**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 June 30, 2006**                                                  |
| ** **     | ** **                                                                                              |
| ** **     | **Or**                                                                                                  |
| ** **     | ** **                                                                                              |
| **o**          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom       to       **

 

**Commission File Number 1-13515**

 

**FOREST OIL CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

**707 17**th Street, Suite 3600 Denver, Colorado 80202

(Address of principal executive offices) (Zip Code)

 

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

 

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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.   x Yes  o No

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

 

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

 

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

Asof July 31, 2006 there were 62,866,871 shares of the registrant’s common stock, par value $.10 per share,outstanding.

 

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**FOREST OILCORPORATIONINDEX TO FORM 10-QJune 30, 2006**
| Part I—FINANCIAL  INFORMATION                                                                         |   |   |   |
|-----------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Item  1—Financial Statements                                                                               |   |   |   |
| Condensed Consolidated Balance Sheets as of  June 30, 2006 and December 31, 2005                      |   | 1      |   |
| Condensed Consolidated Statements of Operations for  the Three and Six Months Ended June 30, 2006 and 2005 |   | 2      |   |
| Condensed Consolidated Statement of Shareholders’  Equity for the Six Months Ended June 30, 2006      |   | 3      |   |
| Condensed Consolidated Statements of Cash Flows for  the Six Months Ended June 30, 2006 and 2005           |   | 4      |   |
| Notes to Condensed Consolidated Financial Statements                                                            |   | 5      |   |
| Item 2—Management’s Discussion and Analysis of  Financial Condition and Results of Operations         |   | 19     |   |
| Item 3—Quantitative and Qualitative Disclosures About  Market Risk                                         |   | 31     |   |
| Item 4—Controls and Procedures                                                                             |   | 33     |   |
| Part II—OTHER  INFORMATION                                                                            |   |   |   |
| Item 4—Submission of Matters to a Vote of Security  Holders                                                |   | 33     |   |
| Item 6—Exhibits                                                                                            |   | 34     |   |
| Signatures                                                                                                      |   | 35     |   |

 

ii

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**PART I—FINANCIALINFORMATION**

**Item 1. FINANCIALSTATEMENTS**

**FORESTOIL CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(In Thousands, Except Share Data)**
| ** **                                                                                              | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                              |       |                    |       |                        |       |
| Current assets:                                                                                         |       |                    |       |                        |       |
| Cash and cash equivalents                                                                               |       | $                       | 5,456      |                        | 7,231      |   |
| Accounts receivable                                                                                     |       | 139,673                 |       | 178,124                     |       |
| Derivative instruments                                                                                  |       | 10,870                  |       | 941                         |       |
| Deferred tax assets                                                                                     |       | 16,816                  |       | 77,346                      |       |
| Other current assets                                                                                    |       | 35,054                  |       | 52,283                      |       |
| Total current assets                                                                                    |       | 207,869                 |       | 315,925                     |       |
| Property and equipment,  at cost:                                                                       |       |                    |       |                        |       |
| Oil and gas properties, full cost method of  accounting:                                                |       |                    |       |                        |       |
| Proved, net of  accumulated depletion of $2,159,630 and $3,059,031                                      |       | 2,298,209               |       | 2,898,774                   |       |
| Unproved                                                                                                |       | 264,218                 |       | 275,684                     |       |
| Net oil and gas  properties                                                                             |       | 2,562,427               |       | 3,174,458                   |       |
| Other property  and equipment, net of accumulated depreciation and amortization of $30,152  and $32,527 |       | 28,550                  |       | 25,560                      |       |
| Net property and  equipment                                                                             |       | 2,590,977               |       | 3,200,018                   |       |
| Derivative  instruments                                                                                 |       | 3,747                   |       | —                      |       |
| Goodwill                                                                                                |       | 87,725                  |       | 87,072                      |       |
| Other assets                                                                                            |       | 35,583                  |       | 42,531                      |       |
|                                                                                                    |       | $                       | 2,925,901  |                        | 3,645,546  |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                           |       |                    |       |                        |       |
| Current liabilities:                                                                                    |       |                    |       |                        |       |
| Accounts payable                                                                                        |       | $                       | 209,266    |                        | 312,076    |   |
| Accrued interest                                                                                        |       | 4,752                   |       | 4,260                       |       |
| Derivative instruments                                                                                  |       | 49,203                  |       | 151,678                     |       |
| Asset retirement obligations                                                                            |       | 1,741                   |       | 33,329                      |       |
| Other current liabilities                                                                               |       | 15,172                  |       | 21,573                      |       |
| Total current liabilities                                                                               |       | 280,134                 |       | 522,916                     |       |
| Long-term  debt                                                                                         |       | 1,086,924               |       | 884,807                     |       |
| Asset retirement  obligations                                                                           |       | 61,023                  |       | 178,225                     |       |
| Derivative  instruments                                                                                 |       | 1,197                   |       | —                      |       |
| Other  liabilities                                                                                      |       | 46,970                  |       | 45,691                      |       |
| Deferred income  taxes                                                                                  |       | 152,593                 |       | 329,385                     |       |
| Total  liabilities                                                                                      |       | 1,628,841               |       | 1,961,024                   |       |
| Shareholders’ equity:                                                                              |       |                    |       |                        |       |
| Preferred stock,  none issued                                                                           |       | —                  |       | —                      |       |
| Common stock, 62,854,397 and 64,548,229 shares  issued and outstanding                                  |       | 6,286                   |       | 6,455                       |       |
| Capital surplus                                                                                         |       | 1,179,987               |       | 1,529,102                   |       |
| Retained earnings                                                                                       |       | 30,013                  |       | 217,293                     |       |
| Accumulated other comprehensive income (loss)                                                           |       | 80,774                  |       | (18,220                     | )          |
| Treasury stock, at cost, 1,861,143 shares held in  2005                                                 |       | —                  |       | (50,108                     | )          |
| Total shareholders’ equity                                                                         |       | 1,297,060               |       | 1,684,522                   |       |
|                                                                                                    |       | $                       | 2,925,901  |                        | 3,645,546  |   |

 

See accompanying Notes toCondensed Consolidated Financial Statements.

1

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**FORESTOIL CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| ** **                                                       | ** ** | **Three Months Ended  June 30,**                       | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                                              | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                       | ** ** | **(In Thousands, Except Per Share Amounts)** | ** ** |
| Revenue:                                                         |       |                                                                  |       |                                          |       |   |   |   |   |
| Oil and gas sales:                                               |       |                                                                  |       |                                          |       |   |   |   |   |
| Natural gas                                                      |       | $                                                                     | 94,753     |                                          | 160,115    |   | 221,806 |   | 314,641 |   |
| Oil, condensate, and natural gas liquids                         |       | 115,470                                                               |       | 109,240                                       |       | 207,513 |   | 213,584 |   |
| Total oil and gas sales                                          |       | 210,223                                                               |       | 269,355                                       |       | 429,319 |   | 528,225 |   |
| Marketing, processing, and other                                 |       | 1,630                                                                 |       | 1,700                                         |       | 3,980 |   | 3,121 |   |
| Total revenue                                                    |       | 211,853                                                               |       | 271,055                                       |       | 433,299 |   | 531,346 |   |
| Operating  expenses:                                             |       |                                                                  |       |                                          |       |   |   |   |   |
| Lease operating expenses                                         |       | 35,529                                                                |       | 45,783                                        |       | 80,860 |   | 93,643 |   |
| Production and property taxes                                    |       | 10,997                                                                |       | 10,547                                        |       | 21,725 |   | 20,444 |   |
| Transportation costs                                             |       | 5,642                                                                 |       | 4,583                                         |       | 10,371 |   | 9,755 |   |
| General and administrative (including stock-based  compensation) |       | 11,071                                                                |       | 11,091                                        |       | 28,207 |   | 21,847 |   |
| Depreciation and depletion                                       |       | 63,253                                                                |       | 97,249                                        |       | 140,921 |   | 193,525 |   |
| Accretion of asset retirement obligations                        |       | 1,301                                                                 |       | 4,322                                         |       | 4,653 |   | 8,599 |   |
| Impairments                                                      |       | 2,078                                                                 |       | —                                        |       | 2,078 |   | 2,924 |   |
| Spin-off and merger costs                                        |       | —                                                                |       | —                                        |       | 5,416 |   | — |   |
| Total operating expenses                                         |       | 129,871                                                               |       | 173,575                                       |       | 294,231 |   | 350,737 |   |
| Earnings from operations                                         |       | 81,982                                                                |       | 97,480                                        |       | 139,068 |   | 180,609 |   |
| Other income and  expense:                                       |       |                                                                  |       |                                          |       |   |   |   |   |
| Interest expense                                                 |       | 17,340                                                                |       | 16,061                                        |       | 32,491 |   | 30,560 |   |
| Unrealized (gains) losses on derivative instruments,  net        |       | (14,378                                                               | )          | (4,310                                        | )          | 9,736 |   | 2,270 |   |
| Realized losses (gains) on derivative instruments,  net          |       | 13,698                                                                |       | (850                                          | )          | 17,613 |   | (318 | ) |
| Other (income) expense, net                                      |       | (110                                                                  | )          | 2,509                                         |       | 750 |   | 3,910 |   |
| Total other income and expense                                   |       | 16,550                                                                |       | 13,410                                        |       | 60,590 |   | 36,422 |   |
| Earnings before  income taxes and discontinued operations        |       | 65,432                                                                |       | 84,070                                        |       | 78,478 |   | 144,187 |   |
| Income tax  expense:                                             |       |                                                                  |       |                                          |       |   |   |   |   |
| Current                                                          |       | 1,819                                                                 |       | 617                                           |       | 2,821 |   | 2,174 |   |
| Deferred                                                         |       | 6,565                                                                 |       | 31,252                                        |       | 17,360 |   | 50,941 |   |
| Total income tax expense                                         |       | 8,384                                                                 |       | 31,869                                        |       | 20,181 |   | 53,115 |   |
| Earnings from  continuing operations                             |       | 57,048                                                                |       | 52,201                                        |       | 58,297 |   | 91,072 |   |
| Income from  discontinued operations, net of tax                 |       | —                                                                |       | —                                        |       | 2,422 |   | — |   |
| Net earnings                                                     |       | $                                                                     | 57,048     |                                          | 52,201     |   | 60,719 |   | 91,072 |   |
| Basic earnings  per common share:                                |       |                                                                  |       |                                          |       |   |   |   |   |
| Earnings from continuing operations                              |       | $                                                                     | .92        |                                          | .85        |   | .94 |   | 1.50 |   |
| Income from discontinued operations, net of tax                  |       | —                                                                |       | —                                        |       | .04 |   | — |   |
| Net earnings per common share                                    |       | $                                                                     | .92        |                                          | .85        |   | .98 |   | 1.50 |   |
| Diluted earnings  per common share:                              |       |                                                                  |       |                                          |       |   |   |   |   |
| Earnings from continuing operations                              |       | $                                                                     | .90        |                                          | .83        |   | .92 |   | 1.46 |   |
| Income from discontinued operations, net of tax                  |       | —                                                                |       | —                                        |       | .04 |   | — |   |
| Net earnings per  common share                                   |       | $                                                                     | .90        |                                          | .83        |   | .96 |   | 1.46 |   |

 

See accompanying Notes to Condensed ConsolidatedFinancial Statements.

2

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**FOREST OILCORPORATIONCONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY(Unaudited)**
| ** **                                                           | ** ** | **Common Stock**   | ** ** | **Capital** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Treasury**           | ** ** | **Total  Shareholders’** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|-------------|------------|--------------|------------|---------------------------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **                                                           | ** ** | **Shares**              | ** ** | **Amount**  | ** ** | **Surplus**  | ** ** | **Earnings**                          | ** ** | **(Loss) Income** | ** ** | **Stock**                     | ** ** | **Equity** | ** ** |
| ** **                                                           | ** ** | **(In Thousands)** | ** ** |
| Balances at January 1, 2006                                     |       | 64,548                  |       | $           | 6,455      |         | 1,529,102  |                                  | 217,293    |                   | (18,220    | )                             | (50,108    | ) | 1,684,522 |   |
| Exercise of stock options                                            |       | 152                     |       | 15          |       | 3,376        |       | (8                                    | )          | —                 |       | 27                            |       | 3,410 |   |
| Tax benefit of stock options exercised                               |       | —                  |       | —      |       | 23           |       | —                                |       | —                 |       | —                        |       | 23 |   |
| Employee stock purchase plan                                         |       | 13                      |       | 2           |       | 364          |       | —                                |       | —                 |       | —                        |       | 366 |   |
| Restricted stock issued, net of forfeitures                          |       | 1                       |       | —      |       | —       |       | —                                |       | —                 |       | —                        |       | — |   |
| Retirement of treasury stock                                         |       | (1,860                  | )          | (186        | )          | (49,895      | )          | —                                |       | —                 |       | 50,081                        |       | — |   |
| Amortization of stock-based compensation                   |       | —                  |       | —      |       | 14,684       |       | —                                |       | —                 |       | —                        |       | 14,684 |   |
| Pro rata distribution of FERI common stock to  shareholders (Note 2) |       | —                  |       | —      |       | (317,667     | )          | (247,991                              | )          | 7,549                  |       | —                        |       | (558,109 | ) |
| Comprehensive  earnings:                                             |       |                    |       |        |       |         |       |                                  |       |                   |       |                          |       |   |   |
| Net earnings                                                         |       | —                  |       | —      |       | —       |       | 60,719                                |       | —                 |       | —                        |       | 60,719 |   |
| Unrealized gain on effective derivative instruments,  net of tax     |       | —                  |       | —      |       | —       |       | —                                |       | 77,074                 |       | —                        |       | 77,074 |   |
| Amortization of deferred hedging loss, net of tax                    |       | —                  |       | —      |       | —       |       | —                                |       | 1,030                  |       | —                        |       | 1,030 |   |
| Decrease in unfunded pension liability, net of tax                   |       | —                  |       | —      |       | —       |       | —                                |       | 83                     |       | —                        |       | 83 |   |
| Foreign currency translation                                         |       | —                  |       | —      |       | —       |       | —                                |       | 13,258                 |       | —                        |       | 13,258 |   |
| Total comprehensive earnings                                         |       |                    |       |        |       |         |       |                                  |       |                   |       |                          |       | 152,164 |   |
| Balances at  June 30, 2006                                      |       | 62,854                  |       | $           | 6,286      |         | 1,179,987  |                                  | 30,013     |                   | 80,774     |                          | —     |   | 1,297,060 |   |

 

See accompanying Notes to Condensed ConsolidatedFinancial Statements.

