**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

| **(Mark One)**                                                                                                                                                                                            | ** **                                                                                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| x                                                                                                                                                                                                         | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| **For the quarterly period ended September 30,  2005**                                                                                                                                               |
| **Or**                                                                                                                                                                                                    |
| o                                                                                                                                                                                                         | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| **For the transition period from                    to                    ** |

 

**CommissionFile Number 1-13515**

**FOREST OIL CORPORATION**

(Exact name of registrantas specified in its charter)

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

 

**707 17thStreet, Suite 3600 Denver, Colorado 80202**

(Address of principalexecutive offices) (Zip Code)

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

Former name, former address and former fiscal year, ifchanged from last report.

**Formeraddress:  1600 Broadway, Suite 2200Denver, Colorado 80202**

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.   Yes x   Noo

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yesx   No o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).   Yeso   No x

As of October 31, 2005 there were 62,100,684shares of the registrant’s commonstock, par value $.10 per share, outstanding.

 

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**FOREST OILCORPORATIONINDEX TO FORM 10-QSeptember 30, 2005**

| Part I—FINANCIAL  INFORMATION                                                                                |   |   |
|------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1—Financial  Statements                                                                                      |   |   |
| Condensed Consolidated  Balance Sheets as of September 30, 2005 and December 31, 2004                        |   | 1      |
| Condensed  Consolidated Statements of Operations for the Three and Nine Months Ended  September 30, 2005 and 2004 |   | 2      |
| Condensed  Consolidated Statement of Shareholders’ Equity for the Nine Months Ended  September 30, 2005      |   | 3      |
| Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended  September 30, 2005 and 2004           |   | 4      |
| Notes to  Condensed Consolidated Financial Statements                                                                  |   | 5      |
| Item  2—Management’s Discussion and Analysis of Financial Condition and Results  of Operations               |   | 20     |
| Item  3—Quantitative and Qualitative Disclosures About Market Risk                                                |   | 30     |
| Item 4—Controls and  Procedures                                                                                   |   | 31     |
| Part II—OTHER  INFORMATION                                                                                   |   |   |
| Item 6—Exhibits                                                                                                   |   | 33     |
| Signatures                                                                                                             |   | 34     |

 

i

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**PART I. FINANCIAL INFORMATION**

**Item 1. FINANCIAL STATEMENTS**

**FOREST OIL CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(In Thousands)**

| ** **                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                              | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| **ASSETS**                                                                                              |       |                   |       |                  |       |   |   |   |   |
| Current assets:                                                                                         |       |                   |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                               |       |                   | $          | 6,589                 |       |   |   | 55,251 |   |   |
| Accounts receivable                                                                                     |       |                   | 161,372    |                  |       |   | 151,927 |   |   |
| Deferred tax asset                                                                                      |       |                   | 125,298    |                  |       |   | 38,321 |   |   |
| Other current assets                                                                                    |       |                   | 32,601     |                  |       |   | 37,969 |   |   |
| Total current assets                                                                                    |       |                   | 325,860    |                  |       |   | 283,468 |   |   |
| Property and equipment,  at cost:                                                                       |       |                   |       |                  |       |   |   |   |   |
| Oil and gas properties,  full cost method of accounting:                                                |       |                   |       |                  |       |   |   |   |   |
| Proved, net of  accumulated depletion of $2,997,500 and $2,701,402                                      |       |                   | 2,781,577  |                  |       |   | 2,495,894 |   |   |
| Unproved                                                                                                |       |                   | 299,050    |                  |       |   | 213,870 |   |   |
| Net oil and gas  properties                                                                             |       |                   | 3,080,627  |                  |       |   | 2,709,764 |   |   |
| Other property and  equipment, net of accumulated depreciation and amortization of $32,226 and  $28,797 |       |                   | 24,774     |                  |       |   | 11,354 |   |   |
| Net property and  equipment                                                                             |       |                   | 3,105,401  |                  |       |   | 2,721,118 |   |   |
| Goodwill                                                                                                |       |                   | 101,590    |                  |       |   | 68,560 |   |   |
| Other assets                                                                                            |       |                   | 39,845     |                  |       |   | 49,359 |   |   |
|                                                                                                    |       |                   | $          | 3,572,696             |       |   |   | 3,122,505 |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                          |       |                   |       |                  |       |   |   |   |   |
| Current liabilities:                                                                                    |       |                   |       |                  |       |   |   |   |   |
| Accounts payable and accrued expenses                                                                   |       |                   | $          | 263,007               |       |   |   | 217,640 |   |   |
| Derivative instruments                                                                                  |       |                   | 290,413    |                  |       |   | 80,523 |   |   |
| Asset retirement obligations                                                                            |       |                   | 34,733     |                  |       |   | 25,452 |   |   |
| Total current liabilities                                                                               |       |                   | 588,153    |                  |       |   | 323,615 |   |   |
| Long-term debt                                                                                          |       |                   | 851,480    |                  |       |   | 888,819 |   |   |
| Asset retirement obligations                                                                            |       |                   | 177,116    |                  |       |   | 184,724 |   |   |
| Derivative  instruments                                                                                 |       |                   | 42,832     |                  |       |   | 20,890 |   |   |
| Other liabilities                                                                                       |       |                   | 41,299     |                  |       |   | 35,785 |   |   |
| Deferred income taxes                                                                                   |       |                   | 344,514    |                  |       |   | 196,525 |   |   |
| Total liabilities                                                                                       |       |                   | 2,045,394  |                  |       |   | 1,650,358 |   |   |
| Shareholders’ equity:                                                                              |       |                   |       |                  |       |   |   |   |   |
| Preferred stock,  none issued                                                                           |       |                   | —     |                  |       |   | — |   |   |
| Common stock, 63,981 and 61,595 shares issued and  outstanding                                          |       |                   | 6,398      |                  |       |   | 6,159 |   |   |
| Capital surplus                                                                                         |       |                   | 1,498,191  |                  |       |   | 1,444,367 |   |   |
| Retained earnings                                                                                       |       |                   | 160,331    |                  |       |   | 66,007 |   |   |
| Accumulated other comprehensive (loss) income                                                           |       |                   | (86,715    | )                     |       |   | 6,780 |   |   |
| Treasury stock, at cost, 1,891 and 1,902 shares held                                                    |       |                   | (50,903    | )                     |       |   | (51,166 | ) |   |
| Total shareholders’ equity                                                                         |       |                   | 1,527,302  |                  |       |   | 1,472,147 |   |   |
|                                                                                                    |       |                   | $          | 3,572,696             |       |   |   | 3,122,505 |   |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements.

1

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**FORESTOIL CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

| ** **                                                              | ** ** | **Three Months Ended  September 30,**                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | **(In Thousands Except Per Share Amounts)** | ** ** |
| Revenue:                                                                |       |                                                                 |       |                                                |       |   |   |   |   |
| Oil and gas sales:                                                      |       |                                                                 |       |                                                |       |   |   |   |   |
| Natural gas                                                             |       | $                                                                    | 156,070    |                                                | 157,424    |   | 470,711 |   | 412,639 |   |
| Oil, condensate and natural gas liquids                                 |       | 110,080                                                              |       | 87,569                                              |       | 323,664 |   | 234,079 |   |
| Total oil and gas sales                                                 |       | 266,150                                                              |       | 244,993                                             |       | 794,375 |   | 646,718 |   |
| Processing and marketing income, net                                    |       | 2,086                                                                |       | 400                                                 |       | 5,207 |   | 1,406 |   |
| Total revenue                                                           |       | 268,236                                                              |       | 245,393                                             |       | 799,582 |   | 648,124 |   |
| Operating expenses:                                                     |       |                                                                 |       |                                                |       |   |   |   |   |
| Lease operating expenses                                                |       | 51,576                                                               |       | 52,401                                              |       | 145,219 |   | 144,458 |   |
| Production and property taxes                                           |       | 10,914                                                               |       | 8,274                                               |       | 31,358 |   | 22,817 |   |
| Transportation costs                                                    |       | 4,597                                                                |       | 4,368                                               |       | 14,352 |   | 11,788 |   |
| General and administrative                                              |       | 9,847                                                                |       | 7,975                                               |       | 31,694 |   | 22,504 |   |
| Depreciation and depletion                                              |       | 91,029                                                               |       | 94,583                                              |       | 284,554 |   | 257,685 |   |
| Accretion of asset retirement obligation                                |       | 4,352                                                                |       | 4,472                                               |       | 12,951 |   | 12,900 |   |
| Retrospective insurance costs and impairment of oil  and gas properties |       | 4,002                                                                |       | —                                              |       | 6,926 |   | 1,690 |   |
| Total operating expenses                                                |       | 176,317                                                              |       | 172,073                                             |       | 527,054 |   | 473,842 |   |
| Earnings from  operations                                               |       | 91,919                                                               |       | 73,320                                              |       | 272,528 |   | 174,282 |   |
| Other income and  expense:                                              |       |                                                                 |       |                                                |       |   |   |   |   |
| Interest expense                                                        |       | 15,664                                                               |       | 16,604                                              |       | 46,224 |   | 42,635 |   |
| Unrealized losses on derivative instruments                             |       | 72,095                                                               |       | 3,584                                               |       | 74,365 |   | 3,367 |   |
| Other expense (income), net                                             |       | 379                                                                  |       | 990                                                 |       | 3,971 |   | (350 | ) |
| Total other income and expense                                          |       | 88,138                                                               |       | 21,178                                              |       | 124,560 |   | 45,652 |   |
| Earnings before  income taxes and discontinued operations               |       | 3,781                                                                |       | 52,142                                              |       | 147,968 |   | 128,630 |   |
| Income tax expense:                                                     |       |                                                                 |       |                                                |       |   |   |   |   |
| Current                                                                 |       | (203                                                                 | )          | 461                                                 |       | 1,971 |   | 1,329 |   |
| Deferred                                                                |       | 719                                                                  |       | 19,906                                              |       | 51,660 |   | 47,759 |   |
| Total income tax expense                                                |       | 516                                                                  |       | 20,367                                              |       | 53,631 |   | 49,088 |   |
| Earnings from  continuing operations                                    |       | 3,265                                                                |       | 31,775                                              |       | 94,337 |   | 79,542 |   |
| Loss from  discontinued operations, net of tax                          |       | —                                                               |       | —                                              |       | — |   | (575 | ) |
| Net earnings                                                            |       | 3,265                                                                |       | 31,775                                              |       | 94,337 |   | 78,967 |   |
| Basic earnings per  common share:                                       |       |                                                                 |       |                                                |       |   |   |   |   |
| Earnings from continuing operations                                     |       | $                                                                    | .05        |                                                | .54        |   | 1.54 |   | 1.42 |   |
| Loss from discontinued operations, net of tax                           |       | —                                                               |       | —                                              |       | — |   | (.01 | ) |
| Net earnings per common share                                           |       | $                                                                    | .05        |                                                | .54        |   | 1.54 |   | 1.41 |   |
| Diluted earnings per  common share:                                     |       |                                                                 |       |                                                |       |   |   |   |   |
| Earnings from continuing operations                                     |       | $                                                                    | .05        |                                                | .53        |   | 1.50 |   | 1.39 |   |
| Loss from discontinued operations, net of tax                           |       | —                                                               |       | —                                              |       | — |   | (.01 | ) |
| Net earnings per  common share                                          |       | $                                                                    | .05        |                                                | .53        |   | 1.50 |   | 1.38 |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements.

2

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**FORESTOIL CORPORATIONCONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY(Unaudited)**

| ** **                                                             | ** ** | **Common Stock**   | ** ** | **Capital ** | ** ** | **Retained ** | ** ** | **Accumulated  Other  Comprehensive ** | ** ** | **Treasury **     | ** ** | **Total  Shareholders’** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------|------------|-------------------|------------|--------------------|------------|---------------------------------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **                                                             | ** ** | **Shares**              | ** ** | **Amount**        | ** ** | **Surplus**        | ** ** | **Earnings**                                | ** ** | **Income (Loss)** | ** ** | **Stock**                     | ** ** | **Equity** | ** ** |
| ** **                                                             | ** ** | **(In Thousands)** | ** ** |
| Balances at January 1, 2005                                  |       | 61,595                  |       |              | $          | 6,159              |       |                                        | 1,444,367  |                   |       | 66,007                        |       |   |   | 6,780 |   |   |   | (51,166 | ) |   |   | 1,472,147 |   |   |
| Exercise of warrants to purchase shares of common  stock               |       | 1,358                   |       |              | 136        |               |       | 14,248                                      |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | 14,384 |   |   |
| Stock options exercised                                                |       | 1,014                   |       |              | 102        |               |       | 26,862                                      |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | 26,964 |   |   |
| Tax benefit of stock options exercised                                 |       | —                  |       |              | —     |               |       | 4,084                                       |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | 4,084 |   |   |
| Employee stock purchase plan                                           |       | 14                      |       |              | 1          |               |       | 457                                         |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | 458 |   |   |
| Effect of issuance of treasury stock for stock options  exercised      |       | —                  |       |              | —     |               |       | —                                      |       |                   | (42        | )                             |       |   | — |   |   |   | 272 |   |   |   | 230 |   |   |
| Restricted stock granted, net of forfeitures                           |       | —                  |       |              | —     |               |       | (20                                         | )          |                   | 29         |                          |       |   | — |   |   |   | (9 | ) |   |   | — |   |   |
| Amortization of deferred stock compensation, net of  forfeitures       |       | —                  |       |              | —     |               |       | 698                                         |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | 698 |   |   |
| Tax benefit of acquired net operating losses                           |       | —                  |       |              | —     |               |       | 7,495                                       |       |                   | —     |                          |       |   | — |   |   |   | — |   |   |   | 7,495 |   |   |
| Comprehensive earnings:                                                |       |                    |       |              |       |               |       |                                        |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                                           |       | —                  |       |              | —     |               |       | —                                      |       |                   | 94,337     |                          |       |   | — |   |   |   | — |   |   |   | 94,337 |   |   |
| Unrealized loss on effective derivative instruments,  net of tax  |       | —                  |       |              | —     |               |       | —                                      |       |                   | —     |                          |       |   | (104,713 | ) |   |   | — |   |   |   | (104,713 | ) |   |
| Unfunded pension liability, net of tax                                 |       | —                  |       |              | —     |               |       | —                                      |       |                   | —     |                          |       |   | (149 | ) |   |   | — |   |   |   | (149 | ) |   |
| Foreign currency translation                                           |       | —                  |       |              | —     |               |       | —                                      |       |                   | —     |                          |       |   | 11,367 |   |   |   | — |   |   |   | 11,367 |   |   |
| Total comprehensive earnings                                           |       |                    |       |              |       |               |       |                                        |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   | 842 |   |   |
| Balances at  September 30, 2005                                   |       | 63,981                  |       |              | $          | 6,398              |       |                                        | 1,498,191  |                   |       | 160,331                       |       |   |   | (86,715 | ) |   |   | (50,903 | ) |   |   | 1,527,302 |   |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements.

