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 June 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(I.R.S. 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
definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý

Accelerated filer o

Non-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 July 31, 2008 there were 89,774,084 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  June 30, 2008



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


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


2Condensed Consolidated Statement of Shareholders' Equity for the Six Months Ended June 30, 2008


3Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 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


42Item 4Controls and Procedures


46Part IIOTHER INFORMATIONItem 1ARisk Factors


47Item 2Unregistered Sales of Equity Securities and Use of Proceeds


49Item 4Submission of Matters to a Vote of Security Holders


49Item 6Exhibits


50Signatures


51


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)

June 30,
2008

December 31,
2007ASSETSCurrent assets:Cash and cash equivalents

$
10,811


9,685Accounts receivable


273,270


201,617Derivative instruments


2,391


30,006Deferred income taxes


135,399


23,854Other investments


29,001


34,694Other current assets


80,747


61,518Total current assets


531,619


361,374Property and equipment, at cost:Oil and gas properties, full cost method of accounting:Proved, net of accumulated depletion of $2,962,108 and $2,742,539


4,952,318


4,414,710Unproved


584,108


568,510Net oil and gas properties


5,536,426


4,983,220Other property and equipment, net of accumulated depreciation and amortization of $33,597 and $30,011


50,815


42,595Net property and equipment


5,587,241


5,025,815Goodwill


265,798


265,618Other assets


44,831


42,741$
6,429,489


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

$
409,680


361,089Accrued interest


7,908


7,693Derivative instruments


375,064


72,675Current portion of long-term debt





266,002Asset retirement obligations


2,555


2,562Other current liabilities


33,865


28,361Total current liabilities


829,072


738,382Long-term debt


1,997,605


1,503,035Asset retirement obligations


91,738


87,943Derivative instruments


152,132


38,171Deferred income taxes


950,432


853,427Other liabilities


64,253


62,779Total liabilities


4,085,232


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





Common stock, 89,767,461 and 88,379,409 shares issued and outstanding


8,977


8,838Capital surplus


1,992,640


1,966,569Retained earnings


224,280


306,062Accumulated other comprehensive income


118,360


130,342Total shareholders' equity


2,344,257


2,411,811$
6,429,489


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
June 30,

Six Months Ended
June 30,2008

2007

2008

2007(In Thousands, Except Per Share Amounts)Revenues

$
515,182


254,669


891,712


437,278Operating expenses:Lease operating expenses


38,413


45,027


75,978


81,067Production and property taxes


24,148


12,808


44,199


20,718Transportation and processing costs


4,641


5,258


9,566


9,452General and administrative (including stock-based compensation)


19,832


13,407


39,120


26,378Depreciation and depletion


126,584


86,126


242,151


146,585Accretion of asset retirement obligations


1,967


1,292


3,751


2,567Gain on sale of assets











(7,176
)Total operating expenses


215,585


163,918


414,765


279,591Earnings from operations


299,597


90,751


476,947


157,687Other income and expense:Interest expense


27,979


29,103


55,836


53,456Unrealized losses (gains) on derivative instruments, net


319,640


(34,813
)

461,853


23,025Realized losses (gains) on derivative instruments, net


58,182


(9,270
)

61,845


(34,404
)Unrealized foreign currency exchange (gains) losses


(460
)

(6,271
)

2,315


(6,320
)Unrealized losses on other investments, net


276





7,367


Other (income) expense, net


(1,862
)

1,122


(1,025
)

234Total other income and expense


403,755


(20,129
)

588,191


35,991Earnings (loss) before income taxes


(104,158
)

110,880


(111,244
)

121,696Income tax:Current


4,000


2,217


3,978


3,095Deferred


(40,140
)

31,864


(42,472
)

34,911Total income tax


(36,140
)

34,081


(38,494
)

38,006Net earnings (loss)

$
(68,018
)

76,799


(72,750
)

83,690Basic earnings (loss) per common share

$
(.78
)

1.11


(.83
)

1.27Diluted earnings (loss) per common share

$
(.78
)

1.08


(.83
)

1.24


See
accompanying Notes to Condensed Consolidated Financial Statements.

2

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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


2,411,811Exercise of stock options


727


73


14,217








14,290Employee stock purchase plan


18


2


749








751Restricted stock issued, net of cancellations


659


66


(66
)







Amortization of stock-based compensation








11,980








11,980Adoption of EITF 06-4 and EITF 06-10











(9,032
)




(9,032
)Restricted stock redeemed and other


(16
)

(2
)

(809
)







(811
)Comprehensive loss:Net loss











(72,750
)




(72,750
)Foreign currency translation














(11,982
)

(11,982
)Total comprehensive loss

















(84,732
)Balances at June 30, 2008


89,767

$
8,977


1,992,640


224,280


118,360


2,344,257


See accompanying Notes to Condensed Consolidated Financial Statements.

3

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

Six Months Ended
June 30,2008

2007(In Thousands)Operating activities:Net earnings (loss)

$
(72,750
)

83,690Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:Depreciation and depletion


242,151


146,585Accretion of asset retirement obligations


3,751


2,567Stock-based compensation expense


9,273


4,721Unrealized losses on derivative instruments, net


461,853


23,025Gain on sale of assets





(7,176
)Deferred income tax


(42,472
)

34,911Unrealized foreign currency exchange losses (gains)


2,315


(6,320
)Unrealized losses on other investments, net


7,367


Other, net


(2,152
)

(1,134
)Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:Accounts receivable


(66,692
)

32,757Other current assets


(21,588
)

726Accounts payable


(12,781
)

(20,503
)Accrued interest and other current liabilities


(18,007
)

(178
)Net cash provided by operating activities


490,268


293,671Investing activities:Acquisition of Houston Exploration, net of cash acquired (Note 2)





(775,960
)Capital expenditures for property and equipment:Exploration, development, and other acquisition costs


(789,303
)

(331,983
)Other fixed assets


(12,069
)

(15,539
)Proceeds from sales of assets


52,367


38,613Other, net


1,036


Net cash used by investing activities


(747,969
)

(1,084,869
)Financing activities:Issuance of 71/4% senior notes, net of issuance costs


247,188


739,176Proceeds from bank borrowings


1,360,178


963,734Repayments of bank borrowings


(1,107,917
)

(647,527
)Redemption of 8% senior notes


(265,000
)

Repurchases of 7% senior subordinated notes


(2,960
)

Repayments of term loans





(111,250
)Repayments of bank debt assumed in acquisition





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


15,041


7,056Other, net


12,325


(1,712
)Net cash provided by financing activities


258,855


772,592Effect of exchange rate changes on cash


(28
)

1,172Net increase (decrease) in cash and cash equivalents


1,126


(17,434
)Cash and cash equivalents at beginning of period


9,685


33,164Cash and cash equivalents at end of period

$
10,811


15,730Cash paid during the period for:Interest

$
66,754


52,575Income taxes


3,352


1,278


See accompanying Notes to Condensed Consolidated Financial Statements.

4

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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 June 30, 2008, the results of its operations for the three and six months ended June 30, 2008 and 2007, and its cash flows for the six months ended June 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

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 $281 million, subject to customary adjustments, for the assets using funds advanced from
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

5

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FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(2) ACQUISITIONS AND DIVESTITURES (Continued)

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
June 30, 2008. The 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

6

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FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(2) ACQUISITIONS AND DIVESTITURES (Continued)

from
operations available for investing activities, and opportunities for cost savings through administrative and operational synergies.

