UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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 incorporation or organization)	(I.R.S. Employer 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

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

Former address: 1600 Broadway, Suite 2200 Denver, Colorado 80202

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

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

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

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

FOREST OIL CORPORATION
INDEX TO FORM 10-Q
September 30, 2005

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

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

FOREST OIL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In Thousands)

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

See accompanying Notes to Condensed Consolidated Financial Statements.

FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

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

See accompanying Notes to Condensed Consolidated Financial Statements.

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

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

See accompanying Notes to Condensed Consolidated Financial Statements.

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

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

See accompanying Notes to Condensed Consolidated Financial Statements.

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

(1) BASIS OF PRESENTATION

The Condensed Consolidated Financial Statements included herein are unaudited and include the accounts of Forest Oil Corporation and its consolidated subsidiaries (collectively, “Forest” or the “Company”). In the opinion of management, all adjustments, consisting of normal recurring accruals, have been made which are necessary for a fair presentation of the financial position of Forest at September 30, 2005, the results of its operations for the three and nine months ended September 30, 2005 and 2004, and its cash flows for the nine months ended September 30, 2005 and 2004. Quarterly results are not necessarily indicative of expected annual results because of the impact of fluctuations in prices received for liquids (oil, condensate, and natural gas liquids) and natural gas and other factors.

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

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

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

For a more complete understanding of Forest’s operations, financial position, and accounting policies, reference is made to the consolidated financial statements of Forest, and related notes thereto, filed with Forest’s annual report on Form 10-K for the year ended December 31, 2004, previously filed with the Securities and Exchange Commission.

(2) ACQUISITIONS AND DIVESTITURES

Acquisitions

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

(2) ACQUISITIONS AND DIVESTITURES (Continued)

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

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

Goodwill of $39.0 million has been recognized to the extent that cost exceeded the fair value of net assets acquired. Goodwill is not expected to be deductible for tax purposes. The goodwill was assigned to Forest’s Western business unit. The principal factors that contributed to the recognition of goodwill include the mix of complementary high-quality assets in one of our existing core areas, lower-risk exploitation opportunities, expected increased cash flow from operations available for investing activities, and opportunities for cost savings through administrative and operational synergies.

Acquisition of The Wiser Oil Company

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

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

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

Divestitures

Spin-off and Merger of Offshore Gulf of Mexico Operations

(2) ACQUISITIONS AND DIVESTITURES (Continued)

Mariner will be a separately traded public company that will own and operate the combined businesses of Mariner and Forest’s Gulf of Mexico operations. The transaction is expected to be non-taxable to the stockholders of both companies.

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

Sale of Marketing Subsidiary

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

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

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

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

Earnings per Share

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

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

Diluted earnings per share is computed by adjusting the average number of common shares outstanding for the dilutive effect, if any, stock options, unvested restricted stock grants, and warrants. The following sets forth the calculation of basic and diluted earnings per share:

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

For the three months ended September 30, 2005 and 2004, options to purchase 4,200 and 1,228,400 shares of common stock, respectively, were not included in the computation of diluted earnings per share, because the exercise prices of these options were greater than the average market price of the common stock during the period. For the nine months ended September 30, 2005 and 2004, options to purchase 42,700 and 1,433,900 shares of common stock, respectively, were not included in the computation of diluted earnings per share, because the exercise prices of these options were greater than the average market price of the common stock during the period.

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

Comprehensive Earnings (Loss):

Comprehensive earnings (loss) is a term used to refer to net earnings (loss) plus other comprehensive income (loss). Other comprehensive income (loss) is comprised of revenues, expenses, gains, and losses that under generally accepted accounting principles are reported as separate components of shareholders’ equity instead of net earnings (loss). Items included in Forest’s other comprehensive income (loss) for the three and nine months ended September 30, 2005 and 2004 are foreign currency gains related to the translation of the assets and liabilities of Forest’s Canadian operations, changes in the unfunded pension liability, unrealized losses related to the change in fair value of derivative instruments designated as cash flow hedges, and unrealized losses related to the change in fair value of securities held for sale.

