10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

(Mark One)

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

or

oTRANSITION 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)

State of incorporation: New York	I.R.S. Employer Identification No. 25-0484900
707 17th Street - Suite 3600 - Denver, Colorado	80202
(Address of Principal Executive Offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

	Title of Each Class		Name of Each Exchange on which Registered
Common Stock, Par Value $.10 Per Share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was $1,808,671,247 (based on the closing price of such stock on the New York Stock Exchange Composite Tape).

There were 63,009,959 shares of the registrant’s common stock, par value $.10 per share, outstanding as of February 16, 2007.

Documents incorporated by reference: Portions of the registrant’s notice of annual meeting of shareholders and proxy statement to be filed pursuant to Regulation 14A within 120 days after the registrant’s fiscal year end of December 31, 2006 are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

		Page No.
	PART I
Item 1.	Business		1
Item 1A.	Risk Factors		16
Item 1B.	Unresolved Staff Comments		23
Item 2.	Properties		23
Item 3.	Legal Proceedings		24
Item 4.	Submission of Matters to a Vote of Security Holders		24
Item 4A.	Executive Officers of Forest		25
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		26
Item 6.	Selected Financial Data		28
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		48
Item 8.	Financial Statements and Supplementary Data		51
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		104
Item 9A.	Controls and Procedures		104
Item 9B.	Other Information		104
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance		106
Item 11.	Executive Compensation		106
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		106
Item 13.	Certain Relationships and Related Transactions, and Director Independence		106
Item 14.	Principal Accounting Fees and Services		107
	PART IV
Item 15.	Exhibits and Financial Statement Schedules		107
	Signatures		114

i

PART I

Item 1.Business.

General

Forest is an independent oil and gas company engaged in the acquisition, exploration, development, and production of natural gas and liquids primarily in North America. 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. Throughout this Form 10-K we use the terms “Forest,” “Company,” “we,” “our,” and “us” to refer to Forest Oil Corporation and its subsidiaries.

We conduct our operations in three geographical segments and five business units. Geographical segments include: the United States, Canada and International. Business units include: the Western United States (“Western”), Southern United States (“Southern”), Alaska, Canada and International. We conduct exploration and development activities in each of our geographical segments; however, all of our estimated proved reserves and producing properties are located in North America. While discoveries of oil and gas have been made in our International business unit, no proven reserves have been recorded to date. At December 31, 2006, approximately 84% of our estimated proved oil and gas reserves were in the United States and approximately 16% were in Canada. Forest’s total estimated proved reserves as of December 31, 2006 were 1,455 Bcfe.

In the following discussion, we make statements that may be deemed “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. See “Forward-Looking Statements,” below, for more details. We also use a number of terms used in the oil and gas industry. See the heading “Glossary of Oil and Gas Terms,” below, for the definition of certain terms.

Pending Acquisition of Houston Exploration

On January 7, 2007, Forest announced it had entered into a definitive agreement and plan of merger pursuant to which The Houston Exploration Company (“Houston Exploration”) will merge with and into Forest in a stock and cash transaction totaling approximately $1.5 billion plus the assumption of debt. Houston Exploration is an independent natural gas and oil producer engaged in the exploration, development, exploitation and acquisition of natural gas and oil reserves in North America with operations in the following four producing areas in the United States: South Texas, East Texas, the Arkoma Basin of Arkansas, and the Uinta and DJ Basins in the Rocky Mountains. The boards of directors of Forest and Houston Exploration have each unanimously approved the transaction. The transaction is subject to regulatory approvals and other customary conditions, as well as both Forest shareholder and Houston Exploration stockholder approvals. Forest management and its board of directors will continue in their current positions with Forest following the completion of the merger. The merger is expected to close in the second quarter of 2007.

Under the terms of the merger agreement, Houston Exploration stockholders are to receive total consideration equal to 0.84 shares of Forest common stock and $26.25 in cash for each share of Houston Exploration common stock outstanding. This represents estimated merger consideration of 23.6 million shares of Forest common stock and cash of approximately $740 million, or $52.47 per share, to be received by the Houston Exploration stockholders (based on the closing price of Forest’s common stock on January 5, 2007 and the number of shares of Houston Exploration common stock outstanding on January 4, 2007 and subject to increase in the event that any additional shares of Houston Exploration common stock are issued prior to the merger closing date in connection with the exercise of outstanding stock options pursuant to the terms of the merger agreement). The actual amount of total cash and stock consideration to be received by each Houston Exploration stockholder will be determined by elections, an

1

equalization formula and a proration procedure. It is anticipated that the transaction will be tax free to Houston Exploration and the stock portion of the consideration will be received tax free by its stockholders. The cash component of the acquisition is expected to be financed under an amended and restated revolving credit facility of up to $1.4 billion for which JPMorgan Chase Bank, N.A. has provided us a commitment letter.

Spin-off of Offshore Gulf of Mexico Operations

On March 2, 2006, Forest completed the spin-off of its offshore Gulf of Mexico operations by means of a stock dividend, which consisted of a pro rata spin-off (the “Spin-off”) of all outstanding shares of Forest Energy Resources, Inc. (hereinafter known as Mariner Energy Resources, Inc. or “MERI”), a total of 50,637,010 shares of common stock, to holders of record of Forest common stock as of the close of business on February 21, 2006. Immediately following the Spin-off, MERI was merged with a subsidiary of Mariner Energy, Inc. (“Mariner”) (the “Merger”). Mariner’s common stock commenced trading on the New York Stock Exchange on March 3, 2006. The Spin-off was completed without the payment of consideration by Forest shareholders and consisted of a special dividend of 0.8093 shares of MERI for each outstanding share of Forest common stock. In the Merger, Forest shareholders received one share of Mariner common stock for each whole share of MERI that they held. The Spin-off was a tax-free transaction for federal income tax purposes.

Business Strategy

Our strategy includes four key points: to provide organic growth, make strategic acquisitions, control costs, and remain financially flexible.

Organic Growth

The acquisitions of The Wiser Oil Company in 2004, the Buffalo Wallow field in 2005, and the East Texas Cotton Valley assets in 2006 provide, and we also expect the proposed acquisition of Houston Exploration to provide, assets conducive to low-risk, repeatable development and exploitation opportunities. In 2007, Forest expects organic growth from its planned exploitation activities, including exploration and development drilling, workovers, stimulation treatments, water floods, and recompletions.

Make Strategic Acquisitions

We pursue strategic acquisitions that meet our criteria for investment returns and that are consistent with our operational focus. We believe this enables us to leverage our technical expertise and existing land and infrastructure positions. Since the inception of our four-point plan in 2003, through 2006, we have spent approximately $1.5 billion (including deferred tax gross ups of $151 million recorded in connection with business combinations) to acquire approximately 838 Bcfe of estimated proved reserves. In general, our acquisition program since 2004 has focused on acquisitions of properties that have substantial development drilling opportunities and undeveloped acreage.

During 2006, we made approximately $316 million of oil and gas acquisitions, including the acquisition of oil and gas properties located primarily in the Cotton Valley trend in East Texas (“Cotton Valley assets”) for approximately $255 million in cash, as adjusted to reflect an economic effective date of February 2, 2006. At the time the acquisition was announced, the Cotton Valley assets included approximately 26,000 net acres, an estimated 110 Bcfe of estimated proved reserves, and production of 13 MMcfe per day. Of the 26,000 net acres, approximately 14,000 net acres were undeveloped.

During 2005, we made approximately $314 million of oil and gas acquisitions (including approximately $71 million of deferred tax gross ups). The largest acquisition was of oil and gas properties in the Buffalo Wallow area in the Texas Panhandle in April 2005. The Buffalo Wallow transaction included the payment

2

of $197 million in cash and the assumption of $35 million of debt to acquire approximately 120 Bcfe of estimated proved reserves and approximately 28,000 net acres primarily in Hemphill and Wheeler Counties, Texas.

During 2004, we made approximately $436 million of oil and gas acquisitions (including approximately $47 million of deferred tax gross ups). Our largest acquisition in 2004 was of The Wiser Oil Company (“Wiser”) in June 2004 which included oil and gas assets valued at $347 million. The Wiser transaction included the payment of $171 million in cash and the assumption of $163 million of debt to acquire approximately 186 Bcfe of estimated proved reserves and approximately 388,000 net acres.

Focus on Cost Control

Maintaining capital spending discipline and a focus on cost control are keystones of Forest’s business philosophy. We establish budgets that are designed to generate discretionary cash flow in each of our producing business units. A critical area of our cost control efforts is lease operating expense. While in a period of rising costs in the oil and gas sector, we have successfully kept our per-unit lease operating expenses attributable to the properties retained after the Spin-off at levels near those achieved in 2004. See “Lease Operating Expenses” and the accompanying table on page 34. Lease operating expense attributable to the retained properties was $1.21 per Mcfe in 2006 compared to $1.19 per Mcfe in 2004.

Maintain Financial Flexibility

We seek to maintain financial flexibility and sufficient liquidity to capitalize on opportunities as they arise. Generally, we attempt to maintain a debt-to-book capitalization ratio of between 30% and 40% but may occasionally exceed this range when conditions warrant using leverage to make strategic acquisitions. At December 31, 2006, for example, our debt-to-book capitalization ratio was 46%, which was higher than our targeted ratio. The higher leverage was due to two transactions in 2006. The Spin-off, which was accounted for as a special dividend, reduced our shareholders’ equity by over $500 million. In addition, we utilized our bank credit facilities in 2006 to purchase the Cotton Valley assets for $255 million as described above. Upon closing the pending acquisition of Houston Exploration, our debt-to-book capitalization ratio will likely increase to approximately 50% due primarily to the approximate $740 million of cash consideration expected to be paid and other Houston Exploration debt to be assumed. However, as discussed below, we have recently announced plans to sell our Alaska business unit in 2007 in order to reduce indebtedness. At December 31, 2006, we had approximately $33 million of cash on hand and $489 million available under our credit facilities.

Hedging is an important part of our strategy to mitigate our exposure to commodity price volatility. We have a board-approved policy related to commodity hedging activities. As of February 27, 2007 we have hedged, via swaps and collar instruments, approximately 55 Bcfe of our 2007 production.

3

Business Unit Activities

The production volumes, estimated proved reserves, and capital expenditures for our business units as of and for the year ended December 31, 2006 are summarized below.

	Production						Reserves		Capital Expenditures
Business Unit	Natural Gas (MMcf)	Oil & NGLs (MBbls)		Total (MMcfe)	Average Daily (MMcfe)		Total (Bcfe)		Exploration and Development			Property Acquisitions		Total(2)
									(In Thousands)
Southern:
Offshore(1)	6,378		275	8,028		22.0		—		$	36,487		672	37,159
Onshore	13,195		1,111	19,861		54.4		338.1		120,188			292,615	412,803
Western	25,924		3,730	48,304		132.4		704.1		277,372			22,026	299,398
Alaska	3,177		1,771	13,803		37.8		180.9		33,585			—	33,585
Canada	24,350		1,139	31,184		85.4		232.1		150,955			—	150,955
International	—		—	—		—		—		6,984			—	6,984
Total	73,024		8,026	121,180		332.0		1,455.2		$	625,571		315,313	940,884

(1)The offshore component of the Southern business unit represented the offshore Gulf of Mexico operations that were included in the Spin-off, which was completed on March 2, 2006 as discussed above.

(2)Does not include estimated discounted asset retirement obligations of $2.4 million, including $1.0 million assumed in connection with acquisition activities.

Southern

The Southern business unit’s onshore operations are located in East Texas, South Texas, and Louisiana Gulf Coast. The onshore portion of the Southern business unit had a production increase of 24% in 2006 compared to 2005. Production was increased through a combination of acquisitions and exploitation, including a drilling program that totaled 56 gross wells in 2006. The Southern business unit’s major capital expenditures in 2007 are expected to be primarily directed to its East Texas Cotton Valley field as well as the Katy field outside of Houston, in which the Company gained operatorship in August 2006.

Western

The Western business unit’s operations are located in the Texas Panhandle, West Texas, New Mexico, western Oklahoma, Utah and Wyoming. The Western business unit had a production increase of 15% in 2006 compared to 2005 primarily due to the continued development of the Buffalo Wallow field and exploration success in the Greater Haley/Vermejo fields in Texas. In 2007, capital expenditures in this business unit are expected to be primarily targeted in the Buffalo Wallow field and the Permian Basin.

Alaska

The Alaska business unit’s operations are primarily located onshore and offshore Cook Inlet. The Alaska business unit had a production decrease of 8% in 2006 compared to 2005. Production decreased due to natural declines in the non-operated offshore oil fields offset in part by increased natural gas production in 2006 from our onshore gas exploration program. Effective October 31, 2006, we transferred the majority of the assets associated with the Alaska business unit to a separate subsidiary which obtained $375 million of term loan financing that is secured by substantially all of the subsidiary’s assets and is nonrecourse to Forest’s other assets. See Note 4 to the Consolidated Financial Statements. In January 2007, the Company announced its plans to sell its Alaska business unit in order to reduce indebtedness associated with the pending acquisition of Houston Exploration.

4

Canada

The Canada business unit’s operations are located primarily in Alberta and British Columbia. The Canada business unit had a production increase of 18% in 2006 compared to 2005. Production was increased through development and exploratory drilling in the Wild River, Ansell and Foothills areas in central Alberta. In 2007, capital expenditures in this business unit are expected to be directed primarily in the Wild River, Evi/Loon, Ansell, and Foothills areas.

International

The International business unit’s operations are located primarily in South Africa, Gabon and Italy. In 2006, the International business unit completed the drilling of a shallow oil prospect in Gabon which was found to be dry; however, the majority of the drilling costs were carried by our partners. In South Africa, the International business unit continued to pursue commercial development of the Ibhubesi field discovery. The business unit filed a production right application and also continued efforts toward securing gas contracts for the Ibhubesi field. In 2007, the business unit plans to drill a gas test well in central Italy which was originally planned for 2006 but was delayed due to rig availability following the receipt of the drilling permit.

Reserves

The following table shows our estimated quantities of proved reserves as of December 31, 2006 and 2005. All estimated proved reserves are currently located in North America. See Note 15 to the Consolidated Financial Statements for additional information regarding estimated proved reserves.

	December 31,
	2006	2005
	Total	Retained Properties(1)		Spin-off Properties(1)		Total
Proved developed:
Natural gas (MMcf)	566,139		497,213		142,143	639,356
Liquids (MBbls)	78,280		62,805		8,792	71,597
Total (MMcfe)	1,035,819		874,043		194,895	1,068,938
Proved undeveloped:
Natural gas (MMcf)	211,900		156,328		88,999	245,327
Liquids (MBbls)	34,584		21,771		3,702	25,473
Total (MMcfe)	419,404		286,954		111,211	398,165
Total proved:
Natural gas (MMcf)	778,039		653,541		231,142	884,683
Liquids (MBbls)	112,864		84,576		12,494	97,070
Total (MMcfe)	1,455,223		1,160,997		306,106	1,467,103

(1)“Retained Properties” refers to the properties and associated estimated proved reserves retained by Forest following the Spin-off transaction completed on March 2, 2006. The “Spin-off Properties” and associated estimated proved reserves relate to Forest’s offshore Gulf of Mexico properties, which were included in the Spin-off, as discussed above.

Uncertainties are inherent in estimating quantities of proved reserves, including many factors beyond our control. Reserve engineering is a subjective process of estimating subsurface accumulations of oil and gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and its interpretation. As a result, estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing, and production subsequent to the date of an estimate, as well as economic factors such as change in product prices or development and production expenses, may require revision of such estimates. Accordingly, oil and gas

5

quantities ultimately recovered will vary from reserve estimates. See Item 1A—“Risk Factors,” for a description of some of the risks and uncertainties associated with our business and reserves.

Forest annually files estimates of its oil and gas reserves with the U.S. Department of Energy (“DOE”). During 2006, we filed estimates of our oil and gas reserves as of December 31, 2005 with the DOE, which were consistent with the reserve data reported for the year ended December 31, 2005 in Note 15 to the Consolidated Financial Statements.

Independent Audit of Reserves

For financial reporting purposes, including this Form 10-K, Forest uses reserve estimates prepared by its internal staff of engineers. A substantial portion of our reserves are audited by independent petroleum engineers engaged by Forest. Our reserve audit procedures require the independent reserve engineers to prepare their own independent estimates of proved reserves for fields comprising at least 80% of the aggregate value of Forest’s year-end proved reserves, discounted at 10% per annum, for each country in which Forest owns fields for which proved reserves have been recorded. The fields selected for audit comprise at least the top 80% of Forest’s fields based on the discounted value of such fields and a minimum of 80% of the value added during the year through discoveries, extensions, and acquisitions. Forest may also include fields that fall outside of the top 80% that represent material volumes of proved reserves, have experienced material revisions to prior estimates of proved reserve volumes or value, or have experienced changes as a result of new operational activity. The procedures prohibit exclusions of any fields, or any part of a field, that comprises part of the top 80%. The independent reserve engineers then compare their estimates to those prepared by Forest. The independent reserve audits prepared for Forest are not financial audits and are not performed in accordance with the established generally accepted financial audit procedures. Instead, a reserve audit is conducted based on rules and regulations, reserve definitions, and costs and price parameters specified by the Securities and Exchange Commission (“SEC”).

For the year-end 2006, we engaged DeGolyer and MacNaughton, an independent petroleum engineering firm, to perform reserve audit services. DeGolyer and MacNaughton independently audited estimates relating to properties constituting approximately 83% of our reserves, as of December 31, 2006, based on reserve values. When compared on a field-by-field basis, some of Forest’s estimates of net proved reserves were greater and some were less than the estimates prepared by DeGolyer and MacNaughton. However, there was no material difference, in the aggregate, between Forest’s internal estimates of total net proved reserves and the estimates prepared by DeGolyer and MacNaughton for the fields subject to the audit.

6

Drilling Activities

During 2006, we drilled a total of 382 gross wells, of which 158 were classified as exploration and 224 were classified as development. Our 2006 drilling program achieved a 98% success rate. The following table summarizes the number of wells drilled during 2006, 2005, and 2004, excluding any wells drilled under farmout agreements, royalty interest ownership, or any other wells in which we do not have a working interest. As of December 31, 2006, we had 27 gross (16 net) wells in progress in the United States and 18 gross (10 net) wells in progress in Canada.

	Year Ended December 31,
	2006				2005				2004
	Gross		Net		Gross		Net		Gross		Net
Development wells, completed as:
Gas wells		210		52		232		32		58		25
Oil wells		13		11		16		14		34		31
Non-productive(1)		1		1		3		3		6		5
Total		224		64		251		49		98		61
Exploratory wells, completed as:
Gas wells		135		68		100		51		36		20
Oil wells		15		9		31		27		1		1
Non-productive(1)		8		5		10		5		9		5
Total		158		82		141		83		46		26

(1)A non-productive well is a well found to be incapable of producing either oil or natural gas in sufficient quantities to justify completion as an oil or natural gas well; also known as a dry well (or dry hole).

Productive Wells

Productive wells consist of producing wells, and wells capable of production, including shut-in wells. One or more completions in the same well bore are counted as one well. As of December 31, 2006, Forest owned interests in 410 gross wells containing multiple completions. The following table summarizes our productive wells as of December 31, 2006, all of which are located in the United States and Canada:

	United States				Canada							Total
	Operated Wells		Non-operated Wells(1)		Operated Wells			Non-operated Wells				Operated and Non-Operated Wells
	Gross	Net	Gross	Net	Gross		Net	Gross		Net		Gross	Net
Gas	719	620	2,824	161		353	279		219		57	4,115	1,117
Oil	1,991	1,792	1,168	283		234	209		95		20	3,488	2,304
Total	2,710	2,412	3,992	444		587	488		314		77	7,603	3,421

(1)The large variance between gross and net non-operated wells is primarily a result of our ownership interest in approximately 2,539 gross gas wells in the San Juan Basin with an average working interest of approximately 2%.

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Acreage

The following table summarizes developed and undeveloped acreage in which we owned a working interest or held an exploration license as of December 31, 2006 and 2005. A majority of our developed acreage in the United States and Canada is subject to mortgage liens securing our bank credit facilities. Acreage related to royalty, overriding royalty, and other similar interests is excluded from this summary, as well as acreage related to any options held by us to acquire additional leasehold interests.

	December 31,
	2006				2005
	Developed Acreage		Undeveloped Acreage		Developed Acreage		Undeveloped Acreage
Location	Gross	Net	Gross	Net	Gross	Net	Gross	Net
United States:
Southern:
Offshore	—	—	—	—	883,340	364,509	335,992	219,446
Onshore	184,475	102,385	252,482	124,252	101,554	59,118	259,310	122,583
Western	262,461	154,267	207,190	103,820	274,881	157,556	197,206	97,678
Alaska	52,242	32,155	1,038,532	1,012,637	308,284	34,029	1,425,943	1,196,061
	499,178	288,807	1,498,204	1,240,709	1,568,059	615,212	2,218,451	1,635,768
Canada	267,157	151,645	1,082,504	581,746	236,678	136,837	1,118,462	598,481
International:
South Africa	—	—	2,771,695	1,474,542	—	—	2,771,695	1,474,542
Gabon	—	—	2,409,276	1,204,638	—	—	2,409,276	963,710
Italy	—	—	654,896	654,014	—	—	756,857	755,975
	—	—	5,835,867	3,333,194	—	—	5,937,828	3,194,227
Total	766,335	440,452	8,416,575	5,155,649	1,804,737	752,049	9,274,741	5,428,476

At December 31, 2006, approximately 1% and 9% of our net undeveloped acreage in the United States and Canada was held under leases that have terms that will expire in 2007 and 2008, respectively, if not extended by exploration or production activities. In the first quarter of 2007, we relinquished two permits in Italy comprising 363,853 gross and net undeveloped acres. The South African national government recently adopted legislation to revise the process pursuant to which it grants petroleum exploration and production licenses. Under the new regulations, we have applied to the government to convert one existing prospecting sublease into an exploration right. In addition, we are in the process of applying for a production right covering the geographic area of our other existing prospecting sublease. Because the regulations implementing the new legislation in South Africa are not yet final, we cannot predict whether these applications, if granted, will meet our economic or operational requirements, in which event we may choose to relinquish our rights.

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Production, Average Sales Prices, and Production Costs

The following table reflects production, average sales price, and production cost information for the years ended December 31, 2006, 2005, and 2004.

	United States							Canada			Total Company
	2006			2005		2004		2006	2005	2004	2006		2005		2004
Natural Gas:
Sales price received (per Mcf)	$	6.21		7.53		6.10		5.07	6.70	4.23	5.83		7.37		5.82
Effects of energy swaps and collars (per Mcf)(1)	(.37		)	(1.24	)	(.56	)	—	—	—	(.25	)	(1.01	)	(.48	)
Average sales price (per Mcf)(1)	$	5.84		6.29		5.54		5.07	6.70	4.23	5.58		6.36		5.34
Natural gas sales volumes (MMcf)	48,674			82,912		91,420		24,350	18,921	15,946	73,024		101,833		107,366
Liquids:
Oil and Condensate:
Sales price received (per Bbl)	$	62.18		52.78		39.24		50.89	41.92	35.49	60.79		51.67		38.88
Effects of energy swaps and collars (per Bbl)(1)	(4.94		)	(11.22	)	(7.84	)	—	—	—	(4.34	)	(10.07	)	(7.09	)
Average sales price (per Bbl)(1)	$	57.24		41.56		31.40		50.89	41.92	35.49	56.45		41.60		31.79
Natural gas liquids:
Average sales price (per Bbl)	$	32.02		29.61		26.05		41.40	36.15	28.08	33.85		30.76		26.56
Total liquids:
Average sales price (per Bbl)(1)	$	51.22		39.12		30.75		47.56	40.04	33.25	50.70		39.23		31.05
Liquids sales volumes (MBbls)	6,887			9,316		9,550		1,139	1,252	1,287	8,026		10,568		10,837
Average sales price (per Mcfe)(1)	$	7.08		6.38		5.38		5.69	6.69	4.66	6.72		6.43		5.28
Total sales volumes (MMcfe)	89,996			138,808		148,720		31,184	26,433	23,668	121,180		165,241		172,388
Production costs (per Mcfe):
Lease operating expenses	$	1.41		1.30		1.15		.91	.71	.76	1.28		1.21		1.10
Production and property taxes	.40			.29		.21		.10	.11	.05	.32		.26		.19
Transportation and processing costs	.13			.10		.09		.32	.22	.13	.18		.12		.10
Total production costs (per Mcfe)	$	1.94		1.69		1.45		1.33	1.04	.94	1.78		1.59		1.38

(1)Include the effects of hedging under cash flow hedge accounting. See Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations”, concerning our hedging activities and the effects of energy swaps and collars not accounted for under cash flow hedge accounting.

Marketing and Delivery Commitments

Our oil and gas production is sold to various purchasers in accordance with our credit policies and procedures. These policies and procedures take into account the credit-worthiness of potential purchasers in choosing purchasers at a given delivery point. We believe that the loss of one or more of our current natural gas spot purchasers would not have a material adverse effect on our ability to sell our production, because any individual spot purchaser could be readily replaced by another spot purchaser, absent a broad market disruption. In 2006, sales to FB Energy Canada Corp and Tesoro Alaska Petroleum Company represented approximately 12% and 13%, respectively, of our total oil and gas revenue.

Our natural gas production is typically sold on a month-to-month basis in the spot market, priced in reference to published indices. Our production of oil and natural gas liquids is typically sold under short-term contracts at prices based upon posted field prices, and is typically sold at the wellhead. In Canada, a portion of our natural gas production is also sold through a joint venture with other producers (the “Canadian Netback Pool”), which is a long-term commitment, or under direct sales contracts or spot

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contracts. See Part II, Item 7A—“Quantitative and Qualitative Disclosures about Market Risk,” below, for further details.

Competition

Forest encounters competition in all aspects of its business, including acquisition of properties and oil and gas leases, marketing oil and gas, obtaining services and labor, and securing drilling rigs and other equipment necessary for drilling and completing wells. Our ability to increase reserves in the future will depend on our ability to generate successful prospects on our existing properties, execute on major development drilling programs, acquire new producing properties, and acquire additional leases and prospects for future development and exploration. Factors that affect our ability to acquire properties include, among others, availability of desirable acquisition targets, staff and resources to identify and evaluate properties, available funds, and internal standards for minimum projected return on investment. Higher recent commodity prices have increased both equipment, service and labor costs in the industry as well as the cost of properties available for acquisition and a large number of the companies that we compete with have substantially larger staffs and greater financial and operational resources. Because of the nature of our oil and gas assets and management’s experience in exploiting our reserves and acquiring properties, management believes that we effectively compete in our markets.

Regulation

Our oil and gas operations are subject to various United States federal, state, and local laws and regulations and foreign laws and regulations.

United States

Various aspects of our oil and natural gas operations are subject to regulation by state and federal agencies. All of the jurisdictions in which we own or operate producing crude oil and natural gas properties have adopted laws regulating the exploration for and production of crude oil and natural gas, including laws requiring permits for the drilling of wells, imposing bonding requirements in order to drill or operate wells, and providing authority for regulation relating to the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, and the abandonment of wells. Our operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration units, the number of wells which may be drilled in an area, and the unitization or pooling of crude oil and natural gas properties. In addition, state conservation laws sometimes establish maximum rates of production from crude oil and natural gas wells, generally prohibit the venting or flaring of natural gas, and impose certain requirements regarding the ratability or fair apportionment of production from fields and individual wells.

Certain of our operations are conducted on federal land pursuant to oil and gas leases administered by the Bureau of Land Management (“BLM”). These leases contain relatively standardized terms and require compliance with detailed BLM regulations and orders (which are subject to change by the BLM). In addition to permits required from other agencies, lessees must obtain a permit from the BLM prior to the commencement of drilling and comply with regulations governing, among other things, engineering and construction specifications for production facilities, safety procedures, plugging and abandonment of Outer Continental Shelf (“OCS”) wells, the valuation of production, and the removal of facilities. Under certain circumstances, the BLM or the Mineral Management Service (“MMS”), as applicable, may require our operations on federal leases to be suspended or terminated. Any such suspension or termination could materially and adversely affect our financial condition and operations.

Additional proposals and proceedings that might affect the oil and gas industry are regularly considered by Congress, the states, the FERC, and the courts. We cannot predict when or whether any such proposals may become effective. No material portion of Forest’s business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the federal government.

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Canada

The oil and natural gas industry in Canada is subject to extensive controls and regulations imposed by various levels of government. Federal authorities do not regulate the price of oil and gas in export trade. Legislation exists, however, that regulates the quantities of oil and natural gas which may be removed from the provinces and exported from Canada in certain circumstances. Regulatory requirements also exist related to licensing for drilling of wells, the method and ability to produce wells, surface usage, transportation of production from wells, and conservation matters. We do not expect that any of these controls and regulations will affect Forest in a manner significantly different from other oil and natural gas companies of similar size with operations in Canada.

The provinces in which we operate have legislation and regulation which govern land tenure, royalties, production rates and taxes, environmental protection, and other matters under their respective jurisdictions. The royalty regime in the provinces in which we operate is a significant factor in the profitability of our production. Crown royalties are determined by government regulation and are typically calculated as a percentage of the value of production. The value of the production and the rate of royalties payable depend on prescribed reference prices, well productivity, geographical location, and the type or quality of the product produced. Any royalties payable on production from privately owned lands are determined by negotiations between Forest and the landowners.

Environmental Regulation

As a lessee and operator of onshore and offshore oil and natural gas properties in the United States and Canada, we are subject to stringent federal, state, provincial, and local laws and regulations relating to environmental protection as well as controlling the manner in which various substances, including wastes generated in connection with oil and gas exploration, production and transportation operations, are released into the environment. Compliance with these laws and regulations can affect the location or size of wells and facilities, prohibit or limit the extent to which exploration and development may be allowed, and require proper closure of wells and restoration of properties when production ceases. Failure to comply with these laws and regulations may result in the assessment of administrative, civil, or criminal penalties, imposition of remedial obligations, incurrence of capital costs to comply with governmental standards, and even injunctions that limit or prohibit exploration and production operations or the disposal of oilfield generated substances.

We currently operate or lease, and have in the past operated or leased, a number of properties that for many years have been used for the exploration and production of oil and gas. Although we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties operated or leased by us or on or under other locations where such wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not under our control. These properties and the wastes disposed thereon may be subject to laws and regulations imposing joint and several, strict liability without regard to fault or the legality of the original conduct that could require us to remove or remediate previously disposed wastes or property contamination, or to perform remedial plugging or pit closure to prevent future contamination. We believe that it is reasonably likely that the trend in environmental legislation and regulation will continue toward stricter standards.

While we believe that we are in substantial compliance with applicable environmental laws and regulations in effect at the present time and that continued compliance with existing requirements will not have a material adverse impact on us, we cannot give any assurance that we will not be adversely affected in the future. We have established internal guidelines to be followed in order to comply with environmental laws and regulations in the United States, Canada, and other relevant international

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jurisdictions. We employ an environmental, health and safety department whose responsibilities include providing assurance that our operations are carried out in accordance with applicable environmental guidelines and safety precautions. Although we maintain pollution insurance against the costs of cleanup operations, public liability, and physical damage, there is no assurance that such insurance will be adequate to cover all such costs or that such insurance will continue to be available in the future.

Employees

As of December 31, 2006, we had 585 employees, including 193 who were employees of our drilling subsidiary. None of our employees is currently represented by a union for collective bargaining purposes.

Geographical Data

Forest operates in one industry segment. For information relating to our geographic operating segments, see Note 14 to the Consolidated Financial Statements of this Form 10-K.

Offices

Our principal office is located in leased space at 707 17th Street, Denver, Colorado 80202. We also lease field offices and subsidiary offices throughout the United States and Canada and in Cape Town, South Africa. Upon consummation of the proposed merger with Houston Exploration, we expect to establish an office in Houston, Texas.

Title to Properties

Title to our oil and gas properties is subject to royalty, overriding royalty, carried, net profits, working, and similar interests customary in the oil and gas industry. Under the terms of our bank credit facilities and term loan facilities, we have granted the lenders a lien on a majority of our properties. In addition, our properties may also be subject to liens incident to operating agreements, as well as other customary encumbrances, easements, and restrictions, and for current taxes not yet due. Forest’s general practice is to conduct a title examination on material property acquisitions. Prior to the commencement of drilling operations, a title examination and, if necessary, curative work is performed. The methods of title examination that we have adopted are reasonable in the opinion of management and are designed to insure that production from our properties, if obtained, will be salable for the account of Forest.

Glossary of Oil and Gas Terms

The terms defined in this section are used throughout this Form 10-K. The definitions of proved developed reserves, proved reserves and proved undeveloped reserves have been abbreviated from the applicable definitions contained in Rule 4-10(a)(2-4) of Regulation S-X. The entire definitions of those terms can be viewed on the SEC’s website at http://www.sec.gov/about/forms/regs-x.pdf.

Bbl.   One stock tank barrel, or 42 U.S. gallons liquid volume, of crude oil or liquid hydrocarbons.

Bcf.   Billion cubic feet of natural gas.

Bcfe.   Billion cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one bbl of crude oil, condensate or natural gas liquids.

Bbtu.   One billion British Thermal Units.

Btu.   A British Thermal Unit, or the amount of heat necessary to raise the temperature of one pound of water one degree Fahrenheit.

Condensate.   Liquid hydrocarbons associated with the production of a primarily natural gas reserve.

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Developed acreage.   The number of acres which are allocated or held by producing wells or wells capable of production.

Development well.   A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.

Dry hole; dry well.   A well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.

Equivalent volumes.   Equivalent volumes are computed with oil and natural gas liquid quantities converted to Mcf on an energy equivalent ratio of one barrel to six Mcf.

Exploitation.   Ordinarily considered to be a form of development within a known reservoir.

Exploratory well.   A well drilled to find and produce oil or gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir or to extend a known reservoir.

Farmout.   An assignment of an interest in a drilling location and related acreage conditional upon the drilling of a well on that location or the undertaking of other work obligations.

Field.   An area consisting of either a single reservoir or multiple reservoirs, all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.

Full cost pool.   The full cost pool consists of all costs associated with property acquisition, exploration, and development activities for a company using the full cost method of accounting. Additionally, any internal costs that can be directly identified with acquisition, exploration, and development activities are included. Any costs related to production, general and administrative expense, or similar activities are not included.

Gross acres or gross wells.   The total acres or wells, as the case may be, in which a working interest is owned.

Lease operating expenses.   The expenses of lifting oil or gas from a producing formation to the surface, constituting part of the current operating expenses of a working interest, and also including labor, superintendence, supplies, repairs, short-lived assets, maintenance, allocated overhead costs, and other expenses incidental to production, but not including lease acquisition or drilling or completion expenses.

Liquids.   Describes oil, condensate, and natural gas liquids.

MBbls.   Thousand barrels of crude oil or other liquid hydrocarbons.

Mcf.   Thousand cubic feet of natural gas.

Mcfe.   Thousand cubic feet equivalent determined using the ratio of six Mcf of natural gas to one bbl of crude oil, condensate or natural gas liquids.

MMBtu.   One million British Thermal Units, a common energy measurement.

MMcf.   Million cubic feet of natural gas.

MMcfe.   Million cubic feet equivalent determined using the ratio of six Mcf of natural gas to one bbl of crude oil, condensate or natural gas liquids.

NGL.   Natural gas liquids.

Net acres or net wells.   The sum of the fractional working interest owned in gross acres or gross wells expressed in whole numbers.

NYMEX.   New York Mercantile Exchange.

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Productive wells.   Producing wells and wells that are capable of production, including injection wells, salt water disposal wells, service wells, and wells that are shut-in.

Proved developed reserves.   Estimated proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.

Proved reserves.   Estimated quantities of crude oil, natural gas, and natural gas liquids which, upon analysis of geologic and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and gas reservoirs under existing economic and operating conditions.

Proved undeveloped reserves.   Estimated proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required.

Reservoir.   A porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

Standardized measure or present value of estimated future net revenues.   An estimate of the present value of the estimated future net revenues from proved oil and gas reserves at a date indicated after deducting estimated production and ad valorem taxes, future capital costs and operating expenses, but before deducting any estimates of U.S. federal income taxes. The estimated future net revenues are discounted at an annual rate of 10%, in accordance with the SEC’s practice, to determine their “present value.” The present value is shown to indicate the effect of time on the value of the revenue stream and should not be construed as being the fair market value of the properties. Estimates of future net revenues are made using oil and natural gas prices and operating costs at the date indicated and held constant for the life of the reserves.

Undeveloped Acreage.   Acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil or natural gas, regardless of whether such acreage contains estimated proved reserves.

Working interest.   An operating interest which gives the owner the right to drill, produce, and conduct operating activities on the property, and to receive a share of production.

Available Information

Forest’s website address is www.forestoil.com. Available on our website, free of charge, are Forest’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports on Forms 3, 4, and 5 filed on behalf of directors and officers, as well as amendments to these reports. These materials are available as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC.

Also posted on Forest’s website, and available in print upon written request of any shareholder addressed to the Secretary of Forest, at 707 17th Street, Suite 3600, Denver, Colorado 80202, are Forest’s Corporate Governance Guidelines, the charters for the committees of our Board of Directors (including the charters of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee) and codes of ethics entitled “Code of Business Conduct and Ethics” and “Proper Business Practices Policy.”

In May 2006, we submitted to the New York Stock Exchange (“NYSE”) the certification of the Chief Executive Officer of Forest required by Section 303A.12 of the NYSE Listed Company Manual, relating to Forest’s compliance with the NYSE’s corporate governance listing standards with no qualifications. Also, we included the certifications of the Principal Executive Officer and Principal Financial Officer of Forest required by Section 302 of the Sarbanes-Oxley Act of 2002 and related rules, relating to the quality of Forest’s public disclosure, in this Form 10-K as Exhibits 31.1 and 31.2.

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Forward-Looking Statements

The information in this Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts or present facts, that address activities, events, outcomes, and other matters that Forest plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates, or anticipates (and other similar expressions) will, should, or may occur in the future are forward-looking statements. Generally, the words “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions identify forward-looking statements, and any statements regarding Forest’s future financial condition, results of operations and business, are also forward-looking statements. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors.”

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;

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

·the amount, nature and timing of any synergies or other benefits expected to result from acquisitions, including the proposed merger with Houston Exploration;

·our outlook on oil and gas prices;

·the impact of political and regulatory developments;

·our future financial condition or results of operations and our future revenues and expenses; and

·our business strategy and other plans and objectives for future operations.

We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the exploration for and development, production, and sale of oil and gas. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of drilling and production equipment and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures, and the other risks described under the caption “Risk Factors.” The financial results of our foreign operations are also subject to currency exchange rate risks.

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

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Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include, among others, the following factors related to the proposed merger with Houston Exploration:

·the ability to consummate the merger;

·difficulties and delays in obtaining regulatory approvals for the merger;

·difficulties and delays in achieving synergies and cost savings from the merger; and

·potential difficulties in meeting conditions set forth in the merger agreement.

Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-K 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-K 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-K with the Securities and Exchange Commission, except as required by law.

Item 1A.Risk Factors.

The nature of the business activities conducted by Forest subject it to certain risks and hazards. The risks discussed below, any of which could materially and adversely affect our business, financial condition, cash flows, or results of operations, are not the only risks we face. We may experience additional risks and uncertainties not currently known to us or, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, cash flows, and results of operations.

Risk Factors Relating to Forest

Oil and gas price declines adversely affect Forest’s financial results and profitability.   Prices for oil and natural gas fluctuate widely. Forest’s revenues, profitability, and future rate of growth depend substantially upon the prevailing prices of oil and natural gas. Increases and decreases in prices also affect the amount of cash flow available for capital expenditures and our ability to borrow money or raise additional capital. The amount we can borrow from banks may be subject to redetermination based on changes in prices. In addition, we may have ceiling test writedowns when prices decline. Lower prices may also reduce the amount of oil and natural gas that Forest can produce economically. Any substantial or extended decline in the prices of or demand for oil and natural gas would have a material adverse effect on our financial condition and results of operations.

We cannot predict future oil and natural gas prices. Oil and gas prices are currently near historical highs and may fluctuate and decline significantly in the near future. Factors that can cause price fluctuations include: relatively minor changes in the supply of and demand for oil and natural gas; market uncertainty; the level of consumer product demand; weather conditions; domestic and foreign governmental regulations; the price and availability of alternative fuels; political and economic conditions in oil producing countries, particularly those in the Middle East, Russia, and South America; the price and quantity of oil and gas imports; or general economic conditions.

Further, oil prices and natural gas prices do not necessarily fluctuate in direct relationship to each other. Because approximately 53% of our estimated proved reserves as of December 31, 2006 were natural gas reserves, our financial results in 2007 are more sensitive to movements in natural gas prices. We have

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announced plans to complete a merger with Houston Exploration and the vast majority of Houston Exploration’s estimated proved reserves are natural gas, therefore, our financial results will be even more sensitive to natural gas price fluctuations following the proposed merger. For all of these reasons, declines in oil and gas prices may have a material adverse effect on our financial condition and results of operations.

We may not be able to obtain adequate financing to execute our operating strategy.   We have historically addressed our long-term liquidity needs through the use of bank credit facilities, cash provided by operating activities, and the issuance of debt and equity securities when market conditions are favorable. We also continue to examine alternative sources of long-term capital such as sales of properties; the issuance of non-recourse production-based financing or net profits interests; sales of prospects and technical information; and joint venture financing.

The availability of these sources of capital will depend upon a number of factors, some of which are beyond our control. These factors include general economic and financial market conditions, oil and natural gas prices, the value and performance of Forest, and the credit ratings assigned to Forest by independent ratings agencies. We will be unable to execute our operating strategy if we cannot obtain adequate capital.

Availability under our bank credit facilities is based on a global borrowing base that is redetermined semi-annually, and may be redetermined at other times during a year at the option of the Company or the lenders. The global borrowing base may be reduced if oil and gas prices decline or we have downward revisions in our estimate of proved reserves. We expect that the terms of our proposed amended and restated credit facilities to be entered into in connection with the proposed merger with Houston Exploration will be substantially similar to Forest’s existing credit facilities. See “—Leverage materially affects our operations,” below.

In addition, if availability under our credit facilities is reduced as a result of a borrowing base limitation or the covenants and financial tests contained in the credit agreements and indentures governing our debt securities, our ability to fund our planned capital expenditures could be adversely affected. After utilizing our available sources of financing, we could be forced to issue additional debt or equity securities to fund such expenditures. We cannot assure you that additional debt or equity financing or cash generated by operations will be available to meet our capital requirements.

A curtailment of capital spending could adversely affect our ability to replace production and our future cash flow from operations and could result in a decline in our oil and gas reserves and production.

Estimates of oil and gas reserves are uncertain and inherently imprecise.Estimating our proved reserves involves many uncertainties, including factors beyond our control. The estimates of proved reserves and related future net revenues described in this Form 10-K are based on various assumptions, which may ultimately prove inaccurate. Petroleum engineers consider many factors and make assumptions in estimating oil and gas reserves and future net cash flows. Lower oil and gas prices generally cause lower estimates of proved reserves. Ultimately, actual production, revenues, and expenditures relating to our reserves will vary from any estimates, and these variations may be material. Also, we may revise estimates of proved reserves to reflect production history, results of exploration and development, and other factors, many of which are beyond our control. As a result of lower oil and gas “spot” prices in the future or downward future reserve revisions, we could incur writedowns of our United State and Canadian full cost pools under “ceiling test” limitations pursuant to full cost accounting. If we were to record writedowns, shareholders’ equity could be reduced significantly. See “Additional Risk Factors Relating to Forest if the Merger with Houston Exploration is Consummated—Forest will be more vulnerable to a ceiling test writedown following the merger with Houston Exploration” below.

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In estimating future net revenues from proved reserves, future prices and costs are assumed to be fixed and a fixed discount factor is applied. Our revenues, profitability and cash flow could be materially less than our estimates if these assumptions and discount factor are incorrect.   The present value of future net revenues from our proved reserves is not necessarily the actual current market value of our estimated oil and natural gas reserves. In accordance with SEC requirements, we base the estimated discounted future net cash flows from our proved reserves on fixed prices and costs as of the date of the estimate. Actual future prices and costs fluctuate over time and may differ materially from those used in the SEC net present value estimate. The timing and amount of development expenditures and the rate and timing of oil, natural gas, and natural gas liquids production will affect both the timing of future net cash flows from our proved reserves and their present value. In addition, the 10% discount factor that we use to calculate the net present value of future net cash flows for reporting purposes in accordance with the SEC’s rules may not necessarily be the most appropriate discount factor. As a result, net present value estimates using actual prices and costs may be significantly less than the SEC estimate that is provided in this Form 10-K.

Lower oil and gas prices and other factors may cause us to record ceiling test writedowns.We use the full cost method of accounting to report our oil and gas operations. Accordingly, we capitalize the cost to acquire, explore for, and develop oil and gas properties. Under full cost accounting rules, the net capitalized costs of oil and gas properties may not exceed a “ceiling limit,” which is based upon the present value of estimated future net cash flows from proved reserves, discounted at 10%. If net capitalized costs of oil and gas properties exceed the ceiling limit, we must charge the amount of the excess to earnings. This is called a “ceiling test writedown.” Under the accounting rules, we are required to perform a ceiling test each quarter. A ceiling test writedown would not impact cash flow from operating activities, but it would reduce our shareholders’ equity. The risk that we will be required to write down the carrying value of our oil and gas properties increases when oil and gas prices are low or volatile. In addition, writedowns may occur if we experience substantial downward adjustments to our estimated proved reserves or our undeveloped property values, or if estimated future development costs increase. We cannot assure you that we will not experience ceiling test writedowns in the future. Our Canadian full cost pool, in particular, could be adversely impacted by moderate declines in commodity prices. The merger with Houston Exploration is expected to increase the risk of a ceiling test writedown. See “Additional Risk Factors Relating to Forest if the Merger with Houston Exploration is Consummated—Forest will be more vulnerable to a ceiling test writedown following the merger with Houston Exploration” below.

Leverage may materially affect our operations.   As of December 31, 2006, the principal amount of our consolidated long-term debt was approximately $1.2 billion, including approximately $107 million outstanding under the combined U.S. and Canadian bank credit facilities among Forest and its Canadian subsidiary and the various lenders that are parties to the facilities and $375 million outstanding under term loan facilities among Forest Alaska Operating LLC and the lenders that are parties to those facilities, which are nonrecourse to Forest and its non-Alaska subsidiaries. Our long-term debt represented 46% of our total capitalization at December 31, 2006. Further, we may incur additional debt in the future, including in connection with acquisitions and refinancings. In connection with the announcement of the proposed merger with Houston Exploration, we also announced our plans to enter into an amended and restated $1.4 billion credit facility which will be used to finance the cash component of the merger consideration, which is expected to total approximately $740 million. See “Risk Factors Relating to Forest if the Merger with Houston Exploration is Consummated” below.

The level of our debt has several important effects on our operations, including, among others:

·a significant portion of our cash flow from operations could be applied to the payment of principal and interest on the debt and will not be available for other purposes;

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·credit rating agencies have changed, and may change in the future, their ratings of our debt and other obligations as a result of changes in our debt level, financial condition, earnings, and cash flow; such ratings changes in turn impact the costs, terms, conditions, and availability of financing;

·covenants contained in our existing and future credit and debt arrangements require us to meet financial tests that affect our flexibility in planning for and reacting to changes in our business, including possible acquisition opportunities;

·our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate, and other purposes is limited and any such financing may be burdened by increased costs or more restrictive covenants;

·we may be at a competitive disadvantage to similar companies that have less debt; and

·we are more vulnerable to adverse economic and industry conditions.

We may incur significant abandonment costs or be required to post substantial performance bonds in connection with the plugging and abandonment of wells, platforms, and pipelines.   We are responsible for the costs associated with the plugging of wells, the removal of facilities and equipment, and site restoration on our oil and gas properties, pro rata to our working interest. Future liabilities for projected abandonment costs, net of estimated salvage values, are included as a reduction in the future cash flows from our reserves in our reserve reporting. As of December 31, 2006, our estimated discounted asset retirement obligation liability recorded in the balance sheet was approximately $64.1 million, of which $16.9 million was for properties in the Cook Inlet of Alaska. Approximately $6.7 million of abandonment costs were settled in 2006 and $2.7 million of abandonment costs are anticipated to be settled in 2007, all of which are expected to be funded by cash flow from operations. Estimates of abandonment costs and their timing may change due to many factors, including actual drilling and production results, inflation rates, changes in abandonment techniques and technology, and changes in environmental laws and regulations.

We may not be able to replace production with new reserves.   In general, the volume of production from oil and gas properties declines as reserves are depleted. The decline rates depend on reservoir characteristics. Our reserves will decline as they are produced unless we are successful in our exploration and development activities or acquire new producing properties. Forest’s future natural gas and oil production is highly dependent upon its level of success in finding or acquiring additional reserves. Exploring for, developing, or acquiring reserves is capital intensive and uncertain. We may be unable to make the necessary capital investment to maintain or expand our oil and gas reserves if cash flow from operations declines or external sources of capital become limited or unavailable. We cannot assure you that our future exploration, development, and acquisition activities will result in additional proved reserves or that we will be able to drill productive wells at acceptable costs.

Our oil and gas drilling and production activities are subject to numerous operational and exploration risks.   Oil and gas drilling and production activities are subject to numerous risks, including the risk that no commercially productive oil or natural gas reservoirs will be found. The cost of drilling and completing wells is often uncertain. Oil and gas drilling and production activities may be shortened, delayed, or canceled as a result of a variety of factors, many of which are beyond our control. These factors include unexpected drilling conditions; geological irregularities or pressure in formations; equipment failures or accidents; shortages in supplies of drilling rigs and related equipment; shortages in labor; weather conditions; delays in the delivery of equipment; and failure to secure necessary regulatory approvals and permits. Further, we cannot assure you that the new wells we drill will be productive or that we will recover all or any portion of our investment. Drilling activities can result in dry wells and wells that are productive but do not produce sufficient net revenues after operating and other costs and thus may be unprofitable.

We may not be insured against all of the operating risks to which our businesses are exposed.   The exploration, development, and production of oil and natural gas and the drilling activities performed by

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our drilling subsidiary involve risks. These operating risks include the risk of fire, explosions, blow-outs, pipe failure, damaged drilling and oil field equipment, abnormally pressured formations, and environmental hazards. Environmental hazards include oil spills, gas leaks, pipeline ruptures, or discharges of toxic gases. If any of these industry operating risks occur, we could have substantial losses. Substantial losses may be caused by injury or loss of life, severe damage to or destruction of property, natural resources, and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties, and suspension of operations. In accordance with industry practice, we maintain insurance against some, but not all, of the risks described above. Generally, pollution related environmental risks are not fully insurable. We cannot assure that our insurance will be fully adequate to cover these losses or liabilities. Also, we cannot predict the continued availability of insurance at premium levels that justify its purchase.

Our international operations may be adversely affected by currency fluctuations and economic and political developments.   We have significant oil and gas operations in Canada. The expenses and revenues of such operations, which represented approximately 19% of our 2006 consolidated production costs, and 22% of our 2006 consolidated oil and gas revenues, are denominated in Canadian dollars. As a result, the profitability of our Canadian operations is subject to the risk of fluctuations in the relative value of the Canadian and United States dollars. We have oil and gas assets in other countries including Italy, Gabon and South Africa. Although there are no material operations in these countries, our operations in these countries may also be adversely affected by political and economic developments, royalty and tax increases, and other laws or policies in these countries, as well as United States policies affecting trade, taxation, and investment in other countries.

In South Africa, we have an interest in offshore properties that have tested natural gas. While no proved reserves have been assigned to these properties as commercial sales contracts have not been established, and if we are unable to arrange for commercial use of these properties, we may not be able to recoup our investment and may not realize our anticipated financial and operating results from these properties. The South African national government has recently adopted legislation to revise the process pursuant to which it grants petroleum exploration and production licenses. Under the new regulations, we have applied to the government to convert one existing prospecting sublease into an exploration right. In addition, we are in the process of applying for a production right covering the geographic area of our other existing prospecting sublease. Because the regulations implementing legislation are not yet final, we cannot predict whether these applications, if granted, will meet our economic or operational requirements, in which event we may choose to relinquish these leases and lose our investment.

Hedging transactions may limit our potential gains.   In order to manage our exposure to price risks in the marketing of our oil and natural gas, we enter into oil and gas price hedging arrangements with respect to a portion of our expected production. Our hedges are limited in duration, usually for periods of one year or less. However, in connection with acquisitions, sometimes our hedges are for longer periods. While intended to reduce the effects of volatile oil and gas prices, such transactions may limit our potential gains if oil and gas prices rise over the price established by the arrangements. For example, in 2006, our hedging arrangements reduced the benefits we received from increases in oil and natural gas prices by approximately $67.7 million. In trying to maintain an appropriate balance, we may end up hedging too much or too little, depending upon how oil or natural gas prices fluctuate in the future. Also, hedging transactions may expose us to the risk of financial loss in certain circumstances, including instances in which our production is less than expected; there is a widening of price basis differentials between delivery points for our production and the delivery point assumed in the hedge arrangement; the counterparties to our future contracts fail to perform under the contracts; or a sudden unexpected event materially impacts oil or natural gas prices.

We cannot assure you that our hedging transactions will reduce the risk or minimize the effect of any decline in oil or natural gas prices. For further information concerning prices, market conditions, and

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energy swap and collar agreements, see Part II, Item 7A—“Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk,” of this Form 10-K, and Note 9 to the Consolidated Financial Statements.

Competition within our industry may adversely affect our operations.   We operate in a highly competitive environment. Forest competes with major and independent oil and gas companies in acquiring desirable oil and gas properties and in obtaining the equipment and labor required to develop and operate such properties. Forest also competes with major and independent oil and gas companies in the marketing and sale of oil and natural gas. Factors that affect our ability to acquire properties include, among others, availability of desirable acquisition targets, staff and resources to identify and evaluate properties, available funds, and internal standards for minimum projected return on investment. Higher recent commodity prices have increased both equipment, service and labor costs in the industry as well as the cost of properties available for acquisition and a large number of the companies that we compete with have substantially larger staffs and greater financial and operational resources. In addition, oil and gas producers are increasingly facing competition from providers of non-fossil energy, and government policy may favor those competitors in the future. Many of these competitors have financial and other resources substantially greater than ours. We can give no assurance that we will be able to compete effectively in the future and that our financial condition and results of operations will not suffer as a result.

Our growth may partially depend on our ability to acquire oil and gas properties on a profitable basis.   Acquisition of producing oil and gas properties is a key element of maintaining and growing reserves and production. Competition for these assets has been and will continue to be intense. The success of any acquisition will depend on a number of factors, including the acquisition price, future oil and gas prices, the ability to reasonably estimate or assess the recoverable volumes of reserves, rates of future production and future net revenues attainable from reserves, future operating and capital costs, results of future exploration, exploitation and development activities on the acquired properties, and future abandonment and possible future environmental liabilities. When acquiring new properties, there are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves, future production rates, and associated costs and potential liabilities with respect to prospective acquisition targets. Actual results from an acquisition may vary substantially from those assumed in the purchase analysis and acquired properties may not produce as expected, or there may be conditions that subject us to increased costs and liabilities including environmental liabilities.

We operate a drilling subsidiary and it involves many operating risks, any one of which could prevent us from realizing profits from the drilling subsidiary.   Forest seeks to increase its oil and gas reserves, production, and cash flow through exploratory and development drilling activities and conducting other production enhancement activities. In 2005, Forest formed a drilling subsidiary to hold drilling equipment and related assets that it acquired in a corporate transaction. The subsidiary performs services for Forest and its subsidiaries as well as third parties. Forest believes these new operations complement its business model and will lessen its exposure to the risks and delays associated with obtaining drilling equipment from third parties in an intensely competitive market. The drilling subsidiary is subject to risks, including shortages in labor and the risks associated with drilling oil and gas wells. These risks include: fires; explosions; blow-outs and surface cratering; pipe failures; casing collapses; natural disasters; and environmental hazards, such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases. If any of these events occur, we could incur substantial losses as a result of injury or loss of life, severe damage to and destruction of property, and environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of our operations.

Our oil and gas operations are subject to various environmental and other governmental regulations that materially affect our operations.   Our oil and gas operations are subject to various United States federal, state, and local and Canadian federal and provincial governmental regulations. These regulations may be changed in response to economic or political conditions. Matters regulated include permits for discharge

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of waste and other substances generated in connection with drilling and production operations, bonds or other financial responsibility requirements to cover drilling contingencies and well plugging and abandonment costs, reports concerning operations, the spacing of wells, and unitization and pooling of properties and taxation. At various times, regulatory agencies have imposed price controls and limitations on oil and gas production. In order to conserve supplies of oil and gas, these agencies may restrict the rates of flow of oil and gas wells below actual production capacity. A substantial spill from one of our facilities could have a material adverse effect on our results of operations, competitive position, or financial condition. United States and non-United States laws regulate production, handling, storage, transportation, and disposal of oil and gas, by-products from oil and gas, and other substances and materials produced or used in connection with oil and gas operations. We cannot predict the ultimate cost of compliance with these requirements or their effect on our operations.

We have limited control over the activities on properties we do not operate.   Although we operate the properties from which most of our production is derived, other companies operate some of our other properties. We have limited ability to influence or control the operation or future development of these non-operated properties or the amount of capital expenditures that we are required to fund for their operation. The success and timing of drilling development activities on properties developed by others depend upon a number of factors that are outside of our control, including the timing and amount of capital expenditures, the operator’s expertise and financial resources, approval of other participants, and selection of technology. Our dependence on the operator and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could have a material adverse effect on the realization of our targeted returns on capital or lead to unexpected future costs.

Our Restated Certificate of Incorporation and By-laws have provisions that discourage corporate takeovers.   Certain provisions of our Restated Certificate of Incorporation and Bylaws and provisions of the New York Business Corporation Law may have the effect of delaying or preventing a change in control. Our directors are elected to staggered terms. Also, our Restated Certificate of Incorporation authorizes our board of directors to issue preferred stock without shareholder approval and to set the rights, preferences, and other designations, including voting rights of those shares as the board may determine. Additional provisions include restrictions on business combinations, the availability of authorized but unissued common stock, and notice requirements for shareholder proposals and director nominations. Also, our board of directors has adopted a shareholder rights plan. If activated, this plan would cause extreme dilution to any person or group that attempts to acquire a significant interest in Forest without advance approval of our board of directors. The provisions contained in our Bylaws and Certificate of Incorporation, alone or in combination with each other and with the rights plan, may discourage transactions involving actual or potential changes of control.

Additional Risk Factors Relating to Forest if the Merger with Houston Exploration is Consummated

The businesses of Forest and Houston Exploration, as well as other businesses that Forest may acquire after completion of the merger, may be difficult to integrate, disrupt Forest’s business, dilute shareholder value or divert management attention.   Risks with respect to the combination of Forest and Houston Exploration, as well as other recent and future acquisitions, include:

·difficulties in the integration of the operations and personnel of the acquired company;

·diversion of management’s attention away from other business concerns; and

·the assumption of any undisclosed or other potential liabilities of the acquired company.

Forest will be more vulnerable to a ceiling test writedown following the merger with Houston Exploration.   As described above in the risk factor entitled, “Risk Factors Relating to Forest—Lower oil and gas and other factors prices may cause us to record ceiling test writedowns,” Forest uses the full cost method of accounting

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and is subject to quarterly ceiling tests. After completion of the merger, Forest will add to net capitalized costs the cost to acquire Houston Exploration’s oil and gas properties. It will also add the estimated proved reserves associated with those properties. Forest expects that the net effect of these additions will be to reduce the difference between the ceiling limit and the net capitalized costs of its U.S. cost center. Based on oil and gas prices at December 31, 2006, on a stand-alone basis Forest had a ceiling limit in excess of the net capitalized costs in the U.S. cost center (the “Available Amount”) of approximately $535 million. Based on Forest’s current estimate of the cost to acquire Houston Exploration’s properties and the estimated proved reserves to be acquired, Forest’s Available Amount would have been approximately $100 million if the pending merger with Houston Exploration had occurred on December 31, 2006. The impact on the Available Amount indicates that Forest may be more likely to incur a writedown of its U.S. full cost pool immediately after the merger than it would have been immediately before the merger.

Forest will incur substantial transaction and merger-related costs in connection with the merger.   We expect to incur a number of non-recurring transaction and merger related costs (estimated to be in excess of $50 million) associated with completing the merger with Houston Exploration, combining the operations of the two companies and achieving desired synergies. These fees and costs will be substantial. Additional unanticipated costs may be incurred in the integration of the businesses of Forest and Houston Exploration. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the two businesses will offset the incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.

Forest will have substantial debt after the effective time of the merger, which could have a material adverse effect on its financial health and limit its future operations.   Forest will have a significant amount of additional debt after the effective time of the merger. Approximately $740 million (based on the number of shares of Houston Exploration common stock outstanding on January 4, 2007) in expected cash consideration is expected to be paid with borrowings under Forest’s proposed amended and restated credit facilities. Forest’s substantial debt could have important consequences. In particular, it could:

·increase its vulnerability to general adverse economic and industry conditions;

·require it to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness, thereby reducing the availability of its cash flow to fund working capital, capital expenditures and other general corporate purposes;

·place it at a competitive disadvantage compared to its competitors that have less debt; and

·limit, along with the financial and other restrictive covenants of its indebtedness, among other things, its ability to borrow additional funds.

See, “Risk Factors Relating to Forest—Leverage may materially affect our operations” above.

Item 1B.Unresolved Staff Comments.

None.

Item 2.Properties.

Information on Properties is contained in Item 1 of this Form 10-K.

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Item 3.Legal Proceedings.

Forest, in the ordinary course of business, is a party to various lawsuits, claims, and proceedings, including the matter identified below. While we believe that the amount of any potential loss would not be material to our consolidated financial position, the ultimate outcome of these matters is inherently difficult to predict with any certainty. In the event of an unfavorable outcome, the potential loss could have an adverse effect on our results of operations and cash flow in the reporting periods in which any such actions are resolved.

Houston Exploration and Forest are subject to an ongoing shareholder lawsuit, which could result in an injunction preventing the consummation of the merger or significant monetary damages. Houston Exploration’s directors and Forest are defendants in a shareholder lawsuit brought by the City of Monroe Employees’ Retirement System (the “Plaintiff”) on June 22, 2006 in State court in Houston, Texas. The Plaintiff asserts that the Houston Exploration directors breached their fiduciary duties by not pursuing a June 12, 2006 unsolicited proposal to purchase the outstanding shares of Houston Exploration common stock for $62 per share that was made by a Houston Exploration shareholder. The Plaintiff also asserts, on behalf of an uncertified class of Houston Exploration’s shareholders, that the Houston Exploration directors’ decision to enter into the merger agreement with Forest constituted a breach of fiduciary duties, because, the Plaintiff alleges, the merger consideration being offered by Forest is inadequate. The Plaintiff asserts that Forest aided and abetted the Houston Exploration directors’ alleged breach of fiduciary duties.

At the time of the filing of this Annual Report, this lawsuit is at an early stage and subject to substantial uncertainties concerning the outcome of material factual and legal issues. Accordingly, based on the current status of the litigation, we cannot currently predict the manner and timing of the resolution of the lawsuit, the likelihood of the issuance of an injunction preventing the consummation of the merger or an estimate of a range of possible losses or any minimum loss that could result in the event of an adverse verdict in the lawsuit. Furthermore, although the combined company’s insurance policies following the merger should provide coverage for the claims against Houston Exploration’s directors, the policies may not be sufficient to cover all costs and liabilities incurred by those directors. The current claim in the lawsuit against Forest is not covered by insurance.

Item 4.Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of our shareholders during the fourth quarter of the fiscal year ended December 31, 2006.

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Item 4A.Executive Officers of Forest.

The following persons were serving as executive officers of Forest as of February 27, 2007.

Name	Age	Years with Forest	Office(1)
H. Craig Clark	50	6	President and Chief Executive Officer, and a member of the Board of Directors since July 2003. Mr. Clark joined Forest in September 2001 as President and Chief Operating Officer. He was appointed President and Chief Executive Officer on July 31, 2003. Mr. Clark was employed by Apache Corporation, an oil and gas exploration and production company, from 1989 to 2001, where he served in various management positions during this period, including Executive Vice President—U.S. Operations and Chairman and Chief Executive Officer of ProEnergy, an affiliate of Apache.
David H. Keyte	50	19	Executive Vice President and Chief Financial Officer since November 1997. Mr. Keyte served as our Vice President and Chief Financial Officer from December 1995 to November 1997 and our Vice President and Chief Accounting Officer from December 1993 until December 1995.
Cecil N. Colwell	56	18	Senior Vice President—Worldwide Drilling since May 2004. Between 2000 and May 2004, Mr. Colwell served as our Vice President—Drilling, and from 1988 to 2000 he served as our Drilling Manager—Gulf Coast.
Leonard C. Gurule	50	4	Senior Vice President—Alaska since September 2003. From 1987 to 2000, he served in various capacities at Atlantic Richfield Co. Between 2000 and September 2003, Mr. Gurule served on the boards of several local community and non-profit organizations and managed his own investment portfolio.
J.C. Ridens	51	3	Senior Vice President—Southern Region (formerly Gulf Coast Region) since April 2004. From 2001 to 2004, Mr. Ridens was employed by Cordillera Energy Partners, LLC, as Vice President of Operations and Exploitation. From 1996 to 2001, he served in various capacities at Apache Corporation.
R. Scot Woodall	45	7	Senior Vice President—Western Region since March 2005. He served as our Vice President—Western Region from March 2004 to March 2005. Mr. Woodall joined Forest in October 2000 and previously served as Production and Engineering Manager for the Western Region. From 1993 to September 2000, he served as Operations and Engineering Manager—Rocky Mountain Division, at Santa Fe Snyder Corporation.
Matthew A. Wurtzbacher	44	8	Senior Vice President—Corporate Planning and Development since May 2003. From December 2000 to May 2003, Mr. Wurtzbacher served as our Vice President—Corporate Planning and Development, and from June 1998 to December 2000 he served as Manager—Operational Planning and Corporate Engineering.
Cyrus D. Marter IV	43	5	Vice President, General Counsel and Secretary since January 2005. Mr. Marter served as Senior Counsel for Forest from June 2002 until October 2004, at which time he became Associate General Counsel. Prior to joining Forest, Mr. Marter was a partner in the law firm of Susman Godfrey L.L.P. in Houston, Texas.
Victor A. Wind	33	2	Corporate Controller. Mr. Wind joined Forest in January 2005. Mr. Wind was previously employed by Evergreen Resources, Inc. from July 2001 to December 2004. He served in various management positions during this period, including Director of Financial Reporting and Controller. From 1997 to 2001, he served in various capacities at BDO Seidman, L.L.P.

(1)Officers are elected to serve for one-year terms at meetings immediately following the last annual meeting, or until their death, resignation, or removal from office, whichever first occurs.

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PART II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Common Stock

Forest has one class of common shares outstanding, its common stock, par value $.10 per share (“Common Stock”). Forest’s Common Stock is traded on the New York Stock Exchange under the symbol “FST.” On February 16, 2007, our Common Stock was held by 640 holders of record. The number of holders does not include the shareholders for whom shares are held in a “nominee” or “street” name.

The table below reflects the high and low intraday sales prices per share of the Common Stock on the New York Stock Exchange composite tape, as well as adjusted prices for Forest common stock that reflect the stock dividend paid by Forest on March 2, 2006. There were no cash dividends declared on the Common Stock in 2005 or 2006. On February 27, 2007, the closing price of Forest Common Stock was $32.14.

		Common Stock			Common Stock (As Adjusted)(1)
		High		Low	High	Low
2005	First Quarter	$	43.29	28.87	29.00	19.34
	Second Quarter	44.00		34.21	29.47	22.91
	Third Quarter	54.76		40.77	36.68	27.31
	Fourth Quarter	54.25		40.26	36.34	26.97
2006	First Quarter	$	52.99	32.51	37.82	30.80
	Second Quarter	39.75		28.00	39.75	28.00
	Third Quarter	35.28		29.06	35.28	29.06
	Fourth Quarter	36.17		29.13	36.17	29.13

(1)On March 2, 2006, Forest completed the Spin-off by means of a special stock dividend paid to all shareholders of Forest Common Stock. The stock dividend consisted of 0.8093 shares of a wholly owned subsidiary of Forest for each outstanding share of Forest Common Stock, which immediately thereafter became the right to receive one share of Mariner for each whole share of such subsidiary in connection with the merger of MERI and such subsidiary. Mariner’s common stock commenced trading on March 3, 2006 at a price of $20.40. Based on the ratio of 0.8093 Mariner shares for each Forest share, the value of the stock dividend to Forest shareholders is deemed by Forest to be equal to $16.51, or the price of Mariner common stock on March 3, 2006 ($20.40) multiplied by 0.8093.

The prices shown in the “As Adjusted” column above for the first quarter of 2005 through the first quarter of 2006 have been adjusted to reflect the stock dividend paid on March 2, 2006. The ratio used for this historical price adjustment is 0.6698. This represents the ratio of (x) $33.49, the per share value of Forest Common Stock immediately after the stock dividend, which was the opening price for Forest shares on March 3, 2006, to (y) $50.00, which represents the sum of $33.49 plus $16.51, the value of the stock dividend described above. That is $33.49 divided by $50.00 equals 0.6698. Prices from the second quarter of 2006 onward are identical in both columns.