3

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**FORESTOIL CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

| ** **                                                                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| ** **                                                                           | ** ** | **(In Thousands)**                             | ** ** |
| Operating activities:                                                                |       |                                                |       |   |   |
| Net earnings                                                                         |       | $                                                   | 94,337     |   | 78,967 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |       |                                                |       |   |   |
| Depreciation and  depletion                                                          |       | 284,554                                             |       | 257,685 |   |
| Accretion of asset  retirement obligation                                            |       | 12,951                                              |       | 12,900 |   |
| Impairment of oil and  gas properties                                                |       | 2,924                                               |       | 1,690 |   |
| Unrealized losses on  derivative instruments                                         |       | 74,365                                              |       | 3,367 |   |
| Deferred income tax  expense                                                         |       | 51,660                                              |       | 48,481 |   |
| Other, net                                                                           |       | 2,309                                               |       | (3,242 | ) |
| Changes in operating assets and liabilities, net of  effects of acquisitions:        |       |                                                |       |   |   |
| Accounts receivable                                                                  |       | (645                                                | )          | 29,629 |   |
| Other current assets                                                                 |       | (3,956                                              | )          | (4,676 | ) |
| Accounts payable and  accrued expenses                                               |       | (67                                                 | )          | (61,180 | ) |
| Net cash provided by  operating activities                                           |       | 518,432                                             |       | 363,621 |   |
| Investing activities:                                                                |       |                                                |       |   |   |
| Acquisition of  subsidiaries                                                         |       | (196,645                                            | )          | (169,821 | ) |
| Capital expenditures for property and equipment:                                     |       |                                                |       |   |   |
| Exploration, development  and other acquisition costs                                |       | (351,488                                            | )          | (235,259 | ) |
| Other fixed assets                                                                   |       | (9,659                                              | )          | (1,938 | ) |
| Proceeds from sales of  assets                                                       |       | 23,668                                              |       | 17,676 |   |
| Sale of goodwill and  contract value                                                 |       | —                                              |       | 8,493 |   |
| Other, net                                                                           |       | (4,273                                              | )          | (5,693 | ) |
| Net cash used by  investing activities                                               |       | (538,397                                            | )          | (386,542 | ) |
| Financing activities:                                                                |       |                                                |       |   |   |
| Proceeds from bank  borrowings                                                       |       | 1,630,000                                           |       | 1,321,074 |   |
| Repayments of bank  borrowings                                                       |       | (1,663,000                                          | )          | (1,342,646 | ) |
| Repayments of bank debt  assumed in acquisitions                                     |       | (35,000                                             | )          | (66,354 | ) |
| Issuance of 8% senior  notes, net of issuance costs                                  |       | —                                              |       | 133,313 |   |
| Redemption of 91¤2  % senior notes                                              |       | —                                              |       | (126,971 | ) |
| Proceeds of common stock  offering, net of offering costs                            |       | —                                              |       | 117,143 |   |
| Proceeds from the  exercise of options and warrants                                  |       | 41,806                                              |       | 11,666 |   |
| Other, net                                                                           |       | (1,723                                              | )          | (8,806 | ) |
| Net cash (used) provided  by financing activities                                    |       | (27,917                                             | )          | 38,419 |   |
| Effect of exchange rate  changes on cash                                             |       | (780                                                | )          | (1,434 | ) |
| Net (decrease) increase  in cash and cash equivalents                                |       | (48,662                                             | )          | 14,064 |   |
| Cash and cash  equivalents at beginning of period                                    |       | 55,251                                              |       | 11,509 |   |
| Cash and cash  equivalents at end of period                                          |       | $                                                   | 6,589      |   | 25,573 |   |
| Cash paid during the period for:                                                     |       |                                                |       |   |   |
| Interest                                                                             |       | $                                                   | 35,235     |   | 34,792 |   |
| Income taxes                                                                         |       | 5,128                                               |       | 3,067 |   |

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4

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**FORESTOIL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**(1) BASIS OF PRESENTATION**

The Condensed Consolidated Financial Statementsincluded herein are unaudited and include the accounts of Forest OilCorporation and its consolidated subsidiaries (collectively, “Forest” or the “Company”).In the opinion of management, all adjustments, consisting of normal recurringaccruals, have been made which are necessary for a fair presentation of thefinancial position of Forest at September 30, 2005, the results of itsoperations for the three and nine months ended September 30, 2005 and2004, and its cash flows for the nine months ended September 30, 2005 and2004. Quarterly results are not necessarily indicative of expected annual resultsbecause 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 ConsolidatedFinancial Statements, management makes various assumptions, judgments, andestimates to determine the reported amount of assets, liabilities, revenue, andexpenses, and in the disclosures of commitments and contingencies. Changes inthese assumptions, judgments, and estimates will occur as a result of the passageof time and the occurrence of future events and, accordingly, actual resultscould differ from amounts initially established.

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

Certain amounts in the prior year financial statementshave been reclassified to conform to the 2005 financial statement presentation.

For a more completeunderstanding of Forest’s operations, financial position, and accountingpolicies, reference is made to the consolidated financial statements of Forest,and related notes thereto, filed with Forest’s annual report on Form 10-Kfor the year ended December 31, 2004, previously filed with the Securitiesand Exchange Commission.

**(2) ACQUISITIONS AND DIVESTITURES**

***Acquisitions***

On April 1, 2005, Forest purchased a privatecompany whose primary assets are located in the Buffalo Wallow field in Texasand include approximately 33,000 gross acres located primarily in Hemphill andWheeler Counties, Texas (“the Buffalo Wallow Acquisition”). The purchase pricewas allocated to assets and liabilities, adjusted for tax effects, based on thefair values at the date of acquisition. The acquisition was accounted for usingthe purchase method of accounting and has been included in the consolidatedfinancial statements of Forest since the date of acquisition. The allocation ofthe purchase price is preliminary because certain items, such as thedetermination of the final tax basis and the fair value of certain assets andliabilities as of the acquisition date, have not been finalized.

5

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

The net cash considerationpaid for the Buffalo Wallow Acquisition was allocated as of September 30,2005, as follows:

| ** **                      | ** ** | **(In Thousands)** | ** ** |
|---------------------------------|------------|-------------------------|------------|
| Current assets                  |       |                    | $          | 9,172 |   |   |
| Oil and gas  properties         |       |                    | 305,005    |   |   |
| Goodwill                        |       |                    | 38,977     |   |   |
| Other assets                    |       |                    | 68         |   |   |
| Current  liabilities            |       |                    | (25,807    | ) |   |
| Derivative  liability - current |       |                    | (6,373     | ) |   |
| Long-term  debt                 |       |                    | (35,000    | ) |   |
| Asset retirement  obligation    |       |                    | (705       | ) |   |
| Deferred taxes                  |       |                    | (88,692    | ) |   |
| Net cash  consideration         |       |                    | $          | 196,645 |   |   |

 

Goodwill of $39.0 millionhas been recognized to the extent that cost exceeded the fair value of netassets acquired. Goodwill is not expected to be deductible for tax purposes. Thegoodwill was assigned to Forest’s Western business unit. The principal factorsthat contributed to the recognition of goodwill include the mix ofcomplementary high-quality assets in one of our existing core areas, lower-riskexploitation opportunities, expected increased cash flow from operationsavailable for investing activities, and opportunities for cost savings throughadministrative and operational synergies.

*Acquisition of TheWiser Oil Company*

In June 2004, Forest completed its acquisition ofthe common stock of The Wiser Oil Company (“Wiser”), which held oil and gas assetslocated in the geographic areas of Forest’s Gulf Coast, Western, and Canadabusiness units (“the Wiser Acquisition”).

The following unauditedpro forma consolidated statements of operations information assumes that theWiser Acquisition occurred as of January 1, 2004. The pro forma results ofoperations is not necessarily indicative of the results of operations thatwould have actually been attained if the transaction had occurred as of January 1,2004.

| ** **                           | ** ** | **Nine Months  Ended   September 30, 2004** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                           | ** ** | **(In Thousands  Except  Per Share Amounts)**    | ** ** |
| Total revenue                        |       |                                                            | $          | 711,354 |   |   |
| Earnings from  continuing operations |       |                                                            | 78,466     |   |   |
| Net earnings                         |       |                                                            | 77,891     |   |   |
| Basic earnings  per share            |       |                                                            | 1.39       |   |   |
| Diluted earnings per  share          |       |                                                            | 1.36       |   |   |

 

***Divestitures***

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

Forest announced on September 12, 2005 that itintends to spin-off to Forest shareholders its offshore Gulf of Mexicooperations, and that the Gulf of Mexico operations would immediately thereafterbe acquired in a merger transaction by Mariner Energy, Inc. (“Mariner”). Afterthe spin-off and merger, 

6

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

Mariner will be aseparately traded public company that will own and operate the combinedbusinesses of Mariner and Forest’s Gulf of Mexico operations. The transactionis expected to be non-taxable to the stockholders of both companies.

Under the terms of the transaction, Forest willincorporate a separate entity (“Spinco”) and contribute all of its offshoreGulf of Mexico operations and certain derivative instruments into Spinco. Forestwill distribute to its shareholders all of the common stock of Spinco, whichwill then merge with a wholly-owned subsidiary of Mariner in a stock-for-stocktransaction. As a result of the transaction, in addition to retaining all oftheir shares of Forest Oil common stock, Forest shareholders will receiveapproximately 0.8 shares of Mariner common stock for each Forest share owned asof the record date of the transaction. Forest shareholders will receiveapproximately 58 percent of the common stock of Mariner on a diluted basis. Inconnection with the spin-off, Spinco will pay Forest $200 million of cash(subject to certain adjustments to reflect an economic effective date for thetransaction of July 1, 2005), which Forest plans to use to pay down debt. Marinerhas applied to list its shares on the New York Stock Exchange.

The transaction is subjectto the approval of Mariner’s stockholders. The boards of directors of bothcompanies have unanimously approved the merger. Completion of the transactionis expected in the first quarter of 2006.

*Sale of MarketingSubsidiary*

On March 1, 2004, the assets and businessoperations of Forest’s Canadian marketing subsidiary, ProMark, were sold toCinergy Canada, Inc. (“Cinergy”) for $11.2 million CDN. Under the terms ofthe purchase and sale agreement, Cinergy will market natural gas (not alreadysubject to prior contractual commitments) on behalf of Forest’s Canadian explorationand production subsidiary, Canadian Forest Oil Ltd., for five years. Cinergywill also administer the netback pool formerly administered by ProMark. Forestcould receive additional contingent payments over the next five years ifCinergy meets certain earnings goals with respect to the acquired business.

As a result of the sale,ProMark’s results of operations have been reported as discontinued operationsin the accompanying financial statements. The components of loss fromdiscontinued operations for the nine months ended September 30, 2004 areas follows:

| ** **                                     | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **September 30, 2004** | ** ** |
| ** **                                     | ** ** | **(In Thousands)**          | ** ** |
| Marketing  revenue, net                        |       |                             | $          | 597 |   |   |
| General and  administrative expense            |       |                             | (280       | ) |   |
| Interest expense                               |       |                             | (2         | ) |   |
| Other expense                                  |       |                             | (166       | ) |   |
| Current income  tax expense                    |       |                             | (2         | ) |   |
| Deferred income  tax expense                   |       |                             | (722       | ) |   |
| Loss from discontinued  operations, net of tax |       |                             | $          | (575 | ) |   |

 

**(3) EARNINGS PER SHARE ANDCOMPREHENSIVE EARNINGS (LOSS)**

***Earnings per Share***

Basic earnings per share is computed by dividing netearnings from continuing operations attributable to common stock by theweighted average number of common shares outstanding during each period,excluding treasury shares.

 

7

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**(3) EARNINGS PER SHARE ANDCOMPREHENSIVE EARNINGS (LOSS) (Continued)**

Dilutedearnings per share is computed by adjusting the average number of common sharesoutstanding for the dilutive effect, if any, stock options, unvested restrictedstock grants, and warrants. The following sets forth the calculation of basicand diluted earnings per share:

| ** **                                                                                | ** ** | **Three Months Ended  September 30,**                 | ** ** | **Nine Months  Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                                             | ** ** | **2004**                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                | ** ** | **(In Thousands Except Per Share Amounts)** | ** ** |
| Earnings from  continuing operations                                                      |       | $                                                                    | 3,265      |                                            | 31,775     |   | 94,337 |   | 79,542 |   |
| Weighted average  common shares outstanding during the period                             |       | 61,946                                                               |       | 59,019                                          |       | 61,198 |   | 56,058 |   |
| Add dilutive  effects of stock options and unvested restricted stock grants               |       | 1,194                                                                |       | 370                                             |       | 1,077 |   | 324 |   |
| Add dilutive  effects of warrants                                                         |       | —                                                               |       | 768                                             |       | 432 |   | 744 |   |
| Weighted average  common shares outstanding, including the effects of dilutive securities |       | 63,140                                                               |       | 60,157                                          |       | 62,707 |   | 57,126 |   |
| Basic earnings  per share from continuing operations                                      |       | $                                                                    | .05        |                                            | .54        |   | 1.54 |   | 1.42 |   |
| Diluted earnings per  share from continuing operations                                    |       | $                                                                    | .05        |                                            | .53        |   | 1.50 |   | 1.39 |   |

 

For the three months ended September 30,2005 and 2004, options to purchase 4,200 and 1,228,400 shares of common stock,respectively, were not included in the computation of diluted earnings pershare, because the exercise prices of these options were greater than theaverage market price of the common stock during the period. For thenine months ended September 30, 2005 and 2004, options to purchase42,700 and 1,433,900 shares of common stock, respectively, were not included inthe computation of diluted earnings per share, because the exercise prices ofthese options were greater than the average market price of the common stockduring the period.