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. As of June 30, 2008, management
has finalized its termination plan as a result of the acquisition and all severance payments have been made. The following table summarizes the activity in the severance accrual through
June 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 June 30, 2008

$







The following summary pro forma combined statements of operations data of Forest for the three and six months ended June 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.

Three Months Ended
June 30, 2007

Six Months Ended
June 30, 2007(In Thousands, Except Per Share Amounts)Revenues

$
354,429


658,235Earnings from continuing operations


87,908


95,975Net earnings


87,908


95,975Basic earnings per common share:From continuing operations

$
1.01


1.11Basic earnings per common share


1.01


1.11Diluted earnings per common share:From continuing operations

$
1.00


1.09Diluted earnings per common share


1.00


1.09


7

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(2) ACQUISITIONS AND DIVESTITURES (Continued)

Divestitures

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 (LOSS) PER SHARE AND COMPREHENSIVE EARNINGS (LOSS)

Earnings (Loss) per Share

Basic earnings (loss) per share is computed by dividing net earnings (loss) 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. Stock options, unvested restricted stock grants, and unvested phantom stock units were not included in the
calculation of diluted loss per share for the three and six months ended June 30, 2008 as their inclusion would have an antidilutive effect. The following sets forth the calculation of basic
and diluted earnings (loss) per share.

Three Months Ended
June 30,

Six Months Ended
June 30,2008

2007

2008

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

$
(68,018
)

76,799


(72,750
)

83,690Weighted average common shares outstanding during the period


87,717


69,247


87,506


65,839Add dilutive effects of stock options, unvested restricted stock grants, and unvested phantom stock units





1,580





1,444Weighted average common shares outstanding, including the effects of dilutive securities


87,717


70,827


87,506


67,283Basic earnings (loss) per share

$
(.78
)

1.11


(.83
)

1.27Diluted earnings (loss) per share

$
(.78
)

1.08


(.83
)

1.24


8

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FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

Comprehensive Earnings (Loss)

Comprehensive earnings (loss) is a term used to refer to net earnings (loss) 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 (loss). Items included in Forest's other comprehensive income (loss) for the three and six months ended June 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
June 30,

Six Months Ended
June 30,2008

2007

2008

2007(In Thousands)Net earnings (loss)

$
(68,018
)

76,799


(72,750
)

83,690Other comprehensive income (loss):Foreign currency translation gains (losses)


2,308


25,921


(11,982
)

28,747Unfunded postretirement benefits, net of tax





(105
)




(209
)Total comprehensive earnings (loss)

$
(65,710
)

102,615


(84,732
)

112,228


9

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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 six months ended June 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
June 30, 2008.

Stock
Options

Restricted
Stock

Phantom
Stock Units

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

$
694


5,756


3,165


9,615Less: stock-based compensation costs capitalized


(301
)

(2,083
)

(1,948
)

(4,332
)Stock-based compensation costs expensed

$
393


3,673


1,217


5,283Six Months Ended June 30, 2008:Total stock-based compensation costs

$
1,529


10,192


3,818


15,539Less: stock-based compensation costs capitalized


(648
)

(3,536
)

(2,341
)

(6,525
)Stock-based compensation costs expensed

$
881


6,656


1,477


9,014Unamortized stock-based compensation costs as of June 30, 2008

$
3,858


59,369


10,528
(2)

73,755Weighted average amortization period remaining


1.7 years


2.4 years


2.2 years


2.4 yearsThree Months Ended June 30, 2007:Total stock-based compensation costs

$
1,749


1,831


568


4,148Less: stock-based compensation costs capitalized


(329
)

(600
)

(366
)

(1,295
)Stock-based compensation costs expensed

$
1,420


1,231


202


2,853Six Months Ended June 30, 2007:Total stock-based compensation costs

$
2,682


3,264


792


6,738Less: stock-based compensation costs capitalized


(638
)

(1,020
)

(504
)

(2,162
)Stock-based compensation costs expensed

$
2,044


2,244


288


4,576


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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 six months ended
June 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


(732,041
)

19.96


29,315


Cancelled


(28,223
)

25.99





Outstanding at June 30, 2008


2,181,242


21.76


115,318


1,779,738


---

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 six months ended June 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


702,845


64.46


69,854


64.66Vested


(51,100
)

41.83





Forfeited


(43,550
)

44.13


(1,400
)

40.91Unvested at June 30, 2008


1,889,195


51.27


232,954


49.15


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.

11

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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:

June 30, 2008

December 31, 2007Principal

Unamortized
Premium
(Discount)

Other(3)

Total

Principal

Unamortized
Premium
(Discount)

Other(3)

Total(In Thousands)U.S. Credit Facility

$
430,000








430,000


165,000








165,000Canadian Credit Facility


112,781








112,781


129,126








129,1268% Senior Notes due 2008(1)














265,000


(48
)

1,050


266,0028% Senior Notes due 2011


285,000


4,521


2,897


292,418


285,000


5,167


3,315


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


2,862


(71
)




2,791


5,822


(158
)




5,66473/4% Senior Notes due 2014


150,000


(1,393
)

10,390


158,997


150,000


(1,512
)

11,275


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


1,000,000


618





1,000,618


750,000








750,000Total debt


1,980,643


3,675


13,287


1,997,605


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

$
1,980,643


3,675


13,287


1,997,605


1,484,948


3,497


14,590


1,503,035


---

Bank Credit Facilities

On May 9, 2008, Forest entered into a first amendment (the "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

12

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FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(5) DEBT (Continued)

amount
could be increased or decreased as a result of such redeterminations. In addition, 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. In the event Forest issues senior notes after May 9, 2008, 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).

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 include provisions and conditions linked to Forest's credit ratings. For example, the Company's collateral requirements will vary based on the Company's credit
ratings. In general, Forest's ability to raise funds and the cost of any financing activities may be affected by the Company's credit ratings at the time any such activities are conducted.

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

13

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(5) DEBT (Continued)

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
%


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. As a result of the repurchase, Forest recorded a loss of $.1 million during the three and six months ended June 30, 2008.

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.

14

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(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 June 30, 2008 and 2007, Forest capitalized $14.8 million and
$8.9 million of general and administrative costs (including stock-based compensation), respectively. For the six months ended June 30, 2008 and 2007, Forest capitalized
$26.9 million and $17.1 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 June 30, 2008 and 2007, the Company capitalized $5.5 million and $1.4 million,
respectively, of interest expense attributed to unproved properties. For the six months ended June 30, 2008 and 2007, the Company capitalized $10.7 million and $2.2 million,
respectively, of interest expense 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 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.

15

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(6) PROPERTY AND EQUIPMENT (Continued)

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.

The
following table summarizes the activity for Forest's asset retirement obligations for the six months ended June 30, 2008 and 2007. The decrease in total asset retirement
obligations at June 30, 2008 compared to June 30, 2007 is primarily due to the sale of the Alaska Assets in August 2007.

