1.5 billion and the assumption of Houston Exploration's debt. Houston Exploration was an independent natural gas and oil producer engaged in the exploration,
development, exploitation, and acquisition of natural gas and oil reserves in North America. Houston Exploration had operations in four producing regions within the United States: South Texas, East
Texas, the Arkoma Basin of Arkansas, and the Uinta and DJ Basins in the Rocky Mountains. Pursuant to the terms and conditions of the agreement and plan of merger ("Merger Agreement"), Forest paid
total merger consideration of $750 million in cash and issued approximately 24 million common shares, valued at $30.28 per share. The cash component of the merger consideration was
financed from a private placement of $750 million of 71/4% senior notes due 2019 and borrowings under the Company's credit facilities. Immediately following the completion of the
merger, Forest repaid all of Houston Exploration's outstanding bank debt totaling $177 million.

The
acquisition, which was accounted for using the purchase method of accounting, has been included in Forest's Condensed Consolidated Financial Statements since June 6, 2007, the
date the acquisition closed. The following table represents the allocation of the total purchase price of Houston Exploration to the acquired assets and liabilities of Houston Exploration as of
September 30, 2008. The

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FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(2) ACQUISITIONS AND DIVESTITURES (Continued)

allocation
represents the estimated fair values assigned to each of the assets acquired and liabilities assumed.

(In Thousands)Fair value of Houston Exploration's net assets:Net working capital, including cash of $3.5 million

$
(3,739
)Proved oil and gas properties


1,741,823Unproved oil and gas properties


448,100Goodwill


177,428Other assets


14,537Derivative instruments


(45,170
)Long-term debt


(182,532
)Asset retirement obligations


(36,424
)Deferred income taxes


(590,504
)Other liabilities


(18,210
)Total fair value of net assets

$
1,505,309Consideration paid for Houston Exploration's net assets:Forest common stock issued

$
726,412Cash consideration paid


749,694Aggregate purchase consideration paid to Houston Exploration stockholders


1,476,106Plus:Cash settlement for Houston Exploration stock options


20,075Direct merger costs incurred


9,128Total consideration paid

$
1,505,309


Goodwill of $177.4 million has been recognized to the extent that the consideration paid exceeded the fair value of the net assets acquired
and has been assigned to the U.S. geographical business segment. Goodwill is not expected to be deductible for tax purposes. The principal factors that contributed to the recognition of goodwill
include the mix of complementary high-quality assets in certain of our existing core areas, lower-risk exploitation opportunities, expected increased cash flow from operations
available for investing activities, and opportunities for cost savings through administrative and operational synergies. Subsequent to September 30, 2008, commodity prices and the Company's
common stock price have declined significantly. These events may suggest that the carrying amount of goodwill may need to be assessed during the fourth quarter in addition to the normal recurring
assessment that occurs during each second quarter and, as warranted, the Company may need to record an impairment.

Included
in the working capital assumed at the acquisition date was a severance accrual of $28.9 million for costs to involuntarily terminate employees of Houston Exploration.
Management determined it would be necessary to eliminate certain overlapping positions to achieve cost savings through administrative and operational synergies. Management has finalized its
termination plan as a

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(2) ACQUISITIONS AND DIVESTITURES (Continued)

result
of the acquisition and all severance payments have been made. The following table summarizes the activity in the severance accrual through September 30, 2008 since the acquisition date.

(In Thousands)Severance accrual at June 6, 2007

$
28,850Cash payments(1)


(26,805
)Net adjustment(2)


(2,045
)Severance accrual at September 30, 2008

$







The following summary pro forma combined statement of operations data of Forest for the nine months ended September, 30, 2007 has been prepared to
give effect to the merger as if the merger had occurred on January 1, 2007. The pro forma financial information is not necessarily indicative of the results that might have occurred had the
transaction taken place on January 1, 2007, and is not intended to be a projection of future results. Future results may vary significantly from the results reflected in the following pro forma
financial information because of normal production declines, changes in commodity prices, future acquisitions and divestitures, future development and exploration activities, and other factors.

Nine Months Ended
September 30, 2007(In Thousands, Except
Per Share Amounts)Revenues

$
971,260Earnings from continuing operations


153,962Net earnings


153,962Basic earnings per common share:From continuing operations

$
1.78Basic earnings per common share


1.78Diluted earnings per common share:From continuing operations

$
1.75Diluted earnings per common share


1.75


Divestitures

2008 Asset Divestiture Program

During the nine months ended September 30, 2008, Forest sold U.S and international oil and gas properties for total proceeds of
$99.4 million, including the sale of all of its unproven oil and gas properties in Gabon for net proceeds of $23.9 million that resulted in a gain on the sale of $21.1 million in
the third quarter.

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(2) ACQUISITIONS AND DIVESTITURES (Continued)

Sale of Alaska Assets

On August 27, 2007, Forest sold all of its assets located in Alaska (the "Alaska Assets") to Pacific Energy
Resources Ltd. ("PERL"). The total consideration received for the Alaska Assets included $400 million in cash, 10 million shares of PERL common stock (subject to
certain restrictions) (the "PERL Shares"), and a zero coupon senior subordinated note from PERL due 2014 in the principal amount at stated maturity of $60.8 million (the "PERL Note"). A portion
of the cash consideration, $269 million, was applied to prepay all amounts due under the Alaska term loan agreements, including accrued interest and prepayment premiums. Consideration received
by Forest in the form of the PERL common stock and the zero coupon senior subordinated note are being held in other investments within the Condensed Consolidated Balance Sheets. Forest accounts for
these investments as trading securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,Accounting for Certain Investments in Debt and
Equity Securities. Investments in debt and equity securities classified as trading securities are recorded at fair value with unrealized gains and losses recognized in "Other
income and expense" in the Condensed Consolidated Statements of Operations.

(3) EARNINGS PER SHARE AND COMPREHENSIVE EARNINGS (LOSS)

Earnings per Share

Basic earnings per share is computed by dividing net earnings attributable to common stock by the weighted average number of common
shares outstanding during each period, excluding treasury shares. Diluted earnings per share is computed by adjusting the average number of common shares outstanding for the dilutive effect, if any,
of stock options, unvested restricted stock
grants, and unvested phantom stock units. The following sets forth the calculation of basic and diluted earnings per share.

Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

2008

2007(In Thousands, Except Per Share Amounts)Net earnings

$
429,007


57,987


356,257


141,677Weighted average common shares outstanding during the period


87,987


86,802


87,667


72,434Add dilutive effects of stock options, unvested restricted stock grants, and unvested phantom stock units


2,019


1,811


1,968


1,585Weighted average common shares outstanding, including the effects of dilutive securities


90,006


88,613


89,635


74,019Basic earnings per share

$
4.88


..67


4.06


1.96Diluted earnings per share

$
4.77


.65


3.97


1.91


9

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(3) EARNINGS PER SHARE AND COMPREHENSIVE EARNINGS (LOSS) (Continued)

Comprehensive Earnings (Loss)

Comprehensive earnings (loss) is a term used to refer to net earnings plus other comprehensive income (loss). Other comprehensive
income (loss) is comprised of revenues, expenses, gains, and losses that under generally accepted accounting principles are reported as separate components of shareholders' equity instead of net
earnings. Items included in Forest's other comprehensive income (loss) for the three and nine months ended September 30, 2008 and 2007 are foreign currency gains (losses) related to the
translation of the assets and liabilities of Forest's Canadian operations and changes in unfunded postretirement benefits.

The
components of comprehensive earnings (loss) are as follows:

Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

2008

2007(In Thousands)Net earnings

$
429,007


57,987


356,257


141,677Other comprehensive income (loss):Foreign currency translation (losses) gains


(18,663
)

25,255


(30,645
)

54,002Unfunded postretirement benefits, net of tax


(7
)

(65
)

(7
)

(274
)Total comprehensive earnings

$
410,337


83,177


325,605


195,405


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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(4) STOCK-BASED COMPENSATION

The table below sets forth total stock-based compensation recorded during the three and nine months ended September 30, 2008 and 2007 under the provisions of SFAS No. 123
(Revised),Share-Based Payment("SFAS 123(R)") and the remaining unamortized amounts and the weighted average amortization period remaining as of
September 30, 2008.

Stock Options

Restricted Stock

Phantom Stock Units

Total(1)(In Thousands)Three Months Ended September 30, 2008:Total stock-based compensation costs

$
745


7,237


(1,030
)

6,952Less: stock-based compensation costs capitalized


(292
)

(2,636
)

658


(2,270
)Stock-based compensation costs expensed

$
453


4,601


(372
)

4,682Nine Months Ended September 30, 2008:Total stock-based compensation costs

$
2,274


17,429


2,788


22,491Less: stock-based compensation costs capitalized


(940
)

(6,172
)

(1,683
)

(8,795
)Stock-based compensation costs expensed

$
1,334


11,257


1,105


13,696Unamortized stock-based compensation costs as of September 30, 2008

$
3,090


52,858


6,293
(2)

62,241Weighted average amortization period remaining


1.4 years


2.3 years


2.1 years


2.2 yearsThree Months Ended September 30, 2007:Total stock-based compensation costs

$
1,089


3,394


551


5,034Less: stock-based compensation costs capitalized


(501
)

(1,526
)

(350
)

(2,377
)Stock-based compensation costs expensed

$
588


1,868


201


2,657Nine Months Ended September 30, 2007:Total stock-based compensation costs

$
3,771


6,658


1,343


11,772Less: stock-based compensation costs capitalized


(1,139
)

(2,546
)

(854
)

(4,539
)Stock-based compensation costs expensed

$
2,632


4,112


489


7,233


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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(4) STOCK-BASED COMPENSATION (Continued)

Stock Options

The following table summarizes stock option activity in the Company's stock-based compensation plans for the nine months ended
September 30, 2008.

Number of
Shares

Weighted
Average Exercise
Price

Aggregate
Intrinsic Value
(In Thousands)(1)

Number of
Shares
ExercisableOutstanding at January 1, 2008


2,941,506

$
21.35

$
87,816


2,275,314Granted











Exercised


(788,641
)

21.14


30,372


Cancelled


(33,573
)

28.04





Outstanding at September 30, 2008


2,119,292


21.32


58,940


1,733,536


---

Restricted Stock and Phantom Stock Units

The following table summarizes the restricted stock and phantom stock unit activity in the Company's stock-based compensation plans for
the nine months ended September 30, 2008.

Restricted Stock

Phantom Stock UnitsNumber of
Shares

Weighted
Average Grant
Date Fair Value

Number of
Shares

Weighted
Average Grant
Date Fair ValueUnvested at January 1, 2008


1,281,000

$
43.41


164,500

$
42.50Awarded


717,645


64.28


82,154


62.97Vested


(57,100
)

42.42


(250
)

55.54Forfeited


(51,000
)

45.15


(1,700
)

43.76Unvested at September 30, 2008


1,890,545


51.32


244,704


49.35


The phantom stock units can be settled in cash, shares of common stock, or a combination of both. The phantom stock units have been accounted for
as a liability within the Condensed Consolidated Financial Statements.

12

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(5) DEBT

Components of debt are as follows:

September 30, 2008

December 31, 2007Principal

Unamortized
Premium
(Discount)

Other(3)

Total

Principal

Unamortized
Premium
(Discount)

Other(3)

Total(In Thousands)U.S. Credit Facility

$
1,140,000








1,140,000


165,000








165,000Canadian Credit Facility


80,814








80,814


129,126








129,1268% Senior Notes due 2008(1)














265,000


(48
)

1,050


266,0028% Senior Notes due 2011


285,000


4,198


2,686


291,884


285,000


5,167


3,315


293,4827% Senior Subordinated Notes due 2013(2)


1,112


(26
)




1,086


5,822


(158
)




5,66473/4% Senior Notes due 2014


150,000


(1,333
)

9,941


158,608


150,000


(1,512
)

11,275


159,76371/4% Senior Notes due 2019(1)


1,000,000


604





1,000,604


750,000








750,000Total debt


2,656,926


3,443


12,627


2,672,996


1,749,948


3,449


15,640


1,769,037Less: current portion of long-term debt














(265,000
)

48


(1,050
)

(266,002
)Long-term debt

$
2,656,926


3,443


12,627


2,672,996


1,484,948


3,497


14,590


1,503,035


---

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(5) DEBT (Continued)

Bank Credit Facilities

On May 9, 2008, Forest entered into a first amendment to its second amended and restated combined credit agreements, which
increased lender commitments to $1.8 billion and established the global borrowing base at $1.8 billion. The amended credit agreements consist of a $1.65 billion U.S. credit
facility through a syndicate of banks led by JPMorgan Chase Bank, N.A. (the "U.S. Credit Facility") and a $150 million Canadian credit facility through a syndicate of banks led by JPMorgan
Chase Bank, N.A., Toronto Branch (the "Canadian Credit Facility," and together with the U.S. Credit Facility, the "Credit Facilities"). The Credit Facilities will mature in June 2012.

Forest's
availability under the Credit Facilities is governed by a borrowing base (the "Global Borrowing Base"), which currently is set at $1.8 billion, with $1.65 billion
allocated to the U.S. Credit Facility and $150 million allocated to the Canadian Credit Facility. The determination of the Global Borrowing Base is made by the lenders in their sole discretion
taking into consideration the estimated value of Forest's oil and gas properties in accordance with the lenders' customary practices for oil and gas loans. The Global Borrowing Base is redetermined
semi-annually, and the available borrowing amount could be increased or decreased as a result of such redeterminations. The lenders completed their semi-annual redetermination
in October 2008 and reaffirmed the $1.8 billion Global Borrowing Base and their $1.8 billion in commitments under the Credit Facilities. In addition to the semi-annual
redetermination, Forest and the lenders each have discretion at any time, but not more often than once during any calendar year, to have the Global Borrowing Base redetermined. The Global Borrowing
Base is also subject to immediate reduction in the event Forest issues senior notes after May 9, 2008. In such case, the Global Borrowing Base will immediately be reduced by an amount equal to
$0.30 of every $1.00 principal amount of newly issued senior notes (excluding any senior notes that Forest may issue to refinance senior notes outstanding on May 9, 2008).