Forest had subscriptionwarrants which entitled the holder to purchase 0.8 shares of common stock for$10.00, or an equivalent of $12.50 per share, and which were originallyscheduled to expire on March 20, 2010 or earlier upon notice of expiration(the “Subscription Warrants”). On April 8, 2005, Forest gave notice thatit was accelerating the expiration of the Subscription Warrants to May 9,2005. During the nine months ended September 30, 2005, approximately 1.4million common shares were issued in connection with the exercise of warrants. Asof September 30, 2005, Forest had no outstanding warrants.

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

Comprehensive earnings (loss) is a term used to referto net earnings (loss) plus other comprehensive income (loss). Othercomprehensive income (loss) is comprised of revenues, expenses, gains, andlosses that under generally accepted accounting principles are reported asseparate components of shareholders’ equity instead of net earnings (loss).Items included in Forest’s other comprehensive income (loss) for the three andnine months ended September 30, 2005 and 2004 are foreign currency gainsrelated to the translation of the assets and liabilities of Forest’s Canadianoperations, changes in the unfunded pension liability, unrealized lossesrelated to the change in fair value of derivative instruments designated ascash flow hedges, and unrealized losses related to the change in fair value ofsecurities held for sale.

8

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

The components ofcomprehensive earnings (loss) are as follows:

| ** **                                                         | ** ** | **Three Months Ended**September 30, | ** ** | **Nine Months Ended**September 30, | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                                           | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **(In Thousands)**                            | ** ** |
| Net earnings                                                       |       | $                                                  | 3,265      |                                              | 31,775     |   | 94,337 |   | 78,967 |   |
| Other comprehensive  income (loss):                                |       |                                               |       |                                              |       |   |   |   |   |
| Foreign currency translation gains                                 |       | 18,257                                             |       | 20,348                                            |       | 11,367 |   | 12,979 |   |
| Unfunded pension liability, net of tax                             |       | —                                             |       | —                                            |       | (149 | ) | — |   |
| Unrealized loss on effective derivative instruments,    net of tax |       | (56,454                                            | )          | (34,806                                           | )          | (104,713 | ) | (62,239 | ) |
| Unrealized gain on securities available for sale,  net of tax      |       | —                                             |       | 773                                               |       | — |   | 1,654 |   |
| Total comprehensive  earnings (loss)                               |       | $                                                  | (34,932    | )                                                 | 18,090     |   | 842 |   | 31,361 |   |

 

**(4) STOCK-BASED COMPENSATION**

Forestapplies APB Opinion 25, *Accounting for StockIssued to Employees*, and related Interpretations to account for itsstock-based compensation plans. Accordingly, no compensation cost isrecognized for options granted at a price equal to or greater than the fairmarket value of the common stock. Compensation cost is recognized over thevesting period of options granted at a price less than the fair market value ofthe common stock at the date of the grant. No compensation cost is recognizedfor stock purchase rights that qualify under Section 423 of the InternalRevenue Code as a non-compensatory plan. Had compensation cost for Forest’sstock option grants and stock purchase rights been determined using the fairvalue of the options and purchase rights at the grant date as prescribed byStatement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation*,Forest’s pro forma net earnings and earnings per common share would have beenas follows:

| ** **                                                                                                                     | ** ** | **Three Months  Ended  September 30,**                     | ** ** | **Nine Months  Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2005**                                                             | ** ** | **2004**                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                     | ** ** | **(In Thousands Except Per Share Amounts)** | ** ** |
| Net earnings  attributable to common stockholders, as reported                                                                 |       | $                                                                    | 3,265      |                                            | 31,775     |   | 94,337 |   | 78,967 |   |
| Add: Stock-based employee compensation included in  reported net earnings, net of tax                                          |       | 176                                                                  |       | 26                                              |       | 433 |   | 61 |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards,   net of tax |       | (1,388                                                               | )          | (2,574                                          | )          | (4,382 | ) | (8,223 | ) |
| Pro forma net earnings                                                                                                         |       | $                                                                    | 2,053      |                                            | 29,227     |   | 90,388 |   | 70,805 |   |
| Earnings per share:                                                                                                            |       |                                                                 |       |                                            |       |   |   |   |   |
| Basic earnings  per common share:                                                                                              |       |                                                                 |       |                                            |       |   |   |   |   |
| As reported                                                                                                                    |       | $                                                                    | .05        |                                            | .54        |   | 1.54 |   | 1.41 |   |
| Pro forma                                                                                                                      |       | $                                                                    | .03        |                                            | .50        |   | 1.48 |   | 1.26 |   |
| Diluted earnings  per common share:                                                                                            |       |                                                                 |       |                                            |       |   |   |   |   |
| As reported                                                                                                                    |       | $                                                                    | .05        |                                            | .53        |   | 1.50 |   | 1.38 |   |
| Pro forma                                                                                                                      |       | $                                                                    | .03        |                                            | .49        |   | 1.44 |   | 1.24 |   |

 

9

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**(5) LONG-TERM DEBT**

Componentsof long-term debt are as follows:

| ** **                       | ** ** | **September 30, 2005** | ** ** | **December 31, 2004**  | ** ** |
|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **Principal**                    | ** ** | **UnamortizedPremium(Discount)** | ** ** | **Other**(1) | ** ** | **Total** | ** ** | **Principal** | ** ** | **UnamortizedPremium(Discount)** | ** ** | **Other**(1) | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **(In Thousands)**          | ** ** |
| U.S. Credit Facility             |       | $                                | 119,000    |                             |       | — |   |   |   | — |   |   | 119,000 |   |   | 152,000 |   |   |   | — |   |   |   | — |   |   | 152,000 |   |
| Canadian Credit Facility         |       | —                           |       |                             | —     |   |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| 8% Senior Notes Due 2008         |       | 265,000                          |       |                             | (268       | ) |   |   | 6,232 |   |   | 270,964 |   |   | 265,000 |   |   |   | (341 | ) |   |   | 7,952 |   |   | 272,611 |   |
| 8% Senior Notes Due 2011         |       | 285,000                          |       |                             | 8,073      |   |   |   | 5,203 |   |   | 298,276 |   |   | 285,000 |   |   |   | 9,042 |   |   |   | 5,829 |   |   | 299,871 |   |
| 73¤4% Senior Notes Due 2014 |       | 150,000                          |       |                             | (2,049     | ) |   |   | 15,289 |   |   | 163,240 |   |   | 150,000 |   |   |   | (2,228 | ) |   |   | 16,565 |   |   | 164,337 |   |
|                             |       | $                                | 819,000    |                             |       | 5,756 |   |   |   | 26,724 |   |   | 851,480 |   |   | 852,000 |   |   |   | 6,473 |   |   |   | 30,346 |   |   | 888,819 |   |

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(1)      Represents theunamortized portion of gains realized upon termination of interest rate swapsthat were accounted for as fair value hedges. The gains are being amortized asa reduction of interest expense over the terms of the notes.

**(6) PROPERTY AND EQUIPMENT**

Forest uses the full cost method of accounting for oiland gas properties. Separate cost centers are maintained for each country inwhich Forest has operations. During the periods presented, Forest’s primary oiland gas operations were conducted in the United States and Canada. All costsincurred in the acquisition, exploration, and development of properties(including costs of surrendered and abandoned leaseholds, delay lease rentals,dry holes, and overhead related to exploration and development activities) andthe fair value of estimated future costs of site restoration, dismantlement,and abandonment activities are capitalized. For the nine months endedSeptember 30, 2005 and 2004, Forest capitalized $19.7 million and $17.3million, respectively, of general and administrative costs related toexploration and development activity. Costs associated with production andgeneral corporate activities are expensed in the period incurred.

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

Pursuant to full cost accounting rules, capitalizedcosts less related accumulated depletion and deferred income taxes for eachcost center may not exceed the sum of (1) the present value of future netrevenue from estimated production of proved oil and gas reserves using currentprices, including the effects of derivative instruments but excluding thefuture cash outflows associated with settling asset retirement obligations thathave been accrued on the balance sheet, and a discount factor of 10%; plus(2) the cost of properties not being amortized, if any; plus (3) thelower of cost or estimated fair value of unproved properties included in thecosts being amortized, if any; less (4) income tax effects related to differencesin the book and tax basis of oil and gas properties. There were no suchprovisions for impairment of oil and gas properties in the periods presented,although our Canadian full cost pool, in 

10

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**(6) PROPERTYAND EQUIPMENT (Continued)**

particular, could beadversely impacted by moderate declines in commodity prices. Gain or loss isnot recognized on the sale of oil and gas properties unless the salesignificantly alters the relationship between capitalized costs and estimatedproved oil and gas reserves attributable to a cost center.

Depletion of proved oiland gas properties is computed on the units-of-production method, wherebycapitalized costs, as adjusted for future development costs and assetretirement obligations, are amortized over the total estimated proved reserves.Furniture and fixtures, computer hardware and software, and other equipment aredepreciated on the straight-line or declining balance method, based uponestimated useful lives of the assets ranging from five to 14 years.

**(7) ASSET RETIREMENTOBLIGATIONS**

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

Thefollowing table summarizes the activity for Forest’s asset retirementobligations for the nine months ended September 30, 2005 and 2004:

| ** **                                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(In Thousands)**                             | ** ** |
| Asset retirement  obligations at beginning of period |       | $                                                   | 210,176    |   | 211,432 |   |
| Accretion expense                                    |       | 12,951                                              |       | 12,900 |   |
| Liabilities  incurred                                |       | 4,181                                               |       | 17,173 |   |
| Liabilities  assumed                                 |       | 705                                                 |       | 7,997 |   |
| Liabilities  settled                                 |       | (19,599                                             | )          | (5,075 | ) |
| Revisions of  estimated liabilities                  |       | 3,002                                               |       | (11,682 | ) |
| Impact of foreign  currency exchange rate            |       | 433                                                 |       | 534 |   |
| Asset retirement  obligations at end of period       |       | 211,849                                             |       | 233,279 |   |
| Less: current  asset retirement obligations          |       | (34,733                                             | )          | (20,911 | ) |
| Long-term asset  retirement obligations              |       | $                                                   | 177,116    |   | 212,368 |   |

 

11

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**(8) EMPLOYEE BENEFITS**

Thefollowing table sets forth the components of the net periodic cost of Forest’sdefined benefit pension plans and postretirement benefits in the United Statesfor the three and nine months ended September 30, 2005 and 2004:

| ** **                      | ** ** | **Pension  Benefits**                            | ** ** | **Postretirement Benefits**(1)              | ** ** | **Pension Benefits**                     | ** ** | **Postretirement  Benefits**(1)                 | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                      | ** ** | **Three Months  Ended  September 30,** | ** ** | **Three Months  Ended  September 30,** | ** ** | **Nine Months**Ended  September 30, | ** ** | **Nine Months  Ended  September 30,** | ** ** |
| ** **                      | ** ** | **2005**                                         | ** ** | **2004**                                         | ** ** | **2005**                                      | ** ** | **2004**                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In Thousands)**                          | ** ** |
| Service cost                    |       | $                                                | —     |                                             | —     |                                          |       | 167                                             |       |   |   | 158 |   |   | — |   | — |   |   | 501 |   |   |   | 474 |   |   |
| Interest cost                   |       | 581                                              |       | 431                                              |       |                                          | 113        |                                            |       |   | 138 |   |   | 1,743 |   | 1,293 |   |   | 339 |   |   |   | 414 |   |   |
| Expected return  on plan assets |       | (586                                             | )          | (381                                             | )          |                                          | —     |                                            |       |   | — |   |   | (1,758 | ) | (1,143 | ) |   | — |   |   |   | — |   |   |
| Recognized  actuarial loss      |       | 188                                              |       | 173                                              |       |                                          | —     |                                            |       |   | 12 |   |   | 564 |   | 519 |   |   | — |   |   |   | 36 |   |   |
| Total net periodic  expense     |       | $                                                | 183        |                                             | 223        |                                          |       | 280                                             |       |   |   | 308 |   |   | 549 |   | 669 |   |   | 840 |   |   |   | 924 |   |   |

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(1)                 Forest has concluded that the benefitsprovided by its plans are actuarially equivalent to Medicare Part D underthe Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”).As a result of the Act’s subsidy, Forest’s projected benefit obligation wasreduced by approximately $.5 million in 2005.

**(9) FINANCIAL INSTRUMENTS**

Forest recognizes the fair value of its derivativeinstruments as assets or liabilities on the balance sheet. The accountingtreatment for the changes in fair value is dependent upon whether or not aderivative instrument is a cash flow hedge or a fair value hedge, and uponwhether or not the derivative qualifies as an effective hedge. Changes in fairvalue of cash flow hedges are recognized, to the extent the hedge is effective,in other comprehensive income until the hedged item is recognized in earnings. Forfair value hedges, to the extent the hedge is effective, there is no effect onthe statement of operations because changes in fair value of the derivativeoffset changes in the fair value of the hedged item. For derivative instrumentsthat do not qualify as fair value hedges or cash flow hedges and ineffectiveportions of hedges designated as cash flow hedges, changes in fair value arerecognized in earnings as other income or expense.

***Commodity Hedges***

Forest periodically hedges a portion of its oil andgas production through swap, basis swap, and collar agreements. The purpose ofthe hedges is to provide a measure of stability to Forest’s cash flows in an environmentof volatile oil and gas prices and to manage the exposure to commodity pricerisk. Forest’s commodity hedges are generally designated as cash flow hedges;however, from time to time certain commodity hedges do not qualify for cashflow hedge accounting either at the inception of the hedge or during the termof the hedge, even though the instruments are expected to serve as effectiveeconomic hedges of Forest’s commodity price exposure.

As a result of production deferrals experienced in theGulf of Mexico related to Hurricanes Katrina and Rita, Forest was required todiscontinue cash flow hedge accounting on various of the Company’s natural gasand oil cash flow hedges during the third quarter of 2005. Accordingly,unrealized hedging losses of $42.8 million were recorded in the current periodrather than being deferred as other comprehensive income until the hedged itemis recognized in earnings. Additionally, the Company recorded approximately$23.0 million and $26.1 million of unrealized losses during the three and nine 

12

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**(9) FINANCIALINSTRUMENTS (Continued)**

months ended September 30,2005, respectively, related to several collar agreements that did not qualifyfor cash flow hedge accounting.