Dividend Restrictions

Forest’s present or future ability to pay dividends is governed by (i) the provisions of the New York Business Corporation Law, (ii) Forest’s restated certificate of incorporation and bylaws, (iii) Forest’s 8% Senior Notes due 2008, Forest’s 8% Senior Notes due 2011, and Forest’s 73¤4% Senior Notes due 2014, and (iv) Forest’s United States and Canadian bank credit facilities dated as of September 29, 2004, as amended. The provisions in the indentures pertaining to these Senior Notes and in the bank credit facilities limit our ability to make restricted payments, which include dividend payments. Also, if the merger with Houston Exploration is completed, the indenture governing its senior subordinated notes will limit our ability to pay dividends. As noted above, on March 2, 2006 Forest distributed a special stock dividend; however, Forest has not paid cash dividends on its Common Stock during the past five years. The

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future payment of cash dividends, if any, on the Common Stock is within the discretion of the Board of Directors and will depend on Forest’s earnings, capital requirements, financial condition, and other relevant factors. There is no assurance that Forest will pay any cash dividends.

On February 10, 2006, Forest declared a special stock dividend payable to holders of record of Forest Common Stock as of the close of business on February 21, 2006, in connection with the Spin-off that was completed on March 2, 2006. In October 2005, Forest amended its credit facilities to permit the Spin-off and the special stock dividend. See Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for more details concerning the Spin-off. For further information regarding our equity securities and our ability to pay dividends on our Common Stock, see Notes 4 and 6 to the Consolidated Financial Statements.

For equity compensation plan information, see Part III, Item 12—“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” below.

Stock Performance Graph

The graph below shows the cumulative total shareholder return assuming the investment of $100 on December 31, 2001 (and the reinvestment of dividends thereafter) in each of Forest Common Stock, the S&P 500 Index, and the Dow Jones U.S. Exploration and Production Index. We believe that the Dow Jones U.S. Exploration and Production Index is meaningful because it is an independent, objective view of the performance of other similarly-sized energy companies.

The information in this Form 10-K appearing under the heading “Stock Performance Graph” is being furnished pursuant to Item 2.01(e) of Regulation S-K and shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Item 2.01(e) of Regulation S-K, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.

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Item 6. Selected Financial Data.

The following table sets forth selected financial and operating data of Forest as of and for each of the years in the five-year period ended December 31, 2006. This data should be read in conjunction with Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” below, and the Consolidated Financial Statements and Notes thereto. On March 2, 2006, Forest completed the Spin-off of its offshore Gulf of Mexico operations. See “Spin-off of Offshore Gulf of Mexico Operations” under Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

	Year Ended December 31,
	2006		2005	2004		2003		2002
	(In Thousands, Except Per Share Amounts, Volumes, and Prices)
FINANCIAL DATA
Revenue:
Oil and gas sales	$	814,469	1,062,517	909,780		655,193		471,740
Marketing, processing, and other	5,523		9,528	3,118		1,985		1,128
Total revenue	819,992		1,072,045	912,898		657,178		472,868
Earnings from continuing operations	166,080		151,568	123,126		90,228		21,083
Income (loss) from discontinued operations, net of tax(1)	2,422		—	(575	)	(7,731	)	193
Cumulative effect of change in accounting principle, net of tax(2)	—		—	—		5,854		—
Net earnings	$	168,502	151,568	122,551		88,351		21,276
Basic earnings per share:
Earnings from continuing operations	$	2.67	2.47	2.16		1.82		.45
Income (loss) from discontinued operations, net of tax	.04		—	(.01	)	(.15	)	—
Cumulative effect of change in accounting principle, net of tax	—		—	—		.12		—
Basic earnings per common share	$	2.71	2.47	2.15		1.79		.45
Diluted earnings per share:
Earnings from continuing operations	$	2.62	2.41	2.12		1.79		.44
Income (loss) from discontinued operations, net of tax	.04		—	(.01	)	(.15	)	—
Cumulative effect of change in accounting principle, net of tax	—		—	—		.11		—
Diluted earnings per common share	$	2.66	2.41	2.11		1.75		.44
Total assets	$	3,189,072	3,645,546	3,122,505		2,683,548		1,924,681
Long-term debt	$	1,204,709	884,807	888,819		929,971		767,219
Shareholders’ equity	$	1,434,006	1,684,522	1,472,147		1,185,798		921,211
OPERATING DATA
Annual production:
Gas (MMcf)	73,024		101,833	107,366		96,977		92,068
Liquids (MBbls)	8,026		10,568	10,837		8,701		8,657
Average sales price(3)
Gas (per Mcf)	$	5.58	6.36	5.34		4.53		3.13
Liquids (per Bbl)	$	50.70	39.23	31.05		24.77		21.16
Capital expenditures, net of proceeds from asset sales(4)	$	934,192	824,045	605,133		716,554		352,812

(1)Discontinued operations relate to the sale of the business assets of our Canadian marketing subsidiary on March 1, 2004. The results for this business’ operations have been reported as discontinued operations in the selected financial data for all periods presented.

(2)Cumulative effect of change in accounting principle for 2003 relates to the adoption of SFAS No. 143 on January 1, 2003.

(3)Includes the effects of hedging under cash flow hedge accounting.

(4)Does not include estimated discounted asset retirement obligations of $2.4 million, $16.3 million, $14.1 million, and $63.7 million related to assets placed in service during the years ended December 31, 2006, 2005, 2004, and 2003 respectively.

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

All expectations, forecasts, assumptions, and beliefs about our future financial results, condition, operations, strategic plans, and performance are forward-looking statements, as described in more detail in Part I, Item 1 under the heading “Forward-Looking Statements.” Our actual results may differ materially because of a number of risks and uncertainties. Some of these risks and uncertainties are detailed in Item 1A under the heading “Risk Factors,” and elsewhere in this Form 10-K. Historical statements made herein are accurate only as of the date of filing of this Form 10-K with the Securities and Exchange Commission, and may be relied upon only as of that date.

The following discussion and analysis should be read in conjunction with Forest’s Consolidated Financial Statements and the Notes to Consolidated Financial Statements.

Overview

Forest is an independent oil and gas company engaged in the acquisition, exploration, development, and production of natural gas and liquids primarily in North America. 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. We conduct our operations in three geographical segments and five business units. The geographical segments are: the United States, Canada and International. The business units are: the Western United States (“Western”), Southern United States (“Southern”), Alaska, Canada and International. We conduct exploration and development activities in each of our geographical segments; however, all of our estimated proved reserves and producing properties are located in North America. While discoveries of oil and gas have been made in our International business unit, no proven reserves have been recorded to date. At December 31, 2006, approximately 84% of our estimated proved oil and gas reserves were in the United States and approximately 16% were in Canada. Forest’s total estimated proved reserves as of December 31, 2006 were 1,455 Bcfe.

Recent Developments

Pending Acquisition of Houston Exploration

On January 7, 2007, Forest announced it had entered into a definitive agreement and plan of merger pursuant to which The Houston Exploration Company (“Houston Exploration”) will merge with and into Forest in a stock and cash transaction totaling approximately $1.5 billion plus the assumption of debt. Houston Exploration is an independent natural gas and oil producer engaged in the exploration, development, exploitation and acquisition of natural gas and oil reserves in North America with operations in the following four producing areas in the United States: South Texas, East Texas, the Arkoma Basin of Arkansas, and the Uinta and DJ Basins in the Rocky Mountains. The boards of directors of Forest and Houston Exploration have each unanimously approved the transaction. The transaction is subject to regulatory approvals and other customary conditions, as well as both Forest shareholder and Houston Exploration stockholder approvals. Forest management and its board of directors will continue in their current positions with Forest following the completion of the merger. The merger is expected to close in the second quarter of 2007.

Under the terms of the merger agreement, Houston Exploration stockholders are to receive total consideration equal to 0.84 shares of Forest common stock and $26.25 in cash for each share of Houston Exploration common stock outstanding. This represents estimated merger consideration of 23.6 million shares of Forest common stock and cash of approximately $740 million, or $52.47 per share, to be received by the Houston Exploration stockholders (based on the closing price of Forest’s common stock on January 5, 2007 and the number of shares of Houston Exploration common stock outstanding on January 4, 2007 and subject to increase in the event that any additional shares of Houston Exploration common stock are issued prior to the merger closing date in connection with the exercise of outstanding

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stock options pursuant to the terms of the merger agreement). The actual amount of total cash and stock consideration to be received by each Houston Exploration stockholder will be determined by elections, an equalization formula and a proration procedure. It is anticipated that the transaction will be tax free to Houston Exploration and the stock portion of the consideration will be received tax free by its stockholders. The cash component of the acquisition is expected to be financed under an amended and restated revolving credit facility of up to $1.4 billion for which JPMorgan Chase Bank, N.A. has provided us a commitment letter.

2006 Highlights

Spin-off of Offshore Gulf of Mexico Operations

On March 2, 2006, Forest completed the spin-off of its offshore Gulf of Mexico operations by means of a stock dividend, which consisted of a pro rata spin-off (the “Spin-off”) of all outstanding shares of Forest Energy Resources, Inc. (hereinafter known as Mariner Energy Resources, Inc. or “MERI”), a total of 50,637,010 shares of common stock, to holders of record of Forest common stock as of the close of business on February 21, 2006. Immediately following the Spin-off, MERI was merged with a subsidiary of Mariner Energy, Inc. (“Mariner”) (the “Merger”). Mariner’s common stock commenced trading on the New York Stock Exchange on March 3, 2006.

The Spin-off was completed without the payment of consideration by Forest shareholders and consisted of a special dividend of 0.8093 shares of MERI for each outstanding share of Forest common stock. In the Merger, Forest shareholders received one share of Mariner common stock for each whole share of MERI that they held. The Spin-off was a tax-free transaction for federal income tax purposes.

Cotton Valley Acquisition

On March 31, 2006, Forest completed the acquisition of oil and gas properties located primarily in the Cotton Valley trend in East Texas. Forest paid approximately $255 million, as adjusted to reflect an economic effective date of February 1, 2006, for properties with an estimated 110 Bcfe of estimated proved reserves at the time the acquisition was announced in February 2006 and production that averaged 13 MMcfe per day in January 2006. Forest obtained approximately 26,000 net acres in the fields, of which approximately 14,000 net acres were undeveloped. This acquisition provided another core area of growth and added significant onshore activity to the Southern business unit. Forest funded this acquisition utilizing its bank credit facilities.

Formation of New Alaska Subsidiaries and Related Financing

As of October 31, 2006, Forest transferred the majority of the assets associated with its Alaska business unit to a new subsidiary, Forest Alaska Operating LLC (“Forest Alaska”), which is indirectly owned 100% by Forest through another subsidiary, Forest Alaska Holding LLC. Forest Alaska holds the oil and gas interests of Forest in the Cook Inlet region of the State of Alaska and entered into a service agreement with Forest for the operation of those assets. The activities of Forest Alaska are intended to focus on the exploitation of its assets and the proposed development of the McArthur River Field over the next several years. The new subsidiary obtained $375 million of term loan financing to fund a $350 million distribution to Forest and provide initial working capital for Forest Alaska’s operations. The term loans are secured by substantially all of the subsidiary’s assets and are non-recourse to Forest. Concurrent with the announcement of the pending Houston Exploration merger, we announced that we intend to sell the Alaska business unit in order to reduce indebtedness associated with the pending merger of Houston Exploration.

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Operational Highlights

Highlights of Forest’s 2006 operations were as follows:

·Forest’s year-end estimated proved reserves were 1,455 Bcfe, nearly equal to 2005’s year-end estimated proved reserves of 1,467 Bcfe, notwithstanding 121 Bcfe of production in 2006 and the 313 Bcfe of estimated proved reserves distributed to our shareholders in connection with the spin-off of our offshore Gulf of Mexico operations.

·Oil and gas production in 2006 from the Retained Properties (see definition below under “Results of Operations”) increased 14% to 113 Bcfe from 99 Bcfe in 2005.

·Net income increased to $169 million, or $2.66 per diluted share, in 2006 from $152 million, or $2.41 per diluted share, in 2005.

·Forest had continuing success in 2006 with its Buffalo Wallow project, East Texas Cotton Valley project, and Foothills/Wild River projects in Canada. Total drilling well counts for 2006 were 146 net wells, with a 96% success rate.

·Forest invested a total of $316 million to acquire 138 Bcfe of estimated proved reserves.

·Effective August 1, 2006, Forest took over as operator of the Katy field. Gross field production increased 54% to 20 MMcfe per day at December 31, 2006 from 13 MMcfe per day achieved through the first six months of the year.

2007 Outlook

In 2007, we expect to continue our development and exploitation activities on our onshore North American assets for which we expect continued production growth. Our capital budget for 2007 is $480 million to $520 million, not including capital expenditures planned for the Houston Exploration assets upon the closing of the proposed merger. Most of this capital budget will be directed to our large drilling programs in Buffalo Wallow, Wild River and East Texas.

We also anticipate a continued favorable commodity price environment in 2007. In our view, the economic growth and the related increased demand for oil and gas should continue to support historically high commodity prices. Within this environment, we anticipate strong financial performance by Forest. Our inventory of exploitation and exploration projects is at a high level, which should provide us good visibility of future production growth. Our 2007 plan anticipates cash flow from operations greater than our exploration and development spending levels, which surplus is expected to be used, in whole or in part, to pay down indebtedness and fund acquisitions.

We face numerous challenges in 2007. We will be challenged with integrating the operations of the proposed acquisition of Houston Exploration. Among other matters, we plan to realign staff and responsibilities, and continue to implement effective cost structures. In addition, we expect our debt-to-book capitalization ratio to be approximately 50% after the closing of the pending Houston Exploration acquisition, which is higher than our targeted ratio of 30% to 40%. We expect to lower the ratio by selling our Alaska business unit and certain other non-core assets. We expect to continue to pursue asset acquisition opportunities in 2007, but expect to continue to confront intense competition for these assets. Also, due to a relatively high commodity price environment, we anticipate service costs as well as costs of equipment and raw materials to remain consistent with the levels experienced in 2006. Our challenge will be to economically add reserves, through drilling and acquisitions, and operate our productive assets in a cost-efficient manner that achieves attractive returns for our shareholders.

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Results of Operations

As a result of the Spin-off discussed above, the revenues and expenses associated with our offshore Gulf of Mexico operations are only included in our consolidated results of operations through February 28, 2006. As a result, the operational results for 2006 presented are not comparable to results for 2005. As such, revenues and expenses in 2006 and 2005 that are directly attributable to the properties included in the Spin-off (the “Spin-off Properties”) and those retained (the “Retained Properties”) are discussed separately.

For the year ended December 31, 2006, Forest reported net earnings of $168.5 million or $2.71 per basic share, an 11% increase compared to net earnings of $151.6 million or $2.47 per basic share in the corresponding 2005 period. The increase in net earnings in 2006 compared to 2005 was primarily due to increases in net unrealized gains on our derivative instruments offset by decreased earnings from operations as a result of the Spin-off transaction discussed above. For the year ended December 31, 2005, Forest reported net earnings of $151.6 million or $2.47 per basic share, a 24% increase compared to net earnings of $122.6 million or $2.15 per basic share in the corresponding 2004 period. The increase in earnings in 2005 compared to 2004 was primarily the result of increased average oil and gas sales prices, offset partially by decreased sales volumes due to production deferrals from the 2005 hurricane season and related per-unit increases in oil and gas production expense. Discussion of the components of the changes in our annual results follows.

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Oil and Gas Sales

Production volumes, revenues, and weighted average sales prices, by product and location for the years ended December 31, 2006, 2005, and 2004 are set forth in the table below.

Year Ended December 31,
2006				2005				2004
Gas	Oil	NGLs	Total	Gas	Oil	NGLs	Total	Gas	Oil	NGLs	Total
(MMcf)	(MBbls)	(MBbls)	(MMcfe)	(MMcf)	(MBbls)	(MBbls)	(MMcfe)	(MMcf)	(MBbls)	(MBbls)	(MMcfe)

Production volumes:
Retained Properties:
United States	42,296	5,050	1,562	81,968	33,792	5,342	1,191	72,990	29,736	5,772	548	67,656
Canada	24,350	739	400	31,184	18,921	844	408	26,433	15,946	897	390	23,668
Total Retained Properties	66,646	5,789	1,962	113,152	52,713	6,186	1,599	99,423	45,682	6,669	938	91,324
Spin-off Properties	6,378	193	82	8,028	49,120	2,070	713	65,818	61,684	2,624	606	81,064
Totals	73,024	5,982	2,044	121,180	101,833	8,256	2,312	165,241	107,366	9,293	1,544	172,388
Revenues (In Thousands):
Retained Properties:

United States	$	248,075		314,410		49,616	612,101		234,895		282,013		34,643	551,551		168,665		224,319		13,528	406,512
United States hedging effects(1)	(967		)	(20,526	)	—	(21,493	)	(16,309	)	(41,898	)	—	(58,207	)	(16,650	)	(43,411	)	—	(60,061	)
Canada	123,408			37,605		16,559	177,572		126,771		35,382		14,748	176,901		67,398		31,839		10,953	110,190
Total Retained Properties	370,516			331,489		66,175	768,180		345,357		275,497		49,391	670,245		219,413		212,747		24,481	456,641
Spin-off Properties	53,975			11,614		3,020	68,609		389,562		109,213		21,732	520,507		388,559		105,113		16,535	510,207
Spin-off Properties hedging effects (1)	(16,926		)	(5,394	)	—	(22,320	)	(86,983	)	(41,252	)	—	(128,235	)	(34,630	)	(22,438	)	—	(57,068	)
Total Spin-off Properties	37,049			6,220		3,020	46,289		302,579		67,961		21,732	392,272		353,929		82,675		16,535	453,139
Totals	$	407,565		337,709		69,195	814,469		647,936		343,458		71,123	1,062,517		573,342		295,422		41,016	909,780
Average sales price:
Retained Properties:
United States	$	5.87		62.26		31.76	7.47		6.95		52.79		29.09	7.56		5.67		38.86		24.69	6.01
United States hedging effects(1)	(.02		)	(4.06	)	—	(.26	)	(.48	)	(7.84	)	—	(.80	)	(.56	)	(7.52	)	—	(.89	)
Canada	5.07			50.89		41.40	5.69		6.70		41.92		36.15	6.69		4.23		35.49		28.08	4.66
Total Retained Properties	5.56			57.26		33.73	6.79		6.55		44.54		30.89	6.74		4.80		31.90		26.10	5.00
Spin-off Properties	8.46			60.18		36.83	8.55		7.93		52.76		30.48	7.91		6.30		40.06		27.29	6.29
Spin-off Properties hedging effects(1)	(2.65		)	(27.95	)	—	(2.78	)	(1.77	)	(19.93	)	—	(1.95	)	(.56	)	(8.55	)	—	(.70	)
Total Spin-off Properties	5.81			32.23		36.83	5.77		6.16		32.83		30.48	5.96		5.74		31.51		27.29	5.59
Totals	$	5.58		56.45		33.85	6.72		6.36		41.60		30.76	6.43		5.34		31.79		26.56	5.28

(1)Commodity swaps and collars were transacted to hedge the price of spot market volumes against price fluctuations.  See Part II, Item 7A—“Quantitative and Qualitative Disclosures about Market Risk” below concerning our hedging activities.

Net oil and gas production from the Retained Properties in 2006 was 113.2 Bcfe or an average of 310.0 MMcfe per day, a 14% increase from 99.4 Bcfe or an average of 272.4 MMcfe per day in 2005. The net increase in oil and gas production was primarily attributable to increases at the Buffalo Wallow field and the recently acquired East Texas properties in the United States and the Wild River field in Canada. Oil and natural gas revenues from the Retained Properties were $768.2 million in 2006, a 15% increase as compared to $670.2 million in 2005. The increase in oil and natural gas revenues from the Retained Properties was due to the 14% increase in production and a 1% increase in the average realized sales price per Mcfe from $6.74 in 2005 to $6.79 in 2006.

Oil and gas production from the Spin-off Properties in 2006 was 8.0 Bcfe or an average of 136.1 MMcfe per day (through February 28, 2006) compared to 65.8 Bcfe or an average of 180.3 MMcfe per day in 2005. Average daily production in 2006 was lower than in 2005 due to shut-in production resulting from hurricanes Rita and Katrina in the third and fourth quarters of 2005. Oil and gas revenues from the Spin-off Properties totaled $46.3 million in 2006 resulting in an average price per Mcfe of $5.77 compared to oil and natural gas revenues from the Spin-off Properties of $392.3 million, or $5.96 per Mcfe in 2005. The decrease in total production and total oil and gas revenues was due to the fact that 2006 includes only two months of offshore production given the Spin-off on March 2, 2006.

Oil and gas sales revenues from all properties increased $152.7 million in 2005 compared to 2004 as a result of a 22% increase in price realizations per Mcfe partially offset by a 4% decrease in production. The decrease in our sales volumes between the same periods of 7.1 Bcfe was due primarily to approximately 16

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Bcfe of deferred production due to hurricanes Katrina and Rita that primarily impacted our offshore Gulf of Mexico properties, offset by increases in our onshore North American production.

The average realized sales prices for the periods presented include losses that we recognized on our derivative instruments designated as cash flow hedges. For the years ended December 31, 2006, 2005 and 2004, Forest recognized hedging losses of $43.8 million, $186.4 million, and $117.1 million, respectively. The recognized losses in 2006 include $15.2 million in hedge losses settled in the fourth quarter of 2005 but recognized in the first quarter of 2006 to correspond with the timing of the production that was deferred by hurricanes Katrina and Rita. See Realized and Unrealized Gains and Losses on Derivative Instruments below for information on gains and losses recognized on derivative instruments not designated as cash flow hedges during the last three years.

Oil and Gas Production Expense

The table below sets forth the detail of oil and gas production expense for the years ended December 31, 2006, 2005, and 2004:

	Year Ended December 31,
	2006						2005					2004
	Retained Properties			Spin-off Properties		Total	Retained Properties		Spin-off Properties		Total	Retained Properties		Spin-off Properties		Total
	(In Thousands, Except per Mcfe Data)
Lease operating expenses (“LOE”):
Direct operating expense and overhead		$	123,191		9,377	132,568		103,742		62,377	166,119		99,597		66,386	165,983
Workover expense		13,369			8,761	22,130		17,096		12,915	30,011		9,485		11,573	21,058
Hurricane repairs		18			158	176		399		3,232	3,631		—		2,120	2,120
Total LOE		$	136,578		18,296	154,874		121,237		78,524	199,761		109,082		80,079	189,161
LOE per Mcfe		$	1.21		2.28	1.28		1.22		1.19	1.21		1.19		.99	1.10
Production and property taxes		$	38,890		151	39,041		40,400		2,215	42,615		30,693		1,548	32,241
Production and property taxes per Mcfe		$	.34		.02	.32		.41		.03	.26		.34		.02	.19
Transportation and processing costs		$	21,532		344	21,876		16,116		3,383	19,499		14,617		2,175	16,792
Transportation and processing costs per Mcfe		$	.19		.04	.18		.16		.05	.12		.16		.03	.10

Lease Operating Expenses

Lease operating expenses for the Retained Properties increased 13%, or $15.3 million, to $136.6 million in 2006 from $121.2 million in 2005. However, on a per-Mcfe basis, LOE from the Retained Properties decreased slightly to $1.21 per Mcfe in 2006 from $1.22 per Mcfe in 2005. Lease operating expenses for the Spin-off Properties were $18.3 million in 2006 compared to $78.5 million in 2005. On a per-Mcfe basis, LOE from the Spin-off properties increased $1.09 per Mcfe in 2006 to $2.28 per Mcfe from $1.19 per Mcfe in 2005 primarily due to a relative increase in workover expenses.

Lease operating expenses from all properties increased $10.6 million to $199.8 in 2005 from $189.2 in 2004. On a per-unit basis, lease operating expenses increased 10% to $1.21 per Mcfe in 2005 from $1.10 per Mcfe in 2004 due primarily to hurricane activity in the third quarter of 2005 that deferred approximately 16 Bcfe of production. As reflected in the table above, direct operating expenses and overhead increased only marginally in 2005 compared to 2004 while increases in workover costs made up the majority of the $10.6 million increase in LOE.

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Production and Property Taxes

Production and property taxes on the Retained Properties decreased by 4% or $1.5 million in 2006 as compared to the prior year. The decrease from the prior year is primarily attributable to severance tax incentives provided in Texas, partially offset by higher realized oil and gas revenues and higher assessed property valuations. Production and property taxes incurred on the Spin-off Properties were $.2 million during 2006 compared to $2.2 million during 2005. The decrease in the Spin-off Properties’ production and property taxes was due to the fact that 2006 includes only two months of activity. The increase in production and property taxes of $10.4 million from 2004 to 2005 on all properties was primarily a result of the higher realized oil and gas revenues and higher assessed property valuations.

As a percentage of oil and natural gas revenue, excluding hedging losses, production and property taxes were 4.5%, 3.4%, and 3.1% for the years ended December 31, 2006, 2005, and 2004, respectively. The increase in each period is primarily the result of a change in our production mix over the last few years to 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 and Processing Costs

Transportation and processing costs for the Retained Properties were $21.5 million or $.19 per Mcfe in 2006 compared to $16.1 million or $.16 per Mcfe in 2005. The increase of $5.4 million or $.03 per Mcfe was primarily due to higher transportation and processing costs in Canada and Alaska. Transportation and processing costs for the Spin-off Properties on a per-Mcfe basis were $.04 for 2006 compared to $.05 during the prior year. Transportation and processing costs for all properties were $19.5 million or $.12 per Mcfe in 2005 and $16.8 million or $.10 per Mcfe in 2004. The increase of $2.7 million or $.02 per Mcfe was due to increases in transportation and processing rates and increases in fuel prices.

General and Administrative Expense

The following table summarizes the components of general and administrative expense and stock-based compensation expense incurred during the periods:

	Year Ended December 31,
	2006			2005		2004
	(In Thousands, Except Per Mcfe Data)
Total general and administrative costs before stock-based compensation	$	58,108		68,934		55,911
General and administrative costs capitalized	(23,730		)	(25,994	)	(23,888	)
General and administrative expense before stock-based compensation	$	34,378		42,940		32,023
General and administrative expense per Mcfe	$	0.28		0.26		0.19
Total stock-based compensation costs	$	22,048		1,275		203
Stock-based compensation costs capitalized	(8,118		)	(512	)	(81	)
Stock-based compensation expense	$	13,930		763		122
Stock-based compensation expense per Mcfe	$	0.11		—		—
Total general administrative expense including stock-based compensation	$	48,308		43,703		32,145

General and Administrative Expenses

The decrease in general and administrative expense before stock-based compensation to $34.4 million in 2006 from $42.9 million in 2005 was primarily related to salary and benefit savings related to a reduction in the number of employees subsequent to the Spin-off as well as a $1.9 million reduction in our post-retiree medical benefit liability caused by a curtailment in the post-retiree medical benefit plan also as a result of the Spin-off. The increase of $10.9 million in general and administrative costs in 2005 as compared to 2004 was primarily related to an increase in salaries and related employee benefit costs caused by our hiring additional employees in conjunction with acquisitions completed in 2004 and early 2005 and general increases in salaries due to the competitive market for experienced oil and gas professionals. The percentage of general and administrative costs capitalized remained relatively constant between the three years, ranging between 38% and 43%.

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Stock-Based Compensation Expense

The significant increase in stock-based compensation in 2006 is due to the implementation of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised), “Share-Based Payment” (“SFAS 123(R)”). Under this method of accounting, compensation cost is recorded for all unvested stock options, restricted stock, and phantom stock units beginning in the period of adoption and prior financial statements are not restated. Under the fair value recognition provisions of SFAS 123(R), stock-based compensation is measured at the grant date based on the value of the awards and is recognized over the requisite service period (usually the vesting period). Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Under APB Opinion No. 25, no compensation expense was recognized for stock options issued to employees because the grant price equaled or was above the market price on the date of the option grant.

In accordance with the provisions of SFAS 123(R), stock-based compensation cost in the amount of $22.0 million was recorded during the year ended December 31, 2006 of which approximately $9.7 million is attributed to a partial settlement of Forest’s restricted stock awards and phantom stock unit awards in connection with the Spin-off. Of the $22.0 million total, $13.9 million was recorded as compensation expense and $8.1 million, or 37%, was capitalized to oil and gas properties in accordance with the full cost method of accounting.

Depreciation and Depletion; Undeveloped Properties

	Year Ended December 31,
	2006		2005	2004
	(In Thousands, Except Per Mcfe Amounts)
Depreciation and depletion expense	$	266,881	368,679	354,092
Depreciation and depletion expense per Mcfe	$	2.20	2.23	2.05

Depreciation, depletion, and amortization expense (“DD&A”) in 2006 was $266.9 million compared to $368.7 million in 2005. On an equivalent Mcf basis, DD&A expense remained consistent at $2.20 per Mcfe in 2006 compared to $2.23 per Mcfe in 2005.  The more significant change between 2005 and 2004 of $.18 per Mcfe was due primarily to higher anticipated drilling and completion costs on future development activities in 2005 as well as the effect of property divestitures in Canada in late 2004.

The following costs of undeveloped properties were not subject to depletion at the periods indicated:

	December 31,	United States		Canada	International		Total
		(In Thousands)
2006		$	149,687	53,034		58,538	261,259
2005		174,249		44,798		56,637	275,684
2004		106,908		46,730		55,966	209,604

The decrease in the total undeveloped properties of $14.4 million in 2006 from 2005 was due primarily to the Spin-off transaction noted above offset by property acquisitions completed during 2006, including the Cotton Valley assets in East Texas. The increase in the total undeveloped properties in 2005 from 2004 was due primarily to the additional undeveloped properties acquired in 2005 in conjunction with the Buffalo Wallow acquisition. See Note 2 to the Consolidated Financial Statements for additional information on the Cotton Valley and Buffalo Wallow acquisitions.

Accretion of Asset Retirement Obligations

Accretion expense of approximately $7.1 million in 2006, and $17.3 million in both 2005 and 2004 was related to the accretion of Forest’s asset retirement obligations pursuant to 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 and a corresponding increase in the carrying amount of the related long-lived asset. The significant decrease in 2006 is attributable to the large reduction in future abandonment liabilities associated with the Spin-off on March 2, 2006, discussed above.

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International Impairments

Forest recorded impairments related to its international properties of $3.7 million in 2006 with $2.1 recorded during the second quarter of 2006 related to a dry hole drilled in Gabon and $1.6 million recorded during the fourth quarter of 2006 related to expired concessions in Italy. In 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 rationalized our international assets to concentrate on fewer areas. In 2004, Forest recorded impairments of international oil and gas properties of $4.1 million related to evaluations of projects in Albania, Germany, and Italy.

Interest Expense

Interest expense of $71.8 million in 2006 was 17% greater than in 2005, primarily due to higher average interest rates and higher average debt balances. Interest expense of $61.4 million in 2005 was 6% greater than $57.8 million in 2004, due primarily to higher average debt balances.

Realized and Unrealized Gains and Losses on Derivative Instruments

Realized and unrealized gains and losses on derivative instruments are primarily related to various derivatives that did not qualify for cash flow hedge accounting either at their inception, or where hedge accounting was discontinued during their term. When the criteria for cash flow hedge accounting are not met or when cash flow hedge accounting is not elected, realized gains and losses (i.e., cash settlements) are recorded under other income and expense in the Consolidated Statements of Operations. Similarly, changes in the fair value of the derivative instruments are recorded as unrealized gains or losses in the Consolidated Statements of Operations. In contrast, cash settlements for derivative instruments that qualify for hedge accounting are recorded as additions to or reductions of oil and gas revenues while 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.

Because a significant portion of our derivatives no longer qualified for hedge accounting and to increase clarity in our financial statements, Forest elected to discontinue hedge accounting for all of its remaining commodity derivatives beginning in March 2006. Subsequent to March 2006, Forest has recognized mark-to-market gains and losses in earnings, rather than deferring such amounts in accumulated other comprehensive income included in shareholders’ equity. This change in reporting has had no impact on Forest’s reported cash flows, although results of operations have been affected by mark-to-market gains and losses, which fluctuate with volatile oil and gas prices.

The table below sets forth realized and unrealized gains and losses principally related to our derivatives that did not qualify for hedge accounting or where hedge accounting was not elected for the periods indicated, which were recorded under other income and expense:

	Year Ended December 31,
	2006			2005		2004
	(In Thousands)
Realized (losses) gains	$	(23,864	)	(35,390	)	336
Unrealized gains (losses)	83,629			(21,373	)	(1,088	)
Total	$	59,765		(56,763	)	(752	)

For comparative purposes, the following table sets forth, for the periods indicated, realized losses on derivative instruments that met the criteria for hedge accounting, which were recorded as reductions of oil and gas revenues.

	Year Ended December 31,
	2006			2005		2004
	(In Thousands)
Realized losses included in oil and gas revenue	$	(43,813	)	(186,442	)	(117,129	)

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Other (Income) Expense, Net

The components of other (income) expense, net for the years ended December 31, 2006, 2005, and 2004 were as follows:

	Year Ended December 31,
	2006			2005	2004
	(In Thousands)
Realized foreign currency exchange gain	$	(315	)	—	(4,728	)
Franchise taxes	1,410			1,963	1,219
Share of (income) loss of equity method investee	(2,334		)	562	(1,726	)
Other, net	1,135			3,722	3,056
Total other (income) expense, net	$	(104	)	6,247	(2,179	)

The foreign currency exchange gains in 2006 and in 2004 are related to the repayment of Canadian intercompany debt and intercompany advances denominated in U.S. dollars. Franchise taxes are paid to the states of Texas and Louisiana based on capital investment deployed in these states, determined by apportioning total capital as defined by statute. Forest’s share of income or loss of equity method investee relates to our 40% ownership of a pipeline company that transports crude oil in Alaska.

Income Tax Expense

The table below sets forth Forest’s total income tax expense from continuing operations and effective tax rates for the periods presented:

	Year Ended December 31,
	2006			2005		2004
	(In Thousands, Except Percentages)
Income tax expense	$	90,903		93,358		78,744
Effective tax rate	35		%	38	%	39	%

The decrease in our effective tax rate in 2006 to 35% from 38% in 2005, was due to a reduction in income taxes of approximately $18.0 million related to statutory rate reductions enacted in Canada and changes in the Texas income tax law, net of tax increases of $7.2 million related to the effects of the Spin-off of our offshore Gulf of Mexico operations (which includes the tax effects of non-deductible Spin-off costs and an increase in Forest’s combined state income tax rates). See Note 5 to the Consolidated Financial Statements for a reconciliation of our income taxes at the statutory rate to income taxes at our effective rate for each period presented.

Results of Discontinued Operations

On March 1, 2004, the assets and business operations of our Canadian marketing subsidiary 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 on behalf of Canadian Forest for five years through February 2009 (unless subject to prior contractual commitment), and will also administer the netback pool that we formerly administered. We could receive additional contingent payments related to this sale over the next three years if Cinergy meets certain earnings goals with respect to the acquired business. During the year ended December 31, 2006, Forest recognized an additional $3.6 million contingent payment ($2.4 million net of tax) due under the agreement, which has been reflected as income from discontinued operations in the Consolidated Statements of Operations. During 2005, Forest did not record a gain or loss from the sale of discontinued operations. In 2004, Forest recorded a $.6 million loss on discontinued operations, net of tax which included marketing income, general and administrative expenses, deferred income tax expense and other income and expense items. The subsidiary’s results of operations have been reported as discontinued operations in the Consolidated Statements of Operations for all years presented.

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Liquidity and Capital Resources

In 2007, as in 2006, we expect our cash flow from operations to be our primary source of liquidity to meet operating expenses and fund capital expenditures other than large acquisitions. Any remaining cash flow from operations will be available for acquisitions, in whole or in part, or other corporate purposes, including the repayment of indebtedness.

The prices we receive for our oil and natural gas production have a significant impact on operating cash flows. While significant price declines in 2007 would adversely affect the amount of cash flow generated from operations, we utilize a hedging program to partially mitigate that risk. As of February 27, 2007, Forest has hedged approximately 55 Bcfe of its 2007 production. This level of hedging provides some certainty of the cash flow we will receive for a portion of our expected 2007 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 2007 hedging contracts, see Item 7A—“Quantitative and Qualitative Disclosures about Market Risk—Hedging Program,” below.

Our $600 million revolving bank credit facilities, which we entered into in September 2004, provide another source of liquidity. These credit facilities, which mature in September 2009, are used to fund daily operating activities and acquisitions in the United States and Canada as needed. At January 31, 2007, we had approximately $107.2 million of outstanding borrowings and letters of credit under the bank credit facilities, and an unused borrowing base of $492.8 million. We intend to amend and restate these credit facilities in connection with our proposed merger with Houston Exploration as described below under “Bank Credit Facilities”.

The public capital markets have been our principal source of funds to finance large acquisitions. We have sold debt and equity securities in both public and private offerings in the past, and we expect that these sources of capital will continue to be available to us in the future for acquisitions. In July 2004, we filed a shelf registration statement that allows Forest to issue equity and debt securities of up to $600 million, all of which is still available. Nevertheless, ready access to capital on reasonable terms can be impacted by our debt ratings assigned by independent rating agencies and are subject to many uncertainties, including restrictions contained in our bank credit facilities and indentures for our senior notes, macroeconomic factors outside of our control, and other risks as explained in Part 1, Item 1A—“Risk Factors.”

In conjunction with the announcement of the pending acquisition of Houston Exploration, we also announced our plans to sell our Alaska business unit and certain other non-core assets, which should provide another source of liquidity in 2007.

We believe that our available cash, cash provided by operating activities, and funds available under our bank credit facilities will be sufficient to fund our operating, interest, and general and administrative expenses, our capital expenditure budget, and our short-term contractual obligations at current levels for the foreseeable future.

Bank Credit Facilities

Forest currently has credit facilities totaling $600 million, consisting of a $500 million U.S. credit facility through a syndicate of banks led by JPMorgan Chase Bank and a $100 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.

Availability under the credit facilities is based either on certain financial covenants included in the credit facilities or on the loan value assigned to Forest’s oil and gas properties. If Forest’s corporate credit

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rating by Moody’s is “Ba1” or higher and “BB+” or higher by S&P, availability under the credit facilities may, at Forest’s election, be governed by certain financial covenants. Alternatively, if Forest’s senior unsecured long-term debt credit rating is “Ba2” or lower by Moody’s or “BB” or lower by S&P, availability under the credit facilities will be governed by a borrowing base (“Global Borrowing Base”). Currently, the amount available under the credit facilities is determined by the Global Borrowing Base. Effective September 29, 2006, the syndicate of banks approved a Global Borrowing Base of $900 million; however, Forest did not elect to change the Global Borrowing Base allocation and the U.S. allocated borrowing base was kept at $500 million and the Canadian allocated borrowing base was kept at $100 million.

The determination of the Global Borrowing Base is made by the lenders taking into consideration the estimated value of Forest’s oil and gas properties in accordance with the lenders’ customary practices for oil and gas loans. This process involves reviewing Forest’s estimated proved reserves and their valuation. While the Global Borrowing Base is in effect, it is redetermined semi-annually, and the available borrowing amount could be increased or decreased as a result of such redeterminations. In addition, Forest and the lenders each have discretion at any time, but not more often than once during any calendar year, to have the Global Borrowing Base redetermined. A revision to Forest’s reserves may prompt such a request on the part of the lenders, which could possibly result in a reduction in the Global Borrowing Base and availability under the credit facilities. If outstanding borrowings under either of the credit facilities exceed the applicable portion of the Global Borrowing Base, Forest would be required to repay the excess amount within a prescribed period. If we are unable to pay the excess amount, it would cause an event of default.

The credit facilities include terms and covenants 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 our 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 may affect the amount available and Forest’s ability to borrow amounts under the credit facilities.

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

At December 31, 2006, there were outstanding borrowings of $23.0 million under the U.S. credit facility at a weighted average interest rate of 8.5%, and there were outstanding borrowings of $84.1 million under the Canadian credit facility at a weighted average interest rate of 5.9%. We also had used the credit facilities for approximately $3.5 million in letters of credit, leaving an unused borrowing amount under the Global Borrowing Base of approximately $489.4 million at December 31, 2006. At January 31, 2007, there were outstanding borrowings of $21.0 million under the U.S. credit facility at a weighted average interest rate of 6.9%, and there were outstanding borrowings of $83.3 million under the Canadian credit facility at a weighted average interest rate of 5.9%. We also had used the credit facilities for approximately $2.9 million in letters of credit, leaving an unused borrowing amount under the Global Borrowing Base of approximately $492.8 million.

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On January 5, 2007, Forest, J.P. Morgan Securities Inc. and JPMorgan Chase Bank, N.A. entered into a commitment letter and fee letter with respect to the financing of the merger with Houston Exploration and the related transactions and the refinancing of certain of Forest’s existing debt. The commitment letter, which is subject to customary conditions, provides for a commitment of an aggregate of up to $1.4 billion in financing under a five-year amended and restated revolving credit facility. Initially, we anticipate the commitments for the amended and restated U.S. and Canadian credit facilities will consist of a U.S. facility of up to $1.25 billion and a Canadian facility of up to $150 million. We expect the terms of the amended and restated credit facilities to be substantially similar to those of the existing credit facilities. We expect to finance the cash portion of the merger consideration, which is expected to be approximately $740 million in cash (based on the outstanding shares of Houston Exploration common stock on January 4, 2007 and subject to increase), through borrowings under these amended and restated credit facilities. Forest also expects to use these credit facilities to pay for related merger costs and expenses and for general corporate purposes following the merger. The commitment letter expires April 30, 2007 and is subject to customary closing conditions.

Term Loan Financing Agreement

On December 8, 2006, Forest, through its wholly-owned subsidiaries Forest Alaska and Forest Alaska Holding LLC (“Forest Holding”), issued, on a non-recourse basis to Forest, term loan financing facilities in the aggregate principal amount of $375 million. The issuance was comprised of two term loan facilities, including a $250 million first lien credit agreement and a $125 million second lien credit agreement (together the “Credit Agreements”). The loan proceeds were used to fund a $350 million distribution to Forest, which Forest used to pay down its U.S. credit facility, and to provide Forest Alaska working capital for its operations and pay transaction fees and expenses. Interest on the loans are based on an adjusted LIBO rate (“LIBOR”) (LIBOR plus 3.50% under the first lien credit agreement and LIBOR plus 6.50% under the second lien credit agreement) or on a rate based on the federal funds rate (federal funds rate plus 3.0% under the first lien credit agreement and federal funds rate plus 6.0% under the second lien credit agreement), at the election of Forest Alaska. The loans under the first lien agreement will become due on December 8, 2010 and the loans under the second lien agreement will become due on December 8, 2011. The term loans are secured by substantially all of the subsidiary’s assets.

Partial repayments on the loans outstanding under the first lien agreement are due at the end of each calendar quarter, while the loans under the second lien agreement are scheduled for repayment on the maturity date. In addition, Forest Alaska is obligated to make mandatory prepayments annually using its excess cash flow and the proceeds associated with certain equity issuances, asset sales, and incurrence of additional indebtedness. Under certain circumstances involving a change in control involving Forest Holding or Forest Alaska, the credit agreements also require Forest Alaska to offer to repurchase outstanding loans and purchase loans put to it by the lenders and, depending on the date of any such repurchase, the repurchase price may include a premium. Upon an event of default, a majority of the lenders under each of the Credit Agreements may request the agent to declare the loans immediately payable. Under certain circumstances involving insolvency, the loans will automatically become immediately due and payable.

The Credit Agreements include terms and covenants that place limitations on certain types of activities that may be conducted by Forest Alaska and Forest Holding. The terms include restrictions or requirements with respect to additional debt, liens, investments, hedging activities, acquisitions, dividends, mergers, sales of assets, transactions with affiliates, and capital expenditures. In addition, the Credit Agreements include financial covenants addressing limitations on present value to total debt and first lien debt, interest coverage and leverage ratios.

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Credit Ratings

Our senior notes are separately rated by two ratings agencies: Moody’s and S&P. In addition, Moody’s and S&P have assigned Forest a general corporate credit rating. From time to time, our assigned credit ratings may change. In assigning ratings, the ratings agencies evaluate a number of factors, such as our industry segment, volatility of our industry segment, the geographical mix and diversity of our asset portfolio, the allocation of properties and exploration and drilling activities among short-lived and longer-lived properties, the need and ability to replace reserves, our cost structure, our debt and capital structure and our general financial condition and prospects.

Our bank credit facilities include conditions that are linked to our credit ratings. The fees and interest rates on our commitments and loans, as well as our collateral obligations, are affected by our credit ratings. The indentures governing our senior notes do not include adverse triggers that are tied to our credit ratings. The indentures include terms that will allow us greater flexibility if our credit ratings improve to investment grade and other tests have been satisfied. In this event, we would have no further obligation to comply with certain restrictive covenants contained in the indentures. Our ability to raise funds and the costs of any financing activities may be affected by our credit rating at the time any such activities are conducted. If we consummate the merger with Houston Exploration as planned, we expect the terms of the amended and restated credit facilities to be substantially similar to those of the existing credit facilities.

Historical Cash Flow

Net cash provided by operating activities, net cash used by investing activities, and net cash provided (used) by financing activities for the years ended December 31, 2006, 2005, and 2004 were as follows:

	Year Ended December 31,
	2006			2005		2004
	(In Thousands)
Net cash provided by operating activities	$	422,478		628,565		568,013
Net cash used by investing activities	(909,891		)	(671,230	)	(455,901	)
Net cash provided (used) by financing activities	513,832			(4,596	)	(68,269	)

The decrease in net cash provided by operating activities in 2006 compared to 2005 of approximately $206.1 million was due primarily to the spin-off of our Gulf of Mexico operations on March 2, 2006. The increase in net cash provided by operating activities in 2005 compared to 2004 of approximately $60.6 million was due primarily to a $42.4 million increase in net income excluding deferred income tax expense.

The increase in cash used by investing activities in 2006 of $238.7 million was due primarily to an increase in cash used for the acquisition, exploration, and development of oil and gas properties of $214.5 million. The increase in cash used by investing activities in 2005 of $215.3 million was due primarily to an increase in cash used for the acquisition, exploration, and development of oil and gas properties of $139.0 million and a decrease in proceeds from the sale of assets of $73.9 million. The major components of cash used by investing activities for the years ended December 31, 2006, 2005 and 2004 were as follows:

	Year Ended December 31,
	2006			2005		2004
	(In Thousands)
Acquisitions	$	(292,807	)	(204,450	)	(249,708	)
Exploration and development costs	(601,641		)	(475,524	)	(291,292	)
Other fixed assets	(21,950		)	(10,743	)	(2,829	)
Proceeds from sales of assets	6,507			24,046		97,933
Other, net	—			(4,559	)	(10,005	)
Net cash used by investing activities	$	(909,891	)	(671,230	)	(455,901	)

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Net cash provided by financing activities in 2006 of $513.8 million primarily included net bank borrowings on our credit facilities of $130.2 million and the issuance of term loans of $375.0 million as discussed above. Net cash used by financing activities in 2005 of $4.6 million primarily included the net repayment of bank borrowings of $33.3 million, more than offset by net proceeds from the exercise of options and warrants of approximately $43.4 million. Net cash used by financing activities of $68.3 million in 2004 included the issuance of 5.0 million shares of common stock at a price of $24.40 per share for net proceeds of $117.1 million after deducting underwriting discounts and commissions and offering expenses. The net proceeds from the offering were used to fund a portion of The Wiser Oil Company (“Wiser”) acquisition. In July 2004, we issued $125 million in principal amount of 8% Senior Notes due 2011, at 107.75% of par for proceeds of $133.3 million (net of related offering costs). The net proceeds were used to reduce outstanding borrowings under our U.S. credit facility. In July 2004, we redeemed, at 101.583% of par value, $125 million in principal amount of 9 1¤2% Senior Subordinated Notes due 2007 that were issued by Wiser. The note redemption was funded using borrowings under our U.S. credit facility.

Capital Expenditures

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

	Year Ended December 31,
	2006		2005	2004
	(In Thousands)
Property acquisitions:(1)
Proved properties	$	261,525	238,942	367,974
Undeveloped properties	53,788		73,868	57,452
	315,313		312,810	425,426
Exploration:
Direct costs	249,838		245,523	79,676
Overhead capitalized	12,121		12,811	11,917
	261,959		258,334	91,593
Development:
Direct costs	343,885		252,509	171,166
Overhead capitalized	19,727		13,695	12,052
	363,612		266,204	183,218
Total capital expenditures(1)(2)(3)	$	940,884	837,348	700,237

(1)Total capital expenditures include both cash expenditures and accrued expenditures. In addition, property acquisitions include a gross up for deferred income taxes of approximately $71.5 million in 2005 and $46.6 million in 2004 and excludes goodwill recorded in connection with business combinations of approximately $23.0 million in 2005 and $64.1 million in 2004. See Note 2 to the Consolidated Financial Statements for the allocation of purchase consideration for the larger acquisitions completed in 2006, 2005, and 2004.

(2)Does not include estimated discounted asset retirement obligations of $2.4 million, $16.3 million, and $14.1 million related to assets placed in service during the years ended December 31, 2006, 2005, and 2004.

(3)Includes $37.2 million of capital expenditures related to offshore Gulf of Mexico operations from January 1, 2006 through the date of the Spin-off on March 2, 2006. Capital expenditures related to offshore Gulf of Mexico operations for 2006 consist of $.7 million for property acquisitions, $24.0 million for exploration, and $12.5 million for development.

Forest’s anticipated expenditures for exploration and development in 2007 are estimated to range from $480 million to $520 million. Some of the factors impacting the level of capital expenditures in 2007 include crude oil and natural gas prices, the volatility in these prices, the cost and availability of the oil field services, and weather disruptions. These expenditures will also increase if the proposed merger with Houston Exploration is consummated.

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Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2006:

	2007		2008	2009	2010	2011	After 2011	Total
	(In Thousands)
Bank debt(1)	$	6,927	6,927	112,289	—	—	—	126,143
Term loans(2)	39,438		39,216	38,995	278,774	139,183	—	535,606
Senior notes(3)	55,625		309,142	34,425	34,425	318,475	177,125	929,217
Operating leases(4)	3,611		3,329	3,278	3,132	3,090	12,375	28,815
Unconditional purchase obligations(5)	46,109		19,517	10,258	5,241	4,599	—	85,724
Other liabilities(6)	6,525		6,482	5,928	6,053	6,795	69,907	101,690
Derivative liabilities(7)	1,294		714	97	—	—	—	2,105
Approved capital projects(8)	50,687		—	—	—	—	—	50,687
Total contractual obligations	$	210,216	385,327	205,270	327,625	472,142	259,407	1,859,987

(1)Bank debt consists of commitments related to our United States and Canadian credit facilities and anticipated interest payments due under the terms of the credit facilities using the average interest rate in effect at December 31, 2006.

(2)Term loans consists of the principal obligations on our term loans and anticipated interest payments due on each using the interest rates in effect at December 31, 2006.

(3)Senior notes consist of the principal obligations on our senior notes and anticipated interest payments due on each.

(4)Consists primarily of leases for office space and leases for well equipment rentals.

(5)Consists primarily of firm commitments for drilling, gathering, processing, and pipeline capacity.

(6)Other liabilities represent current and noncurrent liabilities that are comprised of benefit obligations and asset retirement obligations, for which neither the ultimate settlement amounts nor their timings can be precisely determined in advance. See “Critical Accounting Policies, Estimates, Judgments, and Assumptions” below for a more detailed discussion of the nature of the accounting estimates involved in estimating asset retirement obligations.

(7)Derivative liabilities represent the fair value of liabilities for oil and gas commodity derivatives as of December 31, 2006. The ultimate settlement amounts of our derivative liabilities are unknown, because they are subject to continuing market risk. See “Critical Accounting Policies, Estimates, Judgments, and Assumptions,” below for a more detailed discussion of the nature of the accounting estimates involved in valuing derivative instruments.

(8)Consists of our net share of budgeted expenditures under Authorizations for Expenditure (“AFE”) that were approved by us and our joint venture partners as of December 31, 2006. Includes AFEs for which Forest is the operator as well as those operated by others.

In addition to the above commitments, we are obligated to make approximately $22.4 million of capital expenditures over the next three years pursuant to the terms of foreign concession arrangements. Forest also makes delay rental payments to lessors during the primary terms of oil and gas leases to delay drilling or production of wells, usually for one year. Although we are not obligated to make such payments, discontinuing them would result in the loss of the oil and gas lease. Our total maximum commitment under these leases, through 2013 totaled approximately $1.3 million as of December 31, 2006.

Off-balance Sheet Arrangements

From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of December 31, 2006, the off-balance sheet arrangements and transactions that we have entered into include (i) undrawn letters of credit, (ii) operating lease agreements, (iii) drilling commitments, and (iv) contractual obligations for which the ultimate settlement amounts are not fixed and determinable such as derivative contracts that are sensitive to future changes in commodity prices and gas transportation commitments. Forest does not believe that these arrangements are reasonably likely to materially affect its liquidity or availability of, or requirements for, capital resources.

Other Obligations

We hold a 40% equity interest in an affiliate that owns a petroleum pipeline system within the Cook Inlet area of Alaska. In our capacity as a shareholder, we have agreed to fund our proportionate share of the operating costs and expenses of this affiliate. We may have contingent obligations in the event the affiliate experiences cash deficiencies. In addition, we may have other contingent obligations if the affiliate is unable to meet its indemnification requirements or its obligations to the operator of the pipeline. We are unable to predict or quantify the amount of these obligations, although we have obtained insurance to mitigate the impacts of certain possible outcomes.

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Surety Bonds

In the ordinary course of our business and operations, we are required to post surety bonds from time to time with third parties, including governmental agencies. As of February 27, 2007, we had obtained surety bonds from a number of insurance and bonding institutions covering certain of our operations in the United States and Canada in the aggregate amount of approximately $19.0 million. See Part I, Item 1—“Business—Regulation” for further information.

Critical Accounting Policies, Estimates, Judgments, and Assumptions

Oil and Gas Reserve Estimates

Our estimates of proved reserves are based on the quantities of oil and gas that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under existing economic and operating conditions. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation, and judgment. For example, we must estimate the amount and timing of future operating costs, production, and property taxes, development costs, and workover costs, all of which may in fact vary considerably from actual results. In addition, as prices and cost levels change from year to year, the estimate of proved reserves also changes. Any significant variance in these assumptions could materially affect the estimated quantity and value of our reserves. Despite the inherent imprecision in these engineering estimates, our reserves are used throughout our financial statements. For example, since we use the units-of-production method to amortize our oil and gas properties, the quantity of reserves could significantly impact our DD&A expense. Our oil and gas properties are also subject to a “ceiling test” limitation based in part on the quantity of our proved reserves. Finally, these reserves are the basis for our supplemental oil and gas disclosures included in Note 15 to the Consolidated Financial Statements.

Reference should be made to “Independent Audit of Reserves” under Part I, Item 1—“Business,” and “Risk Factors Relating to Forest—Estimates of oil and gas reserves are uncertain and inherently imprecise”, under Part I, Item 1A—“Risk Factors,” in this Form 10-K.

Accounting for Oil and Gas Derivatives Instruments

The Company follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133 requires the accounting recognition of all derivative instruments as either assets or liabilities at fair value. Under the provisions of SFAS 133, the Company may or may not elect to designate a derivative instrument as a hedge against changes in the fair value of an asset or a liability (a “fair value hedge”) or against exposure to variability in expected future cash flows (a “cash flow hedge”). The accounting treatment for the changes in fair value of a derivative instrument 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 is designated as a hedge as noted above. Changes in fair value of a derivative designated as a cash flow hedge are recognized, to the extent the hedge is effective, in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of a derivative instrument designated as a fair value hedge, to the extent the hedge is effective, have no effect on the statement of operations due to the fact that changes in fair value of the derivative offsets changes in the fair value of the hedged item. Where hedge accounting is not elected or if a derivative instrument does not qualify as either a fair value hedge or a cash flow hedge, changes in fair value are recognized in earnings as other income or expense.

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 some of its natural gas and oil hedges during the third and fourth quarters of 2005. Additionally, as a result of the Spin-off on March 2, 2006, additional commodity swaps and collars formerly designated as cash flow hedges of offshore Gulf of Mexico production also no longer qualified for hedge accounting. Because a significant portion of the

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Company’s derivatives no longer qualified for hedge accounting and to increase clarity in its financial statements, the Company elected to discontinue hedge accounting prospectively for all of its remaining commodity derivatives beginning in March 2006. Accordingly, after March 2006, all changes in the fair values of our derivative instruments have been and will continue to be recognized as other income or expense.

The estimated fair values of our derivative instruments require substantial judgment. These values are based upon, among other things, future prices, volatility, time to maturity, and credit risk. The values we report in our financial statements change as these estimates are revised to reflect actual results, changes in market conditions, or other factors, many of which are beyond our control.

Due to the volatility of oil and natural gas prices, the fair values of our derivative instruments are subject to large fluctuations in estimated fair value from period to period. For example, a hypothetical increase in the forward oil and natural gas prices used to calculate the fair value of the derivative instruments at December 31, 2006 of $1.00 per barrel and $.10 per MMbtu, respectively, would change the fair values of our derivative instruments at December 31, 2006 by approximately $11.0 million. It has been our experience that commodity prices are subject to large fluctuations, and we expect this volatility to continue. Actual gains or losses recognized in conjunction with our commodity derivative contracts will likely differ from those estimated at December 31, 2006 and will depend exclusively on the price of the commodities on the specified settlement dates provided by the derivative contracts.

Valuation of Deferred Tax Assets

We use the asset and liability method of accounting for income taxes. Under this method, income tax assets and liabilities are generally determined based on differences between the financial statement carrying values of book assets and liabilities and their respective income tax bases (temporary differences). Income tax assets and liabilities are measured using the tax rates expected to be in effect when the temporary differences are likely to reverse. The effect on income tax assets and liabilities of a change in tax rates is included in operations in the period in which the change is enacted. The book value of income tax assets is limited to the amount of the tax benefit that is more likely than not to be realized in the future.

In assessing the value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon future taxable income during the periods in which related temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets will reverse, management believes it is more likely than not that we will realize the benefits of these deferred tax assets, net of the existing valuation allowances at December 31, 2006. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during relevant periods are reduced.

Asset Retirement Obligations

Forest has obligations to remove tangible equipment and restore locations at the end of the oil and gas production operations. Forest’s largest concentration of removal and restoration obligations is associated with plugging and abandoning wells and removing and disposing of offshore oil and gas platforms in the Cook Inlet of Alaska. Estimating the future restoration and removal costs, or asset retirement obligations, is difficult and requires management to make estimates and judgments, because most of the obligations are many years in the future, and contracts and regulations often have vague descriptions of what constitutes removal. Asset removal technologies and costs are constantly changing, as are regulatory, political, environmental, safety, and public relations considerations.

Inherent in the calculation of the present value of our asset retirement obligations (“ARO”) under SFAS No. 143 are numerous assumptions and judgments, including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory,

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environmental, and political environments. To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance. Increases in the discounted ARO liability resulting from the passage of time are reflected as accretion expense in the Consolidated Statement of Operations.

Full Cost Method of Accounting

The accounting for our business is subject to special accounting rules that are unique to the oil and gas industry. There are two allowable methods of accounting for oil and gas business activities: the full cost method and the successful efforts method. The differences between the two methods can lead to significant variances in the amounts reported in our financial statements. We have elected to follow the full-cost method, which is described below.

Under the full cost method, separate cost centers are maintained for each country in which we incur costs. 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) are capitalized. The fair value of estimated future costs of site restoration, dismantlement, and abandonment activities is capitalized, and a corresponding asset retirement obligation liability is recorded. Capitalized costs applicable to each full cost center are depleted using the units of production method based on conversion to common units of measure using one barrel of oil as an equivalent to six thousand cubic feet of natural gas. Changes in estimates of reserves or future development costs are accounted for prospectively in the depletion calculations. Assuming consistent production year over year, our depletion expense will be significantly higher or lower if we significantly decrease or increase our estimates of remaining proved reserves.

Investments in unproved properties are not depleted pending the 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 in the appropriate full cost pool, or reported as impairment expense in the Consolidated Statements of Operations, as applicable.

Companies that use the full cost method of accounting for oil and gas exploration and development activities are required to perform a ceiling test each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is performed each quarter on a country-by-country basis. The test determines a limit, or ceiling, on the book value of oil and gas properties. That limit is basically the after tax present value of the future net cash flows from proved crude oil and natural gas reserves, as adjusted for asset retirement obligations and the effect of cash flow hedges. This ceiling is compared to the net book value of the oil and gas properties reduced by any related net deferred income tax liability. If the net book value reduced by the related deferred income taxes exceeds the ceiling, an impairment or non-cash writedown is required. A ceiling test impairment could cause Forest to record a significant non-cash loss for a particular period; however, future DD&A expense would be reduced thereafter.

In countries or areas where the existence of proved reserves has not yet been determined, leasehold costs, seismic costs, and other costs incurred during the exploration phase remain capitalized as unproved property costs until proved reserves have been established or until exploration activities cease. If exploration activities result in the establishment of proved reserves, amounts are reclassified as proved properties and become subject to depreciation, depletion, and amortization, and the application of the ceiling limitation. Unproved properties are assessed periodically to ascertain whether impairment has

47

occurred. An impairment of unproved property costs may be indicated through evaluation of drilling results, relinquishment of drilling rights or other information.

Under the alternative “successful efforts method” of accounting, surrendered, abandoned, and impaired leases, delay lease rentals, exploratory dry holes, and overhead costs are expensed as incurred. Capitalized costs are depleted on a property-by-property basis under the successful efforts method. Impairments are assessed on a property by property basis and are charged to expense when assessed.

In general, the application of the full cost method of accounting results in higher capitalized costs and higher depletion rates compared to the successful efforts method.

The full cost method is used to account for our oil and gas exploration and development activities, because we believe it appropriately reports the costs of our exploration programs as part of an overall investment in discovering and developing proved reserves.

Impact of Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FAS 109, “Accounting for Income Taxes” (“FIN 48”), to create a single model to address accounting for uncertainty in income tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. Forest will adopt FIN 48 as of January 1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings and other accounts as applicable. The Company has not determined the effect, if any, the adoption of FIN 48 will have on the Company’s financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We have not determined the effect, if any, the adoption of this statement will have on our financial position or results of operations.

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement expands the use of fair value measurement and applies to entities that elect the fair value option. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We have not determined the effect, if any, the adoption of this statement will have on our financial position or results of operations.

Item 7A.Quantitative and Qualitative Disclosures about Market Risk.

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

Commodity Price Risk

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

Hedging Program

In order to reduce the impact of fluctuations in prices on our revenues, or to protect the economics of property acquisitions, we make use of an oil and gas hedging strategy. Under our hedging strategy, we

48

enter into commodity swaps, collars, and other financial instruments with counterparties who, in general, are participants in our credit facilities. These arrangements, which are based on prices available in the financial markets at the time the contracts are entered into, are settled in cash and do not require physical deliveries of hydrocarbons.

Swaps

In a typical commodity swap agreement, we receive the difference between a fixed price per unit of production and a price based on an agreed upon published, third-party index if the index price is lower than the fixed price. If the index price is higher, we pay the difference. By entering into swap agreements, we effectively fix the price that we will receive in the future for the hedged production. Our current swaps are settled in cash on a monthly basis. As of December 31, 2006, we had entered into the following swaps:

	Swaps
	Natural Gas (NYMEX HH)								Oil (NYMEX WTI)
	Bbtu Per Day		Weighted Average Hedged Price per MMBtu			Fair Value			Barrels Per Day(1)		Weighted Average Hedged Price per Bbl			Fair Value
						(In Thousands)								(In Thousands)
Fiscal 2007		20.0		$	8.10		$	8,122		7,000		$	70.03		$	12,252
Fiscal 2008		—		—			—			6,500		69.72			4,915
Fiscal 2009		—		—			—			5,500		69.76			4,858
Fiscal 2010		—		—			—			2,000		73.15			4,434

(1)Subsequent to December 31, 2006, Forest unwound two oil swap agreements covering 1,000 Bbl per day in 2009 and 500 Bbl per day in 2010 for total proceeds of $6.9 million.

Collars

Forest also enters into collar agreements with third parties. A collar agreement is similar to a swap agreement, except that we receive the difference between the floor price and the index price only if the index price is below the floor price; and we pay the difference between the ceiling price and the index price only if the index price is above the ceiling price.

Costless Collars

Natural Gas (NYMEX HH)

Oil (NYMEX WTI)

Bbtu Per Day

Weighted Average Hedged Floor and Ceiling Price per MMBtu

Fair Value

Barrels Per Day

Weighted Average Hedged Floor and Ceiling Price per Bbl

Fair Value

(In Thousands)

(In Thousands)

Fiscal 2007

35.0

$

8.76/11.70

$

26,299

4,000

$

65.81/87.18

$

6,531

Basis Swaps

Forest also uses basis swaps in connection with natural gas swaps in order to fix the price differential between the NYMEX Henry Hub price and the index price at which the physical gas is sold. At December 31, 2006, there were basis swaps in place covering 35.0 Bbtu per day in 2007 with a fair market value of $(1.3) million.

The fair value of our hedges based on the futures prices quoted on December 31, 2006 was a net asset of approximately $66.1 million.

49

The following table reconciles the changes that occurred in the fair values of our open derivative contracts during 2006, beginning with the fair value of our commodity contracts on December 31, 2005, plus the increase in fair value during the period and the fair value of commodity contracts included in the Spin-off, plus the contract losses settled and recognized during the period.

	Fair Value of Derivative Contracts
	(In Thousands)
As of December 31, 2005		$	(150,737	)
Net increase in fair value		132,092
Fair value of derivatives transferred in Spin-off		17,087
Net contract losses recognized		67,677
As of December 31, 2006		$	66,119

In January and February 2007, we entered into four additional swap agreements and one additional collar agreement to hedge a portion of expected future production attributable to the pending acquisition of Houston Exploration as summarized in the table below.

	Natural Gas (NYMEX HH)
	Swaps					Collars
	Bbtu per Day		Weighted Average Hedged Price per MMBtu			Bbtu per Day		Weighted Average Hedged Floor and Ceiling Price per MMBtu
April 2007 – December 2007		40.0		$	7.77		—		—
Fiscal 2008		—		—			10.0		$	7.75/9.57

Long-Term Sales Contracts

A portion of Canadian Forest’s natural gas production is sold in a joint venture with other producers (the “Canadian Netback Pool”). The Canadian Netback Pool’s resale markets are comprised of market based and fixed price contracts. Canadian Forest’s contractual obligation to deliver natural gas production volumes to these contracts extends through 2011. Canadian Forest’s average daily production sold through the Canadian Netback Pool represented approximately 7% of Forest’s total average daily production in 2006. Canadian Forest supplied 55% of the Canadian Netback Pool sales quantity in 2006, and it is estimated that Canadian Forest will supply 79% of the Canadian Netback Pool quantity in the 2007 contract year. We expect that Canadian Forest’s pro rata obligations as a gas producer will increase in 2008 and future years. In 2006, the weighted average price paid under the resale contracts was approximately 55% of market value based on the average closing AECO prices during 2006. To the extent the Canadian Netback Pool’s supply is insufficient to meet the delivery obligations under the resale contracts, as is currently the case, the Canadian Netback Pool must make up the shortfall by purchasing spot market gas at prices that currently exceed the prices paid under the resale contracts. This shortfall could increase if individual producers were to default on their supply obligations owed to the Canadian Netback Pool.

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

50

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 interest rates by year of maturity for Forest’s debt obligations at December 31, 2006:

	2007			2008		2009		2010		2011		2014		Total		Fair Value
	(Dollar Amounts in Thousands)
Bank credit facilities:
Variable rate	$	—		—		107,094		—		—		—		107,094		107,094
Average interest rate(1)	—			—		6.47	%	—		—		—		6.47	%
Term loans:
Variable rate	$	2,500		2,500		2,500		242,500		125,000		—		375,000		381,250
Average interest rate(1)	8.85		%	8.85	%	8.85	%	8.85	%	11.85	%	—		9.85	%
Total variable rate debt:
Variable rate	$	2,500		2,500		109,594		242,500		125,000		—		482,094		488,344
Average interest rate(1)	8.85		%	8.85	%	6.52	%	8.85	%	11.85	%	—		9.10	%
Long-term debt:
Fixed rate	$	—		265,000		—		—		285,000		150,000		700,000		720,319
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 December 31, 2006.

(2)The effective interest rate on the 8% Senior Notes due 2008, the 8% Senior Notes due 2011, and the 7 3¤4% Senior Notes due 2014 is reduced from the coupon rate as a result of amortization of gains related to the termination of related interest rate swaps.

Item 8.Financial Statements and Supplementary Data.

Information concerning this Item begins on the following page.

51

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Forest Oil Corporation

We have audited the accompanying consolidated balance sheet of Forest Oil Corporation and subsidiaries as of December 31, 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Forest Oil Corporation and subsidiaries at December 31, 2006, and the consolidated results of their operations and their cash flows for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Notes 1 and 7 to the consolidated financial statements, Forest Oil Corporation changed its method of accounting for Share-Based Payments in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004) on January 1, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Forest Oil Corporation’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2007 an unqualified opinion thereon.