Borrowings
under the U.S. Credit Facility bear interest at one of two rates as may be elected by Forest. Loans will bear interest at a rate that is based on interest rates applicable to
dollar deposits in the London interbank market ("LIBO Rate"), or a rate based on the greater of the prime rate announced by the global administrative agent or the federal funds rate plus
1/2 of 1%. Loans under the Canadian Credit Facility will bear interest at a rate that may be based on the base rate announced by the Canadian administrative agent, the LIBO Rate, a rate
based on the greater of the rate for U.S. dollar denominated loans made by the Canadian administrative agent and the federal funds rate plus 1/2 of 1%, or a banker's acceptance rate. At
September 30, 2008, the borrowings under the U.S. Credit Facility and Canadian Credit Facility had weighted average interest rates of 4.4% and 4.7%, respectively.

The
Credit Facilities include terms and covenants that place limitations on certain types of activities, including restrictions or requirements with respect to additional debt, liens,
asset sales, hedging activities, investments, dividends, mergers, and acquisitions, and include financial covenants.

Under
certain conditions, amounts outstanding under the Credit Facilities may be accelerated. Bankruptcy and insolvency events with respect to Forest or certain of its subsidiaries will
result in an automatic acceleration of the indebtedness under the Credit Facilities. Subject to notice and cure periods in certain cases, other events of default under either of the Credit Facilities
will result in acceleration of the indebtedness under the facilities at the option of the lenders. Such other events of

14

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(5) DEBT (Continued)

default
include non-payment, breach of warranty, non-performance of obligations under the Credit Facilities (including financial covenants), default on other indebtedness,
certain pension plan events, certain adverse judgments, change of control, a failure of the liens securing the Credit Facilities, and an event of default under the Canadian Credit Facility.

The
Credit Facilities are collateralized by a portion of Forest's assets. The Company is also required to mortgage and grant a security interest in the greater of 75% of the present
value of its consolidated proved oil and gas properties, or 1.875 multiplied by the allocated U.S. borrowing base. The Company also has pledged the stock of several subsidiaries to the lenders to
secure the Credit Facilities. Under certain circumstances, the Company could be obligated to pledge additional assets as collateral. If Forest's corporate credit ratings by Moody's and S&P improve and
meet pre-established levels, the collateral requirements would not apply and, at the Company's request, the banks would release their liens and security interests on its properties.

From
time to time, Forest and the syndication agents, documentation agents, global administrative agent, and the other lenders party to the Credit Facilities engage in other
transactions, including securities offerings where such parties or their affiliates may serve as an underwriter or initial purchaser of Forest's securities and, or serve as counterparties to Forest's
derivative agreements.

71/4% Senior Notes Due 2019

On May 22, 2008, Forest issued an additional $250 million in principal amount of 71/4% senior notes due in
2019 (the "71/4% Notes") at 100.25% of par for net proceeds of $247.2 million, after deducting initial purchaser discounts. The additional 71/4% Notes were used to
redeem a portion of the Company's 8% senior notes due 2008 that matured on June 15, 2008. The additional 71/4% Notes were issued under an existing indenture (the "Indenture")
dated as of June 6, 2007 among Forest, Forest Oil Permian Corporation, a wholly-owned subsidiary of Forest ("Forest Permian"), as subsidiary guarantor, and U.S. Bank National Association, as
trustee. Forest previously issued an aggregate principal amount of $750 million in 71/4% Notes under the Indenture, and there is now a total of $1 billion in
71/4% Notes outstanding. The 71/4% Notes are jointly and severally guaranteed by Forest Permian on an unsecured basis. Interest is payable on June 15 and
December 15 of each year, beginning June 15, 2008. The 71/4% Notes will mature on June 15, 2019.

Forest
may redeem up to 35% of the 71/4% Notes at any time prior to June 15, 2010, on one or more occasions, with the proceeds from certain equity offerings at a
redemption price equal to 107.25% of the principal amount, plus accrued but unpaid interest. Forest may redeem the 71/4% Notes at any time beginning on or after June 15, 2012 at
the prices set forth below, expressed as percentages of the principal amount redeemed, plus accrued but unpaid interest:

2012


103.6
%2013


102.4
%2014


101.2
%2015 and thereafter


100.0
%


15

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(5) DEBT (Continued)

Forest
may also redeem the 71/4% Notes, in whole or in part, at a price equal to the principal amount plus a "make whole" premium, at any time prior to June 15,
2012, using a discount rate of the Treasury rate plus 0.50%, plus accrued but unpaid interest.

Forest
and its restricted subsidiaries are subject to certain negative covenants under the Indenture governing the 71/4% Notes. The Indenture limits the ability of Forest
and each of its restricted subsidiaries to, among other things: incur additional indebtedness, create certain liens, make certain types of "restricted payments," make investments, sell assets, enter
into agreements that restrict dividends or other payments from its subsidiaries to itself, consolidate, merge or transfer all or substantially all of its assets, engage in transactions with
affiliates, and pay dividends or make other distributions on capital stock or subordinated indebtedness.

7% Senior Subordinated Notes Due 2013

On May 22, 2008, Forest repurchased $3.0 million in principal amount of 7% senior subordinated notes due in 2013 (the "7%
Notes") at 99.9375% of par value. On September 3, 2008, Forest repurchased an additional $1.8 million in principal amount of the 7% Notes at 99.0000% of par value.

8% Senior Notes Due 2008

On June 15, 2008, Forest redeemed $265 million in principal amount of 8% senior notes due in 2008 (the "8% Notes due
2008") that matured as of that date. The Company used net proceeds received from the issuance of additional 71/4% Notes and borrowings under its credit facilities to fund the redemption
of the 8% Notes due 2008.

(6) PROPERTY AND EQUIPMENT

The Company uses the full cost method of accounting for oil and gas properties. Separate cost centers are maintained for each country in which the Company has operations. During the
periods presented, the Company's primary oil and gas operations were conducted in the United States and Canada. All costs incurred 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) and the fair value of estimated future costs
of site restoration, dismantlement, and abandonment activities are capitalized. During the three months ended September 30, 2008 and 2007, Forest capitalized $11.8 million and
$12.7 million of general and administrative costs (including stock-based compensation), respectively. For the nine months ended September 30, 2008 and 2007, Forest capitalized
$38.7 million and $29.8 million of general and administrative costs (including stock-based compensation), respectively. Interest costs related to significant unproved properties that are
under development are also capitalized to oil and gas properties. During the three months ended September 30, 2008 and 2007, the Company capitalized $4.0 million and $6.3 million,
respectively, of interest costs attributed to unproved properties. For the nine months ended September 30, 2008 and 2007, the Company capitalized $14.6 million and $8.5 million,
respectively, of interest costs attributed to unproved properties.

Investments
in unproved properties, including capitalized interest costs, are not depleted pending determination of the existence of proved reserves. Unproved properties are assessed
periodically to

16

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(6) PROPERTY AND EQUIPMENT (Continued)

ascertain
whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding
period of the properties, and geographic and geologic data obtained relating to the properties. Where it is not practicable to assess individually the amount of impairment of properties for which
costs are not individually significant, such properties are grouped for purposes of assessing impairment. The amount of impairment assessed is added to the costs to be amortized, or is reported as a
period expense, as appropriate.

Pursuant
to full cost accounting rules, the Company must perform a ceiling test each quarter on its proved oil and gas assets within each separate cost center. The ceiling test provides
that capitalized costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the present value of future net revenue from estimated
production of proved oil and gas reserves using current prices, excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, at
a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs
being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. Should the net capitalized costs for a cost center exceed the
sum of the components noted above, an impairment charge would be recognized to the extent of the excess capitalized costs. There were no provisions for impairment of proved oil and gas properties in
2008 or 2007, although the Company's ceiling test in each of its cost centers could be adversely impacted by declines in commodity prices.

Gain
or loss is not recognized on the sale of oil and gas properties unless the sale significantly alters the relationship between capitalized costs and estimated proved oil and gas
reserves attributable to a cost center.

Depletion
of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, as adjusted for future development costs and
asset retirement obligations, are amortized over the total estimated proved reserves. Furniture and fixtures, leasehold improvements, computer hardware and software, and other equipment are
depreciated on the straight-line or declining balance method, based upon estimated useful lives of the assets ranging from three to 15 years.

(7) ASSET RETIREMENT OBLIGATIONS

Forest records estimated future asset retirement obligations pursuant to the provisions of SFAS No. 143,Accounting for Asset Retirement
Obligations("SFAS 143"). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is
incurred with a corresponding increase in the carrying amount of the related long-lived asset.
Subsequent to initial measurement, the asset retirement liability is required to be accreted each period to its present value. Capitalized costs are depleted as a component of the full cost pool using
the units-of-production method. Forest's asset retirement obligations consist of costs related to the plugging of wells, the removal of facilities and equipment, and site
restoration on oil and gas properties.

17

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(7) ASSET RETIREMENT OBLIGATIONS (Continued)

The
following table summarizes the activity for Forest's asset retirement obligations for the nine months ended September 30, 2008 and 2007.

Nine Months Ended
September 30,2008

2007(In Thousands)Asset retirement obligations at beginning of period

$
90,505


64,102Accretion expense


5,622


4,547Liabilities incurred


8,455


3,435Liabilities settled


(3,152
)

(863
)Disposition of properties


(3,692
)

(17,476
)Liabilities assumed


2,747


40,073Revisions of estimated liabilities


737


372Impact of foreign currency exchange rate


(1,106
)

2,492Asset retirement obligations at end of period


100,116


96,682Less: current asset retirement obligations


(4,204
)

(1,151
)Long-term asset retirement obligations

$
95,912


95,531


(8) EMPLOYEE BENEFITS

Pension Plans and Postretirement Benefits

The following table sets forth the components of the net periodic cost of Forest's defined benefit pension plans and postretirement
benefits in the United States for the three and nine months ended September 30, 2008 and 2007.

Three Months Ended
September 30,

Nine Months Ended
September 30,Pension
Benefits

Postretirement
Benefits

Pension
Benefits

Postretirement
Benefits2008

2007

2008

2007

2008

2007

2008

2007(In Thousands)Service cost

$



170


127


103





227


381


308Interest cost


569


636


110


94


1,707


1,770


330


282Expected return on plan assets


(633
)

(641
)







(1,899
)

(1,922
)




Amortization of prior service cost





79











105





Recognized actuarial loss (gain)


182


199


(30
)

(22
)

545


589


(90
)

(65
)Total net periodic expense

$
118


443


207


175


353


769


621


525


Split Dollar Life Insurance

The Company provides life insurance benefits for certain retirees and former executives under split dollar life insurance plans. Under
the life insurance plans, the Company is assigned a portion of the benefits. No current employees are covered by these plans. On January 1, 2008, the Company adopted

18

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(8) EMPLOYEE BENEFITS (Continued)

Emerging
Issues Task Force ("EITF") Issue No. 06-4,Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements("EITF 06-4"), and EITF Issue No. 06-10,Accounting for Collateral Assignment Split-Dollar
Life Insurance Arrangements("EITF 06-10"). Pursuant to these pronouncements, the Company recognized a liability for the estimated cost of maintaining the
insurance policies during the postretirement periods of the retirees and former executives in accordance with SFAS No. 106,Employers' Accounting for Postretirement
Benefits Other Than Pensions("SFAS 106"). Upon adoption, Forest recorded a $9.0 million liability as a change in accounting principle through a cumulative effect
adjustment to retained earnings. The weighted average discount rate used to determine the postretirement benefit obligation and accretion expense was 5.55%. The Company's
estimate of costs expected to be paid in 2008 to maintain these life insurance policies is $.9 million. Accretion of the discounted life insurance obligations totaled $.1 million and
$.4 million during the three and nine months ended September 30, 2008, respectively. As of September 30, 2008, the Condensed Consolidated Balance Sheet includes a liability
associated with the life insurance policies of $7.6 million and an asset of $2.6 million, representing the estimated cash surrender value of the life insurance policies.

(9) FAIR VALUE MEASUREMENTS

In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157,Fair Value Measurements("SFAS 157"). This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Company adopted
the provisions of SFAS 157 as of January 1, 2008 for all financial and nonfinancial assets and liabilities recognized or disclosed at fair value on a recurring basis. The Company will
adopt SFAS 157 as it relates to all nonfinancial assets and liabilities that are not recognized or disclosed on a recurring basis as of January 1, 2009 pursuant to the provisions of FASB
Staff Position No. FAS 157-2,Effective Date of FASB Statement No. 157. The adoption of SFAS 157 did not materially
impact the Company's financial position, results of operations, or cash flow.

SFAS 157
establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as inputs
such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

As
of September 30, 2008, the Company held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis, including: (i) the
Company's commodity derivative instruments and (ii) other investments, which are comprised of the PERL Note and the PERL Shares.

The
Company used the income approach in determining the fair value of its derivative instruments, utilizing present value techniques for valuing its swaps and basis swaps and
option-pricing models for valuing its collars and three-way collars. The Company's derivative instruments are included within the Level 2 fair value hierarchy. The Company also used
the income approach, utilizing present value techniques, in determining the fair value of its PERL Note, which is included within the Level 3 fair value hierarchy. The Company used the market
approach in determining the fair value of the PERL Shares, which are included within the Level 1 fair value hierarchy.

19

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(9) FAIR VALUE MEASUREMENTS (Continued)

The
Company's assets and liabilities measured at fair value on a recurring basis at September 30, 2008, were as follows:

Description

Using
Quoted Prices in Active
Markets for
Identical Assets
(Level 1)

Using
Significant Other
Observable Inputs
(Level 2)

Using
Significant
Unobservable Inputs
(Level 3)

Total(In Thousands)Assets:Derivative instruments

$



68,509





68,509Other investments


3,759





10,543


14,302Liabilities:Derivative instruments





(89,857
)




(89,857
)


The
following table presents a reconciliation of the beginning and ending balances of the Company's assets measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) for the three and nine months ended September 30, 2008.