3

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**FOREST OILCORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

 
| ** **                                                                                     | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                                                                     | ** ** | **(In Thousands)**                       | ** ** |
| Operating  activities:                                                                         |       |                                          |       |   |   |
| Net earnings                                                                                   |       | $                                             | 60,719     |   | 91,072 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities:           |       |                                          |       |   |   |
| Depreciation and depletion                                                                     |       | 140,921                                       |       | 193,525 |   |
| Accretion of asset retirement obligations                                                      |       | 4,653                                         |       | 8,599 |   |
| Stock-based compensation                                                                       |       | 9,812                                         |       | 282 |   |
| Impairments                                                                                    |       | 2,078                                         |       | 2,924 |   |
| Unrealized losses on derivative instruments, net                                               |       | 9,736                                         |       | 2,270 |   |
| Amortization of deferred derivative losses                                                     |       | 15,204                                        |       | — |   |
| Deferred income tax expense                                                                    |       | 18,587                                        |       | 50,941 |   |
| Other, net                                                                                     |       | 46                                            |       | (504 | ) |
| Changes in operating assets and liabilities, net of  effects of acquisitions and divestitures: |       |                                          |       |   |   |
| Accounts receivable                                                                            |       | (13,938                                       | )          | 20,745 |   |
| Other current assets                                                                           |       | (19,197                                       | )          | 1,324 |   |
| Accounts payable                                                                               |       | (19,232                                       | )          | (41,753 | ) |
| Accrued interest and other current liabilities                                                 |       | (12,237                                       | )          | (4,002 | ) |
| Net cash  provided by operating activities                                                     |       | 197,152                                       |       | 325,423 |   |
| Investing activities:                                                                          |       |                                          |       |   |   |
| Capital expenditures for property and equipment:                                               |       |                                          |       |   |   |
| Exploration, development, and acquisition costs                                                |       | (610,151                                      | )          | (398,208 | ) |
| Other fixed assets                                                                             |       | (5,330                                        | )          | (4,853 | ) |
| Proceeds from sales of assets                                                                  |       | 1,355                                         |       | 6,437 |   |
| Other, net                                                                                     |       | (35                                           | )          | (5,047 | ) |
| Net cash used by  investing activities                                                         |       | (614,161                                      | )          | (401,671 | ) |
| Financing activities:                                                                          |       |                                          |       |   |   |
| Proceeds from bank borrowings                                                                  |       | 1,623,943                                     |       | 1,157,953 |   |
| Repayments of bank borrowings                                                                  |       | (1,245,614                                    | )          | (1,126,000 | ) |
| Repayments of bank debt assumed in acquisition                                                 |       | —                                        |       | (35,000 | ) |
| Proceeds from Spin-off (Note 2)                                                                |       | 21,670                                        |       | — |   |
| Proceeds from the exercise of options and warrants  and employee stock purchases               |       | 3,775                                         |       | 38,453 |   |
| Net increase in bank overdrafts                                                                |       | 11,582                                        |       | — |   |
| Other, net                                                                                     |       | (54                                           | )          | 322 |   |
| Net cash  provided by financing activities                                                     |       | 415,302                                       |       | 35,728 |   |
| Effect of exchange rate changes on cash                                                        |       | (68                                           | )          | (683 | ) |
| Net decrease in  cash and cash equivalents                                                     |       | (1,775                                        | )          | (41,203 | ) |
| Cash and cash  equivalents at beginning of period                                              |       | 7,231                                         |       | 55,251 |   |
| Cash and cash  equivalents at end of period                                                    |       | $                                             | 5,456      |   | 14,048 |   |
| Cash paid during the period for:                                                               |       |                                          |       |   |   |
| Interest                                                                                       |       | $                                             | 38,087     |   | 32,283 |   |
| Income taxes                                                                                   |       | 4,618                                         |       | 5,141 |   |

 

See accompanying Notes to Condensed ConsolidatedFinancial Statements.

4

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**FOREST OILCORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**(1) BASIS OFPRESENTATION**

The Condensed Consolidated Financial Statementsincluded herein are unaudited and include the accounts of Forest OilCorporation and its consolidated subsidiaries (collectively, “Forest” or the “Company”).In the opinion of management, all adjustments, consisting of normal recurringaccruals, have been made which are necessary for a fair presentation of thefinancial position of Forest at June 30, 2006, the results of itsoperations for the three and six months ended June 30, 2006 and 2005, andits cash flows for the six months ended June 30, 2006 and 2005. Interimresults are not necessarily indicative of expected annual results because ofthe impact of fluctuations in prices received for liquids (oil, condensate, andnatural gas liquids) and natural gas and other factors.

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

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

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

For a more complete understanding of Forest’soperations, financial position, and accounting policies, reference is made tothe consolidated financial statements of Forest, and related notes thereto,filed with Forest’s annual report on Form 10-K for the year ended December 31,2005, previously filed with the Securities and Exchange Commission.

**(2) ACQUISITIONSAND DIVESTITURES**

***Acquisitions***

On March 31, 2006, Forest completed the acquisitionof oil and gas properties located primarily in the Cotton Valley trend in EastTexas. Forest paid approximately $255 million, as adjusted to reflect aneconomic effective date of February 1, 2006, for properties with anestimated 110 Bcfe of estimated proved reserves at the time the acquisition wasannounced in February 2006 and production that averaged 13 MMcfe per dayin January 2006. Forest acquired approximately 26,000 net acres in thefields, of which approximately 14,000 net acres were undeveloped. Forest fundedthis acquisition utilizing its bank credit facilities.

***Divestitures***

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

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

5

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

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

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

 

The followingtable presents the revenues and direct operating expenses of the offshore Gulfof Mexico operations reported in the Condensed Consolidated Statements ofOperations. The six months ended June 30, 2006 includes only two months ofthe offshore Gulf of Mexico operations, through February 28, 2006, whereasthe 2005 period includes all six months of activity.
| ** **                                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                   | ** ** | **   2006   **    | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | **(In Thousands)**                         | ** ** |
| Oil and gas  revenues                                        |       | $                                               | —     |                                          | 113,489    |   | 46,289 |   | 234,332 |   |
| Oil and gas  production expense:                             |       |                                            |       |                                          |       |   |   |   |   |
| Lease operating expenses                                     |       | —                                          |       | 19,202                                        |       | 18,296 |   | 35,824 |   |
| Transportation costs                                         |       | —                                          |       | 1,019                                         |       | 344 |   | 1,861 |   |
| Production and property taxes                                |       | —                                          |       | 690                                           |       | 151 |   | 1,283 |   |
| Oil and gas revenues in  excess of direct operating expenses |       | $                                               | —     |                                          | 92,578     |   | 27,498 |   | 195,364 |   |

 

*Sale of ProMark—DiscontinuedOperations*

On March 1, 2004, the Company sold the assets andbusiness operations of Producers Marketing, Ltd. (“ProMark”) to CinergyCanada, Inc. (“Cinergy”) for $11.2 million CDN. As a result of thesale, ProMark’s results of operations were reported as discontinued operationsin the historical financial statements. Under the terms of the purchase andsale agreement, Forest may receive additional contingent consideration over aperiod of five years through February 2009. During the six months ended June 30,2006, Forest recognized an additional $3.6 million contingent payment ($2.4million net of tax), which has been reflected as income from discontinuedoperations in the Condensed Consolidated Statements of Operations.

6

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

***Earnings per Share***

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

Diluted earningsper share is computed by adjusting the average number of common sharesoutstanding for the dilutive effect, if any, of stock options, unvestedrestricted stock grants, unvested phantom stock units, and warrants. Thefollowing sets forth the calculation of basic and diluted earnings per share:
| ** **                                                                                                 | ** ** | **Three Months Ended  June 30,**                       | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2006**                                                              | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                 | ** ** | **(In Thousands, Except Per Share Amounts)** | ** ** |
| Earnings from  continuing operations                                                                       |       | $                                                                     | 57,048     |                                          | 52,201     |   | 58,297 |   | 91,072 |   |
| Income from discontinued  operations, net of tax                                                           |       | —                                                                |       | —                                        |       | 2,422 |   | — |   |
| Net earnings                                                                                               |       | $                                                                     | 57,048     |                                          | 52,201     |   | 60,719 |   | 91,072 |   |
| Weighted average  common shares outstanding during the period                                              |       | 62,195                                                                |       | 61,419                                        |       | 62,155 |   | 60,817 |   |
| Add dilutive  effects of stock options, unvested restricted stock grants, and unvested phantom stock units |       | 1,294                                                                 |       | 990                                           |       | 1,184 |   | 984 |   |
| Add dilutive  effects of warrants                                                                          |       | —                                                                |       | 318                                           |       | — |   | 632 |   |
| Weighted average  common shares outstanding, including the effects of dilutive securities                  |       | 63,489                                                                |       | 62,727                                        |       | 63,339 |   | 62,433 |   |
| Basic earnings  per share:                                                                                 |       |                                                                  |       |                                          |       |   |   |   |   |
| From continuing operations                                                                                 |       | $                                                                     | .92        |                                          | .85        |   | .94 |   | 1.50 |   |
| From discontinued operations                                                                               |       | —                                                                |       | —                                        |       | .04 |   | — |   |
| Basic earnings per share                                                                                   |       | $                                                                     | .92        |                                          | .85        |   | .98 |   | 1.50 |   |
| Diluted earnings  per share:                                                                               |       |                                                                  |       |                                          |       |   |   |   |   |
| From continuing operations                                                                                 |       | $                                                                     | .90        |                                          | .83        |   | .92 |   | 1.46 |   |
| From discontinued operations                                                                               |       | —                                                                |       | —                                        |       | .04 |   | — |   |
| Diluted earnings  per share                                                                                |       | $                                                                     | .90        |                                          | .83        |   | .96 |   | 1.46 |   |

 

***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 andsix months ended June 30, 2006 and 2005 are foreign currency gains(losses) related to the translation of the assets and liabilities of Forest’sCanadian operations, changes in the unfunded pension liability, and net hedginglosses deferred in other comprehensive income.

7

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

The components ofcomprehensive earnings (loss) are as follows:
| ** **                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(In Thousands)**                         | ** ** |
| Net earnings                                                  |       | $                                               | 57,048     |                                          | 52,201     |   | 60,719 |   | 91,072 |   |
| Other  comprehensive income (loss):                           |       |                                            |       |                                          |       |   |   |   |   |
| Foreign currency translation gains (losses)                   |       | 15,188                                          |       | (4,011                                        | )          | 13,258 |   | (6,890 | ) |
| Unfunded pension liability, net of tax                        |       | —                                          |       | —                                        |       | 83 |   | (149 | ) |
| Unrealized gain (loss) on derivative instruments,  net of tax |       | 1,030                                           |       | 27,250                                        |       | 78,104 |   | (48,259 | ) |
| Total comprehensive  earnings                                 |       | $                                               | 73,266     |                                          | 75,440     |   | 152,164 |   | 35,774 |   |

 

**(4) STOCK-BASEDCOMPENSATION**

Prior to January 1, 2006, the Company accountedfor stock-based compensation using the intrinsic value method prescribed inAccounting Principles Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations. UnderAPB Opinion No. 25, no compensation expense was recognized for stockoptions issued to employees if the grant price equaled or was above the marketprice on the date of the option grant. Effective January 1, 2006, theCompany adopted the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123 (Revised), *Share-Based Payment*(“SFAS 123(R)”) using the modified prospective method. Under this method, compensation cost is recorded for all unvestedstock options, restricted stock, and phantom stock units beginning in theperiod of adoption and prior period financial statements are not restated. Underthe fair value recognition provisions of SFAS 123(R), stock-based compensationis measured at the grant date based on the value of the awards and the value isrecognized on a straight-line basis over the requisite service period (usuallythe vesting period).

The table belowsets forth total stock-based compensation recorded during the three and sixmonths ended June 30, 2006 under the provisions of SFAS 123(R) andthe remaining unamortized amounts as of June 30, 2006. Approximately $9.7million of the $16.2 million of total stock-based compensation for the sixmonths ended June 30, 2006 was attributable to a partial settlement of theCompany’s restricted stock awards and phantom stock unit awards in connectionwith the Spin-off.
| ** **                                                           | ** ** | **Stock  Options**      | ** ** | **Restricted  Stock** | ** ** | **Phantom  Stock Units** | ** ** | **Total **(1) | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|-------------------------------|------------|--------------------|------------|
| ** **                                                           | ** ** | **(In Thousands)** | ** ** |
| **Three  months ended June 30, 2006:**                          | ** ** | ** **              | ** ** | ** **            | ** ** | ** **                    | ** ** | ** **         | ** ** |
| Total stock-based compensation costs                                 |       | $                       | 1,896      |                  | 1,275      |                          | 107        |               | 3,278      |   |
| Less: stock-based compensation costs capitalized                     |       | (279                    | )          | (505                  | )          | (61                           | )          | (845               | )          |
| Stock-based compensation costs expensed                              |       | $                       | 1,617      |                  | 770        |                          | 46         |               | 2,433      |   |
| **Six months ended June 30, 2006:**                             | ** ** | ** **              | ** ** | ** **            | ** ** | ** **                    | ** ** | ** **         | ** ** |
| Total stock-based compensation costs                                 |       | $                       | 3,022      |                  | 11,522     |                          | 1,520      |               | 16,064     |   |
| Less: stock-based compensation costs capitalized                     |       | (710                    | )          | (4,286                | )          | (848                          | )          | (5,844             | )          |
| Stock-based compensation costs expensed                              |       | $                       | 2,312      |                  | 7,236      |                          | 672        |               | 10,220     |   |
| Unamortized stock-based compensation costs as of  June 30, 2006 |       | $                       | 8,109      |                  | 13,316     |                          | 2,176      | (2)                | 23,601     |   |
| Weighted average  amortization period remaining                      |       | 1.5 years               |       | 2.3 years             |       | 2.5 years                     |       | 2.0 years          |       |

----

(1)                The Company alsomaintains an employee stock purchase plan (which is not included in the tableabove) under which $.1 million of compensation cost was recognized forboth the three and six months ended June 30, 2006 under the provisions ofSFAS 123(R).

(2)                Basedon the closing price of the Company’s common stock on June 30, 2006.

SFAS 123(R) required the Company to estimateforfeitures in calculating the cost related to stock-based compensation asopposed to recognizing forfeitures and the corresponding reduction in expenseas the forfeitures occur. The cumulative adjustment recorded related to thischange of approximately $.1 million was recorded as a reduction in general andadministrative expense and capitalized oil and gas properties in the firstquarter of 2006 and was not presented separately

8

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

in the Condensed Consolidated Statement of Operations.The impact of adopting SFAS 123(R) as of January 1, 2006 resulted ina decrease to net income of approximately $.5 million, or $.01 per basic anddiluted share.

***Equity Incentive Plans***

In 2001, the Company adopted the Forest OilCorporation 2001 Stock Incentive Plan (the “2001 Plan”) under whichnon-qualified stock options, incentive stock options, restricted stock, phantomstock units, and other awards may be granted to employees, consultants, andnon-employee directors. In 2003, the Company amended the 2001 Plan to increasethe number of shares of the Company’s common stock, at par value $.10 per share(“Common Stock”), reserved for issuance. The aggregate number of shares ofCommon Stock that the Company may issue under the 2001 Plan may not exceed5,012,074 shares. Options have historically been granted at an exercise priceequal to the fair market value of one share of Common Stock on the date ofgrant. Options granted to employees under the 2001 Plan generally vest inincrements of 25% on each of the first four anniversary dates of the date ofgrant and have a term of ten years. Options granted to non-employee directorsvest immediately and have a term of ten years. In connection with the Spin-off,the shares available for grant and outstanding stock options under the 2001Plan were adjusted to reflect the economic effect of the Spin-off by reducingthe exercise price and increasing the number of underlying shares. As of June 30,2006, the Company had 625,784 shares available for issuance under the 2001Plan.