The Company is also required to measureineffectiveness on hedges that qualify for cash flow hedge accounting but donot qualify as “perfect” hedges. Ineffectiveness occurs when the change in thefair value of the hedged item (i.e., oil and natural gas) is not equally offsetby the change in the fair value of the hedge instrument.

The table below summarizesthe realized and unrealized losses Forest incurred related to its hedgingactivities for the periods indicated.

| ** **                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                    | ** ** | **(In Thousands)**                              | ** ** |
| Realized losses  on derivatives designated as cash flow hedges(1)             |       | $                                                    | (64,313    | )                                                   | (30,447    | ) | (118,663 | ) | (80,109 | ) |
| Realized (losses)  gains on derivatives not designated as cash flow hedges(2) |       | (38                                                  | )          | (675                                                | )          | 280 |   | 310 |   |
| Ineffectiveness  recognized on derivatives designated as cash flow hedges(2)  |       | (6,296                                               | )          | 79                                                  |       | (5,504 | ) | 101 |   |
| Unrealized losses  on derivatives not designated as cash flow hedges (2)      |       | (65,799                                              | )          | (3,663                                              | )          | (68,861 | ) | (3,468 | ) |
| Total realized  and unrealized losses recorded                                |       | $                                                    | (136,446   | )                                                   | (34,706    | ) | (192,748 | ) | (83,166 | ) |

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

(2)                 Included in other expense (income), net in theCondensed Consolidated Statements of Operations.

Thetables below set forth, as of September 30, 2005, the quantity of oil andgas hedged under commodity swaps and collars. The table includes all theCompany’s commodity swaps and collars, including those instruments that do notqualify for cash flow hedge accounting.

| ** **           | ** ** | **Swaps**                                 | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **Natural Gas (NYMEX HH)** | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **           | ** ** | **Bbtu  Per Day**                    | ** ** | **Weighted Average  Hedged Price  per MMBtu** | ** ** | **Barrels  Per Day** | ** ** | **Weighted Average  Hedged Price per Bbl** | ** ** |
| Fourth Quarter  2005 |       |                                      | 103.4      |   |   |   | $ | 5.09 |   |   |   | 8,500 |   |   |   | $ | 35.42 |   |   |
| First Quarter 2006   |       |                                      | 50.0       |   |   |   | 6.02 |   |   |   | 4,000 |   |   |   | 31.58 |   |   |
| Second Quarter 2006  |       |                                      | 50.0       |   |   |   | 6.02 |   |   |   | 4,000 |   |   |   | 31.58 |   |   |
| Third Quarter 2006   |       |                                      | 50.0       |   |   |   | 6.02 |   |   |   | 4,000 |   |   |   | 31.58 |   |   |
| Fourth Quarter  2006 |       |                                      | 50.0       |   |   |   | 6.02 |   |   |   | 4,000 |   |   |   | 31.58 |   |   |

 

| ** **           | ** ** | **Costless Collars**                 | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **Natural Gas (NYMEX HH)** | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **           | ** ** | **Bbtu  Per Day**                    | ** ** | **Weighted Average  Hedged Floor and  Ceiling Price  per MMBtu** | ** ** | **Barrels  Per Day** | ** ** | **Weighted Average  Hedged Floor and  Ceiling Price per Bbl** | ** ** |
| Fourth Quarter  2005 |       |                                      | 43.4       |   |   |   | $ | 5.85/7.17 |   |   |   | 1,000 |   |   |   | $ | 42.00/47.30 |   |   |
| First Quarter  2006  |       |                                      | 50.0       |   |   |   | 7.43/11.88 |   |   |   | 5,500 |   |   |   | 46.73/65.87 |   |   |
| Second Quarter  2006 |       |                                      | 50.0       |   |   |   | 7.43/11.88 |   |   |   | 5,500 |   |   |   | 46.73/65.87 |   |   |
| Third Quarter  2006  |       |                                      | 50.0       |   |   |   | 7.43/11.88 |   |   |   | 5,500 |   |   |   | 46.73/65.87 |   |   |
| Fourth Quarter 2006  |       |                                      | 50.0       |   |   |   | 7.43/11.88 |   |   |   | 5,500 |   |   |   | 46.73/65.87 |   |   |

** **

13

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**(9) FINANCIALINSTRUMENTS (Continued)**

 

| ** **           | ** ** | **Three-way Collars**    | ** ** |
|----------------------|------------|-------------------------------|------------|
| ** **           | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **           | ** ** | **Barrels  per Day**     | ** ** | **Weighted  Average Hedged  Lower Floor Price  per Bbl** | ** ** | **Weighted  Average Hedged  Upper Floor Price  per Bbl** | ** ** | **Weighted Average  Hedged  Ceiling Price  per Bbl** | ** ** |
| Fourth Quarter  2005 |       |                          | 1,500      |   |   |   | $ | 24.00 |   |   |   | $ | 28.00 |   |   |   | $ | 32.00 |   |   |
|                      |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Forest also uses basis swaps in connection withnatural gas swaps in order to fix the price differential between the NYMEX priceand the index price at which the hedged gas is sold. At September 30,2005, there were basis swaps not designated as cash flow hedges in place withweighted average volumes of 40.0 Bbtu per day for the remainder of 2005.

At September 30,2005, the net fair value of Forest’s commodity derivative contracts was aliability of $333.2 million (of which $290.4 million was classified as current).Based on the estimated fair values of the derivative contracts at September 30,2005, Forest would reclassify net losses of $214.2 million into earningsrelated to the derivative contracts during the next 12 months; however, actualgains or losses recognized may differ materially. Forest is exposed to risksassociated with swap and collar agreements arising from movements in the pricesof oil and natural gas and from the unlikely event of non-performance by thecounterparties to the swap and collar agreements.

***Interest Rate Swaps***

Inprior years, Forest entered into interest rate swaps designated as fair valuehedges of fixed rate debt. The swaps were intended to exchange the fixedinterest rates on the notes for variable rates over the terms of the notes. Forestterminated these interest rate swaps in 2002 and 2003. The aggregate gains of$40.7 million were deferred and added to the carrying value of the relateddebt, and are being amortized as a reduction of interest expense over theremaining terms of the notes. During the three months ended September 30,2005 and 2004, Forest recognized a portion of the gains by reducing interestexpense by $1.2 million in each period. During the nine months ended September 30,2005 and 2004, Forest recognized a portion of the gains by reducing interestexpense by $3.6 million and $3.7 million, respectively.

**(10) COMMON STOCK OFFERING**

In June 2004,Forest issued 5.0 million shares of common stock at a price of $24.40 pershare. Net proceeds from this offering were approximately $117.1 millionafter deducting underwriting discounts and commissions and estimated offeringexpenses. The net proceeds from the offering were used to fund a portion of theWiser Acquisition.

**(11) BUSINESS AND GEOGRAPHICAL SEGMENTS**

Segment information hasbeen prepared in accordance with Statement of Financial Accounting Standards No. 131,*Disclosures About Segments of an Enterpriseand Related Information*. At September 30, 2005, Forest had fivereportable segments consisting of oil and gas operations in five business units(Gulf Coast, Western, Alaska, Canada, and International). Forest’s remainingprocessing activities are not significant and therefore are not reported as aseparate segment, but are included as a reconciling item in the informationbelow. The segments were determined based upon the type of operations in eachbusiness unit and the geographical location of each. The segment data presentedbelow was prepared on the same basis as the Condensed Consolidated FinancialStatements.

14

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**(11) BUSINESS AND GEOGRAPHICAL SEGMENTS(Continued)**

**Three Months Ended September 30, 2005**

| ** **                               | ** ** | **Oil and Gas Operations** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **Gulf Coast**                       | ** ** | **Western** | ** ** | **Alaska** | ** ** | **Total U.S.** | ** ** | **Canada** | ** ** | **International** | ** ** | **Total  Company** | ** ** |
| ** **                               | ** ** | **(In Thousands)**                   | ** ** |
| Revenue                                  |       | $                                         | 118,492    |   | 66,404 |   | 33,296 |   | 218,192 |   | 47,958 |   |   | — |   |   | 266,150 |   |
| Expenses:                                |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lease operating   expenses               |       | 25,117                                    |       | 10,282 |   | 11,368 |   | 46,767 |   | 4,809 |   |   | — |   |   | 51,576 |   |
| Production and property taxes            |       | 3,612                                     |       | 6,697 |   | 46 |   | 10,355 |   | 559 |   |   | — |   |   | 10,914 |   |
| Transportation costs                     |       | 761                                       |       | 633 |   | 1,858 |   | 3,252 |   | 1,345 |   |   | — |   |   | 4,597 |   |
| General and administrative               |       | 1,526                                     |       | 1,460 |   | 368 |   | 3,354 |   | 1,056 |   |   | 113 |   |   | 4,523 |   |
| Depletion                                |       | 46,870                                    |       | 15,816 |   | 10,962 |   | 73,648 |   | 16,349 |   |   | — |   |   | 89,997 |   |
| Accretion of asset retirement obligation |       | 3,474                                     |       | 232 |   | 399 |   | 4,105 |   | 236 |   |   | 11 |   |   | 4,352 |   |
| Retrospective insurance costs            |       | 4,002                                     |       | — |   | — |   | 4,002 |   | — |   |   | — |   |   | 4,002 |   |
| Earnings (loss) from operations          |       | $                                         | 33,130     |   | 31,284 |   | 8,295 |   | 72,709 |   | 23,604 |   |   | (124 | ) |   | 96,189 |   |
| Capital expenditures                     |       | $                                         | 51,017     |   | 60,106 |   | 5,969 |   | 117,092 |   | 31,684 |   |   | 1,135 |   |   | 149,911 |   |
| Net oil and gas properties               |       | $                                         | 1,250,046  |   | 973,405 |   | 368,068 |   | 2,591,519 |   | 433,298 |   |   | 55,810 |   |   | 3,080,627 |   |
| Goodwill                                 |       | $                                         | 14,602     |   | 71,479 |   | — |   | 86,081 |   | 15,509 |   |   | — |   |   | 101,590 |   |

 

Areconciliation of segment earnings (loss) from operations to consolidatedearnings before income taxes and discontinued operations is as follows:

| ** **                                                | ** ** | **(In Thousands)** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|
| Earnings from  operations for reportable segments         |       |                    | $          | 96,189 |   |   |
| Processing and  marketing income, net                     |       |                    | 2,086      |   |   |
| Corporate general  and administrative expense             |       |                    | (5,324     | ) |   |
| Administrative  asset depreciation                        |       |                    | (1,032     | ) |   |
| Interest expense                                          |       |                    | (15,664    | ) |   |
| Unrealized losses  on derivative instruments              |       |                    | (72,095    | ) |   |
| Other expense,  net                                       |       |                    | (379       | ) |   |
| Earnings before income  taxes and discontinued operations |       |                    | $          | 3,781 |   |   |

 

15

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**(11) BUSINESS AND GEOGRAPHICAL SEGMENTS (Continued)**

**NineMonths Ended September 30, 2005**

| ** **                                                              | ** ** | **Oil and Gas Operations** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                              | ** ** | **Gulf Coast**                       | ** ** | **Western** | ** ** | **Alaska** | ** ** | **Total U.S.** | ** ** | **Canada** | ** ** | **International** | ** ** | **Total  Company** | ** ** |
| ** **                                                              | ** ** | **(In Thousands)**                   | ** ** |
| Revenue                                                                 |       | $                                         | 402,570    |   | 187,943 |   | 86,702 |   | 677,215 |   | 117,160 |   |   | — |   |   | 794,375 |   |
| Expenses:                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lease operating expenses                                                |       | 67,213                                    |       | 27,865 |   | 35,609 |   | 130,687 |   | 14,532 |   |   | — |   |   | 145,219 |   |
| Production and property taxes                                           |       | 10,605                                    |       | 17,581 |   | 1,168 |   | 29,354 |   | 2,004 |   |   | — |   |   | 31,358 |   |
| Transportation costs                                                    |       | 2,822                                     |       | 1,539 |   | 5,522 |   | 9,883 |   | 4,469 |   |   | — |   |   | 14,352 |   |
| General and administrative                                              |       | 7,277                                     |       | 4,145 |   | 2,103 |   | 13,525 |   | 3,827 |   |   | 681 |   |   | 18,033 |   |
| Depletion                                                               |       | 155,306                                   |       | 50,495 |   | 30,681 |   | 236,482 |   | 45,354 |   |   | — |   |   | 281,836 |   |
| Accretion of asset retirement obligation                                |       | 10,366                                    |       | 740 |   | 1,149 |   | 12,255 |   | 675 |   |   | 21 |   |   | 12,951 |   |
| Retrospective insurance costs and impairment of oil  and gas properties |       | 4,002                                     |       | — |   | — |   | 4,002 |   | — |   |   | 2,924 |   |   | 6,926 |   |
| Earnings (loss)  from operations                                   |       | $                                         | 144,979    |   | 85,578 |   | 10,470 |   | 241,027 |   | 46,299 |   |   | (3,626 | ) |   | 283,700 |   |
| Capital expenditures                                                    |       | $                                         | 155,517    |   | 407,137 |   | 13,206 |   | 575,860 |   | 77,539 |   |   | 2,389 |   |   | 655,788 |   |
| Net oil and gas  properties                                             |       | $                                         | 1,250,046  |   | 973,405 |   | 368,068 |   | 2,591,519 |   | 433,298 |   |   | 55,810 |   |   | 3,080,627 |   |
| Goodwill                                                                |       | $                                         | 14,602     |   | 71,479 |   | — |   | 86,081 |   | 15,509 |   |   | — |   |   | 101,590 |   |

 

Areconciliation of segment earnings (loss) from operations to consolidatedearnings before income taxes and discontinued operations is as follows:

| ** **                                                | ** ** | **(In Thousands)** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|
| Earnings from  operations for reportable segments         |       |                    | $          | 283,700 |   |   |
| Processing and  marketing income, net                     |       |                    | 5,207      |   |   |
| Corporate general  and administrative expense             |       |                    | (13,661    | ) |   |
| Administrative  asset depreciation                        |       |                    | (2,718     | ) |   |
| Interest expense                                          |       |                    | (46,224    | ) |   |
| Unrealized losses  on derivative instruments              |       |                    | (74,365    | ) |   |
| Other expense,  net                                       |       |                    | (3,971     | ) |   |
| Earnings before income  taxes and discontinued operations |       |                    | $          | 147,968 |   |   |