Three Months Ended
September 30, 2008

Nine Months Ended
September 30, 2008(In Thousands)Balance at beginning of period

$
16,742


15,023Total gains or (losses) (realized/unrealized):Included in earnings


(6,199
)

(4,480
)Included in other comprehensive income





Purchases, sales, issuances, and settlements (net)





Transfers in and/or out of Level 3





Balance at end of period

$
10,543


10,543The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating
to assets still held at end of period

$
(6,199
)

(6,154
)


Gains
and losses (realized and unrealized) included in earnings related to the Company's assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the three

20

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(9) FAIR VALUE MEASUREMENTS (Continued)

and
nine months ended September 30, 2008 are reported in the Condensed Consolidated Statements of Operations as follows:

Three Months Ended
September 30, 2008

Nine Months Ended
September 30, 2008Unrealized Losses (Gains) on
Other Investments, Net

Unrealized Losses (Gains) on
Other Investments, Net

Other Expense,
Net(1)(In Thousands)Total losses or (gains) included in earnings for the period

$
6,199


6,154


(1,674
)Change in unrealized losses or (gains) relating to assets still held at end of period

$
6,199


6,154





---

(10) DERIVATIVE INSTRUMENTS

Commodity Derivatives

Forest periodically enters into derivative instruments such as swap, basis swap, and collar agreements in order to provide a measure of
stability to Forest's cash flows in an environment of volatile oil and gas prices and to manage the exposure to commodity price risk. Forest's commodity derivative instruments generally serve as
effective economic hedges of commodity price exposure; however, the Company has elected not to account for the derivatives as cash flow hedges. As such, the Company recognizes all changes in fair
value of its derivative instruments in earnings rather
than deferring such amounts in accumulated other comprehensive income included in shareholders' equity as would be done if cash flow hedge accounting was utilized. Forest is exposed to risks
associated with swap and collar agreements arising from movements in the prices of oil and natural gas and from non-performance by the counterparties to the swap and collar agreements.

21

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(10) DERIVATIVE INSTRUMENTS (Continued)

The
tables below set forth Forest's outstanding commodity swaps and collars as of September 30, 2008.

SwapsNatural Gas (NYMEX HH)

Oil (NYMEX WTI)Bbtu
per Day(1)

Weighted Average
Hedged Price per
MMBtu

Barrels
per Day

Weighted Average
Hedged Price per
BblFourth Quarter 2008


70

$
9.02


6,500

$
69.72Calendar 2009


110


9.33


4,500


69.01Calendar 2010








1,500


72.95


---

Costless CollarsNatural Gas (NYMEX HH)Bbtu
per Day

Weighted Average Hedged
Floor and Ceiling Price per
MMBtuFourth Quarter 2008


80

$
7.33/8.87Calendar 2009


40


8.25/10.92




Three-Way Costless CollarsNatural Gas (NYMEX HH)Bbtu
per Day

Weighted Average Hedged
Lower Floor, Upper Floor, and
Ceiling Price per MMBtuFourth Quarter 2008


30

$
6.00/8.00/10.00


Forest
also uses basis swaps in connection with natural gas swaps in order to fix the price differential between the NYMEX price and the index price at which the natural gas production
is sold. As of September 30, 2008, Forest had basis swaps outstanding covering 80 Bbtu per day for the remainder of 2008.

At
September 30, 2008, the fair values of Forest's commodity derivative instruments are presented within the Condensed Consolidated Balance Sheet as liabilities of
$89.9 million, of which $60.7 million is classified as current, and assets of $68.5 million, of which $60.8 million is classified as current. Due to the volatility of oil
and natural gas prices, the estimated fair values of Forest's commodity derivative instruments are subject to large fluctuations from period to period. Forest has experienced the effects of these
commodity price fluctuations in both the current period and prior periods and expects that volatility in commodity prices will continue.

In
October 2008, in order to reduce credit exposure to certain counterparties, Forest elected to terminate two Calendar 2009 gas swaps for 20 Bbtu per day with a weighted average hedged
price per MMBtu of $9.29 and one Calendar 2009 gas collar for 20 Bbtu per day with a hedged floor and ceiling price per MMBtu of $8.00 and $10.56, respectively, for proceeds of $19.2 million.

22

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(10) DERIVATIVE INSTRUMENTS (Continued)

In
November 2008, Forest entered into two additional gas swap agreements covering 20 Bbtu per day for Calendar 2009 at a weighted average hedged price per MMBtu of $7.84, with
10 Bbtu per day subject to a $6.00 written put.

The
table below summarizes the realized and unrealized gains and losses Forest incurred related to its commodity derivatives for the periods indicated.

Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

2008

2007(In Thousands)Realized losses (gains) on derivatives(1)

$
48,842


(30,178
)

109,798


(64,452
)Unrealized (gains) losses on derivatives(1)


(498,182
)

9,180


(31,608
)

33,995Net realized and unrealized (gains) losses recorded

$
(449,340
)

(20,998
)

78,190


(30,457
)


---

Interest Rate Swaps

The Company may enter into interest rate swap agreements in an attempt to normalize the mix of fixed and floating interest rates within
its debt portfolio. In June 2008, the Company terminated all of its outstanding interest rate swaps for a net gain of $.4 million.

The
table below summarizes the realized and unrealized gains and losses Forest incurred related to its interest rate swaps for the periods indicated.

Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

2008

2007(In Thousands)Realized (gains) losses on derivatives(1)(2)

$



(209
)

889


(339
)Unrealized losses (gains) on derivatives(1)





3,235


(4,721
)

1,445Net realized and unrealized losses (gains) recorded

$



3,026


(3,832
)

1,106


---

23

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FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(11) GEOGRAPHICAL SEGMENTS

Segment information has been prepared in accordance with SFAS No. 131,Disclosures About Segments
of an Enterprise and Related Information. At September 30, 2008, Forest conducted operations in one industry segment, that being the oil and gas exploration and
production industry, and had three reportable geographical business segments: United States, Canada, and International. Forest's remaining activities were not significant and therefore were not
reported as a separate segment, but have been included as a reconciling item in the information below. The segments were determined based upon the geographical location of operations in each business
segment. The segment data presented below was prepared on the same basis as the Condensed Consolidated Financial Statements.

Oil and Gas OperationsThree Months Ended
September 30, 2008

Nine Months Ended
September 30, 2008United
States

Canada

International

Total
Company

United
States

Canada

International

Total
Company(In Thousands)Revenue

$
406,484


67,753





474,237


1,155,818


210,084





1,365,902Expenses:Lease operating expenses


35,488


9,424





44,912


93,534


27,356





120,890Production and property taxes


22,524


958





23,482


64,995


2,686





67,681Transportation and processing costs


2,545


2,329





4,874


7,240


7,200





14,440Depletion


112,233


22,249





134,482


305,660


67,204





372,864Accretion of asset retirement obligations


1,579


271


21


1,871


4,678


882


62


5,622Earnings (loss) from operations

$
232,115


32,522


(21
)

264,616


679,711


104,756


(62
)

784,405Capital expenditures(1)

$
1,411,927


55,758


1,483


1,469,168


2,175,261


158,473


4,057


2,337,791Goodwill

$
248,805


16,283





265,088


248,805


16,283





265,088


---

24

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(11) GEOGRAPHICAL SEGMENTS (Continued)

A reconciliation of segment earnings from operations to consolidated earnings before income taxes is as follows:

Three Months Ended
September 30, 2008

Nine Months Ended
September 30, 2008(In Thousands)Earnings from operations for reportable segments

$
264,616


784,405Marketing and other


(77
)

(30
)General and administrative expense (including stock-based compensation)


(18,046
)

(57,166
)Administrative asset depreciation


(2,249
)

(6,018
)Interest expense


(30,429
)

(86,265
)Unrealized gains on derivative instruments, net


498,182


36,329Realized losses on derivative instruments, net


(48,842
)

(110,687
)Unrealized foreign currency exchange losses


(4,456
)

(6,771
)Unrealized losses on other investments, net


(14,699
)

(22,066
)Gain on sale of assets


21,063


21,063Other expense, net


(2,114
)

(1,089
)Earnings before income taxes

$
662,949


551,705




Oil and Gas OperationsThree Months Ended
September 30, 2007

Nine Months Ended
September 30, 2007United
States

Canada

International

Total
Company

United
States

Canada

International

Total
Company(In Thousands)Revenue

$
269,683


43,334





313,017


609,060


140,452





749,512Expenses:Lease operating expenses


40,705


7,564





48,269


106,151


23,185





129,336Production and property taxes


15,336


776





16,112


34,619


2,211





36,830Transportation and processing costs


3,187


2,577





5,764


7,298


7,918





15,216Depletion


99,893


20,578





120,471


204,133


61,065





265,198Accretion of asset retirement obligations


1,650


316


14


1,980


3,678


831


38


4,547Earnings (loss) from operations

$
108,912


11,523


(14
)

120,421


253,181


45,242


(38
)

298,385Capital expenditures(1)

$
252,280


47,162


9,092


308,534


2,573,700


128,457


11,922


2,714,079Goodwill

$
272,764


17,418





290,182


272,764


17,418





290,182


---

25

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(11) GEOGRAPHICAL SEGMENTS (Continued)

A reconciliation of segment earnings from operations to consolidated earnings before income taxes is as follows:

Three Months Ended
September 30, 2007

Nine Months Ended
September 30, 2007(In Thousands)Earnings from operations for reportable segments

$
120,421


298,385Marketing, processing, and other


8


791General and administrative expense (including stock-based compensation)


(16,716
)

(43,094
)Administrative asset depreciation


(1,534
)

(3,392
)Interest expense


(32,567
)

(86,023
)Unrealized losses on derivative instruments, net


(12,415
)

(35,440
)Realized gains on derivative instruments, net


30,387


64,791Unrealized foreign currency exchange gains


1,075


7,395Unrealized gains on other investments, net


2,521


2,521Gain on sale of assets





7,176Other expense, net


(4,145
)

(4,379
)Earnings before income taxes

$
87,035


208,731


The
following tables set forth information regarding the Company's total assets by segment and long-lived assets by geographic area. Long-lived assets include net
property and equipment and goodwill.

Total AssetsSeptember 30, 2008

December 31, 2007(In Thousands)United States

$
6,716,601


4,828,582Canada


814,721


791,714International


75,568


75,252Total assets

$
7,606,890


5,695,548




Long-Lived AssetsSeptember 30, 2008

December 31, 2007(In Thousands)United States

$
6,322,875


4,487,257Canada


768,107


730,418International


74,853


73,758Total long-lived assets

$
7,165,835


5,291,433


26

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(12) CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Company's 8% senior notes due 2011, 73/4% senior notes due 2014, and 71/4% senior notes due 2019
have been fully and unconditionally guaranteed by a wholly-owned subsidiary of the Company (the "Subsidiary Guarantor"). The Company's remaining subsidiaries (the "Non-Guarantor
Subsidiaries") have not provided guarantees. Based on this distinction, the following presents condensed consolidating financial information as of September 30, 2008 and December 31,
2007 and for the three and nine months ended September 30, 2008 and 2007 on an issuer (parent company), guarantor subsidiary, non-guarantor subsidiaries, eliminating entries, and
consolidated basis. Elimination entries presented are necessary to combine the entities.

CONDENSED CONSOLIDATING BALANCE SHEETS  (Unaudited)  (In Thousands)

September 30, 2008

December 31, 2007Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedASSETSCurrent assets:Cash and cash equivalents

$
186


58


252





496


1,189


386


8,110





9,685Accounts receivable


125,225


11,698


69,845


(1,000
)

205,768


121,698


8,979


80,890


(9,950
)

201,617Deferred income taxes


3,837


518


29





4,384


23,854











23,854Other current assets


170,348


144


11,664





182,156


116,898


273


9,047





126,218Total current assets


299,596


12,418


81,790


(1,000
)

392,804


263,639


9,638


98,047


(9,950
)

361,374Property and equipment, at cost


7,247,365


343,215


2,413,545





10,004,125


5,363,127


240,748


2,194,490





7,798,365Less accumulated depreciation, depletion, and amortization


2,102,938


100,660


899,780





3,103,378


1,852,033


82,743


837,774





2,772,550Net property and equipment


5,144,427


242,555


1,513,765





6,900,747


3,511,094


158,005


1,356,716





5,025,815Investment in subsidiaries


858,244








(858,244
)




740,964








(740,964
)

Note receivable from subsidiary


93,053








(93,053
)




73,307








(73,307
)

Goodwill


225,845





39,243





265,088


225,178





40,440





265,618Due from (to) parent and subsidiaries


368,386


5,683


(374,069
)







308,381


28,409


(336,790
)




Other assets


45,438


5


2,808





48,251


39,424


1


3,316





42,741$
7,034,989


260,661


1,263,537


(952,297
)

7,606,890


5,161,987


196,053


1,161,729


(824,221
)

5,695,548LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
349,444


18,437


67,620


(1,000
)

434,501


293,523


9,810


67,706


(9,950
)

361,089Current portion of long-term debt

















266,002











266,002Other current liabilities


128,576


1,773


9,657





140,006


103,288


1,012


6,991





111,291Total current liabilities


478,020


20,210


77,277


(1,000
)

574,507


662,813


10,822


74,697


(9,950
)

738,382Long-term debt


2,592,182





80,814





2,672,996


1,373,909





129,126





1,503,035Note payable to parent








93,053


(93,053
)










73,307


(73,307
)

Other liabilities


145,119


1,793


43,522





190,434


136,362


1,690


50,841





188,893Deferred income taxes


695,200


82,648


266,637





1,044,485


577,092


62,509


213,826





853,427Total liabilities


3,910,521


104,651


561,303


(94,053
)

4,482,422


2,750,176


75,021


541,797


(83,257
)

3,283,737Shareholders' equity


3,124,468


156,010


702,234


(858,244
)

3,124,468


2,411,811


121,032


619,932


(740,964
)

2,411,811$
7,034,989


260,661


1,263,537


(952,297
)

7,606,890


5,161,987


196,053


1,161,729


(824,221
)

5,695,548


27

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(12) CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS  (Unaudited)  (In Thousands)

Three Months Ended September 30,2008

2007Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedRevenues

$
321,720


31,275


121,165





474,160


209,139


18,655


85,891


(660
)