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

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

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

(4) STOCK-BASED COMPENSATION

Forest applies APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations to account for its stock-based compensation plans. Accordingly, no compensation cost is recognized for options granted at a price equal to or greater than the fair market value of the common stock. Compensation cost is recognized over the vesting period of options granted at a price less than the fair market value of the common stock at the date of the grant. No compensation cost is recognized for stock purchase rights that qualify under Section 423 of the Internal Revenue Code as a non-compensatory plan. Had compensation cost for Forest’s stock option grants and stock purchase rights been determined using the fair value of the options and purchase rights at the grant date as prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, Forest’s pro forma net earnings and earnings per common share would have been as follows:

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

(5) LONG-TERM DEBT

Components of long-term debt are as follows:

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

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

(6) PROPERTY AND EQUIPMENT

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

Investments in unproved properties, including related capitalized interest costs, are not depleted pending determination of the existence of proved reserves. Unproved properties are assessed periodically to ascertain whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, and geographic and geologic data obtained relating to the properties. Where it is not practicable to assess individually the amount of impairment of properties for which costs are not individually significant, such properties are grouped for purposes of assessing impairment. The amount of impairment assessed is added to the costs to be amortized, or is reported as a period expense, as appropriate.

Pursuant to full cost accounting rules, capitalized costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves using current prices, including the effects of derivative instruments but excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, and a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. There were no such provisions for impairment of oil and gas properties in the periods presented, although our Canadian full cost pool, in

(6) PROPERTY AND EQUIPMENT (Continued)

particular, could be adversely impacted by moderate declines in commodity prices. Gain or loss is not recognized on the sale of oil and gas properties unless the sale significantly alters the relationship between capitalized costs and estimated proved oil and gas reserves attributable to a cost center.

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

(7) ASSET RETIREMENT OBLIGATIONS

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

The following table summarizes the activity for Forest’s asset retirement obligations for the nine months ended September 30, 2005 and 2004:

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

(8) EMPLOYEE BENEFITS

The following table sets forth the components of the net periodic cost of Forest’s defined benefit pension plans and postretirement benefits in the United States for the three and nine months ended September 30, 2005 and 2004:

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

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

(9) FINANCIAL INSTRUMENTS

Forest recognizes the fair value of its derivative instruments as assets or liabilities on the balance sheet. The accounting treatment for the changes in fair value is dependent upon whether or not a derivative instrument is a cash flow hedge or a fair value hedge, and upon whether or not the derivative qualifies as an effective hedge. Changes in fair value of cash flow hedges are recognized, to the extent the hedge is effective, in other comprehensive income until the hedged item is recognized in earnings. For fair value hedges, to the extent the hedge is effective, there is no effect on the statement of operations because changes in fair value of the derivative offset changes in the fair value of the hedged item. For derivative instruments that do not qualify as fair value hedges or cash flow hedges and ineffective portions of hedges designated as cash flow hedges, changes in fair value are recognized in earnings as other income or expense.

Commodity Hedges

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

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

(9) FINANCIAL INSTRUMENTS (Continued)

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

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

The table below summarizes the realized and unrealized losses Forest incurred related to its hedging activities for the periods indicated.

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

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

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

The tables below set forth, as of September 30, 2005, the quantity of oil and gas hedged under commodity swaps and collars. The table includes all the Company’s commodity swaps and collars, including those instruments that do not qualify for cash flow hedge accounting.

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

Costless Collars

Natural Gas (NYMEX HH)

Oil (NYMEX WTI)

Bbtu
Per Day

Weighted Average
Hedged Floor and
Ceiling Price
per MMBtu

Barrels
Per Day

Weighted Average
Hedged Floor and
Ceiling Price per Bbl

Fourth Quarter 2005

43.4

5.85/7.17

1,000

42.00/47.30

First Quarter 2006

50.0

7.43/11.88

5,500

46.73/65.87

Second Quarter 2006

50.0

7.43/11.88

5,500

46.73/65.87

Third Quarter 2006

50.0

7.43/11.88

5,500

46.73/65.87

Fourth Quarter 2006

50.0

7.43/11.88

5,500

46.73/65.87

(9) FINANCIAL INSTRUMENTS (Continued)

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

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

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

Interest Rate Swaps

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

(10) COMMON STOCK OFFERING

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

(11) BUSINESS AND GEOGRAPHICAL SEGMENTS

Segment information has been prepared in accordance with Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information. At September 30, 2005, Forest had five reportable segments consisting of oil and gas operations in five business units (Gulf Coast, Western, Alaska, Canada, and International). Forest’s remaining processing activities are not significant and therefore are not reported as a separate segment, but are included as a reconciling item in the information below. The segments were determined based upon the type of operations in each business unit and the geographical location of each. The segment data presented below was prepared on the same basis as the Condensed Consolidated Financial Statements.