Six Months Ended
June 30,2008

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

$
90,505


64,102Accretion expense


3,751


2,567Liabilities incurred


6,353


1,256Liabilities settled


(1,292
)

(818
)Disposition of properties


(3,692
)

Liabilities assumed


1,096


40,073Revisions of estimated liabilities


(1,945
)

(28
)Impact of foreign currency exchange rate


(483
)

1,345Asset retirement obligations at end of period


94,293


108,497Less: current asset retirement obligations


(2,555
)

(6,232
)Long-term asset retirement obligations

$
91,738


102,265


16

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(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 six months ended June 30, 2008 and 2007.

Three Months Ended
June 30,

Six Months Ended
June 30,Pension
Benefits

Postretirement
Benefits

Pension
Benefits

Postretirement
Benefits2008

2007

2008

2007

2008

2007

2008

2007(In Thousands)Service cost

$



57


127


102





57


254


205Interest cost


569


581


110


94


1,138


1,134


220


188Expected return on plan assets


(633
)

(640
)







(1,266
)

(1,281
)




Amortization of prior service cost





26











26





Recognized actuarial loss (gain)


181


195


(30
)

(21
)

363


390


(60
)

(43
)Total net periodic expense

$
117


219


207


175


235


326


414


350


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 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 $1.1 million. Accretion of the discounted life insurance obligations totaled $.1 million and $.3 million during the
three and six months ended June 30, 2008, respectively. As of June 30, 2008, the Company's liability associated with the life insurance policies was $8.2 million. In addition, as
of June 30, 2008, the Company had recorded a $2.9 million asset 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

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FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(9) FAIR VALUE MEASUREMENTS (Continued)

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. We
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 June 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 in
determining the fair value of its PERL Note and PERL Shares, utilizing present value techniques for valuing its PERL Note and an option-pricing model for valuing its PERL Shares. Because the PERL
Shares are restricted and not registered for public sale, they could not be valued within the Level 1 fair value hierarchy and are instead included within the Level 2 fair value
hierarchy. The PERL Note is included within the Level 3 fair value hierarchy.

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

Description

Using
Significant Other
Observable Inputs
(Level 2)

Using
Significant
Unobservable Inputs
(Level 3)

Total(In Thousands)Assets:Derivative instruments

$
2,391





2,391Other investments


12,259


16,742


29,001Liabilities:Derivative instruments


(527,196
)




(527,196
)


18

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(9) FAIR VALUE MEASUREMENTS (Continued)

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 six months ended June 30, 2008.

Three Months Ended
June 30, 2008

Six Months Ended
June 30, 2008(In Thousands)Balance at beginning of period

$
16,069


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


673


1,719Included in other comprehensive income





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





Transfers in and/or out of Level 3





Balance at end of period

$
16,742


16,742The 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

$
(193
)

45


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

Three Months Ended
June 30, 2008

Six Months Ended
June 30, 2008Unrealized Losses on
Other Investments, Net

Other (Income)
Expense, Net(1)

Unrealized Losses on
Other Investments, Net

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

$
193


(866
)

(45
)

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

$
193





(45
)




---

(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

19

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(10) DERIVATIVE INSTRUMENTS (Continued)

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.

The
tables below set forth Forest's outstanding commodity swaps and collars as of June 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 BblThird Quarter 2008


70

$
9.02


6,500

$
69.72Fourth 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
MMBtuThird Quarter 2008


80

$
7.33/8.87Fourth Quarter 2008


80


7.33/8.87Calendar 2009


40


8.25/10.92Three-Way Costless CollarsNatural Gas (NYMEX HH)Bbtu
per Day

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


30

$
6.00/8.00/10.00Fourth 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 June 30, 2008, Forest had basis swaps outstanding covering 80 Bbtu per day for the remainder of 2008.

At
June 30, 2008, the fair values of Forest's commodity derivative instruments are presented within the Condensed Consolidated Balance Sheet as liabilities of
$527.2 million, of which $375.1 million is classified as current, and assets of $2.4 million, all of which is classified as current. Due to the volatility

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(10) DERIVATIVE INSTRUMENTS (Continued)

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 prior periods and expects that this commodity price volatility will continue.

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
June 30,

Six Months Ended
June 30,2008

2007

2008

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

$
57,577


(9,140
)

60,956


(34,273
)Unrealized losses (gains) on derivatives(1)


329,144


(33,074
)

466,574


24,814Net realized and unrealized losses (gains) recorded

$
386,721


(42,214
)

527,530


(9,459
)


---

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. During the three months ended June 30, 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
June 30,

Six Months Ended
June 30,2008

2007

2008

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

$
605


(130
)

889


(131
)Unrealized gains on derivatives(1)


(9,504
)

(1,739
)

(4,721
)

(1,789
)Net realized and unrealized gains recorded

$
(8,899
)

(1,869
)

(3,832
)

(1,920
)


---

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Table of Contents

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 June 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 June 30, 2008

Six Months Ended June 30, 2008United
States

Canada

International

Total
Company

United
States

Canada

International

Total
Company(In Thousands)Revenue

$
433,838


81,240





515,078


749,334


142,331





891,665Expenses:Lease operating expenses


29,112


9,301





38,413


58,046


17,932





75,978Production and property taxes


23,297


851





24,148


42,471


1,728





44,199Transportation and processing costs


2,263


2,378





4,641


4,695


4,871





9,566Depletion


101,566


23,107





124,673


193,425


45,196





238,621Accretion of asset retirement obligations


1,624


323


20


1,967


3,099


611


41


3,751Earnings (loss) from operations

$
275,976


45,280


(20
)

321,236


447,598


71,993


(41
)

519,550Capital expenditures(1)

$
567,595


31,540


1,669


600,804


763,334


102,715


2,574


868,623Goodwill

$
248,804


16,994





265,798


248,804


16,994





265,798


---

22

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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 (loss) before income taxes is as follows:

Three Months
Ended
June 30, 2008

Six Months
Ended
June 30, 2008(In Thousands)Earnings from operations for reportable segments

$
321,236


519,550Marketing and other


104


47General and administrative expense (including stock-based compensation)


(19,832
)

(39,120
)Administrative asset depreciation


(1,911
)

(3,530
)Interest expense


(27,979
)

(55,836
)Unrealized losses on derivative instruments, net


(319,640
)

(461,853
)Realized losses on derivative instruments, net


(58,182
)

(61,845
)Unrealized foreign currency exchange gains (losses)


460


(2,315
)Unrealized losses on other investments, net


(276
)

(7,367
)Other income, net


1,862


1,025Earnings (loss) before income taxes

$
(104,158
)

(111,244
)


23

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Table of Contents

FOREST OIL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(11) GEOGRAPHICAL SEGMENTS (Continued)



Oil and Gas OperationsThree Months Ended June 30, 2007

Six Months Ended June 30, 2007United States

Canada

International

Total
Company

United States

Canada

International

Total
Company(In Thousands)Revenue

$
201,953


51,986





253,939


339,377


97,118





436,495Expenses:Lease operating expenses


36,811


8,216





45,027


65,446


15,621





81,067Production and property taxes


12,063


745





12,808


19,283


1,435





20,718Transportation and processing costs


2,398


2,860





5,258


4,111


5,341





9,452Depletion


63,008


22,056





85,064


104,240


40,487





144,727Accretion of asset retirement obligations


1,026


254


12


1,292


2,028


515


24


2,567Earnings (loss) from operations

$
86,647


17,855


(12
)

104,490


144,269


33,719


(24
)

177,964Capital expenditures(1)

$
2,222,477


24,570


2,201


2,249,248


2,321,420


81,295


2,830


2,405,545Goodwill

$
322,119


16,264





338,383


322,119


16,264





338,383


---

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
June 30, 2007

Six Months Ended
June 30, 2007(In Thousands)Earnings from operations for reportable segments

$
104,490


177,964Marketing, processing, and other


730


783General and administrative expense (including stock-based compensation)


(13,407
)

(26,378
)Administrative asset depreciation


(1,062
)

(1,858
)Interest expense


(29,103
)

(53,456
)Unrealized gains (losses) on derivative instruments, net


34,813


(23,025
)Realized gains on derivative instruments, net


9,270


34,404Unrealized foreign currency exchange gains


6,271


6,320Gain on sale of assets





7,176Other expense, net


(1,122
)

(234
)Earnings before income taxes

$
110,880


121,696


The following tables set forth information regarding the Company's total assets by segment and long-lived assets by geographic area.