313,025Operating expenses:Lease operating expenses


28,832


4,671


11,319


90


44,912


25,838


4,151


18,271


9


48,269Other direct operating costs


22,876


2,262


3,218





28,356


15,331


1,358


5,187





21,876General and administrative (including stock-based compensation)


15,977


45


2,024





18,046


13,466


32


3,218





16,716Depreciation and depletion


91,095


6,445


39,197


(6
)

136,731


81,998


4,866


35,144


(3
)

122,005Gain on sale of assets








(21,063
)




(21,063
)













Accretion of asset retirement obligations


1,507


44


320





1,871


1,297


43


640





1,980Total operating expenses


160,287


13,467


35,015


84


208,853


137,930


10,450


62,460


6


210,846Earnings from operations


161,433


17,808


86,150


(84
)

265,307


71,209


8,205


23,431


(666
)

102,179Equity earnings in subsidiaries


135,279








(135,279
)




(52,430
)







52,430


Other income and expense:Interest expense


26,868





8,380


(4,819
)

30,429


25,341





11,818


(4,592
)

32,567Unrealized (gains) losses on derivative instruments, net


(362,289
)

(85,366
)

(50,527
)




(498,182
)

7,000


1,126


4,289





12,415Realized losses (gains) on derivative instruments, net


36,034


7,050


5,758





48,842


(28,441
)

(336
)

(1,610
)




(30,387
)Unrealized losses (gains) on other investments, net


14,699











14,699


(2,521
)










(2,521
)Other (income) expense, net


(3,140
)




5,321


4,389


6,570


(67,115
)

215


1,989


67,981


3,070Total other income and expense


(287,828
)

(78,316
)

(31,068
)

(430
)

(397,642
)

(65,736
)

1,005


16,486


63,389


15,144Earnings (loss) before income taxes


584,540


96,124


117,218


(134,933
)

662,949


84,515


7,200


6,945


(11,625
)

87,035Income tax


155,533


34,915


43,494





233,942


26,528


2,624


(104
)




29,048Net earnings (loss)

$
429,007


61,209


73,724


(134,933
)

429,007


57,987


4,576


7,049


(11,625
)

57,987


28

---





Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(12) CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS  (Unaudited)  (In Thousands)

Nine Months Ended September 30,2008

2007Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedRevenues

$
926,667


90,819


348,386





1,365,872


422,053


50,505


280,595


(2,850
)

750,303Operating expenses:Lease operating expenses


77,642


10,724


32,390


134


120,890


55,317


12,251


61,801


(33
)

129,336Other direct operating costs


61,762


6,431


13,928





82,121


33,806


4,065


14,175





52,046General and administrative (including stock-based compensation)


48,901


72


8,193





57,166


33,706


100


9,288





43,094Depreciation and depletion


250,996


17,917


109,980


(11
)

378,882


148,116


13,760


106,722


(8
)

268,590Gain on sale of assets








(21,063
)




(21,063
)







(7,176
)




(7,176
)Accretion of asset retirement obligations


4,471


126


1,025





5,622


2,438


153


1,956





4,547Total operating expenses


443,772


35,270


144,453


123


623,618


273,383


30,329


186,766


(41
)

490,437Earnings from operations


482,895


55,549


203,933


(123
)

742,254


148,670


20,176


93,829


(2,809
)

259,866Equity earnings in subsidiaries


159,797








(159,797
)




(20,524
)







20,524


Other income and expense:Interest expense


75,237





24,162


(13,134
)

86,265


54,064


9


43,716


(11,766
)

86,023Unrealized losses (gains) on derivative instruments, net


10,590


(19,011
)

(27,908
)




(36,329
)

5,099


6,995


23,346





35,440Realized losses (gains) on derivative instruments, net


78,876


19,046


12,765





110,687


(50,393
)

(5,341
)

(9,057
)




(64,791
)Unrealized losses (gains) on other investments, net


22,066











22,066


(2,521
)










(2,521
)Other (income) expense, net


(11,362
)

(27
)

6,730


12,519


7,860


(74,399
)

459


(4,254
)

75,178


(3,016
)Total other income and expense


175,407


8


15,749


(615
)

190,549


(68,150
)

2,122


53,751


63,412


51,135Earnings (loss) before income taxes


467,285


55,541


188,184


(159,305
)

551,705


196,296


18,054


40,078


(45,697
)

208,731Income tax


111,028


20,139


64,281





195,448


54,619


6,548


5,887





67,054Net earnings (loss)

$
356,257


35,402


123,903


(159,305
)

356,257


141,677


11,506


34,191


(45,697
)

141,677


29

---



Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(12) CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS  (Unaudited)  (In Thousands)

Nine Months Ended September 30,2008

2007Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

Consolidated

Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

ConsolidatedOperating activities:Net earnings

$
196,460


35,402


124,395


356,257


95,980


11,506


34,191


141,677Adjustments to reconcile net earnings to net cash provided by operating activities:Depreciation and depletion


250,996


17,917


109,969


378,882


148,116


13,760


106,714


268,590Unrealized losses (gains) on derivative instruments, net


10,590


(19,011
)

(27,908
)

(36,329
)

5,099


6,995


23,346


35,440Deferred income tax


108,601


20,139


59,769


188,509


50,894


6,548


3,197


60,639Other, net


36,621


126


(12,095
)

24,652


3,510


153


(5,793
)

(2,130
)Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:Accounts receivable


2,588


(2,719
)

(1,103
)

(1,234
)

23,835


(499
)

12,745


36,081Other current assets


(46,919
)

129


(3,485
)

(50,275
)

(12,275
)

1,881


7,829


(2,565
)Accounts payable


(835
)

495


945


605


(15,638
)

564


(19,650
)

(34,724
)Accrued interest and other current liabilities


16,484


(183
)

5,082


21,383


26,384


(179
)

(8,424
)

17,781Net cash provided by operating activities


574,586


52,295


255,569


882,450


325,905


40,729


154,155


520,789Investing activities:Capital expenditures for property and equipment


(1,533,130
)

(94,332
)

(326,879
)

(1,954,341
)

(1,395,469
)

(19,033
)

79,443


(1,335,059
)Proceeds from sales of assets


75,151





24,265


99,416


404,301


26,120


71,313


501,734Other, net


13,902


(4
)




13,898











Net cash (used) provided by investing activities


(1,444,077
)

(94,336
)

(302,614
)

(1,841,027
)

(991,168
)

7,087


150,756


(833,325
)Financing activities:Issuance of 71/4% senior notes, net of issuance costs


247,188








247,188


739,176








739,176Proceeds from bank borrowings


2,344,000





265,133


2,609,133


1,043,000





165,553


1,208,553Repayments of bank borrowings


(1,369,000
)




(305,884
)

(1,674,884
)

(951,000
)




(153,387
)

(1,104,387
)Redemption of 8% senior notes


(265,000
)







(265,000
)










Repurchases of 7% senior subordinated notes


(4,710
)







(4,710
)










Repayments of debt














(176,885
)




(375,000
)

(551,885
)Net activity in investments from subsidiaries


(114,600
)

41,313


73,287





11,356


(47,991
)

36,635


Other, net


30,610


400


6,754


37,764


1,535


84


(6,548
)

(4,929
)Net cash provided (used) by financing activities


868,488


41,713


39,290


949,491


667,182


(47,907
)

(332,747
)

286,528Effect of exchange rate changes on cash








(103
)

(103
)







1,658


1,658Net (decrease) increase in cash and cash equivalents


(1,003
)

(328
)

(7,858
)

(9,189
)

1,919


(91
)

(26,178
)

(24,350
)Cash and cash equivalents at beginning of period


1,189


386


8,110


9,685


771


126


32,267


33,164Cash and cash equivalents at end of period

$
186


58


252


496


2,690


35


6,089


8,814


30

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(13) RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141 (Revised),Business Combinations("SFAS 141(R)"),
which significantly changes the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles and requirements for how an acquirer in a business
combination: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree,
(ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations that are completed or close on or after
the beginning of the first annual reporting period that begins on or after December 15, 2008. The adoption of this pronouncement may have a material impact on the accounting for any acquisition
the Company may make after January 1, 2009.

In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51("SFAS 160"). This statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the
consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported
at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of
consolidated net income attributable to the parent and to the noncontrolling interest. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The Company does not expect the adoption of this pronouncement to have a material impact on the Company's financial position or results of operations.

In
February 2008, the FASB issued FASB Staff Position No. 157-2,Effective Date of FASB Statement No. 157("FSP
157-2"). FSP 157-2 delays the effective date of SFAS No. 157,Fair Value Measurements, for one year for nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently
evaluating the impact the adoption of SFAS 157 will have on the Company's financial position and results of operations for nonfinancial assets and liabilities.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement
No. 133("SFAS 161"). SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair
value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This statement is
effective for fiscal years and interim periods beginning after November 15, 2008. The adoption of this pronouncement will have no impact on the Company's financial position or results of
operations, but may require expanded disclosures about derivative instruments.

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Table of Contents

Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Forest Oil Corporation ("Forest") is an independent oil and gas company engaged in the acquisition, exploration, development, and
production of natural gas and liquids in North America and selected international locations. Forest was incorporated in New York in 1924, as the successor to a company formed in 1916, and has been a
publicly held company since 1969. Unless the context otherwise indicates, references in this quarterly report on Form 10-Q to "Forest," "we," "ours," "us," or like terms refer to
Forest Oil Corporation and its subsidiaries.

We
currently conduct our operations in three geographical segments and five business units. Geographical segments include: the United States, Canada, and International. Business units
include: Western, Eastern, Southern, Canada, and International. We conduct exploration and development activities in each of our geographical segments; however, substantially all of our estimated
proved reserves and all of our producing properties are located in onshore North America. At December 31, 2007, approximately 85% of our estimated proved oil and natural gas reserves were in
the United States, approximately 12% were in Canada, and approximately 3% were in Italy. Approximately 73% of our estimated proved reserves was natural gas as of September 30, 2008. See
Note 11 to the Condensed Consolidated Financial Statements for additional information about our geographical segments.

The
following discussion and analysis should be read in conjunction with Forest's Condensed Consolidated Financial Statements and Notes thereto, the information under the heading
"Forward-Looking Statements" below, and the information included in Forest's 2007 Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports
on Form 8-K under the headings "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies,
Estimates, Judgments, and Assumptions."

Quarter and Year-to-Date 2008 Highlights

Oil and Gas Production

Production for the third quarter of 2008 decreased to 47.9 Bcfe from 48.0 Bcfe in the corresponding period in 2007 due to an
approximate 1.45 Bcfe of net oil and gas production volumes deferred as a result of hurricanes and third party downstream pipeline disruptions. For the nine months ended September 30, 2008,
production increased 24% to 137.3 Bcfe as compared to 110.3 Bcfe in the corresponding period in 2007. These production changes are discussed further in Results of Operations, Oil and Gas Production and Revenues, below.

Oil and Gas Revenues

Revenues increased 52% in the third quarter of 2008 to $474.2 million from $313.0 million in the third quarter of 2007
primarily due to a 52% increase in average realized prices. Revenues increased 82% in the nine months ended September 30, 2008 to $1.37 billion from $749.5 million in the
corresponding period in 2007 due to a 46% increase in average realized prices and a 24% increase in production. These increases are discussed further in Results of Operations, Oil and Gas Production and
Revenues, below.

Acquisition Activity

On September 30, 2008, Forest acquired producing oil and natural gas properties including 118,000 gross acres (85,000 net acres)
located in its Greater Buffalo Wallow and East Texas/North Louisiana core areas from Cordillera Texas, L.P. Forest estimated the proved oil and gas reserves associated with these assets, which
produced an average of 34 MMcfe per day during the first half of 2008, to be

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approximately
350 Bcfe as of the closing date. Forest paid approximately $570 million in cash, subject to customary post-closing adjustments, to reflect an economic effective date
of July 1, 2008, and issued 7.25 million shares of Forest's common stock, valued at approximately $360 million (based on a September 30, 2008 closing price), to the seller
for these assets. Forest funded the cash component of the purchase price primarily using advances under its credit facilities.

On
May 2, 2008, Forest acquired producing oil and natural gas properties including approximately 69,000 gross acres (47,000 net acres) located primarily in its core
Ark-La-Tex region in East Texas and North Louisiana. Forest estimated the proved oil and gas reserves associated with these assets, which produced an average of 13 MMcfe per
day in 2007, to be approximately 110 Bcfe as of the closing date. Forest paid approximately $284 million, as adjusted to reflect an economic effective date of April 1, 2008, for the
assets using funds advanced under its credit facilities.

Asset Divestiture Program

During the nine months ended September 30, 2008, Forest sold U.S. and international oil and gas properties for total proceeds of
$99.4 million, including the sale of all of its unproven oil and gas properties in Gabon for net proceeds of $23.9 million that resulted in a gain on the sale of $21.1 million in
the third quarter. In September 2008, Forest entered into an agreement to sell certain operated and non-operated properties in the Rockies, including its Niobrara, San Juan and various
properties in Wyoming and Utah, for $258 million. At the instigation of the counterparty to the transaction, we are currently in discussions that may result in modifications to the
transaction's terms. Forest expects that proceeds from the pending divestiture transaction will be utilized to reduce its outstanding borrowings under its credit facilities.

In
addition, Forest previously disclosed that it was targeting additional property divestitures of between $450 million and $750 million during fourth quarter 2008 and the
first part of 2009. Forest expects to continue to pursue these sales; however, due to distressed economic conditions, tightened access to credit markets, and significant declines in commodity prices,
Forest now believes that this goal may be unlikely to be achieved over the next year.

Credit Facilities

On May 9, 2008, Forest entered into an amendment to its second amended and restated combined credit facilities with existing and
new lenders which increased the combined commitment amount from $1 billion to $1.8 billion and increased the global borrowing base to $1.8 billion. In October 2008, the lenders
reaffirmed their commitments totaling $1.8 billion and completed their semi-annual redetermination of the global borrowing base and confirmed it at $1.8 billion.

Senior Notes Offering

On May 22, 2008, Forest issued an additional $250 million in principal amount of 71/4% senior notes due in
2019 (the "71/4% Notes") at 100.25% of par for net proceeds of $247.2 million, after deducting initial purchaser discounts. The additional 71/4% Notes were used to
redeem a portion of Forest's $265 million in principal amount of 8% senior notes that matured on June 15, 2008.