(11) BUSINESS AND GEOGRAPHICAL SEGMENTS (Continued)

Three Months Ended September 30, 2005

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

A reconciliation of segment earnings (loss) from operations to consolidated earnings before income taxes and discontinued operations is as follows:

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

(11) BUSINESS AND GEOGRAPHICAL SEGMENTS (Continued)

Nine Months Ended September 30, 2005

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

A reconciliation of segment earnings (loss) from operations to consolidated earnings before income taxes and discontinued operations is as follows:

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

(11) BUSINESS AND GEOGRAPHICAL SEGMENTS (Continued)

Three Months Ended September 30, 2004

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

A reconciliation of segment earnings (loss) from operations to consolidated earnings before income taxes and discontinued operations is as follows:

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

(11) BUSINESS AND GEOGRAPHICAL SEGMENTS (Continued)

Nine Months Ended September 30, 2004

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

A reconciliation of segment earnings (loss) from operations to consolidated earnings before income taxes and discontinued operations is as follows:

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

(12) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

(12) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

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

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

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

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment (“SAB 107”), which expresses views of the staff regarding the interaction between SFAS 123(R) and certain SEC rules and regulations. SAB 107 also provides the Staff’s views regarding the valuation of share-based payment arrangements for public companies. Forest will evaluate the requirements of SAB 107 in connection with Forest’s future adoption of SFAS 123(R).

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

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

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

Recent Developments

Spin-off and Merger of Offshore Gulf of Mexico Operations

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

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

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

Hurricane Impact

Our operations were adversely affected by one of the most active hurricane seasons in recorded history, primarily with respect to our Gulf of Mexico operations. During the third quarter of 2005, we estimate that 6 Bcfe of total available production was shut-in and deferred until later dates as a result of Hurricanes Katrina and Rita. As of October 31, 2005, approximately 100 to 110 MMcfe per day remained shut in. Accordingly, our fourth quarter production will be negatively impacted as well. We estimate that 10 Bcfe of total available production will remain shut-in and deferred in the fourth quarter of 2005.

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

Overview of Third Quarter 2005 Results

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

· Unrealized losses recorded on commodity hedges increased approximately $68.5 million over the prior year’s third quarter due to several hedges that no longer qualified for cash flow hedge accounting as a result of Hurricanes Katrina and Rita and due to an increase in the ineffectiveness measured and recorded on other commodity hedges. See Note 9 to the Condensed Consolidated Financial Statements for more information.

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

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

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

Results of Operations

Oil and Gas Sales

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

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

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

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

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

(1) Includes the effects of hedging. See Note 9 to the Condensed Consolidated Financial Statements for further details regarding hedging activities.

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

(1) Includes the effects of hedging. See Note 9 to the Condensed Consolidated Financial Statements for further details regarding hedging activities.

Lease Operating Expenses

The table below sets forth the detail of lease operating expenses (“LOE”), the primary component of oil and gas production expense, for the three and nine months ended September 30, 2005;

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

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

Production and Property Taxes

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

Transportation Costs

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

General and Administrative Expense; Overhead

The following table summarizes the components of total overhead costs incurred during the periods:

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

The increase in total overhead costs and overhead costs expensed in the three and nine month periods was primarily related to an increase in salaries and related burdens caused by our hiring additional employees in conjunction with our recent acquisitions, general increases in salaries due to an increasingly competitive market for experienced oil and gas professionals, and increases in health insurance costs.

Depreciation and Depletion

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

Retrospective Insurance Costs and Impairment of Oil and Gas Properties

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

During the nine months ended September 30, 2005, Forest recorded an impairment of $2.9 million related to certain international properties, principally related to its leaseholds in Romania. The Romania impairment was recorded in the first quarter of 2005 in connection with our decision to exit the country as we rationalize our international assets to concentrate on fewer areas.

Interest Expense

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

Unrealized Losses on Derivative Instruments

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

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

Current and Deferred Income Tax Expense

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

Discontinued Operations

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

Liquidity and Capital Resources

In 2005, as in 2004, we expect our cash flow from operations to provide our primary source of liquidity to meet operating expenses and fund capital expenditures other than large acquisitions. Any remaining cash flow from operations will be available to fund acquisitions, in whole or in part, or for other corporate purposes. During the nine months ended September 30, 2005, our operating cash flow has exceeded capital expenditures excluding acquisitions of subsidiaries by $157.3 million compared to $126.4 million in the corresponding period in 2004.

The prices we receive for our oil and natural gas production have a significant impact on operating cash flows. While price declines could adversely affect the amount of cash flow generated from operations, we utilize a hedging program to mitigate the risks associated with volatile oil and gas prices. As of September 30, 2005, Forest had hedged approximately 19.6 Bcfe of its remaining 2005 production primarily to protect the economics of recent acquisitions of oil and gas properties. This level of hedging provides greater certainty of the cash flow we will receive for our 2005 production. Depending on changes in oil and gas futures markets and management’s view of underlying oil and natural gas supply and demand trends, we may increase or decrease our current hedging positions. For further information concerning our 2005 and 2006 hedging contracts, see Note 9 to the Condensed Consolidated Financial Statements.