Ernst & Young LLP

Denver, Colorado
February 27, 2007

52

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Forest Oil Corporation:

We have audited the accompanying consolidated balance sheet of Forest Oil Corporation and subsidiaries as of December 31, 2005 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Forest Oil Corporation and subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

KPMG LLP

Denver, Colorado
March 13, 2006

53

FOREST OIL CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

	December 31,
	2006		2005
ASSETS
Current assets:
Cash and cash equivalents	$	33,164	7,231
Accounts receivable	125,446		178,124
Derivative instruments	53,205		941
Deferred tax asset	—		77,346
Other current assets	49,185		52,283
Total current assets	261,000		315,925
Property and equipment, at cost:
Oil and gas properties, full cost method of accounting:
Proved, net of accumulated depletion of $2,265,018 and $3,059,031	2,486,153		2,898,774
Unproved	261,259		275,684
Net oil and gas properties	2,747,412		3,174,458
Other property and equipment, net of accumulated depreciation and amortization of $32,504 and $32,527	42,514		25,560
Net property and equipment	2,789,926		3,200,018
Derivative instruments	15,019		—
Goodwill	86,246		87,072
Other assets	36,881		42,531
	$	3,189,072	3,645,546
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	224,933	312,076
Accrued interest	6,235		4,260
Derivative instruments	1,294		151,678
Current portion of long-term debt	2,500		—
Asset retirement obligations	2,694		33,329
Deferred income taxes	14,907		—
Other current liabilities	11,378		21,573
Total current liabilities	263,941		522,916
Long-term debt	1,204,709		884,807
Asset retirement obligations	61,408		178,225
Derivative instruments	811		—
Deferred income taxes	191,957		329,385
Other liabilities	32,240		45,691
Total liabilities	1,755,066		1,961,024
Commitments and contingencies (Note 11)
Shareholders’ equity:
Preferred stock, none issued and outstanding	—		—
Common stock, 62,998,155 and 64,548,229 shares issued and outstanding	6,300		6,455
Capital surplus	1,215,660		1,529,102
Retained earnings	137,796		217,293
Accumulated other comprehensive income (loss)	74,250		(18,220	)
Treasury stock, at cost, 1,861,143 shares held in 2005	—		(50,108	)
Total shareholders’ equity	1,434,006		1,684,522
	$	3,189,072	3,645,546

See accompanying Notes to Consolidated Financial Statements.

54

FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2006			2005	2004
	(In Thousands, Except Per Share Amounts)
Revenue:
Oil and gas sales:
Natural gas	$	407,565		647,936	573,342
Oil, condensate, and natural gas liquids	406,904			414,581	336,438
Total oil and gas sales	814,469			1,062,517	909,780
Marketing, processing, and other	5,523			9,528	3,118
Total revenue	819,992			1,072,045	912,898
Operating expenses:
Lease operating expenses	154,874			199,761	189,161
Production and property taxes	39,041			42,615	32,241
Transportation and processing costs	21,876			19,499	16,792
General and administrative (including stock-based compensation)	48,308			43,703	32,145
Depreciation and depletion	266,881			368,679	354,092
Accretion of asset retirement obligations	7,096			17,317	17,251
Impairment and other	3,668			11,132	12,929
Spin-off and merger costs	5,416			—	—
Total operating expenses	547,160			702,706	654,611
Earnings from operations	272,832			369,339	258,287
Other income and expense:
Interest expense	71,787			61,403	57,844
Unrealized (gains) losses on derivative instruments, net	(83,629		)	21,373	1,088
Realized losses (gains) on derivative instruments, net	23,864			35,390	(336	)
Unrealized foreign currency exchange loss	3,931			—	—
Other (income) expense, net	(104		)	6,247	(2,179	)
Total other income and expense	15,849			124,413	56,417
Earnings before income taxes and discontinued operations	256,983			244,926	201,870
Income tax expense:
Current	2,126			3,498	2,960
Deferred	88,777			89,860	75,784
Total income tax expense	90,903			93,358	78,744
Earnings from continuing operations	166,080			151,568	123,126
Income (loss) from discontinued operations, net of tax	2,422			—	(575	)
Net earnings	$	168,502		151,568	122,551
Basic earnings per common share:
Earnings from continuing operations	$	2.67		2.47	2.16
Income (loss) from discontinued operations, net of tax	.04			—	(.01	)
Basic earnings per common share	$	2.71		2.47	2.15
Diluted earnings per common share:
Earnings from continuing operations	$	2.62		2.41	2.12
Income (loss) from discontinued operations, net of tax	.04			—	(.01	)
Diluted earnings per common share	$	2.66		2.41	2.11

See accompanying Notes to Consolidated Financial Statements.

55

FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock			Capital Surplus		(Accumulated Deficit) Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Total Shareholders’ Equity
	(In Thousands)
Balances at January 1, 2004	55,632	$	5,563	1,302,340			(56,495	)		(9,740	)		(55,870	)		1,185,798
Common stock issued, net of offering costs	5,030	503		116,585			—			—			—			117,088
Exercise of warrants to purchase 162,901 shares of common stock	163	16		3,093			—			—			—			3,109
Exercise of stock options	748	74		17,297			(320	)		—			2,147			19,198
Tax benefit of stock options exercised	—	—		2,168			—			—			—			2,168
Employee stock purchase plan	22	3		507			—			—			—			510
Retirement of 501 shares in lieu of taxes on restricted stock award	—	—		—			—			—			(15	)		(15	)
Restricted stock issued	—	—		(2,843	)		271			—			2,572			—
Amortization of deferred stock compensation, net of forfeitures and other	—	—		203			—			—			—			203
Tax benefit of acquired net operating losses	—	—		5,283			—			—			—			5,283
Other	—	—		(266	)		—			—			—			(266	)
Comprehensive earnings:
Net earnings	—	—		—			122,551			—			—			122,551
Reclassification of hedges to earnings, net of tax	—	—		—			—			72,620			—			72,620
Change in fair value of hedges, net of tax	—	—		—			—			(90,889	)		—			(90,889	)
Decrease in unfunded postretirement benefits, net of tax	—	—		—			—			5,565			—			5,565
Foreign currency translation	—	—		—			—			29,224			—			29,224
Total comprehensive earnings																139,071
Balances at December 31, 2004	61,595	6,159		1,444,367			66,007			6,780			(51,166	)		1,472,147
Exercise of warrants to purchase 1,358,350 shares of common stock	1,358	137		14,248			—			—			—			14,385
Exercise of stock options	1,040	104		27,624			(376	)		—			1,006			28,358
Tax benefit of stock options exercised	—	—		4,587			—			—			—			4,587
Employee stock purchase plan	19	1		633			—			—			—			634
Restricted stock issued, net of forfeitures	536	54		(200	)		94			—			52			—
Amortization of deferred stock compensation, net of forfeitures and other	—	—		1,235			—			—			—			1,235
Tax benefit of acquired net operating losses	—	—		36,608			—			—			—			36,608
Comprehensive earnings:
Net earnings	—	—		—			151,568			—			—			151,568
Reclassification of hedges to earnings, net of tax	—	—		—			—			144,290			—			144,290
Change in fair value of hedges, net of tax	—	—		—			—			(180,591	)		—			(180,591	)
Increase in unfunded postretirement benefits, net of tax	—	—		—			—			(210	)		—			(210	)
Foreign currency translation	—	—		—			—			11,511			—			11,511
Total comprehensive earnings																126,568
Balances at December 31, 2005	64,548	6,455		1,529,102			217,293			(18,220	)		(50,108	)		1,684,522

See accompanying Notes to Consolidated Financial Statements.

56

FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)

	Common Stock					Capital Surplus		(Accumulated Deficit) Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Total Shareholders’ Equity
	(In Thousands)
Balances at December 31, 2005	64,548		6,455			1,529,102			217,293			(18,220	)		(50,108	)		1,684,522
Exercise of stock options	289		28			6,019			(8	)		—			27			6,066
Tax benefit of stock options exercised	—		—			25			—			—			—			25
Employee stock purchase plan	28		4			741			—			—			—			745
Restricted stock issued, net of forfeitures	(6	)	(1		)	—			—			—			—			(1	)
Retirement of treasury stock	(1,861	)	(186		)	(49,895	)		—			—			50,081			—
Amortization of stock-based compensation	—		—			20,158			—			—			—			20,158
Tax benefit of acquired net operating losses	—		—			8,337			—			—			—			8,337
Pro rata distribution of MERI common stock to shareholders (Note 2)	—		—			(298,827	)		(247,991	)		7,549			—			(539,269	)
Comprehensive earnings:
Net earnings	—		—			—			168,502			—			—			168,502
Reclassification of hedges to earnings, net of tax	—		—			—			—			50,581			—			50,581
Change in fair value of hedges, net of tax	—		—			—			—			30,873			—			30,873
Decrease in unfunded postretirement benefits, net of tax	—		—			—			—			2,333			—			2,333
Foreign currency translation	—		—			—			—			1,134			—			1,134
Total comprehensive earnings																		253,423
Balances at December 31, 2006	62,998		$	6,300		1,215,660			137,796			74,250			—			1,434,006

See accompanying Notes to Consolidated Financial Statements.

57

FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2006			2005		2004
	(In Thousands)
Operating activities:
Net earnings	$	168,502		151,568		122,551
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and depletion	266,881			368,679		354,092
Accretion of asset retirement obligations	7,096			17,317		17,251
Impairments	3,668			2,924		6,261
Unrealized (gains) losses on derivative instruments, net	(83,629		)	21,373		1,088
Cash settlements on derivatives acquired in business combinations	—			14,704		8,833
Stock-based compensation expense	13,240			763		122
Unrealized foreign currency exchange loss	3,931			—		—
Deferred income tax expense	90,004			89,860		76,506
Other, net	5,899			(13,593	)	(9,277	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(640		)	(15,350	)	32,754
Other current assets	(39,860		)	(25,858	)	(7,610	)
Accounts payable	9,200			9,528		(43,456	)
Accrued interest and other current liabilities	(21,814		)	6,650		8,898
Net cash provided by operating activities	422,478			628,565		568,013
Investing activities:
Capital expenditures for property and equipment:
Acquisition, exploration, and development costs	(894,448		)	(679,974	)	(541,000	)
Other fixed assets	(21,950		)	(10,743	)	(2,829	)
Proceeds from sales of assets	6,507			24,046		97,933
Sale of goodwill and contract value	—			—		8,493
Other, net	—			(4,559	)	(18,498	)
Net cash used by investing activities	(909,891		)	(671,230	)	(455,901	)
Financing activities:
Proceeds from bank borrowings	3,410,778			2,351,741		2,025,074
Repayments of bank borrowings	(3,280,574		)	(2,350,000	)	(2,165,646	)
Proceeds from term loans, net of issuance costs	367,706			—		—
Repayments of bank debt assumed in acquisitions	—			(35,000	)	(66,354	)
Proceeds from Spin-off	21,670			—		—
Proceeds from the exercise of options and warrants and from employee stock purchase plan	6,811			43,377		22,894
Issuance of 8% senior notes, net of issuance costs	—			—		133,312
Redemption of 91¤2% senior notes	—			—		(126,971	)
Proceeds of common stock offerings, net of offering costs	—			—		117,088
Cash settlements on derivatives acquired in business combinations	—			(14,704	)	(8,833	)
Other, net	(12,559		)	(10	)	1,167
Net cash provided (used) by financing activities	513,832			(4,596	)	(68,269	)
Effect of exchange rate changes on cash	(486		)	(759	)	(101	)
Net increase (decrease) in cash and cash equivalents	25,933			(48,020	)	43,742
Cash and cash equivalents at beginning of year	7,231			55,251		11,509
Cash and cash equivalents at end of year	$	33,164		7,231		55,251
Cash paid during the year for:
Interest	$	76,979		66,140		64,687
Income taxes	5,590			7,900		3,790

See accompanying Notes to Consolidated Financial Statements.

58

FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005, and 2004

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Description of the Business

Forest Oil Corporation is an independent oil and gas company engaged in the acquisition, exploration, development, and production of natural gas and liquids primarily in North America. 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 Company is active in several of the major exploration and producing areas in the United States and in Canada and has exploratory interests in various other foreign countries.

Basis of Presentation and Principles of Consolidation

The consolidated financial statements include the accounts of Forest Oil Corporation and its consolidated subsidiaries (collectively, “Forest” or the “Company”). Significant intercompany balances and transactions are eliminated. The Company consolidates all subsidiaries in which it controls over 50% of the voting interests. Entities in which the Company does not have a direct or indirect majority voting interest are generally accounted for using the equity method. Under the equity method, the initial investment in the affiliated entity is recorded at cost and subsequently increased or reduced to reflect the Company’s share of gains or losses or dividends received from the affiliate. The Company’s share of the income or losses of the affiliate is included in the Company’s reported net earnings.

Certain amounts in prior years’ financial statements have been reclassified to conform to the 2006 financial statement presentation.

Assumptions, Judgments, and Estimates

In the course of preparing the consolidated financial statements, management makes various assumptions, judgments, and estimates to determine the reported amounts 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 previously established.

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

Cash Equivalents

The Company considers all debt instruments with original maturities of three months or less to be cash equivalents.

59

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Property and Equipment

The Company uses the full cost method of accounting for oil and gas properties. Separate cost centers are maintained for each country in which the Company has operations. During 2006, 2005, and 2004, the Company’s primary oil and gas operations were conducted in the United States and Canada. All costs incurred in the acquisition, exploration, and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes, and overhead related to exploration and development activities) and the fair value of estimated future costs of site restoration, dismantlement, and abandonment activities are capitalized. For the years ended December 31, 2006, 2005, and 2004 Forest capitalized $31.8 million, $26.5 million, and $24.0 million of general and administrative costs, respectively. Interest costs related to significant unproved properties which are under development are also capitalized to oil and gas properties. During 2006 and 2005, the Company capitalized approximately $3.7 million and $.9 million of interest expense attributed to unproved properties. No interest was capitalized in 2004.

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

Pursuant to full cost accounting rules, the Company must perform a ceiling test each quarter on its proved oil and gas assets. The ceiling test provides that capitalized costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves using current prices, excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, 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. Should the net capitalized costs for a cost center exceed the sum of the components noted above, an impairment charge would be recognized to the extent of the excess capitalized costs. There were no provisions for impairment of proved oil and gas properties in 2006, 2005, or 2004. However, at September 30, 2006, the spot price that Forest used for its Canadian natural gas in computing its cost center ceiling was temporarily depressed to a level at which Forest’s capitalized costs in its Canadian cost center would have exceeded the cost center ceiling, as described above, by approximately $66.9 million. Subsequent to September 30, 2006 and before the release of the quarterly financial statements, the spot price of Canadian natural gas increased to levels such that Forest’s Canadian cost center ceiling exceeded its capitalized costs. As such, no impairment adjustment to the Canadian cost center was necessary as of September 30, 2006.

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

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

60

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

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 activities for the Company’s asset retirement obligations for the years ended December 31, 2006 and 2005:

	Year Ended
	December 31,
	2006			2005
	(In Thousands)
Asset retirement obligations at beginning of period	$	211,554		210,176
Accretion expense	7,096			17,317
Liabilities incurred	3,033			4,739
Liabilities settled	(6,652		)	(32,711	)
Liabilities included in the Spin-off	(150,182		)	—
Liabilities assumed	1,009			705
Revisions of estimated liabilities	(1,687		)	10,890
Impact of foreign currency exchange rate	(69		)	438
Asset retirement obligations at end of period	64,102			211,554
Less: current asset retirement obligations	2,694			33,329
Long-term asset retirement obligations	$	61,408		178,225

Financial Instruments

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents, derivative instruments and accounts receivable. The Company’s cash equivalents and derivative instruments are placed with major financial institutions. The Company attempts to minimize credit risk exposure to purchasers of the Company’s oil and natural gas through formal credit policies, monitoring procedures, and letters of credit when considered necessary.

61

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

The Company used various assumptions and methods in estimating fair value disclosures for financial instruments. The carrying amounts of cash and cash equivalents and accounts receivable approximated their fair value due to the short maturity of these instruments. The fair values of derivative instruments were based on quoted market prices and option pricing models. The carrying amount of the Company’s credit facilities approximated fair value because the interest rates on the credit facilities are variable. The fair values of the Company’s senior notes and term loan facilities were estimated based on quoted market prices, if available, or quoted market prices of comparable instruments. The carrying values and fair values of the Company’s debt instruments (other than its credit facilities) are summarized below for the periods presented.

	December 31, 2006			December 31, 2005
	Carrying		Fair	Carrying	Fair
	Amount		Value	Amount	Value
	(In Thousands)
8% Senior Notes due 2008	$	268,200	271,294	270,408	276,263
Term Loan Facility—first lien due 2010	250,000		251,250	—	—
Term Loan Facility—second lien due 2011	125,000		130,000	—	—
8% Senior Notes due 2011	295,610		296,400	297,742	311,363
73¤4% Senior Notes due 2014	161,305		152,625	162,851	155,625

Oil and Gas Sales

Natural gas revenues are recorded on the entitlement method. Under the entitlement method, revenue is recorded when title passes based on the Company’s net interest. The Company records its entitled share of revenues based on its entitled share of gas proceeds. Since there is a ready market for natural gas, the Company sells the majority of its products soon after production at various locations, including the wellhead, at which time title and risk of loss pass to the buyer.

Gas imbalances occur when the Company sells more or less than its entitled ownership percentage of total gas production. Any amount received in excess of the Company’s share is treated as a liability. If the Company receives less than its entitled share, the underproduction is recorded as a receivable. At December 31, 2006, the Company had a net gas imbalance payable of $.5 million and at December 31, 2005, the Company had a net gas imbalance receivable of $4.0 million.

Oil revenues are recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title is transferred.

In 2006, sales to two purchasers were approximately 13%, and 12% of total revenue, in 2005, there were no purchasers who exceeded 10% of total revenue, and in 2004, sales to four purchasers were approximately 15%, 11%, 11%, and 11% of total revenue.

Accounts Receivable

The components of accounts receivable include the following:

	December 31,
	2006			2005
	(In Thousands)
Oil and gas sales	$	89,082		136,973
Joint interest billings	27,891			38,595
Other	8,814			4,103
Allowance for doubtful accounts	(341		)	(1,547	)
Total accounts receivable	$	125,446		178,124

62

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Marketing, Processing, and Other

Marketing, processing, and other primarily consists of marketing fees earned from third party marketing arrangements and fees earned attributable to volumes processed on behalf of third parties through Company-owned gas processing plants.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. This method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between financial accounting bases and tax bases of assets and liabilities. The tax benefits of tax loss carryforwards and other deferred tax benefits are recorded as an asset to the extent that management assesses the utilization of such assets to be more likely than not. When the future utilization of some portion of the deferred tax asset is determined not to be more likely than not, a valuation allowance is provided to reduce the recorded deferred tax assets. Management believes that it could implement tax planning strategies to prevent certain of these carryforwards from expiring.

Foreign Currency Translation

The functional currency of Canadian Forest Oil Ltd. (“Canadian Forest”), the Company’s wholly-owned Canadian subsidiary, is the Canadian dollar. Assets and liabilities related to Canadian Forest are generally translated at end-of-period exchange rates, and related translation adjustments are generally reported as a component of shareholders’ equity in accumulated other comprehensive income (loss). Statement of operations accounts are translated at the average of the exchange rates for the period.

During 2006 and 2004, Forest realized approximately $.3 million and $4.7 million, respectively, of foreign currency exchange gains in connection with the repayment of intercompany debt and intercompany advances denominated in U.S. dollars.

63

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Earnings per Share

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

	Year Ended December 31,
	2006		2005	2004
	(In Thousands, Except Per Share Amounts)
Earnings from continuing operations	$	166,080	151,568	123,126
Income (loss) from discontinued operations, net of tax	2,422		—	(575	)
Net earnings	$	168,502	151,568	122,551
Weighted average common shares outstanding during the period	62,226		61,405	56,925
Add dilutive effects of stock options, unvested restricted stock grants, and unvested phantom stock units	1,205		1,145	384
Add dilutive effects of warrants	—		328	780
Weighted average common shares outstanding, including the effects of dilutive securities	63,431		62,878	58,089
Basic earnings per common share:
From continuing operations	$	2.67	2.47	2.16
From discontinued operations	.04		—	(.01	)
Basic earnings per common share	$	2.71	2.47	2.15
Diluted earnings per common share:
From continuing operations	$	2.62	2.41	2.12
From discontinued operations	.04		—	(.01	)
Diluted earnings per common share	$	2.66	2.41	2.11

Stock-Based Compensation

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

Treasury Stock

In May 2006, Forest retired its treasury stock. The Company had historically accounted for treasury stock acquisitions using the cost method. Under this method, for reissuance of treasury stock, to the extent

64

(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

that the reissuance price was more than the cost, the excess was recorded as an increase to capital surplus. If the reissuance price was less than the cost, the difference was also recorded to capital surplus to the extent there was a cumulative treasury stock paid in capital balance.

Debt Issue Costs

Included in other assets are costs associated with the issuance of our senior notes, term loans, and our revolving bank credit facilities. The remaining unamortized debt issue costs at December 31, 2006 and 2005 totaled $13.0 million and $7.5 million, respectively, and are being amortized over the life of the respective debt instruments.

Goodwill

The Company accounts for goodwill in accordance with SFAS No. 142, “Goodwill and other Intangible Assets”, and is required to make an annual impairment assessment in lieu of periodic amortization. The impairment assessment requires the Company to make estimates regarding the fair value of the reporting unit to which goodwill has been assigned. Although the Company bases its fair value estimate on assumptions it believes to be reasonable, those assumptions are inherently unpredictable and uncertain. Downward revisions of estimated reserve quantities, increases in future cost estimates, divestiture of a significant component of the reporting unit, continued weakening of the U.S. dollar or depressed natural gas, NGLs, and crude oil prices could lead to an impairment of goodwill in future periods.

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 the Company’s other comprehensive income (loss) during the last three years include:  foreign currency gains (losses) related to the translation of the assets and liabilities of the Company’s Canadian operations; changes in the unfunded postretirement benefits; and unrealized gains (losses) related to the changes in fair value of derivative instruments designated as cash flow hedges.

The components of accumulated other comprehensive earnings (loss) for the years ended December 31, 2006, 2005, and 2004 are as follows:

							Unrealized			Accumulated
	Foreign			Unfunded			Gain (Loss)			Other
	Currency			Postretirement			on Derivative			Comprehensive
	Translation			Benefits(1)			Instruments, Net(1)			Income (Loss)
	(In Thousands)
Balance at January 1, 2004		$	38,678		(13,985	)		(34,433	)		(9,740	)
2004 activity		29,224			5,565			(18,269	)		16,520
Balance at December 31, 2004		67,902			(8,420	)		(52,702	)		6,780
2005 activity		11,511			(210	)		(36,301	)		(25,000	)
Balance at December 31, 2005		79,413			(8,630	)		(89,003	)		(18,220	)
2006 activity		1,134			2,333			89,003			92,470
Balance at December 31, 2006		$	80,547		(6,297	)		—			74,250

(1)Net of tax.

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(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Impact of Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FAS 109, “Accounting for Income Taxes” (“FIN 48”), to create a single model to address accounting for uncertainty in income tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of January 1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings and other accounts as applicable. The Company has not determined the effect, if any, the adoption of FIN 48 will have on the Company’s financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We have not determined the effect, if any, the adoption of this statement will have on our financial position or results of operations.

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement expands the use of fair value measurement and applies to entities that elect the fair value option. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We have not determined the effect, if any, the adoption of this statement will have on our financial position or results of operations .

(2)ACQUISITIONS AND DIVESTITURES:

Acquisitions

Subsequent Event—Pending Acquisition of Houston Exploration

On January 7, 2007, Forest announced it had entered into a definitive agreement and plan of merger pursuant to which The Houston Exploration Company (“Houston Exploration”) will merge with and into Forest in a stock and cash transaction totaling approximately $1.5 billion plus the assumption of debt. Houston Exploration is an independent natural gas and oil producer engaged in the exploration, development, exploitation and acquisition of natural gas and oil reserves in North America with operations in the following four producing areas in the United States: South Texas, East Texas, the Arkoma Basin of Arkansas, and the Uinta and DJ Basins in the Rocky Mountains. The boards of directors of Forest and Houston Exploration have each unanimously approved the transaction. The transaction is subject to regulatory approvals and other customary conditions, as well as both Forest shareholder and Houston Exploration stockholder approvals. Forest management and its board of directors will continue in their current positions with Forest following the completion of the merger. The merger is expected to close in the second quarter of 2007.

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(2)ACQUISITIONS AND DIVESTITURES: (Continued)

Under the terms of the merger agreement, Houston Exploration stockholders are to receive total consideration equal to 0.84 shares of Forest common stock and $26.25 in cash for each share of Houston Exploration common stock outstanding. This represents estimated merger consideration of 23.6 million shares of Forest common stock and cash of approximately $740 million, or $52.47 per share, to be received by the Houston Exploration stockholders (based on the closing price of Forest’s common stock on January 5, 2007 and the number of shares of Houston Exploration common stock outstanding on January 4, 2007 and subject to increase in the event that any additional shares of Houston Exploration common stock are issued prior to the merger closing date in connection with the exercise of outstanding stock options pursuant to the terms of the merger agreement). The actual amount of total cash and stock consideration to be received by each Houston Exploration stockholder will be determined by elections, an equalization formula and a proration procedure. It is anticipated that the transaction will be tax free to Houston Exploration and the stock portion of the consideration will be received tax free by its stockholders. The cash component of the acquisition is expected to be financed under an amended and restated revolving credit facility of up to $1.4 billion for which JPMorgan Chase Bank, N.A. has provided us a commitment letter.

Cotton Valley Acquisition

On March 31, 2006, Forest completed the acquisition of oil and gas properties located primarily in the Cotton Valley trend in East Texas. Forest paid approximately $255 million, as adjusted to reflect an economic effective date of February 1, 2006, for properties with an estimated 110 Bcfe of estimated proved reserves (unaudited) at the time the acquisition was announced in February 2006 and production that averaged 13 MMcfe per day (unaudited) in January 2006. Forest acquired approximately 26,000 net acres (unaudited) in the fields, of which approximately 14,000 net acres (unaudited) were undeveloped. Forest funded this acquisition utilizing its bank credit facilities.

Buffalo Wallow Acquisition

On April 1, 2005, Forest purchased a private company whose primary assets were located in the Buffalo Wallow field in Texas and included approximately 33,000 gross acres (unaudited) located primarily in Hemphill and Wheeler Counties, Texas (“the Buffalo Wallow Acquisition”). At the time of acquisition, the Buffalo Wallow Acquisition also included approximately 120 Bcfe of estimated proved reserves (unaudited). The purchase price was allocated to assets and liabilities, adjusted for tax effects, based on their estimated 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.

67

(2)ACQUISITIONS AND DIVESTITURES: (Continued)

The total cash consideration paid for the Buffalo Wallow Acquisition was allocated as follows:

	Purchase Price Allocation
	(In Thousands)
Current assets		$	9,434
Oil and gas properties		305,005
Goodwill		22,959
Other assets		68
Current liabilities		(27,251		)
Derivative liability—current		(6,373		)
Long-term debt		(35,000		)
Asset retirement obligations		(705		)
Deferred income taxes		(71,492		)
Total cash consideration		$	196,645

Goodwill of $23.0 million was 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 U.S. geographical business segment. 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, the Company completed its acquisition of the common stock of The Wiser Oil Company (“Wiser”), which held oil and gas assets located in the Company’s Southern United States, Western United States, and Canada business units (the “Wiser Acquisition”). The Wiser Acquisition provided potential for increased production, reserves, and undeveloped acreage as well as diversification in terms of both current production and long-term growth opportunities. At the time the acquisition was closed, the net oil and gas reserves were estimated to be approximately 186 Bcfe (unaudited), of which 85% (unaudited) were classified as proved developed and the remaining amounts were classified as proved undeveloped. Average production from the Wiser properties at the time of acquisition was 64 MMcfe (unaudited) per day. The acquisition also included working capital and certain other financial assets and liabilities of Wiser. 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.

68

(2)ACQUISITIONS AND DIVESTITURES: (Continued)

The total cash purchase price, including transaction costs, of $171 million was allocated to the assets acquired and the liabilities assumed based on the estimated fair values set forth in the table below.

	Purchase Price Allocation
	(In Thousands)
Current assets		$	24,432
Proved properties		301,103
Other plant and equipment assets		2,450
Undeveloped leasehold costs		45,803
Goodwill		64,109
Current liabilities		(37,872		)
Derivative liability—current		(8,028		)
Long-term debt		(163,325		)
Asset retirement obligations		(7,997		)
Other liabilities		(3,489		)
Deferred income taxes		(46,631		)
Total cash consideration		$	170,555

Goodwill of $64.1 million ($63.6 million before effects of foreign currency exchange) was 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 U.S. and Canadian geographical business segments. The principal factor that contributed to the recognition of goodwill was opportunities for cost savings through administrative and operational synergies.

Divestitures

Spin-off and Merger of Offshore Gulf of Mexico Operations

On March 2, 2006, Forest completed the spin-off of its offshore Gulf of Mexico operations by means of a special dividend, which consisted of a pro rata spin-off (the “Spin-off”) of all outstanding shares of Forest Energy Resources, Inc. (hereinafter known as Mariner Energy Resources, Inc. or “MERI”), a total of 50,637,010 shares of common stock, to holders of record of Forest common stock as of the close of business on February 21, 2006. Immediately following the Spin-off, MERI was merged with a subsidiary of Mariner Energy, Inc. (“Mariner”) (the “Merger”). Mariner’s common stock commenced trading on the New York Stock Exchange on March 3, 2006.

The Spin-off was a tax-free transaction for federal income tax purposes. Prior to the Merger, as part of the Spin-off, MERI paid Forest approximately $176.1 million. The $176.1 million was drawn on a newly created bank credit facility established by MERI immediately prior to the Spin-off. This credit facility and associated liability were included in the Spin-off. Subsequent to the closing, Forest received additional net cash proceeds of $21.7 million from MERI for a total of $197.8 million. As of February 27, 2007, in accordance with the transaction agreements, Forest and MERI had submitted post-closing adjustments from which Forest has determined it owed MERI approximately $5.8 million as of December 31, 2006, which is subject to further adjustment.

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(2)ACQUISITIONS AND DIVESTITURES: (Continued)

The table below sets forth the effect of the Spin-off on the Company’s balance sheet:

	Change in Balance Sheet Accounts
	(In Thousands)
Assets (Increase/(Decrease))
Cash		$	(10	)
Accounts receivable—Due from MERI		15,166
Accounts receivable—third parties		(54,078		)
Other current assets		(44,837		)
Proved oil and gas properties, net of accumulated depletion		(1,033,289		)
Unproved oil and gas properties		(38,523		)
Other assets		(7,919		)
Liabilities and Shareholders’ Equity ((Increase)/Decrease)
Current liabilities		96,142
Derivative instruments		17,087
MERI credit facility		176,102
Asset retirement obligations		150,182
Deferred income taxes		184,483
Other liabilities		225
Accumulated other comprehensive income		(7,549		)
Net decrease to capital surplus and retained earnings		$	(546,818	)

70

(2)ACQUISITIONS AND DIVESTITURES: (Continued)

Sale of ProMark

On March 1, 2004, the Company sold the assets and business operations of Producers Marketing, Ltd. (“ProMark”) to Cinergy Canada, Inc. (“Cinergy”) for $11.2 million CDN. As a result of the sale, ProMark’s results of operations were reported as discontinued operations in the historical financial statements. Under the terms of the purchase and sale agreement, Forest may receive additional contingent consideration over a period of five years through February 2009. During the year ended December 31, 2006, Forest recognized an additional $3.6 million contingent payment ($2.4 million net of tax), which has been reflected as income from discontinued operations in the Consolidated Statements of Operations. The following table sets forth the components of loss from the discontinued operations for the year ended December 31, 2004:

	Year Ended December 31, 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)PROPERTY AND EQUIPMENT:

Net property and equipment at December 31, 2006 and 2005 consists of the following:

	2006			2005
	(In Thousands)
Oil and gas properties:
Proved	$	4,751,171		5,957,805
Unproved	261,259			275,684
Accumulated depletion	(2,265,018		)	(3,059,031	)
Net oil and gas properties	2,747,412			3,174,458
Other property and equipment:
Furniture and fixtures, computer hardware and software, and other equipment	75,018			58,087
Accumulated depreciation and amortization	(32,504		)	(32,527	)
Net other property and equipment	42,514			25,560
Total net property and equipment	$	2,789,926		3,200,018

71

(3)PROPERTY AND EQUIPMENT: (Continued)

The following table sets forth a summary of oil and gas property costs not being depleted at December 31, 2006, by the year in which such costs were incurred:

	Total		2006	2005	2004	2003 and Prior
	(In Thousands)
United States:
Acquisition costs	$	68,371	42,454	20,463	5,446		8
Exploration costs	81,316		64,364	13,291	1,167		2,494
Total United States	149,687		106,818	33,754	6,613		2,502
Canada:
Acquisition costs	25,169		—	3,523	7,214		14,432
Exploration costs	27,865		21,409	1,299	35		5,122
Total Canada	53,034		21,409	4,822	7,249		19,554
International:
Acquisition costs	740		—	—	—		740
Exploration costs	57,798		6,035	2,315	1,879		47,569
Total International	58,538		6,035	2,315	1,879		48,309
Total	$	261,259	134,262	40,891	15,741		70,365

The majority of the United States and Canada unproved oil and gas property costs, or those not being depleted, relate to oil and gas property acquisitions discussed in Note 2 as well as work-in-progress on various exploration projects. The Company expects that substantially all of its unproved property costs in the U.S. and Canada as of December 31, 2006 will be reclassified to proved properties within five years. Forest also holds interests in various projects located outside North America. Costs related to these international interests of $58.5 million are not being depleted pending determination of the existence of estimated proved reserves. Forest’s exploration project in South Africa accounts for the majority of the international costs not being amortized. In 2006, the Company continued to pursue commercial development of the Ibhubesi field discovery in South Africa. The Company also filed a production right application and also continued efforts toward securing gas contracts for the Ibhubesi field.

72

(4)   DEBT:

Components of debt are as follows:

	December 31, 2006								December 31, 2005
	Principal		Unamortized Premium (Discount)			Other(2)		Total	Principal		Unamortized Premium (Discount)			Other(2)		Total
	(In Thousands)
U.S. Credit Facility	$	23,000		—			—	23,000		97,000		—			—	97,000
Canadian Credit Facility	84,094			—			—	84,094		56,806		—			—	56,806
Term Loan Facilities(1)	375,000			—			—	375,000		—		—			—	—
8% Senior Notes due 2008	265,000			(146	)		3,346	268,200		265,000		(244	)		5,652	270,408
8% Senior Notes due 2011	285,000			6,458			4,152	295,610		285,000		7,750			4,992	297,742
73¤4% Senior Notes due 2014	150,000			(1,751	)		13,056	161,305		150,000		(1,990	)		14,841	162,851
Total debt	1,182,094			4,561			20,554	1,207,209		853,806		5,516			25,485	884,807
Less: current portion of long-term debt	2,500			—			—	2,500		—		—			—	—
Long-term debt	$	1,179,594		4,561			20,554	1,204,709		853,806		5,516			25,485	884,807

(1)In December 2006, Forest’s wholly-owned subsidiaries, Forest Alaska and Forest Holding, entered into term loan financing arrangements in the aggregate principal amount of $375 million. The financing is comprised of two term loan facilities, including a $250 million first lien credit agreement and a $125 million second lien credit agreement. The term loans mature in December 2010 and December 2011, respectively, and are non-recourse to Forest.

(2)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 note issues.

Bank Credit Facilities

The Company currently has credit facilities totaling $600 million, consisting of a $500 million U.S. credit facility through a syndicate of banks led by JPMorgan Chase and a $100 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.

Availability under the credit facilities is based either on certain financial covenants included in the credit facilities or on the loan value assigned to Forest’s oil and gas properties. If Forest’s corporate credit rating by Moody’s is “Ba1” or higher and “BB+” or higher by S&P, availability under the credit facilities may, at Forest’s election, be governed by certain financial covenants. Alternatively, if Forest’s senior unsecured long-term debt credit rating is “Ba2” or lower by Moody’s or “BB” or lower by S&P, availability under the credit facilities will be governed by a borrowing base (“Global Borrowing Base”). Currently, the amount available under the credit facilities is determined by the Global Borrowing Base. Effective September 29, 2006, the syndicate of banks approved a Global Borrowing Base of $900 million; however, Forest did not elect to change the Global Borrowing Base allocation and the U.S. allocated borrowing base was kept at $500 million and the Canadian allocated borrowing base was kept at $100 million.

At December 31, 2006, there were outstanding borrowings of $23.0 million under the U.S. credit facility at a weighted average interest rate of 8.5%, and there were outstanding borrowings of $84.1 million under the Canadian credit facility at a weighted average interest rate of 5.9%. Forest also had used the credit facilities for approximately $3.5 million in letters of credit, leaving an unused borrowing amount under the Global Borrowing Base of approximately $489.4 million at December 31, 2006.

The determination of the Global Borrowing Base is made by the lenders taking into consideration the estimated value of Forest’s oil and gas properties in accordance with the lenders’ customary practices for oil and gas loans. This process involves reviewing Forest’s estimated proved reserves and their valuation. While the Global Borrowing Base is in effect, it is redetermined semi-annually, and the available

73

(4)DEBT: (Continued)

borrowing amount could be increased or decreased as a result of such redeterminations. In addition, Forest and the lenders each have discretion at any time, but not more often than once during any calendar year, to have the Global Borrowing Base redetermined. A revision to Forest’s reserves may prompt such a request on the part of the lenders, which could possibly result in a reduction in the Global Borrowing Base and availability under the credit facilities. If outstanding borrowings under either of the credit facilities exceed the applicable portion of the Global Borrowing Base, Forest would be required to repay the excess amount within a prescribed period. If we are unable to pay the excess amount, it would cause an event of default.

The credit facilities include terms and covenants 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 our 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 may affect the amount available and Forest’s ability to borrow amounts under the credit facilities.

The credit facilities include conditions linked to the Company’s credit ratings. The fees and interest rates on the Company’s commitments and loans and its collateral obligations are affected by its credit ratings. The Company’s ability to raise funds and the cost of any financing activities may be affected by the Company’s credit ratings at the time any such activities are conducted.

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

On January 5, 2007, Forest, J.P. Morgan Securities Inc. and JPMorgan Chase Bank, N.A. entered into a commitment letter and fee letter with respect to the financing of the merger with Houston Exploration and the related transactions and the refinancing of certain of Forest’s existing debt. The commitment letter, which is subject to customary conditions, provides for a commitment of an aggregate of up to $1.4 billion in financing under a five-year amended and restated revolving credit facility. Initially, we anticipate the commitments for the amended and restated U.S. and Canadian credit facilities will consist of an up to $1.25 billion U.S. facility and an up to $150 million Canadian facility. We expect the terms of the amended and restated credit facilities to be substantially similar to those of the existing credit facilities. We expect to finance the cash portion of the merger consideration, which is expected to be approximately $740 million in cash (based on the outstanding shares of Houston Exploration common stock on January 4, 2007 and subject to increase), through borrowings under these amended and restated credit facilities. Forest also expects to use these credit facilities to pay for related merger costs and expenses and for general corporate purposes following the merger. The commitment letter expires April 30, 2007 and is subject to customary closing conditions.

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(4)DEBT: (Continued)

Term Loan Facilities

On December 8, 2006, Forest, through its wholly-owned subsidiaries Forest Alaska Operating LLC (“Forest Alaska”) and Forest Alaska Holding LLC (“Forest Holding”), issued, on a non-recourse basis to Forest, term loan financing facilities in the aggregate principal amount of $375 million. The issuance was comprised of two term loan facilities, including a $250 million first lien credit agreement and a $125 million second lien credit agreement (together the “Credit Agreements”). The loan proceeds were used to fund a $350 million distribution to Forest, which Forest used to pay down its U.S. credit facility, and to provide Forest Alaska working capital for its operations and pay transaction fees and expenses. Interest on the loans are based on an adjusted LIBO rate (“LIBOR”) (LIBOR plus 3.50% under the first lien credit agreement and LIBOR plus 6.50% under the second lien credit agreement) or on a rate based on the federal funds rate (federal funds rate plus 3.0% under the first lien credit agreement and federal funds rate plus 6.0% under the second lien credit agreement), at the election of Forest Alaska. The loans under the first lien agreement will become due on December 8, 2010 and the loans under the second lien agreement will become due on December 8, 2011.

Partial repayments on the loans outstanding under the first lien agreement are due at the end of each calendar quarter, while the loans under the second lien agreement are scheduled for repayment on the maturity date. In addition, Forest Alaska is obligated to make mandatory prepayments annually using its excess cash flow and the proceeds associated with certain equity issuances, asset sales, and incurrence of additional indebtedness. Under certain circumstances involving a change in control involving Forest Holding or Forest Alaska, the credit agreements also require Forest Alaska to offer to repurchase outstanding loans and purchase loans put to it by the lenders and, depending on the date of any such repurchase, the repurchase price may include a premium. Upon an event of default, a majority of the lenders under each of the Credit Agreements may request the agent to declare the loans immediately payable. Under certain circumstances involving insolvency, the loans will automatically become immediately due and payable.

The Credit Agreements include terms and covenants that place limitations on certain types of activities that may be conducted by Forest Alaska and Forest Holding. The terms include restrictions or requirements with respect to additional debt, liens, investments, hedging activities, acquisitions, dividends, mergers, sales of assets, transactions with affiliates, and capital expenditures. In addition, the Credit Agreements include financial covenants addressing limitations on present value to total debt and first lien debt, interest coverage and leverage ratios.

8% Senior Notes Due 2008

In June 2001, Forest issued $200 million in principal amount of 8% Senior Notes due in June 2008 (the “8% Notes Due 2008”) at par for proceeds of $199.5 million (net of related offering costs). In October 2001, Forest issued an additional $65 million in principal amount of 8% Notes Due 2008 at 99% of par for proceeds of $63.6 million (net of related offering costs).

8% Senior Notes Due 2011

In December 2001, Forest issued $160 million in principal amount of 8% Senior Notes due 2011 (the “8% Notes Due 2011”) at par for proceeds of $157.5 million (net of related offering costs). In July 2004, Forest issued an additional $125 million in principal amount of 8% Senior Notes due 2011 at 107.75% of par for proceeds of $133.3 million (net of related offering costs).

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(4)DEBT: (Continued)

73¤4% Senior Notes Due 2014

In April 2002, Forest issued $150 million in principal amount of 73¤4% Senior Notes due 2014 (the “73¤4% Notes”) at 98.09% of par for proceeds of $146.8 million (net of related offering costs). The 73¤4% Notes are redeemable, at the option of the Company, at any time on or after May 1, 2007 at the approximate redemption rates set forth below, plus accrued and unpaid interest:

	Year	Redemption Rate
2007			103.9	%
2008			102.6	%
2009			101.3	%
2010 and thereafter			100.0	%

Principal Maturities

Principal maturities of debt at December 31, 2006 are as follows (in thousands):

2007	$	2,500
2008	267,500
2009	109,594
2010	242,500
2011	410,000
Thereafter	150,000

(5)   INCOME TAXES:

The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”).

The table below sets forth the provision for income taxes from continuing operations for the periods presented.

	Year Ended December 31,
	2006		2005		2004
	(In Thousands)
Current:
Federal	$	1,341	3,738		980
Foreign	140		238		297
State	645		(478	)	1,683
	2,126		3,498		2,960
Deferred:
Federal	77,445		55,608		60,776
Foreign	3,643		24,310		9,852
State, net	7,689		9,942		5,156
	88,777		89,860		75,784
	$	90,903	93,358		78,744

The Company’s current income tax expense for the periods presented was due primarily to federal alternative minimum tax and to Alaska state income taxes. Deferred income taxes generally result from recognizing income and expenses at different times for financial and tax reporting. In the U.S., the largest differences are the tax effects of book recognition of unrealized gains and losses with respect to derivative instruments and the capitalization of certain development, exploration, and other costs under the full cost method of accounting. In Canada, differences result in part from accelerated cost recovery of oil and gas capital expenditures for tax purposes.

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(5)INCOME TAXES: (Continued)

Income from continuing operations before income taxes and discontinued operations consists of the following for the periods presented:

	Year Ended December 31,
	2006		2005	2004
	(In Thousands)
United States federal	$	211,785	168,024	174,398
Foreign	45,198		76,902	27,472
	$	256,983	244,926	201,870

A reconciliation of income tax computed by applying the United States statutory federal income tax rate is as follows:

	Year Ended December 31,
	2006			2005		2004
	(In Thousands)
Federal income tax at 35% of income before income taxes and discontinued operations	$	89,944		85,724		70,655
State income taxes, net of federal income tax benefits	7,616			5,759		5,140
Change in the valuation allowance for deferred tax assets	(1,464		)	(5,460	)	1,029
Effect of differing tax rates in Canada	(160		)	1,537		2,440
Effect of taxable dividends repatriated under Section 965 of the I.R.C.	—			4,275		—
Effect of Canadian statutory rate reductions	(12,292		)	(3,129	)	(2,388	)
Effect of state statutory rate reductions	(5,706		)	—		—
Effects related to the Spin-off	7,209			—		—
Other	5,756			4,652		1,868
Total income tax expense	$	90,903		93,358		78,744

77

(5)INCOME TAXES: (Continued)

The components of the net deferred tax liability by geographical segment at December 31, 2006 and 2005 are as follows:

	December 31, 2006
	United States				Canada		Total
	(In Thousands)
Deferred tax assets:
Allowance for doubtful accounts		$	487		—		487
Investment in equity affiliate		1,378			—		1,378
Accrual for post retirement benefits		4,415			—		4,415
Stock-based compensation accruals under SFAS 123(R)		2,155			—		2,155
Net operating loss carryforwards		157,084			621		157,705
Capital loss carryforward		113			3,891		4,004
Depletion carryforward		7,455			—		7,455
Alternative minimum tax credit carryforward		3,478			—		3,478
Other		9,762			969		10,731
Total gross deferred tax assets		186,327			5,481		191,808
Less valuation allowance		(27,036		)	(2,642	)	(29,678	)
Net deferred tax assets		159,291			2,839		162,130
Deferred tax liabilities:
Property and equipment		(264,137		)	(78,786	)	(342,923	)
Unrealized losses on derivative contracts, net		(24,795		)	—		(24,795	)
Other		—			(1,276	)	(1,276	)
Total gross deferred tax liabilities		(288,932		)	(80,062	)	(368,994	)
Net deferred tax liabilities		$	(129,641	)	(77,223	)	(206,864	)

	December 31, 2005
	United States				Canada		Total
	(In Thousands)
Deferred tax assets:
Allowance for doubtful accounts		$	761		—		761
Investment in equity affiliate		2,166			—		2,166
Accrual for post retirement benefits		6,765			—		6,765
Unrealized losses on derivative contracts, net		60,211			—		60,211
Net operating loss carryforwards		184,577			2,497		187,074
Capital loss carryforward		115			3,937		4,052
Depletion carryforward		7,554			—		7,554
Alternative minimum tax credit carryforward		1,978			—		1,978
Other		8,691			417		9,108
Total gross deferred tax assets		272,818			6,851		279,669
Less valuation allowance		(45,340		)	(3,937	)	(49,277	)
Net deferred tax assets		227,478			2,914		230,392
Deferred tax liabilities:
Property and equipment		(405,130		)	(74,134	)	(479,264	)
Other		(1,661		)	(1,506	)	(3,167	)
Total gross deferred tax liabilities		(406,791		)	(75,640	)	(482,431	)
Net deferred tax liabilities		$	(179,313	)	(72,726	)	(252,039	)

78

(5)   INCOME TAXES: (Continued)

The net deferred tax liabilities are reflected in the Consolidated Balance Sheets as follows:

	December 31, 2006
	United States				Canada		Total
	(In Thousands)
Current deferred tax liabilities		$	(14,907	)	—		(14,907	)
Non-current deferred tax liabilities		(114,734		)	(77,223	)	(191,957	)
Net deferred tax liabilities		$	(129,641	)	(77,223	)	(206,864	)

	December 31, 2005
	United States				Canada		Total
	(In Thousands)
Current deferred tax assets		$	77,346		—		77,346
Non-current deferred tax liabilities		(256,659		)	(72,726	)	(329,385	)
Net deferred tax liabilities		$	(179,313	)	(72,726	)	(252,039	)

U.S. federal net operating loss carryforwards at December 31, 2006 were approximately $447.9 million. Of this amount, approximately $186.5 million was acquired by the Company in a merger that occurred in 2000 and approximately $38.7 million was acquired by the Company in its acquisitions of other corporate entities in 2004 and 2005. The Company’s federal net operating losses are scheduled to expire in years 2006 through 2024.

The Company’s ability to use some of its net operating loss carryforwards and certain other tax attributes to reduce current and future U.S. federal taxable income is subject to limitations under the Internal Revenue Code. In particular, the Company’s ability to utilize such carryforwards is limited due to the occurrence of “Ownership Changes” within the meaning of Section 382 of the Internal Revenue Code. The Company has established a valuation allowance against its net operating loss carryforwards in the amount of $24.2 million, recognizing the effects of Section 382 on its ability to ever realize these carryforwards.

The net changes in the total valuation allowance for the years ended December 31, 2006, 2005, and 2004 were as follows:

	2006				2005		2004
	(In Thousands)
Net decrease in the valuation allowance for deferred tax assets attributable to reassessment of the amount of tax losses of acquired subsidiary expected to be utilized		$	(8,337	)	(36,608	)	(4,044	)
Decrease in the valuation allowance for net expiring operating loss carryforwards		(9,967		)	(3,483	)	(25,313	)
Other decreases in the valuation allowance for deferred tax assets		(1,465		)	(2,443	)	—
Net decrease in the valuation allowance		$	(19,769	)	(42,534	)	(29,357	)

$18.4 million of the decrease in valuation allowance for deferred tax assets in 2006 relates to tax loss carryforwards of an acquired subsidiary which were previously provided against. $10 million of this amount relates to tax loss carryforwards that expired unused in 2005. In 2006, the Company determined that it was more likely than not that $8.4 million would be realized in the future and this amount was released with a corresponding adjustment to capital surplus. The other decreases in the valuation allowance of $1.4 million relate to adjustments to state and Canadian tax loss carryforwards.

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(5)INCOME TAXES: (Continued)

Though not included in the tables or discussion above, the Company has a net deferred tax asset of $2.8 million in international locations. The Company has, in prior years, established a valuation allowance equal to the $2.8 million net deferred tax asset as the Company currently does not have production in the related international locations. The net deferred tax asset is composed of a deferred tax asset related to loss carryforwards (with carryover periods ranging from 5 years to an indefinite period) in the amount of $18.6 million, net of a deferred tax liability related to property and equipment of $15.8 million.

The Alternative Minimum Tax (“AMT”) credit carryforward available to reduce future U.S. federal regular taxes aggregated $3.5 million at December 31, 2006. This amount may be carried forward indefinitely.

Canadian tax pools relating to the exploration, development, and production of oil and natural gas that are available to reduce future Canadian federal income taxes aggregated approximately $219 million ($255 million CDN) at December 31, 2006. The Canadian tax pools include approximately $44 million ($52 million CDN) acquired from predecessor companies that are limited in use to income derived from assets acquired. These tax pool balances are deductible on a declining balance basis ranging from 4% to 100% of the balance annually, and are composed of costs incurred for oil and gas properties, and developmental and exploration expenditures, as follows:

	2006		2005
	(In Thousands of Canadian Dollars)
Canadian capital cost allowance (deductible at 4% - 45% annually)	$	76,051	56,818
Canadian development expense (deductible at 30% annually)	130,792		86,881
Canadian exploration expense (deductible at 100% annually)	1,704		44,273
Canadian oil and gas property expense (deductible at 10% annually)	46,387		41,970
	$	254,934	229,942

Other Canadian tax pools and loss carryforwards available to reduce future Canadian federal income taxes were approximately $21.4 million ($24.9 million CDN) at December 31, 2006, of which $19.3 million may be carried forward indefinitely.

The Company’s Canadian operations generated book income (after tax) of approximately $45 million during 2006. As of December 31, 2006, the Company’s Canadian operations had reported accumulated undistributed book earnings of approximately $81 million. The Company has not provided deferred tax liabilities with respect to U.S. income tax or Canadian withholding taxes related to these undistributed earnings. During 2006, all cash flow generated in Canada was reinvested in Canadian capital expenditures. Based on its current plans, the Company intends that future cash flows generated by Canadian operations will continue to be reinvested in Canadian exploration, development or acquisition activities or utilized to satisfy external and intercompany debt of the Canadian operations. Should the Company distribute Canadian earnings, we may be subject to U.S. income taxes and Canadian withholding taxes. It is not practicable to estimate the amount of such taxes that may be payable if such a distribution occurs. The Company currently has no foreign tax credits to offset such taxes.

(6)   SHAREHOLDERS’ EQUITY:

Common Stock

At December 31, 2006, the Company had 200 million shares of common stock (“Common Stock”), par value $.10 per share, authorized.

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.

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(6)   SHAREHOLDERS’ EQUITY: (Continued)

Rights Agreement

In October 1993, the Board of Directors adopted a shareholders’ rights plan and entered into the Rights Agreement. The Company distributed one Preferred Share Purchase Right (the “Rights”) for each outstanding share of the Company’s Common Stock. The Rights are exercisable only if a person or group acquires 20% or more of the Company’s Common Stock or announces a tender offer that would result in ownership by a person or group of 20% or more of the Common Stock.

In October 2003, the Board of Directors of Forest entered into the First Amended and Restated Rights Agreement (the “First Amended Rights Agreement”). The rights issued under the First Amended Rights Agreement will expire on October 29, 2013, unless earlier exchanged or redeemed, and entitle the holder thereof to purchase 1/100th of a preferred share at an initial purchase price of $120.

Warrants

At December 31, 2006 and December 31, 2005, Forest did not have any warrants outstanding. During 2005, two series of warrants expired, including warrants that expired on February 15, 2005 (“2005 Warrants”) in accordance with the terms of the warrants. In April 2005, Forest provided notice of acceleration of subscription warrants (“Subscription Warrants”) that were originally set to expire on March 20, 2010, and on May 9, 2005 all of the remaining unexercised Subscription Warrants expired.

In connection with the expiration of the 2005 Warrants and the Subscription Warrants during 2005, a total of 1,907,333 warrants to purchase shares of Common Stock were exercised. As a result of these exercises, in 2005 Forest received cash proceeds of $14.4 million and issued a total of 1,358,350 shares of Common Stock.

During the year ending December 31, 2004, warrants totaling 267,508 were exercised to purchase 162,901 shares of Common Stock.

(7)STOCK-BASED COMPENSATION:

Prior to January 1, 2006, the Company accounted for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Under APB Opinion No. 25, no compensation expense was recognized for stock options issued to employees if the grant price equaled or was above the market price on the date of the option grant. Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R) using the modified prospective method. Under this method, compensation cost is recorded for all unvested stock options, restricted stock, and phantom stock units beginning in the period of adoption and prior period financial statements are not restated. Under the fair value recognition provisions of SFAS 123(R), stock-based compensation is measured at the grant date based on the value of the awards and the value is recognized on a straight-line basis over the requisite service period (usually the vesting period).

The table below sets forth total stock-based compensation recorded during 2006 under the provisions of SFAS 123(R), the remaining unamortized amounts and the weighted average amortization period remaining as of December 31, 2006. Approximately $9.7 million of the $22.0 million of total stock-based compensation for 2006 was attributable to a partial settlement of the Company’s restricted stock awards and phantom stock unit awards in connection with the Spin-off.

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(7)STOCK-BASED COMPENSATION: (Continued)

	Stock Options			Restricted Stock		Phantom Stock Units			Total(1)
	(In Thousands)
Year ended December 31, 2006:
Total stock-based compensation costs	$	5,348		14,551			1,890		21,789
Less: stock-based compensation costs capitalized	(1,645		)	(5,279	)		(1,194	)	(8,118	)
Stock-based compensation costs expensed	$	3,703		9,272			696		13,671
Unamortized stock-based compensation costs as of December 31, 2006	$	6,006		10,725			1,867	(2)	18,598
Weighted average amortization period remaining	1.5 years			1.8 years			2.1 years		1.7 years

(1)The Company also maintains an employee stock purchase plan (which is not included in the table above) under which $.3 million of compensation cost was recognized for the year ended December 31, 2006 under the provisions of SFAS 123(R).

(2)Based on the closing price of the Company’s Common Stock on December 31, 2006.

SFAS 123(R) required the Company to estimate forfeitures in calculating the cost related to stock-based compensation as opposed to recognizing forfeitures and the corresponding reduction in expense as the forfeitures occur. The cumulative adjustment recorded related to this change of approximately $.1 million was recorded as a reduction in general and administrative expense and capitalized oil and gas properties during 2006 and was not presented separately in the Consolidated Statement of Operations. The impact of adopting SFAS 123(R) as of January 1, 2006 resulted in a decrease to net earnings of approximately $1.9 million, or $.03 per basic and diluted share for the year ending December 31, 2006.

Equity Incentive Plans

In 2001, the Company adopted the Forest Oil Corporation 2001 Stock Incentive Plan (the “2001 Plan”) under which qualified and non-qualified stock options, restricted stock, and other awards may be granted to employees, consultants and non-employee directors. In 2003, the Company amended the 2001 Plan to increase the number of shares reserved for issuance. The aggregate number of shares of Common Stock that the Company may issue under the 2001 Plan may not exceed 5.0 million shares. The exercise price of an option shall not be less than the fair market value of one share of Common Stock on the date of grant. Options under the 2001 Plan generally vest in increments of 25% on each of the first four anniversary dates of the date of grant and have a term of ten years. As of December 31, 2006, the Company had 667,957 shares available to be issued under the 2001 Plan. As a result of the Spin-off, outstanding stock options and the shares available for grant for all employees under the 2001 Plan were adjusted to reflect the economic effect of the Spin-off.

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

Stock Options

The following table summarizes stock option activity in the Company’s stock-based compensation plans for the years ended December 31, 2006, 2005, and 2004. During 2006 the number of shares and the exercise price of the outstanding stock options were adjusted so that the fair value of each award was the same immediately before and after the Spin-off, in accordance with the anti-dilution provisions in the 2001 Plan and 1996 Plan.

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(7)STOCK-BASED COMPENSATION: (Continued)

	Number of Shares		Weighted Average Exercise Price			Aggregate Intrinsic Value (In Thousands)(1)			Number of Shares Exercisable
Outstanding at January 1, 2004	3,465,429			$	25.51		$	12,146	2,368,908
Granted at fair value	1,502,450			28.21
Exercised	(827,817	)		23.20
Cancelled	(369,250	)		28.24
Outstanding at December 31, 2004	3,770,812			26.82			18,024		1,841,439
Granted at fair value	180,700			38.82
Exercised	(1,078,067	)		26.32			13,469
Cancelled	(295,210	)		27.71
Outstanding at December 31, 2005	2,578,235			27.78			45,889		1,348,599
Granted	—			—
Exercised	(58,337	)		28.71			1,255
Cancelled	(98,587	)		30.91
Outstanding at March 2, 2006	2,421,311			27.63			55,723
Adjustment to give effect to Spin-off	1,176,804			—
Granted	55,000			36.61
Exercised	(231,470	)		18.96			3,536
Cancelled	(93,366	)		20.94
Outstanding at December 31, 2006	3,328,279			18.80			46,279		2,338,751

(1)The intrinsic value of a stock option is the amount by which the current market value of the underlying stock exceeds the exercise price of the option.

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

The fair value of each option granted in 2006, 2005, and 2004 was estimated using the Black-Scholes option pricing model. The following assumptions were used to compute the weighted average fair market value of options granted during the periods presented:

	2006			2005			2004
Expected life of options	10 years			5 years			5 years
Risk free interest rates	4.64% - 5.13		%	3.64% - 4.45		%	2.98% - 4.01		%
Estimated volatility	45		%	28		%	39		%
Dividend yield	0.0		%	0.0		%	0.0		%
Weighted average fair market value of options granted during the year	$	23.35		$	12.77		$	11.64

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(7)STOCK-BASED COMPENSATION: (Continued)

The following table summarizes information about options outstanding at December 31, 2006:

	Stock Options Outstanding									Stock Options Exercisable
Range of Exercise Prices	Number of Options	Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price			Aggregate Intrinsic Value (In Thousands)			Number Exercisable	Weighted Average Exercise Price			Aggregate Intrinsic Value (In Thousands)
$8.41 – 16.30	671,101		5.72		$	14.80		$	12,027	523,522		$	14.64		$	9,422
16.44 – 16.85	812,345		6.55		16.83			12,899		521,859		16.82			8,251
16.88 – 20.02	679,923		4.69		18.88			9,398		643,523		18.94			8,812
20.19 – 20.47	23,775		7.27		20.32			294		9,288		20.39			114
20.60 – 36.95	1,141,135		7.68		22.47			11,661		640,559		22.86			6,262
$8.41 – 36.95	3,328,279		6.39		18.80			$	46,279	2,338,751		18.59			$	32,861

Restricted Stock and Phantom Stock Units

The following table summarizes the restricted stock and phantom stock unit activity for the years ended December 31, 2006, 2005, 2004. The grant date fair value of the restricted stock and phantom stock units was determined by reference to the average of the high and low stock price of a share of Common Stock as published by the New York Stock Exchange on the date of grant.

	Restricted Stock						Phantom Stock Units
	Number of Shares			Weighted Average Grant Date Fair Value(1)			Number of Shares			Weighted Average Grant Date Fair Value(1)
Unvested at January 1, 2004		—			$	—		—			$	—
Awarded		95,600			29.44			—			—
Vested		—			—			—			—
Forfeited		—			—			—			—
Unvested at December 31, 2005		95,600			29.44			—			—
Awarded		548,000			45.82			72,350			46.07
Vested		(600	)		30.61			—			—
Forfeited		(9,000	)		30.61			—			—
Unvested at December 31, 2006		634,000			43.58			72,350			46.07
Awarded		38,200			39.24			13,900			36.24
Vested		(200	)		46.07			—			—
Forfeited		(44,550	)		45.95			(8,300	)		46.07
Unvested at December 31, 2006		627,450			43.15			77,950			44.32

(1)These per-share fair values represent the actual grant date fair value and have not been adjusted to give effect to the Spin-off. In connection with the Spin-off, holders of restricted stock awards received 0.8093 unrestricted shares of MERI for each share of restricted stock. Accordingly, compensation cost of approximately $8.4 million was recorded in the first quarter of 2006 as a partial settlement of the restricted stock award, or approximately $13.00 per share. In addition, cash bonuses totaling $1.2 million were paid to Canadian employees in the first quarter of 2006 that held phantom stock units on that date representing the per-share value of the MERI shares received by each holder of restricted stock.

The restricted stock and phantom stock units generally vest on the third anniversary of the date of the award, but may vest earlier upon a qualifying disability, death, retirement, or a change in control of the Company in accordance with the term of the underlying agreement. The phantom stock units can be settled in cash, shares of Common Stock, or a combination of both. The phantom stock units have been accounted for as a liability within the consolidated financial statements. The Company recorded amortization of deferred stock-based compensation costs of $1.3 million and $.2 million during the years ended December 31, 2005 and 2004, respectively, related to these equity awards.

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(7)STOCK-BASED COMPENSATION: (Continued)

Employee Stock Purchase Plan

The Company has a 1999 Employee Stock Purchase Plan (the “ESPP”), under which it is authorized to issue up to 300,000 shares of Common Stock. Employees who are regularly scheduled to work more than 20 hours per week and more than five months in any calendar year may participate in the ESPP. Under the terms of the ESPP, employees may elect each quarter to have up to 15% of their annual base earnings withheld to purchase shares of Common Stock, up to a limit of $25,000 of Common Stock per calendar year. The ESPP currently provides for four offering periods during the year which coincide with the calendar quarters. The purchase price of a share of Common Stock purchased under the ESPP is equal to 85% of the lower of the beginning-of-quarter or end-of-quarter market price. ESPP participants are restricted from selling the shares of Common Stock purchased under the ESPP for a period of six months after purchase. As of December 31, 2006, the Company had 161,651 shares available for issuance under the ESPP.

The fair value of each stock purchase right granted under the ESPP during 2006, 2005, and 2004 was estimated using the Black-Scholes option pricing model. The following assumptions were used to compute the weighted average fair market value of purchase rights granted during the periods presented:

	2006	2005	2004
Expected option life	3 months	3 months	3 months
Risk free interest rates	4.16% - 5.08%	2.32% - 3.61%	0.93% - 1.71%
Estimated volatility	21%	26%	23%
Dividend yield	0.0%	0.0%	0.0%
Weighted average fair market value of purchase rights granted	$9.38	$12.11	$7.91

Pro Forma Effects

Had compensation cost for the Company’s stock-based compensation plans been determined using the fair value of the options at the grant date as prescribed by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, the Company’s pro forma net earnings and earnings per common share would have been as follows:

	Year Ended December 31,
	2005			2004
	(In Thousands, Except Per Share Amounts)
Net earnings, as reported	$	151,568		122,551
Add: Stock-based employee compensation included in reported net earnings, net of tax	457			92
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax	(2,709		)	(3,155	)
Pro forma net earnings	$	149,316		119,488
Basic earnings per common share:
As reported	$	2.47		2.15
Pro forma	2.43			2.10
Diluted earnings per common share:
As reported	$	2.41		2.11
Pro forma	2.37			2.06

85

(8)EMPLOYEE BENEFITS:

Pension Plans and Postretirement Benefits

The Company has a qualified defined benefit pension plan that covers certain employees and former employees in the United States (the “Forest Pension Plan”). The Company also has a non-qualified unfunded supplementary retirement plan (the “Supplemental Executive Retirement Plan” or “SERP”) that provides certain retired executives with defined retirement benefits in excess of qualified plan limits imposed by federal tax law. The Forest Pension Plan and the SERP were curtailed and all benefit accruals under both plans were suspended effective May 31, 1991. In addition, as a result of the Wiser Acquisition in 2004, Forest assumed a noncontributory defined benefit pension plan (the “Wiser Pension Plan”). The Wiser Pension Plan was curtailed and all benefit accruals were suspended effective December 11, 1998. In October 2000, the Wiser Pension Plan was amended to provide additional benefits by implementing a cash balance plan for the then current employees of Wiser. In December 2004, all benefit accruals under the Wiser Pension Plan were suspended. The Forest Pension Plan, the Wiser Pension Plan, and the SERP are hereinafter collectively referred to as the “Plans.”

In addition to the Plans described above, Forest also provides postretirement benefits to employees in the U.S. and Canada, their beneficiaries, and covered dependents. These benefits, which consist primarily of medical benefits payable on behalf of retirees in the U.S. and Canada, are referred to as “Postretirement Benefits” throughout this Note. The postretirement benefits in both the U.S. and Canada are closed to new participants.

Investments of the Plans

The weighted average asset allocations of the Forest Pension Plan and Wiser Pension Plan at December 31, 2006 and 2005 are set for the in the following table:

	Forest Pension Plan						Wiser Pension Plan
	2006			2005			2006			2005
Fixed income securities		33	%		49	%		28	%		18	%
Equity securities		64	%		50	%		67	%		44	%
Other		3	%		1	%		5	%		38	%
		100	%		100	%		100	%		100	%

The overall investment goal for pension plan assets is to achieve an investment return that allows plan assets to achieve the assumed actuarial interest rate and to exceed the rate of inflation. In order to manage risk, in terms of volatility, the portfolios are designed to avoid a loss of 20% during any single year and to express no more volatility than experienced by the S&P 500 Stock Index.

The Plans’ assets are invested with a view toward the long term in order to fulfill the obligations promised to participants as well as to control future levels of funding. The long-term goal for equity securities exposure is 50% of plan assets at market value. The targeted maximum equity exposure is 60%. There is no specified minimum equity exposure for any point in time. The long-term goal for fixed income exposure is 50% of the plan assets at market value. The maximum allowable fixed income exposure is 70%. There is no specified minimum fixed income exposure for any point in time. This asset allocation is designed to achieve an appropriate balance between capital appreciation, preservation of capital, and current income.

Expected Benefit Payments

In the future, it is anticipated that the Company will be required to provide benefit payments from the Forest Pension Plan and the Wiser Pension Plan and fund benefit payments directly for the SERP and the

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(8)EMPLOYEE BENEFITS: (Continued)

other postretirement benefits plans in 2007 through 2011 and in the aggregate for the years 2012 through 2016 in the following amounts:

	2007		2008	2009	2010	2011	2012- 2016
	(In Thousands)
Forest Pension Plan(1)	$	2,368	2,384	2,367	2,336	2,305	10,868
SERP	62		59	57	54	52	215
Wiser Pension Plan(1)	821		806	803	805	798	4,005
Postretirement benefits (U.S.)	582		572	572	594	615	2,896
Postretirement benefits (Canada)	45		48	51	55	58	336

(1)Benefit payments expected to be made to participants in the Forest Pension Plan and Wiser Pension Plan are expected to be paid out of funds held in trusts established for each plan.