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

The Company has historically issued new shares of CommonStock or treasury stock to settle its equity based awards. In May 2006,Forest retired the Company’s treasury stock. As a result of the retirement,settlements on equity based awards subsequent to May 2006 will be fromissuances of new shares of Common Stock.

***Stock Options***

The followingtable summarizes stock option activity in the Company’s stock-basedcompensation plans for the six months ended June 30, 2006. The number ofshares and the exercise price of the outstanding stock options were adjusted sothat the fair value of each award was the same immediately before and after theSpin-off, in accordance with the anti-dilution provisions in the 2001 Plan and1996 Plan.
| ** **                             | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** | **Aggregate  Intrinsic Value**(In Thousands)(1) | ** ** | **Number of  Shares  Exercisable** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------|------------|
| Outstanding at  January 1, 2006   |       | 2,578,235                   |       | $                                                          | 27.78      |                                                      | $          | 45,889                                  |       | 1,348,599 |   |
| Granted                                |       | —                      |       | —                                                     |       |                                                      |       |                                    |       |
| Exercised                              |       | (58,337                     | )          | 28.71                                                      |       | 1,255                                                     |       |                                    |       |
| Cancelled                              |       | (98,587                     | )          | 30.91                                                      |       |                                                      |       |                                    |       |
| Outstanding at  March 2, 2006     |       | 2,421,311                   |       | 27.63                                                      |       | 55,723                                                    |       |                                    |       |
| Adjustment to  give effect to Spin-off |       | 1,176,804                   |       | —                                                     |       |                                                      |       |                                    |       |
| Granted                                |       | 50,000                      |       | 36.95                                                      |       |                                                      |       |                                    |       |
| Exercised                              |       | (94,516                     | )          | 18.34                                                      |       | 1,662                                                     |       |                                    |       |
| Cancelled                              |       | (49,835                     | )          | 20.06                                                      |       |                                                      |       |                                    |       |
| Outstanding at  June 30, 2006     |       | 3,503,764                   |       | 18.84                                                      |       | 49,349                                                    |       | 2,199,687                               |       |
|                                        |            |                             |            |                                                            |            |                                                           |            |                                         |            |  |  |

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(1)                Theintrinsic value of a stock option is the amount by which the current marketvalue of the underlying stock exceeds the exercise price of the option.

Stock options are grantedat the fair market value of one share of Common Stock on the date of grant.Options granted to non-employee directors vest immediately and options grantedto officers and other employees vest ratably over four years. All outstandingoptions had a term of ten years at the date of grant.

9

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

The fair value ofstock options granted in the second quarter of 2006 was estimated using theBlack-Scholes option pricing model. The following weighted averageassumptions were used to compute the fair market value of stock options grantedin the six months ended June 30, 2006 and 2005:
| ** **                                                               | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Expected life of  options                                                |       | 10 years                                      |       | 5  years |   |
| Risk free  interest rates                                                |       | 5.13%                                         |       | 3.64%  to 4.20% |   |
| Estimated  volatility                                                    |       | 45%                                           |       | 33%  to 35% |   |
| Dividend yield                                                           |       | 0.0%                                          |       | 0.0% |   |
| Weighted average fair  market value of options granted during the period |       | $23.60                                        |       | $9.17 |   |

 

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

The followingtable summarizes information about options outstanding at June 30, 2006:
| ** **                              | ** ** | **Stock Options Outstanding** | ** ** | **Stock Options Exercisable** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | ** **                              | ** ** | **Number of  Options**             | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value(In  Thousands)** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value(In  Thousands)** | ** ** |
| $ 8.41 -  16.75               |       | 727,226                                 |       | 6.28                                    |       | $ | 14.93 |   | $ | 13,086 |   | 519,613 |   | $ | 14.79 |   | $ | 9,391 |   |
|  16.82 -  16.85               |       | 778,726                                 |       | 7.05                                    |       | 16.84 |   | 12,524 |   | 485,641 |   | 16.84 |   | 7,784 |   |
|  16.88 -  20.02               |       | 761,345                                 |       | 4.84                                    |       | 18.91 |   | 10,673 |   | 716,772 |   | 18.97 |   | 9,961 |   |
|  20.19 -  20.47               |       | 33,436                                  |       | 7.88                                    |       | 20.30 |   | 422 |   | 11,704 |   | 20.35 |   | 146 |   |
|  20.60 -  36.95               |       | 1,203,031                               |       | 8.22                                    |       | 22.41 |   | 12,644 |   | 465,957 |   | 23.44 |   | 4,392 |   |
| $ 8.41 - 36.95                |       | 3,503,764                               |       | 6.82                                    |       | 18.84 |   | $ | 49,349 |   | 2,199,687 |   | 18.47 |   | $ | 31,674 |   |
|                                         |            |                                         |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Restricted Stock and Phantom Stock Units***

The followingsummarizes restricted stock and phantom stock unit activity during the sixmonths ended June 30, 2006. The grant date fair value of the restrictedcommon stock and phantom stock units was determined by reference to the averageof the high and low stock price of a share of Common Stock as published by theNYSE on the date of grant.
| ** **                        | ** ** | **Restricted Stock**  | ** ** | **Phantom Stock Units**                          | ** ** |
|-----------------------------------|------------|----------------------------|------------|------------------------------------------------------------|------------|
| ** **                        | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value**(1) | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value**(1) | ** ** |
| Unvested at  January 1, 2006 |       | 634,000                    |       | $                                                          | 43.72      |   | 72,350 |   | $ | 46.07 |   |
| Granted                           |       | 22,600                     |       | 43.85                                                      |       | 9,500 |   | 38.77 |   |
| Vested                            |       | (100                       | )          | 46.07                                                      |       | — |   | — |   |
| Forfeited                         |       | (21,350                    | )          | 46.07                                                      |       | (6,000 | ) | 46.07 |   |
| Unvested at  June 30, 2006   |       | 635,150                    |       | 43.65                                                      |       | 75,850 |   | 45.16 |   |
|                                   |            |                            |            |                                                            |            |  |  |  |  |  |  |

----

(1)                Theseper-share fair values represent the actual grant date fair value and have notbeen adjusted to give effect to the Spin-off. In connection with the Spin-off,holders of restricted stock awards received .8093 unrestricted shares of FERIfor each share of restricted stock. Accordingly, compensation cost ofapproximately $8.4 million was recorded in the first quarter of 2006 as apartial settlement of the restricted stock award, or approximately $13.00 pershare. In addition, cash bonuses totaling $1.2 million were paid to Canadianemployees in the first quarter of 2006 who held phantom stock units on thatdate representing the per-share value of the FERI shares received by eachholder of restricted stock.

10

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

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

***Employee Stock Purchase Plan***

The Company has a 1999 Employee Stock Purchase Plan(the “ESPP”), under which it is authorized to issue up to 300,000 shares ofCommon Stock. Employees who are regularly scheduled to work more than20 hours per week and more than five months in any calendar year mayparticipate in the ESPP. Under the terms of the ESPP, employees may elect eachquarter to have up to 15% of their annual base earnings withheld to purchaseshares of Common Stock, up to a limit of $25,000 of Common Stock per calendaryear. The ESPP currently provides for four offering periods during the yearwhich coincide with the calendar quarters. The purchase price of a share ofCommon Stock purchased under the ESPP is equal to 85% of the lower of thebeginning-of-quarter or end-of-quarter market price. ESPP participants arerestricted from selling the shares of Common Stock purchased under the ESPP fora period of six months after purchase. As of June 30, 2006, the Companyhad 176,056 shares available for issuance under the ESPP.

***Pro Forma Effects***

Had Forestrecognized compensation expense for all stock-based awards based upon theestimated fair value on the grant date under the fair value methodologyprescribed by SFAS 123, as amended by SFAS 148 and SFAS 123(R), its pro formanet earnings and earnings per common sharefor the three and six month periods ended June 30, 2005 would have been asfollows:
| ** **                                                                                                                    | ** ** | **Three Months Ended  June 30, 2005** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **(In Thousands)**                                   | ** ** |
| Net earnings, as  reported                                                                                                    |       | $                                                         | 52,201     |                                                    | 91,072     |   |
| Add: Stock-based  employee compensation included in reported net income, net of tax                            |       | 99                                                        |       | 174                                                     |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value  based method for all awards, net of tax |       | (722                                                      | )          | (1,458                                                  | )          |
| Pro forma net  earnings                                                                                                       |       | $                                                         | 51,578     |                                                    | 89,788     |   |
| Basic earnings per  common share:                                                                                             |       |                                                      |       |                                                    |       |
| As reported                                                                                                                   |       | $                                                         | .85        |                                                    | 1.50       |   |
| Pro forma                                                                                                                     |       | $                                                         | .84        |                                                    | 1.48       |   |
| Diluted earnings per  common share:                                                                                           |       |                                                      |       |                                                    |       |
| As reported                                                                                                                   |       | $                                                         | .83        |                                                    | 1.46       |   |
| Pro forma                                                                                                                     |       | $                                                         | .82        |                                                    | 1.44       |   |

 

11

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**(5) LONG-TERMDEBT**

Components oflong-term debt are as follows:
| ** **                        | ** ** | **June 30, 2006** | ** ** | **December 31, 2005**  | ** ** |
|-----------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **Principal**               | ** ** | **UnamortizedPremium(Discount)** | ** ** | **Other **(1) | ** ** | **Total** | ** ** | **Principal** | ** ** | **UnamortizedPremium(Discount)** | ** ** | **Other **(1) | ** ** | **Total** | ** ** |
| ** **                        | ** ** | **(In Thousands)**     | ** ** |
| U.S. Credit  Facility             |       | $                           | 280,000    |                             | —     |   | — |   | 280,000 |   | 97,000 |   | — |   | — |   | 97,000 |   |
| Canadian Credit  Facility         |       | 78,839                      |       | —                           |       | — |   | 78,839 |   | 56,806 |   | — |   | — |   | 56,806 |   |
| 8% Senior Notes  Due 2008         |       | 265,000                     |       | (195                             | )          | 4,512 |   | 269,317 |   | 265,000 |   | (244 | ) | 5,652 |   | 270,408 |   |
| 8% Senior Notes  Due 2011         |       | 285,000                     |       | 7,104                            |       | 4,576 |   | 296,680 |   | 285,000 |   | 7,750 |   | 4,992 |   | 297,742 |   |
| 73¤4%  Senior Notes Due 2014 |       | 150,000                     |       | (1,870                           | )          | 13,958 |   | 162,088 |   | 150,000 |   | (1,990 | ) | 14,841 |   | 162,851 |   |
|                              |       | $                           | 1,058,839  |                             | 5,039      |   | 23,046 |   | 1,086,924 |   | 853,806 |   | 5,516 |   | 25,485 |   | 884,807 |   |

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(1)                Representsthe unamortized portion of gains realized upon termination of interest rateswaps that were accounted for as fair value hedges. The gains are beingamortized as a reduction of interest expense over the terms of the notes.

**(6) PROPERTYAND EQUIPMENT**

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

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

Pursuant to full cost accounting rules, capitalizedcosts less related accumulated depletion and deferred income taxes for eachcost center may not exceed the sum of (1) the present value of future netrevenue from estimated production of proved oil and gas reserves using currentprices, including the effects of derivative instruments but excluding thefuture cash outflows associated with settling asset retirement obligations thathave been accrued on the balance sheet, and a discount factor of 10%; plus (2) thecost of properties not being amortized, if any; plus (3) the lower of costor estimated fair value of unproved properties included in the costs beingamortized, if any; less (4) income tax effects related to differences inthe book and tax basis of oil and gas properties. Gain or loss is notrecognized on the sale of oil and gas properties unless the sale significantlyalters the relationship between capitalized costs and estimated proved oil andgas reserves attributable to a cost center.

Depletion of proved oil and gas properties is computedon the units-of-production method, whereby capitalized costs, as adjusted forfuture development costs and asset retirement obligations, are amortized overthe total estimated proved reserves. Furniture and fixtures, computer hardwareand software, and other equipment are depreciated on the straight-line ordeclining balance method, based upon estimated useful lives of the assetsranging from three to 12 years.

12

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**(7) ASSETRETIREMENT OBLIGATIONS**

Forest records estimated future asset retirementobligations pursuant to the provisions of Statement of Financial AccountingStandards No. 143, *Accounting for AssetRetirement Obligations* (“SFAS No. 143”). SFAS No. 143requires entities to record the fair value of a liability for an assetretirement obligation in the period in which it is incurred with 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.

The followingtable summarizes the activity for Forest’s asset retirement obligations for thesix months ended June 30, 2006 and 2005:
| ** **                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(In Thousands)**                       | ** ** |
| Asset retirement  obligations at beginning of period |       | $                                             | 211,554    |   | 210,176 |   |
| Accretion  expense                                   |       | 4,653                                         |       | 8,599 |   |
| Liabilities  incurred                                |       | 488                                           |       | 3,433 |   |
| Liabilities  assumed                                 |       | 1,009                                         |       | 705 |   |
| Liabilities  included in the Spin-off                |       | (150,182                                      | )          | — |   |
| Liabilities  settled                                 |       | (5,604                                        | )          | (9,266 | ) |
| Revisions of  estimated liabilities                  |       | 340                                           |       | 3,561 |   |
| Impact of  foreign currency exchange rate            |       | 506                                           |       | (219 | ) |
| Asset retirement  obligations at end of period       |       | 62,764                                        |       | 216,989 |   |
| Less: Current  asset retirement obligations          |       | (1,741                                        | )          | (36,772 | ) |
| Long-term asset  retirement obligations              |       | $                                             | 61,023     |   | 180,217 |   |

 

**(8) EMPLOYEEBENEFITS**

The followingtable sets forth the components of the net periodic cost of Forest’s definedbenefit pension plans and postretirement benefits in the United States for thethree and six months ended June 30, 2006 and 2005:
| ** **                      | ** ** | **Pension Benefits**                   | ** ** | **Postretirement  Benefits**                | ** ** | **Pension Benefits**                 | ** ** | **Postretirement  Benefits**              | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **Three Months  Ended  June 30,** | ** ** | **Three Months  Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
| ** **                      | ** ** | **2006**                                    | ** ** | **2005**                                    | ** ** | **2006**                                  | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(In Thousands)**                     | ** ** |
| Service cost                    |       | $                                           | —     |                                        | —     |                                      | 137        |                                      | 167        |   | — |   | — |   | 306 |   | 334 |   |
| Interest cost                   |       | 548                                         |       | 581                                         |       | 101                                       |       | 113                                       |       | 1,096 |   | 1,162 |   | 219 |   | 226 |   |
| Curtailment gain  (1)           |       | —                                      |       | —                                      |       | —                                    |       | —                                    |       | — |   | — |   | (1,851 | ) | — |   |
| Expected return  on plan assets |       | (607                                        | )          | (586                                        | )          | —                                    |       | —                                    |       | (1,215 | ) | (1,172 | ) | — |   | — |   |
| Recognized  actuarial loss      |       | 228                                         |       | 188                                         |       | —                                    |       | —                                    |       | 455 |   | 376 |   | — |   | — |   |
| Total net periodic  expense     |       | $                                           | 169        |                                        | 183        |                                      | 238        |                                      | 280        |   | 336 |   | 366 |   | (1,326 | ) | 560 |   |

----

(1)                Forestrecognized a $1.9 million curtailment gain in connection with the Spin-off on March 2,2006. This gain was recorded as a reduction in general and administrativeexpense for the six months ended June 30, 2006.