Total AssetsJune 30, 2008

December 31, 2007(In Thousands)United States

$
5,516,319


4,828,582Canada


835,841


791,714International


77,329


75,252Total assets

$
6,429,489


5,695,548




Long-Lived Assets(1)June 30, 2008

December 31, 2007(In Thousands)United States

$
5,009,472


4,487,257Canada


767,256


730,418International


76,311


73,758Total long-lived assets

$
5,853,039


5,291,433


---

25

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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 June 30, 2008 and December 31, 2007 and for the three and six months ended June 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.

26

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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 BALANCE SHEETS

(Unaudited)

(In Thousands)

June 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

$
1,446


174


9,191





10,811


1,189


386


8,110





9,685Accounts receivable


175,707


14,507


101,961


(18,905
)

273,270


121,698


8,979


80,890


(9,950
)

201,617Deferred income taxes


135,399











135,399


23,854











23,854Other current assets


101,249


146


10,744





112,139


116,898


273


9,047





126,218Total current assets


413,801


14,827


121,896


(18,905
)

531,619


263,639


9,638


98,047


(9,950
)

361,374Property and equipment, at cost


5,973,780


253,291


2,355,875





8,582,946


5,363,127


240,748


2,194,490





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


2,011,911


94,214


889,580





2,995,705


1,852,033


82,743


837,774





2,772,550Net property and equipment


3,961,869


159,077


1,466,295





5,587,241


3,511,094


158,005


1,356,716





5,025,815Investment in subsidiaries


757,936








(757,936
)




740,964








(740,964
)

Note receivable from subsidiary


93,053








(93,053
)




73,307








(73,307
)

Goodwill


225,844





39,954





265,798


225,178





40,440





265,618Due from (to) parent and subsidiaries


432,216


(16,624
)

(415,592
)







308,381


28,409


(336,790
)




Other assets


42,334


(1
)

2,498





44,831


39,424


1


3,316





42,741$
5,927,053


157,279


1,215,051


(869,894
)

6,429,489


5,161,987


196,053


1,161,729


(824,221
)

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

$
353,929


11,900


62,756


(18,905
)

409,680


293,523


9,810


67,706


(9,950
)

361,089Current portion of long-term debt

















266,002











266,002Other current liabilities


408,326


1,078


9,988





419,392


103,288


1,012


6,991





111,291Total current liabilities


762,255


12,978


72,744


(18,905
)

829,072


662,813


10,822


74,697


(9,950
)

738,382Long-term debt


1,884,824





112,781





1,997,605


1,373,909





129,126





1,503,035Notes payable to parent








93,053


(93,053
)










73,307


(73,307
)

Other liabilities


260,824


1,766


45,533





308,123


136,362


1,690


50,841





188,893Deferred income taxes


674,893


47,733


227,806





950,432


577,092


62,509


213,826





853,427Total liabilities


3,582,796


62,477


551,917


(111,958
)

4,085,232


2,750,176


75,021


541,797


(83,257
)

3,283,737Shareholders' equity


2,344,257


94,802


663,134


(757,936
)

2,344,257


2,411,811


121,032


619,932


(740,964
)

2,411,811$
5,927,053


157,279


1,215,051


(869,894
)

6,429,489


5,161,987


196,053


1,161,729


(824,221
)

5,695,548


27

---



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 June 30,2008

2007Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedRevenues

$
350,896


33,664


133,169


(2,547
)

515,182


131,163


16,857


107,024


(375
)

254,669Operating expenses:Lease operating expenses


24,667


2,906


10,805


35


38,413


16,661


3,585


24,754


27


45,027Other direct operating costs


20,845


2,313


5,631





28,789


11,511


1,400


5,155





18,066General and administrative (including stock-based compensation)


16,048


21


3,763





19,832


10,337


37


3,033





13,407Depreciation and depletion


83,548


6,037


37,001


(2
)

126,584


41,973


4,777


39,378


(2
)

86,126Accretion of asset retirement obligations


1,555


41


371





1,967


568


70


654





1,292Total operating expenses


146,663


11,318


57,571


33


215,585


81,050


9,869


72,974


25


163,918Earnings from operations


204,233


22,346


75,598


(2,580
)

299,597


50,113


6,988


34,050


(400
)

90,751Equity earnings in subsidiaries


(4,361
)







4,361





22,968








(22,968
)

Other income and expense:Interest expense


24,177





7,797


(3,995
)

27,979


16,711


2


16,133


(3,743
)

29,103Unrealized losses (gains) on derivative instruments, net


232,905


46,192


40,543





319,640


(38,631
)

(1,114
)

4,932





(34,813
)Realized losses (gains) on derivative instruments, net


43,663


8,108


6,411





58,182


(5,193
)

(1,820
)

(2,257
)




(9,270
)Other (income) expense, net


(4,304
)

7


(366
)

2,617


(2,046
)

(4,095
)

90


(4,910
)

3,766


(5,149
)Total other income and expense


296,441


54,307


54,385


(1,378
)

403,755


(31,208
)

(2,842
)

13,898


23


(20,129
)Earnings (loss) before income taxes


(96,569
)

(31,961
)

21,213


3,159


(104,158
)

104,289


9,830


20,152


(23,391
)

110,880Income tax


(28,551
)

(11,599
)

4,010





(36,140
)

27,490


3,651


2,940





34,081Net earnings (loss)

$
(68,018
)

(20,362
)

17,203


3,159


(68,018
)

76,799


6,179


17,212


(23,391
)

76,799


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)

Six Months Ended June 30,2008

2007Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

Eliminations

ConsolidatedRevenues

$
604,947


59,544


227,221





891,712


212,914


31,850


194,704


(2,190
)

437,278Operating expenses:Lease operating expenses


48,810


6,053


21,071


44


75,978


29,479


8,100


43,530


(42
)

81,067Other direct operating costs


38,886


4,169


10,710





53,765


18,475


2,707


8,988





30,170General and administrative (including stock-based compensation)


32,924


27


6,169





39,120


20,240


68


6,070





26,378Depreciation and depletion


159,901


11,472


70,783


(5
)

242,151


66,118


8,894


71,578


(5
)

146,585Gain on sale of assets























(7,176
)




(7,176
)Accretion of asset retirement obligations


2,964


82


705





3,751


1,141


110


1,316





2,567Total operating expenses


283,485


21,803


109,438


39


414,765


135,453


19,879


124,306


(47
)