Forest anticipates that it will make contributions in 2007 totaling $1.1 million to the Plans and $.5 million for the Postretirement Benefit plans, net of retiree contributions as applicable.

The following tables set forth the estimated benefit obligations, the fair value of the assets, and the funded status of the Plans and the Postretirement Benefit plans at December 31, 2006 and 2005. Amounts for the Forest Pension Plan, the SERP, and the Wiser Pension Plan are combined in the “Pension Benefits” columns.

	Pension Benefits					Postretirement Benefits
	2006			2005		2006		2005
	(In Thousands)
Benefit obligation at the beginning of the year	$	42,804		40,921		10,297		11,144
Service cost	—			—		580		671
Interest cost	2,192			2,325		453		493
Actuarial (gain) loss(1)	(1,257		)	2,875		(271	)	(1,439	)
Effect of curtailment	—			—		(2,092	)	—
Benefits paid	(3,183		)	(3,317	)	(584	)	(671	)
Medicare reimbursements	—			—		7		—
Retiree contributions	—			—		68		78
Impact of foreign currency exchange rate	—			—		(1	)	21
Benefit obligation at the end of the year	$	40,556		42,804		8,457		10,297

(1)The actuarial gain of $1.4 million in 2005 for the postretirement benefit includes approximately $.6 million associated with the federal subsidy provided by the Medicare Prescription Drug, Improvement and Modernization Act of 2003.

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(8)EMPLOYEE BENEFITS: (Continued)

Fair Value of Plan Assets

	Pension Benefits					Postretirement Benefits
	2006			2005		2006		2005
	(In Thousands)
Fair value of plan assets at beginning of the year	$	34,472		33,405	)	—		—
Actual return on plan assets	3,761			1,794		—		—
Retiree contributions	—			—		68		78
Medicare reimbursements	—			—		7		—
Employer contribution	2,565			2,590		509		593
Benefits paid	(3,183		)	(3,317	)	(584	)	(671	)
Fair value of plan assets at the end of the year	$	37,615		34,472		—		—

Funded Status

	Pension Benefits					Postretirement Benefits
	2006			2005		2006		2005
	(In Thousands)
Excess of benefit obligation over plan assets	$	(2,941	)	(8,332	)	(8,457	)	(10,297	)
Unrecognized actuarial loss (gain)	10,422			13,920		(271	)	241
Net amount recognized	$	7,481		5,588		(8,728	)	(10,056	)
Amounts recognized in the balance sheet consist of:
Accrued benefit liability	$	(2,941	)	(8,332	)	(8,457	)	(10,056	)
Accumulated other comprehensive income—net actuarial loss (gain)	10,422			13,920		(271	)	—
Net amount recognized	$	7,481		5,588		(8,728	)	(10,056	)

The Company adopted the recognition provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 106, and 132(R)” and initially applied them to the funded status of its defined benefit post retirement plans as of December 31, 2006. The initial recognition of the funded status of its defined benefit post retirement plans resulted in an increase in accumulated other comprehensive income in shareholders’ equity of $.1 million.

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(8)EMPLOYEE BENEFITS: (Continued)

The following table sets forth the projected and accumulated benefit obligations for the pension plans compared to the fair value of the plan assets for the periods indicated.

	December 31,
	2006		2005
	(In Thousands)
Projected benefit obligation	$	40,556	42,804
Accumulated benefit obligation	40,556		42,804
Fair value of plan assets	37,615		34,472

Actuarial Assumptions and Annual Periodic Expense

The following tables set forth the components of the net periodic cost and the underlying weighted average actuarial assumptions for the years ended December 31, 2006, 2005, and 2004:

	Pension Benefits									Postretirement Benefits
	2006			2005			2004			2006		2005		2004
	(In Thousands)
Service cost	$	—			—			81		580		671		645
Interest cost		2,192			2,325			2,056		453		493		580
Curtailment gain(1)		—			—			—		(1,851	)	—		—
Expected return on plan assets		(2,430	)		(2,346	)		(1,843	)	—		—		—
Recognized actuarial loss		899			753			692		—		—		219
Amortization of prior service cost		10			—			—		—		—		—
Settlement loss		—			—			20		—		—		—
Total net periodic expense (benefit)	$	671			732			1,006		(818	)	1,164		1,444
Assumptions used to determine net periodic expense:
Discount rate		5.32	%		5.75	%		6.00	%	4.72% & 5.46	%	5.75% & 6.00	%	6.00% & 6.75	%
Expected return on plan assets		7% & 8	%		7% & 8	%		7% & 8	%	n/a		n/a		n/a
Assumptions used to determine benefit obligations:
Discount rate		5.64	%		5.32	%		5.75	%	3.98% & 5.75	%	4.72% & 5.46	%	5.75% & 6.00	%

(1)Forest recognized a $1.9 million curtailment gain in connection with the Spin-off on March 2, 2006. This gain was recorded as a reduction in general and administrative expense for the year ended December 31, 2006.

The discount rates used to determine benefit obligations were determined by adjusting the Moody’s Aa Corporate bond yield to reflect the difference between the duration of the future estimated cash flows of the Plans and the other postretirement benefit obligations and the duration of the Moody’s Aa index.

The Company estimates that net periodic expense for the year ended December 31, 2007, will include expense of $.6 million resulting from the amortization of its related accumulated actuarial loss included in accumulated other comprehensive income at December 31, 2006.

For measurement purposes, the annual rate of increase in the per capita cost of covered health care benefits for the U.S. Postretirement Benefits was held constant at 5.50% during 2006 and thereafter. The annual rate of increase in the per capita cost of covered health care benefits for the Canadian Postretirement Benefits was assumed to be 4% per year for the dental plan; 5% per year for Provincial health care; and 10% in 2007, 9% in 2008, 8% in 2009, 7% in 2010, 6% in 2011, and 5% thereafter for the medical plan.

89

(8)EMPLOYEE BENEFITS: (Continued)

Assumed health care cost trend rates have a significant effect on the amounts reported for postretirement benefits. A one-percentage-point change in assumed health care cost trend rates would have the following effects for 2006:

	Postretirement Benefits
	1% Increase			1% Decrease
	(In Thousands)
Effect on service and interest cost components		$	308		(193	)
Effect on postretirement benefit obligation		$	1,463		(1,141	)

Employee Retirement Savings Plans

Forest sponsors a qualified tax-deferred savings plan (“Retirement Savings Plan”) for its employees in the U.S. in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Employees may defer up to 80% of their compensation, subject to certain limitations. Effective January 1, 2004, the Company matching percentage is 7% of eligible employee compensation. Expenses associated with the Company’s contributions to the Retirement Savings Plan totaled $1.9 million in 2006, $2.2 million in 2005, and $1.9 million in 2004. In each of these years, the Company matched employee contributions in cash.

Canadian Forest provides a savings plan (“Canadian Savings Plan”) that is available to all of its employees. Employees may contribute up to 4% of their salary, subject to certain limitations, with Canadian Forest matching the employee contribution in full. The expense associated with Canadian Forest’s contributions to the plan was approximately $.2 million in each of 2006, 2005 and 2004. All employees of Canadian Forest also participate in a defined contribution pension plan (the “Defined Contribution Pension Plan”). The expense associated with the contributions made by Canadian Forest to the Defined Contribution Pension Plan was $.2 million in 2006 and $.3 million in each of 2005 and 2004.

Due to the achievement of various corporate performance objectives in 2004, the Company contributed approximately $2.0 million as an employer discretionary contribution to the Retirement Savings Plan as well as an additional $.2 million to the Canadian Savings Plan. These discretionary contributions were paid in March 2005.

Deferred Compensation Plan

Forest has an Executive Deferred Compensation Plan (the “Executive Plan”) pursuant to which certain officers may participate and defer a portion of their compensation after contributing the maximum allowable amount to the Retirement Savings Plan. Prior to 2006, the Company recorded a liability for matching contributions and accrued interest on each participant’s account balance at the rate of 1% per month. Effective January 1, 2006 the interest rate was changed to .5% per month. The expense associated with the Company’s matching contributions to the Executive Plan and interest was $.3 million in 2006, and $.4 million in both 2005 and 2004. Beginning on January 1, 2007, the Executive Plan was amended and under the modified structure, participants may designate how deferred amounts are deemed to be invested. There are several investment options available to the participants. As a result, the fair value of the liability recorded with respect to the deferred amounts will fluctuate due to gains and losses associated with investment options selected by the participants. The fair value of amounts deferred (including accrued interest) under the Executive Plan was approximately $2.4 million and $1.9 million at December 31, 2006 and 2005, respectively.

90

(9)   DERIVATIVE INSTRUMENTS:

Forest periodically enters into derivative instruments such as swap, basis swap, and collar agreements in order to provide a measure of stability to Forest’s cash flows in an environment of volatile oil and gas prices and to manage the exposure to commodity price risk. Forest’s commodity derivative instruments generally serve as effective economic hedges of commodity price exposure; however, various circumstances can cause commodity hedges to not qualify for cash flow hedge accounting either at the inception of the hedge or during the term of the hedge. When the criteria for cash flow hedge accounting are not met or when cash flow hedging is not elected, realized gains and losses (i.e., cash settlements) are recorded in other income and expense in the Consolidated Statements of Operations. Similarly, changes in the fair value of the derivative instruments are recorded as unrealized gains or losses in the Consolidated Statements of Operations. In contrast, cash settlements for derivative instruments that qualify for hedge accounting are recorded as additions to or reductions of oil and gas revenues while 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.

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 some of its natural gas and oil hedges during the third and fourth quarters of 2005. Additionally, as a result of the Spin-off on March 2, 2006, additional commodity swaps and collars formerly designated as cash flow hedges of offshore Gulf of Mexico production also no longer qualified for hedge accounting. Because a significant portion of the Company’s derivatives no longer qualified for hedge accounting and to increase clarity in its financial statements, the Company elected to discontinue hedge accounting prospectively for all of its remaining commodity derivatives beginning in March 2006. This change in reporting has not impacted the Company’s reported cash flows, although the results of operations have been affected by mark-to-market gains and losses, which fluctuate with volatile oil and gas prices. Subsequent to March 2006, the Company has recognized all mark-to-market gains and losses in earnings, rather than deferring such amounts in accumulated other comprehensive income included in shareholders’ equity.

The tables below set forth, as of December 31, 2006, the quantity of oil and gas hedged under commodity swaps and collars.

	Swaps
	Natural Gas (NYMEX HH)					Oil (NYMEX WTI)
	Bbtu Per Day		Weighted Average Hedged Price per MMBtu			Barrels Per Day(1)		Weighted Average Hedged Price per Bbl
Fiscal 2007		20.0		$	8.10		7,000		$	70.03
Fiscal 2008		—		—			6,500		69.72
Fiscal 2009		—		—			5,500		69.76
Fiscal 2010		—		—			2,000		73.15

(1)Subsequent to December 31, 2006, Forest unwound two oil swap agreements covering 1,000 Bbl per day in 2009 and 500 Bbl per day 2010 for total proceeds of $6.9 million.

	Costless Collars
	Natural Gas (NYMEX HH)			Oil (NYMEX WTI)
	Bbtu Per Day		Weighted Average Hedged Floor and Ceiling Price per MMBtu	Barrels Per Day		Weighted Average Hedged Floor and Ceiling Price per Bbl
Fiscal 2007		35.0	$8.76/11.70		4,000	$65.81/87.18

91

(9)DERIVATIVE INSTRUMENTS: (Continued)

Forest also uses basis swaps in connection with natural gas swaps in order to fix the price differential between the NYMEX Henry Hub price and the index price at which the physical gas is sold. At December 31, 2006, there were basis swaps in place covering 35.0 Bbtu per day in 2007.

As of December 31, 2006, the net fair values of the Company’s derivative instruments was $66.1 million, which is presented on the Consolidated Balance Sheet as a derivative asset of $68.2 million (of which $53.2 million was classified as current) and a derivative liability of $2.1 million (of which $1.3 million was classified as current). 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.

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

	Year Ended December 31,
	2006			2005	2004
	(In Thousands)
Realized losses on derivatives designated as cash flow hedges(1)	$	43,813		186,442	117,129
Realized losses (gains) on derivatives not designated as cash flow hedges(2)	23,864			35,390	(336	)
Ineffectiveness recognized on derivatives designated as cash flow hedges(2)	(5,573		)	5,747	(156	)
Unrealized (gains) losses on derivatives not designated as cash flow hedges(2)	(78,056		)	15,626	1,244
Total realized and unrealized (gains) losses recorded	$	(15,952	)	243,205	117,881

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

(2)Included in other income and expense in the Consolidated Statements of Operations.

In January and February 2007, we entered into four additional swap agreements and one additional collar agreement to hedge a portion of expected future production attributable to the pending acquisition of Houston Exploration as summarized in the table below.

	Natural Gas (NYMEX HH)
	Swaps					Collars
	Bbtu per Day		Weighted Average Hedged Price per MMBtu			Bbtu per Day		Weighted Average Hedged Floor and Ceiling Price per MMBtu
April 2007 – December 2007		40.0		$	7.77		—		—
Fiscal 2008		—		—			10.0		$	7.75/9.57

(10)   RELATED PARTY TRANSACTIONS:

Beginning in 1995, the Company consummated certain transactions with The Anschutz Corporation (“Anschutz”) pursuant to which Anschutz acquired a significant ownership position in the Company. As of December 31, 2006, Anschutz owned approximately 12.6% of Forest’s outstanding common stock. Based on reports filed with the SEC, as of January 31, 2007, Anschutz has entered into forward sales contracts covering 7.1 million shares of Common Stock, or approximately 11.3% of Forest’s outstanding common stock, that will settle in 2009 and 2010, and Anschutz retains voting rights for these shares through the settlement dates.

92

(10)   RELATED PARTY TRANSACTIONS: (Continued)

In 1998, Forest purchased certain oil and gas assets from Anschutz, including two concessions in South Africa. Over the years, the parties have entered into agreements concerning the development of these concession blocks. In March 2003, Forest entered into a Participation Agreement regarding the development of offshore South Africa acreage, including the Ibhubesi Gas Field, with The Petroleum Oil and Gas Corporation of South Africa (Pty) Limited (“PetroSA”) and Anschutz Overseas South Africa (Pty) Limited (“Anschutz Overseas”). As of February 27, 2007, the parties’ interests in the concessions were as follows: Forest 53.2%, Anschutz Overseas 22.8%, and PetroSA 24.0%. Forest is the operator of these concession blocks and is reimbursed by the partners for exploration expenditures and general, technical and administrative overhead.

(11)   COMMITMENTS AND CONTINGENCIES:

Future rental payments for office facilities, office equipment, and well equipment under the remaining terms of non-cancelable operating leases are $3.6 million, $3.3 million, $3.3 million, $3.1 million, and $3.1 million for the years ending December 31, 2007 through 2011, respectively. Future rental payments under the remaining terms of non-cancelable operating leases for fiscal periods beyond 2011 total $12.4 million. During the years ended December 31, 2006 and 2005, the Company received approximately $.6 million and $5.0 million, respectively, in corporate office lease concessions and incentives. These incentives were deferred and will be amortized as reductions in office lease expense over the term of the lease through 2016. Amortization of lease concessions and incentives was $.5 million in 2006 and $.1 million in 2005. Remaining terms for unconditional purchase obligations consisting of firm commitments for drilling, gathering, processing and pipeline capacity are $46.1 million, $19.5 million, $10.3 million, $5.2 million and $4.6 million for the years ending December 31, 2007 through 2011, respectively.

Net rental payments applicable to exploration and development activities and capitalized to oil and gas properties were $9.4 million in 2006, $7.0 million in 2005, and $5.6 million in 2004. Net rental payments under non-cancelable operating leases charged to expense amounted to $4.1 million in 2006, $4.6 million in 2005, and $3.7 million in 2004. There are no leases that are accounted for as capital leases.

Forest, in the ordinary course of business, is a party to various lawsuits, claims, and proceedings. While we believe that the amount of any potential loss upon resolution of these matters would not be material to our consolidated financial position, the ultimate outcome of these matters is inherently difficult to predict with any certainty. In the event of an unfavorable outcome, the potential loss could have an adverse effect on Forest’s results of operations and cash flow in the reporting periods in which any such actions are resolved. Forest is also involved in a number of governmental proceedings in the ordinary course of business, including environmental matters.

Houston Exploration and Forest are currently subject to an ongoing shareholder lawsuit, which could result in an injunction preventing the consummation of the merger discussed in Note 2 or significant monetary damages. Houston Exploration’s directors and Forest are defendants in a shareholder lawsuit brought by the City of Monroe Employees’ Retirement System (the “Plaintiff”) in Houston, Texas. The Plaintiff asserts that the Houston Exploration directors breached their fiduciary duties by not pursuing a June 12, 2006 unsolicited proposal to purchase the outstanding shares of Houston Exploration common stock for $62 per share that was made by a Houston Exploration shareholder. The Plaintiff also asserts, on behalf of an uncertified class of Houston Exploration’s shareholders, that the Houston Exploration directors’ decision to enter into the merger agreement with Forest constituted a breach of fiduciary duties because, the Plaintiff alleges, the merger consideration being offered by Forest is inadequate. The Plaintiff asserts that Forest aided and abetted the Houston Exploration directors’ alleged breach of fiduciary duties.

93

(11)COMMITMENTS AND CONTINGENCIES: (Continued)

At the time of the filing of these consolidated financial statements, this lawsuit is at an early stage and subject to substantial uncertainties concerning the outcome of material factual and legal issues. Accordingly, based on the current status of the litigation, we cannot currently predict the manner and timing of the resolution of the lawsuit, the likelihood of the issuance of an injunction preventing the consummation of the merger or an estimate of a range of possible losses or any minimum loss that could result in the event of an adverse verdict in the lawsuit. Furthermore, although the combined company’s insurance policies following the merger should provide coverage for the claims against Houston Exploration’s directors, the policies may not be sufficient to cover all costs and liabilities incurred by those directors. The current claim in the lawsuit against Forest is not covered by insurance.

Long-Term Sales Contracts

A portion of Canadian Forest’s natural gas production is sold in a joint venture with other producers (the “Canadian Netback Pool”). The Canadian Netback Pool’s resale markets are comprised of market based and fixed price contracts. Canadian Forest’s contractual obligation to deliver natural gas production volumes to these contracts extends through 2011. Canadian Forest’s average daily production sold through the Canadian Netback Pool represented approximately 7% of Forest’s total average daily production in 2006. Canadian Forest supplied 55% of the Canadian Netback Pool sales quantity in 2006, and it is estimated that Canadian Forest will supply 79% of the Canadian Netback Pool quantity in the 2007 contract year. We expect that Canadian Forest’s pro rata obligations as a gas producer will increase in 2008 and future years. In 2006, the weighted average price paid under the resale contracts was approximately 55% of market value based on the average closing AECO prices during 2006. To the extent the Canadian Netback Pool’s supply is insufficient to meet the delivery obligations under the resale contracts, as is currently the case, the Canadian Netback Pool must make up the shortfall by purchasing spot market gas at prices that currently exceed the prices paid under the resale contracts.

(12)   OTHER (INCOME) EXPENSE:

The components of other (income) expense, net for the years ended December 31, 2006, 2005, and 2004 were as follows:

	Year Ended December 31,
	2006			2005	2004
	(In Thousands)
Realized foreign currency exchange gain	$	(315	)	—	(4,728	)
Franchise taxes	1,410			1,963	1,219
Share of (income) loss of equity method investee	(2,334		)	562	(1,726	)
Other, net	1,135			3,722	3,056
Total other (income) expense, net	$	(104	)	6,247	(2,179	)

94

(13)SELECTED QUARTERLY FINANCIAL DATA (unaudited):

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(In Thousands, Except Per Share Amounts)
2006(1)
Revenue	$	221,446		211,853		202,839		183,854
Earnings from operations	$	57,086		81,982		79,129		54,635
Net earnings from continuing operations	$	1,249		57,048		76,934		30,849
Net earnings	$	3,671		57,048		76,934		30,849
Basic earnings per share from continuing operations	$	.02		.92		1.24		.49
Basic earnings per share	.06			.92		1.24		.49
Diluted earnings per share from continuing operations	.02			.90		1.21		.48
Diluted earnings per share	.06			.90		1.21		.48
2005(1)
Revenue	$	260,291		271,055		268,236		272,463
Earnings from operations	$	83,129		97,480		91,919		96,811
Net earnings from continuing operations	$	38,871		52,201		3,265		57,231
Net earnings	$	38,871		52,201		3,265		57,231
Basic earnings per share from continuing operations	$	.65		.85		.05		.92
Basic earnings per share	.65			.85		.05		.92
Diluted earnings per share from continuing operations	.63			.83		.05		.90
Diluted earnings per share	.63			.83		.05		.90

(1)Since the third quarter of 2005, net earnings from continuing operations has been subject to large fluctuations due to the discontinuance of cash flow hedge accounting as discussed in Note 9.

(14)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 December 31, 2006, Forest conducted operations in one industry segment, that being the oil and gas exploration and production industry, and had three reportable geographical business segments:  United States, Canada and International. On March 1, 2004, the assets and business operations of the Company’s gas marketing subsidiary, ProMark, were sold to Cinergy, as discussed in Note 2. Accordingly, ProMark’s results of operations have been reported as discontinued operations. The Company’s remaining marketing and processing activities are not significant and therefore are not reported as a separate segment and are included as a reconciling item in the information below.

The segments were determined based upon the geographical location of operations in each business segment. The segment data presented below was prepared on the same basis as the consolidated financial statements. Effective in the first quarter of 2006, Forest ceased allocating general and administrative expenses to the business segments to correspond with its decision to monitor and evaluate general and administrative expenses at the corporate level. Effective in the third quarter of 2006, Forest decreased the number of reportable segments from five to three to correspond to the same number of cost centers under the full cost accounting rules. Segment information previously reported has been modified to conform to the current presentation.

95

(14)GEOGRAPHICAL SEGMENTS: (Continued)

	Oil and Gas Operations
	Year Ended December 31, 2006
	United States			Canada	International			Total Company
	(In Thousands)
Revenue		$	636,897	177,572		—			814,469
Expenses:
Lease operating expenses		126,647		28,227		—			154,874
Production and property taxes		36,060		2,981		—			39,041
Transportation and processing costs		11,941		9,935		—			21,876
Depletion		188,073		75,366		—			263,439
Accretion of asset retirement obligations		6,046		1,004		46			7,096
Impairment and other		—		—		3,668			3,668
Earnings (loss) from operations		$	268,130	60,059		(3,714	)		324,475
Capital expenditures(1)		$	782,945	150,955		6,984			940,884
Goodwill		$	71,377	14,869		—			86,246

(1)Does not include estimated discounted asset retirement obligations of $2.4 million related to assets placed in service during the year ended December 31, 2006.

Information for reportable segments relates to the Company’s 2006 consolidated totals as follows:

	(In Thousands)
Earnings from operations for reportable segments		$	324,475
Marketing, processing, and other		5,523
General and administrative expense (including stock-based compensation)		(48,308		)
Interest expense		(71,787		)
Administrative asset depreciation		(3,442		)
Spin-off and merger costs		(5,416		)
Realized losses on derivative instruments, net		(23,864		)
Unrealized gains on derivative instruments, net		83,629
Unrealized foreign currency exchange loss		(3,931		)
Other income, net		104
Earnings before income taxes and discontinued operations		$	256,983

	Oil and Gas Operations
	Year Ended December 31, 2005
	United States			Canada	International			Total Company
	(In Thousands)
Revenue		$	885,616	176,901		—		1,062,517
Expenses:
Lease operating expenses		180,867		18,894		—		199,761
Production and property taxes		39,819		2,796		—		42,615
Transportation and processing costs		13,805		5,694		—		19,499
Depletion		301,536		63,335		—		364,871
Accretion of asset retirement obligations		16,323		962		32		17,317
Impairment and other		8,208		—		2,924		11,132
Earnings (loss) from operations		$	325,058	85,220		(2,956	)	407,322
Capital expenditures(1)		$	718,641	115,019		3,688		837,348
Goodwill		$	71,377	15,695		—		87,072

(1)Does not include estimated discounted asset retirement obligations of $16.3 million related to assets placed in service during the year ended December 31, 2005.

96

(14)GEOGRAPHICAL SEGMENTS: (Continued)

Information for reportable segments relates to the Company’s 2005 consolidated totals as follows:

	(In Thousands)
Earnings from operations for reportable segments		$	407,322
Marketing, processing, and other		9,528
General and administrative expense (including stock-based compensation)		(43,703		)
Interest expense		(61,403		)
Administrative asset depreciation		(3,808		)
Realized losses on derivative instruments, net		(35,390		)
Unrealized losses on derivative instruments, net		(21,373		)
Other expense, net		(6,247		)
Earnings before income taxes and discontinued operations		$	244,926

	Oil and Gas Operations
	Year Ended December 31, 2004
	United States			Canada	International			Total Company
	(In Thousands)
Revenue		$	799,590	110,190		—			909,780
Expenses:
Lease operating expenses		171,299		17,862		—			189,161
Production and property taxes		31,098		1,143		—			32,241
Transportation and processing costs		13,635		3,157		—			16,792
Depletion		304,574		45,737		—			350,311
Accretion of asset retirement obligations		16,485		766		—			17,251
Impairment and other		7,040		1,764		4,125			12,929
Earnings (loss) from operations		$	255,459	39,761		(4,125	)		291,095
Capital expenditures(1)		$	536,172	158,310		5,755			700,237
Goodwill		$	54,384	14,176		—			68,560

(1)Does not include estimated discounted asset retirement obligations of $14.1 million related to assets placed in service during the year ended December 31, 2004.

Information for reportable segments relates to the Company’s 2004 consolidated totals as follows:

	(In Thousands)
Earnings from operations for reportable segments		$	291,095
Marketing, processing, and other		3,118
General and administrative expense (including stock-based compensation)		(32,145		)
Interest expense		(57,844		)
Administrative asset depreciation		(3,781		)
Realized gains on derivative instruments, net		336
Unrealized losses on derivative instruments, net		(1,088		)
Other income, net		2,179
Earnings before income taxes and discontinued operations		$	201,870

97

(15)SUPPLEMENTAL FINANCIAL DATA—OIL AND GAS PRODUCING ACTIVITIES (unaudited):

The following information is presented in accordance with Statement of Financial Accounting Standards No. 69, “Disclosure about Oil and Gas Producing Activities” (“SFAS No. 69”).

(A) Costs Incurred in Oil and Gas Exploration and Development Activities. The following costs were incurred in oil and gas acquisition, exploration, and development activities during the years ended December 31, 2006, 2005, and 2004:

	United States		Canada	International		Total
	(In Thousands)
2006
Property acquisition costs:
Proved properties	$	262,534	—		—	262,534
Unproved properties	53,788		—		—	53,788
Exploration costs	155,824		99,657		6,984	262,465
Development costs	312,104		52,348		—	364,452
Total costs incurred(1)(2)	$	784,250	152,005		6,984	943,239
2005
Property acquisition costs:
Proved properties	$	236,629	3,018		—	239,647
Unproved properties	69,288		4,580		—	73,868
Exploration costs	179,006		77,448		3,688	260,142
Development costs	248,029		31,996		—	280,025
Total costs incurred(1)	$	732,952	117,042		3,688	853,682
2004
Property acquisition costs:
Proved properties	$	278,499	100,031		—	378,530
Unproved properties	43,171		14,281		—	57,452
Exploration costs	69,325		19,542		5,755	94,622
Development costs	157,242		26,456		—	183,698
Total costs incurred(1)	$	548,237	160,310		5,755	714,302

(1)Includes amounts relating to estimated asset retirement obligations of $2.4 million, $16.3 million, and $14.1 million for assets placed in service in the years ended December 31, 2006, 2005, and 2004, respectively.

(2)Includes $37.2 million of capital expenditures related to offshore Gulf of Mexico operations from January 1, 2006 through the date of the Spin-off on March 2, 2006. Costs incurred related to offshore Gulf of Mexico operations for 2006 consist of $.7 million for property acquisitions, $24.0 million for exploration, and $12.5 million for development.

(B) Aggregate Capitalized Costs. The aggregate capitalized costs relating to oil and gas activities at the end of each of the years indicated were as follows:

	2006			2005		2004
	(In Thousands)
Costs related to proved properties	$	4,751,171		5,957,805		5,201,562
Costs related to unproved properties	261,259			275,684		209,604
	5,012,430			6,233,489		5,411,166
Less accumulated depletion	(2,265,018		)	(3,059,031	)	(2,701,402	)
	$	2,747,412		3,174,458		2,709,764

98

(15)SUPPLEMENTAL FINANCIAL DATA—OIL AND GAS PRODUCING ACTIVITIES (unaudited): (Continued)

(C) Results of Operations from Producing Activities. Results of operations from producing activities for the years ended December 31, 2006, 2005, and 2004 are presented below.

	United States		Canada	Total
	(In Thousands)
2006
Oil and gas sales	$	636,897	177,572	814,469
Expenses:
Production expense	174,648		41,143	215,791
Depletion expense	188,073		75,366	263,439
Accretion of asset retirement obligations	6,046		1,004	7,050
Income tax expense	103,498		17,970	121,468
Total expenses	472,265		135,483	607,748
Results of operations from producing activities	$	164,632	42,089	206,721
Depletion rate per Mcfe	$	2.09	2.42	2.17
2005
Oil and gas sales	$	885,616	176,901	1,062,517
Expenses:
Production expense	234,491		27,384	261,875
Depletion expense	301,536		63,335	364,871
Impairment and other	8,208		—	8,208
Accretion of asset retirement obligations	16,323		962	17,285
Income tax expense	123,522		28,463	151,985
Total expenses	684,080		120,144	804,224
Results of operations from producing activities	$	201,536	56,757	258,293
Depletion rate per Mcfe	$	2.17	2.40	2.21
2004
Oil and gas sales	$	799,590	110,190	909,780
Expenses:
Production expense	216,032		22,162	238,194
Depletion expense	304,574		45,737	350,311
Impairment and other	2,233		—	2,233
Accretion of retirement obligations	16,485		766	17,251
Income tax expense	98,901		13,952	112,853
Total expenses	638,225		82,617	720,842
Results of operations from producing activities	$	161,365	27,573	188,938
Depletion rate per Mcfe	$	2.05	1.93	2.03

99

(15)SUPPLEMENTAL FINANCIAL DATA—OIL AND GAS PRODUCING ACTIVITIES (unaudited): (Continued)

(D) Estimated Proved Oil and Gas Reserves.   The Company’s estimate of its net proved and proved developed oil and gas reserves and changes for 2006, 2005, and 2004 follows. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, that is, prices and costs as of the date the estimate is made.

Prices include consideration of changes in existing prices provided only by contractual arrangement, but not on escalations based on future conditions. Prices do not include the effects of commodity hedges. Purchases of reserves in place represent volumes recorded on the closing dates of the acquisitions for financial accounting purposes.

Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included as “proved developed reserves” only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.

Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

	Liquids							Gas
	(MBbls)							(MMcf)
	United States		Canada			Total		United States		Canada		Total		Total MMcfe
Balance at January 1, 2004	74,072			7,252		81,324		690,182		117,886		808,068		1,296,012
Revisions of previous estimates	3,664			(359	)	3,305		(20,125	)	(6,586	)	(26,711	)	(6,881	)
Extensions and discoveries	1,098			213		1,311		33,212		11,582		44,794		52,660
Production	(9,550	)		(1,287	)	(10,837	)	(91,420	)	(15,946	)	(107,366	)	(172,388	)
Sales of reserves in place	(4,203	)		(4,003	)	(8,206	)	(13,160	)	(22,193	)	(35,353	)	(84,589	)
Purchases of reserves in place	17,982			3,934		21,916		84,889		32,804		117,693		249,189
Balance at December 31, 2004	83,063			5,750		88,813		683,578		117,547		801,125		1,334,003
Revisions of previous estimates	10,225			(551	)	9,674		11,720		1,299		13,019		71,063
Extensions and discoveries	3,388			1,002		4,390		50,276		38,651		88,927		115,267
Production	(9,316	)		(1,252	)	(10,568	)	(82,912	)	(18,921	)	(101,833	)	(165,241	)
Sales of reserves in place	(1,272	)		—		(1,272	)	(7,390	)	—		(7,390	)	(15,022	)
Purchases of reserves in place	5,990			43		6,033		87,902		2,933		90,835		127,033
Balance at December 31, 2005	92,078			4,992		97,070		743,174		141,509		884,683		1,467,103
Revisions of previous estimates	26,286			735		27,021		(83,435	)	28,451		(54,984	)	107,142
Extensions and discoveries	4,850			1,107		5,957		102,173		52,333		154,506		190,248
Production	(6,887	)		(1,139	)	(8,026	)	(48,674	)	(24,350	)	(73,024	)	(121,180	)
Sales of reserves in place(1)	(13,047	)		—		(13,047	)	(248,028	)	—		(248,028	)	(326,310	)
Purchases of reserves in place	3,889			—		3,889		114,886		—		114,886		138,220
Balance at December 31, 2006	107,169			5,695		112,864		580,096		197,943		778,039		1,455,223
Proved developed reserves at:
December 31, 2004	61,494			5,551		67,045		532,810		94,320		627,130		1,029,400
December 31, 2005	66,818			4,779		71,597		524,424		114,932		639,356		1,068,938
December 31, 2006	73,239			5,041		78,280		407,965		158,174		566,139		1,035,819

(1)Includes 313 Bcfe related to the Spin-off on March 2, 2006, as discussed in Note 2.

100

(15)SUPPLEMENTAL FINANCIAL DATA—OIL AND GAS PRODUCING ACTIVITIES (unaudited): (Continued)

(E) Standardized Measure of Discounted Future Net Cash Flows.   Future oil and gas sales and production and development costs have been estimated using prices and costs in effect at the end of the years indicated, except in those instances where the sale of oil and natural gas is covered by contracts. Where the sale is covered by contracts, the applicable contract prices, including fixed and determinable escalations, were used for the duration of the contract. Thereafter, the current spot price was used. All cash flow amounts, including income taxes, are discounted at 10%.

Future income tax expenses are estimated using an estimated combined federal and state income tax rate of 37.5% in the U.S. and an average combined federal and provincial rate of 29.25% in Canada. Estimates for future general and administrative and interest expense have not been considered.

Changes in the demand for oil and natural gas, inflation, and other factors make such estimates inherently imprecise and subject to substantial revision. This table should not be construed to be an estimate of the current market value of the Company’s proved reserves. Management does not rely upon the information that follows in making investment decisions.

	December 31, 2006
	United States			Canada		Total
	(In Thousands)
Future oil and gas sales	$	8,600,619		1,276,442		9,877,061
Future production costs	(2,349,072		)	(287,054	)	(2,636,126	)
Future development costs	(681,060		)	(87,555	)	(768,615	)
Future income taxes	(1,317,621		)	(214,804	)	(1,532,425	)
Future net cash flows	4,252,866			687,029		4,939,895
10% annual discount for estimated timing of cash flows	(2,109,005		)	(236,526	)	(2,345,531	)
Standardized measure of discounted future net cash flows	$	2,143,861		450,503		2,594,364

	December 31, 2005
	United States			Canada		Total
	(In Thousands)
Future oil and gas sales	$	11,247,050		1,322,259		12,569,309
Future production costs	(2,359,620		)	(232,520	)	(2,592,140	)
Future development costs	(803,078		)	(56,662	)	(859,740	)
Future income taxes	(2,514,541		)	(256,888	)	(2,771,429	)
Future net cash flows	5,569,811			776,189		6,346,000
10% annual discount for estimated timing of cash flows	(2,230,609		)	(262,766	)	(2,493,375	)
Standardized measure of discounted future net cash flows	$	3,339,202		513,423		3,852,625

	December 31, 2004
	United States			Canada		Total
	(In Thousands)
Future oil and gas sales	$	7,284,594		755,171		8,039,765
Future production costs	(1,817,089		)	(165,915	)	(1,983,004	)
Future development costs	(663,272		)	(38,956	)	(702,228	)
Future income taxes	(1,330,800		)	(107,868	)	(1,438,668	)
Future net cash flows	3,473,433			442,432		3,915,865
10% annual discount for estimated timing of cash flows	(1,247,157		)	(153,151	)	(1,400,308	)
Standardized measure of discounted future net cash flows	$	2,226,276		289,281		2,515,557

101

(15)SUPPLEMENTAL FINANCIAL DATA—OIL AND GAS PRODUCING ACTIVITIES (unaudited): (Continued)

(F) Changes in the Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves.   An analysis of the changes in the standardized measure of discounted future net cash flows during each of the last three years is as follows:

	December 31, 2006
	United States			Canada		Total
	(In Thousands)
Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at beginning of year	$	3,339,202		513,423		3,852,625
Changes resulting from:
Sales of oil and gas, net of production costs	(507,337		)	(136,429	)	(643,766	)
Net changes in prices and future production costs	(1,699,819		)	(287,119	)	(1,986,938	)
Net changes in future development costs	(151,433		)	(9,971	)	(161,404	)
Extensions, discoveries, and improved recovery	286,598			136,881		423,479
Development costs incurred during the period	311,883			51,729		363,612
Revisions of previous quantity estimates	304,238			84,013		388,251
Sales of reserves in place(1)	(1,380,077		)	—		(1,380,077	)
Purchases of reserves in place	371,265			—		371,265
Accretion of discount on reserves at beginning of year before income taxes	468,429			67,036		535,465
Net change in income taxes	800,912			30,940		831,852
Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at end of year	$	2,143,861		450,503		2,594,364

(1)Includes the effect of the Spin-off on March 2, 2006, as discussed in Note 2.

The computation of the standardized measure of discounted future net cash flows relating to proved oil and gas reserves at December 31, 2006 was based on weighted average year-end spot natural gas prices of approximately $5.28 per Mcf in the United States and approximately $5.05 per Mcf in Canada, and on weighted average year-end spot liquids prices of approximately $51.69 per barrel in the United States and approximately $48.76 per barrel in Canada.

	December 31, 2005
	United States			Canada		Total
	(In Thousands)
Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at beginning of year	$	2,226,276		289,281		2,515,557
Changes resulting from:
Sales of oil and gas, net of production costs	(840,297		)	(149,517	)	(989,814	)
Net changes in prices and future production costs	1,414,816			206,500		1,621,316
Net changes in future development costs	(135,308		)	(14,601	)	(149,909	)
Extensions, discoveries, and improved recovery	284,981			214,016		498,997
Development costs incurred during the period	235,521			30,683		266,204
Revisions of previous quantity estimates	209,948			(7,930	)	202,018
Sales of reserves in place	(44,100		)	—		(44,100	)
Purchases of reserves in place	298,189			9,186		307,375
Accretion of discount on reserves at beginning of year before income taxes	296,413			34,730		331,143
Net change in income taxes	(607,237		)	(98,925	)	(706,162	)
Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at end of year	$	3,339,202		513,423		3,852,625

102

(15)SUPPLEMENTAL FINANCIAL DATA—OIL AND GAS PRODUCING ACTIVITIES (unaudited): (Continued)

The computation of the standardized measure of discounted future net cash flows relating to proved oil and gas reserves at December 31, 2005 was based on weighted average year-end spot natural gas prices of approximately $8.44 per Mcf in the United States and approximately $7.78 per Mcf in Canada, and on weighted average year-end spot liquids prices of approximately $54.03 per barrel in the Unites States and approximately $44.34 per barrel in Canada.

	December 31, 2004
	United States			Canada		Total
	(In Thousands)
Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at beginning of year	$	2,061,370		246,560		2,307,930
Changes resulting from:
Sales of oil and gas, net of production costs	(702,832		)	(89,001	)	(791,833	)
Net changes in prices and future production costs	217,917			60,660		278,577
Net changes in future development costs	(49,696		)	(16,053	)	(65,749	)
Extensions, discoveries, and improved recovery	153,376			32,159		185,535
Development costs incurred during the period	152,641			30,577		183,218
Revisions of previous quantity estimates	11,024			(21,059	)	(10,035	)
Sales of reserves in place	(90,124		)	(106,320	)	(196,444	)
Purchases of reserves in place	387,396			133,974		521,370
Accretion of discount on reserves at beginning of year before income taxes	262,221			29,305		291,526
Net change in income taxes	(177,017		)	(11,521	)	(188,538	)
Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at end of year	$	2,226,276		289,281		2,515,557

The computation of the standardized measure of discounted future net cash flows relating to proved oil and gas reserves at December 31, 2004 was based on weighted average year-end spot natural gas prices of approximately $5.88 per Mcf in the United States and approximately $4.81 per Mcf in Canada, and on weighted average year-end spot liquids prices of approximately $39.23 per barrel in the United States and approximately $32.94 per barrel in Canada.

103

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

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

Our Chief Executive Officer, H. Craig Clark, and our Chief Financial Officer, David H. Keyte, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”). Based on this evaluation, they believe that as of the Evaluation Date our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Controls over Financial Reporting.

There has not been any change in our internal control over financial reporting that occurred during our quarterly period ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Managements’ Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act, Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Item 9B.Other Information.

None.

104

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Forest Oil Corporation

We have audited management’s assessment, included in the accompanying Managements’ Annual Report on Internal Control over Financial Reporting, that Forest Oil Corporation maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Forest Oil Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Forest Oil Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Forest Oil Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Forest Oil Corporation as of December 31, 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the period ended December 31, 2006 and our report dated February 27, 2007 expressed an unqualified opinion thereon.

Ernst & Young LLP

Denver, Colorado
February 27, 2007

105

PART III

Item 10.Directors, Executive Officers and Corporate Governance.

The names of the executive officers of Forest and their titles, ages, and biographies required by this Item are incorporated by reference to the information set forth under the caption “Executive Officers of Forest” included in Part I, Item 4A of this Form 10-K.

The following information will be included in Forest’s Notice of Annual Meeting of Shareholders and Proxy Statement (the “Proxy Statement”) to be filed with the SEC within 120 days after Forest’s fiscal year end of December 31, 2006 and is incorporated herein by reference:

·Information concerning Forest’s directors is incorporated by reference to the information under the caption “Proposal No. 1—Election of Directors”

·Information concerning Forest’s procedures for recommending nominees to the Board and Forest’s Audit Committee and designated “audit committee financial expert” is set forth under the caption “Corporate Governance Principles and Information about the Board and its Committees”

·Information about Forest’s code of ethics for directors, officers, and employees is set forth under the caption “Corporate Governance Principles and Information about the Board and its Committees”

·Information about compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance”

Item 11.Executive Compensation.

Information regarding Forest’s compensation of its named executive officers is set forth under the captions “Executive Compensation” in the Proxy Statement, which information is incorporated herein by reference. Information regarding Forest’s compensation of its directors is set forth under the caption “Executive Compensation—Director Compensation” in the Proxy Statement, which information is incorporated herein by reference. See also “Executive Compensation—Compensation Committee Report, and Corporate Governance Principles and Information About the Board and Its Committees—Compensation Committee Interlocks and Insider Participation” for additional information, which information is incorporated herein by reference.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information regarding security ownership of certain beneficial owners, directors, and executive officers is set forth under the caption “Common Stock Ownership of Certain Beneficial Owners and Management” in the Proxy Statement, which information is incorporated herein by reference.

Information regarding Forest’s equity compensation plans is set forth under the caption “Executive Compensation—Equity Compensation Plan Information” in the Proxy Statement, which information is incorporated herein by reference.

Item 13.Certain Relationships and Related Transactions, and Director Independence.

Information regarding certain relationships and related transactions is set forth under the caption “Transactions with Related Persons, Promoters and Certain Control Persons” and information regarding director independence is set forth under the caption “Corporate Governance Principles and Information about the Board and its Committees—Board Independence” included in the Proxy Statement, which information is incorporated herein by reference.

106

Item 14.Principal Accounting Fees and Services.

Information regarding principal auditor fees and services is set forth under the captions “Principal Accountant Fees and Services” and “Report of the Audit Committee” in the Proxy Statement, which information is incorporated herein by reference.

PART IV

Item 15.Exhibits and Financial Statement Schedules.

(a)           The following documents are filed as part of this report or are incorporated by reference:

(1)   Financial Statements:

1.Independent Auditors’ Report

2.Consolidated Balance Sheets—December 31, 2006 and 2005

3.Consolidated Statements of Operations—Years Ended December 31, 2006, 2005, and 2004

4.Consolidated Statements of Shareholders’ Equity—Years Ended  December 31, 2006, 2005, and 2004

5.      Consolidated Statements of Cash Flows—Years Ended December 31, 2006, 2005, and 2004

6.Notes to Consolidated Financial Statements—Years Ended December 31, 2006, 2005, and 2004

(2)Financial Statement Schedules: All schedules have been omitted because the information is either not required or is set forth in the financial statements or the notes thereto.

(3)Exhibits: See the Index of Exhibits listed in Item 15(b) hereof for a list of those exhibits filed as part of this Form 10-K.

107

(b)          Index of Exhibits:

Exhibit Number		Description
3.1	Restated Certificate of Incorporation of Forest Oil Corporation dated October 14, 1993, incorporated herein by reference to Exhibit 3(i) to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 1993 (File No. 0-4597).
3.2	Certificate of Amendment of the Restated Certificate of Incorporation, dated as of July 20, 1995, incorporated herein by reference to Exhibit 3(i)(a) to Form 10-Q for Forest Oil Corporation for the quarter ended June 30, 1995 (File No. 0-4597).
3.3	Certificate of Amendment of the Certificate of Incorporation, dated as of July 26, 1995, incorporated herein by reference to Exhibit 3(i)(b) to Form 10-Q for Forest Oil Corporation for the quarter ended June 30, 1995 (File No. 0-4597).
3.4	Certificate of Amendment of the Certificate of Incorporation dated as of January 5, 1996, incorporated herein by reference to Exhibit 3(i)(c) to Forest Oil Corporation’s Registration Statement on Form S-2 (File No. 33-64949).
3.5	Certificate of Amendment of the Certificate of Incorporation dated as of December 7, 2000, incorporated herein by reference to Exhibit 3(i)(d) to Form 10-K for Forest Oil Corporation for the year ended December 31, 2000 (File No. 001-13515).
3.6	Bylaws of Forest Oil Corporation Restated as of February 14, 2001 as amended by Amendments No. 1, No. 2 and No. 3, incorporated herein by reference to Exhibit 3.1 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2004 (File No. 001- 13515).
4.1	Indenture dated as of June 21, 2001 between Forest Oil Corporation and State Street Bank and Trust Company, incorporated herein by reference to Exhibit 4.2 to Form 10-Q for Forest Oil Corporation for the quarter ended June 30, 2001 (File No. 001-13515).
4.2	Indenture dated December 7, 2001 between Forest Oil Corporation and State Street Bank and Trust Company, incorporated herein by reference to Exhibit 4.5 to Forest Oil Corporation’s Registration Statement on Form S-4 dated February 6, 2002 (File No. 333-82254).

108

Exhibit Number		Description
4.3	Indenture dated as of April 25, 2002 between Forest Oil Corporation and State Street Bank and Trust Company, incorporated herein by reference to Exhibit 4.6 to Forest Oil Corporation’s Registration Statement on Form S-4 dated June 11, 2002 (File No. 333-90220).
4.4	Registration Rights Agreement, dated as of July 10, 2000, by and between Forest Oil Corporation and the other signatories thereto, incorporated herein by reference to Exhibit 4.15 to Forest Oil Corporation Registration Statement on Form S-4, dated November 6, 2000 (File No. 333-49376).
4.5	First Amended and Restated Rights Agreement, dated as of October 17, 2003, between Forest Oil Corporation and Mellon Investor Services LLC, incorporated herein by reference to Exhibit 4.1 to Forest Oil’s Current Report on Form 8-K, dated October 17, 2003 (File No. 001-13515).
4.6	Mortgage, Deed of Trust, Assignment, Security Agreement, Financing Statement and Fixture Filing from Forest Oil Corporation to Robert C. Mertensotto, trustee, and Gregory P. Williams, trustee (Utah), and The Chase Manhattan Bank, as Global Administrative Agent, dated as of December 7, 2000, incorporated herein by reference to Exhibit 4.13 to Form 10-K for Forest Oil Corporation for the year ended December 31, 2000 (File No. 001-13515).
4.7	U.S. Credit Agreement—Amended and Restated Credit Agreement dated as of September 28, 2004, among Forest Oil Corporation, each of the lenders that is party thereto, Bank of America, N.A. and Citibank, N.A., as Co-Global Syndication Agents, BNP Paribas and Harris Nesbitt Financing, Inc., as Co-U.S. Documentation Agents, and JPMorgan Chase Bank, as Global Administrative Agent, incorporated herein by reference to Exhibit 10.1 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2004 (File No. 001-13515).
4.8	Canadian Credit Agreement—Amended and Restated Credit Agreement dated as of September 28, 2004, among Forest Oil Corporation, each of the lenders that is party thereto, Bank of America, N.A. and Citibank, N.A., as Co-Global Syndication Agents, BNP Paribas and Harris Nesbitt Financing, Inc., as Co-U.S. Documentation Agents, and JPMorgan Chase Bank, as Global Administrative Agent, incorporated herein by reference to Exhibit 10.2 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2004 (File No. 001-13515).
4.9	First Amendment to the 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 America, 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, incorporated herein by reference to Exhibit 4.1 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2005 (File No. 001-13515).
4.10	Second Amendment to the Amended and Restated Combined Credit Agreements, dated effective as of December 21, 2005, among Forest Oil Corporation, Canadian Forest Oil, each of the lenders that is party thereto, Bank of America, N.A. and Citibank, N.A., as Co-Global Syndication Agents, BNP Paribas and Harris Nesbitt Financing, Inc., as Co-U.S. Documentation Agents, and 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, incorporated herein by reference to Exhibit 4.11 to Form 10-K for Forest Oil Corporation for the year ended December 31, 2005 (File No. 001-13515).

109

Exhibit Number		Description
4.11	Third Amendment to the Amended and Restated Combined Credit Agreements, effective as of October 31, 2006, among Forest Oil Corporation, Canadian Forest Oil Ltd., each of the lenders that is party thereto, Bank of America, 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, incorporated herein by reference to Exhibit 10.1 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2006 (File No. 001-13515).
4.12†	First Lien Credit Agreement dated as of December 8, 2006, among Forest Alaska Operating LLC, Forest Alaska Holding LLC, each of the lenders that is party thereto, Credit Suisse, as Administrative Agent and Collateral Agent, Credit Suisse Securities (USA) LLC and J.P. Morgan Securities Inc., as Co-Lead Arrangers and Joint Bookrunners, and JPMorgan Chase Bank, N.A., as Syndication Agent.
4.13†	Second Lien Credit Agreement dated as of December 8, 2006, among Forest Alaska Operating LLC, Forest Alaska Holding LLC, each of the lenders that is party thereto, Credit Suisse, as Administrative Agent and Collateral Agent, Credit Suisse Securities (USA) LLC and J.P. Morgan Securities Inc., as Co-Lead Arrangers and Joint Bookrunners, and JPMorgan Chase Bank, N.A., as Syndication Agent.
10.1*	Forest Oil Corporation 1996 Stock Incentive Plan and Option Agreement, incorporated herein by reference to Exhibit 4.1 to Form S-8 for Forest Oil Corporation dated June 7, 1996 (File No. 0-4597).
10.2*	First Amendment to Forest Oil Corporation 1996 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.1 to Form 10-Q for Forest Oil Corporation for the quarter ended June 30, 2001 (File No. 001-13515).
10.3*	Second Amendment to Forest Oil Corporation 1996 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 to Form 10-Q for Forest Oil Corporation for the quarter ended June 30, 2001 (File No. 001-13515).
10.4*	Amendment No. 3 to Forest Oil Corporation 1996 Stock Incentive Plan dated December 6, 2005, incorporated herein by reference to Exhibit 10.4 to Form 10-K for Forest Oil Corporation for the year ended December 31, 2005 (File No. 001-13515).
10.5*	Forest Oil Corporation 2001 Stock Incentive Plan, incorporated herein by reference to Exhibit 4.1 to Form S-8 for Forest Oil Corporation dated June 6, 2001 (File No. 333-62408).
10.6*	Amendment No. 1 to Forest Oil Corporation’s 2001 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.1 to Form 10-Q for Forest Oil Corporation for the quarter ended June 30, 2003 (File No. 001-13515).
10.7*	Amendment No. 2 to Forest Oil Corporation’s 2001 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.1 to Form 10-Q for Forest Oil Corporation for the quarter ended March 31, 2004 (File No. 001-13515).
10.8*	Amendment No. 3 to Forest Oil Corporation 2001 Stock Incentive Plan, dated January 10, 2006, incorporated herein by reference to Exhibit 10.8 to Form 10-K for Forest Oil Corporation for the year ended December 31, 2005 (File No. 001-13515).
10.9*	Form of Employee Stock Option Agreement, incorporated herein by reference to Exhibit 4.2 to Form S-8 for Forest Oil Corporation dated June 6, 2001 (File No. 333-62408).
10.10*	Form of Non-Employee Director Stock Option Agreement, incorporated herein by reference to Exhibit 4.3 to Form S-8 for Forest Oil Corporation dated June 6, 2001 (File No. 333-62408).

110

Exhibit Number		Description
10.11*	Form of Restricted Stock Agreement, incorporated herein by reference to Exhibit 10.6 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2004 (File No. 001-13515).
10.12*	Form of Restricted Stock Agreement, incorporated herein by reference to Exhibit 10.12 to Form 10-K for Forest Oil Corporation for the year ended December 31, 2005 (File No. 001-13515).
10.13*	Form of Grandfathered SVP Severance Agreement, incorporated herein by reference to Exhibit 10.4 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2004 (File No. 001-13515).
10.14*	Form of SVP Severance Agreement, incorporated herein by reference to Exhibit 10.3 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2004 (File No. 001-13515).
10.15*	Form of VP Severance Agreement, incorporated herein by reference to Exhibit 10.5 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2004 (File No. 001-13515).
10.16*	Form of Amended Grandfathered SVP Severance Agreement, incorporated herein by reference to Exhibit 10.1 to Form 8-K dated June 10, 2005 (File No. 001-13515).
10.17*	Form of Amended SVP Severance Agreement, incorporated herein by reference to Exhibit 10.2 to Form 8-K dated June 10, 2005 (File No. 001- 13515).
10.18*	Form of Amended Grandfathered VP Severance Agreement, incorporated herein by reference to Exhibit 10.3 to Form 8-K dated June 10, 2005 (File No. 001-13515).
10.19*	Form of Amended VP Severance Agreement, incorporated herein by reference to Exhibit 10.4 to Form 8-K dated June 10, 2005 (File No. 001- 13515).
10.20*	Forest Oil Corporation Pension Trust Agreement dated as of January 1, 2002 by and between Forest Oil Corporation and the trustees named therein or their successors, incorporated herein by reference to Exhibit 10.1 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2002 (File No. 001-13515).
10.21*	First Amendment to Forest Oil Corporation Pension Trust Agreement as Amended and Restated January 1, 2002, effective as of May 10, 2005, incorporated herein by reference to Exhibit 10.1 to Form 10-Q for Forest Oil Corporation for the quarter ended June 30, 2005 (File No. 001-13515).
10.22*	Second Amendment to Forest Oil Corporation Pension Trust Agreement as Amended and Restated January 1, 2002, effective as of May 10, 2006, incorporated herein by reference to Exhibit 10.1 to Form 10-Q for Forest Oil Corporation for the quarter ended June 30, 2006 (File No. 001-13515).
10.23*	Forest Oil Corporation Amended and Restated Salary Deferral Compensation Plan, incorporated herein by reference to Exhibit 10.3 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2003 (File No. 001-13515).
10.24*	Forest Oil Corporation 2005 Salary Deferred Compensation Plan, effective as of December 31, 2004, incorporated herein by reference to Exhibit 10.24 to Form 10-K for Forest Oil Corporation for the year ended December 31, 2004 (File No. 001-13515).
10.25*	Forest Oil Corporation Amended and Restated 2005 Salary Deferred Compensation Plan, effective as of December 31, 2004, incorporated herein by reference to Exhibit 10.21 to Form 10-K for Forest Oil Corporation for the year ended December 31, 2005 (File No. 001-13515).

111

Exhibit Number		Description
10.26*	First Amendment to the Forest Oil Corporation Amended and Restated Salary Deferral Compensation Plan, effective as of December 31, 2005, incorporated herein by reference to Exhibit 10.22 to Form 10-K for Forest Oil Corporation for the year ended December 31, 2005 (File No. 001-13515).
10.27*	Forest Oil Corporation Change of Control Deferred Compensation Plan, incorporated herein by reference to Exhibit 10.18 to Form 10-K for Forest Oil Corporation for the year ended December 31, 2002 (File No. 001-13515).
10.28*	Forest Oil Corporation Executive Deferred Compensation Plan, effective as of July 1, 1994, incorporated herein by reference to Exhibit 10.24 to Form 10-K for Forest Oil Corporation for the year ended December 31, 2003 (File No. 001-13515).
10.29*	First Amendment to Forest Oil Corporation Executive Deferred Compensation Plan dated November 13, 2002, incorporated herein by reference to Exhibit 10.20 to Form 10-K for Forest Oil Corporation for the year ended December 31, 2002 (File No. 001-13515).
10.30*	Second Amendment to Forest Oil Corporation Executive Deferred Compensation Plan dated February 3, 2003, incorporated herein by reference to Exhibit 10.21 to Form 10-K for Forest Oil Corporation for the year ended December 31, 2002 (File No. 001-13515).
10.31*	Third Amendment to Forest Oil Corporation Executive Deferred Compensation Plan dated December 20, 2005, incorporated herein by reference to Exhibit 10.27 to Form 10-K for Forest Oil Corporation for the year ended December 31, 2005 (File No. 001-13515).
10.32*†	Forest Oil Corporation Executive Deferred Compensation Plan as Amended and Restated, effective as of January 1, 2005.
10.33*	Forest Oil Corporation 2006 Annual Incentive Plan, incorporated herein by reference to Exhibit 10.1 to Form 8-K for Forest Oil Corporation dated May 11, 2006 (File No. 001-13515).
10.34	Agreement and Plan of Merger by and among Forest Oil Corporation, MJCO Corporation and The Houston Exploration Company dated as of January 7, 2007, incorporated herein by reference to Exhibit 2.1 to Form 8-K for Forest Oil Corporation dated January 7, 2007 (File No. 001-13515).
10.35	Voting Agreement dated as of January 8, 2007, by and among Forest Oil Corporation, MJCO Corporation and JANA Master Fund, Ltd., and JANA Piranha Master Fund, Ltd., incorporated herein by reference to Exhibit 2.2 to Form 8-K for Forest Oil Corporation dated January 7, 2007 (File No. 001-13515).
10.36	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., incorporated herein by reference to Exhibit 10.1 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2005 (No. 001-13515).
10.37	Tax Sharing Agreement between Forest Oil Corporation, SML Wellhead Corporation and Mariner Energy, Inc., dated as of September 9, 2005, incorporated herein by reference to Exhibit 10.2 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2005 (File No. 001-13515).
10.38	Transition Services Agreement, dated as of September 9, 2005, between Forest Oil Corporation and SML Wellhead Corporation, incorporated herein by reference to Exhibit 10.3 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2005 (File No. 001-13515).
10.39	Employee Benefits Agreement, dated as of September 9, 2005, between Forest Oil Corporation and SML Wellhead Corporation, incorporated herein by reference to Exhibit 10.4 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2005 (File No. 001-13515).

112

Exhibit Number		Description
10.40	Distribution Agreement, dated as of September 9, 2005, between Forest Oil Corporation and SML Wellhead Corporation, incorporated herein by reference to Exhibit 10.5 to Form 10-Q for Forest Oil Corporation for the quarter ended September 30, 2005 (File No. 001-13515).
21.1†	List of Subsidiaries of Registrant.
23.1†	Consent of Ernst & Young LLP.
23.2†	Consent of KPMG LLP.
23.3†	Consent of DeGolyer and MacNaughton.
24.1†	Powers of Attorney (included on the signature pages hereof).
31.1†	Certification of Principal Executive Officer of Forest Oil Corporation as required by Rule 13a-14(a) of the Securities Act of 1934.
31.2†	Certification of Principal Financial Officer of Forest Oil Corporation as required by Rule 13a-14(a) of the Securities Act of 1934.
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.

*              Contract or compensatory plan or arrangement in which directors and/or officers participate.

**           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.

†              Indicates Exhibits filed with this Form 10-K.

113

SIGNATURES

Pursuant to the requirements of Section 13 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.

Date: February 28, 2007	FOREST OIL CORPORATION (Registrant)
	By:	/s/ H. CRAIG CLARK
		H. Craig Clark President and Chief Executive Officer

Power of Attorney

The officers and directors of Forest Oil Corporation, whose signatures appear below, hereby constitute and appoint H. Craig Clark, David H. Keyte, Cyrus D. Marter IV, and Victor A. Wind and each of them (with full power to each of them to act alone), the true and lawful attorney-in-fact to sign and execute, on behalf of the undersigned, any amendment(s) to this Form 10-K Annual Report for the year ended December 31, 2006, and any instrument or document filed as part of, as an exhibit to or in connection with any amendment, and each of the undersigned does hereby ratify and confirm as his own act and deed all that said attorneys shall do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signatures	Title	Date
/s/ H. CRAIG CLARK	President and Chief Executive Officer and Director (Principal Executive Officer)	February 28, 2007
H. Craig Clark
/s/ DAVID H. KEYTE	Executive Vice President and Chief Financial Officer (Principal Financial Officer)	February 28, 2007
David H. Keyte
/s/ VICTOR A. WIND	Corporate Controller (Principal Accounting Officer)	February 28, 2007
Victor A. Wind
/s/ FORREST E. HOGLUND	Chairman of the Board of Directors	February 28, 2007
Forrest E. Hoglund
s/ WILLIAM L. BRITTON	Director	February 28, 2007
William L. Britton
/s/ LOREN K. CARROLL	Director	February 28, 2007
Loren K. Carroll
/s/ CORTLANDT S. DIETLER	Director	February 28, 2007
Cortlandt S. Dietler
/s/ DOD. A. FRASER	Director	February 28, 2007
Dod. A. Fraser
/s/ JAMES H. LEE	Director	February 28, 2007
James H. Lee
/s/ JAMES D. LIGHTNER	Director	February 28, 2007
James D. Lightner
/s/ PATRICK R. MCDONALD	Director	February 28, 2007
Patrick R. McDonald

114

Index to Exhibits

Exhibit Number	Description
4.12	First Lien Credit Agreement dated as of December 8, 2006, among Forest Alaska Operating LLC, Forest Alaska Holding LLC, each of the lenders that is party thereto, Credit Suisse, as Administrative Agent and Collateral Agent, Credit Suisse Securities (USA) LLC and J.P. Morgan Securities Inc., as Co-Lead Arrangers and Joint Bookrunners, and JPMorgan Chase Bank, N.A., as Syndication Agent.
4.13	Second Lien Credit Agreement dated as of December 8, 2006, among Forest Alaska Operating LLC, Forest Alaska Holding LLC, each of the lenders that is party thereto, Credit Suisse, as Administrative Agent and Collateral Agent, Credit Suisse Securities (USA) LLC and J.P. Morgan Securities Inc., as Co-Lead Arrangers and Joint Bookrunners, and JPMorgan Chase Bank, N.A., as Syndication Agent.
10.32	Forest Oil Corporation Executive Deferred Compensation Plan as Amended and Restated, effective as of January 1, 2005.
21.1	List of Subsidiaries of Registrant.
23.1	Consent of Ernst & Young LLP.
23.2	Consent of KPMG LLP.
23.3	Consent of DeGolyer and MacNaughton.
31.1	Certification of Principal Executive Officer of Forest Oil Corporation as required by Rule 13a-14(a) of the Securities Act of 1934.
31.2	Certification of Principal Financial Officer of Forest Oil Corporation as required by Rule 13a-14(a) of the Securities Act of 1934.
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.

*              Furnished herewith.

115

EX-4.12

Exhibit 4.12

FIRST LIEN CREDIT AGREEMENT

dated as of December 8, 2006,

among

FOREST ALASKA OPERATING LLC,
as the Borrower,

FOREST ALASKA HOLDING LLC,
as Holdings,

the LENDERS from time to time party hereto

and

CREDIT SUISSE,
as Administrative Agent and Collateral Agent

CREDIT SUISSE SECURITIES (USA) LLC

and

J.P. MORGAN SECURITIES INC.,
as Co-Lead Arrangers and Joint Bookrunners

JPMORGAN CHASE BANK, N.A.,
as Syndication Agent

Table of Contents

	Page
ARTICLE I
Definitions
SECTION 1.01. Defined Terms	1
SECTION 1.02. Terms Generally	28
SECTION 1.03. Classification of Loans and Borrowings	29
ARTICLE II
The Credits
SECTION 2.01. Commitments	29
SECTION 2.02. Loans	29
SECTION 2.03. Evidence of Debt; Repayment of Loans	30
SECTION 2.04. Fees	31
SECTION 2.05. Interest on Loans	31
SECTION 2.06. Default Interest	31
SECTION 2.07. Alternate Rate of Interest	32
SECTION 2.08. Termination and Reduction of Commitments	32
SECTION 2.09. Conversion and Continuation of Borrowings	32
SECTION 2.10. Repayment of Borrowings	34
SECTION 2.11. Optional Prepayment; Prepayment Premium	34
SECTION 2.12. Mandatory Prepayments	35
SECTION 2.13. Reserve Requirements; Change in Circumstances	37
SECTION 2.14. Change in Legality	38
SECTION 2.15. Indemnity	38
SECTION 2.16. Pro Rata Treatment	39
SECTION 2.17. Sharing of Setoffs	39
SECTION 2.18. Payments	40
SECTION 2.19. Taxes	40
SECTION 2.20. Assignment of Commitments Under Certain Circumstances; Duty to Mitigate	42
SECTION 2.21. Change in Control Put	43
ARTICLE III
Representations and Warranties
SECTION 3.01. Organization; Powers	44
SECTION 3.02. Authorization	44
SECTION 3.03. Enforceability	44

i

	Page
SECTION 3.04. Governmental Approvals	45
SECTION 3.05. Financial Statements; Absence of Undisclosed Liabilities; Reserve Reports	45
SECTION 3.06. No Material Adverse Change	45
SECTION 3.07. Title to Properties; Possession Under Leases	46
SECTION 3.08. Subsidiaries	46
SECTION 3.09. Litigation; Compliance with Laws	46
SECTION 3.10. Agreements	47
SECTION 3.11. Federal Reserve Regulations	47
SECTION 3.12. Investment Company Act	47
SECTION 3.13. Use of Proceeds	47
SECTION 3.14. Tax Returns	47
SECTION 3.15. No Material Misstatements	47
SECTION 3.16. Employee Benefit Plans	48
SECTION 3.17. Environmental Matters	48
SECTION 3.18. Insurance	48
SECTION 3.19. Security Documents	48
SECTION 3.20. Location of Real Property and Leased Premises	49
SECTION 3.21. Labor Matters	50
SECTION 3.22. Solvency	50
SECTION 3.23. Sanctioned Persons	50
SECTION 3.24. Gas Imbalances; Prepayments	51
ARTICLE IV
Conditions of Lending
ARTICLE V
Affirmative Covenants
SECTION 5.01. Existence; Compliance with Laws; Businesses and Properties	54
SECTION 5.02. Insurance	54
SECTION 5.03. Obligations and Taxes	55
SECTION 5.04. Financial Statements, Reports, etc	56
SECTION 5.05. Litigation and Other Notices	58
SECTION 5.06. Information Regarding Collateral	58
SECTION 5.07. Maintaining Records; Access to Properties and Inspections	59
SECTION 5.08. Use of Proceeds	59
SECTION 5.09. Employee Benefits	59
SECTION 5.10. Compliance with Environmental Laws	60
SECTION 5.11. Preparation of Environmental Reports	60
SECTION 5.12. Further Assurances	60
SECTION 5.13. Compliance with Leases	61

ii

	Page
SECTION 5.14. Interest Rate Protection Agreements	61
SECTION 5.15. Commodity Price Hedging Program	61
SECTION 5.16. Delivery of Reserve Reports	61
SECTION 5.17. Title Information	63
ARTICLE VI
Negative Covenants
SECTION 6.01. Indebtedness	64
SECTION 6.02. Liens	65
SECTION 6.03. Sale and Lease-Back Transactions	66
SECTION 6.04. Investments, Loans and Advances	66
SECTION 6.05. Mergers, Consolidations, Sales of Assets and Acquisitions	68
SECTION 6.06. Restricted Payments; Payment of Certain Indebtedness; Restrictive Agreements	68
SECTION 6.07. Transactions with Affiliates	70
SECTION 6.08. Business of Holdings, Borrower and Subsidiaries; No Foreign Subsidiaries	70
SECTION 6.09. Amendment of Certain Indebtedness and Agreements	70
SECTION 6.10. Interest Coverage Ratio	70
SECTION 6.11. Asset Coverage Ratios	71
SECTION 6.12. Leverage Ratio	71
SECTION 6.13. Capital Expenditures	72
SECTION 6.14. Fiscal Year	73
SECTION 6.15. Certain Equity Interests	73
SECTION 6.16. Hedging Agreements	73
SECTION 6.17. Take-or-Pay or Other Prepayments	73
ARTICLE VII
Events of Default
ARTICLE VIII
The Agent
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices	79
SECTION 9.02. Survival of Agreement	79
SECTION 9.03. Binding Effect	80

iii

	Page
SECTION 9.04. Successors and Assigns	80
SECTION 9.05. Expenses; Indemnity	83
SECTION 9.06. Right of Setoff	85
SECTION 9.07. Applicable Law	85
SECTION 9.08. Waivers; Amendment	85
SECTION 9.09. Interest Rate Limitation	86
SECTION 9.10. Entire Agreement	86
SECTION 9.11. WAIVER OF JURY TRIAL	87
SECTION 9.12. Severability	87
SECTION 9.13. Counterparts	87
SECTION 9.14. Headings	87
SECTION 9.15. Jurisdiction; Consent to Service of Process	87
SECTION 9.16. Confidentiality	88
SECTION 9.17. Termination or Release	89
SECTION 9.18. USA PATRIOT Act Notice	89
SECTION 9.19. No Fiduciary Relationship	89
SECTION 9.20. Intercreditor Agreement	90
SECTION 9.21. Security Documents	90
SECTION 9.22. Parent Liability	90

iv

Schedules
Schedule 1.01(a)	Existing Hedging Agreements
Schedule 1.01(b)	Closing Date Mortgaged Real Property
Schedule 1.01(c)	Qualified Purchaser
Schedule 2.01	Lenders and Commitments
Schedule 3.08	Subsidiaries
Schedule 3.09	Litigation
Schedule 3.17	Environmental Matters
Schedule 3.19(a)	UCC Filing Offices
Schedule 3.19(c)	Mortgage Filing Offices
Schedule 3.20(a)	Owned Real Property
Schedule 3.20(b)	Leased Real Property
Schedule 3.24	Gas Imbalances
Schedule 6.01	Existing Indebtedness
Schedule 6.02	Existing Liens
Exhibits
Exhibit A	Form of Administrative Questionnaire
Exhibit B	Form of Assignment and Acceptance
Exhibit C	Form of Guarantee and Collateral Agreement
Exhibit D	Form of Intercreditor Agreement
Exhibit E	Form of Mortgage
Exhibit F	Form of Parent Undertaking
Exhibit G	Form of Opinion of Vinson & Elkins LLP
Exhibit H	Form of Solvency Certificate
Exhibit I	Form of Compliance Certificate
Exhibit J	Form of Engineer’s Certificate
Exhibit K	Form of Responsible Officer’s Certificate
Exhibit L	Form of Exemption Certificate

v

FIRST LIEN CREDIT AGREEMENT dated as of December 8, 2006 (this “Agreement”), among FOREST ALASKA OPERATING LLC, a limited liability company organized under the laws of the State of Delaware (the “Borrower”); FOREST ALASKA HOLDING LLC, a limited liability company organized under the laws of the State of Delaware (“Holdings”); the LENDERS from time to time party hereto; JPMORGAN CHASE BANK, N.A., as Syndication Agent; and CREDIT SUISSE, as Administrative Agent and Collateral Agent.