** **

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**(11) BUSINESSAND GEOGRAPHICAL SEGMENTS (Continued)**

 

**ThreeMonths Ended September 30, 2004**

| ** **                               | ** ** | **Oil and Gas Operations** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **Gulf Coast**                       | ** ** | **Western** | ** ** | **Alaska** | ** ** | **Total U.S.** | ** ** | **Canada** | ** ** | **International** | ** ** | **Total  Company** | ** ** |
| ** **                               | ** ** | **(In Thousands)**                   | ** ** |
| Revenue                                  |       | $                                         | 148,533    |   | 48,221 |   | 12,371 |   | 209,125 |   | 35,868 |   |   | — |   |   | 244,993 |   |
| Expenses:                                |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lease operating expenses                 |       | 28,673                                    |       | 9,549 |   | 7,952 |   | 46,174 |   | 6,227 |   |   | — |   |   | 52,401 |   |
| Production and property taxes       |       | 2,859                                     |       | 4,379 |   | 676 |   | 7,914 |   | 360 |   |   | — |   |   | 8,274 |   |
| Transportation costs                     |       | 847                                       |       | 187 |   | 2,059 |   | 3,093 |   | 1,275 |   |   | — |   |   | 4,368 |   |
| General and administrative               |       | 2,157                                     |       | 920 |   | 770 |   | 3,847 |   | 1,128 |   |   | — |   |   | 4,975 |   |
| Depletion                                |       | 57,014                                    |       | 9,792 |   | 12,341 |   | 79,147 |   | 14,422 |   |   | — |   |   | 93,569 |   |
| Accretion of asset retirement obligation |       | 3,534                                     |       | 303 |   | 373 |   | 4,210 |   | 262 |   |   | — |   |   | 4,472 |   |
| Earnings (loss)  from operations         |       | $                                         | 53,449     |   | 23,091 |   | (11,800 | ) | 64,740 |   | 12,194 |   |   | — |   |   | 76,934 |   |
| Capital  expenditures                    |       | $                                         | 39,748     |   | 15,294 |   | 4,163 |   | 59,205 |   | 11,078 |   |   | 1,375 |   |   | 71,658 |   |
| Net oil and gas  properties              |       | $                                         | 1,296,060  |   | 584,907 |   | 385,509 |   | 2,266,476 |   | 428,071 |   |   | 57,589 |   |   | 2,752,136 |   |
| Goodwill                                 |       | $                                         | 16,401     |   | 36,080 |   | — |   | 52,481 |   | 11,497 |   |   | — |   |   | 63,978 |   |

 

Areconciliation of segment earnings (loss) from operations to consolidated earningsbefore income taxes and discontinued operations is as follows:

| ** **                                                | ** ** | **(In Thousands)** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|
| Earnings from  operations for reportable segments         |       |                    | $          | 76,934 |   |   |
| Processing and  marketing income, net                     |       |                    | 400        |   |   |
| Corporate general  and administrative expense             |       |                    | (3,000     | ) |   |
| Administrative  asset depreciation                        |       |                    | (1,014     | ) |   |
| Interest expense                                          |       |                    | (16,604    | ) |   |
| Unrealized losses  on derivative instruments              |       |                    | (3,584     | ) |   |
| Other expense,  net                                       |       |                    | (990       | ) |   |
| Earnings before income  taxes and discontinued operations |       |                    | $          | 52,142 |   |   |

** **

17

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**(11) BUSINESSAND GEOGRAPHICAL SEGMENTS (Continued)**

 

**NineMonths Ended September 30, 2004**

| ** **                               | ** ** | **Oil and Gas Operations** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **Gulf Coast**                       | ** ** | **Western** | ** ** | **Alaska** | ** ** | **Total U.S.** | ** ** | **Canada** | ** ** | **International** | ** ** | **Total  Company** | ** ** |
| ** **                               | ** ** | **(In Thousands)**                   | ** ** |
| Revenue                                  |       | $                                         | 409,975    |   | 117,410 |   | 46,399 |   | 573,784 |   | 72,934 |   |   | — |   |   | 646,718 |   |
| Expenses:                                |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lease operating expenses                 |       | 84,247                                    |       | 21,384 |   | 27,039 |   | 132,670 |   | 11,788 |   |   | — |   |   | 144,458 |   |
| Production and property taxes            |       | 8,619                                     |       | 10,725 |   | 2,221 |   | 21,565 |   | 1,252 |   |   | — |   |   | 22,817 |   |
| Transportation costs                     |       | 2,559                                     |       | 568 |   | 7,069 |   | 10,196 |   | 1,592 |   |   | — |   |   | 11,788 |   |
| General and administrative               |       | 6,006                                     |       | 1,865 |   | 2,548 |   | 10,419 |   | 2,612 |   |   | — |   |   | 13,031 |   |
| Depletion                                |       | 157,183                                   |       | 23,633 |   | 43,567 |   | 224,383 |   | 30,551 |   |   | — |   |   | 254,934 |   |
| Accretion of asset retirement obligation |       | 10,400                                    |       | 893 |   | 1,098 |   | 12,391 |   | 509 |   |   | — |   |   | 12,900 |   |
| Impairment of oil and gas properties     |       | —                                    |       | — |   | — |   | — |   | — |   |   | 1,690 |   |   | 1,690 |   |
| Earnings (loss) from operations          |       | $                                         | 140,961    |   | 58,342 |   | (37,143 | ) | 162,160 |   | 24,630 |   |   | (1,690 | ) |   | 185,100 |   |
| Capital expenditures                     |       | $                                         | 228,042    |   | 200,767 |   | 9,048 |   | 437,857 |   | 134,518 |   |   | 3,900 |   |   | 576,275 |   |
| Net oil and gas properties               |       | $                                         | 1,296,060  |   | 584,907 |   | 385,509 |   | 2,266,476 |   | 428,071 |   |   | 57,589 |   |   | 2,752,136 |   |
| Goodwill                                 |       | $                                         | 16,401     |   | 36,080 |   | — |   | 52,481 |   | 11,497 |   |   | — |   |   | 63,978 |   |

 

Areconciliation of segment earnings (loss) from operations to consolidatedearnings before income taxes and discontinued operations is as follows:

| ** **                                                | ** ** | **(In Thousands)** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|
| Earnings from  operations for reportable segments         |       |                    | $          | 185,100 |   |   |
| Processing and  marketing income, net                     |       |                    | 1,406      |   |   |
| Corporate general  and administrative expense             |       |                    | (9,473     | ) |   |
| Administrative  asset depreciation                        |       |                    | (2,751     | ) |   |
| Interest expense                                          |       |                    | (42,635    | ) |   |
| Unrealized losses  on derivative instruments              |       |                    | (3,367     | ) |   |
| Other income, net                                         |       |                    | 350        |   |   |
| Earnings before income  taxes and discontinued operations |       |                    | $          | 128,630 |   |   |

 

**(12) IMPACT OF RECENTLY ISSUED ACCOUNTINGPRONOUNCEMENTS**

In December 2004, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 123(R), *Share-BasedPayment*(“SFAS 123(R)”), which is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation*. SFAS 123(R) iseffective for public companies for interim or annual periods beginning after December 15,2005, supersedes APB Opinion No. 25, *Accounting for StockIssued to Employees*, and amends SFAS No. 95, *Statement of Cash Flows*. SFAS 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the financial statements based on their fair values,beginning with the first interim or annual period after December 15, 2005.The pro forma disclosures previously permitted under SFAS No. 123 will nolonger be an alternative to financial statement recognition. SFAS 123(R) alsorequires the tax benefits in excess of recognized compensation expenses to be reportedas a financing cash flow, rather than as an operating cash flow as 

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**(12) IMPACTOF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)**

currently required. Thisrequirement may serve to reduce Forest’s future cash provided by operatingactivities and increase future cash provided by financing activities, to theextent of associated tax benefits that may be realized in the future.

We are required toadopt SFAS 123(R) in the first quarter of 2006. Under SFAS 123(R), we mustdetermine the appropriate fair value model to be used for valuing share-basedpayments, the amortization method for compensation cost, and the transitionmethod to be used at date of adoption. The transition methods includeprospective and retroactive adoption options. Under the retroactive options,prior periods may be restated either as of the beginning of the year ofadoption or for all periods presented. The prospective method requires thatcompensation expense be recorded for all unvested stock options and restrictedstock at the beginning of the first quarter of adoption of SFAS 123(R); theretroactive methods would record compensation expense for all unvested stockoptions and restricted stock beginning with the first period restated. We areevaluating the requirements of SFAS 123(R), and we expect that the adoption ofSFAS 123(R) will have a material impact on our consolidated results ofoperations and earnings per share. We have not yet determined the method ofadoption or the effect of adopting SFAS 123(R), and we have not determinedwhether the adoption will result in amounts that are similar to the current proforma disclosures under SFAS No. 123.

Forest has an Employee Stock Purchase Plan (the “ESPP”)that allows eligible employees to quarterly purchase Forest’s common stock at adiscount. The provisions of SFAS 123(R) will cause the ESPP to be acompensatory plan. However, the change in accounting for the ESPP is notexpected to have a material impact on Forest’s financial position, futureresults of operations, or liquidity. Historically, the ESPP compensatoryamounts that would have been recorded under SFAS 123(R) have been nominal.

In March 2005, the SEC issued Staff AccountingBulletin No. 107, *Share-Based Payment*(“SAB107”), which expresses views of the staff regarding the interaction betweenSFAS 123(R) and certain SEC rules and regulations. SAB 107 alsoprovides the Staff’s views regarding the valuation of share-based paymentarrangements for public companies. Forest will evaluate the requirements of SAB107 in connection with Forest’s future adoption of SFAS 123(R).

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**Item 2.**                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following discussionand analysis should be read in conjunction with Forest’s Condensed ConsolidatedFinancial Statements and Notes thereto, the information under the heading “Forward-LookingStatements” below, and the information included in Forest’s 2004 Annual Reporton Form 10-K under the heading “Management’s Discussion and Analysisof Financial Condition and Results of Operations—Risk Factors, and—CriticalAccounting Policies, Estimates, Judgments, and Assumptions.”  Unless the context otherwise indicates,references in this quarterly report on Form 10-Q to “Forest,”  “we,” “ours,” “us,” or like terms refer toForest Oil Corporation and its subsidiaries.

***Recent Developments***

***Spin-off and Merger of Offshore Gulf of MexicoOperations***

Forest announced on September 12, 2005 that itintends to spin-off to Forest shareholders its offshore Gulf of Mexicooperations, and that the Gulf of Mexico operations would immediately thereafterbe acquired in a merger transaction by Mariner Energy, Inc. (“Mariner”). Afterthe spin-off and merger, Mariner will be a separately traded public company thatwill own and operate the combined businesses of Mariner and Forest’s Gulf ofMexico operations. The transaction is expected to be non-taxable to thestockholders of both companies.

Under the terms of the transaction, Forest willincorporate a separate entity (“Spinco”) and contribute all of its offshoreGulf of Mexico operations and certain derivative instruments into Spinco. Forestwill distribute to its shareholders all of the common stock of Spinco, whichwill then merge with a wholly-owned subsidiary of Mariner in a stock-for-stocktransaction. As a result of the transaction, in addition to retaining all oftheir shares of Forest Oil common stock, Forest shareholders will receiveapproximately 0.8 shares of Mariner common stock for each Forest share owned asof the record date of the transaction. Forest shareholders will receiveapproximately 58 percent of the common stock of Mariner on a diluted basis. Spincowill borrow from a third party and pay to Forest $200 million of cash (subjectto certain adjustments to reflect an economic effective date for thetransaction of July 1, 2005), which Forest plans to use to pay down debt.Mariner has applied to list its shares on the New York Stock Exchange.

The transaction is subjectto the approval of Mariner’s stockholders. The boards of directors of bothcompanies have unanimously approved the merger. Completion of the transactionis expected in the first quarter of 2006. As of December 31, 2004, Forest’soffshore Gulf of Mexico operations were estimated to contain approximately 340billion cubic feet equivalent of proved reserves, 79% of which were natural gas.As of December 31, 2004, the net acreage associated with Forest’s Gulf ofMexico operations was approximately 664,000 acres.

***Hurricane Impact***

Our operations were adversely affected by one of themost active hurricane seasons in recorded history, primarily with respect toour Gulf of Mexico operations. During the third quarter of 2005, we estimatethat 6 Bcfe of total available production was shut-in and deferred until laterdates as a result of Hurricanes Katrina and Rita. As of October 31, 2005,approximately 100 to 110 MMcfe per day remained shut in. Accordingly, ourfourth quarter production will be negatively impacted as well. We estimate that10 Bcfe of total available production will remain shut-in and deferred in thefourth quarter of 2005.

20

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Wecarry property and casualty insurance to insure against property damages suchas those caused by hurricanes. The insurance has a $5 million deductible foreach occurrence. Our estimated uninsured liability for the repair of ourfacilities damaged by hurricanes in the third quarter of 2005 will be $10million, the majority of which will be incurred in the fourth quarter of 2005as the related repairs are made. Our insurance does not insure against lossesor deferrals of production caused by shut-in production.

**Overviewof Third Quarter 2005 Results**

Our reportedearnings of $3.3 million for the third quarter of 2005, or $.05 per dilutedshare, was 90% lower than net income of $31.8 million, or $.53 per dilutedshare, for the same period in 2004. The quarter-over-quarter net income changewas primarily caused by the following factors:

·       Unrealized losses recordedon commodity hedges increased approximately $68.5 million over the prior year’sthird quarter due to several hedges that no longer qualified for cash flowhedge accounting as a result of Hurricanes Katrina and Rita and due to anincrease in the ineffectiveness measured and recorded on other commodity hedges.See Note 9 to the Condensed Consolidated Financial Statements for moreinformation.

·       Sales volumes decreased 14%to 40.1 Bcfe in the third quarter of 2005 from 46.5 Bcfe in 2004. The decreasein production volumes was primarily attributable to approximately 6 Bcfe ofproduction shut-in during the third quarter of 2005 due to hurricanes in theGulf of Mexico and anticipated declines in production rates in other areasoffset by additional production from the Buffalo Wallow Acquisition in April 2005and the continued drilling and development of these and other properties.

·       Oil and natural gasrevenues increased 9% to $266.2 million in the third quarter of 2005 from$245.0 million in the corresponding period in 2004 due to higher realizedprices.