279,591Earnings from operations


321,462


37,741


117,783


(39
)

476,947


77,461


11,971


70,398


(2,143
)

157,687Equity earnings in subsidiaries


24,518








(24,518
)




31,906








(31,906
)

Other income and expense:Interest expense


48,369





15,782


(8,315
)

55,836


28,723


9


31,898


(7,174
)

53,456Unrealized losses (gains) on derivative instruments, net


372,879


66,355


22,619





461,853


(1,901
)

5,869


19,057





23,025Realized losses (gains) on derivative instruments, net


42,842


11,996


7,007





61,845


(21,952
)

(5,005
)

(7,447
)




(34,404
)Other (income) expense, net


(855
)

(27
)

1,409


8,130


8,657


(7,284
)

244


(6,243
)

7,197


(6,086
)Total other income and expense


463,235


78,324


46,817


(185
)

588,191


(2,414
)

1,117


37,265


23


35,991Earnings (loss) before income taxes


(117,255
)

(40,583
)

70,966


(24,372
)

(111,244
)

111,781


10,854


33,133


(34,072
)

121,696Income tax


(44,505
)

(14,776
)

20,787





(38,494
)

28,091


3,924


5,991





38,006Net earnings (loss)

$
(72,750
)

(25,807
)

50,179


(24,372
)

(72,750
)

83,690


6,930


27,142


(34,072
)

83,690


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)

Six Months Ended June 30,2008

2007Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

Consolidated

Parent
Company

Guarantor
Subsidiary

Combined
Non-Guarantor
Subsidiaries

ConsolidatedOperating activities:Net earnings (loss)

$
(97,122
)

(25,807
)

50,179


(72,750
)

49,618


6,930


27,142


83,690Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:Depreciation and depletion


159,901


11,472


70,778


242,151


66,118


8,894


71,573


146,585Unrealized losses (gains) on derivative instruments, net


372,879


66,355


22,619


461,853


(1,901
)

5,869


19,057


23,025Deferred income tax


(44,350
)

(14,776
)

16,654


(42,472
)

27,489


3,924


3,498


34,911Other, net


15,886


82


4,586


20,554


2,371


110


(9,823
)

(7,342
)Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:Accounts receivable


(47,894
)

(5,528
)

(13,270
)

(66,692
)

29,009


959


2,789


32,757Other current assets


(19,544
)

127


(2,171
)

(21,588
)

8,020


(529
)

(6,765
)

726Accounts payable


(8,238
)

(633
)

(3,910
)

(12,781
)

(7,195
)

137


(13,445
)

(20,503
)Accrued interest and other current liabilities


(16,185
)

22


(1,844
)

(18,007
)

1,621


(136
)

(1,663
)

(178
)Net cash provided by operating activities


315,333


31,314


143,621


490,268


175,150


26,158


92,363


293,671Investing activities:Acquisitions, net of cash acquired














(775,960
)







(775,960
)Capital expenditures for property and equipment


(580,537
)

(8,904
)

(211,931
)

(801,372
)

(160,207
)

(11,378
)

(175,937
)

(347,522
)Other, net


53,379





24


53,403


4,144


25,751


8,718


38,613Net cash (used) provided by investing activities


(527,158
)

(8,904
)

(211,907
)

(747,969
)

(932,023
)

14,373


(167,219
)

(1,084,869
)Financing activities:Issuance of 71/4% senior notes, net of issuance costs


247,188








247,188


739,176








739,176Proceeds from bank borrowings


1,212,000





148,178


1,360,178


875,000





88,734


963,734Repayments of bank borrowings


(947,000
)




(160,917
)

(1,107,917
)

(548,000
)




(99,527
)

(647,527
)Redemption of 8% senior notes


(265,000
)







(265,000
)










Repurchases of 7% senior subordinated notes


(2,960
)







(2,960
)










Repayments of debt














(176,885
)




(111,250
)

(288,135
)Net activity in investments from subsidiaries


(59,051
)

(21,745
)

80,796





(143,442
)

(40,631
)

184,073


Other, net


26,905


(877
)

1,338


27,366


11,494





(6,150
)

5,344Net cash provided (used) by financing activities


212,082


(22,622
)

69,395


258,855


757,343


(40,631
)

55,880


772,592Effect of exchange rate changes on cash








(28
)

(28
)







1,172


1,172Net increase (decrease) in cash and cash equivalents


257


(212
)

1,081


1,126


470


(100
)

(17,804
)

(17,434
)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

$
1,446


174


9,191


10,811


1,241


26


14,463


15,730


30

---



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 this pronouncement will have on the Company's financial position and results of operations.

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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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. 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 under the heading "Risk Factors," and "Management's Discussion and
Analysis of Financial Condition and Results of OperationsCritical Accounting Policies, Estimates, Judgments, and Assumptions."

Second Quarter 2008 Highlights

Revenue and Production Increase

Revenues increased 102% in the second quarter of 2008 to $515.2 million from $254.7 million in the second quarter of 2007
due to a 31% increase in production volumes and a 55% increase in average realized prices. These increases are discussed further in Results of Operations,Oil and Gas
Production and Revenues, below.

Ark-La-Tex Acquisition

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 $281 million, subject to customary adjustments, for the assets using funds advanced under its
credit facilities.

Amended 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.

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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.

RESULTS OF OPERATIONS

Forest reported a net loss of $68.0 million in the second quarter of 2008 compared to net earnings of $76.8 million in
the second quarter of 2007. Earnings from operations were $299.6 million in the second quarter of 2008 compared to $90.8 million in the second quarter of 2007. The second quarter of 2008
was negatively impacted by fair value adjustments on our derivative instruments, which primarily consisted of oil and natural gas swaps and collars. In the second quarter of 2008, we recognized
unrealized losses on derivative instruments of $319.6 million compared to gains of $34.8 million in the second quarter of 2007.

During
the first six months of 2008, Forest reported a net loss of $72.8 million compared to net earnings of $83.7 million during the same period of 2007. Earnings from
operations were $476.9 million during the first six months of 2008 compared to $157.7 million in the same period of 2007. Each period was negatively impacted by fair value adjustments on
our derivative instruments, which primarily consisted of oil and natural gas swaps and collars. During the first six months of 2008, we recognized unrealized losses on derivative instruments of
$461.9 million compared to $23.0 million in the same period of 2007.

Discussion
of the components of the changes in our quarterly and year to date results follows. Each period in 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 our Alaska assets (the "Alaska Assets") in August 2007 to Pacific Energy
Resources Ltd. ("PERL"). Details for each of these transactions 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 six months ended
June 30, 2008 and 2007 are set forth in the tables below. These tables do

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not
include miscellaneous marketing revenues of $.1 million and $.7 million for the three months ended June 30, 2008 and 2007, respectively, and $.8 million for the six
months ended June 30, 2007.