The Borrower has requested the Lenders to extend credit in the form of the Loans (such term and each other capitalized term used but not defined in this recital having the meaning given it in Article I) on the Effective Date in an aggregate principal amount not in excess of $250,000,000.  The Borrower has further requested the Second Lien Lenders to extend credit in the form of the Second Lien Loans on the Effective Date in an aggregate principal amount not in excess of $125,000,000.  On the Effective Date, (a) $350,000,000 of the proceeds of the Loans and the Second Lien Loans will be used to fund a distribution (the “Distribution”) by the Borrower to Holdings and by Holdings to the Parent and (b) $25,000,000 of the proceeds of the Loans and the Second Lien Loans will be retained by the Borrower to be used for general corporate purposes of the Borrower and the Subsidiaries, including the payment of fees and expenses related to the Transactions.

The Lenders are willing to extend such credit to the Borrower on the terms and subject to the conditions set forth herein.  Accordingly, the parties hereto agree as follows:

ARTICLE I

Definitions

SECTION 1.01.  Defined Terms.  As used in this Agreement, the following terms shall have the meanings specified below:

“1P Capital Expenditures” shall mean, without duplication, Capital Expenditures made with respect to (a) proved oil and gas reserves and (b) assets described in clause (g) of the definition of “Oil and Gas Properties” used in connection with the operation, work or development of proved oil and gas reserves (it being agreed that Capital Expenditures in respect of assets described in such clause (g) that are used in connection with both proved and probable oil and gas reserves shall be allocated by the Borrower between 1P Capital Expenditures and 2P Capital Expenditures in a reasonable manner); provided that, for purposes of this definition, the parenthetical in clause (g) of the definition of “Oil and Gas Properties” shall be disregarded.

“2P Capital Expenditures” shall mean, without duplication, Capital Expenditures made with respect to (a) probable oil and gas reserves and (b) assets described in clause (g) of the definition of “Oil and Gas Properties” used in connection with the operation,

work or development of probable oil and gas reserves (it being agreed that Capital Expenditures in respect of assets described in such clause (g) that are used in connection with both proved and probable oil and gas reserve, shall be allocated by the Borrower between 1P Capital Expenditures and 2P Capital Expenditures in a reasonable manner); provided that, for purposes of this definition, the parenthetical in clause (g) of the definition of “Oil and Gas Properties” shall be disregarded.

“4Q06 Consolidated EBITDAX” shall mean the amount equal to the sum of (a) Consolidated EBITDAX for the period from and including November 1, 2006 through and including December 31, 2006 plus (b) $1,874,000.

“4Q06 Consolidated Interest Expense” shall mean the amount equal to the product of (a) Consolidated Interest Expense for the period from and including the Closing Date through and including December 31, 2006 and (b) 4.00.

“ABR”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.

“Account Control Agreement” shall mean an account control agreement, in form and substance reasonably satisfactory to the Agent and the Borrower, designating the Agent as secured party.

“Adjusted LIBO Rate” shall mean, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum equal to the product of (a) the LIBO Rate in effect for such Interest Period and (b) Statutory Reserves.

“Administrative Agent Fee Letter” shall mean the Administrative Agent Fee Letter dated as of November 1, 2006, between the Borrower, the Agent and Credit Suisse Securities (USA) LLC.

“Administrative Questionnaire” shall mean an Administrative Questionnaire in the form of Exhibit A, or such other form as may be supplied from time to time by the Agent.

“Affiliate” shall mean, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified; provided, however, that, for purposes of Section 6.07, the term “Affiliate” shall also include any person that directly or indirectly owns 10% or more of any class of Equity Interests of the person specified or that is an officer or director of the person specified.

“Agent” shall mean Credit Suisse, in its capacity as administrative agent for the Lenders and collateral agent for the Secured Parties.

“Agreement” shall have the meaning assigned to such term in the introductory paragraph.

2

“Alternate Base Rate” shall mean, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%.  If the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Agent to obtain sufficient quotations in accordance with the terms of the definition thereof, the Alternate Base Rate shall be determined without regard to clause (b) of the preceding sentence until the circumstances giving rise to such inability no longer exist.  Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, as the case may be.

“Annualized Consolidated Interest Expense” shall mean (a) for the period ended on March 31, 2007 composed of four consecutive fiscal quarters, 200% of the sum of (i) 4Q06 Consolidated Interest Expense plus (ii) the Consolidated Interest Expense for the fiscal quarter ended March 31, 2007, (b) for the period ended on June 30, 2007 composed of four consecutive fiscal quarters, 133.33% of the sum of (i) 4Q06 Consolidated Interest Expense plus (ii) the Consolidated Interest Expense for the period ended on June 30, 2007 composed of two consecutive fiscal quarters and (c) for the period ended on September 30, 2007 composed of four consecutive fiscal quarters, 100% of the sum of (i) 4Q06 Consolidated Interest Expense plus (ii) Consolidated Interest Expense for the period ended on September 30, 2007 composed of three fiscal quarters.

“Anticipated Production” shall mean, for any month, the reasonably anticipated production of crude oil and natural gas (calculated separately) from the Borrower’s and the Subsidiaries’ proved developed producing reserves.

“Applicable Percentage” shall mean, for any day (a) with respect to any Eurodollar Loan, 3.50% per annum and (b) with respect to any ABR Loan, 2.50% per annum.

“Asset Sale” shall mean the sale, transfer or other disposition (by way of merger, casualty, condemnation or otherwise) by Holdings, the Borrower or any of the Subsidiaries to any person other than the Borrower or any Subsidiary Loan Party of (a) any Equity Interests in any of the Subsidiaries (including any such sale by the issuer of such Equity Interests but excluding directors’ qualifying shares) or (b) any other assets of Holdings, the Borrower or any of the Subsidiaries (other than (i) inventory (including Hydrocarbons), damaged, obsolete or worn out assets, scrap and Permitted Investments, in each case disposed of in the ordinary course of business and (ii) any sale, transfer or other disposition that, together with all related sales, transfers or other dispositions, has a value not in excess of $2,500,000).

“Assignment and Acceptance” shall mean an assignment and acceptance entered into by a Lender and an assignee, and accepted by the Agent, in the form of Exhibit B or such other form as shall be approved by the Agent.

3

“Available Cash” shall mean all cash and Permitted Investments of Holdings and its subsidiaries.

“BLM Leases” shall mean leases in respect of Real Property located on Federal lands and over which the the Federal Bureau of Land Management has jurisdiction.

“BLM Sub-Collateral Agent” shall have the meaning assigned to such term in Article VIII.

“Board” shall mean the Board of Governors of the Federal Reserve System of the United States of America.

“Borrower” shall have the meaning assigned to such term in the introductory paragraph to this Agreement.

“Borrowing” shall mean Loans of the same Type made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect.

“Business” means the oil and gas interests in the Cook Inlet region of Alaska contributed by Holdings to the Borrower pursuant to the Master Conveyance, as described in the schedules thereto.

“Business Day” shall mean any day other than a Saturday, Sunday or day on which banks in New York City are authorized or required by law to close; provided, however, that when used in connection with a Eurodollar Loan, the term “Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.

“Capital Expenditures” shall mean, for any period, (a) the additions to property, plant and equipment and other capital expenditures (including maintenance capital expenditures) of Holdings and its subsidiaries that are (or should be) set forth in a consolidated statement of cash flows of Holdings for such period prepared in accordance with GAAP and (b) Capital Lease Obligations or Synthetic Lease Obligations incurred by Holdings and its subsidiaries during such period, but excluding in each case any such expenditure made to restore, replace or rebuild property to the condition of such property immediately prior to any damage, loss, destruction or condemnation of such property, to the extent such expenditure is made with insurance proceeds, condemnation awards or damage recovery proceeds relating to any such damage, loss, destruction or condemnation.

“Capital Lease Obligations” of any person shall mean the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

4

A “Change in Control” shall be deemed to have occurred if (a) at any time (i) the Parent or one or more Non-Financial Qualified Purchasers shall not beneficially own, directly or indirectly, at least 75% of the issued and outstanding Equity Interests in Holdings and (ii) one or more Financial Qualified Purchasers shall fail beneficially to own, directly or indirectly, at least 51% of the issued and outstanding Equity Interests in Holdings, (b) at any time Holdings shall fail to directly own, beneficially and of record, 100% of the issued and outstanding Equity Interests in the Borrower, (c) any change in control (or similar event, however denominated) with respect to Holdings, the Borrower or any Subsidiary shall occur under and as defined in any indenture or agreement in respect of Material Indebtedness to which Holdings, the Borrower or any Subsidiary is a party or (d) at the time of any sale, transfer or disposition of Equity Interests in Holdings (other than to an Affiliate of the seller thereof), the aggregate principal amount of outstanding Loans and Second Lien Loans as of such time shall exceed 70% of the Enterprise Value as of such time.

“Change in Law” shall mean (a) the adoption of any law, rule or regulation after the Closing Date, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the Closing Date or (c) compliance by any Lender (or, for purposes of Section 2.13, by any lending office of such Lender or by such Lender’s holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the Closing Date.

“Closing Date” shall mean the date of this Agreement.

“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

“Collateral” shall mean all the “Collateral”, as defined in any Security Document and shall also include the Mortgaged Properties.

“Collateral Agreement” shall mean the First Lien Guarantee and Collateral Agreement, substantially in the form of Exhibit C, among the Borrower, Holdings, the Subsidiaries party thereto and the Agent for the benefit of the Secured Parties.

“Collateral and Guarantee Requirement” means, at any time, the requirement that:

(a) the Agent shall have received from each of Holdings, the Borrower and the Subsidiaries either (i) a counterpart of the Collateral Agreement duly executed and delivered on behalf of such person or (ii) in the case of any person that becomes a Subsidiary after the Effective Date, a supplement to the Collateral Agreement, in the form specified therein, duly executed and delivered on behalf of such person within the period required by Section 5.12;

(b) subject to Section Section 4.01(d)(i)(C) of the Collateral Agreement, all outstanding Equity Interests in the Borrower and each Domestic Subsidiary and all other Equity Interests owned by or on behalf of any Loan Party shall have been pledged

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pursuant to the Collateral Agreement and the Agent shall have received (to the extent such Equity Interests are certificated securities) certificates or other instruments representing all such Equity Interests, together with undated stock powers or other instruments of transfer with respect thereto endorsed in blank;

(c) all Indebtedness of Holdings, the Borrower and each Subsidiary that is owing to any Loan Party shall have been pledged pursuant to the Collateral Agreement and, to the extent such Indebtedness is evidenced by a promissory note, the Agent shall have received all such promissory notes, together with undated instruments of transfer with respect thereto endorsed in blank;

(d) the Agent shall have received (i) counterparts of a Mortgage with respect to each Mortgaged Property duly executed and delivered by the record owner of such Mortgaged Property, (ii) tax Lien searches at the applicable State’s central filing system and Uniform Commercial Code searches in form and substance reasonably satisfactory to the Agent, (iii) opinions of counsel in the jurisdictions in which the Mortgaged Properties owned by the Borrower or any Subsidiary on the Closing Date are located, addressed to the Agent and each Lender, with respect to title to Leases included in the Oil and Gas Properties on the Closing Date that represent 95% of the Proved PV-10% and 55% of the Probable PV-10% (as determined by reference to the Reserve Report as of June 30, 2006 delivered to the Agent prior to the Closing Date), in form and substance reasonably satisfactory to the Agent, (iv) on the Closing Date and on the date of any acquisition of a Mortgaged Property, opinions of counsel in the jurisdictions in which such Mortgaged Property is located, addressed to the Agent and each Lender, with respect to the enforceability and validity of the Mortgages thereon and any related fixture filings, in form and substance reasonably satisfactory to the Agent and (v) all such other items as shall be reasonably necessary in the opinion of counsel to the Agent to create and evidence a valid and perfected first priority mortgage Lien and provide appropriate notice and filing of such Lien on such Mortgaged Property, subject only to Liens permitted to Section 6.02;

(e) at all times after the 30th day following the Closing Date and thereafter, the Agent shall have received from each applicable Loan Party and each applicable depository bank or securities intermediary, an executed counterpart of an Account Control Agreement in respect of each deposit account and securities account of any Loan Party that is required to be subject to an Account Control Agreement by Section 4.04(b) of the Collateral Agreement;

(f) all documents and instruments, including Uniform Commercial Code financing statements and filings with the MMS, required by law or reasonably requested by the Agent to be filed, registered or recorded to create the Liens intended to be created by the Security Documents and perfect such Liens to the extent required by, and with the priority required by, the Security Documents, shall have been filed, registered or recorded or delivered to the Agent for filing, registration or recording, and all filing, recording and similar fees and Taxes payable in connection with the foregoing shall have been paid or provided for in a manner reasonably satisfactory to the Agent; and

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(g) except for approvals identified in the Parent Undertaking as approvals to be obtained after the Effective Date, each Loan Party shall have obtained all consents and approvals required to be obtained by it in connection with the execution and delivery of all Security Documents to which it is a party, the performance of its obligations thereunder and the granting by it of the Liens thereunder;

provided that the foregoing definition shall not require the creation or perfection of pledges of or security interests in, or the obtaining of legal opinions with respect to, particular assets of the Loan Parties if and for so long as the Agent, in consultation with the Borrower, determines that the cost of creating or perfecting such pledges or security interests in such assets or obtaining legal opinions in respect of such assets shall be excessive in view of the benefits to be obtained by the Lenders therefrom.  The Agent may grant extensions of time for the perfection of security interests in or the obtaining of legal opinions with respect to particular assets where it determines that perfection cannot be accomplished, or opinions cannot be obtained, without undue effort or expense by the time or times at which it would otherwise be required by the Loan Documents.

“Commitment” shall mean, with respect to each Lender, the commitment of such Lender to make Loans hereunder as set forth on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender assumed its Commitment, as applicable, as the same may be (a) reduced on or prior to the Effective Date pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04.

“Confidential Information Memorandum” shall mean the Confidential Information Memorandum of the Borrower dated November 14, 2006.

“Consolidated EBITDAX” shall mean, for any period, (a) Consolidated Net Income of Holdings and its subsidiaries for such period plus (b) the sum of Consolidated Interest Expense, depreciation, depletion expense, amortization expense, income taxes, exploration expense and other non-cash charges and expenses (except those excluded in determining Consolidated Net Income) incurred by Holdings and its subsidiaries during such period; provided, however, that, except for purposes of determining Excess Cash Flow, Consolidated EBITDAX for any period shall be calculated on a pro forma basis for any divestitures or acquisitions consummated during such period and, if any such acquisition or divestiture has a fair market value in excess of $5,000,000, as if such acquisition or divestiture had occurred on the first day of such period).  Notwithstanding any other provision in this Agreement, “Consolidated EBITDAX” for the fiscal quarter ended on June 30, 2006, September 30, 2006 and December 31, 2006 shall be deemed to be $23,733,000, $18,106,000 and 4Q06 Consolidated EBITDAX.

“Consolidated Interest Expense” shall mean, for any period, (a) the interest expense (including imputed interest expense in respect of Capital Lease Obligations and Synthetic Lease Obligations) of Holdings and its subsidiaries for such period, determined on a consolidated basis in accordance with GAAP plus (b) any interest accrued during such period in respect of Indebtedness of Holdings or any of its subsidiaries that is required to be capitalized rather than included in consolidated interest expense for such

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period in accordance with GAAP plus (c) the amount of dividends paid to any person (other than Holdings or any of its subsidiaries) during such period on preferred stock in Holdings, the Borrower or any of their Subsidiaries, determined on a consolidated basis in accordance with GAAP.  For purposes of the foregoing, interest expense shall be determined after giving effect to any net payments made or received by the Borrower or any Subsidiary with respect to interest rate Hedging Agreements.  Notwithstanding any other provision in this Agreement, “Consolidated Interest Expense” for any period of four fiscal quarters ended on or prior to September 30, 2007 shall be deemed to be Annualized Consolidated Interest Expense.

“Consolidated Net Income” shall mean, for any period, the net income or loss of Holdings and its subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income of any Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary in the amount of such income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, statute, rule or governmental regulation applicable to such Subsidiary, (b) the income of any person in which any other person (other than Holdings, the Borrower or a wholly owned Subsidiary or any director holding qualifying shares in accordance with applicable law) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to Holdings, the Borrower or a wholly owned Subsidiary by such person during such period, (c) any gains or losses attributable to sales of assets not in the ordinary course of business, (d) any extraordinary or non-recurring non-cash gains or non-cash losses (including any non-cash gains or non-cash losses related to any Hedging Agreements) recorded by Holdings and its Subsidiaries during such period or (e) any non-cash ceiling-test write downs and/or impairments.

“Contracts” shall mean all contracts, agreements, operating agreements, farm-out or farm-in agreements, sharing agreements, mineral purchase agreements, contracts for the purchase, exchange, transportation, processing or sale of Hydrocarbons, rights-of-way, easements, surface leases, equipment leases, permits, franchises, licenses, pooling or unitization agreements, and unit or pooling designations and orders now or hereafter affecting any of the Oil and Gas Properties, Operating Equipment, Fixture Operating Equipment or Hydrocarbons now or hereafter covered hereby, or which are useful or appropriate in drilling for, producing, treating, handling, storing, transporting or marketing oil, gas or other minerals produced from any of the Oil and Gas Properties, and all as such contracts and agreements as they may be amended, supplemented or otherwise modified from time to time.

“Control” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms “Controlling” and “Controlled” shall have meanings correlative thereto.

“Current Assets” shall mean, at any time, the consolidated current assets (other than cash, Permitted Investments and FAS 133 assets) of Holdings and its subsidiaries in accordance with GAAP.  For purposes of calculating Excess Cash Flow, Current Assets

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shall be calculated without regard to any changes in Current Assets as a result of (a) any reclassification in accordance with GAAP of assets or liabilities, as applicable, between current and noncurrent or (b) the effects of purchase accounting.

“Current Liabilities” shall mean, at any time, the consolidated current liabilities of Holdings and its subsidiaries at such time (excluding, without duplication, the current portion of any long-term Indebtedness not yet due and FAS 133 liabilities) in accordance with GAAP.  For purposes of calculating Excess Cash Flow, Current Liabilities shall be calculated without regard to any changes in Current Liabilities as a result of (a) any reclassification in accordance with GAAP of assets or liabilities, as applicable, between current and noncurrent or (b) the effects of purchase accounting.

“Declined Amounts” shall have the meaning assigned to such term in Section 2.12(g).

“Default” shall mean any event or condition which upon notice, lapse of time or both would constitute an Event of Default.

“Disqualified Stock” shall mean any Equity Interest that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, (a) matures (excluding any maturity as the result of an optional redemption by the issuer thereof) or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, or requires the payment of any cash dividend or any other scheduled payment constituting a return of capital, in each case at any time on or prior to the first anniversary of the Maturity Date or (b) is convertible into or exchangeable (unless at the sole option of the issuer thereof) for (i) debt securities or (ii) any Equity Interest referred to in clause (a) above, in each case at any time prior to the first anniversary of the Maturity Date.

“Distribution” shall have the meaning assigned to such term in the recitals to this Agreement.

“dollars” or “$” shall mean lawful money of the United States of America.

“Domestic Subsidiary” shall mean a Subsidiary incorporated or organized under the laws of the United States of America, any State thereof or the District of Columbia.

“Effective Date” shall mean the first date on which the conditions specified in Article IV are satisfied (or waived in accordance with Section 9.08).

“Enterprise Value” shall mean, as of any date of determination, the sum of (i) purchase price paid for any Equity Interests sold, transferred or disposed on such day multiplied by the fraction the numerator of which 100% and the denominator of which is the percentage of all issued and outstanding Equity Interests in Holdings on such day represented by such sold, transferred or disposed Equity Interests plus (ii) the aggregate principal amount of Indebtedness of Holdings and its subsidiaries, determined on a consolidated basis, as of such time.

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“Environmental Laws” shall mean all former, current and future Federal, state, local and foreign laws (including common law), treaties, regulations, rules, ordinances, codes, decrees, judgments, directives, orders (including consent orders), and agreements in each case, relating to protection of the environment, natural resources, human health and safety or the presence, Release of, or exposure to, Hazardous Materials, or the generation, manufacture, processing, distribution, use, treatment, storage, transport, recycling or handling of, or the arrangement for such activities with respect to, Hazardous Materials.

“Environmental Liability” shall mean all liabilities, obligations, damages, losses, claims, actions, suits, judgments, orders, fines, penalties, fees, expenses and costs (including administrative oversight costs, natural resource damages and remediation costs), whether contingent or otherwise, arising out of or relating to (a) compliance or non-compliance with any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the Release of any Hazardous Materials or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.

“Equity Interests” shall mean shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity interests in any person, and any option, warrant or other right entitling the holder thereof to purchase or otherwise acquire any such equity interest.

“Equity Issuance” shall mean any issuance or sale by Holdings or the Borrower of any Equity Interests in Holdings or the Borrower, as applicable, except in each case for (a) any issuance of directors’ qualifying shares, (b) issuances or sales of common stock in Holdings to management or employees in Holdings, the Borrower or any Subsidiary under any employee stock option or stock purchase plan or employee benefit plan in existence from time to time and (c) issuances or sales of Equity Interests in Holdings that do not result in a Change in Control.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time.

“ERISA Affiliate” shall mean any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code, or solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.

“ERISA Event” shall mean (a) any “reportable event”, as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Plan (other than an event for which the 30-day notice period is waived), (b) the existence with respect to any Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA) and, on and after the effectiveness of the Pension Act, any failure by any Plan to satisfy the minimum funding standards (within the meaning of Section 412 of the Code or Section 302 of ERISA) applicable to such Plan, whether or not waived,

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(c) the filing pursuant to Section 412 of the Code or Section 303 of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan, (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan or the withdrawal or partial withdrawal of the Borrower or any of its ERISA Affiliates from any Plan or Multiemployer Plan, (e) the receipt by the Borrower or any of its ERISA Affiliates from the PBGC or a plan administrator of any notice relating to the intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan, (f) the adoption of any amendment to a Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, (g) on an after the effectiveness of the Pension Act, a determination that any Plan is, or is expected to be, in “at risk” status (within the meaning of Section 303(i)(4)(a) of ERISA or Section 430(i)(4)(A) of the Code), (h) the receipt by the Borrower or any of its ERISA Affiliates of any notice, or the receipt by any Multiemployer Plan from the Borrower or any of its ERISA Affiliates of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA (or, after the effectiveness of the Pension Act, that a Multiemployer Plan is endangered or in critical status within the meaning of Section 305 of ERISA) or (i) the occurrence of a “prohibited transaction” with respect to which the Borrower or any of the Subsidiaries is a “disqualified person” (within the meaning of Section 4975 of the Code) or with respect to which the Borrower or any such Subsidiary could otherwise be liable.

“Eurodollar”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate.

“Event of Default” shall have the meaning assigned to such term in Article VII.

“Excess Cash Flow” shall mean, for any fiscal year of Holdings and its subsidiaries, the excess of (a) the sum, without duplication, of (i) Consolidated EBITDAX for such fiscal year and (ii) reductions to noncash working capital of Holdings and its subsidiaries for such fiscal year (i.e., the decrease, if any, in Current Assets minus Current Liabilities from the beginning to the end of such fiscal year) over (b) the sum, without duplication, of (i) the amount of any Taxes paid or payable in cash by Holdings and its subsidiaries with respect to such fiscal year, including Taxes paid or payable in cash to the Parent under the Tax Sharing Agreements, (ii) Consolidated Interest Expense for such fiscal year paid in cash, (iii) Capital Expenditures made in cash during such fiscal year, except to the extent financed with the proceeds of Indebtedness, issuances of Equity Interests, casualty proceeds, condemnation proceeds, other proceeds that would not be included in Consolidated EBITDAX or amounts that were offered to the Lenders and the Second Lien Lenders to prepay outstanding Loans pursuant to Section 2.12(c) and outstanding Second Lien Loans pursuant to Section 2.12(c) of the Second Lien Credit Agreement but were not accepted by either the Lenders or the Second Lien Lenders, (iv) permanent repayments of Indebtedness (other than mandatory prepayments of Loans under Section 2.12) made in cash by Holdings and its subsidiaries during such fiscal year, but only to the extent that the Indebtedness so prepaid by its terms cannot be reborrowed

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or redrawn and such prepayments do not occur in connection with a refinancing of all or any portion of such Indebtedness, (v) additions to noncash working capital for such fiscal year (i.e., the increase, if any, in Current Assets minus Current Liabilities from the beginning to the end of such fiscal year) and (vi) to the extent not Capital Expenditures, cash exploration expenses and cash asset retirement expenses incurred during such fiscal year, except to the extent financed with the proceeds of Indebtedness, issuances of Equity Interests, casualty proceeds, condemnation proceeds or other proceeds that would not be included in Consolidated EBITDAX.

“Excluded Taxes” shall mean, with respect to the Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America or by any Governmental Authority of the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction described in clause (a) above and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.20(a)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender’s failure to comply with Section 2.19(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.19(a).

“Extraordinary Receipts” shall mean the receipt by Holdings, the Borrower or any of the Subsidiaries of any non-ordinary course tax refunds, pension plan reversions, judgments, litigation settlements or non-casualty insurance proceeds.

“Federal Funds Effective Rate” shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day for such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it.

“Federal Tax Sharing Agreement” shall mean Federal Income Tax Allocation Agreement dated as of November 1, 2006, between the Parent and Holdings.

“Financial Officer” of any person shall mean the chief financial officer, principal accounting officer, treasurer or controller of such person.

“Financial Qualified Purchaser” shall mean any of (a) Arc Financial, (b) Encap Investments, (c) First Reserve Corporation, (d) Perry Capital, (e) Quantum Energy Partners, (f) Quantum Resources and (g) Yorktown Partners.

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“Fixture Operating Equipment” shall mean any of the items described in the first sentence of the definition of “Operating Equipment” which as a result of being incorporated into realty or structures or improvements located therein or thereon, with the intent that they remain there permanently, constitute fixtures under the laws of the state in which such equipment is located.

“Foreign Lender” shall mean any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

“Foreign Subsidiary” shall mean any Subsidiary that is not a Domestic Subsidiary.

“GAAP” shall mean United States generally accepted accounting principles applied on a consistent basis.

“Governmental Authority” shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body.

“Granting Lender” shall have the meaning assigned to such term in Section 9.04(i).

“Guarantee” of or by any person shall mean any obligation, contingent or otherwise, of such person guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness or other obligation, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment of such Indebtedness or other obligation or (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation; provided, however, that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business.

“Hazardous Materials” shall mean (a) petroleum and any petroleum products or Hydrocarbons, coal ash, radon gas, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, chlorofluorocarbons and all other ozone-depleting substances and (b) any chemical, material, substance or waste that is prohibited, limited or regulated by or pursuant to any Environmental Law.

“Hedging Agreement” means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement.  The “principal amount” of the obligations of any person in respect of any Hedging Agreement at any

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time shall be the maximum aggregate amount (after giving effect to any netting agreements) that such person would be required to pay if such Hedging Agreement were terminated at such time.

“Hedging Obligations” means the due and punctual payment and performance of all obligations of each Loan Party under each Hedging Agreement (a) that is in effect on the Closing Date and set forth in Schedule 1.01(a) hereto, (b) that is in effect on the Closing Date with a counterparty that is (i) the Agent or the Syndication Agent, (ii) a Lender as of the Closing Date or (iii) an Affiliate of the Agent, the Syndication Agent or any such Lender or (c) that is entered into after the Closing Date with a counterparty that is (i) the Agent or the Syndication Agent, (ii) a Lender as of the date on which the Hedging Agreement is entered into or (iii) an Affiliate of the Agent, the Syndication Agent or any such Lender.

“Holdings” shall have the meaning assigned to such term in the introductory paragraph to this Agreement.

“Hydrocarbon Interests” shall mean all rights, titles, interests and estates now owned or hereafter acquired in and to oil and gas leases, leasehold interests and licenses, oil, gas and mineral leases or other liquid or gaseous hydrocarbon licenses, leases, fee mineral interests, term mineral interests, subleases, mineral servitudes, farm-outs, royalties, overriding royalty and royalty interests, non-consent interests arising out of or pursuant to Contracts, net profit interests, net revenue and profit interests, oil payments, production payments, production payment interests and similar interests and estates, including all reserved or residual interests of whatever nature and all reversionary or carried interests relating to any of the foregoing.  Unless otherwise indicated herein, each reference to the term “Hydrocarbon Interests” shall mean Hydrocarbon Interests of the Borrower and the Subsidiaries.

“Hydrocarbons” shall mean oil, gas, casinghead gas, drip gasoline, natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons, kerosene, liquefied petroleum gas, refined lubricating oils, diesel fuel and all products refined, separated, settled or dehydrated therefrom.

“Indebtedness” of any person shall mean, without duplication, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such person under conditional sale or other title retention agreements relating to property or assets acquired by such person, (d) all obligations of such person in respect of the deferred purchase price of property or services (excluding accounts payable not more than 90 days past due incurred in the ordinary course of business), (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the Indebtedness secured thereby has been assumed, (f) all Guarantees by such person of Indebtedness of others, (g) all Capital Lease Obligations and Synthetic Lease Obligations of such person, (h) all obligations, contingent or otherwise, of such person as an account

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party in respect of letters of credit and letters of guaranty, (i) all obligations, contingent or otherwise, in respect of bankers’ acceptances, (j) all obligations of such person with respect to any arrangement, directly or indirectly, whereby such person or its subsidiaries shall sell or transfer any material asset, and whereby such person or any of its subsidiaries shall then or immediately thereafter rent or lease as lessee such asset or any part thereof and (k) all net payments that such person would have to make in the event of an early termination under any Hedging Agreement if, on the date Indebtedness of such person is being determined, such Hedging Agreement became subject to an early termination as of such date.  The Indebtedness of any person shall include the Indebtedness of any other person (including any partnership in which such person is a general partner) to the extent such person is liable therefor as a result of such person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such person is not liable therefor.

“Indemnified Taxes” shall mean Taxes other than Excluded Taxes.

“Independent Engineer” shall mean (a) DeGolyer & MacNaughton, (b) Ryder Scott Company Petroleum Engineers, (c) Netherland, Sewell & Associates, Inc., (d) Collarini Engineering, Inc. or (e) another independent petroleum engineer reasonably acceptable to the Agent.

“Intercompany Services Agreement” shall mean (a) the intercompany services agreement between the Parent and the Borrower, in substantially the form approved by the Agent prior to the Closing Date or (b) one or more service agreements, in form and substance reasonably acceptable to the Agent, pursuant to which the services provided for under the agreement described in clause (a) are performed by an entity of established reputation in the oil and gas industry (which may be a Qualified Purchaser) on terms (including pricing) and conditions then consistent with standard industry practice for such services.

“Intercreditor Agreement” shall mean the Intercreditor Agreement, substantially in the form of Exhibit D, among the Agent, the Second Lien Agent, Holdings and the Borrower.

“Interest Coverage Ratio” shall mean, for any period, the ratio of (a) Consolidated EBITDAX for such period to (b) Consolidated Interest Expense for such period.

“Interest Payment Date” shall mean (a) with respect to any ABR Loan, the last Business Day of each March, June, September and December, commencing on the last Business Day of March 2007, and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months’ duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months’ duration been applicable to such Borrowing.

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“Interest Period” shall mean, with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect; provided, however, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day.  Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.

“Leases” shall mean all leases in respect of real property containing proved, probable or possible oil or gas reserves to which the Borrower or any Subsidiary is a party.

“Lenders” shall mean the persons listed on Schedule 2.01 and any other person that has become a party hereto pursuant to an Assignment and Acceptance, other than any such person that ceases to be a party hereto pursuant to an Assignment and Acceptance.

“Leverage Ratio” shall mean, on any date, the ratio of (a) Total Debt on such date to (b) Consolidated EBITDAX for the period of four consecutive fiscal quarters most recently ended on or prior to such date.

“LIBO Rate” shall mean, with respect to any Eurodollar Borrowing for any Interest Period, the rate per annum determined by the Agent at approximately 11:00 a.m. (London time) on the date that is two Business Days prior to the commencement of such Interest Period by reference to the British Bankers’ Association Interest Settlement Rates for deposits in dollars (as set forth by any service selected by the Agent that has been nominated by the British Bankers’ Association as an authorized information vendor for the purpose of displaying such rates) for a period equal to such Interest Period; provided that, to the extent that an interest rate is not ascertainable pursuant to the foregoing provisions of this definition, the “LIBO Rate” shall be the interest rate per annum determined by the Agent to be the average of the rates per annum at which deposits in dollars are offered for such relevant Interest Period to major banks in the London interbank market in London, England by the Agent at approximately 11:00 a.m. (London time) on the date that is two Business Days prior to the beginning of such Interest Period.

“Lien” shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

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“Loan Documents” shall mean this Agreement, the Security Documents and the promissory notes, if any, executed and delivered pursuant to Section 2.03(e).

“Loan Document Obligations” means (a) the due and punctual payment by the Borrower of (i) the principal of, premium (if any) and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise and (ii) all other monetary obligations of the Borrower to any of the Secured Parties under this Agreement and each of the other Loan Documents, including obligations to pay fees, expense reimbursement obligations and indemnification obligations, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), (b) the due and punctual performance of all other obligations of the Borrower under or pursuant to this Agreement and each of the other Loan Documents to which it is a party and (c) the due and punctual payment and performance of all the obligations of each other Loan Party under or pursuant to the Security Documents and each of the other Loan Documents to which they are a party.

“Loan Parties” shall mean Holdings, the Borrower and the Subsidiary Loan Parties.

“Loans” shall mean the term loans made by the Lenders to the Borrower pursuant to Section 2.01.

“Margin Stock” shall have the meaning assigned to such term in Regulation U.

“Master Conveyance” shall mean (a) the Master Conveyance dated as of November 1, 2006, between the Parent and Holdings and (b) the Master Conveyance dated as of November 1, 2006, between Holdings and the Borrower.

“Material Adverse Effect” shall mean (a) a materially adverse effect on the business, assets, liabilities, operations, condition (financial or otherwise) or operating results of Holdings and its subsidiaries, taken as a whole, (b) a material impairment of the ability of the Borrower or any other Loan Party to perform any of its obligations under any Loan Document to which it is or will be a party or (c) a material impairment of the rights and remedies of or benefits available to the Lenders under any Loan Document.

“Material Indebtedness” shall mean Indebtedness (other than the Loans), or obligations in respect of one or more Hedging Agreements, of any one or more of Holdings, the Borrower or any Subsidiary in an aggregate principal amount exceeding $5,000,000.

“Maturity Date” shall mean December 8, 2010.

“MMS” shall mean the United States Department of Interior Minerals Management Service.

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“MMS Leases” shall mean the leases designated as such on Schedule 1.01(b).

“Moody’s” shall mean Moody’s Investors Service, Inc., or any successor thereto.

“Mortgaged Properties” shall mean (a) all Real Property of any Loan Party on the Closing Date and listed on Schedule 1.01(b) and (b) any after acquired Real Property of any Loan Party having a gross purchase price of $1,000,000 or more at the time of the acquisition thereof.

“Mortgages” shall mean the mortgages, deeds of trust, leasehold mortgages, assignments of leases and rents, modifications and other security documents substantially in the form of Exhibit E or in other forms reasonably acceptable to the Agent and the Borrower.

“Multiemployer Plan” shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

“Net Cash Proceeds” shall mean (a) with respect to any Asset Sale, the cash proceeds thereof (including cash proceeds subsequently received (as and when received) in respect of noncash consideration initially received), net of (i) selling and other expenses (including reasonable broker’s fees or commissions, legal fees, transfer and similar taxes, Hedging Agreement termination costs and the Borrower’s good faith estimate of income taxes actually paid or payable in connection with such sale), (ii) amounts provided as a reserve, in accordance with GAAP, against any liabilities under any indemnification obligations or purchase price adjustment associated with such Asset Sale (provided that, to the extent and at the time any such amounts are released from such reserve, such amounts shall constitute Net Cash Proceeds) and (iii) any amount payable in respect of any Indebtedness for borrowed money which is secured by the asset sold in such Asset Sale and which is required to be repaid with such proceeds (excluding any such Indebtedness assumed by the purchaser of such asset); provided, however, that, if (x) the Borrower shall deliver a certificate of a Financial Officer of the Borrower to the Agent at the time of receipt thereof setting forth the Borrower’s intent to reinvest such proceeds to acquire, maintain, explore, develop, construct, improve, upgrade or repair assets useful in the business of the Borrower and the Subsidiaries within 180 days of receipt of such proceeds and (y) no Default or Event of Default shall have occurred and shall be continuing at the time of the delivery of such certificate or at the proposed time of the application of such proceeds, such proceeds shall not constitute Net Cash Proceeds except to the extent not so used at the end of such 180 day period, at which time such proceeds shall be deemed to be Net Cash Proceeds, (b) with respect to any issuance or incurrence of Indebtedness or any Equity Issuance, the cash proceeds thereof (including cash proceeds subsequently received (as and when received) in respect of noncash consideration initially received), net of all taxes and customary fees, commissions, costs and other expenses incurred in connection therewith and (c) with respect to any Extraordinary Receipts, the cash proceeds thereof (including cash proceeds subsequently received (as and when received) in respect of noncash consideration initially received).

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“Non-Financial Qualified Purchaser” shall mean any Qualified Purchaser that is not a Financial Qualified Purchaser.

“NYMEX” shall mean the New York Mercantile Exchange.

“Obligations” means (a) the Loan Document Obligations and (b) the Hedging Obligations.

“Oil and Gas Properties” shall mean (a) Hydrocarbon Interests, (b) properties and assets now or hereafter pooled or unitized with Hydrocarbon Interests, (c) all currently existing or future unitization, pooling agreements and declarations of pooled units and the units created thereby (including all units created under orders, regulations and rules of any Governmental Authority) which may affect all or any portion of the Hydrocarbon Interests, (d) all operating agreements, contracts and other Contracts, including production sharing contracts and agreements, which relate to any of the Hydrocarbon Interests or the production, sale, purchase, exchange or processing of Hydrocarbons from or attributable to such Hydrocarbon Interests, (e) all Hydrocarbons in and under and which may be produced and saved or attributable to the Hydrocarbon Interests, including all oil in tanks, and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests, (f) all tenements, hereditaments, appurtenances and properties and assets in any manner appertaining, belonging, affixed or incidental to the Hydrocarbon Interests and (g) all properties and assets, rights, titles, interests and estates described or referred to above, including any and all properties and assets, real or personal, now owned or hereinafter acquired and situated upon, used, held for use or useful in connection with the operating, working or development of any of such Hydrocarbon Interests or properties and assets (excluding drilling rigs, automotive equipment, rental equipment or other personal property or assets which may be on such premises for the purpose of drilling a well or for other similar temporary uses) and including any and all oil wells, gas wells, injection wells or other wells, buildings, structures, fuel separators, liquid extraction plants, plant compressors, pumps, pumping units, field gathering systems, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, equipment, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, surface leases, rights-of-way, easements and servitudes together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing.  Unless otherwise indicated herein, each reference to the term “Oil and Gas Properties” shall mean Oil and Gas Properties of the Borrower and the Subsidiaries.

“Operating Equipment” means all surface or subsurface machinery, equipment, facilities, supplies or other properties and assets of whatsoever kind or nature now or hereafter located on any of the properties or assets affected by the Oil and Gas Properties which are useful for the production, treatment, storage or transportation of Hydrocarbons, including all oil wells, gas wells, water wells, injection wells, casing, tubing, rods, pumping units and engines, christmas trees, derricks, separators, gun barrels, flow lines, pipelines, tanks, gas systems (for gathering, treating and compression), water systems (for treating, disposal and injection), supplies, derricks, wells, power plants, poles, cables, wires, meters, processing plants, compressors, dehydration units, lines, transformers,

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starters and controllers, machine shops, tools, storage yards and equipment stored therein, buildings and camps, telegraph, telephone and other communication systems, roads, loading racks, shipping facilities and all additions, substitutes and replacements for, and accessories and attachments to, any of the foregoing.  “Operating Equipment” shall not include any items incorporated into realty or structures or improvements located therein or thereon in such a manner that they no longer remain personal property under the laws of the State in which such equipment is located.

“Other Taxes” shall mean any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document.

“Parent” shall mean Forest Oil Corporation, a corporation organized under the laws of the State of New York.

“Parent Undertaking” shall mean the Parent Undertaking, substantially in the form of Exhibit F hereto, among the Parent, the Agent and the Second Lien Agent.

“PBGC” shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA.

“PDP PV-10%” shall mean, on any date, 100% of the present value of future revenues less severance and ad valorem taxes, operating expenses and capital expenditures of the proved developed producing oil and gas reserves attributable to the Oil and Gas Properties, as evaluated in the most recently delivered Reserve Report in respect of proved developed producing oil and gas reserves attributable to the Oil and Gas Properties, discounted at a rate of 10% and utilizing the monthly crude oil (WTI) and natural gas (Henry Hub) prices, in each case based upon (i) the actual monthly price quoted on NYMEX on such date for the corresponding month through the 60th month from such date and (ii) the arithmetic monthly average for months 49 through 60 for each month after the 60th month.  The amount of the PDP PV-10% then in effect shall be (a) calculated on a pro forma basis for dispositions and acquisitions consummated since the date of the most recently delivered Reserve Report in respect of proved developed producing oil and gas reserves attributable to the Oil and Gas Properties to the extent that a reserve report reasonably acceptable to the Agent in respect of proved developed producing oil and gas reserves attributable to such disposition or acquisition is available and (b) adjusted to give effect to the Borrower’s and the Subsidiaries’ commodity hedges then in effect.

“PDP Total Debt Coverage Ratio” shall mean, on any date, the ratio of (a) PDP PV-10% as of such date to (b) Total Debt as of such date.

“PDP First Lien Debt Coverage Ratio” shall mean, on any date, the ratio of (a) PDP PV-10% as of such date to (b) the aggregate principal amount of Loans outstanding under this Agreement as of such date.

“Pension Act” shall mean the Pension Protection Act of 2006.

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“Perfection Certificate” shall mean the Perfection Certificate substantially in the form of Exhibit B to the Collateral Agreement.

“Permitted Acquisition” shall mean the acquisition by the Borrower or any Subsidiary of all or substantially all of the assets of a person or a line of business of such person, or not less than 100% of the Equity Interests (other than directors’ qualifying shares) in a person (referred to herein as the “Acquired Entity”); provided that (i) such acquisition was not preceded by an unsolicited tender offer for such Equity Interests by, or proxy contest initiated by, Holdings, the Borrower or any Subsidiary, (ii) the Acquired Entity shall be in a similar line of business as that of the Borrower and the Subsidiaries as conducted during the current and most recent calendar year and (iii) at the time of such transaction (A) both before and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing, (B) the Borrower would be in compliance with the covenants set forth in Sections 6.10, 6.11 and 6.12 as of the most recently completed period of four consecutive fiscal quarters ending prior to such transaction for which the financial statements and certificates required by Section 5.04(a) or 5.04(b), as the case may be, have been delivered, after giving pro forma effect to such transaction, any related incurrences of Indebtedness and any other event occurring after such period as to which pro forma recalculation is appropriate (including any other transaction described in this definition occurring after such period) as if such transaction had occurred as of the first day of such period, (C) (I) the total consideration paid in connection with such acquisition and any other acquisitions pursuant to Section 6.04(g) (including any Indebtedness of the Acquired Entity that is assumed by the Borrower or any Subsidiary following such acquisition and any payments following such acquisition pursuant to earn-out provisions or similar obligations) made in the same fiscal year, together with all investments in Oil and Gas Properties made pursuant to Section 6.04(k) in such fiscal year, shall not in the aggregate exceed $15,000,000 and (II) the total consideration paid in connection with such acquisition and any other acquisitions pursuant to Section 6.04(g) (including any Indebtedness of the Acquired Entity that is assumed by the Borrower or any Subsidiary following such acquisition and any payments following such acquisition pursuant to earn-out provisions or similar obligations) during the term of this Agreement, together with all investments in Oil and Gas Properties made pursuant to Section 6.04(k) during the term of this Agreement, shall not in the aggregate exceed $50,000,000, (D) the Borrower shall have delivered a certificate of a Financial Officer of the Borrower, certifying as to the foregoing and containing reasonably detailed calculations in support thereof, in form and substance satisfactory to the Administrative Agent and (E) the Borrower shall comply, and shall cause the Acquired Entity to comply, with the applicable provisions of Section 5.12 and the Security Documents.

“Permitted Investments” shall mean:

(a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof;

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(b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moody’s;

(c) investments in certificates of deposit, banker’s acceptances and time deposits maturing within one year from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, the Agent or any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $500,000,000;

(d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria of clause (c) above;

(e) investments in “money market funds” within the meaning of Rule 2a-7 of the Investment Company Act of 1940, as amended, substantially all of whose assets are invested in investments of the type described in clauses (a) through (d) above; and

(f) investments in so-called “auction rate” securities rated AAA or higher by S&P or Aaa or higher by Moody’s and which have a reset date not more than 90 days from the date of acquisition thereof.

“Permitted Refinancing Indebtedness” shall mean any Indebtedness (other than obligations under Hedging Agreements) issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, defease or refund (collectively, to “Refinance”) the Indebtedness (other than obligations under Hedging Agreements) being Refinanced (or previous refinancings thereof constituting Permitted Refinancing Indebtedness); provided that (a) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness so Refinanced (plus unpaid accrued interest, underwriting discounts, origination fees and premium thereon), (b) the average life to maturity of such Permitted Refinancing Indebtedness is greater than or equal to that of the Indebtedness being Refinanced, (c) if the Indebtedness being Refinanced is subordinated in right of payment to the Obligations under this Agreement, such Permitted Refinancing Indebtedness shall be subordinated in right of payment to such Obligations on terms at least as favorable to the Lenders as those contained in the documentation governing the Indebtedness being Refinanced, (d) no Permitted Refinancing Indebtedness shall have different obligors, or greater guarantees or security, than the Indebtedness being Refinanced and (e) if the Indebtedness being Refinanced is secured by any collateral (whether equally and ratably with, or junior to, the Secured Parties or otherwise), such Permitted Refinancing Indebtedness may be secured by such collateral on terms (including Lien subordination terms) no less favorable to the Secured Parties than those contained in the documentation governing the Indebtedness being Refinanced.

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“person” shall mean any natural person, corporation, business trust, joint venture, association, company, limited liability company, partnership, Governmental Authority or other entity.

“Plan” shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 307 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

“Prime Rate” shall mean the rate of interest per annum determined from time to time by Credit Suisse as its prime rate in effect at its principal office in New York City and notified to the Borrower.

“Probable PV-10%” shall mean, on any date, 100% of the present value of future revenues less severance and ad valorem taxes, operating expenses and capital expenditures of the probable oil and gas reserves attributable to the Oil and Gas Properties, in each case as evaluated in the most recently delivered Reserve Report in respect of probable oil and gas reserves attributable to the Oil and Gas Properties, as the case may be, discounted at a rate of 10% and utilizing the monthly crude oil (WTI) and natural gas (Henry Hub) prices, in each case based upon the actual monthly price quoted on NYMEX on such date for the corresponding month through the 60th month from such date and (ii) the arithmetic monthly average for months 49 through 60 for each month after the 60th month.  The amount of the Probable PV-10% then in effect shall be (a) calculated on a pro forma basis for dispositions and acquisitions consummated since the date of the most recently delivered Reserve Report in respect of probable oil and gas reserves attributable to the Oil and Gas Properties to the extent that a reserve report reasonably acceptable to the Agent in respect of probable oil and gas reserves attributable to such disposition or acquisition is available and (b) adjusted to give effect to the Borrower’s and the Subsidiaries’ commodity hedges then in effect.

“Proved PV-10%” shall mean, on any date, 100% of the present value of future revenues less severance and ad valorem taxes, operating expenses and capital expenditures of the proved oil and gas reserves attributable to the Oil and Gas Properties, as evaluated in the most recently delivered Reserve Report in respect of proved oil and gas reserves attributable to the Oil and Gas Properties, discounted at a rate of 10% and utilizing the monthly crude oil (WTI) and natural gas (Henry Hub) prices, in each case based upon (i) the actual monthly price quoted on NYMEX on such date for the corresponding month through the 60th month from such date and (ii) the arithmetic monthly average for months 49 through 60 for each month after the 60th month.  The amount of the Proved PV-10% then in effect shall be (a) calculated on a pro forma basis for dispositions and acquisitions consummated since the date of the most recently delivered Reserve Report in respect of proved oil and gas reserves attributable to the Oil and Gas Properties to the extent that a reserve report reasonably acceptable to the Agent in respect of proved oil and gas reserves attributable to such disposition or acquisition is available and (b) adjusted to give effect to the Borrower’s and the Subsidiaries’ commodity hedges then in effect.

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“Proved Total Debt Coverage Ratio” shall mean, on any date, the ratio of (a) Proved PV-10% as of such date to (b) Total Debt as of such date.

“Purchase Date” shall have the meaning assigned to such term in Section 2.21.

“Qualified Capital Stock” of any person shall mean any Equity Interest of such person that is not Disqualified Stock.

“Qualified Purchaser” shall mean each person listed on Schedule 1.01(c), any wholly-owned subsidiary of any such person and any fund managed by any such person.

“Real Property” shall mean, collectively, all right, title and interest of the Borrower or any Subsidiary in and to any and all parcels of real property owned, leased or operated by the Borrower or any Subsidiary together with all improvements and appurtenant fixtures, equipment, personal property, easements and other property and rights incidental to the ownership, lease or operation thereof, including all Oil and Gas Properties that constitute real property.

“Register” shall have the meaning assigned to such term in Section 9.04(d).

“Regulation T” shall mean Regulation T of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

“Regulation U” shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

“Regulation X” shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

“Related Fund” shall mean, with respect to any Lender that is a fund or commingled investment vehicle that invests in bank loans, any other fund that invests in bank loans and is managed or advised by the same investment advisor as such Lender or by an Affiliate of such investment advisor.

“Related Parties” shall mean, with respect to any specified person, such person’s Affiliates and the directors, trustees, officers, employees, agents and advisors of such person and such person’s Affiliates.

“Release” shall mean any release, spill, emission, leaking, dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching or migration into or through the environment or within or upon any building, structure, facility or fixture.

“Required Lenders” shall mean, at any time, Lenders having Loans and unused Commitments representing more than 50% of the sum of all Loans outstanding and unused Commitments at such time.

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Reserve Report” shall mean (a) each of the reserve reports referred to in Section 3.05(c) and (b) any other reserve report delivered to the Agent or any Lender pursuant to or in connection with this Agreement.

“Responsible Officer” of any person shall mean any executive officer or Financial Officer of such person and any other officer or similar official thereof responsible for the administration of the obligations of such person in respect of this Agreement, including a reserve engineer of seniority reasonably acceptable to the Agent.

“Restricted Indebtedness” shall mean Indebtedness of Holdings, the Borrower or any Subsidiary, the payment, prepayment, repurchase or defeasance of which is restricted under Section 6.06(b).

“Restricted Payment” shall mean any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in Holdings, the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any Equity Interests in Holdings, the Borrower or any Subsidiary.

“Second Lien Agent” shall mean the “Agent”, as defined in the Second Lien Credit Agreement.

“Second Lien Credit Agreement” shall mean the Second Lien Credit Agreement dated as of the date hereof, among the Borrower, Holdings, the lenders from time to time party thereto and Credit Suisse, as administrative agent and collateral agent.

“Second Lien Lenders” shall mean “Lenders”, as defined in the Second Lien Credit Agreement.

“Second Lien Loan Documents” shall mean “Loan Documents”, as defined in the Second Lien Credit Agreement.

“Second Lien Loan Parties” shall mean “Loan Parties”, as defined in the Second Lien Credit Agreement.

“Second Lien Loans” shall mean “Loans”, as defined in the Second Lien Credit Agreement.

“Second Lien Obligations” shall mean “Obligations”, as defined in the Second Lien Credit Agreement.

“Second Lien Secured Party” shall mean “Secured Party”, as defined in the Second Lien Credit Agreement.

“Secured Parties” shall mean (a) the Lenders, (b) the Agent, (c) each counterparty to any Hedging Agreement entered into with a Loan Party the obligations under which constitute Obligations, (d) the beneficiaries of each indemnification

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obligation undertaken by any Loan Party under any Loan Document and (e) the successors and permitted assigns of each of the foregoing.

“Security Documents” shall mean the Mortgages, the Collateral Agreement, the Account Control Agreements, the Intercreditor Agreement and each of the security agreements, mortgages and other instruments and documents executed and delivered pursuant to any of the foregoing or pursuant to Section 5.12.

“SPC” shall have the meaning assigned to such term in Section 9.04(i).

“S&P” shall mean Standard & Poor’s Ratings Service, a division of the McGraw-Hill Companies, Inc., or any successor thereto.

“State Tax Sharing Agreement” shall mean the State Consolidated or Combined Income Tax Allocation Agreement dated as of November 1, 2006, between the Parent and Holdings.

“Statutory Reserves” shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority, domestic or foreign, to which the Agent or any Lender (including any branch, Affiliate or other fronting office making or holding a Loan) is subject for Eurocurrency Liabilities (as defined in Regulation D of the Board).  Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities as defined in Regulation D of the Board) and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D.  Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

“subsidiary” shall mean, with respect to any person (herein referred to as the “parent”), any corporation, partnership, limited liability company, association or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, Controlled or held or (b) that is, at the time any determination is made, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent.

“Subsidiary” shall mean any subsidiary of the Borrower.

“Subsidiary Loan Party” shall mean each Subsidiary that has executed the Collateral Agreement or a supplement thereto and a Mortgage in respect of each Mortgaged Property which is owned by it.

“Syndication Agent” shall mean JPMorgan Chase Bank, N.A., in its capacity as syndication agent for the Lenders.

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“Synthetic Lease Obligations” means all monetary obligations under (a) a synthetic, off-balance sheet or tax retension lease or (b) an agreement for the use or possession of property creating obligations that do not (and should not) appear on the balance sheet of such person but which, upon the insolvency or bankruptcy of such person, would be characterized as the indebtedness of such person (without regard to accounting treatment).

“Synthetic Purchase Agreement” shall mean any swap, derivative or other agreement or combination of agreements pursuant to which Holdings, the Borrower or any Subsidiary is or may become obligated to make (a) any payment in connection with a purchase by any third party from a person other than Holdings, the Borrower or any Subsidiary of any Equity Interest or Restricted Indebtedness or (b) any payment (other than on account of a permitted purchase by it of any Equity Interest or Restricted Indebtedness) the amount of which is determined by reference to the price or value at any time of any Equity Interest or Restricted Indebtedness; provided that no phantom stock or similar plan providing for payments only to current or former directors, officers or employees of Holdings, the Borrower or the Subsidiaries (or to their heirs or estates) shall be deemed to be a Synthetic Purchase Agreement.

“Taxes” shall mean any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority.

“Tax Sharing Agreements” means (a) the Federal Tax Sharing Agreement and (b) the State Tax Sharing Agreement, in each case in the form approved by the Agent prior to the Closing Date.

“Total Debt” shall mean, at any time, the Indebtedness of Holdings and its subsidiaries on a consolidated basis at such time described under clauses (a), (b), (c), (d), (e), (f), (g), (h), (i) and (j); provided that “Total Debt” shall exclude any Indebtedness of Holdings and its subsidiaries composed of outstanding but undrawn letters of credit or outstanding but undrawn performance bonds.

“Transactions” shall mean, collectively, (a) the contribution of the Business by the Parent to Holdings and by Holdings to the Borrower, (b) the execution, delivery and performance by the Loan Parties of the Loan Documents to which they are a party and the borrowing of Loans hereunder, (c) the execution, delivery and performance by the Second Lien Loan Parties of the Second Lien Loan Documents to which they are party and the borrowing of Second Lien Loans thereunder, (d) the Distribution, (e) the execution, delivery and performance by the parties thereto of the Intercompany Services Agreement and the Tax Sharing Agreements and (f) the payment of fees and expenses in connection with the foregoing.

“Type”, when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, the term “Rate” shall mean the Adjusted LIBO Rate and the Alternate Base Rate.

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“USA PATRIOT Act” shall mean The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Title III of Pub. L. No. 107-56 (signed into law October 26, 2001)).

“wholly owned Subsidiary” of any person shall mean a subsidiary of such person of which securities (except for directors’ qualifying shares) or other ownership interests representing 100% of the Equity Interests are, at the time any determination is being made, owned, Controlled or held by such person or one or more wholly owned Subsidiaries of such person or by such person and one or more wholly owned Subsidiaries of such person.

“Withdrawal Liability” shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.

SECTION 1.02.  Terms Generally.  The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall”; and the words “asset” and “property” shall be construed as having the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, (a) any reference in this Agreement to any Loan Document shall mean such document as amended, restated, supplemented, waived or otherwise modified from time to time and (b) all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that if Holdings notifies the Agent that Holdings wishes to amend any covenant in Article VI or any related definition to eliminate the effect of any change in GAAP occurring after the date of this Agreement on the operation of such covenant (or if the Agent notifies Holdings that the Required Lenders wish to amend Article VI or any related definition for such purpose), then Holding’s compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to Holdings and the Required Lenders.  Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented, waived or otherwise modified (subject to any restrictions on such amendments, supplements, waivers or modifications set forth herein), (b) any definition of or reference to any statute, regulation or other law herein shall be construed (i) as referring to such statute, regulation or other law as from time to time amended, supplemented or otherwise modified (including by succession of comparable successor statutes, regulations or other laws) and (ii) to include all official rulings and interpretations thereunder, (c) any reference herein to any person shall be construed to

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include such person’s successors and assigns and (d) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof.

SECTION 1.03.  Classification of Loans and Borrowings.  For purposes of this Agreement, Loans may be classified and referred to by Type (e.g., a “Eurodollar Loan”). Borrowings also may be classified and referred to by Type (e.g., a “Eurodollar Borrowing”).

ARTICLE II

The Credits

SECTION 2.01.  Commitments.  On the terms and subject to the conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make a Loan to the Borrower on the Effective Date in a principal amount not to exceed its Commitment.  The Loans made on the Effective Date shall be Eurodollar Loans with an Interest Period of one month’s duration and shall be disbursed to the account designated by the Borrower in a writing delivered to the Agent at least two Business Days prior to the Effective Date.  Amounts paid or prepaid in respect of Loans may not be reborrowed.

SECTION 2.02.  Loans.  (a)  Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their Commitments; provided, however, that the failure of any Lender to make any Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender).  The Loans comprising any Borrowing shall be in an aggregate principal amount that is an integral multiple of $1,000,000 and not less than $5,000,000.

(b)  Subject to Sections 2.07 and 2.14, each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request pursuant to Section 2.09.  Each Lender may at its option make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.  Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Borrower shall not be entitled to request any Borrowing that, if made, would result in more than seven Eurodollar Borrowings outstanding hereunder at any time. For purposes of the foregoing, Borrowings having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Borrowings.

(c)  Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds to such account in New York City as the Agent may designate not later than 1:00 p.m., New York City time, and the Agent shall promptly credit the amounts so received to the account designated by

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the Borrower pursuant to Section 2.01 or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the Lenders.

(d)  Unless the Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Agent such Lender’s portion of such Borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of such Borrowing in accordance with paragraph (c) above and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If the Agent shall have so made funds available then, to the extent that such Lender shall not have made such portion available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower to but excluding the date such amount is repaid to the Agent at (i) in the case of the Borrower, a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, a rate determined by the Agent to represent its cost of overnight or short-term funds (which determination shall be conclusive absent manifest error). If such Lender shall repay to the Agent such corresponding amount, such amount shall constitute such Lender’s Loan as part of such Borrowing for purposes of this Agreement.

(e)  Nothing in this Section shall be deemed to relieve any Lender of its obligations in respect of its Commitment hereunder or to prejudice any rights that the Borrower may have against any Lender as a result of a default by such Lender under this Agreement.

SECTION 2.03.  Evidence of Debt; Repayment of Loans.  (a)  The Borrower hereby unconditionally promises to pay to the Agent for the account of each Lender the principal amount of each Loan of such Lender as provided in Section 2.10.

(b)  Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement.

(c)  The Agent shall maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Type thereof and, if applicable, the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Agent hereunder from the Borrower or any Guarantor and each Lender’s share thereof.

(d)  The entries made in the accounts maintained pursuant to paragraphs (b) and (c) above shall be prima facie evidence of the existence and amounts of the obligations therein recorded; provided, however, that the failure of any Lender or the

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Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrower to repay the Loans in accordance with their terms.

(e)  Any Lender may request that Loans made by it hereunder be evidenced by a promissory note.  In such event, the Borrower shall execute and deliver to such Lender a promissory note payable to such Lender and its registered assigns and in a form and substance reasonably acceptable to the Agent and the Borrower. Notwithstanding any other provision of this Agreement, in the event any Lender shall request and receive such a promissory note, the interests represented by such note shall at all times (including after any assignment of all or part of such interests pursuant to Section 9.04) be represented by one or more promissory notes payable to the payee named therein or its registered assigns.

SECTION 2.04.  Fees.  The Borrower agrees to pay to the Agent, for its own account, the fees set forth in the Administrative Agent Fee Letter at the times and in the amounts specified therein.

SECTION 2.05.  Interest on Loans.  (a)  Subject to the provisions of Section 2.06, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when the Alternate Base Rate is determined by reference to the Prime Rate and over a year of 360 days at all other times and calculated from and including the date of such Borrowing to but excluding the date of repayment thereof) at a rate per annum equal to the Alternate Base Rate plus the Applicable Percentage.

(b)  Subject to the provisions of Section 2.06, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days and calculated from and including the date of such Borrowing to but excluding the date of repayment thereof) at a rate per annum equal to the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Percentage.

(c)  Interest on each Loan shall be payable in arrears on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. The applicable Alternate Base Rate or Adjusted LIBO Rate for each day or each Interest Period, as the case may be, shall be determined by the Agent, and such determination shall be conclusive absent manifest error.

SECTION 2.06.  Default Interest.  If the Borrower shall default in the payment of any principal of or interest on any Loan or any other amount due hereunder or under any other Loan Document, by acceleration or otherwise, then, until such defaulted amount shall have been paid in full, to the extent permitted by law, all amounts outstanding under this Agreement and the other Loan Documents shall bear interest (after as well as before judgment), payable on demand, (a) in the case of principal, at the rate otherwise applicable to such Loan pursuant to Section 2.05 plus 2.00% per annum and (b) in all other cases, at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when determined by

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reference to the Prime Rate and over a year of 360 days at all other times) equal to the rate that would be applicable to an ABR Loan plus 2.00% per annum.

SECTION 2.07.  Alternate Rate of Interest.  In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Agent shall have determined that dollar deposits in the principal amounts of the Loans comprising such Borrowing are not generally available in the London interbank market, or that the rates at which such dollar deposits are being offered will not adequately and fairly reflect the cost to Lenders representing the Required Lenders of making or maintaining Eurodollar Loans during such Interest Period, or that reasonable means do not exist for ascertaining the Adjusted LIBO Rate, the Agent shall, as soon as practicable thereafter, give written or fax notice of such determination to the Borrower and the Lenders. In the event of any such determination, until the Agent shall have advised the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, any request by the Borrower for a Eurodollar Borrowing pursuant to Section 2.09 shall be deemed to be a request for an ABR Borrowing.  Each determination by the Agent under this Section shall be conclusive absent manifest error.

SECTION 2.08.  Termination and Reduction of Commitments.  (a)  The Commitments shall automatically terminate upon the making of the Loans on the Effective Date.  Notwithstanding the foregoing, all the Commitments shall automatically terminate at 5:00 p.m., New York City time, on December 31, 2006, if the making of the Loans shall not have occurred by such time.

(b)  Upon at least three Business Days’ prior irrevocable written or fax notice to the Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitments; provided, however, that each partial reduction of the Commitments shall be in an integral multiple of, and in a minimum amount of, $1,000,000.

(c)  Each reduction in the Commitments hereunder shall be made ratably among the Lenders in accordance with their Commitments.

SECTION 2.09.  Conversion and Continuation of Borrowings.  The Borrower shall have the right at any time upon prior irrevocable notice to the Agent (a) not later than 2:00 p.m., New York City time, one Business Day prior to conversion, to convert any Eurodollar Borrowing into an ABR Borrowing, (b) not later than 2:00 p.m., New York City time, three Business Days prior to conversion or continuation, to convert any ABR Borrowing into a Eurodollar Borrowing or to continue any Eurodollar Borrowing as a Eurodollar Borrowing for an additional Interest Period and (c) not later than 2:00 p.m., New York City time, three Business Days prior to conversion, to convert the Interest Period with respect to any Eurodollar Borrowing to another permissible Interest Period, subject in each case to the following:

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(i)  each conversion or continuation shall be made pro rata among the Lenders in accordance with the principal amounts of the Loans comprising the converted or continued Borrowing;

(ii)  if less than all the outstanding principal amount of any Borrowing shall be converted or continued, then each resulting Borrowing shall satisfy the limitations specified in Sections 2.02(a) and 2.02(b) regarding the principal amount and maximum number of Borrowings of the relevant Type;

(iii)  each conversion shall be effected by each Lender and the Agent by recording for the account of such Lender the new Loan of such Lender resulting from such conversion and reducing the Loan (or portion thereof) of such Lender being converted by an equivalent principal amount; accrued interest on any Eurodollar Loan (or portion thereof) being converted shall be paid by the Borrower at the time of conversion;

(iv)  if any Eurodollar Borrowing is converted at a time other than the end of the Interest Period applicable thereto, the Borrower shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.15;

(v)  any portion of a Borrowing maturing or required to be repaid in less than one month may not be converted into or continued as a Eurodollar Borrowing;

(vi)  any portion of a Eurodollar Borrowing that cannot be converted into or continued as a Eurodollar Borrowing by reason of the immediately preceding clause shall be automatically converted at the end of the Interest Period in effect for such Borrowing into an ABR Borrowing;

(vii)  no Interest Period may be selected for any Eurodollar Borrowing that would end later than a date on which a repayment of Loans pursuant to Section 2.10(a) is due and which occurs on or after the first day of such Interest Period if, after giving effect to such selection, the aggregate outstanding amount of (A) the Eurodollar Borrowings with Interest Periods ending on or prior to such date and (B) the ABR Borrowings would not be at least equal to the principal amount of Borrowings to be paid on such date; and

(viii)  upon notice to the Borrower from the Agent given at the request of the Required Lenders, after the occurrence and during the continuance of an Event of Default, no outstanding Loan may be converted into, or continued as, a Eurodollar Loan.