2008-2009 Outlook

We recognize several significant changes in the global economy and the oil and gas industry. Specifically, the global credit markets
are in a state of distress and there are broad expectations of a U.S. and global recession in the near term. As a result of these negative global economic expectations, and the scarcity and increased
cost of capital, oil and gas prices have declined significantly.

Due
to these changes in outlook, Forest believes that there will be the following impacts:



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Given
the expected decrease in earnings and cash flow from operations, and the likelihood that we may not be able to achieve further asset sales at prices we believe to be reasonable, we
are in the process of significantly decreasing our capital spending in order to lower the capital spend rate entering 2009. While we will continue to pursue asset sales of $450 million to
$750 million as previously disclosed, Forest will operate as if no such sales will occur.

In
2009, we intend to limit our exploration and development capital expenditures to a level that can be funded with cash flow from operations, excluding changes in working capital. This
is the same business model we employed from 2004 to 2007. We anticipate borrowings under our credit facilities on December 31, 2008 will be approximately $1.4 billion, which would give
us $400 million of liquidity entering 2009 based on current conditions and the assumption that no further asset sales close in the fourth quarter of 2008.

RESULTS OF OPERATIONS

Forest reported net earnings of $429.0 million in the third quarter of 2008 compared to net earnings of $58.0 million in
the third quarter of 2007. Earnings from operations were $265.3 million in the third quarter of 2008 compared to $102.2 million in the third quarter of 2007. The third quarter net
earnings of 2008 were favorably impacted by fair value adjustments on our oil and gas derivative instruments. In the third quarter of 2008, we recognized unrealized gains on derivative instruments of
$498.2 million compared to losses of $12.4 million in the third quarter of 2007.

During
the first nine months of 2008, Forest reported net earnings of $356.3 million compared to net earnings of $141.7 million during the same period of 2007. Earnings
from operations were $742.3 million during the first nine months of 2008 compared to $259.9 million in the same period of 2007. Net earnings for the nine months ended
September 30, 2008 were also favorably impacted by fair value adjustments on our derivative instruments, which primarily consisted of oil and natural gas swaps and collars. During the first
nine months of 2008, we recognized unrealized gains on derivative instruments of $36.3 million compared to losses of $35.4 million in the same period of 2007.

Discussion
of the components of the changes in our quarterly and year-to-date results follows. Comparability between the third quarter of 2008 and corresponding
period in 2007 was impacted by the sale of our Alaska assets (the "Alaska Assets") in August 2007 to Pacific Energy Resources Ltd. ("PERL"). The nine months ended
September 30, 2008 as compared to the corresponding period in 2007 was significantly impacted by our acquisition of The Houston Exploration Company ("Houston Exploration") in June 2007 as well
as the sale of the Alaska Assets to PERL in August 2007. Details for the acquisition and divestiture transactions discussed above are included in Note 2 to the Condensed Consolidated Financial
Statements.

Oil and Gas Production and Revenues

Production volumes, revenues, and weighted average sales prices by product and location for the three and nine months ended
September 30, 2008 and 2007 are set forth in the tables below. These

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tables
do not include miscellaneous marketing losses of $.1 million for the three months ended September 30, 2008 and revenues of $.8 million for the nine months ended
September 30, 2007.

Three Months Ended September 30,2008

2007Gas

Oil

NGLs

Total

Gas

Oil

NGLs

Total(MMcf)

(MBbls)

(MBbls)

(MMcfe)

(MMcf)

(MBbls)

(MBbls)

(MMcfe)Production volumes:United States


29,942


905


836


40,388


29,038


1,114


715


40,012Canada


5,808


205


73


7,476


6,486


191


65


8,022Totals


35,750


1,110


909


47,864


35,524


1,305


780


48,034Revenues (in thousands):United States

$
255,627


105,209


45,648


406,484


161,305


80,407


27,971


269,683Canada


40,464


21,659


5,630


67,753


28,680


11,923


2,731


43,334Totals

$
296,091


126,868


51,278


474,237


189,985


92,330


30,702


313,017Average sales price:United States

$
8.54


116.25


54.60


10.06


5.55


72.18


39.12


6.74Canada


6.97


105.65


77.12


9.06


4.42


62.42


42.02


5.40Totals

$
8.28


114.30


56.41


9.91


5.35


70.75


39.36


6.52




Nine Months Ended September 30,2008

2007Gas

Oil

NGLs

Total

Gas

Oil

NGLs

Total(MMcf)

(MBbls)

(MBbls)

(MMcfe)

(MMcf)

(MBbls)

(MBbls)

(MMcfe)Production volumes:United States


84,561


2,788


2,260


114,849


55,099


3,558


1,672


86,479Canada


17,461


602


228


22,441


19,051


603


189


23,803Totals


102,022


3,390


2,488


137,290


74,150


4,161


1,861


110,282Revenues (in thousands):United States

$
724,991


310,569


120,258


1,155,818


327,746


222,363


58,951


609,060Canada


133,596


60,849


15,639


210,084


100,293


33,055


7,104


140,452Totals

$
858,587


371,418


135,897


1,365,902


428,039


255,418


66,055


749,512Average sales price:United States

$
8.57


111.39


53.21


10.06


5.95


62.50


35.26


7.04Canada


7.65


101.08


68.59


9.36


5.26


54.82


37.59


5.90Totals

$
8.42


109.56


54.62


9.95


5.77


61.38


35.49


6.80


Net oil and gas production in the third quarter of 2008 was 47.9 Bcfe or an average of 520.3 MMcfe per day, a slight decrease from 48.0 Bcfe or an
average of 522.1 MMcfe per day in the third quarter of 2007. The decrease in oil and gas production for the comparable three month periods was due to normal production declines on existing wells, the
sale of the Alaska Assets in 2007, shut-in production as a result of Hurricanes Gustav and Ike and by third party pipeline
disruptions, which deferred approximately 1.45 Bcfe of net oil and gas production volumes during the third quarter of 2008, all of which were offset by continued drilling and acquisition activities.
Net oil and gas production for the nine months ended September 30, 2008 was 137.3 Bcfe or an average of 501.1 MMcfe per day, a 24% increase from 110.3 Bcfe or an average of 404.0 MMcfe per day
in the same period in the prior year. The net increase in oil and gas production during the comparable nine month periods was primarily attributable to continued drilling and acquisition activity,
partially offset by normal production declines on existing wells, the sale of the Alaska Assets in August 2007, and the deferred production discussed above.

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Oil
and natural gas revenues were $474.2 million in the third quarter of 2008, reflecting a 52% increase as compared to $313.0 million in the third quarter of 2007. The
increase in oil and natural gas revenues between the comparable three month periods was primarily due to a 52% increase in average realized sales prices. Oil and natural gas revenues were
$1.37 billion during the nine months ended September 30, 2008, a 82% increase as compared to $749.5 million for the same period in the prior year. The increase in oil and natural
gas revenues between the comparable nine month periods was due to the 24% increase in daily production and a 46% increase in average realized sales prices. No hedging gains or losses are included in
the average sales prices presented above given our election not to utilize cash flow hedge accounting. SeeRealized and Unrealized Gains and LossesDerivative
Instrumentsbelow for information on gains and losses recognized on derivative instruments.

Oil and Gas Production Expense

The table below sets forth the detail of oil and gas production expense for the three and nine months ended September 30, 2008
and 2007.

Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

2008

2007(In Thousands, Except Per Mcfe Data)Production expense:Lease operating expenses

$
44,912


48,269


120,890


129,336Production and property taxes


23,482


16,112


67,681


36,830Transportation and processing costs


4,874


5,764


14,440


15,216Production expense

$
73,268


70,145


203,011


181,382Production expense per Mcfe:Lease operating expenses

$
.94


1.00


.88


1.17Production and property taxes


.49


.34


.49


.33Transportation and processing costs


.10


.12


.11


.14Production expense per Mcfe

$
1.53


1.46


1.48


1.64


Lease
operating expenses in the third quarter of 2008 were $44.9 million, or $.94 per Mcfe, compared to $48.3 million, or $1.00 per Mcfe, in the third quarter of 2007. The
decrease in lease operating expense in total and on a per-unit basis in the comparable three month periods was primarily attributable to the sale of the Alaska Assets in August 2007,
partially offset by increased fuel and power costs. During the nine months ended September 30, 2008, lease operating expenses were $120.9 million, or $.88 per Mcfe, compared to
$129.3 million, or $1.17 per Mcfe, in the same period in the prior year. The decrease in lease operating expense from the prior year was primarily attributable to the sale of the Alaska Assets
in August 2007 offset by the Houston Exploration acquisition in June 2007 and increased fuel and power costs. On a per-Mcfe basis, the 25% decrease from the prior year was primarily due to
lower average per-unit lease operating expenses from the assets associated with the Houston Exploration acquisition and the divestiture of the Alaska Assets, which had higher average
per-unit lease operating expenses.

Production
and property taxes, which primarily consist of severance taxes paid on the value of the oil and gas produced, generally fluctuate proportionately with our oil and gas
revenues. As a percentage of oil and natural gas revenue, production and property taxes were 5.0% and 5.1% for the three months ended September 30, 2008 and 2007, respectively. For the nine
months ended September 30, 2008 and 2007, production and property taxes were 5.0% and 4.9% of oil and natural gas revenue, respectively. Normal fluctuations will occur between periods based on
the approval of

36

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incentive
tax credits in Texas, changes in tax rates, and changes in the assessed values of oil and gas reserves and other property and equipment for purposes of ad valorem taxes.

Transportation
and processing costs decreased to $4.9 million, or $.10 per Mcfe, in the third quarter of 2008, from $5.8 million, or $.12 per Mcfe, in the third quarter of
2007. Transportation and processing costs were $14.4 million, or $.11 per Mcfe, in the nine months ended September 30, 2008, compared to $15.2 million, or $.14 per Mcfe, for the
corresponding 2007 period. The per-unit decrease in each period was primarily due to lower per-unit transportation costs recognized in 2008 as a result of the sale of the
Alaska Assets in August 2007.

General and Administrative Expense

The following table summarizes the components of general and administrative expense incurred during the periods indicated.

Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

2008

2007(In Thousands, Except Per Mcfe Data)Stock-based compensation costs

$
7,090


5,140


22,888


12,023Other general and administrative costs


22,744


24,272


72,973


60,872General and administrative costs capitalized


(11,788
)

(12,696
)

(38,695
)

(29,801
)General and administrative expense

$
18,046


16,716


57,166


43,094General and administrative expense per Mcfe

$
.38


.35


.42


.39


General
and administrative expense in the third quarter of 2008 was $18.0 million compared to $16.7 million in the third quarter of 2007. The $1.3 million increase
in general and administrative expense in the comparable three month periods was due to a $1.9 million increase in stock-based compensation and $.9 million less of general and
administrative costs capitalized offset by a $1.5 million
decrease in other general and administrative costs. During the nine months ended September 30, 2008, general and administrative expense was $57.2 million compared to $43.1 million
in the same period of 2007. The 33% increase in general and administrative expense in the comparable nine month periods was primarily related to increased employee salary and benefit costs resulting
from the acquisition of Houston Exploration in June 2007 and increased stock-based compensation. The percentage of general and administrative costs capitalized remained relatively constant between
each of the periods presented, ranging from 40% to 43%.

Depreciation and Depletion

Depreciation, depletion and amortization expense ("DD&A") in the third quarter of 2008 was $136.7 million, or $2.86 per Mcfe,
compared to $122.0 million, or $2.54 per Mcfe, in the third quarter of 2007. The per-unit increase for the comparable three month periods was primarily due to price-related downward
reserve revisions at September 30, 2008 which increased the per-unit depletion rate for the third quarter of 2008. During the nine months ended September 30, 2008, DD&A was
$378.9 million, or $2.76 per Mcfe, compared to $268.6 million, or $2.44 per Mcfe, for the same period in 2007. The per-unit increase in the comparable nine month periods was
primarily due to the acquisition of the Houston Exploration properties in June 2007.

Gain on Sale of Assets

In August 2008, Forest recognized a $21.1 million gain on the sale of all of its unproven oil and gas properties in Gabon for
net proceeds of $23.9 million. In February 2007, Forest sold its overriding royalty interests in Australia for net proceeds of $7.2 million, which resulted in a gain on the sale of
$7.2 million.

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Interest Expense

The following table summarizes interest expense incurred during the periods indicated.

Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

2008

2007(In Thousands)Interest costs

$
34,381


38,846


100,904


94,504Interest costs capitalized


(3,952
)

(6,279
)

(14,639
)

(8,481
)Interest expense

$
30,429


32,567


86,265


86,023


Interest
expense in the third quarter of 2008 totaled $30.4 million compared to $32.6 million in the third quarter of 2007. The $2.1 million decrease in interest
expense in the comparable three month periods was due to a $4.4 million decrease in interest costs primarily as a result of the repayment of the Alaska term loans in August 2007 in connection
with the sale of our Alaska Assets, partially offset by a $2.3 million decrease in interest capitalization. Interest capitalization decreased due to significant developmental drilling activity
in 2008 which resulted in the reclassification of unproved properties to proved oil and gas properties. Interest costs related to significant unproved properties that are under development are
capitalized to oil and gas properties under the full cost method of accounting. During the nine months ended September 30, 2008, interest expense totaled $86.3 million compared to
$86.0 million for the same period in 2007. The $.3 million increase in interest expense in the comparable nine month periods was due to a $6.4 million increase in interest costs
primarily as a result of the issuance of $750 million in principal amount of 71/4% Notes in conjunction with the acquisition of Houston Exploration in June 2007, which was offset
by a $6.1 million increase in interest capitalization as a result of the acquisition of Houston Exploration, which included a large investment in unproved properties.

Realized and Unrealized Gains and Losses

Derivative Instruments

The table below sets forth realized and unrealized gains and losses on derivatives recognized under "Other income and expense" in our
Condensed Consolidated Statements of Operations for the periods indicated. See Note 9 and Note 10 to the Condensed Consolidated Financial Statements for more information on our
derivative instruments.

Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

2008

2007(In Thousands)Realized losses (gains) on derivatives, net:Oil

$
28,952


3,418


77,758


(17,346
)Gas


19,890


(33,596
)

32,040


(47,106
)Interest





(209
)

889


(339
)Total

$
48,842


(30,387
)

110,687


(64,791
)Unrealized (gains) losses on derivatives, net:Oil

$
(142,102
)

17,494


(3,741
)

61,538Gas


(356,080
)

(8,314
)

(27,867
)

(27,543
)Interest





3,235


(4,721
)

1,445Total

$
(498,182
)

12,415


(36,329
)

35,440


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Other Investments

Unrealized losses on other investments totaled $14.7 million and $22.1 million for the three and nine months ended
September 30, 2008, respectively. Unrealized gains on other investments totaled $2.5 million for the three and nine months ended September 30, 2007. The unrealized gains and
losses on other investments relate to fair value adjustments to the shares of PERL common stock and zero coupon senior subordinated note from PERL due 2014, which were received as a portion of the
total consideration for the Alaska Assets. See Note 2 and Note 9 to the Condensed Consolidated Financial Statements for more information on these investments.

Foreign Currency Exchange

Unrealized foreign currency exchange gains and losses relate to the outstanding intercompany indebtedness between Forest Oil
Corporation and our Canadian subsidiary. Unrealized foreign currency exchange losses were $4.5 million and $6.8 million for the three and nine months ended September 30, 2008,
respectively. Since intercompany debt is denominated in U.S. dollars, the strengthening of the U.S. dollar in 2008 resulted in an unrealized foreign exchange loss in each period in 2008. Conversely,
the weakening of the U.S. dollar in 2007 resulted in unrealized foreign currency exchange gains of $1.1 million and $7.4 million for the three and nine months ended September 30,
2007, respectively. Realized foreign currency exchange gains and losses relate to repayments of intercompany debt owed to Forest Oil Corporation by our Canadian subsidiary. During the three and nine
months ended September 30, 2007, realized foreign currency exchange gains were $4.9 million and $7.3 million, respectively.

Current and Deferred Income Tax

Our effective income tax rate was approximately 35.3% for the three and nine months ended September 30, 2008. This effective
rate is based primarily on the expected mix of total 2008 pre-tax earnings between the United States and Canada, which have statutory rates of approximately 36% and 30%, respectively. Our
effective income tax rate was 33.4% and 32.1% for the three and nine months ended September 30, 2007, respectively. The increase in the effective income tax rate in the comparable three month
periods is primarily due to the release of valuation allowances on capital loss carryforwards in Canada and capital gains in Canada which are taxed at 50% of statutory rates, both of which occurred in
2007. The increase in the effective income tax rate in the comparable nine month periods is primarily due to the effects of statutory income tax rate reductions enacted in Canada, which necessitated a
reduction to our deferred income tax liabilities in Canada, the release of valuation allowances, and capital gains in Canada which are taxed at 50% of statutory rates, all of which occurred in 2007.

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LIQUIDITY AND CAPITAL RESOURCES

For the remainder of 2008 and in 2009, we expect our cash flow from operations to be our primary source of liquidity to meet operating
expenses and fund capital expenditures.

The
prices we receive for our oil and natural gas production have a significant impact on operating cash flows. While significant price declines adversely affect the amount of cash flow
that we generate from operations, we utilize a hedging program to partially mitigate our risk. As of November 5, 2008, we have hedged approximately 13 Bcfe of our remaining 2008 production and
approximately 57 Bcfe of our 2009 production. This level of hedging provides a measure of certainty of the cash flow we will receive for a portion of our remaining 2008 and 2009 production.
Depending on changes in oil and gas futures markets and management's view of underlying oil and natural gas supply and demand trends, we may increase or decrease our current hedging positions. For
further information concerning our hedging contracts, see Item 3"Quantitative and Qualitative Disclosures about Market RiskCommodity Price Risk," below.

Another
source of liquidity is our revolving U.S. and Canadian bank credit facilities. On May 9, 2008, we entered into an amendment to our second amended and restated combined
credit facilities, which increased the commitments from $1 billion to $1.8 billion and established the global borrowing base at $1.8 billion. In October 2008, our lenders
reaffirmed the global borrowing base and their commitments totaling $1.8 billion. These credit facilities, which mature in June 2012, are used to fund daily operating activities and certain
acquisitions and debt refinancings in the United States and Canada as needed. At October 31, 2008, we had $518.4 million available for borrowing under the credit facilities. Further,
based on current conditions and assuming no further asset sales close in the fourth quarter, we anticipate that we will have approximately $400 million available for borrowing under our credit
facilities at the end of the year. See "Bank Credit Facilities" below for details.

The
public capital markets have been our principal source of funds to finance large acquisitions and other types of large expenditures outside ordinary operating activities. In the past,
we have issued debt and equity securities in both public and private offerings. For example, in May 2008 we issued an additional $250 million principal amount of 71/4% senior
notes due 2019 in a private offering and used the proceeds to redeem a portion of the senior notes that matured on June 15, 2008. Our ability to access the capital markets on reasonable terms
is impacted by the credit ratings assigned to our debt by independent rating agencies, the value and performance of our debt and equity securities, our operational and financial performance, and
prevailing oil and natural gas commodity prices and other macroeconomic factors outside our control. In recent months, the global financial and credit markets have been distressed and the commodity
markets have been subject to significant fluctuations. As a result of these conditions, access to funding has greatly diminished and, at this time, we do not believe that we would be able to access
the public capital markets on terms that we find reasonable and we do not currently plan to access the capital markets absent a change in market conditions. A decision not to access the capital
markets may impact our ability to fully implement our business plans, take advantage of business opportunities in the future, or refinance outstanding indebtedness. See Part 1,
Item 1A"Risk Factors" of our 2007 Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on
Form 8-K, and Part II, Item 1A of this Report for a description of other risks that may impact our operations and results.

Asset
divestitures provide another source of funds. Forest intended to complete asset divestitures in 2008 for expected proceeds ranging from $300 million to $500 million.
In addition to these sales, Forest was targeting other property divestitures of between $500 million and $600 million in late 2008 and in 2009. As of November 1, 2008, we had
closed on approximately $100 million in asset sales and had entered into an agreement for the sale of assets that provides for a purchase price of $258 million. As a result of distressed
conditions in the global financial markets, diminished access to the credit markets, and significant declines in commodity prices over the last several months, we have not been

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able
to complete our planned divestitures for 2008 on terms that we found economically attractive and do not anticipate achieving our remaining goal of additional asset sales of $450 million to
$750 million within our original timetable. If we are unable to complete our planned asset divestitures, we do not anticipate having these proceeds available to reduce amounts outstanding under
our credit facilities.

For
the remainder of 2008, we believe that our available cash, cash provided by operating activities, and funds available under our bank credit facilities will be sufficient to fund our
daily operating activities, interest, general and administrative expense, our capital expenditure budget, and our short-term contractual obligations.

During
2009, the funds generated from operations and amounts available under our credit facilities are expected to be adequate to address our daily operating needs, general and
administrative expenses, and short-term contractual obligations, in addition to our 2009 capital expenditure plans. However, further declines in oil and natural gas commodity prices in
2009 will adversely impact the amount of cash provided from operating activities and may impact the amount of funds available under our credit facilities. In addition, a continuation of the distressed
economic conditions and diminished credit and capital markets may adversely impact our access to other sources of funding on reasonable terms. Nevertheless, if commodity prices continue to decline and
economic conditions do not improve, we believe we have the flexibility to adjust our capital expenditure plan as needed to provide liquidity to meet financial obligations.

Bank Credit Facilities

On May 9, 2008, we entered into a first amendment to our second amended and restated combined credit agreements, which increased
lender commitments to $1.8 billion and established the global borrowing base at $1.8 billion. The amended credit agreements consist of a $1.65 billion U.S. credit facility through
a syndicate of banks led by JPMorgan Chase Bank, N.A. (the "U.S. Credit Facility") and a $150 million Canadian credit facility through a syndicate of banks led by JPMorgan Chase Bank, N.A.,
Toronto Branch (the "Canadian Credit Facility," and together with the U.S. Credit Facility, the "Credit Facilities"). The Credit Facilities will mature in June 2012.

Forest's
availability under the Credit Facilities is governed by a borrowing base (the "Global Borrowing Base"), which currently is set at $1.8 billion, with $1.65 billion
allocated to the U.S. Credit Facility and $150 million allocated to the Canadian Credit Facility. The determination of the Global Borrowing Base is made by the lenders, applying their own
assumptions in their sole discretion, taking into consideration the estimated value of Forest's oil and gas properties in accordance with the lenders' customary practices for oil and gas loans. The
Global Borrowing Base is redetermined semi-annually, and the available borrowing amount could be increased or decreased as a result of such redeterminations. In addition to the
semi-annual redeterminations, Forest and the lenders each have discretion at any time, but not more often than once during any calendar year, to have the Global Borrowing Base
redetermined. Because the process for determining the Global Borrowing Base involves evaluating the estimated value of our oil and gas properties, a continuation of the decline in oil and gas
commodity prices observed over the last several months could result in a determination to decrease the Global Borrowing Base; however, as of October 17, 2008, our lenders, after completing
their semi-annual redetermination process, reaffirmed our $1.8 billion Global Borrowing Base and their $1.8 billion in commitments under the Credit Facilities. The Global
Borrowing Base is also subject to change in the event Forest issues senior notes after May 9, 2008. In such case, the Global Borrowing Base will immediately be reduced by an amount equal to
$0.30 of
every $1.00 principal amount of newly issued senior notes (excluding any senior notes that Forest may issue to refinance senior notes outstanding on May 9, 2008).

Borrowings
under the U.S. Credit Facility bear interest at one of two rates as may be elected by Forest. Loans will bear interest at a rate that is based on interest rates applicable to
dollar deposits in

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the
London interbank market ("LIBO Rate"), or a rate based on the greater of the prime rate announced by the global administrative agent or the federal funds rate plus 1/2 of 1%. Loans
under the Canadian Credit Facility will bear interest at a rate that may be based on the base rate announced by the Canadian administrative agent, the LIBO Rate, a rate based on the greater of the
rate for U.S. dollar denominated loans made by the Canadian administrative agent and the federal funds rate plus 1/2 of 1%, or a banker's acceptance rate.

The
Credit Facilities include terms and covenants that place limitations on certain types of activities, including restrictions or requirements with respect to additional debt, liens,
asset sales, hedging activities, investments, dividends, mergers, and acquisitions, and include financial covenants.

Under
certain conditions, amounts outstanding under the Credit Facilities may be accelerated. Bankruptcy and insolvency events with respect to Forest or certain of its subsidiaries will
result in an automatic acceleration of the indebtedness under the Credit Facilities. Subject to notice and cure periods in certain cases, other events of default under either of the Credit Facilities
will result in acceleration of the indebtedness under the facilities at the option of the lenders. Such other events of default include non-payment, breach of warranty,
non-performance of obligations under the Credit Facilities (including financial covenants), default on other indebtedness, certain pension plan events, certain adverse judgments, change of
control, a failure of the liens securing the Credit Facilities, and an event of default under the Canadian Credit Facility.

The
Credit Facilities are collateralized by a portion of Forest's assets. We are required to mortgage and grant a security interest in the greater of 75% of the present value of our
consolidated proved oil and gas properties, or 1.875 multiplied by the allocated U.S. borrowing base. We also have pledged the stock of several subsidiaries to the lenders to secure the Credit
Facilities. Under certain circumstances, we could be obligated to pledge additional assets as collateral. If Forest's corporate credit ratings by Moody's and S&P improve and meet
pre-established levels, the collateral requirements would not apply and, at our request, the banks would release their liens and security interests on our properties.

The
lending group under our U.S. Credit Facility includes the following institutions: JPMorgan Chase Bank, N.A. ("JPMorgan Chase"), Bank of America, N.A. ("Bank of America"), Citibank,
N.A. ("Citibank"), BNP Paribas, BMO Capital Markets Financing, Inc. ("BMO"), Credit Suisse, Cayman Islands Branch ("Credit Suisse"), Deutsche Bank Securities Inc. (acts only as
Co-U.S. Documentation Agent) ("Deutsche Bank"), U.S. Bank National Association, The Bank of Nova Scotia ("Bank of Nova Scotia"), Fortis Capital Corp. ("Fortis"), Bank of Scotland, ABN
Ambro Bank N.V., UBS Loan Finance LLC, Compass Bank, Wells Fargo Bank, N.A. ("Wells Fargo"), Mizuho Corporate Bank, Ltd., and Toronto Dominion (Texas) LLC. The lenders
under our Canadian Credit Facility include: JPMorgan Chase Bank, N.A., Toronto Branch ("JPM Toronto", with JPMorgan Chase, collectively "JPMorgan"), Bank of Montreal, The Toronto-Dominion Bank
(together with Toronto Dominion (Texas) LLC, "Toronto Dominion"), Bank of America, N.A., Canada Branch, and Citibank, N.A., Canada Branch. Of the $1.8 billion total commitments under the
Credit Facilities, JPMorgan, Bank of America, BNP Paribas, Credit Suisse, Deutsche Bank, Bank of Nova Scotia, Toronto Dominion, and Wells Fargo hold approximately 62% of the total commitments, with
each of these eight lenders holding an equal share. With respect to the other 38% of the total commitments, no single lender holds more than 4.2% of the total commitments. In addition to our
relationships with these institutions under the Credit Facilities, from time to time we engage in other transactions with a number of these institutions. Such institutions or their affiliates may
serve as underwriter or initial purchaser of our debt and equity securities, act as agent or directly purchase our production and, or serve as counterparties to our commodity and interest rate
derivative agreements. As of November 5, 2008, our lenders and their affiliates were our primary derivative counterparties and we had entered into commodity derivative transactions covering
approximately 74 Bcfe of our remaining 2008, 2009 and 2010 production with the following lenders or an affiliate of such lender: BMO, BNP Paribas, Credit Suisse, Deutsche Bank, Fortis, Bank of
Nova Scotia, and Toronto Dominion. Our agreements with BMO, BNP Paribas, and

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Toronto
Dominion account for approximately 50% of our remaining 2008, 2009, and 2010 hedged production. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk" below for
additional details concerning our derivative arrangements.