·       Average realized pricesincreased 26% to $6.64 per Mcfe in 2005 from $5.27 per Mcfe in 2004.

**Results of Operations**

***Oil and Gas Sales***

Net oil and gas production in the third quarter of2005 decreased to 40.1 Bcfe or an average of 435.8 MMcfe per day, from 46.5Bcfe or an average of 505.8 MMcfe per day in the third quarter of 2004. Thedecrease in production was due primarily to shut-in production in the Gulf ofMexico region due to Hurricanes Katrina and Rita. Net oil and gas production inthe first nine months of 2005 increased to 129.7 Bcfe or an average of 475.1MMcfe per day, from 126.2 Bcfe or an average of 460.5 MMcfe per day in thefirst nine months of 2004. The increase of 3.5 Bcfe was due primarily to theBuffalo Wallow Acquisition in April 2005, the drilling and development ofthe these and other properties, offset by approximately 6 Bcfe of productionshut-in and deferred due to the hurricane activity in the third quarter of2005.

Oil and natural gas revenues were $266.2 million and$794.4 million during the three and nine months ended September 30, 2005,as compared to $245.0 million and $646.7 million for the same periods in theprior year. The increase in oil and natural gas revenues for the three monthperiod was primarily due to a 26% increase in the average realized sales priceper Mcfe from $5.27 in 2004 to $6.64 in 2005, partially offset by a net 14%decrease in oil and gas production as discussed above. Likewise, the increasein oil and natural gas revenues for the nine month period was primarily due toa 20% increase in the average realized sales price per Mcfe and a 3% increasein oil and gas production.

The average realized sales prices for the periodspresented include hedging losses that we recognized on our derivativeinstruments. For the three and nine months ended September 30, 2005,Forest recognized hedging losses of $64.3 million and $118.7 million,respectively, compared to hedging losses of $30.4 million and $80.1 millionduring the same periods in the prior year.

21

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Salesvolumes, oil and gas sales revenue, and average sales prices for the three andnine months ended September 30, 2005 and 2004 were as follows:

| ** **                  | ** **   | **Three Months Ended September 30,** | ** **   |
|-----------------------------|--------------|----------------------------------------------------------|--------------|
| ** **                  | ** **   | **2005**                                                 | ** **   | **2004** | ** ** |
| ** **                  | ** **   | **Natural  Gas**                                         | ** **   | **Oil and  Condensate** | ** ** | **Natural  Gas  Liquids** | ** ** | **Total** | ** ** | **Natural  Gas** | ** ** | **Oil and  Condensate** | ** ** | **Natural  Gas  Liquids** | ** ** | **Total** | ** ** |
| *** ***                | *** *** | ***(MMcf)***                                             | *** *** | ***(MBbls)*** | *** *** | ***(MBbls)*** | *** *** | ***(MMcfe)*** | *** *** | ***(MMcf)*** | *** *** | ***(MBbls)*** | *** *** | ***(MBbls)*** | *** *** | ***(MMcfe)*** | *** *** |
| Sales volumes:              |         |                                                     |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States               |         | 19,848                                                   |         |   | 1,833 |   |   |   | 431 |   |   |   | 33,432 |   |   |   | 25,094 |   |   |   | 2,140 |   |   |   | 188 |   |   |   | 39,062 |   |   |
| Canada                      |         | 4,821                                                    |         |   | 203 |   |   |   | 103 |   |   |   | 6,657 |   |   |   | 4,888 |   |   |   | 323 |   |   |   | 107 |   |   |   | 7,468 |   |   |
| Total                       |         | 24,669                                                   |         |   | 2,036 |   |   |   | 534 |   |   |   | 40,089 |   |   |   | 29,982 |   |   |   | 2,463 |   |   |   | 295 |   |   |   | 46,530 |   |   |
| Revenues (in thousands)(1): |         |                                                     |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States               |         | $                                                        | 122,512      |   |   | 82,130 |   |   |   | 13,550 |   |   |   | 218,192 |   |   |   | 136,591 |   |   |   | 67,379 |   |   |   | 5,155 |   |   |   | 209,125 |   |   |
| Canada                      |         | 33,558                                                   |         |   | 10,359 |   |   |   | 4,041 |   |   |   | 47,958 |   |   |   | 20,833 |   |   |   | 11,901 |   |   |   | 3,134 |   |   |   | 35,868 |   |   |
| Total                       |         | $                                                        | 156,070      |   |   | 92,489 |   |   |   | 17,591 |   |   |   | 266,150 |   |   |   | 157,424 |   |   |   | 79,280 |   |   |   | 8,289 |   |   |   | 244,993 |   |   |
| Average sales price:        |         |                                                     |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States(1)            |         | $                                                        | 6.17         |   |   | 44.81 |   |   |   | 31.44 |   |   |   | 6.53 |   |   |   | 5.44 |   |   |   | 31.49 |   |   |   | 27.42 |   |   |   | 5.35 |   |   |
| Canada(1)                   |         | 6.96                                                     |         |   | 51.03 |   |   |   | 39.23 |   |   |   | 7.20 |   |   |   | 4.26 |   |   |   | 36.85 |   |   |   | 29.29 |   |   |   | 4.80 |   |   |
| Total sales price received  |         | $                                                        | 7.82         |   |   | 58.92 |   |   |   | 32.94 |   |   |   | 8.24 |   |   |   | 5.57 |   |   |   | 40.70 |   |   |   | 28.10 |   |   |   | 5.92 |   |   |
| Hedging effects             |         | (1.49                                                    | )            |   | (13.49 | ) |   |   | — |   |   |   | (1.60 | ) |   |   | (.32 | ) |   |   | (8.51 | ) |   |   | — |   |   |   | (.65 | ) |   |
| Net sales price  received   |         | $                                                        | 6.33         |   |   | 45.43 |   |   |   | 32.94 |   |   |   | 6.64 |   |   |   | 5.25 |   |   |   | 32.19 |   |   |   | 28.10 |   |   |   | 5.27 |   |   |

----

(1)                 Includes the effects of hedging. See Note9 to the Condensed Consolidated Financial Statements for further detailsregarding hedging activities.

| ** **                  | ** **   | **Nine Months Ended September 30,** | ** **   |
|-----------------------------|--------------|---------------------------------------------------------|--------------|
| ** **                  | ** **   | **2005**                                                | ** **   | **2004** | ** ** |
| ** **                  | ** **   | **Natural  Gas**                                        | ** **   | **Oil and  Condensate** | ** ** | **Natural  Gas  Liquids** | ** ** | **Total** | ** ** | **Natural  Gas** | ** ** | **Oil and  Condensate** | ** ** | **Natural  Gas  Liquids** | ** ** | **Total** | ** ** |
| *** ***                | *** *** | ***(MMcf)***                                            | *** *** | ***(MBbls)*** | *** *** | ***(MBbls)*** | *** *** | ***(MMcfe)*** | *** *** | ***(MMcf)*** | *** *** | ***(MBbls)*** | *** *** | ***(MBbls)*** | *** *** | ***(MMcfe)*** | *** *** |
| Sales volumes:              | * *     | * *                                                | * *     |   | * * | * * |   |   | * * | * * |   |   | * * | * * |   |   | * * | * * |   |   | * * | * * |   |   | * * | * * |   |   | * * | * * |   |
| United States               |         | 66,264                                                  |         |   | 5,892 | * * |   |   | 1,444 | * * |   |   | 110,280 | * * |   |   | 68,343 | * * |   |   | 6,426 | * * |   |   | 443 | * * |   |   | 109,557 | * * |   |
| Canada                      |         | 13,676                                                  |         |   | 638 | * * |   |   | 318 | * * |   |   | 19,412 | * * |   |   | 11,285 | * * |   |   | 612 | * * |   |   | 280 | * * |   |   | 16,637 | * * |   |
| Total                       |         | 79,940                                                  |         |   | 6,530 | * * |   |   | 1,762 | * * |   |   | 129,692 | * * |   |   | 79,628 | * * |   |   | 7,038 | * * |   |   | 723 | * * |   |   | 126,194 | * * |   |
| Revenues (in thousands)(1): |         |                                                    |         |   |   | * * |   |   |   | * * |   |   |   | * * |   |   |   | * * |   |   |   | * * |   |   |   | * * |   |   |   | * * |   |
| United States               |         | $                                                       | 390,978      |   |   | 245,611 | * * |   |   | 40,626 | * * |   |   | 677,215 | * * |   |   | 368,566 | * * |   |   | 193,834 | * * |   |   | 11,384 | * * |   |   | 573,784 | * * |   |
| Canada                      |         | 79,733                                                  |         |   | 26,564 | * * |   |   | 10,863 | * * |   |   | 117,160 | * * |   |   | 44,073 | * * |   |   | 21,504 | * * |   |   | 7,357 | * * |   |   | 72,934 | * * |   |
| Total                       |         | $                                                       | 470,711      |   |   | 272,175 | * * |   |   | 51,489 | * * |   |   | 794,375 | * * |   |   | 412,639 | * * |   |   | 215,338 | * * |   |   | 18,741 | * * |   |   | 646,718 | * * |   |
| Average sales price:        |         |                                                    |         |   |   | * * |   |   |   | * * |   |   |   | * * |   |   |   | * * |   |   |   | * * |   |   |   | * * |   |   |   | * * |   |
| United States(1)            |         | $                                                       | 5.90         |   |   | 41.69 | * * |   |   | 28.13 | * * |   |   | 6.14 | * * |   |   | 5.39 | * * |   |   | 30.16 | * * |   |   | 25.70 | * * |   |   | 5.24 | * * |   |
| Canada(1)                   |         | 5.83                                                    |         |   | 41.64 | * * |   |   | 34.16 | * * |   |   | 6.04 | * * |   |   | 3.91 | * * |   |   | 35.14 | * * |   |   | 26.28 | * * |   |   | 4.38 | * * |   |
| Total sales price received  |         | $                                                       | 6.63         |   |   | 50.74 | * * |   |   | 29.22 | * * |   |   | 7.04 | * * |   |   | 5.58 | * * |   |   | 37.40 | * * |   |   | 25.92 | * * |   |   | 5.75 | * * |   |
| Hedging effects             |         | (.74                                                    | )            |   | (9.06 | *)* |   |   | — | * * |   |   | (.91 | *)* |   |   | (0.40 | *)* |   |   | (6.80 | *)* |   |   | — | * * |   |   | (.63 | *)* |   |
| Net sales price  received   |         | $                                                       | 5.89         |   |   | 41.68 | * * |   |   | 29.22 | * * |   |   | 6.13 | * * |   |   | 5.18 | * * |   |   | 30.60 | * * |   |   | 25.92 | * * |   |   | 5.12 | * * |   |

----

(1)                 Includes the effects of hedging. See Note9 to the Condensed Consolidated Financial Statements for further detailsregarding hedging activities.

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***Lease Operating Expenses***

Thetable below sets forth the detail of lease operating expenses (“LOE”), theprimary component of oil and gas production expense, for the three and ninemonths ended September 30, 2005;

| ** **                             | ** ** | **Three Months Ended  September 30,**                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                                            | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **(In Thousands Except Per Mcfe Amounts)** | ** ** |
| Direct operating  expense and overhead |       | $                                                                   | 43,727     |                                                | 48,366     |   | 122,817 |   | 128,785 |   |
| Workover expense                       |       | 6,930                                                               |       | 4,035                                               |       | 21,426 |   | 15,673 |   |
| Hurricane repairs                      |       | 919                                                                 |       | —                                              |       | 976 |   | — |   |
| Total LOE                              |       | $                                                                   | 51,576     |                                                | 52,401     |   | 145,219 |   | 144,458 |   |
| LOE per Mcfe                           |       | $                                                                   | 1.29       |                                                | 1.13       |   | 1.12 |   | 1.14 |   |

 

As reflected above, directoperating expenses and overhead declined in 2005 compared to 2004 in each ofthe respective periods due to cost control efforts focused primarily on ourGulf Coast business unit implemented in late 2004 but were offset primarily byhigher workover costs. On a per-unit basis, total LOE increased 14% to $1.29per Mcfe in the third quarter of 2005 from $1.13 per Mcfe in the third quarterof 2004 due primarily to hurricane activity in the third quarter of 2005 thatdeferred Gulf of Mexico production.

***Production and Property Taxes***

Production and propertytaxes increased by 32% or $2.6 million during the third quarter 2005 ascompared to the prior year’s third quarter. Production and property taxesincreased by 37% or $8.5 million during the nine months ended September 30,2005 as compared to the corresponding period in 2004. The increases in eachperiod are primarily a result of the higher realized oil and gas revenues,higher assessed property valuations, and a change in our production mix with ahigher percentage of onshore production, which is generally subject toproduction taxes, versus offshore production which is generally not subject toproduction taxes.

***Transportation Costs***

Transportation costsincreased to $4.6 million in the three months ended September 30, 2005from $4.4 million for the corresponding 2004 period. Transportation costs on aper-Mcfe basis were $.11 per Mcfe and $.09 per Mcfe, for the quarters ended September 30,2005 and 2004, respectively. Transportation costs increased to $14.4 million inthe nine months ended September 30, 2005 from $11.8 million for thecorresponding 2004 period as a result of increases in production as well asincreases in commodity prices. Transportation costs on a per-Mcfe basis were$.11 per Mcfe and $.09 per Mcfe, for the nine months ended September 30,2005 and 2004, respectively.

***General and Administrative Expense; Overhead***

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

| ** **                        | ** ** | **Three Months Ended  September 30,**                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2005**                                                            | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **(In Thousands Except Per Mcfe Amounts)** | ** ** |
| Total overhead  costs             |       | $                                                                   | 16,912     |                                                | 13,466     |   | 51,347 |   | 39,826 |   |
| Overhead costs  capitalized       |       | (7,065                                                              | )          | (5,491                                              | )          | (19,653 | ) | (17,322 | ) |
| Overhead costs  expensed          |       | $                                                                   | 9,847      |                                                | 7,975      |   | 31,694 |   | 22,504 |   |
| Overhead costs expensed  per Mcfe |       | $                                                                   | .25        |                                                | .17        |   | .24 |   | .18 |   |

 

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The increase in totaloverhead costs and overhead costs expensed in the three and nine month periodswas primarily related to an increase in salaries and related burdens caused byour hiring additional employees in conjunction with our recent acquisitions,general increases in salaries due to an increasingly competitive market forexperienced oil and gas professionals, and increases in health insurance costs.