Three Months Ended June 30,2008

2007Gas

Oil

NGLs

Total

Gas

Oil

NGLs

Total(MMcf)

(MBbls)

(MBbls)

(MMcfe)

(MMcf)

(MBbls)

(MBbls)

(MMcfe)Production volumes:United States


28,261


944


748


38,413


15,714


1,334


516


26,814Canada


5,836


209


71


7,516


6,591


206


65


8,217Totals


34,097


1,153


819


45,929


22,305


1,540


581


35,031Revenues (in thousands):United States

$
276,064


115,750


42,024


433,838


102,367


81,350


18,236


201,953Canada


53,005


23,168


5,067


81,240


38,390


11,043


2,553


51,986Totals

$
329,069


138,918


47,091


515,078


140,757


92,393


20,789


253,939Average sales price:United States

$
9.77


122.62


56.18


11.29


6.51


60.98


35.34


7.53Canada


9.08


110.85


71.37


10.81


5.82


53.61


39.28


6.33Totals

$
9.65


120.48


57.50


11.21


6.31


60.00


35.78


7.25




Six Months Ended June 30,2008

2007Gas

Oil

NGLs

Total

Gas

Oil

NGLs

Total(MMcf)

(MBbls)

(MBbls)

(MMcfe)

(MMcf)

(MBbls)

(MBbls)

(MMcfe)Production volumes:United States


54,619


1,883


1,424


74,461


26,061


2,444


957


46,467Canada


11,653


397


155


14,965


12,565


412


124


15,781Totals


66,272


2,280


1,579


89,426


38,626


2,856


1,081


62,248Revenues (in thousands):United States

$
469,364


205,360


74,610


749,334


166,441


141,956


30,980


339,377Canada


93,132


39,190


10,009


142,331


71,613


21,132


4,373


97,118Totals

$
562,496


244,550


84,619


891,665


238,054


163,088


35,353


436,495Average sales price:United States

$
8.59


109.06


52.39


10.06


6.39


58.08


32.37


7.30Canada


7.99


98.72


64.57


9.51


5.70


51.29


35.27


6.15Totals

$
8.49


107.26


53.59


9.97


6.16


57.10


32.70


7.01


Net oil and gas production in the second quarter of 2008 was 45.9 Bcfe or an average of 505 MMcfe per day, a 31% increase from 35.0 Bcfe or an
average of 385 MMcfe per day in the second quarter of 2007. Net oil and gas production in the first six months of 2008 was 89.4 Bcfe or an average of 491 MMcfe per day, a 44% increase from 62.2 Bcfe
or an average of 344 MMcfe per day in the same period in the prior year. The net increase in oil and gas production in both periods was primarily attributable to the Houston Exploration acquisition in
June 2007 and the Ark-La-Tex acquisition in May 2008, which were partially offset by the sale of the Alaska Assets in August 2007.

Oil
and natural gas revenues were $515.1 million in the second quarter of 2008, reflecting a 103% increase as compared to $253.9 million in the second quarter of 2007. The
increase in oil and natural gas revenues between the comparable three month periods was due to the 31% increase in daily

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production
and a 55% increase in average realized sales prices. Oil and natural gas revenues were $891.7 million during the six months ended June 30, 2008, a 104% increase as compared to
$436.5 million for the same period in the prior year. The increase in oil and natural gas revenues between the comparable six month periods was due to the 44% increase in daily production and a
42% increase in average realized sales prices. No hedging gains or losses were included in the average sales prices presented given our election not to utilize cash flow hedge accounting. See Realized 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 six months ended June 30, 2008 and
2007.

Three Months Ended
June 30,

Six Months Ended
June 30,2008

2007

2008

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

$
38,413


45,027


75,978


81,067Production and property taxes


24,148


12,808


44,199


20,718Transportation and processing costs


4,641


5,258


9,566


9,452Production expense

$
67,202


63,093


129,743


111,237Production expense per Mcfe:Lease operating expenses

$
.84


1.29


.85


1.30Production and property taxes


.53


.37


.49


.33Transportation and processing costs


.10


.15


.11


.15Production expense per Mcfe

$
1.46


1.80


1.45


1.79


Lease operating expenses in the second quarter of 2008 were $38.4 million, or $.84 per Mcfe, compared to $45.0 million, or $1.29 per
Mcfe, in the second quarter of 2007. During the six month period ended June 30, 2008, lease operating expenses were $76.0 million, or $.85 per Mcfe, compared to $81.1 million, or
$1.30 per Mcfe, in the same period in the prior year. The decrease in lease operating expense in both periods was primarily attributable to the sale of the Alaska Assets in August 2007 offset by the
Houston Exploration acquisition in June 2007. On a per-Mcfe basis, the 35% decrease in both periods 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 4.7% and 5.0% for the three months ended June 30, 2008 and 2007, respectively. For the six months
ended June 30, 2008 and 2007, production and property taxes were 5.0% and 4.7%, respectively, of oil and natural gas revenue. Normal fluctuations will occur between periods based on the
approval of 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 $4.6 million, or $.10 per Mcfe, in the second quarter of 2008, from $5.3 million, or $.15 per Mcfe, in the second quarter
of 2007. Transportation and processing costs were $9.6 million, or $.11 per Mcfe, in the six months ended June 30, 2008, compared

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to
$9.5 million, or $.15 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
June 30,

Six Months Ended
June 30,2008

2007

2008

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

$
9,748


4,220


15,798


6,883Other general and administrative costs


24,880


18,085


50,229


36,600General and administrative costs capitalized


(14,796
)

(8,898
)

(26,907
)

(17,105
)General and administrative expense

$
19,832


13,407


39,120


26,378General and administrative expense per Mcfe

$
.43


.38


.44


.42


General and administrative expense in the second quarter of 2008 was $19.8 million compared to $13.4 million in the second quarter
of 2007. During the six month period ended June 30, 2008, general and administrative expense was $39.1 million compared to $26.4 million in the same period of 2007. The 48%
increase in general and administrative expense in each period 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 39% to 43%.

Depreciation and Depletion

Depreciation, depletion and amortization expense ("DD&A") in the second quarter of 2008 was $126.6 million, or $2.76 per Mcfe,
compared to $86.1 million, or $2.46 per Mcfe, in the second quarter of 2007. During the six months ended June 30, 2008, DD&A was $242.2 million, or $2.71 per Mcfe, compared to
$146.6 million, or $2.35 per Mcfe, for the same period in 2007. The per-unit increase in both periods was primarily due to the acquisition of the Houston Exploration properties in
June 2007.

Gain on Sale of Assets

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.

Interest Expense

Interest expense in the second quarter of 2008 totaled $28.0 million compared to $29.1 million in the second quarter of
2007. During the six months ended June 30, 2008,
interest expense totaled $55.8 million compared to $53.5 million for the same period in 2007. 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. Forest capitalized interest of $5.5 million and $1.4 million during the three months ended June 30,
2008 and 2007, respectively. During the six months ended June 30, 2008, Forest capitalized interest of $10.7 million compared to $2.2 million for the same period in 2007. The
increase in interest capitalized was primarily due to the acquisition of Houston Exploration in June 2007, which included a large investment in unproved properties.

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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 Notes 9 and 10 to the Condensed Consolidated Financial Statements for more information on our derivative
instruments.