At
September 30, 2008, there were outstanding borrowings of $1,140.0 million under the U.S. Credit Facility at a weighted average interest rate of 4.4%, and there were
outstanding borrowings of $80.8 million under the Canadian Credit Facility at a weighted average interest rate of 4.7%. We also had used the Credit Facilities for approximately
$2.8 million in letters of credit, leaving an unused borrowing amount under the Credit Facilities of approximately $576.4 million at September 30, 2008. At October 31,
2008, there were outstanding borrowings of $1,195.0 million under the U.S. Credit Facility at a weighted average interest rate of 5.0%, and there were outstanding borrowings of
$83.9 million under the Canadian Credit Facility at a weighted average interest rate of 4.2%. We also had used the Credit Facilities for approximately $2.7 million in letters of credit,
leaving an unused borrowing amount under the Credit Facilities of approximately $518.4 million at October 31, 2008. Based on our current expectations and assumptions, including, among
others, no additional asset sales, we anticipate that we will have approximately $400 million available for borrowing under the Credit Facilities at December 31, 2008.

Credit Ratings

Our credit risk is evaluated by two independent rating agencies based on publicly available information and information obtained during
our ongoing discussions with the rating agencies. Moody's Investor Services and Standard & Poor's Rating Services currently rate each series of our senior notes and, in addition, they have
assigned Forest a general credit rating. Our Credit Facilities include provisions that are linked to our credit ratings. For example, our collateral requirements will vary based on our credit ratings;
however, we do not have any credit rating triggers that would accelerate the maturity of amounts due under credit facilities or the debt issued under the indentures for our senior notes. The
indentures for the senior notes also include terms linked to our credit ratings. These terms allow us greater flexibility if our credit ratings improve to investment grade and other tests have been
satisfied, in which event we would not be obligated to comply with certain restrictive covenants included in the indentures. Our ability to raise funds and the costs of any financing activities will
be affected by our credit rating at the time any such financing activities are conducted.

Cash Flow

Net cash provided by operating activities, net cash used by investing activities, and net cash provided by financing activities for the
nine months ended September 30, 2008 and 2007 were as follows:

Nine Months Ended
September 30,2008

2007(In Thousands)Net cash provided by operating activities

$
882,450


520,789Net cash used by investing activities


(1,841,027
)

(833,325
)Net cash provided by financing activities


949,491


286,528


Cash
flows provided by operating activities are primarily affected by production volumes and commodity prices, net of the effects of settlements of our derivative contracts, and changes
in working capital. The increase in net cash provided by operating activities in the nine months ended September 30, 2008 compared to the same period of 2007 was primarily due to higher net
earnings before non-cash charges partially offset by an increased investment in net operating assets in 2008 as

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compared
to 2007. Given the recent decline in oil and gas prices, cash flows from operations will likely be lower in the fourth quarter of 2008 and in 2009.

Cash
flows used by investing activities are primarily comprised of the acquisition, exploration and development of oil and gas properties net of dispositions of oil and gas properties.
The increase in net cash used by investing activities in the nine months ended September 30, 2008 compared to the same period of 2007 was primarily due to increased exploration and development
expenditures in 2008 and proceeds from the Alaska Assets in the third quarter of 2007. See "Capital Expenditures" below.

Net
cash provided by financing activities in the nine months ended September 30, 2008 included net bank proceeds of $934.2 million; the issuance of additional
71/4% senior notes, for net proceeds of $247.2 million; proceeds from the exercise of stock options and from the employee stock purchase plan of $17.5 million; and the
redemption of our 8% senior notes of $265.0 million. Net cash provided by financing activities in the nine months ended September 30, 2007 included the issuance of the
71/4% Notes for net proceeds of $739.2 million; net bank proceeds of $104.2 million; proceeds from the exercise of stock options and from the employee stock purchase plan
of $8.1 million; the repayment of Houston Exploration's bank debt of $176.9 million; and repayments on the Alaska term loans of $375.0 million.

Capital Expenditures

Expenditures for property acquisition and exploration and development were as follows:

Nine Months Ended
September 30,2008

2007(In Thousands)Property acquisition costs:Proved properties

$
804,750


1,695,003Unproved properties


564,602


468,1001,369,352


2,163,103Exploration and development costs:Direct costs


915,105


512,694Overhead capitalized


38,695


29,801Interest capitalized


14,639


8,481968,439


550,976Total capital expenditures for property acquisition and exploration and development(1)(2)

$
2,337,791


2,714,079


---

For the nine months ended September 30, 2008, expenditures for exploration and development activities totaled $968.4 million.
Forest's anticipated expenditures for exploration and development in 2008 are estimated to range from $1.25 billion to $1.35 billion. Some of the factors impacting the level of capital
expenditures for the remainder of 2008 include oil and natural gas prices, the cost and availability of oil field services, weather disruptions, general economic conditions, and the cost of capital.

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Forward-Looking Statements

The information in this Quarterly Report on Form 10-Q including "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 2 of Part I of this report, contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts or present facts, that address 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 may occur in the future are
forward-looking statements. Generally, the words "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar
expressions identify forward-looking statements, and any statements regarding Forest's future financial condition, results of operations, and business are also forward-looking statements. These
forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events.
When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading "Risk Factors" included in Part I of our 2007
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and the risks described in Item 1A of
Part II in this report.

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



We
caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control,
incident to the exploration for and development, production, and sale of oil and gas. These risks 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
and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures, and the other risks

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described
in the Form 10-K under the caption "Risk Factors." The financial results of our foreign operations are also subject to currency exchange rate risks.

Reserve
engineering is a process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on
the quality of available data, the interpretation of such data, and price and cost assumptions made by reservoir engineers. In addition, the results of drilling, testing, and production activities may
justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates
may differ significantly from the quantities of oil and natural gas that are ultimately recovered.

Should
one or more of the risks or uncertainties described above or elsewhere in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual
results and plans could differ 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 expressly qualified in their entirety by this
cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Forest or persons acting on its behalf may
issue. Forest does not
undertake to update any forward-looking statements to reflect events or circumstances after the date of filing this Form 10-Q with the Securities and Exchange Commission, except as
required by law.

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, including the effects of adverse changes in commodity prices, foreign currency exchange rates, and
interest rates as discussed below.

Commodity Price Risk

We produce and sell natural gas, crude oil, and natural gas liquids for our own account in the United States and Canada. As a result,
our financial results are affected when prices for these commodities fluctuate. Such effects can be significant.

Hedging Program

In order to reduce the impact of fluctuations in commodity prices, or to protect the economics of property acquisitions, we make use of
an oil and gas hedging 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 based on prices available in the financial markets at the time the contracts are entered into, are settled in cash and do not require physical deliveries of
hydrocarbons.

Swaps

In a typical commodity swap agreement, we receive the difference between a fixed price 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. If the index price is higher, we pay the difference. By entering into swap agreements, we effectively fix the price that we will
receive in the future for the hedged production.

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Our current swaps are settled in cash on a monthly basis. As of September 30, 2008, we had entered into the following swaps:

SwapsNatural Gas (NYMEX HH)

Oil (NYMEX WTI)Bbtu
per Day(1)

Weighted Average
Hedged Price
per MMBtu

Fair Value

Barrels
per Day

Weighted Average
Hedged Price
per Bbl

Fair Value(In Thousands)





(In Thousands)Fourth Quarter 2008


70

$
9.02

$
9,279


6,500

$
69.72

$
(18,218
)Calendar 2009


110


9.33


45,216


4,500


69.01


(52,462
)Calendar 2010











1,500


72.95


(15,687
)


---

In October 2008, in order to reduce credit exposure to certain counterparties, we elected to terminate two Calendar 2009 gas swaps for 20 Bbtu per
day with a weighted average hedged price per MMBtu of $9.29 for proceeds of $12.6 million.

In
November 2008, Forest entered into two additional gas swap agreements covering 20 Bbtu per day for Calendar 2009 at a weighted average hedged price per MMBtu of $7.84, with
10 Bbtu per day subject to a $6.00 written put.

Costless Collars

Forest also enters into costless collar agreements with third parties. A collar agreement is similar to a swap agreement, except that
we receive the difference between the floor price and the index price only if the index price is below the floor price and we pay the difference between the ceiling price and the index price only if
the index price is above the ceiling price. As of September 30, 2008, we had entered into the following collars:

Costless CollarsNatural Gas (NYMEX HH)Bbtu
per Day

Weighted Average
Hedged Floor and
Ceiling Price
per MMBtu

Fair Value(In Thousands)Fourth Quarter 2008


80

$
7.33/8.87

$
538Calendar 2009


40


8.25/10.92


6,829


In
October 2008, in order to reduce credit exposure to a certain counterparty, we elected to terminate a Calendar 2009 gas collar for 20 Bbtu per day with a hedged floor and ceiling
price per MMBtu of $8.00 and $10.56, respectively, for proceeds of $6.6 million.

Three-Way Costless Collars

Forest also enters into three-way costless collars with third parties. These instruments establish two floors and one
ceiling. Upon settlement, if the index price is below the lowest floor, Forest receives the difference between the two floors. If the index price is between the two floors, Forest receives the
difference between the higher of the two floors and the index price. If the index price is between the higher floor and the ceiling, Forest does not receive or pay any amounts. If the index price is
above the

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ceiling,
Forest pays the excess over the ceiling price. As of September 30, 2008, we had entered into the following three-way collars:

Three-Way Costless CollarsNatural Gas (NYMEX HH)Bbtu
per Day

Weighted Average
Hedged Lower Floor,
Upper Floor, and
Ceiling Price
per MMBtu

Fair Value(In Thousands)Fourth Quarter 2008


30

$
6.00/8.00/10.00

$
1,763


Basis Swaps

Forest also uses basis swaps in connection with natural gas swaps in order to fix the price differential between the NYMEX price and
the index price at which the natural gas production is sold. As of September 30, 2008, we had entered into the following basis swaps:

Basis SwapsBbtu
per Day

Fair Value(In Thousands)Fourth Quarter 2008


80

$
1,394


Interest Rate Swaps

Forest may enter into interest rate swap agreements in an attempt to normalize the mix of fixed and floating interest rates within its
debt portfolio. In June 2008, Forest terminated all of its outstanding interest rate swaps for a net gain of $.4 million.

Fair Value Reconciliation

The table below sets forth the changes that occurred in the fair values of our open derivative contracts during the nine months ended
September 30, 2008, beginning with the fair value of our derivative contracts on December 31, 2007. Due to the volatility of oil and natural gas prices, the estimated fair values of our
commodity derivative instruments are subject to large fluctuations from period to period. It has been our experience that commodity prices are subject to large fluctuations, and we expect this
volatility to continue. Actual gains and losses recognized related to our commodity derivative instruments will likely differ from those estimated at September 30, 2008 and will depend
exclusively on the price of the commodities on the specified settlement dates provided by the derivative contracts.

Fair Value of Derivative ContractsCommodity

Interest Rate

Total(In Thousands)As of December 31, 2007

$
(76,119
)

(4,721
)

(80,840
)Settlements of acquired derivatives


23,163





23,163Net (decrease) increase in fair value


(78,190
)

3,832


(74,358
)Net contract losses recognized


109,798


889


110,687As of September 30, 2008

$
(21,348
)




(21,348
)


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Foreign Currency Exchange Risk

We conduct business in several foreign currencies and thus are subject to foreign currency exchange rate risk on cash flows related to
sales, expenses, financing, and investing transactions. In the past, we have not entered into any foreign currency forward contracts or other similar financial instruments to manage this risk.
Expenditures incurred relative to the foreign concessions held by Forest outside of North America have been primarily United States dollar-denominated, as have cash proceeds related to property sales
and farmout arrangements. Substantially all of our Canadian revenues and costs are denominated in Canadian dollars. While the value of the Canadian dollar does fluctuate in relation to the U.S.
dollar, we believe that any currency risk associated with our Canadian operations would not have a material impact on our results of operations.

Interest Rate Risk

The following table presents principal amounts and related weighted average fixed interest rates by year of maturity for Forest's debt
obligations and the fair value of our debt obligations at September 30, 2008.

2011

2012

2013

2014

2019

Total

Fair
Value(Dollar Amounts in Thousands)Bank credit facilities:Variable rate

$



1,220,814











1,220,814


1,220,814Average interest rate(1)





4.44
%










4.44
%Long-term debt:Fixed rate

$
285,000





1,112


150,000


1,000,000


1,436,112


1,282,815Coupon interest rate


8.00
%




7.00
%

7.75
%

7.25
%

7.45
%Effective interest rate(2)


7.71
%




7.00
%

6.56
%

7.25
%

7.27
%


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Item 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to Forest and its consolidated
subsidiaries is made known to the Officers who certify Forest's financial reports and the Board of Directors.

Our
Chief Executive Officer, 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 the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the quarterly period ended
September 30, 2008 (the "Evaluation Date"). Based on this evaluation, they believe that as of the Evaluation Date our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized, and reported within the time
periods specified in the SEC's rules and forms; and (ii) is accumulated and communicated to Forest's management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There has not been any change in our internal control over financial reporting that occurred during our quarterly period ended
September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART IIOTHER INFORMATION

Item 1A.    RISK FACTORS

The following risk factors update the Risk Factors included in our Annual Report on Form 10-K for fiscal year ended
December 31, 2007 ("Annual Report"). Except as set forth below and as disclosed in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2008 and
June 30, 2008 and our Current Reports on Form 8-K, there have been no material changes to the risks described in Part I, Item 1A, of our Annual Report.

We have substantial capital requirements, and we may be unable to obtain needed financing on satisfactory terms necessary to execute our operating strategy.