***Depreciation and Depletion***

Depreciation, depletionand amortization expense for the three months ended September 30, 2005 was$91.0 million compared to $94.6 million for the same period in 2004. On anequivalent Mcf basis, depreciation, depletion and amortization expense was$2.27 per Mcfe for the three months ended September 30, 2005 compared to$2.03 per Mcfe for the same period in the prior year. During the nine monthsended September 30, 2005, depreciation, depletion and amortization expensewas $284.6 million or $2.19 per Mcfe as compared to $257.7 million or $2.04 perMcfe for the same period in the prior year. The increases of $.24 per Mcfe and$.15 per Mcfe for the three and nine months ended September 30, 2005 ascompared to the corresponding periods in the prior year, respectively, areprimarily due to higher finding and development costs as well as higheranticipated drilling and completion costs on future development activities.

***Retrospective Insurance Costs and Impairment of Oiland Gas Properties***

During the three and nine months endedSeptember 30, 2004, we accrued $.2 million and $.7 million, respectively,of retrospective insurance costs, which are representative of the additionalamounts that we estimate would be payable to the mutual insurance company withwhom we carry a portion of our insurance if we elected to withdraw ourmembership. In addition, at the end of the third quarter, the mutual insurancecompany increased its incurred but not reported loss reserve (“IBNR reserve”)as a result of damage from Hurricane Katrina. Due to the significance of the increase in the IBNR reserve, Forest’sestimated portion of the loss was billed in the third quarter of 2005,resulting in an additional premium payable by Forest in 2005 of $3.3 million.To date, we have accrued approximately $9.1 million in retrospective insurancecosts, of which $5.8 million is payable only if we elect to withdraw from themutual insurance company at the end of 2005. Forest has made no such electionin 2005.

During the nine monthsended September 30, 2005, Forest recorded an impairment of $2.9 millionrelated to certain international properties, principally related to itsleaseholds in Romania. The Romania impairment was recorded in the first quarterof 2005 in connection with our decision to exit the country as we rationalizeour international assets to concentrate on fewer areas.

***Interest Expense***

Interest expense in thethird quarter of 2005 totaled $15.7 million compared to $16.6 million in thethird quarter of 2004. The decrease in interest expense for the third quarterof 2005 compared to the third quarter of 2004 was due primarily to loweraverage debt balances partially offset by higher average interest rates.Interest expense for the first nine months of 2005 was $46.2 million comparedto $42.6 million in the first nine of 2004. The increase in interest expense duringthe nine months ended September 30, 2005 as compared to the same period in2004 was due primarily to higher average interest rates partially offset bylower average debt balances.

***Unrealized Losses on Derivative Instruments***

Unrealized losses on derivative instruments for thethree and nine months ended September 30, 2005 of $72.1 million and $74.4million, respectively, includes $65.8 million and $68.9 million, respectively,of mark-to-market adjustments on the derivative instruments that do not qualifyfor cash flow hedge accounting as well as $6.3 million and $5.5 million,respectively, of hedging ineffectiveness.

24

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As a result of productiondeferrals experienced in the Gulf of Mexico related to Hurricanes Katrina andRita, we were required to discontinue cash flow hedge accounting on various ofour natural gas and oil cash flow hedges during the third quarter of 2005.Accordingly, unrealized hedging losses of $42.8 million were recorded in thecurrent period rather than being deferred as other comprehensive income untilthe hedged item is recognized in earnings. Additionally, we recordedapproximately $23.0 million and $26.1 million of unrealized losses during thethree and nine months ended September 30, 2005, respectively, related toseveral collar agreements that did not qualify for cash flow hedge accountingsince the acquisition or execution of the instruments. Hedge ineffectiveness of$6.3 million and $5.5 million recorded in the three and nine months endedSeptember 30, 2005, respectively, is related to a widened basisdifferential between the indexes that our hedges are based and the indexes thatour actual production is sold.

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

Forest recorded income taxexpense of $.5 million and $53.6 million in the three and nine months ended September 30,2005, compared to $20.4 million and $49.1 million in the comparable periods of2004. The decrease in income tax expense for the three month period ended September 30,2005 compared to the three month period ended September 30, 2004 wasattributable to the decrease in earnings before income taxes. Conversely, theincrease in income tax expense in the corresponding nine month periods was dueto an increase in earnings before income taxes.

***Discontinued Operations***

On March 1, 2004, theassets and business operations of our Canadian marketing subsidiary, ProMark,were sold to Cinergy Canada, Inc. for $11.2 million CDN. See Note 2to the Condensed Consolidated Financial Statements for more information.

**Liquidity and Capital Resources**

In 2005, as in 2004, we expect our cash flow fromoperations to provide our primary source of liquidity to meet operatingexpenses and fund capital expenditures other than large acquisitions. Anyremaining cash flow from operations will be available to fund acquisitions, inwhole or in part, or for other corporate purposes. During the nine months endedSeptember 30, 2005, our operating cash flow has exceeded capitalexpenditures excluding acquisitions of subsidiaries by $157.3 million comparedto $126.4 million in the corresponding period in 2004.

The prices we receive for our oil and natural gasproduction have a significant impact on operating cash flows. While pricedeclines could adversely affect the amount of cash flow generated fromoperations, we utilize a hedging program to mitigate the risks associated withvolatile oil and gas prices. As of September 30, 2005, Forest had hedgedapproximately 19.6 Bcfe of its remaining 2005 production primarily to protectthe economics of recent acquisitions of oil and gas properties. This level ofhedging provides greater certainty of the cash flow we will receive for our2005 production. Depending on changes in oil and gas futures markets andmanagement’s view of underlying oil and natural gas supply and demand trends,we may increase or decrease our current hedging positions. For furtherinformation concerning our 2005 and 2006 hedging contracts, see Note 9 to theCondensed Consolidated Financial Statements.

Another source of liquidity is our $600 million revolvingbank credit facilities, as explained below, under the caption “Bank CreditFacilities.”  We use the creditfacilities to fund daily operating activities and acquisitions in the UnitedStates and Canada as needed. As of September 30, 2005, we had $473.5million available under the credit facilities.

The public capital markets have been our principalsource of permanent financing. We have issued debt and equity in both publicand private offerings in the past, and we expect that these sources of capital 

25

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should continue to beavailable to us in the future. Nevertheless, ready access to capital onreasonable terms are subject to many uncertainties, as explained in Forest’s2004 Annual Report on Form 10-K under the heading, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—RiskFactors.”

We recently announced our intention to spin-off toForest shareholders our offshore Gulf of Mexico operations. These operationsaccounted for approximately 39% and 43% of our total oil and gas production forthe three and nine months ended September 30, 2005, respectively, and 35%and 41% of our consolidated oil and gas revenues for the same periods,respectively. As a result of the spin-off, we expect future cash flows fromoperations to be appreciably lower than had we retained these properties,however, we also expect a significant decrease in capital expenditures. Inconnection with the spin-off, we expect to receive approximately $200 million(subject to certain adjustments to reflect an economic effective date for thetransaction of July 1, 2005), which we plan to use to pay down debt.

We do not believe thespin-off will have a material impact on our liquidity or capital resources. Wehave amended our credit facilities to allow for the spin-off and, as describedbelow, our global borrowing base will be adjusted to $600 million uponcompletion of the spin-off.

***Bank Credit Facilities***

We have credit facilities totaling $600 million,consisting of a $550 million U.S. credit facility through a syndicate ofbanks led by JPMorgan Chase and a $50 million Canadian credit facilitythrough a syndicate of banks led by JPMorgan Chase Bank, Toronto Branch. Thecredit facilities mature in September 2009. Subject to the agreement ofForest and the applicable lenders, the size of the credit facilities may beincreased by $200 million in the aggregate. The credit facilities arecollateralized by a portion of Forest’s assets.

Currently, the amount available under the creditfacilities is determined by a borrowing base (the “Global Borrowing Base”). EffectiveOctober 19, 2005, the Global Borrowing Base was increased to $900 million.Concurrent with the spin-off of the offshore Gulf of Mexico operations, theGlobal Borrowing Base will be reduced to $600 million. However, our borrowingcapacity is limited to $600 million, the current commitment level. At September 30,2005, there were outstanding borrowings of $119 million under the U.S.credit facility at a weighted average interest rate of 5.1%, and there were nooutstanding borrowings under the Canadian credit facility. We also had used thecredit facilities for approximately $7.5 million in letters of credit, leavingan unused borrowing amount under the Global Borrowing Base of approximately$473.5 million at September 30, 2005.

On October 31, 2005, amounts outstanding underthe U.S. facility were $132 million at a weighted average interest rate of5.3%, and there were no amounts outstanding under the Canadian facility. As aresult of increased amounts outstanding, and $7.5 million in letters of creditoutstanding, the unused borrowing amount on October 31, 2005 wasapproximately $460.5 million.

The credit facilitiesinclude terms and covenants that place limitations on certain types ofactivities, including restrictions or requirements with respect to additionaldebt, liens, asset sales, hedging activities, investments, dividends, mergers,and acquisitions. The credit facilities also include several financialcovenants. Availability, interest rates, security requirements, and other termsof borrowing under the credit facilities will vary based on Forest’s creditratings and financial condition, as determined by certain financial tests. Inparticular, any time that availability is not determined by the GlobalBorrowing Base, the amount available and Forest’s ability to borrow under thecredit facilities is determined by certain financial covenants. Also, even whenavailability is determined by the Global Borrowing Base, certain financialcovenants can still affect the amount available and Forest’s ability to borrowamounts under the credit facilities.

26

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***Cash Flow***

Netcash provided by operating activities, net cash used by investing activities,and net cash (used) provided by financing activities for the nine months ended September 30,2005 and 2004 were as follows:

| ** **                                        | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                        | ** ** | **2005**                                            | ** ** | **2004**   | ** ** | **% Change** | ** ** |
| ** **                                        | ** ** | **(Dollar Amounts In Thousands)**    | ** ** |
| Net cash provided  by operating activities        |       | $                                                   | 518,432    |       | 363,621    |   |   | 43 | % |   |
| Net cash used by  investing activities            |       | (538,397                                            | )          | (386,542   | )          |   | 39 | % |   |
| Net cash (used) provided  by financing activities |       | (27,917                                             | )          | 38,419     |       |   | (173 | )% |   |
|                                                   |            |                                                     |            |            |            |  |  |  |  |  |

 

The increase in net cashprovided by operating activities in the nine months ended September 30,2005 compared to the same period of 2004 was due primarily to higher oil andgas revenues. The increase in cash used by investing activities in the ninemonths ended September 30, 2005 was due primarily to increased capitalspending. Net cash used by financing activities in the nine months ended September 30,2005 included net bank repayments of $68.0 million offset by proceeds fromthe exercise of stock options and warrants of $14.4 million and $27.0 million,respectively. The 2004 period included net bank debt repayments of $87.9million offset by proceeds from the issuance of common stock of $117.1 millionand proceeds from the exercise of stock options and warrants of approximately$11.7 million.

***Capital Expenditures***

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

| ** **                                                                               | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| ** **                                                                               | ** ** | **(In Thousands)**                             | ** ** |
| Property acquisition  costs(1):                                                          |       |                                                |       |   |   |
| Proved properties                                                                        |       | $                                                   | 242,997    |   | 328,119 |   |
| Unproved properties                                                                      |       | 69,350                                              |       | 54,003 |   |
|                                                                                     |       | 312,347                                             |       | 382,122 |   |
| Exploration costs:                                                                       |       |                                                |       |   |   |
| Direct costs                                                                             |       | 96,690                                              |       | 66,254 |   |
| Overhead capitalized                                                                     |       | 9,710                                               |       | 9,071 |   |
|                                                                                     |       | 106,400                                             |       | 75,325 |   |
| Development costs:                                                                       |       |                                                |       |   |   |
| Direct costs                                                                             |       | 227,098                                             |       | 110,577 |   |
| Overhead capitalized                                                                     |       | 9,943                                               |       | 8,251 |   |
|                                                                                     |       | 237,041                                             |       | 118,828 |   |
| Total capital  expenditures for property acquisition, exploration, and development(1)(2) |       | $                                                   | 655,788    |   | 576,275 |   |

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(1)                 Total capital expenditures include bothcash expenditures and accrued expenditures. In addition, property acquisitionsinclude a gross up for deferred taxes of approximately $88.7 million in 2005and $50.6 million in 2004. 

(2)                 Does not include estimated discountedasset retirement obligations of $7.9 million and $13.5 million related toassets placed in service during the nine months ended September 30, 2005and 2004, respectively.

Forest’s anticipated expenditures for exploration anddevelopment in 2005 are estimated to range from $475 million to$500 million. Some of the factors impacting the level of capitalexpenditures in 2005 

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include crude oil andnatural gas prices, the volatility in these prices, the cost and availabilityof the oil field services, and weather disruptions.

In addition, while weintend to continue a strategy of acquiring reserves that meet our investmentcriteria, no assurance can be given that we can locate or finance any property acquisitions.

**Recent Accounting Pronouncements**

In December 2004, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) SFAS No. 123(R), *Share-Based Payment*(“SFAS 123(R)”), which is a revision ofSFAS No. 123, *Accounting for Stock-BasedCompensation*. SFAS 123(R) is effective for public companies forinterim or annual periods beginning after December 15, 2005, supersedesAPB Opinion No. 25, *Accounting for StockIssued to Employees*, and amends SFAS No. 95, *Statement of Cash Flows*. SFAS 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the financial statements based on their fair values,beginning with the first interim or annual period after December 15, 2005,with early adoption encouraged. The pro forma disclosures previously permittedunder SFAS No. 123 will no longer be an alternative to financial statementrecognition. SFAS 123(R) also requires the tax benefits in excess ofrecognized compensation expenses to be reported as a financing cash flow,rather than as an operating cash flow as currently required. This requirementmay serve to reduce Forest’s future cash provided by operating activities andincrease future cash provided by financing activities, to the extent of associatedtax benefits that may be realized in the future.