Each notice pursuant to this Section shall be irrevocable and shall refer to this Agreement and specify (i) the identity and amount of the Borrowing that the Borrower requests be converted or continued, (ii) whether such Borrowing is to be converted to or continued as a Eurodollar Borrowing or an ABR Borrowing, (iii) if such notice requests a conversion, the date of such conversion (which shall be a Business Day) and (iv) if such

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Borrowing is to be converted to or continued as a Eurodollar Borrowing, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Eurodollar Borrowing, the Borrower shall be deemed to have selected an Interest Period of one month’s duration. The Agent shall advise the Lenders of any notice given pursuant to this Section and of each Lender’s portion of any converted or continued Borrowing. If the Borrower shall not have given notice in accordance with this Section to continue any Borrowing into a subsequent Interest Period (and shall not otherwise have given notice not later than 2:00 p.m., New York City time, three Business Days prior to the end of such Interest Period, of its intent to convert such Borrowing or to prepay such Borrowing at the end of such Interest Period), such Borrowing shall, at the end of the Interest Period applicable thereto, automatically be continued as a Eurodollar Borrowing with an Interest Period of one month’s duration.

SECTION 2.10.  Repayment of Borrowings.  (a)  The Borrower shall pay to the Agent, for the account of the Lenders, on the last Business Day of each March, June, September and December occurring after the Effective Date, commencing on the last Business Day of March 2007, a principal amount of the Loans equal to 0.25% of the aggregate principal amount of the Loans made on the Effective Date, together in each case with accrued and unpaid interest on the principal amount to be paid to but excluding the date of such payment.

(b)  To the extent not previously paid, all Loans shall be due and payable on the Maturity Date, together with accrued and unpaid interest on the principal amount to be paid to but excluding the date of payment.

(c)  All repayments pursuant to this Section shall be subject to Section 2.15, but shall otherwise be without premium or penalty.

SECTION 2.11.  Optional Prepayment; Prepayment Premium.  (a)  The Borrower shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, upon at least three Business Days’ prior written or fax notice (or telephone notice promptly confirmed by written or fax notice) in the case of Eurodollar Loans or upon at least one Business Day prior written or fax notice (or telephone notice promptly confirmed by written or fax notice) in the case of ABR Loans, to the Agent before 2:00 p.m., New York City time; provided, however, that each partial prepayment shall be in an amount that is an integral multiple of $1,000,000 and not less than $5,000,000.

(b)  Any prepayment of any Loan made pursuant to this Section or pursuant to Section 2.12 with the proceeds of any incurrence of Indebtedness at any time on or prior to the first anniversary of the Closing Date shall be accompanied by a prepayment premium equal to 1% of the principal amount of such Loan prepaid.

(c)  Optional prepayments of Loans shall be applied pro rata against the remaining scheduled installments of principal due in respect of the Loans.

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(d)  Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such Borrowing by the amount stated therein on the date stated therein; provided that a notice of optional prepayment may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Agent on or prior to the specified effective date) if such condition is not satisfied.  All prepayments under this Section shall be subject to Section 2.15.  All prepayments under this Section shall be accompanied by accrued and unpaid interest on the principal amount to be prepaid to but excluding the date of payment.

SECTION 2.12.  Mandatory Prepayments.  (a)  Not later than the third Business Day following the receipt of Net Cash Proceeds in respect of any Asset Sale, the Borrower shall make an offer to the Lenders by notice to the Agent to apply 100% of such Net Cash Proceeds to prepay outstanding Loans in accordance with paragraphs (g) and (h) below.

(b)  If and on each occasion that an Equity Issuance occurs, the Borrower shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the occurrence of such Equity Issuance, make an offer to the Lenders by notice to the Agent to apply 50% of the Net Cash Proceeds therefrom to prepay outstanding Loans in accordance with paragraphs (g) and (h) below.

(c)  No later than the date on which the financial statements with respect to any fiscal year, commencing with the fiscal year ending December 31, 2007, are delivered pursuant to Section 5.04(a), the Borrower shall make an offer to the Lenders by notice to the Agent to prepay outstanding Loans in accordance with paragraphs (g) and (h) below in an aggregate principal amount equal to 100% of Excess Cash Flow for such fiscal year; provided that if the Available Cash as of the last day of such fiscal year would have been less than $20,000,000 if 100% of Excess Cash Flow for such fiscal year had been applied to prepay Loans or Second Lien Loans on such last day, the amount required to be offered to prepay outstanding Loans will be reduced by an amount equal to such shortfall.

(d)  If any Loan Party or any subsidiary of a Loan Party shall receive Net Cash Proceeds from the issuance or incurrence of Indebtedness of any Loan Party or any subsidiary of a Loan Party (other than any cash proceeds from the issuance of Indebtedness permitted pursuant to Section 6.01), the Borrower shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the receipt of such Net Cash Proceeds by such Loan Party or such subsidiary, make an offer to the Lenders by notice to the Agent to apply an amount equal to 100% of such Net Cash Proceeds to prepay outstanding Loans in accordance with paragraphs (g) and (h) below.

(e)  Not later than the third Business Day following the receipt of Net Cash Proceeds in respect of any Extraordinary Receipts, the Borrower shall make an offer to

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the Lenders by notice to the Agent to apply 100% of such Net Cash Proceeds to prepay outstanding Loans in accordance with paragraphs (g) and (h) below.

(f)  Mandatory prepayments of outstanding Loans under this Agreement shall be applied pro rata against the remaining scheduled installments of principal due in respect of the Loans.

(g)  Within three Business Days after the Agent receives notice of an offer from the Borrower under paragraphs (a), (b), (c), (d) or (e) of this Section, any Lender may elect, by notice to the Agent, to accept or decline all (but not a portion) of its pro rata share of such prepayment; provided that any failure by a Lender to give such notice shall be deemed to an acceptance of such prepayment (such declined amounts being called the “Declined Amounts”).  On the fourth Business Day after the Agent receives notice of such an offer from the Borrower, the Borrower shall pay all amounts which are not Declined Amounts and shall offer the Declined Amounts to the Lenders not so declining such prepayment (with such non-declining Lenders having the right to accept or decline any prepayment with Declined Amounts in the manner specified by the Agent, it being agreed that any such Lender may accept an amount in excess of its pro rata share of the Declined Amounts up to the principal amount of its outstanding Loans, subject to pro-ration as set forth below).  Such non-declining Lenders must accept or decline the Declined Amounts so offered within one Business Day at which time the Declined Amounts accepted by such non-declining Lenders shall be paid by the Borrower to the Lenders accepting such amounts within one Business Day following acceptance (ratably in accordance with the amounts accepted by them) and any remaining Declined Amounts shall be applied as may be required pursuant to the mandatory prepayment provisions of the Second Lien Credit Agreement.

(h)  (i)  The Borrower shall deliver to the Agent, at the time of each offer to make a prepayment required under this Section, a certificate signed by a Financial Officer of the Borrower setting forth in reasonable detail the calculation of the amount of such prepayment to be offered.  Each offer shall specify the proposed prepayment date, the Type of each Borrowing being prepaid and the principal amount of each Borrowing (or portion thereof) to be prepaid. All prepayments of Borrowings under this Section shall be subject to Section 2.15, but shall otherwise be without premium or penalty, and shall be accompanied by accrued and unpaid interest on the principal amount to be prepaid to but excluding the date of payment.

(ii)  In connection with any optional prepayments by the Borrower of the Loans pursuant to Section 2.11, any optional prepayment thereof shall be applied first to ABR Borrowings to the full extent thereof before application to Eurodollar Borrowings, in each case in a manner that minimizes the amount of any payments required to be made by the Borrower pursuant to Section 2.15.

(iii)  In connection with any mandatory prepayments by the Borrower of the Loans pursuant to this Section, such prepayments shall be applied on a pro rata basis to the then outstanding Loans being prepaid irrespective of

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whether such outstanding Loans are ABR Loans or Eurodollar Loans; provided that if no Lender exercises the right to decline a mandatory prepayment of the Loans pursuant to paragraph (g) of this Section, then, such mandatory prepayment shall be applied first to Loans that are ABR Loans to the full extent thereof before application to Loans that are Eurodollar Loans, in each case in a manner that minimizes the amount of any payments required to be made by the Borrower pursuant to Section 2.15.

SECTION 2.13.  Reserve Requirements; Change in Circumstances. 
(a)  Notwithstanding any other provision of this Agreement, if any Change in Law shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by any Lender (except any such reserve requirement which is reflected in the Adjusted LIBO Rate) or shall impose on such Lender or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise) by an amount deemed by such Lender to be material, then the Borrower will pay to such Lender upon demand such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered.

(b)  If any Lender shall have determined that any Change in Law regarding capital adequacy has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement or the Loans made by such Lender pursuant hereto to a level below that which such Lender or such Lender’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time the Borrower shall pay to such Lender, such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered.

(c)  A certificate of a Lender setting forth (i) the amount or amounts necessary to compensate such Lender or its holding company, as applicable, as specified in paragraph (a) or (b) above and (ii) in reasonable detail, the manner in which the amount claimed was determined shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate delivered by it within 10 days after its receipt of the same.

(d)  Failure or delay on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital shall not constitute a waiver of such Lender’s right to demand such compensation; provided that the Borrower shall not be under any obligation to compensate any Lender under paragraph (a) or (b) above with respect to increased costs or reductions with respect to any period prior to the date that is 120 days prior to such request if such Lender knew or could reasonably have been expected to know of the circumstances giving rise to

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such increased costs or reductions and of the fact that such circumstances would result in a claim for increased compensation by reason of such increased costs or reductions; provided further that the foregoing limitation shall not apply to any increased costs or reductions arising out of the retroactive application of any Change in Law within such 120-day period. The protection of this Section shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of the Change in Law that shall have occurred or been imposed.

SECTION 2.14.  Change in Legality.  (a)  Notwithstanding any other provision of this Agreement, if any Change in Law shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrower and to the Agent:

(i)  such Lender may declare that Eurodollar Loans will not thereafter (for the duration of such unlawfulness) be made by such Lender hereunder (or be continued for additional Interest Periods) and ABR Loans will not thereafter (for such duration) be converted into Eurodollar Loans, whereupon any request for a Eurodollar Borrowing (or to convert an ABR Borrowing to a Eurodollar Borrowing or to continue a Eurodollar Borrowing for an additional Interest Period) shall, as to such Lender only, be deemed a request for an ABR Loan (or a request to continue an ABR Loan as such for an additional Interest Period or to convert a Eurodollar Loan into an ABR Loan, as the case may be), unless such declaration shall be subsequently withdrawn; and

(ii)  such Lender may require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below.

In the event any Lender shall exercise its rights under (i) or (ii) above, all payments and prepayments of principal that would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans.

(b)  For purposes of this Section, a notice to the Borrower by any Lender shall be effective as to each Eurodollar Loan made by such Lender, if lawful, on the last day of the Interest Period then applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrower.

SECTION 2.15.  Indemnity.  The Borrower shall indemnify each Lender against any loss or expense that such Lender may sustain or incur as a consequence of (a) any event, other than a default by such Lender in the performance of its obligations hereunder, which results in (i) such Lender receiving or being deemed to receive any amount on account of the principal of any Eurodollar Loan prior to the end of the Interest

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Period in effect therefor (including any Interest Period for which a Borrowing is automatically continued pursuant to Section 2.09), (ii) the conversion of any Eurodollar Loan to an ABR Loan, or the conversion of the Interest Period with respect to any Eurodollar Loan, in each case other than on the last day of the Interest Period in effect therefor or (iii) any Eurodollar Loan to be made by such Lender (including any Eurodollar Loan to be made pursuant to a conversion or continuation under Section 2.09) not being made after notice of such Loan shall have been given by the Borrower hereunder (any of the events referred to in this clause (a) being called a “Breakage Event”) or (b) any default in the making of any payment or prepayment required to be made hereunder. In the case of any Breakage Event, such loss shall include an amount equal to the excess, as reasonably determined by such Lender, of (i) its cost of obtaining funds for the Eurodollar Loan that is the subject of such Breakage Event for the period from the date of such Breakage Event to the last day of the Interest Period in effect (or that would have been in effect) for such Loan over (ii) the amount of interest likely to be realized by such Lender in redeploying the funds released or not utilized by reason of such Breakage Event for such period. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error.

SECTION 2.16.  Pro Rata Treatment.  Except as required under Section 2.12 and 2.14, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the Loans, each reduction of the Commitments and each conversion of any Borrowing to or continuation of any Borrowing as a Borrowing of any Type shall be allocated pro rata among the Lenders in accordance with their Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the principal amounts of their outstanding Loans).  Each Lender agrees that in computing such Lender’s portion of any Borrowing to be made hereunder, the Agent may, in its discretion, round each Lender’s percentage of such Borrowing to the next higher or lower whole dollar amount.

SECTION 2.17.  Sharing of Setoffs.  Each Lender agrees that if it shall, through the exercise of a right of banker’s lien, setoff or counterclaim against the Borrower or any other Loan Party, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans as a result of which the unpaid principal portion of its Loans shall be proportionately less than the unpaid principal portion of the Loans of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Loans of such other Lender, so that the aggregate unpaid principal amount of the Loans and participations in Loans held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Loans then outstanding as the principal amount of its Loans prior to such exercise of banker’s lien, setoff or counterclaim or other event was to the principal amount of all Loans outstanding prior to such exercise of banker’s lien, setoff or counterclaim or other event; provided, however, that if any such purchase or purchases or adjustments shall be made pursuant to

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this Section and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrower and Holdings expressly consent to the foregoing arrangements and agree that any Lender holding a participation in a Loan deemed to have been so purchased may exercise any and all rights of banker’s lien, setoff or counterclaim with respect to any and all moneys owing by the Borrower and Holdings to such Lender by reason thereof as fully as if such Lender had made a Loan directly to the Borrower in the amount of such participation.

SECTION 2.18.  Payments.  (a)  The Borrower shall make each payment (including principal of or interest on any Borrowing or any fees or other amounts) hereunder and under any other Loan Document not later than 2:00 p.m., New York City time, on the date when due in immediately available dollars, without setoff, defense or counterclaim. Any amounts received after such time on any date may, in the discretion of the Agent, be deemed to have been received on the next succeeding Business Day.  Each such payment shall be made to the Agent at its offices at Eleven Madison Avenue, New York, NY 10010. The Agent shall promptly distribute to each Lender any payments received by the Agent on behalf of such Lender.

(b)  Except as otherwise expressly provided herein, whenever any payment (including principal of or interest on any Borrowing or any fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or fees, if applicable.

SECTION 2.19.  Taxes.  (a)  Any and all payments by or on account of any obligation of the Borrower or any other Loan Party hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that, if the Borrower or any other Loan Party shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Agent or Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower or such Loan Party shall make such deductions and (iii) the Borrower or such Loan Party shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.

(b)  In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

(c)  The Borrower shall indemnify the Agent and each Lender, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Agent or such Lender, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower or any other Loan Party hereunder or under any other Loan Document (including Indemnified Taxes or Other

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Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or by the Agent on behalf of itself or a Lender shall be conclusive absent manifest error.  Notwithstanding anything herein to the contrary, neither the Agent nor any Lender shall be indemnified for any Taxes hereunder unless such person shall make written demand on the Borrower for reimbursement of such Taxes no later than 120 days after the date on which such person makes payment of such Taxes.  If such person fails to give the Borrower timely notice as provided in the preceding sentence, the Borrower shall not have any obligation to pay such claim for reimbursement.

(d)  As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower or any other Loan Party to a Governmental Authority, the Borrower shall deliver to the Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Agent.

(e)  Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate.  In addition, any Lender, if requested by the Borrower or the Agent, shall deliver such other documentation prescribed by applicable law or reasonably requested by the Borrower or the Agent as will enable the Borrower or the Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements.  Without limiting the generality of the foregoing, if the Borrower, Holdings or the Parent is resident for tax purposes in the United States, any Foreign Lender shall deliver to the Borrower and the Agent (in such number of copies as shall be reasonably requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the request of the Borrower or the Agent, but only if such Foreign Lender is legally entitled to do so), whichever of the following is applicable:

(i)  duly completed copies of Internal Revenue Service Form W-8BEN claiming eligibility for benefits of an income tax treaty to which the United States is a party;

(ii)  duly completed copies of Internal Revenue Service Form W-8ECI;

(iii)  in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under section 881(c) of the Code, (A) a certificate substantially in the form of Exhibit L, which indicates that such

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Foreign Lender is not (I) a “bank” within the meaning of section 881(c)(3)(A) of the Code, (II) a “10 percent shareholder” of the Borrower, Holdings or the Parent within the meaning of section 871(h)(3)(B) or section 881(c)(3)(B) of the Code or (III) a “controlled foreign corporation” described in section 881(c)(3)(C) of the Code and (B) duly completed copies of  Internal Revenue Service Form W-8BEN; or

(iv)  any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in United States federal withholding tax duly completed together with such supplementary documentation as may be prescribed by applicable law to permit the Borrower to determine the withholding or deduction required to be made.

(f)  If the Agent or a Lender determines, in its sole discretion, that it has received a refund of any Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section, it shall pay over such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses of the Agent or such Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided that the Borrower, upon the request of the Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Agent or such Lender if the Agent or such Lender is required to repay such refund to such Governmental Authority.  This Section shall not be construed to require the Agent or any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the Borrower or any other person.

SECTION 2.20.  Assignment of Commitments Under Certain Circumstances; Duty to Mitigate.  (a)  In the event (i) any Lender delivers a certificate requesting compensation pursuant to Section 2.13, (ii) any Lender delivers a notice described in Section 2.14, (iii) the Borrower is required to pay any additional amount to any Lender or any Governmental Authority on account of any Lender pursuant to Section 2.19, (iv) any Lender defaults in its obligations to fund Loans hereunder or (v) any Lender refuses to consent to any amendment, waiver or other modification of any Loan Document requested by the Borrower that requires the consent of a greater percentage of the Lenders than the Required Lenders and such amendment, waiver or other modification is consented to by the Required Lenders, the Borrower may, at its sole expense and effort (including with respect to the processing and recordation fee referred to in Section 9.04(b)), upon notice to such Lender and the Agent, require such Lender to transfer and assign, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all of its interests, rights and obligations under this Agreement and the other Loan Documents to an assignee that shall assume such assigned obligations and, with respect to clause (iv) above, shall consent to such requested amendment, waiver or other modification of any Loan Documents (which assignee may be another Lender, if a Lender accepts such assignment); provided that (x) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority

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having jurisdiction, (y) the Borrower shall have received the prior written consent of the Agent, which consent shall not unreasonably be withheld or delayed and (z) the Borrower or such assignee shall have paid to the affected Lender in immediately available funds an amount equal to the sum of the principal of and interest accrued to the date of such payment on the outstanding Loans of such Lender plus all fees and other amounts accrued for the account of such Lender hereunder with respect thereto (including any amounts under Sections 2.13 and 2.15 and, if applicable, the prepayment premium pursuant to Section 2.11(b) (with such assignment being deemed to be an optional prepayment for purposes of determining the applicability of Section 2.11(b), such amount to be payable by the Borrower)); provided further that, if prior to any such transfer and assignment the circumstances or event that resulted in such Lender’s claim for compensation under Section 2.13, notice under Section 2.14 or the amounts paid pursuant to Section 2.19, as the case may be, cease to cause such Lender to suffer increased costs or reductions in amounts received or receivable or reduction in return on capital, or cease to have the consequences specified in Section 2.14, or cease to result in amounts being payable under Section 2.19, as the case may be (including as a result of any action taken by such Lender pursuant to paragraph (b) below), or if such Lender shall waive its right to claim further compensation under Section 2.13 in respect of such circumstances or event or shall withdraw its notice under Section 2.14 or shall waive its right to further payments under Section 2.19 in respect of such circumstances or event or shall consent to the proposed amendment, waiver, consent or other modification, as the case may be, then such Lender shall not thereafter be required to make any such transfer and assignment hereunder. Each Lender hereby grants to the Agent an irrevocable power of attorney (which power is coupled with an interest) to execute and deliver, on behalf of such Lender as assignor, any Assignment and Acceptance necessary to effectuate any assignment of such Lender’s interests hereunder in the circumstances contemplated by this paragraph.

(b)  If (i) any Lender shall request compensation under Section 2.13, (ii) any Lender delivers a notice described in Section 2.14 or (iii) the Borrower is required to pay any additional amount to any Lender or any Governmental Authority on account of any Lender, pursuant to Section 2.19, then such Lender shall use reasonable efforts (which shall not require such Lender to incur an unreimbursed loss or unreimbursed cost or expense or otherwise take any action inconsistent with its internal policies or legal or regulatory restrictions or suffer any disadvantage or burden deemed by it to be significant) (x) to file any certificate or document reasonably requested in writing by the Borrower or (y) to assign its rights and delegate and transfer its obligations hereunder to another of its offices, branches or affiliates, if such filing or assignment would reduce its claims for compensation under Section 2.13 or enable it to withdraw its notice pursuant to Section 2.14 or would reduce amounts payable pursuant to Section 2.19, as the case may be, in the future. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such filing or assignment, delegation and transfer.

SECTION 2.21.  Change in Control Put.  The Borrower shall notify the Agent of the occurrence of a Change in Control within one Business Day thereof, and the Agent shall promptly thereafter notify the Lenders thereof.  At any time prior to the 30th day

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following delivery of the notice by the Agent pursuant to the preceding sentence (the “Purchase Date”), each Lender shall have the right, by notice to the Borrower and the Agent, to require the Borrower, on the Purchase Date, to prepay in full (but not in part) the outstanding principal amount of such Lender’s Loans at a purchase price equal to 101% of the principal amount thereof, together with accrued and unpaid interest on the principal amount thereof to but excluding the date of payment, and all other amounts then due to such Lender (including amounts payable under Section 2.15) under the Loan Documents.

ARTICLE III

Representations and Warranties

Each of Holdings and the Borrower represents and warrants as of the Effective Date to the Agent and each of the Lenders that:

SECTION 3.01.  Organization; Powers.  Holdings, the Borrower and each of the Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (c) is qualified to do business, and is in good standing, in every jurisdiction where such qualification is required, except where the failure so to qualify could not reasonably be expected to result in a Material Adverse Effect and (d) has the power and authority to execute, deliver and perform its obligations under each of the Loan Documents to which it is a party and each other agreement or instrument contemplated thereby to which it is or will be a party and, in the case of the Borrower, to borrow hereunder.

SECTION 3.02.  Authorization.  The Transactions (a) have been duly authorized by all requisite corporate and, if required, member action and (b) will not (i) violate (A) in any material respect any provision of any material law, statute, rule or regulation, or of the certificate or articles of incorporation or other constitutive documents or by-laws of Holdings, the Borrower or any Subsidiary, (B) in any material respect any material order of any Governmental Authority or (C) any provision of any material indenture, agreement or other instrument to which the Parent, its subsidiaries, Holdings, the Borrower or any Subsidiary is a party or by which any of them or any of their property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under, or give rise to any right to accelerate or to require the prepayment, repurchase or redemption of any obligation under, any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by Holdings, the Borrower or any Subsidiary (other than any Lien permitted by Section 6.02).

SECTION 3.03.  Enforceability.  This Agreement has been duly executed and delivered by Holdings and the Borrower and constitutes, and each other Loan Document when executed and delivered by the each Loan Party party thereto will constitute, a legal,

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valid and binding obligation of such Loan Party enforceable against such Loan Party in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

SECTION 3.04.  Governmental Approvals.  No action, consent or approval of, registration or filing with or any other action by any Governmental Authority is or will be required in connection with the Transactions, except for (a) the filing of Uniform Commercial Code financing statements, (b) recordation of the Mortgages, (c) approvals identified in the Parent Undertaking as to be obtained after the Effective Date and (d) such as have been made or obtained and are in full force and effect.

SECTION 3.05.  Financial Statements; Absence of Undisclosed Liabilities; Reserve Reports.  (a)  Holdings has heretofore furnished to the Lenders (a) Holdings’ consolidated pro forma statements of revenue and direct operating expenses for the years ended December 31, 2004 and 2005 and (b) Holdings’ consolidated pro forma statements of revenue and direct operating expenses for the nine month period ended on September 30, 2006, in all cases giving effect to the contribution of the Business to the Borrower and the other Transactions to occur on or prior to the Effective Date as if they had occurred at the beginning of the period presented therein.  Such pro forma statements have been prepared in good faith by Holdings based on the assumptions used to prepare the pro forma financial information contained in the Confidential Information Memorandum (which assumptions are believed by Holdings on the Closing Date and on the Effective Date to be reasonable), are based on the best information available to the Borrower as of the date of delivery thereof, accurately reflect all adjustments required to be made to give effect to the contribution of the Business and the Transactions and present fairly, in all material respects, on a pro forma basis, the estimated consolidated results of operations of Holdings and its consolidated subsidiaries for such periods.

(b)  Except (i) as disclosed in the Confidential Information Memorandum, (ii) unrealized losses in respect of Hedging Agreements and (iii) any plugging and abandonment liabilities, after giving effect to the contribution of the Business and the other Transactions to occur on or prior to the Effective Date, none of Holdings, the Borrower or the Subsidiaries will have, as of the Effective Date, any material contingent liabilities, unusual long-term commitments or unrealized losses.

(c)  The Borrower has heretofore furnished to the Lenders a reserve report prepared by DeGolyer & MacNaughton setting forth as of June 30, 2006, the proved and probable oil and gas reserves attributable to Oil and Gas Properties included in the Business, together with a projection of the rate of production and future revenues less severance and ad valorem taxes, operating expenses and capital expenditures with respect thereto as of such date.

SECTION 3.06.  No Material Adverse Change.  Since September 30, 2006, no event, change or condition has occurred that has had, or could reasonably be expected to have, a Material Adverse Effect.

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SECTION 3.07.  Title to Properties; Possession Under Leases.  (a)  Each of the Borrower and the Subsidiaries has good and marketable title to, or valid leasehold interests in, all its material properties and assets (including Mortgaged Property), except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes.  Prior to the Closing Date, the Parent transferred good and marketable title to, or valid leasehold interests in, the Real Property included in the Business (other than the MMS Leases) to the Borrower or one of the Subsidiaries and true and complete copies of the instruments effecting such transfers were provided to the Agent prior to the Closing Date.

(b)  Each of the Borrower and the Subsidiaries has complied in all material respects with all obligations under all material leases to which it is a party and all such leases are in full force and effect.  Each of the Borrower and the Subsidiaries enjoys peaceful and undisturbed possession under all such material leases.

(c)  As of the Effective Date, neither Holdings nor the Borrower has received any notice or has any knowledge of any pending or contemplated condemnation proceeding affecting the Leases or the Mortgaged Properties or any sale or disposition thereof in lieu of condemnation.

SECTION 3.08.  Subsidiaries.  Schedule 3.08 sets forth as of the Effective Date a list of all Subsidiaries and the percentage ownership interest of Holdings, the Borrower and any Subsidiary therein. The shares of capital stock or other Equity Interests so indicated on Schedule 3.08 are fully paid and are owned by Holdings or the Borrower, directly or indirectly, free and clear of all Liens (other than Liens created under the Loan Documents or the Second Lien Loan Documents).

SECTION 3.09.  Litigation; Compliance with Laws.  (a)  Except as set forth on Schedule 3.09, there are no actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to the knowledge of Holdings or the Borrower, threatened against or affecting Holdings or the Borrower or any Subsidiary or any business, property or rights of any such person (i) that involve any Loan Document or the Transactions or (ii) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect.

(b)  Since the Closing Date, there has been no change in the status of the matters disclosed on Schedule 3.09 that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect.

(c)  None of Holdings, the Borrower or any of the Subsidiaries or any of their material properties or assets is in violation of, nor will the continued operation of their material properties and assets as currently conducted violate, any law, rule or regulation (including any zoning, building, Environmental Law, ordinance, code or approval or any building permits) or any restrictions of record or agreements affecting any Lease or Mortgaged Property, or is in default with respect to any judgment, writ, injunction,

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decree or order of any Governmental Authority, where such violation or default could reasonably be expected to result in a Material Adverse Effect.

SECTION 3.10.  Agreements.  (a)  None of Holdings, the Borrower or any of the Subsidiaries is a party to any agreement or instrument or subject to any corporate restriction that has resulted or could reasonably be expected to result in a Material Adverse Effect.

(b)  None of the Borrower or any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be expected to result in a Material Adverse Effect.  None of the Borrower or any of the Subsidiaries is in material default under any Lease.

SECTION 3.11.  Federal Reserve Regulations.  (a)  None of Holdings, the Borrower or any of the Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock.

(b)  No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase or carry Margin Stock, or to refinance Indebtedness originally incurred for such purpose, or for any purpose that entails a violation of, or that is inconsistent with, the provisions of the Regulations of the Board, including Regulation T, U or X.

SECTION 3.12.  Investment Company Act.  None of Holdings, the Borrower or any Subsidiary is an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940.

SECTION 3.13.  Use of Proceeds.  The Borrower will use the proceeds of the Loans only for the purposes specified in the recitals to this Agreement.

SECTION 3.14.  Tax Returns.  Each of the Holdings, the Borrower and the Subsidiaries has filed or caused to be filed all Federal, state, local and foreign tax returns or materials required to have been filed by it and has paid or caused to be paid all taxes due and payable by it and all assessments received by it, except (a) taxes that are being contested in good faith by appropriate proceedings and for which Holdings, the Borrower or such Subsidiary, as applicable, shall have set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect.

SECTION 3.15.  No Material Misstatements.  None of (a) the Confidential Information Memorandum or (b) any other information, report, financial statement, exhibit or schedule furnished by or on behalf of Holdings or the Borrower to the Agent or any Lender in connection with the negotiation of any Loan Document or included therein or delivered pursuant thereto contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not

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materially misleading in light of the circumstances under which they were made; provided that to the extent any such information, report, financial statement, exhibit or schedule was based upon or constitutes a forecast or projection, each of Holdings and the Borrower represents only that it was prepared in good faith based upon (i) assumptions that were reasonable at the time made and at the time such information, report, financial statement, exhibit or schedule was furnished to the Agent or such Lender and (ii) accounting principles consistent with the accounting principles used to prepare the Parent’s historical audited financial statements (it being understood that projections concerning volumes attributable to the Oil and Gas Properties and production and cost estimates thereof are necessarily based upon professional opinions, estimates and projections).

SECTION 3.16.  Employee Benefit Plans.  Each Plan or Multiemployer Plan is in compliance in all material respects with the applicable provisions of ERISA and the Code and the regulations and published interpretations thereunder. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events, could reasonably be expected to result in material liability of the Borrower or any of its ERISA Affiliates. The present value of all benefit liabilities under all Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the last annual valuation date applicable thereto, exceed the fair market value of the assets of all Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) by an amount which, if it constituted a direct liability of the Borrower, could reasonably be expected to result in a Material Adverse Effect.

SECTION 3.17.  Environmental Matters.  (a)  Except as set forth in Schedule 3.17 and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, none of Holdings, the Borrower or any of the Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability.

(b)  Since the Closing Date, there has been no change in the status of the matters disclosed on Schedule 3.17 that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect.

SECTION 3.18.  Insurance.  The Borrower and the Subsidiaries have insurance in such amounts and covering such risks and liabilities as are in accordance with normal practice in their industry.  As of the Effective Date, the insurance maintained by, or on behalf of, the Borrower and the Subsidiaries is in full force and effect and all premiums currently due have been duly paid.

SECTION 3.19.  Security Documents.  (a)  The Collateral Agreement, upon execution and delivery thereof by the parties thereto, will create in favor of the Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest

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in the Collateral (as defined in the Collateral Agreement) and the proceeds thereof and (i) when control of the Pledged Collateral (as defined in the Collateral Agreement) is obtained by the Agent, the Lien created under Collateral Agreement shall constitute a perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in such Pledged Collateral and (ii) when financing statements in appropriate form are filed in the offices specified on Schedule 3.19(a), the Lien created under the Collateral Agreement will constitute a perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in such Collateral (other than Intellectual Property, as defined in the Collateral Agreement) to the extent perfection can be obtained by filing Uniform Commercial Code financing statements, in each case prior and superior in right to any other person (other than Liens expressly permitted by Section 6.02).

(b)  Upon the recordation of the Collateral Agreement (or a short-form security agreement in form and substance reasonably satisfactory to the Borrower and the Agent) with the United States Patent and Trademark Office and the United States Copyright Office, together with the financing statements in appropriate form filed in the offices specified on Schedule 3.19(a), the Lien created under the Collateral Agreement shall constitute a perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in the Intellectual Property (as defined in the Collateral Agreement) in which a security interest may be perfected by filing in the United States and its territories and possessions, in each case prior and superior in right to any other person (other than Liens expressly permitted by Section 6.02), it being understood that subsequent recordings in the United States Patent and Trademark Office and the United States Copyright Office may be necessary to perfect a Lien on registered trademarks and patents, trademark and patent applications and registered copyrights acquired by the Loan Parties after the Effective Date.

(c)  The Mortgages are effective to create in favor of the Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable Lien on all of the Loan Parties’ right, title and interest in and to the Mortgaged Properties and the proceeds thereof, and when the Mortgages are filed in the offices specified on Schedule 3.19(c), the Mortgages shall constitute perfected Liens on, and security interests in, all right, title and interest of the Loan Parties in such Mortgaged Properties and the proceeds thereof, in each case prior and superior in right to any other person (other than Liens expressly permitted by Section 6.02).

(d)  When Account Control Agreements in respect of deposit accounts and securities accounts of the Loan Parties are executed and delivered by the applicable Loan Parties, the applicable depositary banks or securities intermediaries and the Agent, the Account Control Agreements will constitute fully perfected Liens on, and security interests in, all right, title and interest of the Loan Parties in such deposit accounts and securities accounts, in each case prior and superior in right to any other person.

SECTION 3.20.  Location of Real Property and Leased Premises.  (a)  Schedule 3.20(a) lists completely and correctly as of the Effective Date all Real Properties owned by the Borrower and the Subsidiaries.  As of the Effective Date, the

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Borrower and the Subsidiaries own in fee all the Real Properties set forth on Schedule 3.20(a).

(b)  Schedule 3.20(b) lists completely and correctly all Real Properties leased by the Borrower and the Subsidiaries as of the Effective Date and the MMS Leases.  As of the Effective Date, the Borrower and the Subsidiaries have valid leases in all the Real Properties set forth on Schedule 3.20(b).

SECTION 3.21.  Labor Matters.  Except to the extent it could not reasonably be expected to cause a Material Adverse Effect, as of the Effective Date, there are no strikes, lockouts or slowdowns against Holdings, the Borrower or any Subsidiary pending or, to the knowledge of Holdings or the Borrower, threatened. The hours worked by and payments made to employees of Holdings, the Borrower and the Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters. All payments due from Holdings, the Borrower or any Subsidiary, or for which any claim may be made against Holdings, the Borrower or any Subsidiary, on account of wages and employee health and welfare insurance and other benefits, have been paid or accrued as a liability on the books of Holdings, the Borrower or such Subsidiary. The consummation of the Transactions will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which Holdings, the Borrower or any Subsidiary is bound.

SECTION 3.22.  Solvency.  Immediately after the consummation of the Transactions to occur on or prior to the Effective Date and immediately following the making of each Loan and after giving effect to the application of the proceeds of each Loan, (a) the fair value of the assets of each Loan Party, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise, (b) the present fair saleable value of the property of each Loan Party will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured, (c) each Loan Party will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured and (d) each Loan Party will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Effective Date.

SECTION 3.23.  Sanctioned Persons.  None of Holdings, the Borrower or any Subsidiary or, to the knowledge of the Borrower, any director, officer, agent, employee or Affiliate of Holdings, the Borrower or any Subsidiary is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and the Borrower will not directly or indirectly use the proceeds of the Loans or otherwise make available such proceeds to any person for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

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SECTION 3.24.  Gas Imbalances; Prepayments.  Except as set forth in Schedule 3.24, on a net basis there are no gas imbalances, take-or-pay arrangements or other prepayments (including deferred production agreements or volumetric production payments) with respect to the Oil and Gas Properties or production therefrom that would require the Borrower or any Subsidiary to deliver Hydrocarbons either generally or produced from the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor.

ARTICLE IV

Conditions of Lending

The obligations of the Lenders to make Loans are subject to the satisfaction of the following conditions:

(a)  The Agent shall have received from (i) each party hereto (A) a counterpart of this Agreement signed on behalf of such party or (B) written evidence reasonably satisfactory to the Agent (which may include a facsimile or other electronic imaging transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement and (ii) each party to the Intercreditor Agreement (A) a counterpart of the Intercreditor Agreement signed on behalf of such party or (B) written evidence reasonably satisfactory to the Agent (which may include a facsimile or other electronic imaging transmission of a signed signature page of the Intercreditor Agreement) that such party has signed a counterpart of the Intercreditor Agreement.

(b)  The representations and warranties set forth in Article III and in each other Loan Document shall be true and correct in all material respects on and as of the date of the Effective Date with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date.

(c)  At the time of and immediately after the making of the Loans, no Default or Event of Default shall have occurred and be continuing.

(d)  The Agent shall have received written opinions of Vinson & Elkins LLP, special counsel for Holdings and the Borrower, substantially to the effect set forth in Exhibit G, in each case (A) dated the Effective Date and (B) addressed to the Agent and the Lenders.

(e)  All legal matters incidental to this Agreement, the Borrowings and extensions of credit hereunder and the other Loan Documents shall be reasonably satisfactory to the Lenders and to the Agent.

(f)  The Agent shall have received such documents and certificates as the Agent or its counsel may reasonably request relating to the organization, existence and good standing of each Loan Party, the authorization of the

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Transactions and any other legal matters relating to the Loan Parties, the Loan Documents or the Transactions, all in form and substance reasonably satisfactory to the Agent and its counsel.

(g)  The Agent shall have received a certificate, dated the Effective Date and signed by a Financial Officer of the Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b), (c), (i), (n), (o) and (s) of this Article.

(h)  The Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder or under any other Loan Document.

(i)  The Collateral and Guarantee Requirement shall have been satisfied and the Agent shall have received a completed Perfection Certificate dated the Effective Date and signed by an executive officer or Financial Officer of the Borrower, together with all attachments contemplated thereby, including the results of searches of (A) Uniform Commercial Code financing statements on file with the Secretary of State of the State of Delaware in the case of Holdings and the Borrower and with the Secretary of State of the State of New York in the case of the Parent and (B) real estate filings and Uniform Commercial Code financing statements on file with the various recording districts of the State of Alaska in which the Mortgaged Properties are situated, copies of such financing statements and real estate filings disclosed by such searches and evidence reasonably satisfactory to the Agent that the Liens indicated by such financing statements and real estate filings are permitted by Section 6.02 or have been or will be simultaneously released or terminated.

(j)  Except for approvals identified in the Parent Undertaking as to be obtained after the Effective Date, the Agent shall have received evidence that the Borrower and each applicable Subsidiary is qualified to own oil, gas and mineral leases and/or rights-of-way on Federal public lands and State lands in the State of Alaska, in accordance with all applicable laws, rules, regulations and orders of the Federal Bureau of Land Management and all applicable Governmental Authorities of the State of Alaska (including the Division of Oil and Gas with the State of Alaska Department of Natural Resources).

(k)  The Agent shall have received a copy of, or a certificate as to coverage under, the insurance policies required by Section 5.02, each of which shall be endorsed or otherwise amended to include a customary lender’s loss payable endorsement and to name the Agent as additional insured, in form and substance reasonably satisfactory to the Agent.

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(l)  The Intercompany Services Agreement, the Tax Sharing Agreements and the Parent Undertaking shall be in full force and effect in the form certified by a Responsible Officer.

(m)  The Agent shall have received a final version of the Environmental and Safety Audit dated as of February 23-26, 2006 prepared by the Parent and the related Status Report dated as of June 8, 2006.

(n)  The Hedging Agreements set forth on Schedule 1.01(a) shall be in full force and effect and shall have the effect of establishing minimum fixed prices or floors on a notional volume of crude oil and natural gas, calculated separately, equal to approximately 75% of Anticipated Production thereof that is not subject to fixed price contracts for each month in the period through and including the third anniversary of the Effective Date.

(o)  Immediately after giving effect to the Transactions to occur on or prior to the Effective Date, Holdings, the Borrower and the Subsidiaries shall have outstanding no Indebtedness or preferred Equity Interests other than (a) Indebtedness outstanding under this Agreement, (b) Indebtedness outstanding under the Second Lien Credit Agreement, (c) Indebtedness set forth on Schedule 6.01 and (d) Hedging Agreements set forth on Schedule 1.01.

(p)  The Lenders shall have received the financial statements referred to in Section 3.05, none of which shall demonstrate a material adverse change in the financial condition of Holdings and its subsidiaries from (and shall not otherwise be materially inconsistent with) the financial statements or forecasts previously provided to the Lenders in the Confidential Information Memorandum.

(q)  The Lenders shall have received the Reserve Report referred to in Section 3.05, and such Reserve Report shall not be materially inconsistent with the versions thereof previously provided to the Lenders.

(r)  The Agent shall have received a solvency certificate from a Financial Officer of Holdings, substantially in the form set forth on Exhibit H, confirming the solvency of Holdings and its subsidiaries on a consolidated basis after giving the Transactions to occur on the Effective Date.

(s)  Except for approvals identified in the Parent Undertaking as to be obtained after the Effective Date, all material requisite Governmental Authorities and third parties shall have approved or consented to the transfer of the Business to the Borrower and the Subsidiaries, the Transactions and the other transactions contemplated hereby to the extent required, all applicable appeal periods shall have expired and there shall not be any pending or threatened litigation, governmental, administrative or judicial

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action that could reasonably be expected to restrain, prevent or impose burdensome conditions on the Transactions or the other transactions contemplated hereby.

(t)  The Lenders shall have received, to the extent requested, all documentation and other information required by regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the USA PATRIOT Act.

The making of the Loans shall be deemed to constitute a representation and warranty by Holdings and the Borrower on the date of their making as to the matters specified in this Article.

ARTICLE V

Affirmative Covenants

Each of Holdings and the Borrower covenants and agrees with each Lender that so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all fees and all other expenses or amounts payable under any Loan Document shall have been paid in full, unless the Required Lenders shall otherwise consent in writing, each of Holdings and the Borrower will, and will cause each of the Subsidiaries to:

SECTION 5.01.  Existence; Compliance with Laws; Businesses and Properties.  (a)  Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except as otherwise expressly permitted under Section 6.05.

(b)  Do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect its rights, licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names, except for failures to do so that, in the aggregate, could not reasonably be expected to result in a Material Adverse Effect; maintain and operate such business in substantially the manner in which it is presently conducted and operated; comply in all material respects with all applicable laws, rules, regulations and decrees and orders of any Governmental Authority (including the qualification and bonding requirements of MMS and the State of Alaska), whether now in effect or hereafter enacted; and at all times maintain and preserve all its property and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times, except for failures to do so that, in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

SECTION 5.02.  Insurance.  (a)  Keep, or cause to be kept, its material insurable properties adequately insured at all times by financially sound and reputable insurers; maintain, or cause to be maintained, such other insurance, to such extent and against such

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risks, including fire and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses operating in the same or similar locations, including public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by it; and maintain such other insurance as may be required by law.

(b)  Cause all such policies covering any Collateral to be endorsed or otherwise amended to include a customary lender’s loss payable endorsement, in form and substance satisfactory to the Agent, which endorsement shall provide that, from and after the Closing Date, if the insurance carrier shall have received written notice from the Agent of the occurrence of an Event of Default, the insurance carrier shall pay all proceeds otherwise payable to the Borrower or the Loan Parties under such policies directly to the Agent; cause all such policies to provide that neither the Borrower, the Agent nor any other party shall be a coinsurer thereunder and to contain a “Replacement Cost Endorsement”, without any deduction for depreciation, and such other provisions as the Agent may reasonably require from time to time to protect their interests; if requested, promptly deliver certified copies of all such policies to the Agent; cause each such policy to provide that it shall not be canceled, modified or not renewed (i) by reason of nonpayment of premium upon not less than 10 days’ prior written notice thereof by the insurer to the Agent (giving the Agent the right to cure defaults in the payment of premiums) or (ii) for any other reason upon not less than 30 days’ prior written notice thereof by the insurer to the Agent; deliver to the Agent, prior to the cancellation, modification or nonrenewal of any such policy of insurance, a copy of a renewal or replacement policy (or other evidence of renewal of a policy previously delivered to the Agent) together with evidence satisfactory to the Agent of payment of the premium therefor.

(c)  With respect to any Mortgaged Property, carry and maintain comprehensive general liability insurance including the “broad form CGL endorsement” and coverage on an occurrence basis against claims made for personal injury (including bodily injury, death and property damage) and umbrella liability insurance against any and all claims, subject to the terms and conditions of the insurance policies, in no event for a combined single limit of less than $1,000,000, naming the Agent as an additional insured, on forms satisfactory to the Agent.

(d)  Notify the Agent promptly whenever any separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section is taken out by any Loan Party; and, if requested, promptly deliver to the Agent a duplicate original copy of such policy or policies.

SECTION 5.03.  Obligations and Taxes.  Pay its obligations (other than Indebtedness) promptly and in accordance with their terms, including in the case of Taxes, by causing such Taxes to be paid in accordance with the Tax Sharing Agreements, and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become more than 60 days delinquent or in default, as

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well as all lawful claims for labor, materials and supplies or otherwise that, if unpaid, might give rise to a Lien upon such properties or any part thereof; provided, however, that such payment and discharge shall not be required with respect to any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and the Holdings, Borrower or the applicable Subsidiary shall have set aside on its books adequate reserves with respect thereto in accordance with GAAP and such contest operates to suspend collection of the contested obligation, tax, assessment or charge and enforcement of a Lien and, in the case of a Mortgaged Property, there is no risk of forfeiture of such property.

SECTION 5.04.  Financial Statements, Reports, etc.  In the case of the Holdings, furnish to the Agent, which shall furnish to each Lender:

(a)  within 90 days after the end of each fiscal year (or, in the case of the fiscal year ending on December 31, 2006, within 120 days after the end of such fiscal year), its consolidated balance sheet and related statements of income, members’ equity and cash flows showing the financial condition of Holdings and its subsidiaries as of the close of such fiscal year and the results of its operations and the operations of such subsidiaries during such year, together with comparative figures for the immediately preceding fiscal year (except for any such preceding fiscal year ended prior to December 31, 2006), all audited by independent public accountants of recognized national standing and accompanied by an opinion of such accountants (which opinion shall be without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements fairly present, in all material respects, the financial condition and results of operations of Holdings and its subsidiaries on a consolidated basis in accordance with GAAP consistently applied;

(b)  within 45 days after the end of each of the first three fiscal quarters of each fiscal year (or, in the case of the fiscal quarter ending on March 31, 2007, within 60 days after the end of such fiscal quarter), its consolidated balance sheet and related statements of income, members’ equity and cash flows showing the financial condition of Holdings and its subsidiaries as of the close of such fiscal quarter and the results of its operations and the operations of such Subsidiaries during such fiscal quarter and the then elapsed portion of the fiscal year, and comparative figures for the same periods in the immediately preceding fiscal year (except for any such preceding fiscal year ended prior to December 31, 2006), all certified by one of its Financial Officers as fairly presenting, in all material respects, the financial condition and results of operations of Holdings and its subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes;

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(c)  concurrently with any delivery of financial statements under paragraph (a) or (b) above, a certificate of a Financial Officer of the Borrower, substantially in the form of Exhibit I hereto, (A) certifying that no Event of Default or Default has occurred or, if an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto, (B) setting forth computations in reasonable detail satisfactory to the Agent demonstrating compliance with the covenants contained in Sections 6.10, 6.11, 6.12 and, in the case of a certificate delivered with the financial statements required by paragraph (a) above, 6.13, (C) setting forth a true and complete list as of the last day of the most recently completed fiscal quarter of all Hedging Agreement of the Borrower and the Subsidiaries, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the net mark-to-market value thereof, any new credit support agreements relating thereto not previously disclosed in writing to the Agent, any margin required or supplied under any credit support agreement and the counterparty to each such Hedging Agreement and (D) in the case of a certificate delivered with the financial statements required by paragraph (a) above, setting forth the Borrower’s calculation of Excess Cash Flow;

(d)  within 90 days after the end of each fiscal year (or, in the case of the fiscal year ending on December 31, 2006, within 120 days after the end of such fiscal year), an operating and capital expenditure budget for Holdings and its subsidiaries, in form reasonably satisfactory to the Agent and prepared by the Borrower for each of the four fiscal quarters of such fiscal year, accompanied by the statement of a Financial Officer of the Borrower to the effect, to the best of his knowledge, the budget is a reasonable estimate for the period covered thereby;

(e)  promptly after the receipt thereof by Holdings or any of its subsidiaries, a copy of any “management letter” received by any such person from its certified public accountants and the management’s response thereto;

(f)  promptly after the furnishing thereof, copies of any material financial statement, report or notice furnished to or by any person pursuant to the terms of any indenture, loan or credit or other similar agreement regarding or with respect to any Material Indebtedness (including with respect to the Second Lien Loan Documents) not otherwise furnished to the Lenders pursuant to any other provision of this Agreement;

(g)  within 45 days after the end of each fiscal quarter (or, in the case of the fiscal quarter ending on March 31, 2007, within 60 days after the end of such fiscal quarter), a report setting forth, for each elapsed calendar month during the then current fiscal year, the volume of production and sales attributable to production (and the prices at which such sales were made and the revenues derived from such sales) for each such calendar month from the Oil and Gas Properties, and setting forth the related ad valorem, severance

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and production taxes and lease operating expenses attributable thereto and incurred for each such calendar month;

(h)  promptly after the request by any Lender, all documentation and other information that such Lender reasonably requests in order to comply with its ongoing obligations under applicable “know your customer” and anti-money laundering rules and regulations, including the USA PATRIOT Act;

(i)  promptly following receipt thereof, on and after the effectiveness of the Pension Act, copies of (i) any documents described in Section 101(k)(1) of ERISA that the Borrower and any of its ERISA Affiliates has received following request thereof with respect to any Multiemployer Plan and (ii) any notices described in Section 101(l)(1) of ERISA that the Borrower or any of its ERISA Affiliates has received following request thereof with respect to any Multiemployer Plan; and

(j)  promptly, from time to time, such other information regarding the operations, business affairs and financial condition of Holdings, the Borrower or any Subsidiary, or compliance with the terms of any Loan Document, as the Agent or any Lender may reasonably request.

SECTION 5.05.  Litigation and Other Notices.  Furnish to the Agent and each Lender prompt written notice of the following:

(a)  any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) taken or proposed to be taken with respect thereto;

(b)  the filing or commencement of, or any threat or notice of intention of any person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against the Borrower or any Affiliate thereof that could reasonably be expected to result in a Material Adverse Effect;

(c)  the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of Holdings and its subsidiaries in an aggregate amount exceeding $5,000,000; and

(d)  any development that has resulted in, or could reasonably be expected to result in, a Material Adverse Effect.

SECTION 5.06.  Information Regarding Collateral.  (a)  Furnish to the Agent prompt written notice of any change (i) in any Loan Party’s legal name, as reflected in its organizational documents, (ii) in the jurisdiction of organization or formation of any Loan Party, (iii) if it is not a registered organization (as defined in the New York Uniform Commercial Code), in the location of its chief executive office or its principal place of

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business, (iv) in any Loan Party’s organizational form or (v) in any Loan Party’s Federal Taxpayer Identification Number or organizational identification number assigned by the jurisdiction of organization.  Holdings and the Borrower agree to promptly provide the Agent with certified organizational documents reflecting any of the changes described in the first sentence of this paragraph.  Holdings and the Borrower agree not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the Uniform Commercial Code or otherwise that are required in order for the Agent to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral. Holdings and the Borrower also agree promptly to notify the Agent if any material portion of the Collateral is damaged or destroyed.

(b)  In the case of the Borrower, upon request by the Agent, at the time of delivery of annual financial statements pursuant to Section 5.04(a), deliver to the Agent a certificate of a Financial Officer of the Borrower setting forth the information required pursuant to Section 2 of the Perfection Certificate or confirming that there has been no change in such information since the date of the Perfection Certificate delivered on the Effective Date or the date of the most recent certificate delivered pursuant to this Section.

SECTION 5.07.  Maintaining Records; Access to Properties and Inspections.  Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of law are made of all dealings and transactions in relation to its business and activities. Each Loan Party will, and will cause each of its subsidiaries to, permit any representatives designated by the Agent or any Lender, upon reasonable prior notice, to visit and inspect the financial records and the properties of such person at reasonable times and as often as reasonably requested and to make extracts from and copies of such financial records, and permit any representatives designated by the Agent or any Lender to discuss the affairs, finances and condition of such person with the officers thereof and independent accountants therefor, all at the reasonable cost and expense of the Borrower.

SECTION 5.08.  Use of Proceeds.  Use the proceeds of the Loans only for the purposes specified in the recitals to this Agreement.

SECTION 5.09.  Employee Benefits.  Furnish to the Agent as soon as possible after, and in any event within ten days after any responsible officer of Holdings, the Borrower or any ERISA Affiliate knows or has reason to know that, any ERISA Event has occurred that, alone or together with any other ERISA Event, could reasonably be expected to result in liability of Holdings, the Borrower or any ERISA Affiliate in an aggregate amount exceeding $5,000,000, a statement of a Financial Officer of Holdings or the Borrower setting forth details as to such ERISA Event and the action, if any, that Holdings or the Borrower proposes to take with respect thereto.  Upon request by a Lender, promptly request (a) the documents described in Section 101(k)(1) of ERISA with respect to a Multiemployer Plan to which the Borrower or any of its ERISA Affiliates contributes and (b) notices described in Section 101(l)(1) of ERISA with respect to a Multiemployer Plan to which the Borrower or any of its ERISA Affiliates contributes.

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SECTION 5.10.  Compliance with Environmental Laws.  Except to the extent it could not reasonably be expected to cause a Material Adverse Effect, (a) comply, and cause all lessees and other persons occupying its properties to comply, in all material respects with all Environmental Laws applicable to its operations and properties; obtain and renew all material permits, licenses or other approvals necessary for its operations and properties pursuant to any Environmental Law and (b) undertake and conduct any remedial action necessary to remove or clean up any Hazardous Materials from any of its current and former properties in accordance with Environmental Laws; provided, however, that none of Holdings, the Borrower or any Subsidiary shall be required to undertake any remedial action required by Environmental Laws to the extent that its obligation to do so is being contested in good faith and by proper proceedings and appropriate reserves are being maintained with respect to such circumstances in accordance with GAAP.

SECTION 5.11.  Preparation of Environmental Reports.  If a Default caused by reason of a breach of Section 3.17 or Section 5.10 shall have occurred and be continuing for more than 20 days without Holdings, the Borrower or any Subsidiary commencing activities reasonably likely to remediate the condition giving rise to such Default, at the written request of the Required Lenders through the Agent, provide to the Lenders within 45 days after such request, at the expense of the Loan Parties, an environmental site assessment report regarding the matters which are the subject of such Default prepared by an environmental consulting firm reasonably acceptable to the Agent and indicating compliance or non-compliance with Environmental Laws and the presence or absence of Hazardous Materials and the estimated cost of any corrective or remedial action in connection with such Default.

SECTION 5.12.  Further Assurances.  Execute any and all further documents, financing statements, agreements and instruments, and take all further action (including filing and recording of Uniform Commercial Code and other financing statements, fixture filings, mortgages and deeds of trust) that may be required under applicable law, or that the Required Lenders or the Agent may reasonably request, to cause the Collateral and Guarantee Requirement to be and remain satisfied at all times, all at the expense of the Loan Parties.  If any additional Subsidiary is formed or acquired after the Effective Date, the Borrower will, within 20 days after such Subsidiary is formed or acquired, notify the Agent and the Lenders thereof and cause the Collateral and Guarantee Requirement to be satisfied with respect to such Subsidiary and with respect to any Equity Interest in or Indebtedness of such Subsidiary owned by or on behalf of any Loan Party.  In addition, from time to time, each of Holdings and the Borrower will, at its cost and expense, promptly secure the Obligations by pledging or creating, or causing to be pledged or created, perfected Liens with respect to its and the Subsidiaries’ assets and properties as is necessary to cause the Collateral and Guarantee Requirement to be and remain satisfied at all times. Such security interests and Liens will be created under the Security Documents and other security agreements, mortgages, deeds of trust and other instruments and documents in form and substance satisfactory to the Agent, and the Borrower shall deliver or cause to be delivered to the Lenders all such instruments and documents (including legal opinions and lien searches) as the Agent shall reasonably request to evidence compliance with this Section. The Borrower agrees to provide such

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evidence as the Agent shall reasonably request as to the perfection and priority status of each such security interest and Lien.  In furtherance of the foregoing, the Borrower will give prompt notice to the Agent of the acquisition by it or any of the Subsidiaries of any real property (or any interest in real property) having a value in excess of $1,000,000.

SECTION 5.13.  Compliance with Leases.  Maintain all Leases in full force and effect (other than as a result of their expiration in accordance with their terms), free of any material default by the Borrower or the applicable Subsidiary.

SECTION 5.14.  Interest Rate Protection Agreements.  As promptly as practicable and in any event within 120 days after the Closing Date, enter into, and for a period of not less than three years after the Closing Date maintain in effect, one or more Hedging Agreements, the effect of which is to fix or cap the interest rates applicable to at least 50% of the Indebtedness that is projected to be outstanding under the Loan Documents and the Second Lien Loan Documents, in each case on terms and conditions reasonably acceptable, taking into account current market conditions, to the Agent.  Each such Hedging Agreement shall be entered into with a person that is reasonably acceptable to the Agent.

SECTION 5.15.  Commodity Price Hedging Program.  At all times maintain one or more Hedging Agreements with persons reasonably acceptable to the Agent, the effect of which is to establish minimum fixed prices or floors within $0.50/Mmbtu and $3.50/Bbl of the NYMEX strip prices (WTI and Henry Hub) available on the date of entry into such Hedging Agreements on a notional volume of crude oil and natural gas, calculated separately, equal to not less than 60% of Anticipated Production thereof that is not subject to fixed price contracts for each month in a period not shorter than the then ensuing 12 months.

SECTION 5.16.  Delivery of Reserve Reports.  (a)  On or prior to September 1 of each year, commencing September 1, 2007, the Borrower shall furnish to the Agent and the Lenders reserve reports prepared by or under the supervision of a reserve engineer of seniority reasonably acceptable to the Agent acting on behalf of the Borrower setting forth as of June 30 of such year, the proved and probable oil and gas reserves attributable to the Oil and Gas Properties, together with (i) a projection of the rate of production and future revenues less severance and ad valorem taxes, operating expenses and capital expenditures with respect thereto as of such date and (ii) a writing from a Responsible Officer of the Borrower, substantially in the form of Exhibit J hereto, certifying that (A) there are no statements or conclusions in such reserve reports which are based upon or include materially misleading information or fail to take into account material information regarding the matters reported therein (it being understood that projections concerning volumes attributable to the Oil and Gas Properties and production and cost estimates contained in each reserve report are necessarily based upon professional opinions, estimates and projections), (B) such reserve reports were prepared in accordance with the procedures used to prepare the reserve report as of June 30 of the immediately preceding year (or, in the case of the reserve report as of June 30, 2007, the reserve reports referred to in Section 3.05(c)) and (C) a writing from a Responsible Officer of the Borrower, substantially in the form of Exhibit K hereto, certifying that

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there are no gas imbalances, take-or-pay arrangements or other prepayments in excess of the volume specified in Schedule 3.24 or permitted by 6.17(b) with respect to the Oil and Gas Properties evaluated in such reserve reports which would require the Borrower or any Subsidiary to deliver Hydrocarbons either generally or produced from the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor.

(b)  On or prior to March 1 of each year, commencing March 1, 2007, the Borrower shall furnish to the Agent and the Lenders a reserve report prepared by an Independent Engineer setting forth as of December 31 of the immediately preceding year, the proved and probable oil and gas reserves attributable to the Oil and Gas Properties, together with (i) a projection of the rate of production and future revenues less severance and ad valorem taxes, operating expenses and capital expenditures with respect thereto as of such date, (ii) a writing from a Responsible Officer of the Borrower, substantially in the form of Exhibit J hereto, certifying that (x) there are no statements or conclusions in such reserve reports which are based upon or include materially misleading information or fail to take into account material information regarding the matters reported therein (it being understood that projections concerning volumes attributable to the Oil and Gas Properties and production and cost estimates contained in each reserve report are necessarily based upon professional opinions, estimates and projections) and (y) such reserve reports were prepared in accordance with the procedures used to prepare the reserve report as of December 31 of the immediately preceding year (or, in the case of the reserve report as of December 31, 2006, the reserve reports referred to in Section 3.05(c)) and (iii) a writing from a Responsible Officer of the Borrower, substantially in the form of Exhibit K hereto, certifying that there are no gas imbalances, take-or-pay arrangements or other prepayments in excess of the volume specified in Schedule 3.24 or permitted by 6.17(b) with respect to the Oil and Gas Properties evaluated in such reserve reports which would require the Borrower or any Subsidiary to deliver Hydrocarbons either generally or produced from the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor.

(c)  If requested by the Required Lenders, but not more than once during any 12 month period, the Borrower shall furnish to the Agent and the Lenders as soon as reasonably practicable, a reserve report prepared by or under the supervision of a reserve engineer of seniority reasonably acceptable to the Agent acting on behalf of the Borrower and audited by an Independent Engineer setting forth as of the date specified in such request, the proved and probable oil and gas reserves attributable to the Oil and Gas Properties, together with (i) a projection of the rate of production and future revenues less severance and ad valorem taxes, operating expenses and capital expenditures with respect thereto as of such date, (ii) a writing from a Responsible Officer of the Borrower, substantially in the form of Exhibit J hereto, certifying that (x) there are no statements or conclusions in such reserve reports which are based upon or include materially misleading information or fail to take into account material information regarding the matters reported therein (it being understood that projections concerning volumes attributable to the Oil and Gas Properties and production and cost estimates contained in each reserve report are necessarily based upon professional opinions, estimates and projections) and (y) such reserve reports were prepared in accordance with the procedures

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used to prepare the most recently delivered Reserve Report) and (iii) a writing from a Responsible Officer of the Borrower, substantially in the form of Exhibit K hereto, certifying that there are no gas imbalances, take-or-pay arrangements or other prepayments in excess of the volume specified in Schedule 3.24 or permitted by 6.17(b) with respect to the Oil and Gas Properties evaluated in such reserve reports which would require the Borrower or any Subsidiary to deliver Hydrocarbons either generally or produced from the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor.

SECTION 5.17.  Title Information.  (a)  On or prior to the delivery to the Agent of each Reserve Report required to be delivered by Section 5.16, the Borrower will deliver to the Agent title information, in form and substance reasonably acceptable to the Agent, that, together with title information previously delivered to the Agent, constitutes title information with respect to Oil and Gas Properties representing at least 80% of Proved PV-10% as of the date of such Reserve Report.

(b)  Within 90 days after notice from the Agent that material title defects or exceptions exist with respect to any Oil and Gas Properties for which title information was provided pursuant paragraph (a) of this Section, the Borrower shall either (i) cure any such material title defects or exceptions, (ii) create a fully perfected Lien on substitute Oil and Gas Properties with no material title defects or exceptions theretofore not composing the Mortgaged Properties that are reasonably acceptable to the Agent or (iii) deliver title information, in form and substance reasonably acceptable to the Agent, that, together with the title information previously delivered to the Agent, constitutes title information with respect to Oil and Gas Properties representing at least 80% of Proved PV-10% as of the date of the most recently delivered Reserve Report (it being understood that any Oil and Gas Property with material title defects or exceptions that have not been cured within 90 days after notice from the Agent pursuant to this paragraph shall be excluded from the determination of such Proved PV-10%).

(c)  If the Borrower is unable to comply with paragraph (b) of this Section, such failure to comply shall not constitute a Default.  Any Oil and Gas Property in respect of which paragraph (b) of this Section shall not have been complied with shall be excluded from the Oil and Gas Properties for purposes of calculating Proved PV-10%, Probable PV-10% and PDP PV-10% to the extent of such title defect until such time as the Borrower has complied with the paragraph (b) of this Section in respect of such Oil and Gas Property.

SECTION 5.18.  Title.  Take such actions as are reasonably requested by the Agent in order to vest good and marketable title or leasehold interest in the Real Properties purported to be owned or leased by the Borrower and the Subsidiaries as of the Closing Date.

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ARTICLE VI

Negative Covenants

Each of Holdings and the Borrower covenants and agrees with each Lender that, so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all fees and all other expenses or amounts payable under any Loan Document have been paid in full, unless the Required Lenders shall otherwise consent in writing, neither Holdings nor the Borrower will, nor will they cause or permit any of the Subsidiaries to:

SECTION 6.01.  Indebtedness.  Incur, create, assume or permit to exist any Indebtedness, except:

(a)  Indebtedness existing on the date hereof and set forth in Schedule 6.01 and any extensions or renewals of such Indebtedness to the extent the principal amount of such Indebtedness is not increased, neither the final maturity nor the weighted average life to maturity of such Indebtedness is decreased, such Indebtedness, if subordinated to the Obligations, remains so subordinated on terms no less favorable to the Lenders, and the original obligors in respect of such Indebtedness remain the only obligors thereon;

(b)  Indebtedness created under the Loan Documents;

(c)  Indebtedness created under the Second Lien Loan Documents and any Permitted Refinancing Indebtedness used to Refinance such Indebtedness;

(d)  intercompany Indebtedness of the Borrower and the Subsidiaries to the extent permitted by Section 6.04(c); provided that any such Indebtedness shall not have been transferred or pledged to an third party;

(e)  Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition, construction or improvement of real property (other than Oil and Gas Properties), improvements thereto and equipment, and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof; provided that (i) such Indebtedness is incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement and (ii) the aggregate principal amount of Indebtedness permitted by this paragraph (e), when combined with the aggregate principal amount of all Capital Lease Obligations and Synthetic Lease Obligations incurred pursuant to Section  6.01(f) shall not exceed $15,000,000 at any time outstanding;

(f)  Capital Lease Obligations and Synthetic Lease Obligations in an aggregate principal amount, when combined with the aggregate principal amount of all Indebtedness incurred pursuant to Section 6.01(e), not in excess of $15,000,000 at any time outstanding;

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(g)  Indebtedness under performance bonds or with respect to workers’ compensation claims, in each case incurred in the ordinary course of business;

(h)  Guarantees permitted under Section 6.04;

(i)  Indebtedness constituting Hedging Agreements permitted by this Agreement; and

(j)  other Indebtedness of the Borrower or the Subsidiaries in an aggregate outstanding principal amount not in excess $10,000,000 at any time.

SECTION 6.02.  Liens.  Create, incur, assume or permit to exist any Lien on any property or assets (including Equity Interests in or other securities of any person, including the Borrower or any Subsidiary) now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except:

(a)  Liens on property or assets of the Borrower and its Subsidiaries existing on the date hereof and set forth in Schedule 6.02; provided that such Liens shall secure only those obligations which they secure on the date hereof and extensions, renewals and replacements thereof permitted hereunder;

(b)  any Lien created under the Loan Documents;

(c)  any Lien created under the Second Lien Loan Documents and Liens securing Permitted Refinancing Indebtedness used to Refinance the Indebtedness under the Second Lien Loan Documents;

(d)  Liens for taxes not yet due or which are being contested in compliance with Section 5.03;

(e)  carriers’, maritime, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business or Liens consisting of joint operating agreements, in each case securing obligations that are not due and payable or which are being contested in compliance with Section 5.03;

(f)  pledges and deposits made in the ordinary course of business in compliance with workmen’s compensation, unemployment insurance and other social security laws or regulations;

(g)  deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases (other than Capital Lease Obligations and Synthetic Lease Obligations), statutory obligations, surety and appeal bonds,

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performance bonds and other obligations of a like nature incurred in the ordinary course of business;

(h)  zoning restrictions, easements, rights-of-way, restrictions on use of real property and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Borrower or any of its Subsidiaries;

(i)  purchase money security interests in real property (other than Oil and Gas Properties), improvements thereto or equipment hereafter acquired (or, in the case of improvements, constructed) by the Borrower or any Subsidiary; provided that (i) such security interests secure Indebtedness permitted by Section 6.01(e), (ii) such security interests are incurred, and the Indebtedness secured thereby is created, within 90 days after such acquisition (or construction), (iii) the Indebtedness secured thereby does not exceed the lesser of the cost or the fair market value of such real property, improvements or equipment at the time of such acquisition (or construction) and (iv) such security interests do not apply to any other property or assets of the Borrower or any Subsidiary;

(j)  Liens arising out of judgments or awards that do not constitute an Event of Default under clause (i) of Article VII; and

(k)  other Liens securing obligations of the Borrower or the Subsidiaries in an aggregate principal amount not in excess of $5,000,000 at any time.

SECTION 6.03.  Sale and Lease-Back Transactions.  Enter into any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred.