Three Months Ended
June 30,

Six Months Ended
June 30,2008

2007

2008

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

$
32,104


(3,687
)

48,806


(20,764
)Gas


25,473


(5,453
)

12,150


(13,509
)Interest


605


(130
)

889


(131
)Total

$
58,182


(9,270
)

61,845


(34,404
)Unrealized losses (gains) on derivatives, net:Oil

$
123,602


18,182


138,361


44,043Gas


205,542


(51,256
)

328,213


(19,229
)Interest


(9,504
)

(1,739
)

(4,721
)

(1,789
)Total

$
319,640


(34,813
)

461,853


23,025


Other Investments

Unrealized losses on other investments totaled $.3 million and $7.4 million for the three and six months ended
June 30, 2008, respectively. The unrealized 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 were $.5 million in the second quarter of 2008 compared to $6.3 million in the
second quarter of 2007. During the six months ended June 30, 2008, unrealized foreign currency exchange losses were $2.3 million compared to gains of $6.3 million in the same
period of 2007. The unrealized foreign currency exchange gains and losses relate to the outstanding intercompany indebtedness between Forest Oil Corporation and our Canadian
subsidiary. The intercompany debt is denominated in U.S. dollars and with the recent strength in the U.S. dollar, an unrealized foreign exchange loss was recognized in the first six months of 2008.

Current and Deferred Income Tax

Our effective income tax rate was approximately 34.6% for the three and six months ended June 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 28%, respectively. Our effective
income tax rate was 30.7% and 31.2% for the three and six months ended June 30, 2007, respectively. The increase in the effective income tax rates in each 2008 period compared to the
corresponding periods in 2007 is primarily due to the effects of statutory income tax

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rate
reductions in Canada in 2007 on our deferred income tax liabilities and the weighting of projected Canadian to United States earnings.

LIQUIDITY AND CAPITAL RESOURCES

In 2008, as in 2007, we expect our cash flow from operations to be our primary source of liquidity to meet operating expenses and fund
capital expenditures other than large acquisitions.

The
prices we receive for our oil and natural gas production have a significant impact on operating cash flows. While significant price declines would adversely affect the amount of cash
flow generated from operations, we utilize a hedging program to partially mitigate that risk. As of August 1, 2008, Forest has hedged approximately 34 Bcfe of its remaining 2008 production.
This level of hedging provides a measure of certainty of the cash flow we will receive for a large portion of our remaining production in 2008. 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.

Our
revolving U.S. and Canadian bank credit facilities provide another source of liquidity. 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. 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. 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. We have
issued debt and equity securities in both public and private offerings in the past, and we expect that these sources of capital will continue to be available to us in the future for acquisitions. For
example, in May 2008 we issued an additional $250 million principal amount of 71/4% senior notes due 2019 in a private offering. Nevertheless, ready access to capital on
reasonable terms can be impacted by our debt ratings assigned by independent rating agencies and are subject to many uncertainties, including restrictions contained in our bank credit facilities and
indentures for our senior notes, macroeconomic factors outside of our control, the price for oil and natural gas, the value and performance of Forest's debt and equity securities, and other risks as
explained in Part 1, Item 1A"Risk Factors" of our 2007 Annual Report on Form 10-K and Part II, Item 1A of this report.

In
addition, during the third quarter 2008 we plan to divest additional non-core assets that are part of our Western business unit. Funds that we may receive from any
divestitures, in addition to the approximate $50 million which we have received relating to sales during the first half of 2008, may provide another source of liquidity in 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, and general and administrative expense, our 2008 capital expenditure budget, and our short-term contractual obligations at current levels for the foreseeable future.

Bank Credit Facilities

On May 9, 2008, we entered into a first amendment (the "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

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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. In addition, 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. In the event Forest issues senior notes after May 9, 2008, 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).

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 include provisions and conditions linked to Forest's credit ratings. For example, our collateral requirements will vary based on our credit ratings. In general,
Forest's ability to raise funds and the cost of any financing activities may be affected by our credit ratings at the time any such activities are conducted.

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.

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.

At
June 30, 2008, there were outstanding borrowings of $430.0 million under the U.S. Credit Facility at a weighted average interest rate of 3.5%, and there were outstanding
borrowings of $112.8 million under the Canadian Credit Facility at a weighted average interest rate of 4.5%. We also had used the Credit Facilities for approximately $2.6 million in
letters of credit, leaving an unused borrowing amount under the Credit Facilities of approximately $1.25 billion at June 30, 2008. At July 31, 2008, there were outstanding
borrowings of $493.0 million under the U.S. Credit Facility at a

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weighted
average interest rate of 3.6%, and there were outstanding borrowings of $92.8 million under the Canadian Credit Facility at a weighted average interest rate of 4.5%. We also had used
the Credit Facilities for approximately $2.6 million in letters of credit, leaving an unused borrowing amount under the Credit Facilities of approximately $1.21 billion at
July 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. 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. Also, the indentures for the senior notes
include terms that will 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
six months ended June 30, 2008 and 2007 were as follows:

Six Months Ended June 30,2008

2007(In Thousands)Net cash provided by operating activities

$
490,268


293,671Net cash used by investing activities


(747,969
)

(1,084,869
)Net cash provided by financing activities


258,855


772,592


The increase in net cash provided by operating activities in the six months ended June 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 compared to 2007. The decrease in net cash used
by investing activities in the six months ended June 30, 2008 compared to the same period of 2007 was primarily due to the acquisition of Houston Exploration in the second quarter of 2007. Net
cash provided by financing activities in the six months ended June 30, 2008 included net bank proceeds of $252.3 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 $15.0 million; and the redemption of our 8% senior notes of
$265.0 million. Net cash provided by financing activities in the six months ended June 30, 2007 included net bank proceeds of $316.2 million; the issuance of 71/4%
senior notes, for net proceeds of $739.2 million; proceeds from the exercise of stock options and from the employee stock purchase plan of $7.1 million; the repayment of Houston
Exploration's bank debt of $176.9 million; and the repayment of $111.3 million of term loans.

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Capital Expenditures

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

Six Months Ended
June 30,2008

2007(In Thousands)Property acquisition costs:Proved properties

$
216,271


1,840,187Unproved properties


93,715


251,000309,986


2,091,187Exploration and development costs:Direct costs


521,043


295,051Overhead capitalized


26,907


17,105Interest capitalized


10,687


2,202558,637


314,358Total capital expenditures for property acquisition and exploration and development(1)(2)

$
868,623


2,405,545


---

For the six months ended June 30, 2008, expenditures for exploration and development activities totaled $558.6 million. Forest's
anticipated expenditures for exploration and development in 2008 are estimated to range from $1.15 billion to $1.25 billion. Some of the factors impacting the level of capital
expenditures in 2008 include crude oil and natural gas prices, the volatility in these prices, the cost and availability of oil field services, and weather disruptions.

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 and the risks described in Item 1A of Part II in this report.

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Table of Contents

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 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.