**(9) FINANCIALINSTRUMENTS**

Forest periodically enters into derivative instrumentssuch as swap, basis swap, and collar agreements in order to provide a measureof stability to Forest’s cash flows in an environment of volatile oil and gasprices and to manage the exposure to commodity price risk. Forest’s commodityderivative instruments generally serve as effective economic hedges of commodityprice exposure; however, various circumstances can cause commodity hedges tonot qualify for cash flow 

13

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hedge accounting eitherat the inception of the hedge or during the term of the hedge. When thecriteria for cash flow hedge accounting are not met or when cash flow hedgingis not elected, realized gains and losses (i.e., cash settlements) are recordedin other income and expense in the Condensed Consolidated Statements ofOperations. Similarly, changes in the fair value of the derivative instrumentsare recorded as unrealized gains or losses in the Condensed ConsolidatedStatements of Operations. In contrast, cash settlements for derivativeinstruments that qualify for hedge accounting are recorded as additions to orreductions of oil and gas revenues while changes in fair value of cash flowhedges are recognized, to the extent the hedge is effective, in othercomprehensive income until the hedged item is recognized in earnings.

*** ***

**(9) FINANCIALINSTRUMENTS (Continued)**

***Discontinuance of Hedge Accounting***

As a result of production deferrals experienced in theGulf of Mexico related to hurricanes Katrina and Rita, Forest was required todiscontinue cash flow hedge accounting on some of its natural gas and oilhedges during the third and fourth quarters of 2005. Additionally, as a resultof the Spin-off on March 2, 2006, additional commodity swaps and collarsformerly designated as cash flow hedges of offshore Gulf of Mexico productionalso no longer qualified for hedge accounting.

Because a significant portion of the Company’sderivatives no longer qualified for hedge accounting and to increase clarity inits financial statements, the Company elected to discontinue hedge accountingprospectively for all of its remaining commodity derivatives beginning in March 2006.This change in reporting will have no impact on the Company’s reported cashflows, although future results of operations will be affected by mark-to-marketgains and losses, which fluctuate with volatile oil and gas prices. Subsequentto March 2006, the Company has recognized all mark-to-market gains andlosses in earnings, rather than deferring such amounts in accumulated othercomprehensive income included in shareholders’ equity.

The netmark-to-market loss on the Company’s remaining swaps and collars that qualifiedfor cash flow hedge accounting at the date the decision was made to discontinuehedge accounting are deferred in accumulated other comprehensive income andwill be amortized into oil and gas revenues as the original forecasted hedgedoil and gas production occurs in 2006. Amortization of the net deferred losseswill be recorded in 2006 as follows:
| ** **           | ** ** | **(In Thousands)** | ** ** |
|----------------------|------------|-------------------------|------------|
| Third Quarter  2006  |       | $                       | 2,250      |   |
| Fourth Quarter  2006 |       | 3,207                   |       |
|                 |       | $                       | 5,457      |   |

 

The table belowsummarizes the realized and unrealized losses (gains) Forest incurred relatedto its derivative instruments for the periods indicated.
| ** **                                                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                      | ** ** | **(In Thousands)**                         | ** ** |
| Realized losses  on derivatives designated as cash flow hedges(1)               |       | $                                               | 1,677      |                                          | 33,541     |   | 38,357 |   | 54,350 |   |
| Realized losses  (gains) on derivatives not designated as cash flow hedges(2)   |       | 13,698                                          |       | (850                                          | )          | 17,613 |   | (318 | ) |
| Ineffectiveness  recognized on derivatives designated as cash flow hedges(2)    |       | —                                          |       | (2,181                                        | )          | (5,573 | ) | (792 | ) |
| Unrealized  (gains) losses on derivatives not designated as cash flow hedges(2) |       | (14,378                                         | )          | (2,129                                        | )          | 15,309 |   | 3,062 |   |
| Total realized and  unrealized losses recorded                                  |       | $                                               | 997        |                                          | 28,381     |   | 65,706 |   | 56,302 |   |

----

(1)                Included in oiland gas sales in the Condensed Consolidated Statements of Operations.

(2)                Included in otherincome and expense in the Condensed Consolidated Statements of Operations.

14

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**(9) FINANCIALINSTRUMENTS (Continued)**

The tables belowset forth Forest’s outstanding commodity swaps and collars as of June 30,2006:
| ** **           | ** ** | **Swaps**                                 | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **Natural Gas (NYMEX HH)** | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **           | ** ** | **Bbtu  per Day**                    | ** ** | **Weighted  Average Hedged  Price per MMBtu** | ** ** | **Barrels  per Day** | ** ** | **Weighted Average  Hedged Price per Bbl** | ** ** |
| Third Quarter 2006   |       | 10.0                                      |       | $ | 5.51 |   | 7,500 |   | $ | 51.18 |   |
| Fourth Quarter  2006 |       | 10.0                                      |       | 5.51 |   | 7,500 |   | 51.18 |   |
| Fiscal 2007          |       | —                                    |       | — |   | 3,500 |   | 73.16 |   |
| Fiscal 2008          |       | —                                    |       | — |   | 3,000 |   | 73.02 |   |
| Fiscal 2009          |       | —                                    |       | — |   | 2,500 |   | 73.02 |   |
| Fiscal 2010          |       | —                                    |       | — |   | 2,000 |   | 73.15 |   |
|                      |            |                                           |            |  |  |  |  |  |  |  |  |

 
| ** **           | ** ** | **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** | ** ** |
| Third Quarter  2006  |       | 50.0                                      |       | $ | 7.43/11.88 |   | 5,500 |   | $ | 46.73/65.87 |   |
| Fourth Quarter  2006 |       | 50.0                                      |       | 7.43/11.88 |   | 5,500 |   | 46.73/65.87 |   |
| Fiscal 2007          |       | 15.0                                      |       | 9.60/10.85 |   | 2,000 |   | 65.13/85.25 |   |
|                      |            |                                           |            |  |  |  |  |  |  |  |  |

 

At June 30, 2006, the fair value of Forest’scommodity derivative contracts was a liability of $50.4 million (of which $49.2million was classified as current) and a derivative asset of $14.6 million (ofwhich $10.9 million was classified as current). 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.

In July 2006,the Company entered into additional costless collar agreements. The table belowsets forth the weighted average terms of these agreements.
| ** **  | ** ** | **Costless Collars**                 | ** ** |
|-------------|------------|-------------------------------------------|------------|
| ** **  | ** ** | **Natural Gas (NYMEX HH)** | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **  | ** ** | **Bbtu  per Day**                    | ** ** | **Weighted Average  Hedged Floor and  Ceiling Price  per MMBtu** | ** ** | **Barrels  per Day** | ** ** | **Weighted Average  Hedged Floor and  Ceiling Price per Bbl** | ** ** |
| Fiscal 2007 |       | 20.0                                      |       | $ | 8.13/12.34 |   | 2,000 |   | $ | 66.50/89.10 |   |
|             |            |                                           |            |  |  |  |  |  |  |  |  |

 

**(10) BUSINESSAND GEOGRAPHICAL SEGMENTS**

Segment information has been prepared in accordancewith Statement of Financial Accounting Standards No. 131, *Disclosures About Segments of an Enterprise andRelated Information*. At June 30, 2006, Forest had fivereportable segments consisting of oil and gas operations in five business unitsSouthern (formerly Gulf Coast), Western, Alaska, Canada, and International. Forest’sremaining marketing and processing activities are not significant and thereforeare not reported as a separate segment, but are included as a reconciling itemin the information below. The segments were determined based upon the type ofoperations in each business unit and the geographical location of each. Thesegment data presented below was prepared on the same basis as the CondensedConsolidated Financial Statements. Effective in the first quarter of 2006, theCompany ceased allocating general and administrative expenses to the businessunits to correspond with the Company’s decision to monitor and evaluate generaland administrative expenses at the corporate level. Additionally, the Companymodified the method utilized in allocating depletion expense between itsbusiness units effective in the first quarter of 2006 such that the depletionrate per Mcfe is consistent among those business units within the U.S. costcenter. Segment information previously reported has been modified to conformwith the current presentation.

15

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

**Three Months EndedJune 30, 2006**
| ** **                                | ** ** | **Oil and Gas Operations** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **Southern**                              | ** ** | **Western** | ** ** | **Alaska** | ** ** | **Total U.S.** | ** ** | **Canada** | ** ** | **International** | ** ** | **Total  Company** | ** ** |
| ** **                                | ** ** | **(In Thousands)**                   | ** ** |
| Revenue                                   |       | $                                         | 40,940     |   | 83,013 |   | 42,192 |   | 166,145 |   | 44,078 |   | — |   | 210,223 |   |
| Expenses:                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Lease operating expenses                  |       | 4,800                                     |       | 9,799 |   | 13,565 |   | 28,164 |   | 7,365 |   | — |   | 35,529 |   |
| Production and property taxes             |       | 2,799                                     |       | 6,880 |   | 577 |   | 10,256 |   | 741 |   | — |   | 10,997 |   |
| Transportation costs                      |       | 151                                       |       | 532 |   | 2,745 |   | 3,428 |   | 2,214 |   | — |   | 5,642 |   |
| Depletion                                 |       | 10,128                                    |       | 24,098 |   | 8,623 |   | 42,849 |   | 19,548 |   | — |   | 62,397 |   |
| Accretion of asset retirement obligations |       | 378                                       |       | 224 |   | 424 |   | 1,026 |   | 264 |   | 11 |   | 1,301 |   |
| Impairments                               |       | —                                    |       | — |   | — |   | — |   | — |   | 2,078 |   | 2,078 |   |
| Earnings (loss)  from operations          |       | $                                         | 22,684     |   | 41,480 |   | 16,258 |   | 80,422 |   | 13,946 |   | (2,089 | ) | 92,279 |   |
| Capital  expenditures                     |       | $                                         | 24,187     |   | 74,689 |   | 10,129 |   | 109,005 |   | 25,128 |   | 4,689 |   | 138,822 |   |
| Goodwill                                  |       | $                                         | 15,009     |   | 56,367 |   | — |   | 71,376 |   | 16,349 |   | — |   | 87,725 |   |

 

A reconciliationof segment earnings (loss) from operations to consolidated earnings beforeincome taxes and discontinued operations is as follows:
| ** **                                                               | ** ** | **(In Thousands)** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|
| Earnings from  operations for reportable segments                        |       | $                       | 92,279     |   |
| Marketing,  processing, and other                                        |       | 1,630                   |       |
| General and  administrative expense (including stock-based compensation) |       | (11,071                 | )          |
| Administrative  asset depreciation                                       |       | (856                    | )          |
| Interest expense                                                         |       | (17,340                 | )          |
| Unrealized gains  on derivative instruments, net                         |       | 14,378                  |       |
| Realized losses  on derivative instruments, net                          |       | (13,698                 | )          |
| Other income,  net                                                       |       | 110                     |       |
| Earnings before income  taxes and discontinued operations                |       | $                       | 65,432     |   |

 

**Six Months Ended June 30,2006**
| ** **                                      | ** ** | **Oil and Gas Operations** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **Southern**                              | ** ** | **Western** | ** ** | **Alaska** | ** ** | **Total U.S.** | ** ** | **Canada** | ** ** | **International** | ** ** | **Total  Company** | ** ** |
| ** **                                      | ** ** | **(In Thousands)**                   | ** ** |
| Revenue                                         |       | $                                         | 111,785    |   | 163,237 |   | 65,713 |   | 340,735 |   | 88,584 |   | — |   | 429,319 |   |
| Expenses:                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Lease operating expenses                        |       | 27,291                                    |       | 19,562 |   | 20,330 |   | 67,183 |   | 13,677 |   | — |   | 80,860 |   |
| Production and property taxes                   |       | 5,008                                     |       | 14,087 |   | 1,177 |   | 20,272 |   | 1,453 |   | — |   | 21,725 |   |
| Transportation costs                            |       | 811                                       |       | 1,125 |   | 4,348 |   | 6,284 |   | 4,087 |   | — |   | 10,371 |   |
| Depletion                                       |       | 36,205                                    |       | 49,290 |   | 15,271 |   | 100,766 |   | 38,487 |   | — |   | 139,253 |   |
| Accretion of asset retirement obligations  |       | 2,832                                     |       | 446 |   | 840 |   | 4,118 |   | 513 |   | 22 |   | 4,653 |   |
| Impairments                                     |       | —                                    |       | — |   | — |   | — |   | — |   | 2,078 |   | 2,078 |   |
| Earnings (loss)  from operations                |       | $                                         | 39,638     |   | 78,727 |   | 23,747 |   | 142,112 |   | 30,367 |   | (2,100 | ) | 170,379 |   |
| Capital  expenditures                           |       | $                                         | 355,730    |   | 157,677 |   | 19,431 |   | 532,838 |   | 74,815 |   | 5,563 |   | 613,216 |   |
| Goodwill                                        |       | $                                         | 15,009     |   | 56,367 |   | — |   | 71,376 |   | 16,349 |   | — |   | 87,725 |   |

 

16

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

A reconciliationof segment earnings (loss) from operations to consolidated earnings beforeincome taxes and discontinued operations is as follows:
| ** **                                                               | ** ** | **(In Thousands)** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|
| Earnings from  operations for reportable segments                        |       | $                       | 170,379    |   |
| Marketing,  processing, and other                                        |       | 3,980                   |       |
| General and  administrative expense (including stock-based compensation) |       | (28,207                 | )          |
| Administrative  asset depreciation                                       |       | (1,668                  | )          |
| Spin-off and  merger costs                                               |       | (5,416                  | )          |
| Interest expense                                                         |       | (32,491                 | )          |
| Unrealized  losses on derivative instruments, net                        |       | (9,736                  | )          |
| Realized losses  on derivative instruments, net                          |       | (17,613                 | )          |
| Other expense,  net                                                      |       | (750                    | )          |
| Earnings before income  taxes and discontinued operations                |       | $                       | 78,478     |   |

 

**Three Months EndedJune 30, 2005**
| ** **                                      | ** ** | **Oil and Gas Operations** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **Southern**                              | ** ** | **Western** | ** ** | **Alaska** | ** ** | **Total U.S.** | ** ** | **Canada** | ** ** | **International** | ** ** | **Total  Company** | ** ** |
| ** **                                      | ** ** | **(In Thousands)**                   | ** ** |
| Revenue                                         |       | $                                         | 136,050    |   | 70,132 |   | 27,004 |   | 233,186 |   | 36,169 |   | — |   | 269,355 |   |
| Expenses:                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Lease operating expenses                        |       | 22,034                                    |       | 9,232 |   | 10,016 |   | 41,282 |   | 4,501 |   | — |   | 45,783 |   |
| Production and property taxes                   |       | 3,431                                     |       | 6,288 |   | 559 |   | 10,278 |   | 269 |   | — |   | 10,547 |   |
| Transportation costs                            |       | 1,112                                     |       | 447 |   | 1,827 |   | 3,386 |   | 1,197 |   | — |   | 4,583 |   |
| Depletion                                       |       | 50,673                                    |       | 23,579 |   | 7,793 |   | 82,045 |   | 14,349 |   | — |   | 96,394 |   |
| Accretion of asset retirement obligations  |       | 3,503                                     |       | 215 |   | 391 |   | 4,109 |   | 203 |   | 10 |   | 4,322 |   |
| Earnings (loss)  from operations                |       | $                                         | 55,297     |   | 30,371 |   | 6,418 |   | 92,086 |   | 15,650 |   | (10 | ) | 107,726 |   |
| Capital  expenditures                           |       | $                                         | 67,335     |   | 323,512 |   | 5,514 |   | 396,361 |   | 11,926 |   | 987 |   | 409,274 |   |
| Goodwill                                        |       | $                                         | 14,602     |   | 70,583 |   | — |   | 85,185 |   | 14,712 |   | — |   | 99,897 |   |