SECTION 6.04.  Investments, Loans and Advances.  Purchase, hold or acquire any Equity Interests, evidences of indebtedness or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment or any other interest in, any other person, except:

(a)  (i) investments by Holdings, the Borrower and the Subsidiaries existing on the Closing Date in the Equity Interests of the Borrower and the Subsidiaries and (ii) additional investments by Holdings, the Borrower and the Subsidiaries in Equity Interests in the Borrower and the Subsidiaries; provided that any such Equity Interests held by a Loan Party shall be pledged pursuant to the Collateral Agreement;

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(b)  Permitted Investments;

(c)  loans or advances made by Holdings or the Borrower to any Subsidiary and made by any Subsidiary to Holdings, the Borrower or any other Subsidiary;

(d)  investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary course of business;

(e)  loans and advances in the ordinary course of business to employees so long as the aggregate principal amount thereof at any time outstanding (determined without regard to any write-downs or write-offs of such loans and advances) shall not exceed $1,000,000;

(f)  Hedging Agreements permitted or required by this Agreement;

(g)  Permitted Acquisitions;

(h)  Investments in the form of non-cash consideration received as a result of asset sales permitted by Section 6.05(b);

(i)  Guarantees by the Borrower of Indebtedness and other obligations of any Subsidiary and Guarantees by any Subsidiary of Indebtedness and other obligations of the Borrower or any other Subsidiary; provided that a Subsidiary that has not Guaranteed the Obligations pursuant to the Collateral Agreement shall not Guarantee any Indebtedness or other obligations of any Loan Party;

(j)  investments in joint ventures for the purpose of exploration, development, gathering and processing Hydrocarbons in an amount not to exceed $10,000,000 in the aggregate during the term of this Agreement;

(k)  investments in Oil and Gas Properties (A) made during any fiscal year that, together with the total consideration paid in connection with any acquisitions pursuant to Section 6.04(g) (including any Indebtedness of the Acquired Entity that is assumed by the Borrower or any Subsidiary following such acquisition and any payments following such acquisition pursuant to earn-out provisions or similar obligations) made in such fiscal year, shall not in the aggregate exceed $15,000,000 and (B) made during the term of this Agreement that, together with the total consideration paid in connection with any acquisitions pursuant to Section 6.04(g) (including any Indebtedness of the Acquired Entity that is assumed by the Borrower or any Subsidiary following such acquisition and any payments following such acquisition pursuant to earn-out provisions or similar obligations) made during the term of this Agreement, shall not in the aggregate exceed $50,000,000; and

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(l)  in addition to investments permitted by paragraphs (a) through (g) above, additional investments, loans and advances by the Borrower and the Subsidiaries so long as the aggregate amount invested, loaned or advanced pursuant to this paragraph (h) (determined without regard to any write-downs or write-offs of such investments, loans and advances) does not exceed $10,000,000 in the aggregate.

SECTION 6.05.  Mergers, Consolidations, Sales of Assets and Acquisitions.  (a)  Merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all the assets (whether now owned or hereafter acquired) of the Borrower or less than all the Equity Interests of any Subsidiary, or purchase, lease or otherwise acquire (in one transaction or a series of transactions) all or any substantial part of the assets of any other person, except that (i) the Borrower and any Subsidiary may purchase and sell inventory in the ordinary course of business and (ii) if at the time thereof and immediately after giving effect thereto no Event of Default or Default shall have occurred and be continuing (A) any wholly owned Subsidiary may merge into the Borrower in a transaction in which the Borrower is the surviving corporation, (B) any wholly owned Subsidiary may merge into or consolidate with any other wholly owned Subsidiary in a transaction in which the surviving entity is a wholly owned Subsidiary and no person other than the Borrower or a wholly owned Subsidiary receives any consideration (provided that if any party to any such transaction is a Loan Party, the surviving entity of such transaction shall be a Loan Party) and (C) the Borrower and the Subsidiaries may make Permitted Acquisitions (including through mergers of Subsidiaries).

(b)  Make any Asset Sale otherwise permitted under paragraph (a) above unless (i) such Asset Sale is for consideration at least 75% of which is cash, (ii) such consideration is at least equal to the fair market value of the assets being sold, transferred, leased or disposed of and (iii) the fair market value of all assets sold, transferred, leased or disposed of pursuant to this paragraph (b) during any fiscal year shall not exceed an amount equal to 7.5% of the Proved PV-10% as of the end of the fiscal year most recently ended prior to the date of such sale, transfer, lease or disposition for which a Reserve Report has been delivered, calculated on a pro forma basis for acquisitions consummated since the end of such fiscal year in the manner specified in the definition of “Proved PV-10%”.

SECTION 6.06.  Restricted Payments; Payment of Certain Indebtedness; Restrictive Agreements.  (a)  Declare or make, or agree to declare or make, directly or indirectly, any Restricted Payment or enter into or be a party to any Synthetic Purchase Agreement, or incur any obligation (contingent or otherwise) to do so; provided, however, that (i) any Subsidiary may declare and pay dividends or make other distributions ratably to its equity holders, (ii) the Borrower may make Restricted Payments to Holdings (x) in an amount not to exceed $100,000 in any fiscal year, to the extent necessary to pay general corporate and overhead expenses incurred by Holdings in the ordinary course of business; provided, however, that all Restricted Payments made to Holdings pursuant to this clause (ii) are used by Holdings for the purposes specified

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herein within 20 days of the receipt thereof, (iii) the Borrower and Holdings may make the Distribution and (iv) the Borrower may make payments in accordance with the Intercompany Services Agreement or the Tax Sharing Agreements in accordance with their terms.

(b)  Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, make or agree to pay or make, directly or indirectly, any payment or other distribution (whether in cash, securities or other property) of or in respect of principal of or interest on any Indebtedness, or any payment or other distribution (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancelation or termination of any Indebtedness, except:

(i)  payment of Indebtedness created under the Loan Documents;

(ii)  payment of scheduled interest and principal payments as and when due in respect of any Indebtedness;

(iii)  mandatory prepayments of the Second Lien Loans in accordance with the terms of the Second Lien Loan Documents;

(iv)  payment when and as due of Indebtedness under Hedging Agreements permitted under this Agreement;

(v)  refinancings of Indebtedness to the extent permitted by Section 6.01; and

(vi)  payments of secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness.

(c)  Enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (i) the ability of Holdings, the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets to secure Indebtedness under the Loan Documents or (ii) the ability of any Subsidiary to pay dividends or other distributions with respect to any of its Equity Interests or to make or repay loans or advances to the Borrower or any other Subsidiary; provided that (A) the foregoing shall not apply to restrictions and conditions imposed by law or by any Loan Document or any Second Lien Loan Document, (B) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (C) clause (i) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (D) clause (i) of the foregoing shall not apply to customary provisions in leases and other contracts restricting the assignment thereof.

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SECTION 6.07.  Transactions with Affiliates.  Except for transactions between or among Loan Parties, sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except that the Borrower or any Subsidiary (a) may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties (including transactions on such terms and conditions with the Cook Inlet Pipeline Company) and (b) may make distributions and payments in accordance with the Intercompany Services Agreement as in effect on the Closing Date and the Tax Sharing Agreements in accordance with their terms (it being understood that distributions and payments made in accordance with the Intercompany Services Agreement, as the same may be amended or otherwise modified from time to time, that comply with clause (a) above shall not violate this Section).

SECTION 6.08.  Business of Holdings, Borrower and Subsidiaries; No Foreign Subsidiaries.  (a)  With respect to Holdings, engage in any business activities or have any assets or liabilities other than its ownership of the Equity Interests in the Borrower and other assets and liabilities incidental thereto, including its liabilities under the Loan Documents and the Second Lien Loan Documents.

(b)  With respect to the Borrower and the Subsidiaries, engage at any time in any business or business activity other than the business currently conducted by it and business activities reasonably related thereto.

(c)  Neither Holdings nor the Borrower shall acquire or own any Foreign Subsidiary.

SECTION 6.09.  Amendment of Certain Indebtedness and Agreements.  Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, amend, modify or waive any of its rights under (a) (i) the Intercompany Services Agreement, (ii) the Tax Sharing Agreements, (iii) the Master Conveyance or (iv) its certificate of incorporation, by-laws or other organizational documents, except, in each case, for amendments, modifications or waivers to any of the foregoing documents that, when taken together will all prior amendments, modifications and waivers to such document, are not material and adverse to the Borrower or the Subsidiaries or to the rights or interests of the Lenders or (b) the Second Lien Loan Documents, except to the extent permitted under the Intercreditor Agreement.

SECTION 6.10.  Interest Coverage Ratio.  Permit the Interest Coverage Ratio for the period of four consecutive fiscal quarters ending on the last day of any fiscal quarter set forth below to be less than the ratio set forth opposite such fiscal quarter:

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Fiscal quarter ending on	Ratio
March 31, 2007	1.65 to 1.00
June 30, 2007	1.65 to 1.00
September 30, 2007	1.65 to 1.00
December 31, 2007	1.65 to 1.00
March 31, 2008	2.15 to 1.00
June 30, 2008	2.15 to 1.00
September 30, 2008	2.15 to 1.00
December 31, 2008	2.15 to 1.00
March 31, 2009	2.75 to 1.00
June 30, 2009	2.75 to 1.00
September 30, 2009	2.75 to 1.00
December 31, 2009	2.75 to 1.00
March 31, 2010	3.25 to 1.00
June 30, 2010	3.25 to 1.00
September 30, 2010 and thereafter	3.25 to 1.00

SECTION 6.11.  Asset Coverage Ratios.  (a)  Proved Total Debt Coverage Ratio.  Permit the Proved Total Debt Coverage Ratio as of the last day of any fiscal quarter set forth below to be less than the ratio set forth below opposite such fiscal quarter:

Fiscal quarter ending on	Ratio
March 31, 2007	1.15 to 1.00
June 30, 2007	1.15 to 1.00
September 30, 2007	1.15 to 1.00
December 31, 2007	1.15 to 1.00
March 31, 2008	1.50 to 1.00
June 30, 2008	1.50 to 1.00
September 30, 2008	1.50 to 1.00
December 31, 2008	1.50 to 1.00
March 31, 2009	1.75 to 1.00
June 30, 2009	1.75 to 1.00
September 30, 2009	1.75 to 1.00
December 31, 2009	1.75 to 1.00
March 31, 2010	2.00 to 1.00
June 30, 2010	2.00 to 1.00
September 30, 2010 and thereafter	2.00 to 1.00

(b)  PDP Total Debt Coverage Ratio.  Permit the PDP Total Debt Coverage Ratio as of the last day of any fiscal quarter to be less than 0.50 to 1.00.

(c)  PDP First Lien Debt Coverage Ratio.  Permit the PDP First Lien Debt Coverage Ratio as of the last day of any fiscal quarter to be less than 0.675 to 1.00.

SECTION 6.12.  Leverage Ratio.  Permit the Leverage Ratio as of the last day of any fiscal quarter set forth below to be greater than the ratio set forth opposite such fiscal quarter:

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Fiscal quarter ending on	Ratio
March 31, 2007	5.750 to 1.00
June 30, 2007	5.750 to 1.00
September 30, 2007	5.750 to 1.00
December 31, 2007	5.750 to 1.00
March 31, 2008	5.375 to 1.00
June 30, 2008	5.000 to 1.00
September 30, 2008	4.625 to 1.00
December 31, 2008	4.250 to 1.00
March 31, 2009	4.000 to 1.00
June 30, 2009	3.750 to 1.00
September 30, 2009	3.500 to 1.00
December 31, 2009	3.250 to 1.00
March 31, 2010	3.150 to 1.00
June 30, 2010	3.150 to 1.00
September 30, 2010 and thereafter	3.000 to 1.00

SECTION 6.13.  Capital Expenditures.  (a)  1P Capital Expenditures.  Permit the aggregate amount of 1P Capital Expenditures made by the Borrower and the Subsidiaries in any fiscal year set forth below to the exceed the amount set forth below opposite such period:

Fiscal year ending on	Amount
December 31, 2007	$	45,000,000
December 31, 2008	$	62,500,000
December 31, 2009	$	27,500,000
December 31, 2010	$	19,400,000

; provided that (i) to the extent the aggregate amount of 1P Capital Expenditures made by the Borrower and the Subsidiaries during any fiscal year set forth above is less than the amount set forth opposite such fiscal year, such shortfall (to the extent not used to make 2P Capital Expenditures as contemplated by paragraph (b) of this Section) may be carried forward and used to make 1P Capital Expenditures in the immediately subsequent fiscal year and (ii) the amount that was offered to the Lenders and the Second Lien Lenders to prepay outstanding Loans pursuant to Section 2.12(c) and outstanding Second Lien Loans pursuant to Section 2.12(c) of the Second Lien Credit Agreement but was not accepted by either the Lenders or the Second Lien Lenders in respect of any fiscal year may be carried forward and used to make 1P Capital Expenditures in the immediately subsequent fiscal year to the extent not used to make 2P Capital Expenditures as contemplated by paragraph (b) of this Section.

(b)  2P Capital Expenditures.  Permit the aggregate amount of 2P Capital Expenditures made by the Borrower and the Subsidiaries in any fiscal year to be greater than $5,000,000; provided that (i) to the extent the aggregate amount of 1P Capital

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Expenditures made by the Borrower and the Subsidiaries during any fiscal year is less than the amount permitted to be made under paragraph (a) of this Section, and such shortfall is not used to make 1P Capital Expenditures in the immediately subsequent fiscal year, 50% of such shortfall may be used to make 2P Capital Expenditures in such immediately subsequent fiscal year and (ii) the amount that was offered to the Lenders and the Second Lien Lenders to prepay outstanding Loans pursuant to Section 2.12(c) and outstanding Second Lien Loans pursuant to Section 2.12(c) of the Second Lien Credit Agreement but was not accepted by either the Lenders or the Second Lien Lenders in respect of any fiscal year may be carried forward and used to make 2P Capital Expenditures in the immediately subsequent fiscal year to the extent not used to make 1P Capital Expenditures as contemplated by paragraph (a) of this Section.

SECTION 6.14.  Fiscal Year.  With respect to Holdings and the Borrower, change their fiscal year-end to a date other than December 31.

SECTION 6.15.  Certain Equity Interests.  (a)  In the case of Holdings, issue any Equity Interest that is not Qualified Capital Stock.

(b)  In the case of the Borrower, issue any Equity Interests to any person other than Holdings.

(c)  In the case of any Subsidiary, issue any Equity Interests to any person other than the Borrower or another Subsidiary.

SECTION 6.16.  Hedging Agreements.  (a)  Enter into any Hedging Agreement, other than (i) Hedging Agreements required by Sections 5.14 and 5.15 and (ii) subject to paragraph (b), Hedging Agreements entered into in the ordinary course of business (and not for speculative purposes) to hedge or mitigate risks to which the Borrower or any Subsidiary is exposed in the conduct of its business or the management of its liabilities.

(b)  Maintain at any time one or more Hedging Agreements with persons reasonably acceptable to the Agent or fixed price contracts, the effect of which is to establish maximum fixed prices or caps on a notional volume of crude oil and natural gas, calculated separately, greater than 80% of Anticipated Production thereof for each month in the then ensuing 12 month period.

(c)  For purposes of this Section, a basis differential hedging agreement will not be considered to be a Hedging Agreement.

SECTION 6.17.  Take-or-Pay or Other Prepayments.  (a)    Except as set forth in Schedule 3.24, allow take-or-pay arrangements or prepayments (including deferred production agreements or volumetric production payments) with respect to the Oil and Gas Properties or production therefrom that could require the Borrower or any Subsidiary to deliver Hydrocarbons either generally or produced from the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor.

(b)  Allow, on a net basis, any gas imbalances that would require the Borrower or any Subsidiary to deliver Hydrocarbons either generally or produced from the Oil and

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Gas Properties in excess of 200 MMcf at some future time without then or thereafter receiving full payment therefor.

ARTICLE VII

Events of Default

In case of the happening of any of the following events (“Events of Default”):

(a)  any representation or warranty made or deemed made in or in connection with any Loan Document or the borrowings hereunder, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished in connection with or pursuant to any Loan Document or the Transactions, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished;

(b)  default shall be made in the payment of any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise;

(c)  default shall be made in the payment of any interest on any Loan or any fee or any other amount (other than an amount referred to in (b) above) due under any Loan Document when and as the same shall become due and payable and such default shall continue unremedied for a period of three Business Days;

(d)  default shall be made in the due observance or performance by Holdings, the Borrower or any Subsidiary of any covenant, condition or agreement contained in Section 2.21, 5.01(a), 5.05 or 5.08 or in Article VI (other than Section 6.16(b));

(e)  default shall be made in the due observance or performance by Holdings, the Borrower or any Subsidiary of any covenant, condition or agreement contained in any Loan Document (other than those specified in (b), (c) or (d) above) and such default shall continue unremedied for a period of 30 days after notice thereof from the Agent or any Lender to the Borrower;

(f)  (i)  Holdings, the Borrower or any Subsidiary shall fail to pay any principal, interest or other amount due in respect of any Material Indebtedness when and as the same shall become due and payable or (ii) any other event or condition shall occur that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the

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prepayment, repurchase, redemption or defeasance thereof prior to its scheduled maturity or that results in the termination or permits any counterparty to terminate any Hedging Agreement the obligations under which constitute Material Indebtedness; provided that this clause (ii) shall not apply to (A) secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness and (B) Indebtedness that becomes due as a result of a condition described in clause (c) of the definition of “Change in Control” as long as the Borrower shall have advised the Lenders at the time of the Change in Control offer that such event constitutes an event of default under such Material Indebtedness;

(g)  an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of Holdings, the Borrower or any Subsidiary, or of a substantial part of the property or assets of Holdings, the Borrower or a Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holdings, the Borrower or any Subsidiary or for a substantial part of the property or assets of Holdings, the Borrower or a Subsidiary or (iii) the winding-up or liquidation of Holdings, the Borrower or any Subsidiary; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered;

(h)  Holdings, the Borrower or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (g) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holdings, the Borrower or any Subsidiary or for a substantial part of the property or assets of Holdings, the Borrower or any Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing;

(i)  one or more judgments shall be rendered against Holdings, the Borrower, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of Holdings, the

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Borrower or any Subsidiary to enforce any such judgment and such judgment either (i) is for the payment of money in an aggregate amount in excess of $5,000,000 or (ii) is for injunctive relief and could reasonably be expected to result in a Material Adverse Effect;

(j)  an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other such ERISA Events, could reasonably be expected to result in liability of the Borrower and its ERISA Affiliates in an aggregate amount exceeding $5,000,000;

(k)  any Guarantee under the Collateral Agreement for any reason shall cease to be in full force and effect (other than in accordance with the terms of the Loan Documents), or any Guarantor shall deny in writing that it has any liability under the Collateral Agreement (other than as a result of the discharge of such Guarantor in accordance with the terms of the Loan Documents);

(l)  any security interest purported to be created by any Security Document shall cease to be, or shall be asserted by the Borrower or any other Loan Party not to be, a valid, perfected, first priority (except as otherwise expressly provided in this Agreement or such Security Document) security interest in the securities, assets or properties covered thereby, except as a result of the sale, transfer or other disposition of such assets in a transaction permitted by the Loan Documents;

(m)  any Loan Document or, except during any period during which the Borrower and the Subsidiaries are capable of performing with their own employees and assets all the activities performed for them under the Intercompany Services Agreement, the Intercompany Services Agreement shall cease to be in full force and effect;

(n)  the Parent Undertaking shall terminate prior to satisfaction of the Parent’s obligations thereunder or there shall occur a material breach under the Parent Undertaking;

then, and in every such event (other than an event with respect to Holdings or the Borrower described in paragraph (g) or (h) above), and at any time thereafter during the continuance of such event, the Agent shall, at the request of the Required Lenders, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding; and in any event with respect to Holdings or

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the Borrower described in paragraph (g) or (h) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding.

ARTICLE VIII

The Agent

Each of the Lenders hereby irrevocably appoints the Agent as its administrative agent and collateral agent and authorizes the Agent to take such actions on its behalf and to exercise such powers as are delegated to the Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto.  Without limiting the generality of the foregoing, the Agent is hereby expressly authorized to execute any and all documents (including releases) with respect to the Collateral and the rights of the Secured Parties with respect thereto, as contemplated by and in accordance with the provisions of this Agreement and the Security Documents.

The bank serving as the Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with Holdings, the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Agent hereunder.

The Agent shall not have any duties or obligations except those expressly set forth in the Loan Documents.  Without limiting the generality of the foregoing, (a) the Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Agent is instructed in writing to exercise by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.08) and (c) except as expressly set forth in the Loan Documents, the Agent shall not have any duty to disclose, nor shall it be liable for the failure to disclose, any information relating to Holdings, the Borrower or any of the Subsidiaries that is communicated to or obtained by the bank serving as the Agent or any of its Affiliates in any capacity.  The Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.08) or in the absence of its own gross negligence or willful misconduct.  The Agent shall not be deemed to have knowledge of any Default unless and until written notice thereof is given to the Agent by Holdings, the Borrower or a Lender, and the Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other

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document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to the Agent.

The Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper person.  The Agent may also rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper person, and shall not incur any liability for relying thereon.  The Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

The Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by it.  The Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers by or through their Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Agent and any such sub-agent, and shall apply to their activities in connection with the syndication of the credit facilities contemplated hereby as well as activities as the Agent.  Without limiting the generality of the foregoing, JPMorgan Chase Bank, N.A. shall act as sub-collateral agent for purposes of the BLM Leases (the “BLM Sub-Collateral Agent”).  The BLM Sub-Collateral Agent shall act at the direction of the Collateral Agent and shall have no liability to Holdings, the Borrower, any Lender or any of their Related Persons for any actions taken by it in accordance with such direction.

Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After an Agent’s resignation hereunder, the provisions of this Article and Section 9.05 shall continue in effect for the benefit of such retiring Agent, its sub-agents and their Related Parties in respect of any actions taken or omitted to be taken by any of them while acting as Agent.

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Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or any document furnished hereunder or thereunder.

Notwithstanding anything herein to the contrary, neither the Syndication Agent nor any arranger, bookrunner or documentation agent listed on the cover page hereof shall have, in any such capacity, any duty or responsibility under any Loan Document.

ARTICLE IX

Miscellaneous

SECTION 9.01.  Notices.  Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by fax, as follows:

(a)  if to the Borrower or Holdings, to it at 707 Seventeeth Street, Suite 3600, Denver, Colorado 80202, Attention of Cyrus Marter, Vice President and Secretary  (Fax No. (303) 812-1445), with a copy to 707 Seventeeth Street, Suite 3600, Denver, Colorado 80202, Attention of Michael Kennedy, Treasurer (Fax No. (303) 812-1510);

(b)  if to the Agent, to Credit Suisse, Eleven Madison Avenue, New York, NY 10010, Attention of Agency Group (Fax No. (212) 325-8304); and

(c)  if to a Lender, to it at its address (or fax number) set forth on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto.

All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by fax or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section or in accordance with the latest unrevoked direction from such party given in accordance with this Section. As agreed to among Holdings, the Borrower, the Agent and the applicable Lenders from time to time, notices and other communications may also be delivered by e-mail to the e-mail address of a representative of the applicable person provided from time to time by such person.

SECTION 9.02.  Survival of Agreement.  All covenants, agreements, representations and warranties made by the Borrower or Holdings herein and in the

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certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Lenders and shall survive the making by the Lenders of the Loans, regardless of any investigation made by the Lenders or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid and so long as the Commitments have not been terminated. The provisions of Sections 2.13, 2.15, 2.19, 9.05 and, until the first anniversary of the Maturity Date, 9.16 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document or any investigation made by or on behalf of the Agent or any Lender.

SECTION 9.03.  Binding Effect.  This Agreement shall become effective when it shall have been executed by the Borrower, Holdings and the Agent and when the Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto.

SECTION 9.04.  Successors and Assigns.  (a)  Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower, Holdings, the Agent or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their successors and assigns.

(b)  Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it), with notice to the Borrower by the Agent and, except in the case of an assignment to a Lender, to an Affiliate of a Lender or to a Related Fund (which will require prior written notice to the Agent), the prior written consent of the Agent (not to be unreasonably withheld or delayed); provided, however, that (i) the amount of the Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall be in an integral multiple of, and not less than, $1,000,000 (or, if less, the entire remaining amount of such Lender’s Commitment or Loans); provided that the principal amount of concurrent assignments to any assignee and its Related Funds shall be aggregated for purposes of determining compliance with the foregoing minimum assignment amount, (ii) the parties to each such assignment shall execute and deliver to the Agent an Assignment and Acceptance via an electronic settlement system acceptable to the Agent (or, if previously agreed with the Agent, manually), and shall pay to the Agent a processing and recordation fee of $3,500 (which fee may be waived or reduced in the sole discretion of the Agent), (iii) the assignee, if it shall not be a Lender, shall deliver to the Agent an Administrative Questionnaire and all applicable tax forms and (iv) failure to deliver notice to the Borrower shall not affect the effectiveness of such assignment.  Upon acceptance and

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recording pursuant to paragraph (e) of this Section, from and after the effective date specified in each Assignment and Acceptance, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.13, 2.15, 2.19 and 9.05, as well as to any fees accrued for its account and not yet paid).

(c)  By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows:  (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitment and the outstanding balances of its Loans, in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto, or the financial condition of the Borrower or any Subsidiary or the performance or observance by the Borrower or any Subsidiary of any of its obligations under this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements referred to in Section 3.05(a) or delivered pursuant to Section 5.04 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender.

(d)  The Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”).  The entries in the

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Register shall be conclusive and the Borrower, the Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary.  The Register shall be available for inspection by the Borrower, the Agent and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

(e)  Upon its receipt of, and consent to, a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above, if applicable, and the written consent of the Agent and any applicable tax forms, the Agent shall promptly (i) accept such Assignment and Acceptance and (ii) record the information contained therein in the Register. No assignment shall be effective unless it has been recorded in the Register as provided in this paragraph (e).

(f)  Each Lender may without the consent of the Borrower or the Agent sell participations to one or more banks or other persons in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided, however, that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other persons shall be entitled to the benefit of the cost protection provisions contained in Sections 2.13, 2.15 and 2.19 to the same extent as if they were Lenders (but, with respect to any particular participant, to no greater extent than the Lender that sold the participation to such participant) and (iv) the Borrower, the Agent and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrower relating to the Loans and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable to such participating bank or person hereunder or the amount of principal of or the rate at which interest is payable on the Loans in which such participating bank or person has an interest, extending any scheduled principal payment date or date fixed for the payment of interest on the Loans in which such participating bank or person has an interest, increasing or extending the Commitments in which such participating bank or person has an interest or releasing any Guarantor (other than in connection with the sale of such Guarantor in a transaction permitted by Section 6.05) or all or substantially all of the Collateral).  A participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.19 unless the Borrower is notified of the participation sold to such participant and such participant agrees, for the benefit of the Borrower, to comply with Section 2.19(e) as though it were a Lender.

(g)  Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure of information designated by the Borrower as confidential,

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each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information on terms no less restrictive than those applicable to the Lenders pursuant to Section 9.16.

(h)  Any Lender may at any time assign all or any portion of its rights under this Agreement to secure extensions of credit to such Lender or in support of obligations owed by such Lender; provided that no such assignment shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto.

(i)  Notwithstanding anything to the contrary contained herein, any Lender (a “Granting Lender”) may grant to a special purpose funding vehicle (an “SPC”), identified as such in writing from time to time by the Granting Lender to the Agent and the Borrower, the option to provide to the Borrower all or any part of any Loan that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to make any Loan and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof.  The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender.  Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Lender).  In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof.  In addition, notwithstanding anything to the contrary contained in this Section, any SPC may (i) with notice to, but without the prior written consent of, the Borrower and the Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Granting Lender or to any financial institutions (consented to by the Borrower and Agent) providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of Loans and (ii) disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC.

(j)  Neither Holdings nor the Borrower shall assign or delegate any of its rights or duties hereunder without the prior written consent of the Agent and each Lender, and any attempted assignment without such consent shall be null and void.

SECTION 9.05.  Expenses; Indemnity.  (a)  The Borrower and Holdings agree, jointly and severally, to pay all reasonable out-of-pocket expenses incurred by the Agent, the co-lead arrangers listed on the cover page of this Agreement, the Syndication Agent or the Affiliates of the foregoing in connection with the arrangement and syndication of

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the credit facilities contemplated hereby and the preparation and administration of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof or incurred by the Agent or any Lender in connection with the enforcement or protection of its rights in connection with this Agreement and the other Loan Documents, including the fees, charges and disbursements of Cravath, Swaine & Moore LLP and Guess & Rudd P.C., counsel for the Agent, and, in connection with any such enforcement or protection, the fees, charges and disbursements of any other counsel for the Agent or any Lender.

(b)  The Borrower and Holdings agree, jointly and severally, to indemnify the Agent, each co-lead arranger listed on the cover page of this Agreement, the Syndication Agent, each Lender and each Related Party of any of the foregoing persons (each such person being called an “Indemnitee”) against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties thereto of their obligations thereunder or the consummation of the Transactions and the other transactions contemplated hereby or thereby (including the syndication of the credit facilities contemplated hereby), (ii) the use of the proceeds of the Loans, (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto (and regardless of whether such matter is initiated by a third party or by the Borrower, any other Loan Party or any of their Affiliates) or (iv) any actual or alleged presence or Release of Hazardous Materials on, at, under or from any property currently or formerly owned or operated by the Borrower or any of the Subsidiaries, or any Environmental Liability related in any way to the Borrower or the Subsidiaries; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted primarily from the gross negligence or wilful misconduct of such Indemnitee.

(c)  To the extent that Holdings and the Borrower fail to pay any amount required to be paid by them to the Agent under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Agent such Lender’s pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Agent in its capacity as such.  For purposes hereof, a Lender’s “pro rata share” shall be determined based upon its share of the outstanding Loans and unused Commitments at the time.

(d)  To the extent permitted by applicable law, neither Holdings nor the Borrower shall assert, and each hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or

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any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof.

(e)  The provisions of this Section shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Agent or any Lender.  All amounts due under this Section shall be payable on written demand therefor.

SECTION 9.06.  Right of Setoff.  If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, except to the extent prohibited by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower or Holdings against any of and all the obligations of the Borrower or Holdings now or hereafter existing under this Agreement and other Loan Documents held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured.  The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have.

SECTION 9.07.  Applicable Law.  THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (OTHER THAN AS EXPRESSLY SET FORTH IN OTHER LOAN DOCUMENTS) SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

SECTION 9.08.  Waivers; Amendment.  (a)  No failure or delay of the Agent or any Lender in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power.  The rights and remedies of the Agent and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have.  No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by the Borrower or any other Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given.  No notice or demand on the Borrower or Holdings in any case shall entitle the Borrower or Holdings to any other or further notice or demand in similar or other circumstances.

(b)  Neither this Agreement nor any other Loan Document nor any provision hereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by the Borrower, Holdings and the Required Lenders or, in the case of any other Loan Document, pursuant

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to an agreement or agreements in writing entered into by the Agent and the Loan Parties that are parties thereto, in each case with the consent of the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any Loan, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan, without the prior written consent of each Lender directly adversely affected thereby, (ii) increase or extend the Commitment or decrease the amount, or extend the date for payment of, any fees of any Lender without the prior written consent of each Lender directly affected thereby, (iii) amend or modify the pro rata requirements of Section 2.16, any other provision of any Loan Document requiring that Loans be made by, or payments of Commitment reductions be allocated among, the Lenders on a pro rata basis, the provisions of Section 9.04(j) or the provisions of this Section or release substantially all the Guarantors (determined based on the fair market value of the Guarantors) (other than in connection with the sale of any Guarantor in a transaction permitted by Section 6.05) or all or substantially all of the Collateral, without the prior written consent of each Lender, (iv) modify the protections afforded to an SPC pursuant to the provisions of Section 9.04(i) without the written consent of such SPC or (v) reduce the percentage contained in the definition of the term “Required Lenders” or any other provision of any Loan Document specifying the number or percentage of Lenders required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder, without the prior written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Agent or under any other Loan Document without the prior written consent of the Agent.

SECTION 9.09.  Interest Rate Limitation.  Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender.

SECTION 9.10.  Entire Agreement.  This Agreement, the Administrative Agent Fee Letter and the other Loan Documents constitute the entire contract between the parties relative to the subject matter hereof.  Any other previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Loan Documents.  Nothing in this Agreement or in the other Loan Documents, expressed or implied, is intended to confer upon any person (other than the parties hereto and thereto, their successors and assigns permitted hereunder, the Indemnitees and, to the

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extent expressly contemplated hereby, the Related Parties of each of the Agent and the Lenders) any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents.

SECTION 9.11.  WAIVER OF JURY TRIAL.  EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS.  EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

SECTION 9.12.  Severability.  In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction).  The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

SECTION 9.13.  Counterparts.  This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original but all of which when taken together shall constitute a single contract, and shall become effective as provided in Section 9.03.  Delivery of an executed signature page to this Agreement by facsimile transmission or other electronic imaging means shall be as effective as delivery of a manually signed counterpart of this Agreement.

SECTION 9.14.  Headings.  Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement.

SECTION 9.15.  Jurisdiction; Consent to Service of Process.  (a)  Each of Holdings and the Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and

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each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court.  Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.  Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against the any other party or their properties in the courts of any jurisdiction.

(b)  Each of Holdings and the Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or Federal court (it being understood that such waiver shall not require any suit, action or proceeding initiated in any court to be remanded or removed to any New York State court or any Federal court of the United States of America sitting in New York City).  Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(c)  Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01.  Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

SECTION 9.16.  Confidentiality.  Each of the Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates’ officers, directors, employees and agents, including accountants, legal counsel and other advisors (it being understood that the persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority or quasi-regulatory authority (such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) in connection with the exercise of any remedies hereunder or under the other Loan Documents or any suit, action or proceeding relating to the enforcement of its rights hereunder or thereunder, (e) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any actual or prospective assignee of or participant in any of its rights or obligations under this Agreement and the other Loan Documents or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower or any Subsidiary or any of their respective obligations, (f) with the consent of the Borrower or (g) to the extent such Information becomes publicly available other than as a result of a breach of this Section.  For the purposes of this Section, “Information” shall mean all information received from the Borrower or Holdings and related to the Borrower or Holdings or their business, other than any such information that was available to the Agent or any Lender on a

88

nonconfidential basis prior to its disclosure by the Borrower or Holdings; provided that, in the case of Information received from the Borrower or Holdings after the date hereof, such information is clearly identified at the time of delivery as confidential.  Any person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such person has exercised the same degree of care to maintain the confidentiality of such Information as such person would accord its own confidential information.

SECTION 9.17.  Termination or Release.  (a)  Each Security Document, the guarantees made therein and the security interests granted thereunder shall terminate when all the Loan Document Obligations have been indefeasibly paid in full in cash and the Commitments have expired or been terminated.

(b)  A Subsidiary Loan Party shall automatically be released from its obligations under the Loan Documents, the guarantee of such Subsidiary Loan Party made under the Collateral Agreement shall automatically be released and the security interests granted in the Collateral of such Subsidiary Loan Party under the Security Documents shall automatically be released upon the consummation of any transaction permitted by this Agreement as a result of which such Subsidiary Loan Party ceases to be a Subsidiary pursuant to the terms of this Agreement.

(c)  Upon any sale or other transfer by any Loan Party of any Collateral that is permitted under this Agreement to any person (other than a Loan Party or an Affiliate of a Loan Party), or upon the effectiveness of any written consent pursuant to Section 9.08 to the release of any security interest granted in any Collateral of such Loan Party under to the Security Documents, the security interests granted in such Collateral under the Security Documents shall be automatically released.

(d)  In connection with any termination or release pursuant to this Section, the Agent shall execute and deliver to the applicable Loan Party, at such Loan Party’s expense, all documents that such Loan Party shall reasonably request to evidence such release or termination.  Any execution and delivery of documents pursuant to this Section shall be without recourse to or warranty by the Agent.

SECTION 9.18.  USA PATRIOT Act Notice.  Each Lender and the Agent (for itself and not on behalf of any Lender) hereby notifies Holdings and the Borrower that pursuant to the requirements of the USA PATRIOT Act, it is required to obtain, verify and record information that identifies Holdings and the Borrower, which information includes the name and address of Holdings and the Borrower and other information that will allow such Lender or the Agent, as applicable, to identify Holdings and the Borrower in accordance with the USA PATRIOT Act.

SECTION 9.19.  No Fiduciary Relationship.  Each of Holdings and the Borrower, on behalf of itself and the Subsidiaries, agrees that in connection with all aspects of the transactions contemplated hereby or by the other Loan Documents and any communications in connection therewith, the Borrower, the Subsidiaries and their Affiliates, on the one hand, and the Agent, the Lenders and their Affiliates, on the other

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hand, will have a business relationship that does not create, by implication or otherwise, any fiduciary duty on the part of the Agent the Lenders or their Affiliates, and no such duty will be deemed to have arisen in connection with any such transaction or communications.

SECTION 9.20.  Intercreditor Agreement.  Reference is made to the Intercreditor Agreement.  Each Lender (a) acknowledges that it has received a copy of the Intercreditor Agreement, (b) acknowledges and agrees to Credit Suisse acting as the Agent and the Second Lien Agent, (c) agrees that it will be bound by and will take no actions contrary to the provisions of the Intercreditor Agreement and (d) authorizes and instructs Credit Suisse to enter into the Intercreditor Agreement as collateral agent for such Lender.

SECTION 9.21.  Security Documents; Parent Undertaking.  Reference is made to the Security Documents.  Each Lender authorizes and instructs Credit Suisse to enter into (a) the Security Documents as collateral agent for such Lender and (b) the Parent Undertaking as administrative agent for such Lender.

SECTION 9.22.  Parent Liability.  Except for the Parent Undertaking, the Lenders agree for themselves and their successors and assigns, that no claim arising against Holdings, the Borrower or any Subsidiary under any Loan Document shall be asserted against the Parent (or any stockholder, manager, officer, director, employee or agent of the Parent) and no judgment, order or execution entered in any suit, action or proceeding, whether legal or equitable, on this Agreement or any of the other Loan Documents shall be obtained or enforced against the Parent (or any stockholder, manager, officer, director, employee or agent of the Parent) or its assets for the purpose of obtaining satisfaction and payment of Indebtedness or any claims arising under this Agreement or any other Loan Document, any right to proceed against the Parent (or any stockholder, manager, officer, director, employee or agent of the Parent) individually or its assets being hereby expressly waived, renounced and remitted by the Lenders for themselves and their successors and assigns.  Nothing in this Section, however, shall be construed so as to prevent the Agent or any Lender from commencing any action, suit or proceeding with respect to or causing legal papers to be served upon the Parent for the purpose of (i) obtaining jurisdiction over Holdings or the Borrower or (ii) obtaining judgment, order or execution against the Parent, in each case (A) arising out of any fraud or intentional misrepresentation by the Parent in connection with the Loan Documents, the arrangement of the credit facility provided for herein or the Transactions, (B) for recovery of moneys received by the Parent in violation of the terms of this Agreement or constituting property of the Borrower or insurance proceeds in respect of Collateral and (C) as a result of the exercise of rights under the Parent Undertaking.

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IN WITNESS WHEREOF, the parties hereto have caused this First Lien Credit Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

FOREST ALASKA OPERATING LLC,
	by
		Name:
		Title:
FOREST ALASKA HOLDING LLC,
	by
		Name:
		Title:
CREDIT SUISSE, Cayman Islands branch, as Administrative Agent, Collateral Agentand Lender,
	by
		Name:
		Title:
	by
		Name:
		Title:
JPMORGAN CHASE BANK, N.A., as Syndication Agent and Lender,
	by
		Name:
		Title:

EX-4.13

Exhibit 4.13

SECOND LIEN CREDIT AGREEMENT

dated as of December 8, 2006,

among

FOREST ALASKA OPERATING LLC,
as the Borrower,

FOREST ALASKA HOLDING LLC,
as Holdings,

the LENDERS from time to time party hereto

and

CREDIT SUISSE,
as Administrative Agent and Collateral Agent

CREDIT SUISSE SECURITIES (USA) LLC

and

J.P. MORGAN SECURITIES INC.,
as Co-Lead Arrangers and Joint Bookrunners

JPMORGAN CHASE BANK, N.A.,
as Syndication Agent

Table of Contents

	Page
ARTICLE I
Definitions
SECTION 1.01. Defined Terms	1
SECTION 1.02. Terms Generally	27
SECTION 1.03. Classification of Loans and Borrowings	28
ARTICLE II
The Credits
SECTION 2.01. Commitments	28
SECTION 2.02. Loans	29
SECTION 2.03. Evidence of Debt; Repayment of Loans	30
SECTION 2.04. Fees	30
SECTION 2.05. Interest on Loans	30
SECTION 2.06. Default Interest	31
SECTION 2.07. Alternate Rate of Interest	31
SECTION 2.08. Termination and Reduction of Commitments	31
SECTION 2.09. Conversion and Continuation of Borrowings	32
SECTION 2.10. Repayment of Borrowings	33
SECTION 2.11. Optional Prepayment; Prepayment Premium	33
SECTION 2.12. Mandatory Prepayments	34
SECTION 2.13. Reserve Requirements; Change in Circumstances	36
SECTION 2.14. Change in Legality	37
SECTION 2.15. Indemnity	38
SECTION 2.16. Pro Rata Treatment	39
SECTION 2.17. Sharing of Setoffs	39
SECTION 2.18. Payments	39
SECTION 2.19. Taxes	40
SECTION 2.20. Assignment of Commitments Under Certain Circumstances; Duty to Mitigate	42
SECTION 2.21. Change in Control Put	43
ARTICLE III
Representations and Warranties
SECTION 3.01. Organization; Powers	44
SECTION 3.02. Authorization	44
SECTION 3.03. Enforceability	44
SECTION 3.04. Governmental Approvals	44

i

	Page
SECTION 3.05. Financial Statements; Absence of Undisclosed Liabilities; Reserve Reports	45
SECTION 3.06. No Material Adverse Change	45
SECTION 3.07. Title to Properties; Possession Under Leases	45
SECTION 3.08. Subsidiaries	46
SECTION 3.09. Litigation; Compliance with Laws	46
SECTION 3.10. Agreements	46
SECTION 3.11. Federal Reserve Regulations	47
SECTION 3.12. Investment Company Act	47
SECTION 3.13. Use of Proceeds	47
SECTION 3.14. Tax Returns	47
SECTION 3.15. No Material Misstatements	47
SECTION 3.16. Employee Benefit Plans	48
SECTION 3.17. Environmental Matters	48
SECTION 3.18. Insurance	48
SECTION 3.19. Security Documents	48
SECTION 3.20. Location of Real Property and Leased Premises	49
SECTION 3.21. Labor Matters	50
SECTION 3.22. Solvency	50
SECTION 3.23. Sanctioned Persons	50
SECTION 3.24. Gas Imbalances; Prepayments	50
ARTICLE IV
Conditions of Lending
ARTICLE V
Affirmative Covenants
SECTION 5.01. Existence; Compliance with Laws; Businesses and Properties	54
SECTION 5.02. Insurance	54
SECTION 5.03. Obligations and Taxes	55
SECTION 5.04. Financial Statements, Reports, etc	56
SECTION 5.05. Litigation and Other Notices	58
SECTION 5.06. Information Regarding Collateral	58
SECTION 5.07. Maintaining Records; Access to Properties and Inspections	59
SECTION 5.08. Use of Proceeds	59
SECTION 5.09. Employee Benefits	59
SECTION 5.10. Compliance with Environmental Laws	59
SECTION 5.11. Preparation of Environmental Reports	60
SECTION 5.12. Further Assurances	60
SECTION 5.13. Compliance with Leases	60
SECTION 5.14. Interest Rate Protection Agreements	60

ii

	Page
SECTION 5.15. Commodity Price Hedging Program	61
SECTION 5.16. Delivery of Reserve Reports	61
SECTION 5.17. Title Information	62
ARTICLE VI
Negative Covenants
SECTION 6.01. Indebtedness	63
SECTION 6.02. Liens	65
SECTION 6.03. Sale and Lease-Back Transactions	66
SECTION 6.04. Investments, Loans and Advances	66
SECTION 6.05. Mergers, Consolidations, Sales of Assets and Acquisitions	67
SECTION 6.06. Restricted Payments; Payment of Certain Indebtedness; Restrictive Agreements	68
SECTION 6.07. Transactions with Affiliates	69
SECTION 6.08. Business of Holdings, Borrower and Subsidiaries; No Foreign Subsidiaries	70
SECTION 6.09. Amendment of Certain Indebtedness and Agreements	70
SECTION 6.10. Asset Coverage Ratios	70
SECTION 6.11. Leverage Ratio	71
SECTION 6.12. Capital Expenditures	71
SECTION 6.13. Fiscal Year	72
SECTION 6.14. Certain Equity Interests	72
SECTION 6.15. Hedging Agreements	73
SECTION 6.16. Take-or-Pay or Other Prepayments	73
ARTICLE VII
Events of Default
ARTICLE VIII
The Agent
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices	79
SECTION 9.02. Survival of Agreement	79
SECTION 9.03. Binding Effect	80
SECTION 9.04. Successors and Assigns	80
SECTION 9.05. Expenses; Indemnity	83

iii

	Page
SECTION 9.06. Right of Setoff	85
SECTION 9.07. Applicable Law	85
SECTION 9.08. Waivers; Amendment	85
SECTION 9.09. Interest Rate Limitation	86
SECTION 9.10. Entire Agreement	86
SECTION 9.11. WAIVER OF JURY TRIAL	86
SECTION 9.12. Severability	87
SECTION 9.13. Counterparts	87
SECTION 9.14. Headings	87
SECTION 9.15. Jurisdiction; Consent to Service of Process	87
SECTION 9.16. Confidentiality	88
SECTION 9.17. Termination or Release	88
SECTION 9.18. USA PATRIOT Act Notice	89
SECTION 9.19. No Fiduciary Relationship	89
SECTION 9.20. Intercreditor Agreement	89
SECTION 9.21. Security Documents	90
SECTION 9.22. Parent Liability	90

iv

Schedules
Schedule 1.01(a)	Existing Hedging Agreements
Schedule 1.01(b)	Closing Date Mortgaged Real Property
Schedule 1.01(c)	Qualified Purchaser
Schedule 2.01	Lenders and Commitments
Schedule 3.08	Subsidiaries
Schedule 3.09	Litigation
Schedule 3.17	Environmental Matters
Schedule 3.19(a)	UCC Filing Offices
Schedule 3.19(c)	Mortgage Filing Offices
Schedule 3.20(a)	Owned Real Property
Schedule 3.20(b)	Leased Real Property
Schedule 3.24	Gas Imbalances
Schedule 6.01	Existing Indebtedness
Schedule 6.02	Existing Liens
Exhibits
Exhibit A	Form of Administrative Questionnaire
Exhibit B	Form of Assignment and Acceptance
Exhibit C	Form of Guarantee and Collateral Agreement
Exhibit D	Form of Intercreditor Agreement
Exhibit E	Form of Mortgage
Exhibit F	Form of Parent Undertaking
Exhibit G	Form of Opinion of Vinson & Elkins LLP
Exhibit H	Form of Solvency Certificate
Exhibit I	Form of Compliance Certificate
Exhibit J	Form of Engineer’s Certificate
Exhibit K	Form of Responsible Officer’s Certificate
Exhibit L	Form of Exemption Certificate

v

SECOND LIEN CREDIT AGREEMENT dated as of December 8, 2006 (this “Agreement”), among FOREST ALASKA OPERATING LLC, a limited liability company organized under the laws of the State of Delaware (the “Borrower”); FOREST ALASKA HOLDING LLC, a limited liability company organized under the laws of the State of Delaware (“Holdings”); the LENDERS from time to time party hereto; JPMORGAN CHASE BANK, N.A., as Syndication Agent; and CREDIT SUISSE, as Administrative Agent and Collateral Agent.

The Borrower has requested the Lenders to extend credit in the form of the Loans (such term and each other capitalized term used but not defined in this recital having the meaning given it in Article I) on the Effective Date in an aggregate principal amount not in excess of $125,000,000.  The Borrower has further requested the First Lien Lenders to extend credit in the form of the First Lien Loans on the Effective Date in an aggregate principal amount not in excess of $250,000,000.  On the Effective Date, (a) $350,000,000 of the proceeds of the Loans and the First Lien Loans will be used to fund a distribution (the “Distribution”) by the Borrower to Holdings and by Holdings to the Parent and (b) $25,000,000 of the proceeds of the Loans and the First Lien Loans will be retained by the Borrower to be used for general corporate purposes of the Borrower and the Subsidiaries, including the payment of fees and expenses related to the Transactions.

The Lenders are willing to extend such credit to the Borrower on the terms and subject to the conditions set forth herein.  Accordingly, the parties hereto agree as follows:

ARTICLE I

Definitions

SECTION 1.01.  Defined Terms.  As used in this Agreement, the following terms shall have the meanings specified below:

“1P Capital Expenditures” shall mean, without duplication, Capital Expenditures made with respect to (a) proved oil and gas reserves and (b) assets described in clause (g) of the definition of “Oil and Gas Properties” used in connection with the operation, work or development of proved oil and gas reserves (it being agreed that Capital Expenditures in respect of assets described in such clause (g) that are used in connection with both proved and probable oil and gas reserves shall be allocated by the Borrower between 1P Capital Expenditures and 2P Capital Expenditures in a reasonable manner); provided that, for purposes of this definition, the parenthetical in clause (g) of the definition of “Oil and Gas Properties” shall be disregarded.

“2P Capital Expenditures” shall mean, without duplication, Capital Expenditures made with respect to (a) probable oil and gas reserves and (b) assets described in clause (g) of the definition of “Oil and Gas Properties” used in connection with the operation, work or development of probable oil and gas reserves (it being agreed that Capital

Expenditures in respect of assets described in such clause (g) that are used in connection with both proved and probable oil and gas reserve, shall be allocated by the Borrower between 1P Capital Expenditures and 2P Capital Expenditures in a reasonable manner); provided that, for purposes of this definition, the parenthetical in clause (g) of the definition of “Oil and Gas Properties” shall be disregarded.

“4Q06 Consolidated EBITDAX” shall mean the amount equal to the sum of (a) Consolidated EBITDAX for the period from and including November 1, 2006 through and including December 31, 2006 plus (b) $1,874,000.

“4Q06 Consolidated Interest Expense” shall mean the amount equal to the product of (a) Consolidated Interest Expense for the period from and including the Closing Date through and including December 31, 2006 and (b) 4.00.

“ABR”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.

“Account Control Agreement” shall mean an account control agreement, in form and substance reasonably satisfactory to the Agent and the Borrower, designating the Agent as secured party.

“Adjusted LIBO Rate” shall mean, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum equal to the product of (a) the LIBO Rate in effect for such Interest Period and (b) Statutory Reserves.

“Administrative Agent Fee Letter” shall mean the Administrative Agent Fee Letter dated as of November 1, 2006, between the Borrower, the Agent and Credit Suisse Securities (USA) LLC.

“Administrative Questionnaire” shall mean an Administrative Questionnaire in the form of Exhibit A, or such other form as may be supplied from time to time by the Agent.

“Affiliate” shall mean, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified; provided, however, that, for purposes of Section 6.07, the term “Affiliate” shall also include any person that directly or indirectly owns 10% or more of any class of Equity Interests of the person specified or that is an officer or director of the person specified.

“Agent” shall mean Credit Suisse, in its capacity as administrative agent for the Lenders and collateral agent for the Secured Parties.

“Agreement” shall have the meaning assigned to such term in the introductory paragraph.

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“Alternate Base Rate” shall mean, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%.  If the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Agent to obtain sufficient quotations in accordance with the terms of the definition thereof, the Alternate Base Rate shall be determined without regard to clause (b) of the preceding sentence until the circumstances giving rise to such inability no longer exist.  Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, as the case may be.

“Annualized Consolidated Interest Expense” shall mean (a) for the period ended on March 31, 2007 composed of four consecutive fiscal quarters, 200% of the sum of (i) 4Q06 Consolidated Interest Expense plus (ii) the Consolidated Interest Expense for the fiscal quarter ended March 31, 2007, (b) for the period ended on June 30, 2007 composed of four consecutive fiscal quarters, 133.33% of the sum of (i) 4Q06 Consolidated Interest Expense plus (ii) the Consolidated Interest Expense for the period ended on June 30, 2007 composed of two consecutive fiscal quarters and (c) for the period ended on September 30, 2007 composed of four consecutive fiscal quarters, 100% of the sum of (i) 4Q06 Consolidated Interest Expense plus (ii) Consolidated Interest Expense for the period ended on September 30, 2007 composed of three fiscal quarters.

“Anticipated Production” shall mean, for any month, the reasonably anticipated production of crude oil and natural gas (calculated separately) from the Borrower’s and the Subsidiaries’ proved developed producing reserves.

“Applicable Percentage” shall mean, for any day (a) with respect to any Eurodollar Loan, 6.50% per annum and (b) with respect to any ABR Loan, 5.50% per annum.

“Asset Sale” shall mean the sale, transfer or other disposition (by way of merger, casualty, condemnation or otherwise) by Holdings, the Borrower or any of the Subsidiaries to any person other than the Borrower or any Subsidiary Loan Party of (a) any Equity Interests in any of the Subsidiaries (including any such sale by the issuer of such Equity Interests but excluding directors’ qualifying shares) or (b) any other assets of Holdings, the Borrower or any of the Subsidiaries (other than (i) inventory (including Hydrocarbons), damaged, obsolete or worn out assets, scrap and Permitted Investments, in each case disposed of in the ordinary course of business and (ii) any sale, transfer or other disposition that, together with all related sales, transfers or other dispositions, has a value not in excess of $2,500,000).

“Assignment and Acceptance” shall mean an assignment and acceptance entered into by a Lender and an assignee, and accepted by the Agent, in the form of Exhibit B or such other form as shall be approved by the Agent.

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“Available Cash” shall mean all cash and Permitted Investments of Holdings and its subsidiaries.

“BLM Leases” shall mean leases in respect of Real Property located on Federal lands and over which the the Federal Bureau of Land Management has jurisdiction.

“BLM Sub-Collateral Agent” shall have the meaning assigned to such term in Article VIII.

“Board” shall mean the Board of Governors of the Federal Reserve System of the United States of America.

“Borrower” shall have the meaning assigned to such term in the introductory paragraph to this Agreement.

“Borrowing” shall mean Loans of the same Type made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect.

“Business” means the oil and gas interests in the Cook Inlet region of Alaska contributed by Holdings to the Borrower pursuant to the Master Conveyance, as described in the schedules thereto.

“Business Day” shall mean any day other than a Saturday, Sunday or day on which banks in New York City are authorized or required by law to close; provided, however, that when used in connection with a Eurodollar Loan, the term “Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.

“Capital Expenditures” shall mean, for any period, (a) the additions to property, plant and equipment and other capital expenditures (including maintenance capital expenditures) of Holdings and its subsidiaries that are (or should be) set forth in a consolidated statement of cash flows of Holdings for such period prepared in accordance with GAAP and (b) Capital Lease Obligations or Synthetic Lease Obligations incurred by Holdings and its subsidiaries during such period, but excluding in each case any such expenditure made to restore, replace or rebuild property to the condition of such property immediately prior to any damage, loss, destruction or condemnation of such property, to the extent such expenditure is made with insurance proceeds, condemnation awards or damage recovery proceeds relating to any such damage, loss, destruction or condemnation.

“Capital Lease Obligations” of any person shall mean the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

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A “Change in Control” shall be deemed to have occurred if (a) at any time (i) the Parent or one or more Non-Financial Qualified Purchasers shall not beneficially own, directly or indirectly, at least 75% of the issued and outstanding Equity Interests in Holdings and (ii) one or more Financial Qualified Purchasers shall not beneficially own, directly or indirectly, at least 51% of the issued and outstanding Equity Interests in Holdings, (b) at any time Holdings shall fail to directly own, beneficially and of record, 100% of the issued and outstanding Equity Interests in the Borrower, (c) any change in control (or similar event, however denominated) with respect to Holdings, the Borrower or any Subsidiary shall occur under and as defined in any indenture or agreement in respect of Material Indebtedness to which Holdings, the Borrower or any Subsidiary is a party or (d) at the time of any sale, transfer or disposition of Equity Interests in Holdings (other than to an Affiliate of the seller thereof), the aggregate principal amount of outstanding Loans and Second Lien Loans as of such time shall exceed 70% of the Enterprise Value as of such time.

“Change in Control Percentage” shall mean, on any day, the greater of (a) 101% or (b) the sum of 100% and the prepayment premium that would have been payable pursuant to Section 2.11(b) of this Agreement in respect of Loans prepaid on such day.

“Change in Law” shall mean (a) the adoption of any law, rule or regulation after the Closing Date, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the Closing Date or (c) compliance by any Lender (or, for purposes of Section 2.13, by any lending office of such Lender or by such Lender’s holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the Closing Date.

“Closing Date” shall mean the date of this Agreement.

“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

“Collateral” shall mean all the “Collateral”, as defined in any Security Document and shall also include the Mortgaged Properties.

“Collateral Agreement” shall mean the Second Lien Guarantee and Collateral Agreement, substantially in the form of Exhibit C, among the Borrower, Holdings, the Subsidiaries party thereto and the Agent for the benefit of the Secured Parties.

“Collateral and Guarantee Requirement” means, at any time, the requirement that:

(a) the Agent shall have received from each of Holdings, the Borrower and the Subsidiaries either (i) a counterpart of the Collateral Agreement duly executed and delivered on behalf of such person or (ii) in the case of any person that becomes a Subsidiary after the Effective Date, a supplement to the Collateral Agreement, in the form specified therein, duly executed and delivered on behalf of such person within the period required by Section 5.12;

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(b) subject to Section 4.01(d)(i)(C) of the Collateral Agreement, all outstanding Equity Interests in the Borrower and each Domestic Subsidiary and all other Equity Interests owned by or on behalf of any Loan Party shall have been pledged pursuant to the Collateral Agreement and the Agent (or, to the extent provided in the First Lien Collateral Agreement, the First Lien Agent) shall have received (to the extent such Equity Interests are certificated securities) certificates or other instruments representing all such Equity Interests, together with undated stock powers or other instruments of transfer with respect thereto endorsed in blank;

(c) all Indebtedness of Holdings, the Borrower and each Subsidiary that is owing to any Loan Party shall have been pledged pursuant to the Collateral Agreement and, to the extent such Indebtedness is evidenced by a promissory note, the Agent shall have received all such promissory notes, together with undated instruments of transfer with respect thereto endorsed in blank;

(d) the Agent shall have received (i) counterparts of a Mortgage with respect to each Mortgaged Property duly executed and delivered by the record owner of such Mortgaged Property, (ii) tax Lien searches at the applicable State’s central filing system and Uniform Commercial Code searches in form and substance reasonably satisfactory to the Agent, (iii) opinions of counsel in the jurisdictions in which the Mortgaged Properties owned by the Borrower or any Subsidiary on the Closing Date are located, addressed to the Agent and each Lender, with respect to title to Leases included in the Oil and Gas Properties on the Closing Date that represent 95% of the Proved PV-10% and 55% of the Probable PV-10% (as determined by reference to the Reserve Report as of June 30, 2006 delivered to the Agent prior to the Closing Date), in form and substance reasonably satisfactory to the Agent, (iv) on the Closing Date and on the date of any acquisition of a Mortgaged Property, opinions of counsel in the jurisdictions in which such Mortgaged Property is located, addressed to the Agent and each Lender, with respect to the enforceability and validity of the Mortgages thereon and any related fixture filings, in form and substance reasonably satisfactory to the Agent and (v) all such other items as shall be reasonably necessary in the opinion of counsel to the Agent to create and evidence a valid and perfected second priority mortgage Lien and provide appropriate notice and filing of such Lien on such Mortgaged Property, subject only to Liens permitted to Section 6.02;

(e) at all times after the 30th day following the Closing Date and thereafter, the Agent shall have received from each applicable Loan Party and each applicable depository bank or securities intermediary, an executed counterpart of an Account Control Agreement in respect of each deposit account and securities account of any Loan Party that is required to be subject to an Account Control Agreement by Section 4.04(b) of the Collateral Agreement;

(f) all documents and instruments, including Uniform Commercial Code financing statements and filings with the MMS, required by law or reasonably requested by the Agent to be filed, registered or recorded to create the Liens intended to be created by the Security Documents and perfect such Liens to the extent required by, and with the priority required by, the Security Documents, shall have been filed, registered or recorded

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or delivered to the Agent for filing, registration or recording, and all filing, recording and similar fees and Taxes payable in connection with the foregoing shall have been paid or provided for in a manner reasonably satisfactory to the Agent; and

(g) except for approvals identified in the Parent Undertaking as approvals to be obtained after the Effective Date, each Loan Party shall have obtained all consents and approvals required to be obtained by it in connection with the execution and delivery of all Security Documents to which it is a party, the performance of its obligations thereunder and the granting by it of the Liens thereunder;

provided that the foregoing definition shall not require the creation or perfection of pledges of or security interests in, or the obtaining of legal opinions with respect to, particular assets of the Loan Parties if and for so long as the Agent, in consultation with the Borrower, determines that the cost of creating or perfecting such pledges or security interests in such assets or obtaining legal opinions in respect of such assets shall be excessive in view of the benefits to be obtained by the Lenders therefrom.  The Agent may grant extensions of time for the perfection of security interests in or the obtaining of legal opinions with respect to particular assets where it determines that perfection cannot be accomplished, or opinions cannot be obtained, without undue effort or expense by the time or times at which it would otherwise be required by the Loan Documents.

“Commitment” shall mean, with respect to each Lender, the commitment of such Lender to make Loans hereunder as set forth on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender assumed its Commitment, as applicable, as the same may be (a) reduced on or prior to the Effective Date pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04.

“Confidential Information Memorandum” shall mean the Confidential Information Memorandum of the Borrower dated November 14, 2006.

“Consolidated EBITDAX” shall mean, for any period, (a) Consolidated Net Income of Holdings and its subsidiaries for such period plus (b) the sum of Consolidated Interest Expense, depreciation, depletion expense, amortization expense, income taxes, exploration expense and other non-cash charges and expenses (except those excluded in determining Consolidated Net Income) incurred by Holdings and its subsidiaries during such period; provided, however, that, except for purposes of determining Excess Cash Flow, Consolidated EBITDAX for any period shall be calculated on a pro forma basis for any divestitures or acquisitions consummated during such period and, if any such acquisition or divestiture has a fair market value in excess of $5,000,000, as if such acquisition or divestiture had occurred on the first day of such period).  Notwithstanding any other provision in this Agreement, “Consolidated EBITDAX” for the fiscal quarter ended on June 30, 2006, September 30, 2006 and December 31, 2006 shall be deemed to be $23,733,000, $18,106,000 and 4Q06 Consolidated EBITDAX.

“Consolidated Interest Expense” shall mean, for any period, (a) the interest expense (including imputed interest expense in respect of Capital Lease Obligations and

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Synthetic Lease Obligations) of Holdings and its subsidiaries for such period, determined on a consolidated basis in accordance with GAAP plus (b) any interest accrued during such period in respect of Indebtedness of Holdings or any of its subsidiaries that is required to be capitalized rather than included in consolidated interest expense for such period in accordance with GAAP plus (c) the amount of dividends paid to any person (other than Holdings or any of its subsidiaries) during such period on preferred stock in Holdings, the Borrower or any of their Subsidiaries, determined on a consolidated basis in accordance with GAAP.  For purposes of the foregoing, interest expense shall be determined after giving effect to any net payments made or received by the Borrower or any Subsidiary with respect to interest rate Hedging Agreements.  Notwithstanding any other provision in this Agreement, “Consolidated Interest Expense” for any period of four fiscal quarters ended on or prior to September 30, 2007 shall be deemed to be Annualized Consolidated Interest Expense.

“Consolidated Net Income” shall mean, for any period, the net income or loss of Holdings and its subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income of any Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary in the amount of such income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, statute, rule or governmental regulation applicable to such Subsidiary, (b) the income of any person in which any other person (other than Holdings, the Borrower or a wholly owned Subsidiary or any director holding qualifying shares in accordance with applicable law) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to Holdings, the Borrower or a wholly owned Subsidiary by such person during such period, (c) any gains or losses attributable to sales of assets not in the ordinary course of business, (d) any extraordinary or non-recurring non-cash gains or non-cash losses (including any non-cash gains or non-cash losses related to any Hedging Agreements) recorded by Holdings and its Subsidiaries during such period or (e) any non-cash ceiling-test write downs and/or impairments.

“Contracts” shall mean all contracts, agreements, operating agreements, farm-out or farm-in agreements, sharing agreements, mineral purchase agreements, contracts for the purchase, exchange, transportation, processing or sale of Hydrocarbons, rights-of-way, easements, surface leases, equipment leases, permits, franchises, licenses, pooling or unitization agreements, and unit or pooling designations and orders now or hereafter affecting any of the Oil and Gas Properties, Operating Equipment, Fixture Operating Equipment or Hydrocarbons now or hereafter covered hereby, or which are useful or appropriate in drilling for, producing, treating, handling, storing, transporting or marketing oil, gas or other minerals produced from any of the Oil and Gas Properties, and all as such contracts and agreements as they may be amended, supplemented or otherwise modified from time to time.

“Control” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms “Controlling” and “Controlled” shall have meanings correlative thereto.

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“Current Assets” shall mean, at any time, the consolidated current assets (other than cash, Permitted Investments and FAS 133 assets) of Holdings and its subsidiaries in accordance with GAAP.  For purposes of calculating Excess Cash Flow, Current Assets shall be calculated without regard to any changes in Current Assets as a result of (a) any reclassification in accordance with GAAP of assets or liabilities, as applicable, between current and noncurrent or (b) the effects of purchase accounting.

“Current Liabilities” shall mean, at any time, the consolidated current liabilities of Holdings and its subsidiaries at such time (excluding, without duplication, the current portion of any long-term Indebtedness not yet due and FAS 133 liabilities) in accordance with GAAP.  For purposes of calculating Excess Cash Flow, Current Liabilities shall be calculated without regard to any changes in Current Liabilities as a result of (a) any reclassification in accordance with GAAP of assets or liabilities, as applicable, between current and noncurrent or (b) the effects of purchase accounting.

“Declined Amounts” shall have the meaning assigned to such term in Section 2.12(g).

“Default” shall mean any event or condition which upon notice, lapse of time or both would constitute an Event of Default.

“Disqualified Stock” shall mean any Equity Interest that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, (a) matures (excluding any maturity as the result of an optional redemption by the issuer thereof) or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, or requires the payment of any cash dividend or any other scheduled payment constituting a return of capital, in each case at any time on or prior to the first anniversary of the Maturity Date or (b) is convertible into or exchangeable (unless at the sole option of the issuer thereof) for (i) debt securities or (ii) any Equity Interest referred to in clause (a) above, in each case at any time prior to the first anniversary of the Maturity Date.

“Distribution” shall have the meaning assigned to such term in the recitals to this Agreement.

“dollars” or “$” shall mean lawful money of the United States of America.

“Domestic Subsidiary” shall mean a Subsidiary incorporated or organized under the laws of the United States of America, any State thereof or the District of Columbia.

“Effective Date” shall mean the first date on which the conditions specified in Article IV are satisfied (or waived in accordance with Section 9.08).

“Enterprise Value” shall mean, as of any date of determination, the sum of (i) purchase price paid for any Equity Interests sold, transferred or disposed on such day multiplied by the fraction the numerator of which 100% and the denominator of which is the percentage of all issued and outstanding Equity Interests in Holdings on such day

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represented by such sold, transferred or disposed Equity Interests plus (ii) the aggregate principal amount of Indebtedness of Holdings and its subsidiaries, determined on a consolidated basis, as of such time.

“Environmental Laws” shall mean all former, current and future Federal, state, local and foreign laws (including common law), treaties, regulations, rules, ordinances, codes, decrees, judgments, directives, orders (including consent orders), and agreements in each case, relating to protection of the environment, natural resources, human health and safety or the presence, Release of, or exposure to, Hazardous Materials, or the generation, manufacture, processing, distribution, use, treatment, storage, transport, recycling or handling of, or the arrangement for such activities with respect to, Hazardous Materials.

“Environmental Liability” shall mean all liabilities, obligations, damages, losses, claims, actions, suits, judgments, orders, fines, penalties, fees, expenses and costs (including administrative oversight costs, natural resource damages and remediation costs), whether contingent or otherwise, arising out of or relating to (a) compliance or non-compliance with any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the Release of any Hazardous Materials or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.

“Equity Interests” shall mean shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity interests in any person, and any option, warrant or other right entitling the holder thereof to purchase or otherwise acquire any such equity interest.

“Equity Issuance” shall mean any issuance or sale by Holdings or the Borrower of any Equity Interests in Holdings or the Borrower, as applicable, except in each case for (a) any issuance of directors’ qualifying shares, (b) issuances or sales of common stock in Holdings to management or employees in Holdings, the Borrower or any Subsidiary under any employee stock option or stock purchase plan or employee benefit plan in existence from time to time and (c) issuances or sales of Equity Interests in Holdings that do not result in a Change in Control.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time.

“ERISA Affiliate” shall mean any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code, or solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.