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

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

should continue to be available to us in the future. Nevertheless, ready access to capital on reasonable terms are subject to many uncertainties, as explained in Forest’s 2004 Annual Report on Form 10-K under the heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors.”

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

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

Bank Credit Facilities

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

Currently, the amount available under the credit facilities is determined by a borrowing base (the “Global Borrowing Base”). Effective October 19, 2005, the Global Borrowing Base was increased to $900 million. Concurrent with the spin-off of the offshore Gulf of Mexico operations, the Global Borrowing Base will be reduced to $600 million. However, our borrowing capacity is limited to $600 million, the current commitment level. At September 30, 2005, there were outstanding borrowings of $119 million under the U.S. credit facility at a weighted average interest rate of 5.1%, and there were no outstanding borrowings under the Canadian credit facility. We also had used the credit facilities for approximately $7.5 million in letters of credit, leaving an unused borrowing amount under the Global Borrowing Base of approximately $473.5 million at September 30, 2005.

On October 31, 2005, amounts outstanding under the U.S. facility were $132 million at a weighted average interest rate of 5.3%, and there were no amounts outstanding under the Canadian facility. As a result of increased amounts outstanding, and $7.5 million in letters of credit outstanding, the unused borrowing amount on October 31, 2005 was approximately $460.5 million.

The credit facilities include terms and covenants that place limitations on certain types of activities, including restrictions or requirements with respect to additional debt, liens, asset sales, hedging activities, investments, dividends, mergers, and acquisitions. The credit facilities also include several financial covenants. Availability, interest rates, security requirements, and other terms of borrowing under the credit facilities will vary based on Forest’s credit ratings and financial condition, as determined by certain financial tests. In particular, any time that availability is not determined by the Global Borrowing Base, the amount available and Forest’s ability to borrow under the credit facilities is determined by certain financial covenants. Also, even when availability is determined by the Global Borrowing Base, certain financial covenants can still affect the amount available and Forest’s ability to borrow amounts under the credit facilities.

Cash Flow

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

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

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

Capital Expenditures

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

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

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

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

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

include crude oil and natural gas prices, the volatility in these prices, the cost and availability of the oil field services, and weather disruptions.

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

Recent Accounting Pronouncements

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

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

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

retrospective application of changes in accounting principle to prior period financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for fiscal years beginning after December 15, 2005. We do not expect the adoption of this statement will have a material impact on our results of operations or financial position.

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (“FIN 47”). This Interpretation clarifies the definition and treatment of conditional asset retirement obligations as discussed in FASB Statement No. 143, Accounting for Asset Retirement Obligations. A conditional asset retirement obligation is defined as an asset retirement activity in which the timing and/or method of settlement are dependent on future events that may be outside the control of the Company. FIN 47 states that a Company must record a liability when incurred for conditional asset retirement obligations if the fair value of the obligation is reasonably estimable. This Interpretation is intended to provide more information about long-lived assets, more information about future cash outflows for these obligations and more consistent recognition of these liabilities. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company does not believe that its financial position, results of operations or cash flows will be materially impacted by this Interpretation.

Forward-Looking Statements

Certain information included in this quarterly report on Form 10-Q and other materials that we file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements that we make, include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to our operations, financial condition, and the oil and gas industry. All statements, other than statements of historical facts or present facts, that address activities, events, outcomes, and other matters that Forest plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates, or anticipates (and other similar expressions) will, should, or may occur in the future are forward-looking statements. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.

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

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

· commodity price volatility,

· inflation,

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

· environmental risks,

· drilling and other operating risks,

· regulatory changes,

· the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production,

· timing of development expenditures, and

· interest rates.

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

Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Commodity Price Risk

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

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

See Note 9 to the Condensed Consolidated Financial Statements for information regarding the terms of the Forest’s derivative instruments that are sensitive to changes in both current and forward oil and gas prices.

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

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

Foreign Currency Exchange Risk

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

Interest Rate Risk

The following table presents principal amounts and related weighted average fixed interest rates by year of maturity for Forest’s debt obligations and the fair value of debt obligations at September 30, 2005:

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

⁽¹⁾ As of September 30, 2005.

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

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to Forest and its consolidated subsidiaries is made known to the Officers who certify Forest’s financial reports and the Board of Directors. There are inherent limitations to the effectiveness of any system of

disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

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

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

· our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

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

PART II—OTHER INFORMATION

Item 6. EXHIBITS

(a) Exhibits.

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

* Filed herewith.

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

SIGNATURES

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

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

Exhibit Index

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