 

A reconciliationof segment earnings (loss) from operations to consolidated earnings beforeincome taxes and discontinued operations is as follows:
| ** **                                                               | ** ** | **(In Thousands)** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|
| Earnings from  operations for reportable segments                        |       | $                       | 107,726    |   |
| Marketing, processing,  and other                                        |       | 1,700                   |       |
| General and  administrative expense (including stock-based compensation) |       | (11,091                 | )          |
| Administrative  asset depreciation                                       |       | (855                    | )          |
| Interest expense                                                         |       | (16,061                 | )          |
| Unrealized gains  on derivative instruments, net                         |       | 4,310                   |       |
| Realized gains  on derivative instruments, net                           |       | 850                     |       |
| Other expense,  net                                                      |       | (2,509                  | )          |
| Earnings before income  taxes and discontinued operations                |       | $                       | 84,070     |   |

 

17

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

**Six Months Ended June 30,2005**
| ** **                                      | ** ** | **Oil and Gas Operations** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **Southern**                              | ** ** | **Western** | ** ** | **Alaska** | ** ** | **Total U.S.** | ** ** | **Canada** | ** ** | **International** | ** ** | **Total  Company** | ** ** |
| ** **                                      | ** ** | **(In Thousands)**                   | ** ** |
| Revenue                                         |       | $                                         | 284,078    |   | 121,539 |   | 53,406 |   | 459,023 |   | 69,202 |   | — |   | 528,225 |   |
| Expenses:                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Lease operating expenses                        |       | 42,096                                    |       | 17,583 |   | 24,241 |   | 83,920 |   | 9,723 |   | — |   | 93,643 |   |
| Production and property taxes                   |       | 6,993                                     |       | 10,884 |   | 1,122 |   | 18,999 |   | 1,445 |   | — |   | 20,444 |   |
| Transportation costs                            |       | 2,061                                     |       | 906 |   | 3,664 |   | 6,631 |   | 3,124 |   | — |   | 9,755 |   |
| Depletion                                       |       | 105,735                                   |       | 42,295 |   | 14,804 |   | 162,834 |   | 29,005 |   | — |   | 191,839 |   |
| Accretion of asset retirement obligations  |       | 6,892                                     |       | 508 |   | 750 |   | 8,150 |   | 439 |   | 10 |   | 8,599 |   |
| Impairments                                     |       | —                                    |       | — |   | — |   | — |   | — |   | 2,924 |   | 2,924 |   |
| Earnings (loss)  from operations                |       | $                                         | 120,301    |   | 49,363 |   | 8,825 |   | 178,489 |   | 25,466 |   | (2,934 | ) | 201,021 |   |
| Capital  expenditures                           |       | $                                         | 104,500    |   | 347,031 |   | 7,237 |   | 458,768 |   | 45,855 |   | 1,254 |   | 505,877 |   |
| Goodwill                                        |       | $                                         | 14,602     |   | 70,583 |   | — |   | 85,185 |   | 14,712 |   | — |   | 99,897 |   |

 

A reconciliationof segment earnings (loss) from operations to consolidated earnings beforeincome taxes and discontinued operations is as follows:
| ** **                                                               | ** ** | **(In Thousands)** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|
| Earnings from  operations for reportable segments                        |       | $                       | 201,021    |   |
| Marketing,  processing, and other                                        |       | 3,121                   |       |
| General and  administrative expense (including stock-based compensation) |       | (21,847                 | )          |
| Administrative  asset depreciation                                       |       | (1,686                  | )          |
| Interest expense                                                         |       | (30,560                 | )          |
| Unrealized  losses on derivative instruments, net                        |       | (2,270                  | )          |
| Realized gains  on derivative instruments, net                           |       | 318                     |       |
| Other expense,  net                                                      |       | (3,910                  | )          |
| Earnings before income  taxes and discontinued operations                |       | $                       | 144,187    |   |

 

**(11) RECENTACCOUNTING PRONOUNCEMENTS**

Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”), *Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109*, was issued in July 2006and will be effective for the Company on January 1, 2007. FIN 48 definesthe threshold for recognizing the benefits of uncertain tax return positions inthe financial statements. The Company has not yet determined the impact this Interpretationwill have on its financial position, results of operations or cash flows.

18

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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 discussion and analysis should be readin conjunction with Forest’s Condensed Consolidated Financial Statements andNotes thereto, the information under the heading “Forward-Looking Statements”below, and the information included in Forest’s 2005 Annual Report on Form 10-Kunder the heading “Risk Factors”, and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Critical Accounting Policies,Estimates, Judgments, and Assumptions.” Unless the context otherwise indicates, references in this quarterlyreport on Form 10-Q to “Forest,” “we,” “ours,” “us,” or like terms refer to Forest Oil Corporation andits subsidiaries.

**2006 OVERVIEW**

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

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

The Spin-off was completed without the payment ofconsideration by Forest shareholders and consisted of a special dividend of0.8093 shares of FERI for each outstanding share of Forest common stock. TheMerger was accomplished by the exchange of all issued and outstanding shares ofFERI for shares of common stock of Mariner, with each whole share of FERIexchanged for one share of Mariner common stock. The Spin-off was a tax-freetransaction for federal income tax purposes. Prior to the Merger, as part ofthe Spin-off, FERI paid Forest an initial cash amount equal to approximately$176.1 million and subsequent to March 31,2006, Forest received an additional $21.7 million for total proceeds of $197.8million. The cash amount is subject to further potential adjustment toreflect an economic effective date for the transaction of July 1, 2005.

***Cotton Valley Acquisition***

On March 31, 2006, Forest completed the acquisitionof oil and gas properties located primarily in the Cotton Valley trend in EastTexas. Forest paid approximately $255 million, as adjusted to reflect aneconomic effective date of February 1, 2006, for properties with anestimated 110 Bcfe of estimated proved reserves at the time the acquisition wasannounced in February 2006 and production that averaged 13 MMcfe per dayin January 2006. Forest obtained approximately 26,000 net acres in thefields, of which approximately 14,000 net acres were undeveloped. Thisacquisition is expected to provide another core area of growth and addsignificant onshore activity to the Southern business unit. Forest funded thisacquisition utilizing its bank credit facilities.

***Production Increase***

Production from the Retained Properties (seedefinition below) increased 17% during the three months ended June 30, 2006from the corresponding period in 2005 and increased 13% during the six monthsended June 30, 2006 from the same period in 2005. The production increaseis discussed further in Results of Operations, *Oil and GasProduction and Revenues*, below.

***Katy Field***

Effective August 1, 2006, Forest took over asoperator of the Katy field. The field has 33,000 gross acres, and Forest has 6to 10 drilling projects planned for 2006 along with facilities modifications.The capital activity in this field is expected to increase as 31 developmentlocations have been identified. Forest plans to undertake a field studyincluding all 131 existing wellbores with a goal to propose a recompletion anddrilling program in 2007.

19

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***Barnett Shale***

In July 2006, Forest entered into a jointexploration agreement with a third party which increases its gross acreageposition in the Barnett Shale to approximately 20,000 acres. The jointexploration agreement involved approximately 14,000 acres in Hill County,Texas. Each party will participate with approximately 50% working interest inthis joint area. The first horizontal well commenced drilling in the thirdquarter of 2006.

**RESULTS OFOPERATIONS**

As a result of the Spin-off discussed above, therevenues and expenses associated with our offshore Gulf of Mexico operationsare only included in our consolidated results of operations through February 28,2006. As a result, the operational results for the three and six month periodsof 2006 presented are not comparable to the corresponding periods in 2005. Inthe following discussions, revenues and expenses directly attributable with theproperties included in the Spin-off (the “Spin-off Properties”) and thoseretained (the “Retained Properties”) are discussed separately.

Our reported earnings of $57.0 million for the secondquarter of 2006, or $.90 per diluted share, were $4.8 million higher than netearnings of $52.2 million, or $.83 per diluted share, for the same period in2005. The increase in net income was primarily attributable to higher commodityprices offset by lower oil and gas production as a result of the Spin-offtransaction discussed above. Reported earnings for the six months ended June 30,2006 of $60.7 million, or $.96 per diluted share, were $30.4 million lower thannet income of $91.1 million, or $1.46 per diluted share, for the same period in2005. The period over period change in net income was primarily due to the factthat the six months ended June 30, 2006 include only two months of theSpin-off Properties’ operations.

***Oil and Gas Production and Revenues***

Production volumes, oil and gas sales revenue, andaverage sales prices for the three months ended June 30, 2006 and 2005were as follows:
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **Gas**                                             | ** ** | **Oil** | ** ** | **NGLs** | ** ** | **Total** | ** ** | **Gas** | ** ** | **Oil** | ** ** | **NGLs** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **(MMcf)**                                          | ** ** | **(MBbls)** | ** ** | **(MBbls)** | ** ** | **(MMcfe)** | ** ** | **(MMcf)** | ** ** | **(MBbls)** | ** ** | **(MBbls)** | ** ** | **(MMcfe)** | ** ** |
| Production volumes:                  |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Retained  Properties:                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States                        |       | 11,503                                              |       | 1,379 |   | 349 | ** ** | **21,871** |   | 8,808 |   | 1,348 |   | 354 | ** ** | **19,020** | ** ** |
| Canada                               |       | 5,964                                               |       | 181 |   | 107 | ** ** | **7,692** |   | 4,448 |   | 216 |   | 101 | ** ** | **6,350** | ** ** |
| Total Retained Properties            |       | 17,467                                              |       | 1,560 |   | 456 | ** ** | **29,563** |   | 13,256 |   | 1,564 |   | 455 | ** ** | **25,370** | ** ** |
| Spin-off Properties                  |       | —                                              |       | — |   | — | ** ** | **—** |   | 14,325 |   | 633 |   | 210 | ** ** | **19,383** | ** ** |
| Totals                               |       | 17,467                                              |       | 1,560 |   | 456 | ** ** | **29,563** |   | 27,581 |   | 2,197 |   | 665 | ** ** | **44,753** | ** ** |
| Revenues (in  thousands):            |       |                                                |       |   |   |   | ** ** | ** ** |   |   |   |   |   |   | ** ** | ** ** | ** ** |
| Retained  Properties:                |       |                                                |       |   |   |   | ** ** | ** ** |   |   |   |   |   |   | ** ** | ** ** | ** ** |
| United States                        |       | $                                                   | 63,896     |   | 92,159 |   | 11,767 | ** ** | **167,822** |   | 52,484 |   | 67,785 |   | 9,073 | ** ** | **129,342** | ** ** |
| United States hedging gains (losses) |       | 2,713                                               |       | (4,390 | ) | — | ** ** | **(1,677** | **)** | (2,726 | ) | (6,919 | ) | — | ** ** | **(9,645** | **)** |
| Canada                               |       | 28,144                                              |       | 10,699 |   | 5,235 | ** ** | **44,078** |   | 24,726 |   | 8,244 |   | 3,199 | ** ** | **36,169** | ** ** |
| Total Retained Properties            |       | 94,753                                              |       | 98,468 |   | 17,002 | ** ** | **210,223** |   | 74,484 |   | 69,110 |   | 12,272 | ** ** | **155,866** | ** ** |
| Spin-off Properties                  |       | —                                              |       | — |   | — | ** ** | **—** |   | 98,856 |   | 32,436 |   | 6,093 | ** ** | **137,385** | ** ** |
| Spin-off Properties hedging losses   |       | —                                              |       | — |   | — | ** ** | **—** |   | (13,225 | ) | (10,671 | ) | — | ** ** | **(23,896** | **)** |
| Total Spin-off Properties            |       | —                                              |       | — |   | — | ** ** | **—** |   | 85,631 |   | 21,765 |   | 6,093 | ** ** | **113,489** | ** ** |
| Totals                               |       | $                                                   | 94,753     |   | 98,468 |   | 17,002 | ** ** | **210,223** |   | 160,115 |   | 90,875 |   | 18,365 | ** ** | **269,355** | ** ** |
| Average sales  price:                |       |                                                |       |   |   |   | ** ** | ** ** |   |   |   |   |   |   | ** ** | ** ** | ** ** |
| Retained  Properties:                |       |                                                |       |   |   |   | ** ** | ** ** |   |   |   |   |   |   | ** ** | ** ** | ** ** |
| United States                        |       | $                                                   | 5.55       |   | 66.83 |   | 33.72 | ** ** | **7.67** |   | 5.96 |   | 50.29 |   | 25.63 | ** ** | **6.80** | ** ** |
| United States hedging gains (losses) |       | .24                                                 |       | (3.18 | ) | — | ** ** | **(.08** | **)** | (.31 | ) | (5.13 | ) | — | ** ** | **(.51** | **)** |
| Canada                               |       | 4.72                                                |       | 59.11 |   | 48.93 | ** ** | **5.73** |   | 5.56 |   | 38.17 |   | 31.67 | ** ** | **5.70** | ** ** |
| Total Retained Properties            |       | 5.42                                                |       | 63.12 |   | 37.29 | ** ** | **7.11** |   | 5.62 |   | 44.19 |   | 26.97 | ** ** | **6.14** | ** ** |
| Spin-off Properties                  |       | —                                              |       | — |   | — | ** ** | **—** |   | 6.90 |   | 51.24 |   | 29.01 | ** ** | **7.09** | ** ** |
| Spin-off Properties hedging losses   |       | —                                              |       | — |   | — | ** ** | **—** |   | (.92 | ) | (16.86 | ) | — | ** ** | **(1.23** | **)** |
| Total Spin-off Properties            |       | —                                              |       | — |   | — | ** ** | **—** |   | 5.98 |   | 34.38 |   | 29.01 | ** ** | **5.86** | ** ** |
| Totals                               |       | $                                                   | 5.42       |   | 63.12 |   | 37.29 | ** ** | **7.11** |   | 5.81 |   | 41.36 |   | 27.62 | ** ** | **6.02** | ** ** |

 