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Table of Contents

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. Our current swaps are settled in cash on a monthly basis. As of June 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
(In Thousands)

Barrels
per Day

Weighted Average
Hedged Price
per Bbl

Fair Value
(In Thousands)Third Quarter 2008


70

$
9.02

$
(27,317
)

6,500

$
69.72

$
(42,129
)Fourth Quarter 2008


70


9.02


(30,190
)

6,500


69.72


(42,141
)Calendar 2009


110


9.33


(120,151
)

4,500


69.01


(112,081
)Calendar 2010











1,500


72.95


(32,117
)


---

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 June 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)Third Quarter 2008


80

$
7.33/8.87

$
(32,457
)Fourth Quarter 2008


80


7.33/8.87


(36,341
)Calendar 2009


40


8.25/10.92


(32,540
)


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Table of Contents

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 ceiling, Forest pays the excess over the
ceiling price. As of June 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)Third Quarter 2008


30

$
6.00/8.00/10.00

$
(9,069
)Fourth Quarter 2008


30


6.00/8.00/10.00


(10,663
)


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 June 30, 2008, we had entered into the following basis swaps:

Basis SwapsBbtu
per Day

Fair Value
(In Thousands)Third Quarter 2008


80

$
275Fourth Quarter 2008


80


2,116


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. During the second quarter of 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 six months ended
June 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

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Table of Contents

instruments
will likely differ from those estimated at June 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


17,888





17,888Net (decrease) increase in fair value


(527,530
)

3,832


(523,698
)Net contract losses recognized


60,956


889


61,845As of June 30, 2008

$
(524,805
)




(524,805
)


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 June 30, 2008.

2011

2012

2013

2014

2019

Total

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

$



542,781











542,781


542,781Average interest rate(1)





3.70
%










3.70
%Long-term debt:Fixed rate

$
285,000





2,862


150,000


1,000,000


1,437,862


1,407,133Coupon 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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Table of Contents

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 June 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
June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Table of Contents

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 Form 10-Q for the period ended March 31, 2008, there have been no material
changes to the risks described in Part I, Item 1A, of our Annual Report.

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 June 30, 2008, the principal amount of our outstanding consolidated debt was approximately
$2.0 billion, including $543 million outstanding under our combined U.S. and Canadian credit facilities. Our outstanding consolidated debt represented approximately 46% of our total
capitalization at June 30, 2008. Further, we may incur more debt in the future. For example, on May 9, 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. We may elect to borrow additional amounts under the amended credit facilities including in connection with acquisitions and debt refinancings or we may elect to seek other sources
of debt financing in the capital markets. Also, on May 22, 2008 we issued $250 million principal amount of additional 71/4% senior notes due 2019 and used a portion of the
proceeds to repay $265 million in principal amount of 8% senior notes that came due on June 15, 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. Further, our failure to comply with the financial and other restrictive covenants relating
to our credit facilities and the indentures pertaining to our outstanding senior notes could result in a default under these agreements, which could adversely affect our business, financial condition,
and results of operations.

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Table of Contents

If
we do not have sufficient funds available, we may need to access the capital markets. Over the recent months, the capital markets have limited the availability of funds due to
distressed conditions in the credit markets and other factors. We cannot predict whether we will need to access the capital markets or whether the market conditions existing at such time will allow us
to obtain the necessary funds.

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 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 August 1, 2008, we had hedged,
via commodity swaps and collar instruments, approximately 34 Bcfe of our remaining 2008 production and 65 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 are 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, during the first six months of 2008, we reported a net loss of $72.8 million. The net loss
reported for the six months ended June 30, 2008 was affected by the non-cash effect of unrealized losses relating to recording our derivative instruments at fair value. 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. 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.

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Table of Contents

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

Unregistered Sales of Securities

There were no sales of unregistered equity securities during the period covered by this report.

Issuer Purchases of Equity Securities

The table below sets forth information regarding repurchases of our common stock during the second 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
ProgramsApril 2008


1,804

$
56.81





May 2008


1,644


64.45





June 2008


932


71.27





Second Quarter Total


4,380

$
62.75








Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 8, 2008, Forest held its Annual Meeting of Shareholders ("Annual Meeting") in Denver, Colorado. A total of 75,369,916
shares of common stock were present at the Annual Meeting, either in person or by proxy, constituting a quorum. The matters voted upon at the Annual Meeting consisted of two proposals set forth in
Forest's Proxy Statement dated March 24, 2008. The two proposals submitted to a vote of shareholders are set forth below. The proposals were each adopted by the shareholders by the indicated
margins.

Proposal No. 1:Election of two Class II directors.

Shares
Voted for

Shares
WithheldH. Craig Clark


63,866,887


11,503,029James H. Lee


63,862,841


11,507,075


In addition to the two Class II directors noted above, the other directors of Forest whose terms did not expire at the 2008 Annual Meeting
include: William L. Britton, Loren K. Carroll, Dod A. Fraser, James D. Lightner, and Patrick R. McDonald.

Proposal No. 2:Ratification of the appointment of Ernst & Young LLP as independent registered public accountants.

Shares
Voted for

Shares
Against

Abstentions75,304,206


58,455


7,255


There were no broker non-votes.

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Table of Contents

Item 6.    EXHIBITS



3.1*

Bylaws of Forest Oil Corporation Restated as of February 14, 2001 as amended by Amendments No. 1, No. 2, No. 3 and No. 4.4.1*

Registration Rights Agreement by and among Forest Oil Corporation, Forest Oil Permian Corporation and Banc of America Securities LLC, for itself and on behalf of the several Initial Purchasers dated as of May 22,
 2008.4.2

First Amendment dated May 9, 2008 to Second Amended and Restated Combined Credit Agreements dated June 6, 2007 among Forest Oil Corporation, Canadian Forest Oil Ltd., each of the lenders that is a party
thereto, JPMorgan Chase Bank, N.A., as Global Administrative Agent, and JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent, incorporated by reference to Exhibit 10.1 to Forest's Current Report on Form 8-K dated
May 9, 2008 (File No. 001-13515).10.1*/**

Amendment No. 1 to Forest Oil Corporation 2007 Stock Incentive Plan.10.2*/**

Form of Restricted Stock Agreement pursuant to the Forest Oil Corporation 2001 and 2007 Stock Incentive Plans, as amended.10.3*/**

Form of Phantom Stock Unit Stock Agreement pursuant to the Forest Oil Corporation 2001 and 2007 Stock Incentive Plans, as amended.10.4*/**

Form of Non-Employee Director Phantom Stock Unit Agreement pursuant to the Forest Oil Corporation 2007 Stock Incentive Plan, as amended.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.


---

50

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Table of Contents

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)August 7, 2008By:

/s/DAVID H. KEYTEDavid H. Keyte Executive Vice President and
Chief Financial Officer
(on behalf of the Registrant and as
Principal Financial Officer)By:

/s/VICTOR A. WINDVictor A. Wind Corporate Controller
(Principal Accounting Officer)


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Table of Contents

Exhibit Index

Exhibit
Number

Description3.1*

Bylaws of Forest Oil Corporation Restated as of February 14, 2001 as amended by Amendments No. 1, No. 2, No. 3 and No. 4.4.1*

Registration Rights Agreement by and among Forest Oil Corporation, Forest Oil Permian Corporation and Banc of America Securities LLC, for itself and on behalf of the several Initial Purchasers dated as of May 22,
 2008.10.1*

Amendment No. 1 to Forest Oil Corporation 2007 Stock Incentive Plan.10.2*

Form of Restricted Stock Agreement pursuant to the Forest Oil Corporation 2001 and 2007 Stock Incentive Plans, as amended.10.3*

Form of Phantom Stock Unit Stock Agreement pursuant to the Forest Oil Corporation 2001 and 2007 Stock Incentive Plans, as amended.10.4*

Form of Non-Employee Director Phantom Stock Unit Agreement pursuant to the Forest Oil Corporation 2007 Stock Incentive Plan, as amended.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.


---

---