We are required to adopt SFAS 123(R) in the firstquarter of 2006. Under SFAS 123(R), we must determine the appropriate fairvalue model to be used for valuing share-based payments, the amortization methodfor compensation cost, and the transition method to be used at date of adoption.The transition methods include prospective and retroactive adoption options. Underthe retroactive options, prior periods may be restated either as of thebeginning of the year of adoption or for all periods presented. The prospectivemethod requires that compensation expense be recorded for all unvested stockoptions and restricted stock at the beginning of the first quarter of adoptionof SFAS 123(R); the retroactive methods would record compensation expense forall unvested stock options and restricted stock beginning with the first periodrestated. We are evaluating the requirements of SFAS 123(R), and we expect thatthe adoption of SFAS 123(R) will have a material impact on ourconsolidated results of operations and earnings per share. We have not yetdetermined the method of adoption or the effect of adopting SFAS 123(R), and wehave not determined whether the adoption will result in amounts that aresimilar to the current pro forma disclosures under SFAS No. 123.

Forest has an Employee Stock Purchase Plan (the “ESPP”)that allows eligible employees to purchase annually Forest’s common stock at adiscount. The provisions of SFAS 123(R) will cause the ESPP to be a compensatoryplan. However, the change in accounting for the ESPP is not expected to have amaterial impact on Forest’s financial position, future results of operations,or liquidity. Historically, the ESPP compensatory amounts that would have beenrecorded under SFAS 123(R) have been nominal.

In March 2005, the SEC issued Staff AccountingBulletin No. 107, *Share-Based Payment*(“SAB107”), which expresses views of the staff regarding the interaction betweenSFAS 123(R) and certain SEC rules and regulations. SAB 107 alsoprovides the Staff’s views regarding the valuation of share-based paymentarrangements for public companies. Forest will evaluate the requirements of SAB107 in connection with Forest’s future adoption of SFAS 123(R).

In June 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*(“SFAS 154”),**which replaces APB Opinion No. 20 and SFAS No. 3.SFAS 154 changes the requirements for the accounting and reporting of a changein accounting principle. APB Opinion No. 20 previously required that mostvoluntary changes in accounting principle be recognized by including thecumulative effect of the new accounting principle in net income of the periodof the change. SFAS 154 now requires 

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retrospective applicationof changes in accounting principle to prior period financial statements, unlessit is impracticable to determine either the period-specific effects or thecumulative effect of the change. SFAS 154 is effective for fiscal yearsbeginning after December 15, 2005. We do not expect the adoption of thisstatement will have a material impact on our results of operations or financialposition.

In March 2005, theFASB issued FASB Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations*(“FIN 47”). ThisInterpretation clarifies the definition and treatment of conditional assetretirement obligations as discussed in FASB Statement No. 143, *Accounting for Asset Retirement Obligations*. A conditionalasset retirement obligation is defined as an asset retirement activity in whichthe timing and/or method of settlement are dependent on future events that maybe outside the control of the Company. FIN 47 states that a Company must recorda liability when incurred for conditional asset retirement obligations if thefair value of the obligation is reasonably estimable. This Interpretation isintended to provide more information about long-lived assets, more informationabout future cash outflows for these obligations and more consistentrecognition of these liabilities. FIN 47 is effective for fiscal years endingafter December 15, 2005. The Company does not believe that its financialposition, results of operations or cash flows will be materially impacted bythis Interpretation.

***Forward-Looking Statements***

Certain information included in this quarterly reporton Form 10-Q and other materials that we file with the Securitiesand Exchange Commission, as well as information included in oral statements orother written statements that we make, include “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934 relating to our operations, financialcondition, and the oil and gas industry. All statements, other than statementsof 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 areforward-looking statements. These forward-looking statements are based onmanagement’s current belief, based on currently available information, as tothe outcome and timing of future events.

These forward-looking statements appear in a number ofplaces and include statements with respect to, among other things, estimates ofour oil and gas reserves; estimates of our future natural gas and liquidsproduction, including estimates of any increases in oil and gas production;planned capital expenditures and availability of capital resources to fundcapital expenditures; cash flow; our outlook on oil and gas prices; drillingactivities and drilling locations; acquisition and development activities andthe funding thereof; hedging activities and the results thereof; liquidity;operating costs; operating margins; political and regulatory developments; ourfuture financial condition or results of operations; and our business strategyand other plans and objectives for future operations.

We caution you thatthese forward-looking statements are not guarantees of future performance andare subject to all of the risks and uncertainties, many of which are beyond ourcontrol, incident to the exploration for and development, production, and saleof oil and gas. In particular, the risk factors discussed below and in ourAnnual Report on Form 10-K could affect our actual results and causeour actual results to differ materially from expectations, estimates, plans, orassumptions expressed in, forecasted in, or implied in such forward-lookingstatement. Among the factors that could cause actual results to differmaterially are:

·       commodityprice volatility,

·       inflation,

·       lackof availability of oil field personnel, equipment, and services,

·       environmentalrisks,

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·       drillingand other operating risks,

·       regulatorychanges,

·       theuncertainty inherent in estimating proved oil and natural gas reserves and inprojecting future rates of production,

·       timingof development expenditures, and

·       interestrates.

The financial results of our foreign operations arealso subject to currency exchange rate risks.

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

All forward-lookingstatements, expressed or implied, included in this Form 10-Q andattributable to Forest are expressly qualified in their entirety by thiscautionary statement. This cautionary statement should also be considered inconnection with any subsequent written or oral forward-looking statements thatForest or persons acting on its behalf may issue. Forest does not undertake toupdate any forward-looking statements to reflect events or circumstances afterthe date of filing this Form 10-Q with the Securities and ExchangeCommission, except as required by law.

**Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

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

**Commodity Price Risk**

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

In order to reduce the impact of fluctuations inprices, or to protect the economics of property acquisitions, we make use of anoil and gas hedging strategy. Under our hedging strategy, we enter intocommodity swaps, collars, and other financial instruments with counterpartieswho, in general, are participants in our credit facilities. These arrangements,which are based on prices available in the financial markets at the time thecontracts are entered into, are settled in cash and do not require physicaldeliveries of hydrocarbons. Hedging arrangements covered 52% and 63%, of ourconsolidated production, on an equivalent basis, during the three months ended September 30,2005 and 2004, respectively, and 48% and 59% during the nine months ended September 30,2005 and 2004, respectively. We do not enter into derivative instruments fortrading purposes.

See Note 9 to the Condensed Consolidated FinancialStatements for information regarding the terms of the Forest’s derivativeinstruments that are sensitive to changes in both current and forward oil andgas prices.

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Thefollowing table reconciles the changes that occurred in the fair values ofForest’s open derivative contracts during the nine months ended September 30,2005, beginning with the fair value of our commodity contracts on December 31,2004, plus the change in fair value during the period, plus the fair value ofcommodity contracts acquired in connection with the acquisition of oil and gascompanies, and plus the contract losses settled, or recognized, during theperiod.

| ** **                                                    | ** ** | **Fair Value of**   | ** ** |
|---------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                    | ** ** | **Derivative Contracts** | ** ** |
| ** **                                                    | ** ** | **(In Thousands)**       | ** ** |
| Unrealized losses  on contracts as of December 31, 2004  |       |                          | $          | (90,249 | ) |   |
| Net decrease in  fair value                                   |       |                          | (355,006   | ) |   |
| Unrealized losses  on acquired contracts                      |       |                          | (6,373     | ) |   |
| Net contract  losses realized                                 |       |                          | 118,383    |   |   |
| Unrealized losses on  contracts of as September 30, 2005 |       |                          | $          | (333,245 | ) |   |

 

**Foreign Currency Exchange Risk**

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

**Interest Rate Risk**

Thefollowing table presents principal amounts and related weighted average fixedinterest rates by year of maturity for Forest’s debt obligations and the fairvalue of debt obligations at September 30, 2005:

| ** **                  | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2011** | ** ** | **2014** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|---------------------|------------|
| ** **                  | ** ** | **(Dollar Amounts in Thousands)** | ** ** |
| Bank credit facilities:     |       |                                             |       |     |       |     |       |     |       |      |       |                |       |   |   |
| Variable rate               |       | $                                                | —     |     | 119,000    |     | —     |     | —     |      | 119,000    |                |       | 119,000 |   |   |
| Average interest rate(1)    |       | —                                           |       | 5.1      | %          | —   |       | —   |       | 5.1       | %          |                |       |   |   |
| Long-term debt:             |       |                                             |       |     |       |     |       |     |       |      |       |                |       |   |   |
| Fixed rate                  |       | $                                                | 265,000    |     | —     |     | 285,000    |     | 150,000    |      | 700,000    |                |       | 754,725 |   |   |
| Coupon interest rate        |       | 8.00                                             | %          | —   |       | 8.00     | %          | 7.75     | %          | 7.95      | %          |                |       |   |   |
| Effective  interest rate(2) |       | 7.13                                             | %          | —   |       | 7.71     | %          | 6.56     | %          | 7.24      | %          |                |       |   |   |

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(1)                 As of September 30, 2005.

(2)                 The effective interest rates on the 8%Senior Notes due 2008, the 8% Senior Notes due 2011, and the 7 3/4%Senior Notes due 2014 are reduced from the coupon rate as a result ofamortization of the gains related to termination of the related interest rateswaps, and unamortized premiums and discounts.

**Item 4. CONTROLS AND PROCEDURES**

***Disclosure Controls and Procedures***

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

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disclosure controls andprocedures, including the possibility of human error and the circumvention oroverriding of controls and procedures. Accordingly, even effective disclosurecontrols and procedures can only provide reasonable assurance of achievingtheir control objectives.

Our Chief ExecutiveOfficer, H. Craig Clark, and our Chief Financial Officer, David H.Keyte, evaluated the effectiveness of our disclosure controls and procedures asof the end of the quarterly period ended September 30, 2005. Based on theevaluation, they believe that:

·       ourdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed by us in the reports we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized, andreported within the time periods specified in the SEC’s rules and forms;and

·       our disclosure controls andprocedures were effective to ensure that information required to be disclosedby us in the reports we file or submit under the Securities Exchange Act of1934 was accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.

***Internal Control Over Financial Reporting***

There has not been any change in our internal controlover financial reporting that occurred during our quarterly period ended September 30,2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

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**PART II—OTHER INFORMATION**

**Item 6. EXHIBITS**

(a)   Exhibits.
| 4.1*  |   | First Amendment to U.S. Amended and Restated Credit  Agreement, dated effective as of October 19, 2005, among Forest Oil  Corporation, each of the lenders that is a party thereto, Bank of American,  N.A. and Citibank, N.A., as Co-Global Syndication Agents, BNP Paribas and  Harris Nesbitt Financing, Inc., as Co-U.S. Documentation Agents, Bank of  Montreal and The Toronto-Dominion Bank, as Co-Canadian Documentation Agents,  JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent  and JPMorgan Chase Bank, N.A., as Global Administrative Agent. |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1* |   | Agreement and Plan of  Merger dated as of September 9, 2005 among Forest Oil Corporation, SML  Wellhead Corporation; Mariner Energy, Inc. and MEI Sub, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.2* |   | Tax Sharing Agreement  between Forest Oil Corporation, SML Wellhead Corporation and Mariner  Energy, Inc. dated as of September 9, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3* |   | Transition Services  Agreement, dated as of September 9, 2005, between Forest Oil Corporation  and SML Wellhead Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.4* |   | Employee Benefits  Agreement dated as of September 9, 2005 between Forest Oil Corporation  and SML Wellhead Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.5* |   | Distribution Agreement  dated as of September 9, 2005 between Forest Oil Corporation and SML  Wellhead Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.1* |   | Certification of  Principal Executive Officer of Forest Oil Corporation as required by  Rule 13a-14(a) of the Securities Exchange Act of 1934, as  amended.                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2* |   | Certification of  Principal Financial Officer of Forest Oil Corporation as required by  Rule 13a-14(a) of the Securities Exchange Act of 1934, as  amended.                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1+ |   | Certification of Chief  Executive Officer of Forest Oil Corporation pursuant to 18 U.S.C. §1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.2+ |   | Certification of Chief  Financial Officer of Forest Oil Corporation pursuant to 18 U.S.C. §1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

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*                    Filed herewith.

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

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**SIGNATURES**

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

|                       |     | Forest Oil Corporation   (Registrant) |
|-----------------------|----------|---------------------------------------|
| November 9, 2005 |     | By:                                   |   | /s/ DAVID H. KEYTE |
|                  |     |                                  |   | David H. Keyte |
|                  |     |                                  |   | *Executive  Vice President and Chief Financial Officer (on behalf of the Registrant and  as Principal Financial Officer)* |
| * *              |     | By:                                   |   | /s/  VICTOR A. WIND |
| * *              |     |                                  |   | Victor A. Wind |
| * *              | * * | * *                              | * * | *Corporate  Controller  (Principal Accounting Officer)* |

 

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**Exhibit Index**

| Exhibit Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1                 |       | First Amendment to U.S. Amended and Restated Credit  Agreement, dated effective as of October 19, 2005, among Forest Oil  Corporation, each of the lenders that is a party thereto, Bank of American,  N.A. and Citibank, N.A., as Co-Global Syndication Agents, BNP Paribas and  Harris Nesbitt Financing, Inc., as Co-U.S. Documentation Agents, Bank of  Montreal and The Toronto-Dominion Bank, as Co-Canadian Documentation Agents,  JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent  and JPMorgan Chase Bank, N.A., as Global Administrative Agent. |
| 10.1                |       | Agreement and Plan of  Merger dated as of September 9, 2005 among Forest Oil Corporation, SML  Wellhead Corporation; Mariner Energy, Inc. and MEI Sub, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.2                |       | Tax Sharing Agreement  between Forest Oil Corporation, SML Wellhead Corporation and Mariner  Energy, Inc. dated as of September 9, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3                |       | Transition Services  Agreement, dated as of September 9, 2005, between Forest Oil Corporation  and SML Wellhead Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.4                |       | Employee Benefits  Agreement dated as of September 9, 2005 between Forest Oil Corporation  and SML Wellhead Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.5                |       | Distribution Agreement  dated as of September 9, 2005 between Forest Oil Corporation and SML  Wellhead Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.1                |       | Certification of  Principal Executive Officer of Forest Oil Corporation as required by  Rule 13a-14(a) of the Securities Exchange Act of 1934, as  amended.                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2                |       | Certification of  Principal Financial Officer of Forest Oil Corporation as required by  Rule 13a-14(a) of the Securities Exchange Act of 1934, as  amended.                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1                |       | Certification of Chief  Executive Officer of Forest Oil Corporation, pursuant to  18 U.S.C. §1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 32.2                |       | Certification of Chief  Financial Officer of Forest Oil Corporation, pursuant to  18 U.S.C. §1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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