20

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Productionvolumes, oil and gas sales revenue, and average sales prices for the six monthsended June 30, 2006 and 2005 were as follows:
| ** **                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------|------------|---------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **Gas**                                           | ** ** | **Oil** | ** ** | **NGLs** | ** ** | **Total** | ** ** | **Gas** | ** ** | **Oil** | ** ** | **NGLs** | ** ** | **Total** | ** ** |
| ** **                         | ** ** | **(MMcf)**                                        | ** ** | **(MBbls)** | ** ** | **(MBbls)** | ** ** | **(MMcfe)** | ** ** | **(MMcf)** | ** ** | **(MBbls)** | ** ** | **(MBbls)** | ** ** | **(MMcfe)** | ** ** |
| Production  volumes:               |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Retained Properties:               |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States                      |       | 20,794                                            |       | 2,522 |   | 685 | ** ** | **40,036** |   | 16,418 |   | 2,739 |   | 535 | ** ** | **36,062** | ** ** |
| Canada                             |       | 11,693                                            |       | 372 |   | 204 | ** ** | **15,149** |   | 8,855 |   | 435 |   | 215 | ** ** | **12,755** | ** ** |
| Total Retained Properties          |       | 32,487                                            |       | 2,894 |   | 889 | ** ** | **55,185** |   | 25,273 |   | 3,174 |   | 750 | ** ** | **48,817** | ** ** |
| Spin-off Properties                |       | 6,378                                             |       | 193 |   | 82 | ** ** | **8,028** |   | 29,998 |   | 1,320 |   | 478 | ** ** | **40,786** | ** ** |
| Totals                             |       | 38,865                                            |       | 3,087 |   | 971 | ** ** | **63,213** |   | 55,271 |   | 4,494 |   | 1,228 | ** ** | **89,603** | ** ** |
| Revenues (in thousands):           |       |                                              |       |   |   |   | ** ** | ** ** |   |   |   |   |   |   | ** ** | ** ** | ** ** |
| Retained Properties:               |       |                                              |       |   |   |   | ** ** | ** ** |   |   |   |   |   |   | ** ** | ** ** | ** ** |
| United States                      |       | $                                                 | 129,275    |   | 159,640 |   | 21,568 | ** ** | **310,483** |   | 94,381 |   | 130,452 |   | 13,509 | ** ** | **238,342** | ** ** |
| United States hedging losses  |       | (4,994                                            | )          | (11,043 | ) | — | ** ** | **(16,037** | **)** | (3,869 | ) | (9,782 | ) | — | ** ** | **(13,651** | **)** |
| Canada                             |       | 60,476                                            |       | 18,776 |   | 9,332 | ** ** | **88,584** |   | 46,175 |   | 16,205 |   | 6,822 | ** ** | **69,202** | ** ** |
| Total Retained Properties          |       | 184,757                                           |       | 167,373 |   | 30,900 | ** ** | **383,030** |   | 136,687 |   | 136,875 |   | 20,331 | ** ** | **293,893** | ** ** |
| Spin-off Properties                |       | 53,975                                            |       | 11,614 |   | 3,020 | ** ** | **68,609** |   | 196,713 |   | 64,751 |   | 13,567 | ** ** | **275,031** | ** ** |
| Spin-off Properties hedging losses |       | (16,926                                           | )          | (5,394 | ) | — | ** ** | **(22,320** | **)** | (18,759 | ) | (21,940 | ) | — | ** ** | **(40,699** | **)** |
| Total Spin-off Properties          |       | 37,049                                            |       | 6,220 |   | 3,020 | ** ** | **46,289** |   | 177,954 |   | 42,811 |   | 13,567 | ** ** | **234,332** | ** ** |
| Totals                             |       | $                                                 | 221,806    |   | 173,593 |   | 33,920 | ** ** | **429,319** |   | 314,641 |   | 179,686 |   | 33,898 | ** ** | **528,225** | ** ** |
| Average sales price:               |       |                                              |       |   |   |   | ** ** | ** ** |   |   |   |   |   |   | ** ** | ** ** | ** ** |
| Retained Properties:               |       |                                              |       |   |   |   | ** ** | ** ** |   |   |   |   |   |   | ** ** | ** ** | ** ** |
| United States                      |       | $                                                 | 6.22       |   | 63.30 |   | 31.49 | ** ** | **7.76** |   | 5.75 |   | 47.63 |   | 25.25 | ** ** | **6.61** | ** ** |
| United States hedging losses  |       | (.24                                              | )          | (4.38 | ) | — | ** ** | **(.40** | **)** | (.24 | ) | (3.57 | ) | — | ** ** | **(.38** | **)** |
| Canada                             |       | 5.17                                              |       | 50.47 |   | 45.75 | ** ** | **5.85** |   | 5.21 |   | 37.25 |   | 31.73 | ** ** | **5.43** | ** ** |
| Total Retained Properties          |       | 5.69                                              |       | 57.83 |   | 34.76 | ** ** | **6.94** |   | 5.41 |   | 43.12 |   | 27.11 | ** ** | **6.02** | ** ** |
| Spin-off Properties                |       | 8.46                                              |       | 60.18 |   | 36.83 | ** ** | **8.55** |   | 6.56 |   | 49.05 |   | 28.38 | ** ** | **6.74** | ** ** |
| Spin-off Properties hedging losses |       | (2.65                                             | )          | (27.95 | ) | — | ** ** | **(2.78** | **)** | (.63 | ) | (16.62 | ) | — | ** ** | **(1.00** | **)** |
| Total Spin-off Properties          |       | 5.81                                              |       | 32.23 |   | 36.83 | ** ** | **5.77** |   | 5.93 |   | 32.43 |   | 28.38 | ** ** | **5.74** | ** ** |
| Totals                             |       | $                                                 | 5.71       |   | 56.23 |   | 34.93 | ** ** | **6.79** |   | 5.69 |   | 39.98 |   | 27.60 | ** ** | **5.90** | ** ** |

 

Net oil and gas production from the RetainedProperties in the second quarter of 2006 was 29.6 Bcfe or an average of 324.9MMcfe per day, a 17% increase from 25.4 Bcfe or an average of 278.8 MMcfe perday in the second quarter of 2005. Net oil and gas production from the RetainedProperties in the first six months of 2006 was 55.2 Bcfe or an average of 304.9MMcfe per day, a 13% increase from 48.8 Bcfe or an average of 269.7 MMcfe perday in the same period of 2005. The net increase in oil and gas production ineach period was primarily attributable to success in in-fill drilling programsas well as exploration success in West Texas throughout 2005 and 2006.

Oil and natural gas revenues from the RetainedProperties were $210.2 million during the three months ended June 30,2006, a 35% increase as compared to $155.9 million for the same period in theprior year. The increase in oil and natural gas revenues for the three monthperiod was due to a 17% increase in production as well as a 16% increase in theaverage realized sales price per Mcfe from $6.14 in 2005 to $7.11 in 2006. Oiland natural gas revenues from the Retained Properties were $383.0 millionduring the six months ended June 30, 2006, a 30% increase as compared to $293.9million for the same period in the prior year. The increase in oil and naturalgas revenues for the six month period was due to a 15% increase in the averagerealized sales price per Mcfe from $6.02 in 2005 to $6.94 in 2006 as well as a13% increase in production.

No oil and gas production or revenue was recognized inthe second quarter of 2006 related to the Spin-off Properties as a result ofthe completion of the Spin-off transaction on March 2, 2006. Oil and gasproduction from the Spin-off Properties during the second quarter of 2005 was19.4 Bcfe or an average of 213.0 MMcfe per day. Net oil and gas production fromthe Spin-off Properties in the first six month period of 2006 was 8.0 Bcfecompared to 40.8 Bcfe in the same period in 2005. The decrease in totalproduction was primarily due the fact that the six month period of 2006 onlyincludes two months of offshore production. During the quarter ended June 30,2005 oil and gas revenues from the Spin-off Properties totaled $113.5 millionresulting in an average price per Mcfe of $5.86. Oil and natural gas revenuesfrom the Spin-off Properties totaled $46.3 million, or $5.77 per Mcfe, duringthe six months ended June 30, 2006, as compared to $234.3 million, or$5.74 per Mcfe, for the same period in the prior year. The decrease in totaloil and gas revenues was due to the fact that the six month period of 2006includes only two months of offshore production.

21

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The average realized sales prices for the periodspresented include losses that we recognized on our derivative instrumentsdesignated as cash flow hedges. For the three months ended June 30, 2006,Forest recognized hedging losses of $1.7 million compared to hedging losses of$33.5 million during the same period in the prior year. For the six monthsended June 30, 2006, Forest recognized hedging losses of $38.4 millioncompared to hedging losses of $54.4 million during the same period in the prioryear. The recognized losses in the first sixmonths of 2006 include $15.2 million in hedge losses settled in the fourthquarter of 2005 but recognized in the first quarter of 2006 to correspond withthe timing of the production that was deferred by hurricanes Katrina and Rita. See*Realizedand Unrealized Gains and Losses on Derivative Instruments*below for information on gains and losses recognized on derivative instrumentsnot designated as cash flow hedges during the three and six months ended June 30,2006 and 2005.

***Oil and Gas Production Expense***

The tables belowset forth the detail of oil and gas production expense, for the three and sixmonths ended June 30, 2006 and 2005:
| ** **                                   | ** ** | **Three Months Ended June 30,**               | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **Retained  Properties**                                          | ** ** | **Spin-off  Properties** | ** ** | **Total** | ** ** | **Retained  Properties** | ** ** | **Spin-off  Properties** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(In Thousands, Except per Mcfe Data)** | ** ** |
| Lease operating  expenses (“LOE”): | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct operating expense and overhead        |       | $                                                                 | 32,840     |   | — | ** ** | **32,840** |   | 23,850 |   | 14,486 | ** ** | **38,336** | ** ** |
| Workover expense                             |       | 2,689                                                             |       | — | ** ** | **2,689** |   | 2,731 |   | 4,716 | ** ** | **7,447** | ** ** |
| Total LOE                                    |       | $                                                                 | 35,529     |   | — | ** ** | **35,529** |   | 26,581 |   | 19,202 | ** ** | **45,783** | ** ** |
| LOE per Mcfe                                 |       | $                                                                 | 1.20       |   | — | ** ** | **1.20** |   | 1.05 |   | .99 | ** ** | **1.02** | ** ** |
| Production and property taxes                |       | $                                                                 | 10,997     |   | — | ** ** | **10,997** |   | 9,857 |   | 690 | ** ** | **10,547** | ** ** |
| Production and  property taxes per Mcfe      |       | $                                                                 | .37        |   | — | ** ** | **.37** |   | .39 |   | .04 | ** ** | **.24** | ** ** |
| Transportation costs                         |       | $                                                                 | 5,642      |   | — | ** ** | **5,642** |   | 3,564 |   | 1,019 | ** ** | **4,583** | ** ** |
| Transportation costs  per Mcfe               |       | $                                                                 | .19        |   | — | ** ** | **.19** |   | .14 |   | .05 | ** ** | **.10** | ** ** |

 
| ** **                                   | ** ** | **Six Months Ended June 30,**                 | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **Retained  Properties**                                          | ** ** | **Spin-off  Properties** | ** ** | **Total** | ** ** | **Retained  Properties** | ** ** | **Spin-off  Properties** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(In Thousands, Except per Mcfe Data)** | ** ** |
| Lease operating  expenses (“LOE”): | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct operating expense and overhead        |       | $                                                                 | 57,759     |   | 9,535 | ** ** | **67,294** |   | 49,903 |   | 29,244 | ** ** | **79,147** | ** ** |
| Workover expense                             |       | 4,805                                                             |       | 8,761 | ** ** | **13,566** |   | 7,916 |   | 6,580 | ** ** | **14,496** | ** ** |
| Total LOE                                    |       | $                                                                 | 62,564     |   | 18,296 | ** ** | **80,860** |   | 57,819 |   | 35,824 | ** ** | **93,643** | ** ** |
| LOE per Mcfe                                 |       | $                                                                 | 1.13       |   | 2.28 | ** ** | **1.28** |   | 1.18 |   | .88 | ** ** | **1.05** | ** ** |
| Production and property taxes                |       | $                                                                 | 21,574     |   | 151 | ** ** | **21,725** |   | 19,161 |   | 1,283 | ** ** | **20,444** | ** ** |
| Production and  property taxes per Mcfe      |       | $                                                                 | .39        |   | .02 | ** ** | **.34** |   | .39 |   | .03 | ** ** | **.23** | ** ** |
| Transportation costs                         |       | $                                                                 | 10,027     |   | 344 | ** ** | **10,371** |   | 7,894 |   | 1,861 | ** ** | **9,755** | ** ** |
| Transportation costs  per Mcfe               |       | $                                                                 | .18        |   | .04 | ** ** | **.16** |   | .16 |   | .05 | ** ** | **.11** | ** ** |

 

22

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*Lease OperatingExpenses*

Lease operating expenses in the second quarter of 2006for the Retained Properties increased 34%, or $8.9 million, to $35.5 millionfrom $26.6 million in the second quarter of 2005. On a per-Mcfe basis, LOEincreased by 14% to $1.20 per Mcfe in the second quarter of 2006 from $1.05 perMcfe in the second quarter of 2005. The 14% increase on a per-unit basis wasprimarily attributable to increases in LOE on non-operated properties,increases in fuel costs and higher Canadian exchange rates. Lease operatingexpenses in the first six months of 2006 attributable to the RetainedProperties increased 8%, or $4.7 million, to $62.6 million from $57.8 millionduring the same period in 2005. On a per-Mcfe basis, LOE decreased 4% to $1.13per Mcfe in first six months of 2006 from $1.18 per Mcfe in the correspondingperiod in 2005. The decrease is attributable to a higher percentage ofproduction derived from newly developed gas properties, cost reductioninitiatives, and decreases in workover expenses offset by the increases in LOEduring the second quarter of 2006 as discussed above.

Lease operating expenses for the Spin-off Propertiesduring in the three months ended June 30, 2005 were $19.2 million, or $.99per Mcfe. Lease operating expenses for the Spin-off Properties during the sixmonth period ended June 30, 2006 were $18.3 million compared to $35.8million in 2005. On a per-Mcfe basis, LOE increased $1.40 per Mcfe in 2006 to$2.28 per Mcfe from $.88 per Mcfe in 2005. The primary reason for the increasein LOE for the Spin-off Properties was due to an increase in workover expenses.

*Production andProperty Taxes*

Production and property taxes on the RetainedProperties increased by 12% or $1.1 million during the second quarter of 2006as compared to the prior year’s second quarter. Production and property taxeson the Retained Properties increased by 13% or $2.4 million during the sixmonth period ending June 30, 2006 as compared to the corresponding periodin the prior year. The increase in each of the respective periods was a resultof the higher realized oil and gas revenues and higher assessed propertyvaluations offset by severance tax incentives in Texas.

Production and property taxes for the Spin-offProperties were $.7 million during the second quarter of 2005.  Production and property taxes incurred on theSpin-off Properties were $.2 million during the first six months of 2006 ascompared to $1.3 million during the same period of the prior year. The decrease in theSpin-off Properties’ production and property taxes was due to the fact that thefirst six months of 2006 includes only two months of activity.

*TransportationCosts*

Transportation costs for the Retained Propertiesincreased to $5.6 million or $.19 per Mcfe in the three months ended June 30,2006 from $3.6 million or $.14 per Mcfe for the corresponding 2005 period. Transportationcosts for the Retained Properties increased $2.1 million to $10.0 million inthe six months ended June 30, 2006 from $7.9 million for the corresponding2005 period. Transportation costs for the Retained Properties on a per-Mcfebasis were $.18 per Mcfe and $.16 per Mcfe for the six month periods ended June 30,2006 and 2005, respectively. The increase in transportation costs in eachperiod was primarily due to higher transportation and processing costs inCanada and Alaska.

Transportation costs for the Spin-off Properties on aper-Mcfe basis were $.05 per Mcfe for the quarter ended June 30, 2005. Transportationcosts for the Spin-off Properties on a per-Mcfe basis were $.04 per Mcfe and$.05 per Mcfe for the six month periods ended June 30, 2006 and 2005,respectively.