We incur, and will continue to incur, substantial capital expenditures for the acquisition, development, and exploration of our oil and natural gas reserves. In
2007, 2006, and 2005, we incurred approximately $3.0 billion, $943 million, and $854 million on capital expenditures, respectively, including approximately $2.2 billion,
$316 million, and $314 million on property acquisitions. During the first nine months of 2008, we have incurred approximately $2.3 billion on capital expenditures, including
approximately $1.4 billion on property acquisitions. We expect that our exploration and development expenditures for 2008 will be approximately $1.25 billion to $1.35 billion. We
intend to finance our capital expenditures in 2009 primarily through cash flow from operations and our bank credit facilities. For any large acquisitions or other large expenditures, we expect we
would need to access the public or private capital markets.

Our
ability to access the asset-sales market and private and public debt and equity markets will depend upon a number of factors, some of which are outside our control. These factors
include:



Oil
and natural gas prices have been extremely volatile during 2008. On November 3, 2008, the closing price of oil on the New York Mercantile Exchange was $63.91 per barrel,
compared to its highest
closing price year-to-date in 2008 of $146.65 per barrel in July 2008. The price of natural gas on the New York Mercantile Exchange has also experienced wide price swings
during the year and closed at $6.84 per MMBtu on November 3, 2008 compared to its highest closing price year-to-date in 2008 of $13.61 per MMBtu in July 2008. As of
September 30, 2008, approximately 73% of our estimated proved reserves was natural gas. The significant declines in oil and natural gas prices will impact our revenue and cash flows and our
spending levels, as our capital expenditures budget and other large expenditures to acquire new properties take into account the volatility of commodity prices along with other factors and we require
higher returns for individual projects if we perceive a higher level of risk. In addition, the volatility in commodity prices will impact our ability to access the capital markets and the amounts
available under our bank credit facilities, which are based on a global borrowing base that is determined by our lenders semi-annually (and may be redetermined at the option of Forest or
the lenders at other times during the year) using a process that takes into account the value of our estimated reserves applying prevailing market values and the lenders' own assumptions.

We
believe that our available cash, cash provided by operating activities, and funds available under our bank credit facilities will be sufficient to fund our operating, interest,
general and administrative expenses, our capital expenditure budget, and our short-term contractual obligations during 2008. If our

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revenues
decrease in the future as a result of a continuation of the decline in commodity prices, however, and we are unable to obtain additional debt or equity financing in the private or public
capital markets or access alternative sources of funds, in 2009 we may have to reduce the level of our capital expenditures and may lack the capital necessary to replace our reserves or maintain our
production at current levels.

We have substantial indebtedness and may incur more debt in the future, and our leverage may materially affect our operations and financial condition.

We have incurred substantial debt. At September 30, 2008, the principal amount of our outstanding consolidated debt was approximately $2.7 billion,
including approximately $1.2 billion outstanding under our combined U.S. and Canadian credit facilities. Our outstanding consolidated debt represented approximately 46% of our total
capitalization at September 30, 2008. Further, we may incur more debt in the future. For example, in May 2008 we entered into an amendment to our second amended and restated combined credit
facilities with existing and new lenders, which increased the combined commitment amount from $1 billion to $1.8 billion and established the global borrowing base at $1.8 billion.
As of September 30, 2008, we had approximately $576 million available for borrowing under our amended credit facilities, and expect to have approximately $400 million available
for borrowing at year end based on current economic conditions and other assumptions, including, among others, that we do not complete any additional asset sales in 2008. We may elect to borrow
additional amounts under the amended credit facilities to fund acquisitions. In addition, in May 2008 we issued $250 million principal amount of additional 71/4% senior notes due
2019 and used a portion of the proceeds to redeem a portion of $265 million in principal amount of 8% senior notes that matured in June 2008. The level
of our debt has several important effects on our business and operations; among other things, it may:



Our
ability to meet our debt obligations and other expenses will depend on our future performance, which will be affected by financial, business, domestic, and foreign economic
conditions, the regulatory environment, and other factors, many of which we are unable to control. If our cash flow is not sufficient to service our debt, we may be required to refinance the debt,
sell assets, or sell shares of our stock on terms that we do not find attractive, if it can be done at all. For example, as part of our 2008 financial plan, we intended to sell $300 million to
$500 million of certain non-core, non-strategic assets. In addition, we were targeting additional asset sales of between $500 million to

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$600 million
in late 2008 and in 2009. As of November 1, 2008 we had closed on approximately $100 million in asset sales and had entered into an agreement for the sale of assets
that provides for a purchase price of approximately $258 million. At the instigation of the counterparty to the $258 million transaction, we are currently in discussions that may result
in modifications to the transaction's terms. As a result of the distressed global economic conditions, diminished access to the credit markets, and significant declines in commodity prices over the
last several months, we have not been able to complete our planned divestitures for 2008 on terms that we found economically attractive and do not anticipate completing our remaining goal to sell
another $450 million to $750 million in assets within our original timetable. If we are unable to execute our asset divestitures, we will be unable to use the proceeds from the planned
divestitures to reduce our level of consolidated debt.

A
failure on our part to comply with the financial and other restrictive covenants contained in our amended credit facilities and the indentures pertaining to our outstanding senior
notes could result in a default under these agreements. Any default under these agreement could adversely affect our business and our financial condition and results of operations, and would impact
our ability to obtain financing in the future.

Our use of hedging transactions could result in financial losses or reduce our income.

To reduce our exposure to fluctuations in oil and natural gas prices, we have entered into and expect in the future to enter into derivative instruments (or,
hedging agreements) for a portion of our oil and natural gas production. Our commodity hedging agreements are limited in duration, usually for periods of one year or less; however, in conjunction with
acquisitions, we sometimes enter into or acquire hedges for longer periods. As of November 5, 2008, we had hedged, via commodity swaps and collar instruments, approximately 13 Bcfe of our
remaining 2008 production and approximately 57 Bcfe of our 2009 production. Our hedging transactions expose us to certain risks and financial losses, including, among
others:



Due
to the volatility of oil and natural gas prices, the estimated fair value of our commodity derivative instruments is subject to significant fluctuations from period to period. The
amount of any actual gains or losses recognized related to our commodity derivative instruments will likely differ from our period to period estimates and will be a function of the actual price of the
commodities on the settlement date provided in the underlying derivative contracts. For example, for the first two quarterly periods in 2008, we reported unrealized losses on our commodity derivative
instruments of $137 million and $329 million, respectively. In contrast, for the third quarter of 2008, we reported unrealized gains on our commodity derivative instruments of
$498 million. We expect that commodity prices will continue to fluctuate in the future and, as a result, our periodic financial results will continue to be subject to fluctuations related to
our derivative instruments.

We
have entered into commodity derivative agreements with a number of the lenders or their affiliates under our Credit Facilities, as well as other financial institutions. As of
November 5, 2008, our lenders and their affiliates were our primary derivative counterparties, including BMO, BNP Paribas, Credit Suisse, Deutsche Bank, Fortis, Bank of Nova Scotia, and Toronto
Dominion. Our derivative

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transactions
with BMO, BNP Paribas, and Toronto Dominion accounted for approximately 38 Bcfe, or 50% of our remaining 2008, 2009, and 2010 hedged production.

For
further information concerning our commodity price hedging transactions and information concerning prices, market conditions, and our swap and collar hedging agreements, see
Part I, Item 3"Qualitative and Quantitative Disclosures about Market Risk," in this report.

We may not be able to obtain funding at all or obtain funding in the capital markets on terms we find acceptable, or obtain funding under our current credit
facilities because of the deterioration of the capital and credit markets and our borrowing base. This may hinder or prevent us from meeting our future capital needs.

Global financial markets and economic conditions have been, and continue to be, disrupted and volatile. Also, the debt and equity capital markets have been
exceedingly distressed. These issues, along with significant write-offs in the financial services sector, the re-pricing of credit risk and the current weak economic conditions
have made, and will likely continue to make, it difficult to obtain funding in the capital markets. At this time, we do not believe that we would be able to access the public markets for additional
funding on terms that we find acceptable.

In
particular, the cost of raising money in the debt and equity capital markets has increased substantially while the availability of funds from those markets generally has diminished
significantly. Also, as a result of concerns about the general stability of financial markets and the solvency of specific counterparties, the cost of obtaining money from the credit markets has
increased as many lenders and institutional investors have increased interest rates, imposed tighter lending standards, refused to refinance existing debt at maturity at all or on terms similar to
existing debt, and reduced and, in some cases, ceased to provide any new funding.

We
have existing credit facilities with lender commitments totaling $1.8 billion and a global borrowing base set at $1.8 billion. In October 2008, our lenders reaffirmed
their commitments of $1.8 billion and completed their semi-annual redetermination process and confirmed our global borrowing base at $1.8 billion. In the future, we may not
be able to access adequate funding under our credit facilities as a result of (i) a decrease in our global borrowing base due to the outcome of a subsequent redetermination, which will be
impacted by, among other things, prevailing oil and natural gas prices and our estimated reserves at such time, or (ii) an unwillingness or inability on the part of our lending counterparties
to meet their funding obligations.

Due
to these factors, we cannot be certain that funding will be available if needed and to the extent required, on acceptable terms. If we are unable to access funding when needed on
acceptable terms, we may not be able to fully implement our business plans, complete new property acquisitions to enhance our development plans, take advantage of business opportunities, respond to
competitive pressures, or refinance our debt obligations as they come due, any of which could have a material adverse effect on our operations and financial results.

Lower oil and gas prices and other factors may cause us to record ceiling test writedowns and other impairments.

We use the full cost method of accounting to report our oil and gas operations. Accordingly, we capitalize the cost to acquire, explore for, and develop oil and
gas properties. Under full cost accounting rules, the net capitalized costs of proved oil and gas properties may not exceed a "ceiling limit," which is based upon the present value of estimated future
net cash flows from proved reserves,
discounted at 10%. If net capitalized costs of proved oil and gas properties exceed the ceiling limit, we must charge the amount of the excess to earnings. This is called a "ceiling test writedown."
Under the accounting rules, we are required to perform a ceiling test each quarter. A ceiling test writedown would not impact cash flow from operating activities, but it would reduce our shareholders'
equity.

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Investments
in unproved properties, including capitalized interest costs, are also assessed periodically to ascertain whether impairment has occurred. Unproved properties whose costs are
individually significant are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, and geographic and geologic data obtained relating to
the properties. The amount of impairment assessed, if any, is added to the costs to be amortized, or is reported as a period expense, as appropriate. If an impairment of unproved properties results in
a reclassification to proved oil and gas properties, the ceiling test cushion would be reduced.

We
also assess the carrying amount of goodwill in the second quarter of each year and at other periods when events occur that may indicate an impairment exists. These events include, for
example, a significant decline in oil and gas prices or a decline in our market captilization.

The
risk that we will be required to write down the carrying value of our oil and gas properties, our unproved properties or goodwill increases when oil and gas prices are low or
volatile. In addition, writedowns may occur if we experience substantial downward adjustments to our estimated proved reserves or our unproved property values, or if estimated future development costs
increase. We cannot assure you that we will not experience ceiling test writedowns or any other impairment in the future. In addition, our ceiling test cushion is subject to fluctuation as a result of
our acquisition and divestiture activity.

At
September 30, 2008, we had sufficient ceiling test cushions and based on our assessments, no impairment was necessary for our investments in unproved properties or goodwill.
However, since that time, commodity prices and financial market conditions have continued to deteriorate and if the decline in the prices for oil and natural gas does not abate, we may incur a ceiling
test writedown or an impairment of unproved oil and gas properties or goodwill in the fourth quarter of 2008.

The market price of our common stock could be adversely affected by sales of substantial amounts of our common stock, including sales by our existing
shareholders.

As of October 31, 2008, we had 97,121,170 shares of common stock outstanding. On September 30, 2008, in connection with our acquisition of assets,
we issued 7.25 million shares of common stock to the seller in a private placement, which represented approximately 7.5% of our outstanding shares of common stock as of such date. The seller
distributed the shares of common stock issued by us to certain of its designees, including certain accredited investors who are members or beneficial owners of the seller's parent company.
Subsequently, on October 1, 2008, pursuant to the terms of the asset purchase and sale agreement, we filed an automatically effective Form S-3 shelf registration statement
with the Securities and Exchange Commission registering the resale of the common stock by the seller and its designees and are required to maintain the effectiveness of the S-3 for a
period of up to one year.

Sales
by the seller or its designees or any of our existing shareholders of a substantial number of shares of our common stock, or the perception that such sales might occur, could have
a material adverse effect on the price of our common stock or could impair our ability to obtain capital through an offering of equity securities.

In
recent months, the securities market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by
many companies, including Forest, for reasons unrelated to their operating performance. Future market fluctuations may result in a lower price of our common stock.

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Item 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Securities

On September 30, 2008, Forest issued 7.25 million shares of its common stock, par value $.10 per share, as partial
consideration for the purchase of certain oil and gas properties located in Texas. Upon issuance, these shares were not registered under the Securities Act of 1933, as amended. For more information,
see Forest's Current Report on Form 8-K, dated September 30, 2008.

Issuer Purchases of Equity Securities

The table below sets forth information regarding repurchases of our common stock during the third quarter of 2008. The shares
repurchased represent shares of our common stock that employees elected to surrender to Forest to satisfy their tax withholding obligations upon the vesting of shares of restricted stock. Forest does
not consider this a share buyback program.

Period

Total # of Shares
Purchased

Average Price
Per Share

Total # of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs

Maximum # (or Approximate Dollar Value) of Shares that May yet be Purchased Under the Plans or ProgramsJuly 2008


150

$
68.18





August 2008


1,741


52.40





September 2008


99


53.05





Third Quarter Total


1,990

$
53.62








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Item 6.    EXHIBITS



10.1

Asset Purchase and Sale Agreement dated as of August 15, 2008 between Cordillera Texas, L.P. and Forest Oil Corporation, incorporated by reference to Exhibit 10.1 to Form 8-K dated
September 30, 2008 (File No. 001-13515).10.2

Amendment No. 1 dated September 30, 2008 to Asset Purchase and Sale Agreement dated as of August 15, 2008 between Cordillera Texas, L.P. and Forest Oil Corporation, incorporated by
reference to Exhibit 10.2 to Form 8-K dated September 30, 2008 (File No. 001-13515).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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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

FOREST OIL CORPORATION(Registrant)November 6, 2008By:

/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

Description31.1*

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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