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***General and Administrative Expense***

The followingtable summarizes the components of general and administrative expense andstock-based compensation expense incurred during the three and six monthperiods ending June 30, 2006 and 2005:
| ** **                                                               | ** ** | **Three Months Ended  June 30,**                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                                          | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                               | ** ** | **(In Thousands, Except per Mcfe Data)** | ** ** |
| Total general  and administrative costs                                  |       | $                                                                 | 14,095     |                                          | 17,200     |   | 29,439 |   | 33,965 |   |
| General and  administrative costs capitalized                            |       | (5,522                                                            | )          | (6,263                                        | )          | (11,584 | ) | (12,400 | ) |
| General and  administrative expense                                      |       | $                                                                 | 8,573      |                                          | 10,937     |   | 17,855 |   | 21,565 |   |
| General and  administrative expense per Mcfe                             |       | $                                                                 | .29        |                                          | .24        |   | .28 |   | .24 |   |
| Total stock-based compensation costs                                     |       | $                                                                 | 3,343      |                                          | 257        |   | 16,196 |   | 470 |   |
| Stock-based  compensation costs capitalized                              |       | (845                                                              | )          | (103                                          | )          | (5,844 | ) | (188 | ) |
| Stock-based  compensation expense                                        |       | $                                                                 | 2,498      |                                          | 154        |   | 10,352 |   | 282 |   |
| Stock-based  compensation expense per Mcfe                               |       | $                                                                 | .08        |                                          | —     |   | .16 |   | — |   |
| Total general  administrative expense including stock-based compensation |       | $                                                                 | 11,071     |                                          | 11,091     |   | 28,207 |   | 21,847 |   |

 

*General andAdministrative Expenses*

The decrease in total general and administrative costsand general and administrative costs expensed from 2005 to 2006 in both thethree and six month periods was primarily related to salary and benefit savingsrelated to employees that terminated their employment with Forest and joinedMariner after the Spin-off. The decrease in total general and administrativecosts and general and administrative costs expensed in the six month period wasalso due to a $1.9 million reduction in our post-retiree medical benefitliability caused by a curtailment in the post retiree medical benefit plan as aresult of the Spin-off.

*Stock-BasedCompensation Expense*

The significant increase in stock-based compensationin 2006 is due to the implementation of Statement of Financial AccountingStandards (“SFAS”) No. 123 (Revised), *Share-Based Payment*(“SFAS 123(R)”). Under this method of accounting, compensation cost is recorded for all unvested stock options, restrictedstock, and phantom stock units beginning in the period of adoption and priorfinancial statements are not restated. Under the fair value recognitionprovisions of SFAS 123(R), stock-based compensation is measured at the grantdate based on the value of the awards and is recognized over the requisiteservice period (usually the vesting period). Prior to January 1, 2006, weaccounted for stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations. Under APB Opinion No. 25, no compensation expense wasrecognized for stock options issued to employees because the grant priceequaled or was above the market price on the date of the option grant.

In accordance with the provisions of SFAS 123(R),stock-based compensation cost in the amount of $3.3 million was recorded in thethree months ended June 30, 2006. Of this amount, $2.5 million wasrecorded as compensation expense and $.8 million was capitalized to oil and gasproperties in accordance with the full cost method of accounting. Stock-basedcompensation cost in the amount of $16.2 million was recorded in the six monthsended June 30, 2006 of which approximately $9.7 million is attributed to apartial settlement of Forest’s restricted stock awards and phantom stock unitawards in connection with the Spin-off. Of this amount, $10.4 million wasrecorded as compensation expense and $5.8 million was capitalized to oil andgas properties in accordance with the full cost method of accounting.

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***Depreciation and Depletion***

Depreciation, depletion and amortization expense (“DD&A”)for the three months ended June 30, 2006 was $63.3 million compared to$97.2 million for the same period in 2005. On an equivalent Mcf basis, DD&Aexpense was $2.14 per Mcfe for the three months ended June 30, 2006compared to $2.17 per Mcfe for the same period in the prior year. DD&A forthe six months ended June 30, 2006 was $140.9 million compared to $193.5million for the same period in 2005. On an equivalent Mcf basis, DD&Aexpense was $2.23 per Mcfe for the six months ended June 30, 2006 comparedto $2.16 per Mcfe for the same period in the prior year.

***Interest Expense***

Interest expense in the second quarter of 2006 totaled$17.3 million compared to $16.1 million in the second quarter of 2005. Interestexpense during the first six months of 2006 totaled $32.5 million compared to$30.6 million in the same period of 2005. The increase in interest expenseduring each period in 2006 compared to the corresponding periods in 2005 wasdue primarily to a combination of higher interest rates and increased averagedebt balances.

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

Realized and unrealized gains and losses on derivativeinstruments are primarily related to derivatives which did not qualify for cashflow hedge accounting either at their inception or where hedge accounting wasdiscontinued during their term. When the criteria for cash flow hedge accountingis not met or when cash flow hedge accounting is not elected, realized gainsand losses (i.e., cash settlements) are recorded in other income and expense inthe Condensed Consolidated Statements of Operations. Similarly, changes in thefair value of the derivative instruments are recorded as unrealized gains orlosses in the Condensed Consolidated Statements of Operations. In contrast,cash settlements for derivative instruments that qualify for hedge accountingare recorded as additions to or reductions of oil and gas revenues, whilechanges in fair value of cash flow hedges are recognized, to the extent thehedge is effective, in other comprehensive income until the hedged item isrecognized in earnings.

The table belowsets forth realized and unrealized gains and losses recognized under “Otherincome and expense” in our Condensed Consolidated Statements of Operationsprincipally related to our derivatives where cash flow hedge accounting was notemployed for the periods indicated.
| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(In Thousands)**                         | ** ** |
| Unrealized  (gains) losses |       | $                                               | (14,378    | )                                             | (4,310     | ) | 9,736 |   | 2,270 |   |
| Realized losses (gains)    |       | 13,698                                          |       | (850                                          | )          | 17,613 |   | (318 | ) |
|                            |            |                                                 |            |                                               |            |  |  |  |  |  |

 

For comparative purposes, the following table setsforth, for the periods indicated, realized losses on derivative instrumentsthat met the criteria for hedge accounting, which were recorded as reductionsof oil and gas revenues.
| ** **                                       | ** ** | **Three Months  Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                    | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(In Thousands)**                     | ** ** |
| Realized losses  included in oil and gas revenue |       | $                                           | 1,677      |                                      | 33,541     |   | 38,357 |   | 54,350 |   |
|                                                  |            |                                             |            |                                           |            |  |  |  |  |  |

 

*Discontinuance ofHedge Accounting*

Because a significant portion of our derivatives nolonger qualified for hedge accounting and to increase clarity in our financialstatements, Forest elected to discontinue hedge accounting for all of itsremaining commodity derivatives beginning in March 2006. Subsequent to March 2006,Forest will recognize mark-to-market gains and losses in earnings, rather than deferringsuch amounts in accumulated other comprehensive income included in shareholders’equity. The net mark-to-market losses on our outstanding derivatives at thetime Forest discontinued hedge accounting are deferred in accumulated othercomprehensive income, and are amortized to earnings as the original hedgedtransactions occur in 2006. This change in reporting will have no impact onForest’s reported cash flows, although future results of operations will be affectedby 

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mark-to-market gains andlosses, which fluctuate with volatile oil and gas prices.

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

Forest recordedincome tax expense of $8.4 million in the three months ended June 30,2006, compared to $31.9 million in the comparable period of 2005. Our effectivetax rates for the three months ended June 30, 2006 and 2005 were 12.8% and37.9%, respectively. The quarter-over-quarter decrease in the effective taxrate was primarily attributable to statutory rate reductions enacted in Canadaas well as changes in the tax regulations in Texas. Together, these adjustmentsreduced our income tax provision in the second quarter 2006 by approximately$16.2 million. Forest recorded income tax expense of $20.2 million and $53.1million in the six months ended June 30, 2006 and 2005, respectively. Oureffective tax rates for the six months ended June 30, 2006 and 2005 were25.7% and 36.8%, respectively. The decrease in the effective tax rate was dueto statutory rate reductions enacted in Canada and changes in the Texas incometax law partially offset by non-deductible spin-off and merger costs and anincrease in our estimated combined state income tax rates resulting from theSpin-off. Together, these adjustments decreased our total tax expense duringthe six months of 2006 by approximately $9.2 million. The table below sets forth the components of our income tax provisionfor the three and six months ended June 30, 2006:
| ** **                                            | ** ** | **Three Months Ended  June 30, 2006** | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                            | ** ** | **(In Thousands)**                                   | ** ** |
| Federal, state and  provincial tax at statutory rates |       | $                                                         | 25,698     |                                                    | 30,256     |   |
| Statutory rate  reductions in Canada                  |       | (10,810                                                   | )          | (10,810                                                 | )          |
| Changes in Texas  income tax law                      |       | (5,430                                                    | )          | (5,430                                                  | )          |
| Increased state  income tax rates from the Spin-off   |       | —                                                    |       | 5,015                                                   |       |
| Non-deductible  spin-off and merger costs             |       | —                                                    |       | 2,067                                                   |       |
| Other, net                                            |       | (1,074                                                    | )          | (917                                                    | )          |
| Total income tax  expense                             |       | $                                                         | 8,384      |                                                    | 20,181     |   |

 

***Discontinued Operations***

On March 1, 2004, Forest sold the assets andbusiness operations of Producers Marketing, Ltd. (“ProMark”) to CinergyCanada, Inc. (“Cinergy”) for $11.2 million CDN. As a result of thesale, ProMark’s results of operations were reported as discontinued operationsin the historical financial statements. Under the terms of the purchase andsale agreement, Forest may receive additional contingent consideration paymentsover a period of five years through February 2009. During the six monthsended June 30, 2006, Forest recognized an additional $3.6 millioncontingent payment ($2.4 million net of tax) due under the agreement, which hasbeen reflected as income from discontinued operations in the CondensedConsolidated Statements of Operations.

***Impairments***

During the second quarter of 2006, Forest recorded animpairment of $2.1 million related to certain properties located in Gabon. TheGabon impairment was related to historical costs impaired to reflect a recentlydrilled dry hole. During the six months ended June 30, 2005, Forestrecorded an impairment of $2.9 million related to various internationalproperties, principally related to its properties in Romania. The Romaniaimpairment was recorded in the first quarter of 2005 in connection with ourdecision to exit the country as we rationalized our international assets toconcentrate on fewer areas.

***Liquidity and Capital Resources***

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

The prices we receive for our oil and natural gasproduction have a significant impact on operating cash flows. While significantprice declines in 2006 would adversely affect the amount of cash flow generatedfrom operations, we utilize a remaining hedging program to partially mitigatethat risk. As of July 1, 2006, Forest has hedged approximately 25.4 Bcfeof its remaining production for 2006. This level of hedging provides a measureof certainty of the cash flow we will receive for a large portion of ourexpected remaining 2006 production. Depending on changes in oil and gas futuresmarkets and management’s view of underlying oil and natural gas supply anddemand trends, we may increase or decrease our current hedging positions. For furtherinformation concerning our 2006 hedging contracts, see Item 3—“Quantitative andQualitative 

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Disclosures about MarketRisk—Commodity Price Risk,” below.

Our $600 million revolving bank creditfacilities, which we entered into in September 2004, provide anothersource of liquidity. These credit facilities, which mature in September 2009,are used to fund daily operating activities and acquisitions in the United Statesand Canada as needed. See “Bank Credit Facilities” below.

On March 2, 2006, we completed the Spin-off ofour offshore Gulf of Mexico operations. As a result of the Spin-off, we expectfuture cash flows from operations to be significantly lower; however, we alsoexpect a significant decrease in offshore capital expenditures and payments forasset retirement obligations. Prior to the Merger, as part of the Spin-off, wereceived approximately $176.1 million from FERI, which we used to pay downour credit facilities. FERI obtained these funds from a bank credit facility itestablished immediately prior to the Spin-off. Subsequent to March 31,2006, we received an additional $21.7 million from FERI for total proceeds of$197.8 million. The total cash received is subject to further potentialadjustment to reflect the economic effective date of July 1, 2005. We donot believe the Spin-off will have a material effect on our liquidity andcapital resources nor do we believe it will materially adversely affect our abilityto access the capital markets.

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

We believe that our available cash, cash provided byoperating activities, and funds available under our bank credit facilities willbe sufficient to fund our operating, interest, and general and administrativeexpenses, our capital expenditure budget, and our short-term contractualobligations at current levels for the foreseeable future.

***Bank Credit Facilities***

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

Availability under the credit facilities will be basedeither on certain financial covenants included in the credit facilities or onthe loan value assigned to Forest’s oil and gas properties. If Forest’scorporate credit rating by Moody’s is “Ba1” or higher and “BB+” or higher by S&P,the credit facilities may be governed by certain financial covenants.Alternatively, if Forest’s corporate credit rating is “Ba2” or lower by Moody’sor “BB” or lower by S&P, availability under the credit facilities will begoverned by a borrowing base (“Global Borrowing Base”). Currently, the amountavailable under the credit facilities is determined by the Global BorrowingBase. On March 2, 2006, concurrent with the completion of the Spin-off,the Global Borrowing Base was reduced from $900 million to $600 million.On May 10, 2006 the Global Borrowing Base was increased to $850 million;however, the size of the commitments remained unchanged with $500 millionallocated to the U.S. credit facility and $100 million allocated to theCanadian facility.

At July 31, 2006, there were outstandingborrowings of $246.0 million under the U.S. credit facility at a weightedaverage interest rate of 6.9%, and there were outstanding borrowings of $75.1 millionunder the Canadian credit facility at a weighted average interest rate of 5.9%.We also had used the credit facilities for approximately $2.7 million inletters of credit, leaving an unused borrowing amount under the GlobalBorrowing Base of approximately $276.2 million at July 31, 2006.

The determination of the Global Borrowing Base is madeby the lenders taking into consideration the estimated value of Forest’s oiland gas properties in accordance with the lenders’ customary practices for oiland gas loans. This process involves reviewing Forest’s estimated provedreserves and their valuation. While the Global Borrowing Base is in effect, itis redetermined semi-annually, and the available borrowing amount could beincreased or decreased as a result of such redeterminations. In addition,Forest and the lenders each have discretion at any time, but not more oftenthan once during any calendar year, to have the Global Borrowing Baseredetermined. A revision to Forest’s reserves may prompt such a request on thepart of the lenders, which could possibly result in a reduction in the GlobalBorrowing Base and availability under the credit facilities. If outstanding borrowingsunder either of the credit facilities exceed the applicable portion of the 

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Global Borrowing Base,Forest would be required to repay the excess amount within a prescribed period.If we are unable to pay the excess amount, it would cause an event of default.

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

The credit facilities are collateralized by a portionof our assets. We are required to mortgage, and grant a security interest in,75% of the present value of our consolidated proved oil and gas properties. Wehave also pledged the stock of several subsidiaries to the lenders to securethe credit facilities. Under certain circumstances, we could be obligated topledge additional assets as collateral. If our corporate credit ratings byMoody’s and S&P improve and meet pre-established levels, the collateralrequirements would not apply and, at our request, the banks would release theirliens and security interests on our properties.

***Cash Flow***

Net cash providedby operating activities, net cash used by investing activities, and net cashprovided by financing activities for the six months ended June 30, 2006and 2005 were as follows:
| ** **                                 | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(In Thousands)**                       | ** ** |
| Net cash  provided by operating activities |       | $                                             | 197,152    |   | 325,423 |   |
| Net cash used by  investing activities     |       | (614,161                                      | )          | (401,671 | ) |
| Net cash provided by  financing activities |       | 415,302                                       |       | 35,728 |   |
|                                            |            |                                               |            |  |  |  |

 

The decrease in net cash provided by operatingactivities in the six months ended June 30, 2006 compared to the sameperiod of 2005 was due primarily to lower oil and gas revenues due to theSpin-off. The increase in cash used by investing activities in the six monthsended June 30, 2006 was due primarily to increased capital expendituresfor exploration and development in the six months ended June 30, 2006compared to the same period in 2005. Net cash provided by financing activitiesin the six months ended June 30, 2006 included net bank proceeds of$378.3 million and proceeds from the exercise of stock options andemployee stock purchases of $3.8 million. Of the $378.3 million in net bankproceeds for the six month period of 2006, $176.1 million was drawn on a bank creditfacility established by FERI in March 2006, immediately prior to theSpin-off. This credit facility and associated liability was included in theSpin-off. The 2005 period included proceeds from the exercise of stock optionsand warrants and employee stock purchases of approximately $38.5 million offsetby net bank debt repayments of $3.0 million.

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***Capital Expenditures***

Expenditures forproperty acquisition, exploration, and development were as follows:
| ** **                                                                                                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                                                                                        | ** ** | **(In Thousands)**                       | ** ** |
| Property  acquisition costs(1):                                                                                   |       |                                          |       |   |   |
| Proved properties                                                                                                 |       | $                                             | 242,995    |   | 242,970 |   |
| Unproved properties                                                                                               |       | 46,517                                        |       | 69,405 |   |
|                                                                                                              |       | 289,512                                       |       | 312,375 |   |
| Exploration  costs:                                                                                               |       |                                          |       |   |   |
| Direct costs                                                                                                      |       | 111,081                                       |       | 65,614 |   |
| Overhead capitalized                                                                                              |       | 7,361                                         |       | 6,569 |   |
|                                                                                                              |       | 118,442                                       |       | 72,183 |   |
| Development  costs:                                                                                               |       |                                          |       |   |   |
| Direct costs                                                                                                      |       | 195,195                                       |       | 115,300 |   |
| Overhead capitalized                                                                                              |       | 10,067                                        |       | 6,019 |   |
|                                                                                                              |       | 205,262                                       |       | 121,319 |   |
| Total capital  expenditures for property acquisition, exploration, and development (1) (2)    |       | $                                             | 613,216    |   | 505,877 |   |

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(1)                Totalcapital expenditures include both cash expenditures and accrued expenditures.

(2)                Doesnot include estimated discounted asset retirement obligations of $1.8 millionand $7.7 million related to assets placed in service during the six monthsended June 30, 2006 and 2005, respectively.

For the six months ended June 30, 2006,expenditures for exploration and development activities totaled $324 million($288 million attributable to the Retained Properties and $36 millionattributable to the Spin-off Properties), exclusive of costs for propertyacquisitions. Forest anticipates expenditures for exploration and developmentactivities in 2006 will approximate $500 million for the Retained Properties. However,due to drilling success at Greater Vermejo/Haley and other areas, Forest isconsidering an increase in the 2006 capital budget later in the third quarterof 2006. Some of the factors impacting the level of capital expenditures in2006 include crude oil and natural gas prices, the volatility in these prices,the cost and availability of oil field services, and weather disruptions.

***Forward-Looking Statements***

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

Theseforward-looking statements appear in a number of places and includestatements with respect to, among other things:

·                    estimates ofour oil and gas reserves;

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

·                    the amount,nature and timing of capital expenditures, including future development costs,and availability of capital resources to fund capital expenditures;

·                    our outlook onoil and gas prices;

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·                    the impact ofpolitical and regulatory developments;

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

·                    our businessstrategy and other plans and objectives for future operations.

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

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

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

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

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

We are exposed to market risk, including the effectsof adverse changes in commodity prices, foreign currency exchange rates, andinterest 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 offluctuations in prices on our revenues, or to protect the economics of propertyacquisitions, we make use of an oil and gas hedging strategy. Under our hedgingstrategy, we enter into commodity swaps, collars, and other financial instrumentswith counterparties who, in general, are participants in our credit facilities.These arrangements, which are based on prices available in the financialmarkets at the time the contracts are entered into, are settled in cash and donot require physical deliveries of hydrocarbons.

***Swaps***

In a typicalcommodity swap agreement, we receive the difference between a fixed price perunit of production and a price based on an agreed upon published, third-partyindex if the index price is lower than the fixed price. If the index price ishigher, we pay the difference. By entering into swap agreements, we effectivelyfix the price that we will receive in the future for the hedged production. Ourcurrent swaps are settled in cash on a monthly basis. As of June 30, 2006,we had entered into the following swaps:
| ** **           | ** ** | **Swaps**                                 | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **Natural Gas (NYMEX HH)** | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **           | ** ** | **Bbtu  per  Day**                        | ** ** | **Weighted  Average Hedged  Price per  MMBtu** | ** ** | **Fair Value  (In Thousands)** | ** ** | **Barrels  per  Day** | ** ** | **Weighted  Average Hedged  Price per Bbl** | ** ** | **Fair Value  (In Thousands)** | ** ** |
| Third Quarter  2006  |       | 10.0                                      |       | $ | 5.51 |   | $ | (555 | ) | 7,500 |   | $ | 51.18 |   | $ | (16,227 | ) |
| Fourth Quarter  2006 |       | 10.0                                      |       | 5.51 |   | (2,414 | ) | 7,500 |   | 51.18 |   | (16,834 | ) |
| Fiscal 2007          |       | —                                    |       | — |   | — |   | 3,500 |   | 73.16 |   | (3,415 | ) |
| Fiscal 2008          |       | —                                    |       | — |   | — |   | 3,000 |   | 73.02 |   | (753 | ) |
| Fiscal 2009          |       | —                                    |       | — |   | — |   | 2,500 |   | 73.02 |   | 966 |   |
| Fiscal 2010          |       | —                                    |       | — |   | — |   | 2,000 |   | 73.15 |   | 1,694 |   |
|                      |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Collars***

Forest also entersinto collar agreements with third parties. A collar agreement is similar to aswap agreement, except that we receive the difference between the floor priceand the index price only if the index price is below the floor price; and wepay the difference between the ceiling price and the index price only if theindex price is above the ceiling price. As of June 30, 2006, we hadentered into the following collars:
| ** **           | ** ** | **Collars**                               | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **Natural Gas (NYMEX HH)** | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **           | ** ** | **Bbtu  per  Day**                        | ** ** | **Weighted  Average  Hedged Floor  and Ceiling  Price per  MMBtu** | ** ** | **Fair Value  (In Thousands)** | ** ** | **Barrels  per Day** | ** ** | **Weighted  Average  Hedged Floor  and Ceiling  Price per Bbl** | ** ** | **Fair Value  (In Thousands)** | ** ** |
| Third Quarter  2006  |       | 50.0                                      |       | $ | 7.43/11.88 |   | $ | 6,894 |   | 5,500 |   | $ | 46.73/65.87 |   | $ | (4,872 | ) |
| Fourth Quarter  2006 |       | 50.0                                      |       | 7.43/11.88 |   | 2,376 |   | 5,500 |   | 46.73/65.87 |   | (6,031 | ) |
| Fiscal 2007          |       | 15.0                                      |       | 9.60/10.85 |   | 3,883 |   | 2,000 |   | 65.13/85.25 |   | (495 | ) |
|                      |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The fair value of our derivative instruments based onthe futures prices quoted on June 30, 2006 was a net liability ofapproximately $35.8 million.

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In July 2006,we entered into additional costless collar agreements. The table below setsforth the terms of these costless collar agreements.
| ** **  | ** ** | **Collars**                               | ** ** |
|-------------|------------|-------------------------------------------|------------|
| ** **  | ** ** | **Natural Gas (NYMEX HH)** | ** ** | **Oil (NYMEX WTI)** | ** ** |
| ** **  | ** ** | **Bbtu per Day**                | ** ** | **Weighted Average  Hedged Floor and Ceiling  Price per MMBtu** | ** ** | **Barrels per  Day** | ** ** | **Weighted Average  Hedged Floor and  Ceiling Price per Bbl** | ** ** |
| Fiscal 2007 |       | 20.0                                      |       | $ | 8.13/12.34 |   | 2,000 |   | $ | 66.50/89.10 |   |
|             |            |                                           |            |  |  |  |  |  |  |  |  |

 

The followingtable reconciles the changes that occurred in the fair values of our openderivative contracts during the six months ended June 30, 2006, beginningwith the fair value of our commodity contracts on December 31, 2005:
| ** **                                                              | ** ** | **Fair Value of  Derivative  Contracts** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                              | ** ** | **(In Thousands)**                            | ** ** |
| Unrealized  losses on derivative contracts as of December 31, 2005 |       | $                                                  | (150,737   | ) |
| Net increase in  fair value                                             |       | 41,897                                             |       |
| Fair value of  derivatives transferred in Spin-off                      |       | 17,087                                             |       |
| Net contract  losses recognized                                         |       | 55,970                                             |       |
| Unrealized losses on  derivative contracts as of June 30, 2006     |       | $                                                  | (35,783    | ) |

 

**Foreign CurrencyExchange Risk**

We conduct business in several foreign currencies andthus are subject to foreign currency exchange rate risk on cash flows relatedto sales, expenses, financing, and investing transactions. In the past, we havenot entered into any foreign currency forward contracts or other similarfinancial instruments to manage this risk. Expenditures incurred relative tothe foreign concessions held by Forest outside of North America have beenprimarily United States dollar-denominated, as have cash proceeds related toproperty sales and farmout arrangements. Substantially all of our Canadianrevenues and costs are denominated in Canadian dollars. While the value of theCanadian dollar does fluctuate in relation to the U.S. dollar, we believe thatany currency risk associated with our Canadian operations would not have amaterial impact on our results of operations.

**Interest Rate Risk**

The followingtable presents principal amounts and related weighted average fixed interestrates by year of maturity for Forest’s debt obligations and the fair value ofour debt obligations at June 30, 2006:
| ** **                   | ** ** | **2008**                                         | ** ** | **2009** | ** ** | **2011** | ** ** | **2014** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|---------------------|------------|
| ** **                   | ** ** | **(Dollar Amounts in Thousands)** | ** ** |
| Bank credit  facilities:     |       |                                             |       |     |       |     |       |     |       |      |       |                |       |
| Variable rate                |       | $                                                | —     |     | 358,839    |     | —     |     | —     |      | 358,839    |                | 358,839    |   |
| Average interest rate (1)    |       | —                                           |       | 6.63     | %          | —   |       | —   |       | 6.63      | %          |                |       |
| Long-term  debt:             |       |                                             |       |     |       |     |       |     |       |      |       |                |       |
| Fixed rate                   |       | $                                                | 265,000    |     | —     |     | 285,000    |     | 150,000    |      | 700,000    |                | 712,419    |   |
| 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 ofJune 30, 2006.

(2)                Theeffective interest rates on the 8% Senior Notes due 2008, the 8% Senior Notesdue 2011, and the 73¤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 amortization of premiums and discounts. 

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**Item 4. CONTROLSAND PROCEDURES**

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

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

Our Chief Executive Officer, H. Craig Clark, andour Chief Financial Officer, David H. Keyte, evaluated the effectivenessof our disclosure controls and procedures, as defined in Rules 13a - 15(e) and15d - 15(e) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”), as of the end of the quarterly period ended June 30,2006 (the “Evaluation Date”). Based on this evaluation, they believe that as ofthe Evaluation Date our disclosure controls and procedures were effective toensure that information required to be disclosed by us in the reports we fileor submit under the Securities Exchange Act of 1934 is recorded, processed,summarized, and reported within the time periods specified in the SEC’s rules andforms.

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

There has not been any change in our internal controlover financial reporting that occurred during our quarterly period ended June 30,2006 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**PART II—OTHERINFORMATION**

**Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

On May 10, 2006, Forest held its Annual Meetingof Shareholders (“Annual Meeting”) in Denver, Colorado. A total of 56,911,229shares of common stock were present at the Annual Meeting, either in person orby proxy, constituting a quorum. The matters voted upon at the Annual Meetingconsisted of two proposals set forth in Forest’s Proxy Statement dated April 4,2006. The two proposals submitted to a vote of shareholders are set forth below.The proposals were each adopted by the shareholders by the indicated margins.

*Proposal No. 1:**  *Election of three Class III directors. 
| ** **          | ** ** | **Shares  Voted for  Election as  Director** | ** ** | **Shares  Withheld  Authority  to Vote for Election** | ** ** |
|---------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| H. Craig Clark      |       | 56,477,260                                             |       | 433,969                                                              |       |
| William L.  Britton |       | 56,016,571                                             |       | 894,658                                                              |       |
| James D. Lightner   |       | 56,478,891                                             |       | 432,338                                                              |       |

 

In addition to the three Class III directorsnoted above, the other directors of Forest whose terms did not expire at the2006 Annual Meeting are: Forrest E. Hoglund, Cortlandt S. Dietler, Dod A.Fraser, James H. Lee and Patrick R. McDonald.

*Proposal No. 2:**  *Ratification of the appointment of KPMG asindependent accountants. 
| **Shares  Voted for** | ** ** | ** ** | ** ** | **Shares  Against** | ** ** | **Abstentions** | ** ** |
|----------------------------|------------|------------|------------|---------------------|------------|-----------------|------------|
| 56,766,733                 |       | 115,859    |       | 28,636              |       |

 

There were no broker non-votes.

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**Item 6.  EXHIBITS**

(a)            Exhibits.
| 10.1* |   | Second Amendment to Forest Oil Corporation Pension  Trust Agreement as Amended and Restated January 1, 2002.                                                    |   |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 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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*                    Filedherewith.

+                    Notconsidered to be “filed” for purposes of Section 18 of the SecuritiesExchange Act of 1934 or otherwise subject to the liabilities of that section.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                     | FOREST OIL CORPORATION  (Registrant) |
|---------------------|--------------------------------------|
|                |                                 |   |
| August 9, 2006 | By:                                  | /s/ DAVID H. KEYTE |
|                |                                 | David H. Keyte |
|                |                                 | *Executive Vice President and   Chief Financial Officer   (on behalf of the Registrant and as Principal   Financial Officer)* |
|                |                                 |   |
|                | By:                                  | /s/ VICTOR A.  WIND |
|                |                                 | Victor A. Wind |
|                |                                 | *Corporate Controller   (Principal Accounting Officer)* |

 

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**Exhibit Index**
| Exhibit Number | ** ** | **Description**                                                                                                                                                       | ** ** |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 10.1  *             |       | Second  Amendment to Forest Oil Corporation Pension Trust Agreement as Amended and  Restated January 1, 2002.                                                    |       |
| 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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*                    Filedherewith.

+                    Notconsidered to be “filed” for purposes of Section 18 of the SecuritiesExchange Act of 1934 or otherwise subject to the liabilities of that section.

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