“ERISA Event” shall mean (a) any “reportable event”, as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Plan (other than an event for which the 30-day notice period is waived), (b) the existence with respect to any Plan

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of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA) and, on and after the effectiveness of the Pension Act, any failure by any Plan to satisfy the minimum funding standards (within the meaning of Section 412 of the Code or Section 302 of ERISA) applicable to such Plan, whether or not waived, (c) the filing pursuant to Section 412 of the Code or Section 303 of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan, (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan or the withdrawal or partial withdrawal of the Borrower or any of its ERISA Affiliates from any Plan or Multiemployer Plan, (e) the receipt by the Borrower or any of its ERISA Affiliates from the PBGC or a plan administrator of any notice relating to the intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan, (f) the adoption of any amendment to a Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, (g) on an after the effectiveness of the Pension Act, a determination that any Plan is, or is expected to be, in “at risk” status (within the meaning of Section 303(i)(4)(a) of ERISA or Section 430(i)(4)(A) of the Code), (h) the receipt by the Borrower or any of its ERISA Affiliates of any notice, or the receipt by any Multiemployer Plan from the Borrower or any of its ERISA Affiliates of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA (or, after the effectiveness of the Pension Act, that a Multiemployer Plan is endangered or in critical status within the meaning of Section 305 of ERISA) or (i) the occurrence of a “prohibited transaction” with respect to which the Borrower or any of the Subsidiaries is a “disqualified person” (within the meaning of Section 4975 of the Code) or with respect to which the Borrower or any such Subsidiary could otherwise be liable.

“Eurodollar”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate.

“Event of Default” shall have the meaning assigned to such term in Article VII.

“Excess Cash Flow” shall mean, for any fiscal year of Holdings and its subsidiaries, the excess of (a) the sum, without duplication, of (i) Consolidated EBITDAX for such fiscal year and (ii) reductions to noncash working capital of Holdings and its subsidiaries for such fiscal year (i.e., the decrease, if any, in Current Assets minus Current Liabilities from the beginning to the end of such fiscal year) over (b) the sum, without duplication, of (i) the amount of any Taxes paid or payable in cash by Holdings and its subsidiaries with respect to such fiscal year, including Taxes paid or payable in cash to the Parent under the Tax Sharing Agreements, (ii) Consolidated Interest Expense for such fiscal year paid in cash, (iii) Capital Expenditures made in cash during such fiscal year, except to the extent financed with the proceeds of Indebtedness, issuances of Equity Interests, casualty proceeds, condemnation proceeds, other proceeds that would not be included in Consolidated EBITDAX or amounts that were offered to the Lenders and the First Lien Lenders to prepay outstanding Loans pursuant to Section 2.12(c) and outstanding First Lien Loans pursuant to Section 2.12(c) of the First Lien Credit

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Agreement but were not accepted by either the Lenders or the First Lien Lenders, (iv) permanent repayments of Indebtedness (other than mandatory prepayments of Loans under Section 2.12) made in cash by Holdings and its subsidiaries during such fiscal year, but only to the extent that the Indebtedness so prepaid by its terms cannot be reborrowed or redrawn and such prepayments do not occur in connection with a refinancing of all or any portion of such Indebtedness, (v) additions to noncash working capital for such fiscal year (i.e., the increase, if any, in Current Assets minus Current Liabilities from the beginning to the end of such fiscal year) and (vi) to the extent not Capital Expenditures, cash exploration expenses and cash asset retirement expenses incurred during such fiscal year, except to the extent financed with the proceeds of Indebtedness, issuances of Equity Interests, casualty proceeds, condemnation proceeds or other proceeds that would not be included in Consolidated EBITDAX.

“Excluded Taxes” shall mean, with respect to the Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America or by any Governmental Authority of the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction described in clause (a) above and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.20(a)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender’s failure to comply with Section 2.19(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.19(a).

“Extraordinary Receipts” shall mean the receipt by Holdings, the Borrower or any of the Subsidiaries of any non-ordinary course tax refunds, pension plan reversions, judgments, litigation settlements or non-casualty insurance proceeds.

“Federal Funds Effective Rate” shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day for such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it.

“Federal Tax Sharing Agreement” shall mean Federal Income Tax Allocation Agreement dated as of November 1, 2006, between the Parent and Holdings.

“Financial Officer” of any person shall mean the chief financial officer, principal accounting officer, treasurer or controller of such person.

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“Financial Qualified Purchaser” shall mean any of (a) Arc Financial, (b) Encap Investments, (c) First Reserve Corporation, (d) Perry Capital, (e) Quantum Energy Partners, (f) Quantum Resources and (g) Yorktown Partners.

“First Lien Credit Agreement” shall mean the First Lien Credit Agreement dated as of the date hereof, among the Borrower, Holdings, the lenders from time to time party thereto and Credit Suisse, as administrative agent and collateral agent.

“First Lien Agent” shall mean the “Agent”, as defined in the First Lien Credit Agreement.

“First Lien Lenders” shall mean “Lenders” as defined in the First Lien Credit Agreement.

“First Lien Loan Documents” shall mean “Loan Documents”, as defined in the First Lien Credit Agreement.

“First Lien Loan Parties” shall mean “Loan Parties”, as defined in the First Lien Credit Agreement.

“First Lien Loans” shall mean “Loans”, as defined in the First Lien Credit Agreement.

“First Lien Obligations” shall mean “Obligations”, as defined in the First Lien Credit Agreement.

“Fixture Operating Equipment” shall mean any of the items described in the first sentence of the definition of “Operating Equipment” which as a result of being incorporated into realty or structures or improvements located therein or thereon, with the intent that they remain there permanently, constitute fixtures under the laws of the state in which such equipment is located.

“Foreign Lender” shall mean any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

“Foreign Subsidiary” shall mean any Subsidiary that is not a Domestic Subsidiary.

“GAAP” shall mean United States generally accepted accounting principles applied on a consistent basis.

“Governmental Authority” shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body.

“Granting Lender” shall have the meaning assigned to such term in Section 9.04(i).

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“Guarantee” of or by any person shall mean any obligation, contingent or otherwise, of such person guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness or other obligation, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment of such Indebtedness or other obligation or (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation; provided, however, that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business.

“Hazardous Materials” shall mean (a) petroleum and any petroleum products or Hydrocarbons, coal ash, radon gas, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, chlorofluorocarbons and all other ozone-depleting substances and (b) any chemical, material, substance or waste that is prohibited, limited or regulated by or pursuant to any Environmental Law.

“Hedging Agreement” means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement.  The “principal amount” of the obligations of any person in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (after giving effect to any netting agreements) that such person would be required to pay if such Hedging Agreement were terminated at such time.

“Holdings” shall have the meaning assigned to such term in the introductory paragraph to this Agreement.

“Hydrocarbon Interests” shall mean all rights, titles, interests and estates now owned or hereafter acquired in and to oil and gas leases, leasehold interests and licenses, oil, gas and mineral leases or other liquid or gaseous hydrocarbon licenses, leases, fee mineral interests, term mineral interests, subleases, mineral servitudes, farm-outs, royalties, overriding royalty and royalty interests, non-consent interests arising out of or pursuant to Contracts, net profit interests, net revenue and profit interests, oil payments, production payments, production payment interests and similar interests and estates, including all reserved or residual interests of whatever nature and all reversionary or carried interests relating to any of the foregoing.  Unless otherwise indicated herein, each reference to the term “Hydrocarbon Interests” shall mean Hydrocarbon Interests of the Borrower and the Subsidiaries.

“Hydrocarbons” shall mean oil, gas, casinghead gas, drip gasoline, natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons, kerosene,

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liquefied petroleum gas, refined lubricating oils, diesel fuel and all products refined, separated, settled or dehydrated therefrom.

“Indebtedness” of any person shall mean, without duplication, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such person under conditional sale or other title retention agreements relating to property or assets acquired by such person, (d) all obligations of such person in respect of the deferred purchase price of property or services (excluding accounts payable not more than 90 days past due incurred in the ordinary course of business), (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the Indebtedness secured thereby has been assumed, (f) all Guarantees by such person of Indebtedness of others, (g) all Capital Lease Obligations and Synthetic Lease Obligations of such person, (h) all obligations, contingent or otherwise, of such person as an account party in respect of letters of credit and letters of guaranty, (i) all obligations, contingent or otherwise, in respect of bankers’ acceptances, (j) all obligations of such person with respect to any arrangement, directly or indirectly, whereby such person or its subsidiaries shall sell or transfer any material asset, and whereby such person or any of its subsidiaries shall then or immediately thereafter rent or lease as lessee such asset or any part thereof and (k) all net payments that such person would have to make in the event of an early termination under any Hedging Agreement if, on the date Indebtedness of such person is being determined, such Hedging Agreement became subject to an early termination as of such date.  The Indebtedness of any person shall include the Indebtedness of any other person (including any partnership in which such person is a general partner) to the extent such person is liable therefor as a result of such person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such person is not liable therefor.

“Indemnified Taxes” shall mean Taxes other than Excluded Taxes.

“Independent Engineer” shall mean (a) DeGolyer & MacNaughton, (b) Ryder Scott Company Petroleum Engineers, (c) Netherland, Sewell & Associates, Inc., (d) Collarini Engineering, Inc. or (e) another independent petroleum engineer reasonably acceptable to the Agent.

“Intercompany Services Agreement” shall mean (a) the intercompany services agreement between the Parent and the Borrower, in substantially the form approved by the Agent prior to the Closing Date or (b) one or more service agreements, in form and substance reasonably acceptable to the Agent, pursuant to which the services provided for under the agreement described in clause (a) are performed by an entity of established reputation in the oil and gas industry (which may be a Qualified Purchaser) on terms (including pricing) and conditions then consistent with standard industry practice for such services.

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“Intercreditor Agreement” shall mean the Intercreditor Agreement, substantially in the form of Exhibit D, among the Agent, the First Lien Agent, Holdings and the Borrower.

“Interest Payment Date” shall mean (a) with respect to any ABR Loan, the last Business Day of each March, June, September and December, commencing on the last Business Day of March 2007, and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months’ duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months’ duration been applicable to such Borrowing.

“Interest Period” shall mean, with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect; provided, however, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day.  Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.

“Leases” shall mean all leases in respect of real property containing proved, probable or possible oil or gas reserves to which the Borrower or any Subsidiary is a party.

“Lenders” shall mean the persons listed on Schedule 2.01 and any other person that has become a party hereto pursuant to an Assignment and Acceptance, other than any such person that ceases to be a party hereto pursuant to an Assignment and Acceptance.

“Leverage Ratio” shall mean, on any date, the ratio of (a) Total Debt on such date to (b) Consolidated EBITDAX for the period of four consecutive fiscal quarters most recently ended on or prior to such date.

“LIBO Rate” shall mean, with respect to any Eurodollar Borrowing for any Interest Period, the rate per annum determined by the Agent at approximately 11:00 a.m. (London time) on the date that is two Business Days prior to the commencement of such Interest Period by reference to the British Bankers’ Association Interest Settlement Rates for deposits in dollars (as set forth by any service selected by the Agent that has been nominated by the British Bankers’ Association as an authorized information vendor for the purpose of displaying such rates) for a period equal to such Interest Period; provided that, to the extent that an interest rate is not ascertainable pursuant to the foregoing provisions of this definition, the “LIBO Rate” shall be the interest rate per annum determined by the Agent to be the average of the rates per annum at which deposits in

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dollars are offered for such relevant Interest Period to major banks in the London interbank market in London, England by the Agent at approximately 11:00 a.m. (London time) on the date that is two Business Days prior to the beginning of such Interest Period.

“Lien” shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

“Loan Documents” shall mean this Agreement, the Security Documents and the promissory notes, if any, executed and delivered pursuant to Section 2.03(e).

“Loan Parties” shall mean Holdings, the Borrower and the Subsidiary Loan Parties.

“Loans” shall mean the term loans made by the Lenders to the Borrower pursuant to Section 2.01.

“Margin Stock” shall have the meaning assigned to such term in Regulation U.

“Master Conveyance” shall mean (a) the Master Conveyance dated as of November 1, 2006, between the Parent and Holdings and (b) the Master Conveyance dated as of November 1, 2006, between Holdings and the Borrower.

“Material Adverse Effect” shall mean (a) a materially adverse effect on the business, assets, liabilities, operations, condition (financial or otherwise) or operating results of Holdings and its subsidiaries, taken as a whole, (b) a material impairment of the ability of the Borrower or any other Loan Party to perform any of its obligations under any Loan Document to which it is or will be a party or (c) a material impairment of the rights and remedies of or benefits available to the Lenders under any Loan Document.

“Material Indebtedness” shall mean Indebtedness (other than the Loans), or obligations in respect of one or more Hedging Agreements, of any one or more of Holdings, the Borrower or any Subsidiary in an aggregate principal amount exceeding $7,500,000.

“Maturity Date” shall mean December 8, 2011.

“MMS” shall mean the United States Department of Interior Minerals Management Service.

“MMS Leases” shall mean the leases designated as such on Schedule 1.01(b).

“Moody’s” shall mean Moody’s Investors Service, Inc., or any successor thereto.

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“Mortgaged Properties” shall mean (a) all Real Property of any Loan Party on the Closing Date and listed on Schedule 1.01(b) and (b) any after acquired Real Property of any Loan Party having a gross purchase price of $1,000,000 or more at the time of the acquisition thereof.

“Mortgages” shall mean the mortgages, deeds of trust, leasehold mortgages, assignments of leases and rents, modifications and other security documents substantially in the form of Exhibit E or in other forms reasonably acceptable to the Agent and the Borrower.

“Multiemployer Plan” shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

“Net Cash Proceeds” shall mean (a) with respect to any Asset Sale, the cash proceeds thereof (including cash proceeds subsequently received (as and when received) in respect of noncash consideration initially received), net of (i) selling and other expenses (including reasonable broker’s fees or commissions, legal fees, transfer and similar taxes, Hedging Agreement termination costs and the Borrower’s good faith estimate of income taxes actually paid or payable in connection with such sale), (ii) amounts provided as a reserve, in accordance with GAAP, against any liabilities under any indemnification obligations or purchase price adjustment associated with such Asset Sale (provided that, to the extent and at the time any such amounts are released from such reserve, such amounts shall constitute Net Cash Proceeds) and (iii) any amount payable in respect of any Indebtedness for borrowed money which is secured by the asset sold in such Asset Sale and which is required to be repaid with such proceeds (excluding any such Indebtedness assumed by the purchaser of such asset); provided, however, that, if (x) the Borrower shall deliver a certificate of a Financial Officer of the Borrower to the Agent at the time of receipt thereof setting forth the Borrower’s intent to reinvest such proceeds to acquire, maintain, explore, develop, construct, improve, upgrade or repair assets useful in the business of the Borrower and the Subsidiaries within 180 days of receipt of such proceeds and (y) no Default or Event of Default shall have occurred and shall be continuing at the time of the delivery of such certificate or at the proposed time of the application of such proceeds, such proceeds shall not constitute Net Cash Proceeds except to the extent not so used at the end of such 180 day period, at which time such proceeds shall be deemed to be Net Cash Proceeds, (b) with respect to any issuance or incurrence of Indebtedness or any Equity Issuance, the cash proceeds thereof (including cash proceeds subsequently received (as and when received) in respect of noncash consideration initially received), net of all taxes and customary fees, commissions, costs and other expenses incurred in connection therewith and (c) with respect to any Extraordinary Receipts, the cash proceeds thereof (including cash proceeds subsequently received (as and when received) in respect of noncash consideration initially received).

“Non-Financial Qualified Purchaser” shall mean any Qualified Purchaser that is not a Financial Qualified Purchaser.

“NYMEX” shall mean the New York Mercantile Exchange.

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“Obligations” means (a) the due and punctual payment by the Borrower of (i) the principal of, premium (if any) and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise and (ii) all other monetary obligations of the Borrower to any of the Secured Parties under this Agreement and each of the other Loan Documents, including obligations to pay fees, expense reimbursement obligations and indemnification obligations, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), (b) the due and punctual performance of all other obligations of the Borrower under or pursuant to this Agreement and each of the other Loan Documents to which it is a party and (c) the due and punctual payment and performance of all the obligations of each other Loan Party under or pursuant to the Security Documents and each of the other Loan Documents to which they are a party.

“Oil and Gas Properties” shall mean (a) Hydrocarbon Interests, (b) properties and assets now or hereafter pooled or unitized with Hydrocarbon Interests, (c) all currently existing or future unitization, pooling agreements and declarations of pooled units and the units created thereby (including all units created under orders, regulations and rules of any Governmental Authority) which may affect all or any portion of the Hydrocarbon Interests, (d) all operating agreements, contracts and other Contracts, including production sharing contracts and agreements, which relate to any of the Hydrocarbon Interests or the production, sale, purchase, exchange or processing of Hydrocarbons from or attributable to such Hydrocarbon Interests, (e) all Hydrocarbons in and under and which may be produced and saved or attributable to the Hydrocarbon Interests, including all oil in tanks, and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests, (f) all tenements, hereditaments, appurtenances and properties and assets in any manner appertaining, belonging, affixed or incidental to the Hydrocarbon Interests and (g) all properties and assets, rights, titles, interests and estates described or referred to above, including any and all properties and assets, real or personal, now owned or hereinafter acquired and situated upon, used, held for use or useful in connection with the operating, working or development of any of such Hydrocarbon Interests or properties and assets (excluding drilling rigs, automotive equipment, rental equipment or other personal property or assets which may be on such premises for the purpose of drilling a well or for other similar temporary uses) and including any and all oil wells, gas wells, injection wells or other wells, buildings, structures, fuel separators, liquid extraction plants, plant compressors, pumps, pumping units, field gathering systems, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, equipment, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, surface leases, rights-of-way, easements and servitudes together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing.  Unless otherwise indicated herein, each reference to the term “Oil and Gas Properties” shall mean Oil and Gas Properties of the Borrower and the Subsidiaries.

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“Operating Equipment” means all surface or subsurface machinery, equipment, facilities, supplies or other properties and assets of whatsoever kind or nature now or hereafter located on any of the properties or assets affected by the Oil and Gas Properties which are useful for the production, treatment, storage or transportation of Hydrocarbons, including all oil wells, gas wells, water wells, injection wells, casing, tubing, rods, pumping units and engines, christmas trees, derricks, separators, gun barrels, flow lines, pipelines, tanks, gas systems (for gathering, treating and compression), water systems (for treating, disposal and injection), supplies, derricks, wells, power plants, poles, cables, wires, meters, processing plants, compressors, dehydration units, lines, transformers, starters and controllers, machine shops, tools, storage yards and equipment stored therein, buildings and camps, telegraph, telephone and other communication systems, roads, loading racks, shipping facilities and all additions, substitutes and replacements for, and accessories and attachments to, any of the foregoing.  “Operating Equipment” shall not include any items incorporated into realty or structures or improvements located therein or thereon in such a manner that they no longer remain personal property under the laws of the State in which such equipment is located.

“Other Taxes” shall mean any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document.

“Parent” shall mean Forest Oil Corporation, a corporation organized under the laws of the State of New York.

“Parent Undertaking” shall mean the Parent Undertaking, substantially in the form of Exhibit F hereto, among the Parent, the Agent and the First Lien Agent.

“PBGC” shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA.

“PDP PV-10%” shall mean, on any date, 100% of the present value of future revenues less severance and ad valorem taxes, operating expenses and capital expenditures of the proved developed producing oil and gas reserves attributable to the Oil and Gas Properties, as evaluated in the most recently delivered Reserve Report in respect of proved developed producing oil and gas reserves attributable to the Oil and Gas Properties, discounted at a rate of 10% and utilizing the monthly crude oil (WTI) and natural gas (Henry Hub) prices, in each case based upon (i) the actual monthly price quoted on NYMEX on such date for the corresponding month through the 60th month from such date and (ii) the arithmetic monthly average for months 49 through 60 for each month after the 60th month.  The amount of the PDP PV-10% then in effect shall be (a) calculated on a pro forma basis for dispositions and acquisitions consummated since the date of the most recently delivered Reserve Report in respect of proved developed producing oil and gas reserves attributable to the Oil and Gas Properties to the extent that a reserve report reasonably acceptable to the Agent in respect of proved developed producing oil and gas reserves attributable to such disposition or acquisition is available

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and (b) adjusted to give effect to the Borrower’s and the Subsidiaries’ commodity hedges then in effect.

“PDP Total Debt Coverage Ratio” shall mean, on any date, the ratio of (a) PDP PV-10% as of such date to (b) Total Debt as of such date.

“Pension Act” shall mean the Pension Protection Act of 2006.

“Perfection Certificate” shall mean the Perfection Certificate substantially in the form of Exhibit B to the Collateral Agreement.

“Permitted Acquisition” shall mean the acquisition by the Borrower or any Subsidiary of all or substantially all of the assets of a person or a line of business of such person, or not less than 100% of the Equity Interests (other than directors’ qualifying shares) in a person (referred to herein as the “Acquired Entity”); provided that (i) such acquisition was not preceded by an unsolicited tender offer for such Equity Interests by, or proxy contest initiated by, Holdings, the Borrower or any Subsidiary, (ii) the Acquired Entity shall be in a similar line of business as that of the Borrower and the Subsidiaries as conducted during the current and most recent calendar year and (iii) at the time of such transaction (A) both before and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing, (B) the Borrower would be in compliance with the covenants set forth in Sections 6.10 and 6.11 as of the most recently completed period of four consecutive fiscal quarters ending prior to such transaction for which the financial statements and certificates required by Section 5.04(a) or 5.04(b), as the case may be, have been delivered, after giving pro forma effect to such transaction, any related incurrences of Indebtedness and any other event occurring after such period as to which pro forma recalculation is appropriate (including any other transaction described in this definition occurring after such period) as if such transaction had occurred as of the first day of such period, (C) (I) the total consideration paid in connection with such acquisition and any other acquisitions pursuant to Section 6.04(g) (including any Indebtedness of the Acquired Entity that is assumed by the Borrower or any Subsidiary following such acquisition and any payments following such acquisition pursuant to earn-out provisions or similar obligations) made in the same fiscal year, together with all investments in Oil and Gas Properties made pursuant to Section 6.04(k) in such fiscal year, shall not in the aggregate exceed $20,000,000 and (II) the total consideration paid in connection with such acquisition and any other acquisitions pursuant to Section 6.04(g) (including any Indebtedness of the Acquired Entity that is assumed by the Borrower or any Subsidiary following such acquisition and any payments following such acquisition pursuant to earn-out provisions or similar obligations) during the term of this Agreement, together with all investments in Oil and Gas Properties made pursuant to Section 6.04(k) during the term of this Agreement, shall not in the aggregate exceed $60,000,000, (D) the Borrower shall have delivered a certificate of a Financial Officer of the Borrower, certifying as to the foregoing and containing reasonably detailed calculations in support thereof, in form and substance satisfactory to the Administrative Agent and (E) the Borrower shall comply, and shall cause the Acquired Entity to comply, with the applicable provisions of Section 5.12 and the Security Documents.

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“Permitted Investments” shall mean:

(a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof;

(b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moody’s;

(c) investments in certificates of deposit, banker’s acceptances and time deposits maturing within one year from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, the Agent or any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $500,000,000;

(d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria of clause (c) above;

(e) investments in “money market funds” within the meaning of Rule 2a-7 of the Investment Company Act of 1940, as amended, substantially all of whose assets are invested in investments of the type described in clauses (a) through (d) above; and

(f) investments in so-called “auction rate” securities rated AAA or higher by S&P or Aaa or higher by Moody’s and which have a reset date not more than 90 days from the date of acquisition thereof.

“Permitted Refinancing Indebtedness” shall mean any Indebtedness (other than obligations under Hedging Agreements) issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, defease or refund (collectively, to “Refinance”) the Indebtedness (other than obligations under Hedging Agreements) being Refinanced (or previous refinancings thereof constituting Permitted Refinancing Indebtedness); provided that (a) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness so Refinanced (plus unpaid accrued interest, underwriting discounts, origination fees and premium thereon), (b) the average life to maturity of such Permitted Refinancing Indebtedness is greater than or equal to that of the Indebtedness being Refinanced, (c) if the Indebtedness being Refinanced is subordinated in right of payment to the Obligations under this Agreement, such Permitted Refinancing Indebtedness shall be subordinated in right of payment to such Obligations on terms at least as favorable to the Lenders as those contained in the documentation governing the Indebtedness being Refinanced, (d) no Permitted Refinancing Indebtedness shall have different obligors, or greater guarantees or security, than the Indebtedness being Refinanced and (e) if the Indebtedness being Refinanced is secured by any

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collateral (whether equally and ratably with, or junior to, the Secured Parties or otherwise), such Permitted Refinancing Indebtedness may be secured by such collateral on terms (including Lien subordination terms) no less favorable to the Secured Parties than those contained in the documentation governing the Indebtedness being Refinanced.

“person” shall mean any natural person, corporation, business trust, joint venture, association, company, limited liability company, partnership, Governmental Authority or other entity.

“Plan” shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 307 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

“Prime Rate” shall mean the rate of interest per annum determined from time to time by Credit Suisse as its prime rate in effect at its principal office in New York City and notified to the Borrower.

“Probable PV-10%” shall mean, on any date, 100% of the present value of future revenues less severance and ad valorem taxes, operating expenses and capital expenditures of the probable oil and gas reserves attributable to the Oil and Gas Properties, in each case as evaluated in the most recently delivered Reserve Report in respect of probable oil and gas reserves attributable to the Oil and Gas Properties, as the case may be, discounted at a rate of 10% and utilizing the monthly crude oil (WTI) and natural gas (Henry Hub) prices, in each case based upon the actual monthly price quoted on NYMEX on such date for the corresponding month through the 60th month from such date and (ii) the arithmetic monthly average for months 49 through 60 for each month after the 60th month.  The amount of the Probable PV-10% then in effect shall be (a) calculated on a pro forma basis for dispositions and acquisitions consummated since the date of the most recently delivered Reserve Report in respect of probable oil and gas reserves attributable to the Oil and Gas Properties to the extent that a reserve report reasonably acceptable to the Agent in respect of probable oil and gas reserves attributable to such disposition or acquisition is available and (b) adjusted to give effect to the Borrower’s and the Subsidiaries’ commodity hedges then in effect.

“Proved PV-10%” shall mean, on any date, 100% of the present value of future revenues less severance and ad valorem taxes, operating expenses and capital expenditures of the proved oil and gas reserves attributable to the Oil and Gas Properties, as evaluated in the most recently delivered Reserve Report in respect of proved oil and gas reserves attributable to the Oil and Gas Properties, discounted at a rate of 10% and utilizing the monthly crude oil (WTI) and natural gas (Henry Hub) prices, in each case based upon (i) the actual monthly price quoted on NYMEX on such date for the corresponding month through the 60th month from such date and (ii) the arithmetic monthly average for months 49 through 60 for each month after the 60th month.  The amount of the Proved PV-10% then in effect shall be (a) calculated on a pro forma basis for dispositions and acquisitions consummated since the date of the most recently

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delivered Reserve Report in respect of proved oil and gas reserves attributable to the Oil and Gas Properties to the extent that a reserve report reasonably acceptable to the Agent in respect of proved oil and gas reserves attributable to such disposition or acquisition is available and (b) adjusted to give effect to the Borrower’s and the Subsidiaries’ commodity hedges then in effect.

“Proved Total Debt Coverage Ratio” shall mean, on any date, the ratio of (a) Proved PV-10% as of such date to (b) Total Debt as of such date.

“Purchase Date” shall have the meaning assigned to such term in Section 2.21.

“Qualified Capital Stock” of any person shall mean any Equity Interest of such person that is not Disqualified Stock.

“Qualified Purchaser” shall mean each person listed on Schedule 1.01(c), any wholly-owned subsidiary of any such person and any fund managed by any such person.

“Real Property” shall mean, collectively, all right, title and interest of the Borrower or any Subsidiary in and to any and all parcels of real property owned, leased or operated by the Borrower or any Subsidiary together with all improvements and appurtenant fixtures, equipment, personal property, easements and other property and rights incidental to the ownership, lease or operation thereof, including all Oil and Gas Properties that constitute real property.

“Register” shall have the meaning assigned to such term in Section 9.04(d).

“Regulation T” shall mean Regulation T of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

“Regulation U” shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

“Regulation X” shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

“Related Fund” shall mean, with respect to any Lender that is a fund or commingled investment vehicle that invests in bank loans, any other fund that invests in bank loans and is managed or advised by the same investment advisor as such Lender or by an Affiliate of such investment advisor.

“Related Parties” shall mean, with respect to any specified person, such person’s Affiliates and the directors, trustees, officers, employees, agents and advisors of such person and such person’s Affiliates.

“Release” shall mean any release, spill, emission, leaking, dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching or migration into or through the environment or within or upon any building, structure, facility or fixture.

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“Required Lenders” shall mean, at any time, Lenders having Loans and unused Commitments representing more than 50% of the sum of all Loans outstanding and unused Commitments at such time.

Reserve Report” shall mean (a) each of the reserve reports referred to in Section 3.05(c) and (b) any other reserve report delivered to the Agent or any Lender pursuant to or in connection with this Agreement.

“Responsible Officer” of any person shall mean any executive officer or Financial Officer of such person and any other officer or similar official thereof responsible for the administration of the obligations of such person in respect of this Agreement, including a reserve engineer of seniority reasonably acceptable to the Agent.

“Restricted Indebtedness” shall mean Indebtedness of Holdings, the Borrower or any Subsidiary, the payment, prepayment, repurchase or defeasance of which is restricted under Section 6.06(b).

“Restricted Payment” shall mean any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in Holdings, the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any Equity Interests in Holdings, the Borrower or any Subsidiary.

“Secured Parties” shall mean (a) the Lenders, (b) the Agent, (c) the beneficiaries of each indemnification obligation undertaken by any Loan Party under any Loan Document and (d) the successors and permitted assigns of each of the foregoing.

“Security Documents” shall mean the Mortgages, the Collateral Agreement, the Account Control Agreements, the Intercreditor Agreement and each of the security agreements, mortgages and other instruments and documents executed and delivered pursuant to any of the foregoing or pursuant to Section 5.12.

“SPC” shall have the meaning assigned to such term in Section 9.04(i).

“S&P” shall mean Standard & Poor’s Ratings Service, a division of the McGraw-Hill Companies, Inc., or any successor thereto.

“State Tax Sharing Agreement” shall mean the State Consolidated or Combined Income Tax Allocation Agreement dated as of November 1, 2006, between the Parent and Holdings.

“Statutory Reserves” shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority, domestic or foreign, to which the Agent or any Lender (including any branch, Affiliate or other fronting office making or holding a

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Loan) is subject for Eurocurrency Liabilities (as defined in Regulation D of the Board).  Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities as defined in Regulation D of the Board) and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D.  Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

“subsidiary” shall mean, with respect to any person (herein referred to as the “parent”), any corporation, partnership, limited liability company, association or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, Controlled or held or (b) that is, at the time any determination is made, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent.

“Subsidiary” shall mean any subsidiary of the Borrower.

“Subsidiary Loan Party” shall mean each Subsidiary that has executed the Collateral Agreement or a supplement thereto and a Mortgage in respect of each Mortgaged Property which is owned by it.

“Syndication Agent” shall mean JPMorgan Chase Bank, N.A., in its capacity as syndication agent for the Lenders.

“Synthetic Lease Obligations” means all monetary obligations under (a) a synthetic, off-balance sheet or tax retension lease or (b) an agreement for the use or possession of property creating obligations that do not (and should not) appear on the balance sheet of such person but which, upon the insolvency or bankruptcy of such person, would be characterized as the indebtedness of such person (without regard to accounting treatment).

“Synthetic Purchase Agreement” shall mean any swap, derivative or other agreement or combination of agreements pursuant to which Holdings, the Borrower or any Subsidiary is or may become obligated to make (a) any payment in connection with a purchase by any third party from a person other than Holdings, the Borrower or any Subsidiary of any Equity Interest or Restricted Indebtedness or (b) any payment (other than on account of a permitted purchase by it of any Equity Interest or Restricted Indebtedness) the amount of which is determined by reference to the price or value at any time of any Equity Interest or Restricted Indebtedness; provided that no phantom stock or similar plan providing for payments only to current or former directors, officers or employees of Holdings, the Borrower or the Subsidiaries (or to their heirs or estates) shall be deemed to be a Synthetic Purchase Agreement.

“Taxes” shall mean any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority.

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“Tax Sharing Agreements” means (a) the Federal Tax Sharing Agreement and (b) the State Tax Sharing Agreement, in each case in the form approved by the Agent prior to the Closing Date.

“Total Debt” shall mean, at any time, the Indebtedness of Holdings and its subsidiaries on a consolidated basis at such time described under clauses (a), (b), (c), (d), (e), (f), (g), (h), (i) and (j); provided that “Total Debt” shall exclude any Indebtedness of Holdings and its subsidiaries composed of outstanding but undrawn letters of credit or outstanding but undrawn performance bonds.

“Transactions” shall mean, collectively, (a) the contribution of the Business by the Parent to Holdings and by Holdings to the Borrower, (b) the execution, delivery and performance by the Loan Parties of the Loan Documents to which they are a party and the borrowing of Loans hereunder, (c) the execution, delivery and performance by the First Lien Loan Parties of the First Lien Loan Documents to which they are party and the borrowing of First Lien Loans thereunder, (d) the Distribution, (e) the execution, delivery and performance by the parties thereto of the Intercompany Services Agreement and the Tax Sharing Agreements and (f) the payment of fees and expenses in connection with the foregoing.

“Type”, when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, the term “Rate” shall mean the Adjusted LIBO Rate and the Alternate Base Rate.

“USA PATRIOT Act” shall mean The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Title III of Pub. L. No. 107-56 (signed into law October 26, 2001)).

“wholly owned Subsidiary” of any person shall mean a subsidiary of such person of which securities (except for directors’ qualifying shares) or other ownership interests representing 100% of the Equity Interests are, at the time any determination is being made, owned, Controlled or held by such person or one or more wholly owned Subsidiaries of such person or by such person and one or more wholly owned Subsidiaries of such person.

“Withdrawal Liability” shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.

SECTION 1.02.  Terms Generally.  The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall”; and the words “asset” and “property” shall be construed as having the same meaning and effect and to refer to any and all tangible and

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intangible assets and properties, including cash, securities, accounts and contract rights. All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, (a) any reference in this Agreement to any Loan Document shall mean such document as amended, restated, supplemented, waived or otherwise modified from time to time and (b) all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that if Holdings notifies the Agent that Holdings wishes to amend any covenant in Article VI or any related definition to eliminate the effect of any change in GAAP occurring after the date of this Agreement on the operation of such covenant (or if the Agent notifies Holdings that the Required Lenders wish to amend Article VI or any related definition for such purpose), then Holding’s compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to Holdings and the Required Lenders.  Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented, waived or otherwise modified (subject to any restrictions on such amendments, supplements, waivers or modifications set forth herein), (b) any definition of or reference to any statute, regulation or other law herein shall be construed (i) as referring to such statute, regulation or other law as from time to time amended, supplemented or otherwise modified (including by succession of comparable successor statutes, regulations or other laws) and (ii) to include all official rulings and interpretations thereunder, (c) any reference herein to any person shall be construed to include such person’s successors and assigns and (d) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof.

SECTION 1.03.  Classification of Loans and Borrowings.  For purposes of this Agreement, Loans may be classified and referred to by Type (e.g., a “Eurodollar Loan”). Borrowings also may be classified and referred to by Type (e.g., a “Eurodollar Borrowing”).

ARTICLE II

The Credits

SECTION 2.01.  Commitments.  On the terms and subject to the conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make a Loan to the Borrower on the Effective Date in a principal amount not to exceed its Commitment.  The Loans made on the Effective Date shall be Eurodollar Loans with an Interest Period of one month’s duration and shall be disbursed to the account designated by the Borrower in a writing delivered to the Agent at least two Business Days prior to the Effective Date.  Amounts paid or prepaid in respect of Loans may not be reborrowed.

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SECTION 2.02.  Loans.  (a)  Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their Commitments; provided, however, that the failure of any Lender to make any Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender).  The Loans comprising any Borrowing shall be in an aggregate principal amount that is an integral multiple of $1,000,000 and not less than $5,000,000.

(b)  Subject to Sections 2.07 and 2.14, each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request pursuant to Section 2.09.  Each Lender may at its option make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.  Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Borrower shall not be entitled to request any Borrowing that, if made, would result in more than seven Eurodollar Borrowings outstanding hereunder at any time. For purposes of the foregoing, Borrowings having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Borrowings.

(c)  Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds to such account in New York City as the Agent may designate not later than 1:00 p.m., New York City time, and the Agent shall promptly credit the amounts so received to the account designated by the Borrower pursuant to Section 2.01 or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the Lenders.

(d)  Unless the Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Agent such Lender’s portion of such Borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of such Borrowing in accordance with paragraph (c) above and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If the Agent shall have so made funds available then, to the extent that such Lender shall not have made such portion available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower to but excluding the date such amount is repaid to the Agent at (i) in the case of the Borrower, a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, a rate determined by the Agent to represent its cost of overnight or short-term funds (which determination shall be conclusive absent manifest error). If such Lender shall repay to the Agent such corresponding amount, such amount shall constitute such Lender’s Loan as part of such Borrowing for purposes of this Agreement.

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(e)  Nothing in this Section shall be deemed to relieve any Lender of its obligations in respect of its Commitment hereunder or to prejudice any rights that the Borrower may have against any Lender as a result of a default by such Lender under this Agreement.

SECTION 2.03.  Evidence of Debt; Repayment of Loans.  (a)  The Borrower hereby unconditionally promises to pay to the Agent for the account of each Lender the principal amount of each Loan of such Lender as provided in Section 2.10.

(b)  Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement.

(c)  The Agent shall maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Type thereof and, if applicable, the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Agent hereunder from the Borrower or any Guarantor and each Lender’s share thereof.

(d)  The entries made in the accounts maintained pursuant to paragraphs (b) and (c) above shall be prima facie evidence of the existence and amounts of the obligations therein recorded; provided, however, that the failure of any Lender or the Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrower to repay the Loans in accordance with their terms.

(e)  Any Lender may request that Loans made by it hereunder be evidenced by a promissory note.  In such event, the Borrower shall execute and deliver to such Lender a promissory note payable to such Lender and its registered assigns and in a form and substance reasonably acceptable to the Agent and the Borrower. Notwithstanding any other provision of this Agreement, in the event any Lender shall request and receive such a promissory note, the interests represented by such note shall at all times (including after any assignment of all or part of such interests pursuant to Section 9.04) be represented by one or more promissory notes payable to the payee named therein or its registered assigns.

SECTION 2.04.  Fees.  The Borrower agrees to pay to the Agent, for its own account, the fees set forth in the Administrative Agent Fee Letter at the times and in the amounts specified therein.

SECTION 2.05.  Interest on Loans.  (a)  Subject to the provisions of Section 2.06, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when the Alternate Base Rate is determined by reference to the Prime Rate and over a year of 360 days at all other times and calculated from and including the date

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of such Borrowing to but excluding the date of repayment thereof) at a rate per annum equal to the Alternate Base Rate plus the Applicable Percentage.

(b)  Subject to the provisions of Section 2.06, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days and calculated from and including the date of such Borrowing to but excluding the date of repayment thereof) at a rate per annum equal to the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Percentage.

(c)  Interest on each Loan shall be payable in arrears on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. The applicable Alternate Base Rate or Adjusted LIBO Rate for each day or each Interest Period, as the case may be, shall be determined by the Agent, and such determination shall be conclusive absent manifest error.

SECTION 2.06.  Default Interest.  If the Borrower shall default in the payment of any principal of or interest on any Loan or any other amount due hereunder or under any other Loan Document, by acceleration or otherwise, then, until such defaulted amount shall have been paid in full, to the extent permitted by law, all amounts outstanding under this Agreement and the other Loan Documents shall bear interest (after as well as before judgment), payable on demand, (a) in the case of principal, at the rate otherwise applicable to such Loan pursuant to Section 2.05 plus 2.00% per annum and (b) in all other cases, at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when determined by reference to the Prime Rate and over a year of 360 days at all other times) equal to the rate that would be applicable to an ABR Loan plus 2.00% per annum.

SECTION 2.07.  Alternate Rate of Interest.  In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Agent shall have determined that dollar deposits in the principal amounts of the Loans comprising such Borrowing are not generally available in the London interbank market, or that the rates at which such dollar deposits are being offered will not adequately and fairly reflect the cost to Lenders representing the Required Lenders of making or maintaining Eurodollar Loans during such Interest Period, or that reasonable means do not exist for ascertaining the Adjusted LIBO Rate, the Agent shall, as soon as practicable thereafter, give written or fax notice of such determination to the Borrower and the Lenders. In the event of any such determination, until the Agent shall have advised the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, any request by the Borrower for a Eurodollar Borrowing pursuant to Section 2.09 shall be deemed to be a request for an ABR Borrowing.  Each determination by the Agent under this Section shall be conclusive absent manifest error.

SECTION 2.08.  Termination and Reduction of Commitments.  (a)  The Commitments shall automatically terminate upon the making of the Loans on the Effective Date.  Notwithstanding the foregoing, all the Commitments shall automatically

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terminate at 5:00 p.m., New York City time, on December 31, 2006, if the making of the Loans shall not have occurred by such time.

(b)  Upon at least three Business Days’ prior irrevocable written or fax notice to the Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitments; provided, however, that each partial reduction of the Commitments shall be in an integral multiple of, and in a minimum amount of, $1,000,000.

(c)  Each reduction in the Commitments hereunder shall be made ratably among the Lenders in accordance with their Commitments.

SECTION 2.09.  Conversion and Continuation of Borrowings.  The Borrower shall have the right at any time upon prior irrevocable notice to the Agent (a) not later than 2:00 p.m., New York City time, one Business Day prior to conversion, to convert any Eurodollar Borrowing into an ABR Borrowing, (b) not later than 2:00 p.m., New York City time, three Business Days prior to conversion or continuation, to convert any ABR Borrowing into a Eurodollar Borrowing or to continue any Eurodollar Borrowing as a Eurodollar Borrowing for an additional Interest Period and (c) not later than 2:00 p.m., New York City time, three Business Days prior to conversion, to convert the Interest Period with respect to any Eurodollar Borrowing to another permissible Interest Period, subject in each case to the following:

(i)  each conversion or continuation shall be made pro rata among the Lenders in accordance with the principal amounts of the Loans comprising the converted or continued Borrowing;

(ii)  if less than all the outstanding principal amount of any Borrowing shall be converted or continued, then each resulting Borrowing shall satisfy the limitations specified in Sections 2.02(a) and 2.02(b) regarding the principal amount and maximum number of Borrowings of the relevant Type;

(iii)  each conversion shall be effected by each Lender and the Agent by recording for the account of such Lender the new Loan of such Lender resulting from such conversion and reducing the Loan (or portion thereof) of such Lender being converted by an equivalent principal amount; accrued interest on any Eurodollar Loan (or portion thereof) being converted shall be paid by the Borrower at the time of conversion;

(iv)  if any Eurodollar Borrowing is converted at a time other than the end of the Interest Period applicable thereto, the Borrower shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.15;

(v)  any portion of a Borrowing maturing or required to be repaid in less than one month may not be converted into or continued as a Eurodollar Borrowing;

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(vi)  any portion of a Eurodollar Borrowing that cannot be converted into or continued as a Eurodollar Borrowing by reason of the immediately preceding clause shall be automatically converted at the end of the Interest Period in effect for such Borrowing into an ABR Borrowing;

(vii)  no Interest Period may be selected for any Eurodollar Borrowing that would end later than the Maturity Date; and

(viii)  upon notice to the Borrower from the Agent given at the request of the Required Lenders, after the occurrence and during the continuance of an Event of Default, no outstanding Loan may be converted into, or continued as, a Eurodollar Loan.

Each notice pursuant to this Section shall be irrevocable and shall refer to this Agreement and specify (i) the identity and amount of the Borrowing that the Borrower requests be converted or continued, (ii) whether such Borrowing is to be converted to or continued as a Eurodollar Borrowing or an ABR Borrowing, (iii) if such notice requests a conversion, the date of such conversion (which shall be a Business Day) and (iv) if such Borrowing is to be converted to or continued as a Eurodollar Borrowing, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Eurodollar Borrowing, the Borrower shall be deemed to have selected an Interest Period of one month’s duration. The Agent shall advise the Lenders of any notice given pursuant to this Section and of each Lender’s portion of any converted or continued Borrowing. If the Borrower shall not have given notice in accordance with this Section to continue any Borrowing into a subsequent Interest Period (and shall not otherwise have given notice not later than 2:00 p.m., New York City time, three Business Days prior to the end of such Interest Period, of its intent to convert such Borrowing or to prepay such Borrowing at the end of such Interest Period), such Borrowing shall, at the end of the Interest Period applicable thereto, automatically be continued as a Eurodollar Borrowing with an Interest Period of one month’s duration.

SECTION 2.10.  Repayment of Borrowings.  (a)  All Loans shall be due and payable on the Maturity Date, together with accrued and unpaid interest on the principal amount to be paid to but excluding the date of payment.

(b)  All repayments pursuant to this Section shall be subject to Section 2.15, but shall otherwise be without premium or penalty.

SECTION 2.11.  Optional Prepayment; Prepayment Premium.  (a)  The Borrower shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, upon at least three Business Days’ prior written or fax notice (or telephone notice promptly confirmed by written or fax notice) in the case of Eurodollar Loans or upon at least one Business Day prior written or fax notice (or telephone notice promptly confirmed by written or fax notice) in the case of ABR Loans, to the Agent before 2:00 p.m., New York City time; provided, however, that each partial prepayment

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shall be in an amount that is an integral multiple of $1,000,000 and not less than $5,000,000.

(b)  Any prepayment of any Loan made pursuant to this Section or pursuant to Section 2.12 with the proceeds of any incurrence of Indebtedness (i) at any time on or prior to the first anniversary of the Closing Date shall be accompanied by a prepayment premium equal to 2% of the principal amount of such Loan prepaid and (ii) at any time from but excluding the first anniversary of the Closing Date through and including the second anniversary of the Closing Date shall be accompanied by a prepayment premium equal to 1% of the principal amount of such Loan prepaid.

(c)  Optional prepayments of Loans shall be applied pro rata against the remaining scheduled installments of principal due in respect of the Loans.

(d)  Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such Borrowing by the amount stated therein on the date stated therein; provided that a notice of optional prepayment may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Agent on or prior to the specified effective date) if such condition is not satisfied.  All prepayments under this Section shall be subject to Section 2.15.  All prepayments under this Section shall be accompanied by accrued and unpaid interest on the principal amount to be prepaid to but excluding the date of payment.

SECTION 2.12.  Mandatory Prepayments.  (a)  Not later than the third Business Day following the receipt of Net Cash Proceeds in respect of any Asset Sale, the Borrower shall make an offer to the Lenders by notice to the Agent to apply 100% of such Net Cash Proceeds to prepay outstanding Loans in accordance with paragraphs (g) and (h) below; provided that, at any time First Lien Loans are outstanding, such Net Cash Proceeds shall only be required to be offered and applied to the extent (if any) that such Net Cash Proceeds remain after any mandatory prepayments required by Section 2.12 of the First Lien Credit Agreement shall have been made in accordance with the terms of such Section.

(b)  If and on each occasion that an Equity Issuance occurs, the Borrower shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the occurrence of such Equity Issuance, make an offer to the Lenders by notice to the Agent to apply 50% of the Net Cash Proceeds therefrom to prepay outstanding Loans in accordance with paragraphs (g) and (h) below; provided that, at any time First Lien Loans are outstanding, such Net Cash Proceeds shall only be required to be so offered and applied to the extent (if any) that such Net Cash Proceeds remain after any mandatory prepayments required by Section 2.12 of the First Lien Credit Agreement shall have been made in accordance with the terms of such Section.

(c)  No later than the date on which the financial statements with respect to any fiscal year, commencing with the fiscal year ending December 31, 2007, are delivered

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pursuant to Section 5.04(a), the Borrower shall make an offer to the Lenders by notice to the Agent to prepay outstanding Loans in accordance with paragraphs (g) and (h) below in an aggregate principal amount equal to 100% of Excess Cash Flow for such fiscal year; provided that, at any time First Lien Loans are outstanding, if the Available Cash as of the last day of such fiscal year would have been less than $20,000,000 if 100% of Excess Cash Flow for such fiscal year had been applied to prepay Loans or Second Lien Loans on such last day, the amount required to be offered to prepay outstanding Loans will be reduced by an amount equal to such shortfall; and provided further, that such Net Cash Proceeds shall only be required to be so offered and applied to the extent (if any) that such Net Cash Proceeds remain after any mandatory prepayments required by Section 2.12 of the First Lien Credit Agreement shall have been made in accordance with the terms of such Section.

(d)  If any Loan Party or any subsidiary of a Loan Party shall receive Net Cash Proceeds from the issuance or incurrence of Indebtedness of any Loan Party or any subsidiary of a Loan Party (other than any cash proceeds from the issuance of Indebtedness permitted pursuant to Section 6.01), the Borrower shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the receipt of such Net Cash Proceeds by such Loan Party or such subsidiary, make an offer to the Lenders by notice to the Agent to apply an amount equal to 100% of such Net Cash Proceeds to prepay outstanding Loans in accordance with paragraphs (g) and (h) below; provided that, at any time First Lien Loans are outstanding, such Net Cash Proceeds shall only be required to be so offered and applied to the extent (if any) that such Net Cash Proceeds remain after any mandatory prepayments required by Section 2.12 of the First Lien Credit Agreement shall have been made in accordance with the terms of such Section.

(e)  Not later than the third Business Day following the receipt of Net Cash Proceeds in respect of any Extraordinary Receipts, the Borrower shall make an offer to the Lenders by notice to the Agent to apply 100% of such Net Cash Proceeds to prepay outstanding Loans in accordance with paragraphs (g) and (h) below; provided that, at any time First Lien Loans are outstanding, such Net Cash Proceeds shall only be required to be so offered and applied to the extent (if any) that such Net Cash Proceeds remain after any mandatory prepayments required by Section 2.12 of the First Lien Credit Agreement shall have been made in accordance with the terms of such Section.

(f)  Mandatory prepayments of outstanding Loans under this Agreement shall be applied pro rata against the remaining scheduled installments of principal due in respect of the Loans.

(g)  Within three Business Days after the Agent receives notice of an offer from the Borrower under paragraphs (a), (b), (c), (d) or (e) of this Section, any Lender may elect, by notice to the Agent, to accept or decline all (but not a portion) of its pro rata share of such prepayment; provided that any failure by a Lender to give such notice shall be deemed to an acceptance of such prepayment (such declined amounts being called the “Declined Amounts”).  On the fourth Business Day after the Agent receives notice of such an offer from the Borrower, the Borrower shall pay all amounts which are not

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Declined Amounts and shall offer the Declined Amounts to the Lenders not so declining such prepayment (with such non-declining Lenders having the right to accept or decline any prepayment with Declined Amounts in the manner specified by the Agent, it being agreed that any such Lender may accept an amount in excess of its pro rata share of the Declined Amounts up to the principal amount of its outstanding Loans, subject to pro-ration as set forth below).  Such non-declining Lenders must accept or decline the Declined Amounts so offered within one Business Day at which time the Declined Amounts accepted by such non-declining Lenders shall be paid by the Borrower to the Lenders accepting such amounts within one Business Day following acceptance (ratably in accordance with the amounts accepted by them) and any remaining Declined Amounts shall be used by the Borrower for general corporate purposes permitted by this Agreement.

(h)  (i)  The Borrower shall deliver to the Agent, at the time of each offer to make a prepayment required under this Section, a certificate signed by a Financial Officer of the Borrower setting forth in reasonable detail the calculation of the amount of such prepayment to be offered.  Each offer shall specify the proposed prepayment date, the Type of each Borrowing being prepaid and the principal amount of each Borrowing (or portion thereof) to be prepaid. All prepayments of Borrowings under this Section shall be subject to Section 2.15, but shall otherwise be without premium or penalty, and shall be accompanied by accrued and unpaid interest on the principal amount to be prepaid to but excluding the date of payment.

(ii)  In connection with any optional prepayments by the Borrower of the Loans pursuant to Section 2.11, any optional prepayment thereof shall be applied first to ABR Borrowings to the full extent thereof before application to Eurodollar Borrowings, in each case in a manner that minimizes the amount of any payments required to be made by the Borrower pursuant to Section 2.15.

(iii)  In connection with any mandatory prepayments by the Borrower of the Loans pursuant to this Section, such prepayments shall be applied on a pro rata basis to the then outstanding Loans being prepaid irrespective of whether such outstanding Loans are ABR Loans or Eurodollar Loans; provided that if no Lender exercises the right to decline a mandatory prepayment of the Loans pursuant to paragraph (g) of this Section, then, such mandatory prepayment shall be applied first to Loans that are ABR Loans to the full extent thereof before application to Loans that are Eurodollar Loans, in each case in a manner that minimizes the amount of any payments required to be made by the Borrower pursuant to Section 2.15.

SECTION 2.13.  Reserve Requirements; Change in Circumstances. 
(a)  Notwithstanding any other provision of this Agreement, if any Change in Law shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by any Lender (except any such reserve requirement which is reflected in the Adjusted LIBO Rate) or shall impose on such Lender or the London interbank market any other condition

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affecting this Agreement or Eurodollar Loans made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise) by an amount deemed by such Lender to be material, then the Borrower will pay to such Lender upon demand such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered.

(b)  If any Lender shall have determined that any Change in Law regarding capital adequacy has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement or the Loans made by such Lender pursuant hereto to a level below that which such Lender or such Lender’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time the Borrower shall pay to such Lender, such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered.

(c)  A certificate of a Lender setting forth (i) the amount or amounts necessary to compensate such Lender or its holding company, as applicable, as specified in paragraph (a) or (b) above and (ii) in reasonable detail, the manner in which the amount claimed was determined shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate delivered by it within 10 days after its receipt of the same.

(d)  Failure or delay on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital shall not constitute a waiver of such Lender’s right to demand such compensation; provided that the Borrower shall not be under any obligation to compensate any Lender under paragraph (a) or (b) above with respect to increased costs or reductions with respect to any period prior to the date that is 120 days prior to such request if such Lender knew or could reasonably have been expected to know of the circumstances giving rise to such increased costs or reductions and of the fact that such circumstances would result in a claim for increased compensation by reason of such increased costs or reductions; provided further that the foregoing limitation shall not apply to any increased costs or reductions arising out of the retroactive application of any Change in Law within such 120-day period. The protection of this Section shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of the Change in Law that shall have occurred or been imposed.

SECTION 2.14.  Change in Legality.  (a)  Notwithstanding any other provision of this Agreement, if any Change in Law shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrower and to the Agent:

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(i)  such Lender may declare that Eurodollar Loans will not thereafter (for the duration of such unlawfulness) be made by such Lender hereunder (or be continued for additional Interest Periods) and ABR Loans will not thereafter (for such duration) be converted into Eurodollar Loans, whereupon any request for a Eurodollar Borrowing (or to convert an ABR Borrowing to a Eurodollar Borrowing or to continue a Eurodollar Borrowing for an additional Interest Period) shall, as to such Lender only, be deemed a request for an ABR Loan (or a request to continue an ABR Loan as such for an additional Interest Period or to convert a Eurodollar Loan into an ABR Loan, as the case may be), unless such declaration shall be subsequently withdrawn; and

(ii)  such Lender may require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below.

In the event any Lender shall exercise its rights under (i) or (ii) above, all payments and prepayments of principal that would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans.

(b)  For purposes of this Section, a notice to the Borrower by any Lender shall be effective as to each Eurodollar Loan made by such Lender, if lawful, on the last day of the Interest Period then applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrower.

SECTION 2.15.  Indemnity.  The Borrower shall indemnify each Lender against any loss or expense that such Lender may sustain or incur as a consequence of (a) any event, other than a default by such Lender in the performance of its obligations hereunder, which results in (i) such Lender receiving or being deemed to receive any amount on account of the principal of any Eurodollar Loan prior to the end of the Interest Period in effect therefor (including any Interest Period for which a Borrowing is automatically continued pursuant to Section 2.09), (ii) the conversion of any Eurodollar Loan to an ABR Loan, or the conversion of the Interest Period with respect to any Eurodollar Loan, in each case other than on the last day of the Interest Period in effect therefor or (iii) any Eurodollar Loan to be made by such Lender (including any Eurodollar Loan to be made pursuant to a conversion or continuation under Section 2.09) not being made after notice of such Loan shall have been given by the Borrower hereunder (any of the events referred to in this clause (a) being called a “Breakage Event”) or (b) any default in the making of any payment or prepayment required to be made hereunder. In the case of any Breakage Event, such loss shall include an amount equal to the excess, as reasonably determined by such Lender, of (i) its cost of obtaining funds for the Eurodollar Loan that is the subject of such Breakage Event for the period from the date of such Breakage Event to the last day of the Interest Period in effect (or that would have been in effect) for such Loan over (ii) the amount of interest likely to be

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realized by such Lender in redeploying the funds released or not utilized by reason of such Breakage Event for such period. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error.

SECTION 2.16.  Pro Rata Treatment.  Except as required under Section 2.12 and 2.14, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the Loans, each reduction of the Commitments and each conversion of any Borrowing to or continuation of any Borrowing as a Borrowing of any Type shall be allocated pro rata among the Lenders in accordance with their Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the principal amounts of their outstanding Loans).  Each Lender agrees that in computing such Lender’s portion of any Borrowing to be made hereunder, the Agent may, in its discretion, round each Lender’s percentage of such Borrowing to the next higher or lower whole dollar amount.

SECTION 2.17.  Sharing of Setoffs.  Each Lender agrees that if it shall, through the exercise of a right of banker’s lien, setoff or counterclaim against the Borrower or any other Loan Party, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans as a result of which the unpaid principal portion of its Loans shall be proportionately less than the unpaid principal portion of the Loans of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Loans of such other Lender, so that the aggregate unpaid principal amount of the Loans and participations in Loans held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Loans then outstanding as the principal amount of its Loans prior to such exercise of banker’s lien, setoff or counterclaim or other event was to the principal amount of all Loans outstanding prior to such exercise of banker’s lien, setoff or counterclaim or other event; provided, however, that if any such purchase or purchases or adjustments shall be made pursuant to this Section and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrower and Holdings expressly consent to the foregoing arrangements and agree that any Lender holding a participation in a Loan deemed to have been so purchased may exercise any and all rights of banker’s lien, setoff or counterclaim with respect to any and all moneys owing by the Borrower and Holdings to such Lender by reason thereof as fully as if such Lender had made a Loan directly to the Borrower in the amount of such participation.

SECTION 2.18.  Payments.  (a)  The Borrower shall make each payment (including principal of or interest on any Borrowing or any fees or other amounts) hereunder and under any other Loan Document not later than 2:00 p.m., New York City time, on the date when due in immediately available dollars, without setoff, defense or counterclaim. Any amounts received after such time on any date may, in the discretion of

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the Agent, be deemed to have been received on the next succeeding Business Day.  Each such payment shall be made to the Agent at its offices at Eleven Madison Avenue, New York, NY 10010. The Agent shall promptly distribute to each Lender any payments received by the Agent on behalf of such Lender.

(b)  Except as otherwise expressly provided herein, whenever any payment (including principal of or interest on any Borrowing or any fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or fees, if applicable.

SECTION 2.19.  Taxes.  (a)  Any and all payments by or on account of any obligation of the Borrower or any other Loan Party hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that, if the Borrower or any other Loan Party shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Agent or Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower or such Loan Party shall make such deductions and (iii) the Borrower or such Loan Party shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.

(b)  In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

(c)  The Borrower shall indemnify the Agent and each Lender, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Agent or such Lender, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower or any other Loan Party hereunder or under any other Loan Document (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or by the Agent on behalf of itself or a Lender shall be conclusive absent manifest error.  Notwithstanding anything herein to the contrary, neither the Agent nor any Lender shall be indemnified for any Taxes hereunder unless such person shall make written demand on the Borrower for reimbursement of such Taxes no later than 120 days after the date on which such person makes payment of such Taxes.  If such person fails to give the Borrower timely notice as provided in the preceding sentence, the Borrower shall not have any obligation to pay such claim for reimbursement.

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(d)  As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower or any other Loan Party to a Governmental Authority, the Borrower shall deliver to the Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Agent.

(e)  Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate.  In addition, any Lender, if requested by the Borrower or the Agent, shall deliver such other documentation prescribed by applicable law or reasonably requested by the Borrower or the Agent as will enable the Borrower or the Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements.  Without limiting the generality of the foregoing, if the Borrower, Holdings or the Parent is resident for tax purposes in the United States, any Foreign Lender shall deliver to the Borrower and the Agent (in such number of copies as shall be reasonably requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the request of the Borrower or the Agent, but only if such Foreign Lender is legally entitled to do so), whichever of the following is applicable:

(i)  duly completed copies of Internal Revenue Service Form W-8BEN claiming eligibility for benefits of an income tax treaty to which the United States is a party;

(ii)  duly completed copies of Internal Revenue Service Form W-8ECI;

(iii)  in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under section 881(c) of the Code, (A) a certificate substantially in the form of Exhibit L, which indicates that such Foreign Lender is not (I) a “bank” within the meaning of section 881(c)(3)(A) of the Code, (II) a “10 percent shareholder” of the Borrower, Holdings or the Parent within the meaning of section 871(h)(3)(B) or section 881(c)(3)(B) of the Code or (III) a “controlled foreign corporation” described in section 881(c)(3)(C) of the Code and (B) duly completed copies of  Internal Revenue Service Form W-8BEN; or

(iv)  any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in United States federal withholding tax duly completed together with such supplementary documentation as may be prescribed by applicable law to permit the Borrower to determine the withholding or deduction required to be made.

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(f)  If the Agent or a Lender determines, in its sole discretion, that it has received a refund of any Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section, it shall pay over such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses of the Agent or such Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided that the Borrower, upon the request of the Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Agent or such Lender if the Agent or such Lender is required to repay such refund to such Governmental Authority.  This Section shall not be construed to require the Agent or any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the Borrower or any other person.

SECTION 2.20.  Assignment of Commitments Under Certain Circumstances; Duty to Mitigate.  (a)  In the event (i) any Lender delivers a certificate requesting compensation pursuant to Section 2.13, (ii) any Lender delivers a notice described in Section 2.14, (iii) the Borrower is required to pay any additional amount to any Lender or any Governmental Authority on account of any Lender pursuant to Section 2.19, (iv) any Lender defaults in its obligations to fund Loans hereunder or (v) any Lender refuses to consent to any amendment, waiver or other modification of any Loan Document requested by the Borrower that requires the consent of a greater percentage of the Lenders than the Required Lenders and such amendment, waiver or other modification is consented to by the Required Lenders, the Borrower may, at its sole expense and effort (including with respect to the processing and recordation fee referred to in Section 9.04(b)), upon notice to such Lender and the Agent, require such Lender to transfer and assign, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all of its interests, rights and obligations under this Agreement and the other Loan Documents to an assignee that shall assume such assigned obligations and, with respect to clause (iv) above, shall consent to such requested amendment, waiver or other modification of any Loan Documents (which assignee may be another Lender, if a Lender accepts such assignment); provided that (x) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority having jurisdiction, (y) the Borrower shall have received the prior written consent of the Agent, which consent shall not unreasonably be withheld or delayed and (z) the Borrower or such assignee shall have paid to the affected Lender in immediately available funds an amount equal to the sum of the principal of and interest accrued to the date of such payment on the outstanding Loans of such Lender plus all fees and other amounts accrued for the account of such Lender hereunder with respect thereto (including any amounts under Sections 2.13 and 2.15 and, if applicable, the prepayment premium pursuant to Section 2.11(b) (with such assignment being deemed to be an optional prepayment for purposes of determining the applicability of Section 2.11(b), such amount to be payable by the Borrower)); provided further that, if prior to any such transfer and assignment the circumstances or event that resulted in such Lender’s claim for compensation under Section 2.13, notice under Section 2.14 or the amounts paid pursuant to Section 2.19, as the case may be, cease to cause such Lender to suffer increased costs

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or reductions in amounts received or receivable or reduction in return on capital, or cease to have the consequences specified in Section 2.14, or cease to result in amounts being payable under Section 2.19, as the case may be (including as a result of any action taken by such Lender pursuant to paragraph (b) below), or if such Lender shall waive its right to claim further compensation under Section 2.13 in respect of such circumstances or event or shall withdraw its notice under Section 2.14 or shall waive its right to further payments under Section 2.19 in respect of such circumstances or event or shall consent to the proposed amendment, waiver, consent or other modification, as the case may be, then such Lender shall not thereafter be required to make any such transfer and assignment hereunder. Each Lender hereby grants to the Agent an irrevocable power of attorney (which power is coupled with an interest) to execute and deliver, on behalf of such Lender as assignor, any Assignment and Acceptance necessary to effectuate any assignment of such Lender’s interests hereunder in the circumstances contemplated by this paragraph.

(b)  If (i) any Lender shall request compensation under Section 2.13, (ii) any Lender delivers a notice described in Section 2.14 or (iii) the Borrower is required to pay any additional amount to any Lender or any Governmental Authority on account of any Lender, pursuant to Section 2.19, then such Lender shall use reasonable efforts (which shall not require such Lender to incur an unreimbursed loss or unreimbursed cost or expense or otherwise take any action inconsistent with its internal policies or legal or regulatory restrictions or suffer any disadvantage or burden deemed by it to be significant) (x) to file any certificate or document reasonably requested in writing by the Borrower or (y) to assign its rights and delegate and transfer its obligations hereunder to another of its offices, branches or affiliates, if such filing or assignment would reduce its claims for compensation under Section 2.13 or enable it to withdraw its notice pursuant to Section 2.14 or would reduce amounts payable pursuant to Section 2.19, as the case may be, in the future. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such filing or assignment, delegation and transfer.

SECTION 2.21.  Change in Control Put.  The Borrower shall notify the Agent of the occurrence of a Change in Control within one Business Day thereof, and the Agent shall promptly thereafter notify the Lenders thereof.  At any time prior to the 30th day following delivery of the notice by the Agent pursuant to the preceding sentence (the “Purchase Date”), each Lender shall have the right, by notice to the Borrower and the Agent, to require the Borrower, on the Purchase Date, to prepay in full (but not in part) the outstanding principal amount of such Lender’s Loans at a purchase price equal to the Change in Control Percentage as of the date of such Change in Control of the principal amount thereof, together with accrued and unpaid interest on the principal amount thereof to but excluding the date of payment, and all other amounts then due to such Lender (including amounts payable under Section 2.15) under the Loan Documents.

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ARTICLE III

Representations and Warranties

Each of Holdings and the Borrower represents and warrants as of the Effective Date to the Agent and each of the Lenders that:

SECTION 3.01.  Organization; Powers.  Holdings, the Borrower and each of the Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (c) is qualified to do business, and is in good standing, in every jurisdiction where such qualification is required, except where the failure so to qualify could not reasonably be expected to result in a Material Adverse Effect and (d) has the power and authority to execute, deliver and perform its obligations under each of the Loan Documents to which it is a party and each other agreement or instrument contemplated thereby to which it is or will be a party and, in the case of the Borrower, to borrow hereunder.

SECTION 3.02.  Authorization.  The Transactions (a) have been duly authorized by all requisite corporate and, if required, member action and (b) will not (i) violate (A) in any material respect any provision of any material law, statute, rule or regulation, or of the certificate or articles of incorporation or other constitutive documents or by-laws of Holdings, the Borrower or any Subsidiary, (B) in any material respect any material order of any Governmental Authority or (C) any provision of any material indenture, agreement or other instrument to which the Parent, its subsidiaries, Holdings, the Borrower or any Subsidiary is a party or by which any of them or any of their property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under, or give rise to any right to accelerate or to require the prepayment, repurchase or redemption of any obligation under, any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by Holdings, the Borrower or any Subsidiary (other than any Lien permitted by Section 6.02).

SECTION 3.03.  Enforceability.  This Agreement has been duly executed and delivered by Holdings and the Borrower and constitutes, and each other Loan Document when executed and delivered by the each Loan Party party thereto will constitute, a legal, valid and binding obligation of such Loan Party enforceable against such Loan Party in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

SECTION 3.04.  Governmental Approvals.  No action, consent or approval of, registration or filing with or any other action by any Governmental Authority is or will be required in connection with the Transactions, except for (a) the filing of Uniform Commercial Code financing statements, (b) recordation of the Mortgages, (c) approvals

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identified in the Parent Undertaking as to be obtained after the Effective Date and (d) such as have been made or obtained and are in full force and effect.

SECTION 3.05.  Financial Statements; Absence of Undisclosed Liabilities; Reserve Reports.  (a)  Holdings has heretofore furnished to the Lenders (a) Holdings’ consolidated pro forma statements of revenue and direct operating expenses for the years ended December 31, 2004 and 2005 and (b) Holdings’ consolidated pro forma statements of revenue and direct operating expenses for the nine month period ended on September 30, 2006, in all cases giving effect to the contribution of the Business to the Borrower and the other Transactions to occur on or prior to the Effective Date as if they had occurred at the beginning of the period presented therein.  Such pro forma statements have been prepared in good faith by Holdings based on the assumptions used to prepare the pro forma financial information contained in the Confidential Information Memorandum (which assumptions are believed by Holdings on the Closing Date and on the Effective Date to be reasonable), are based on the best information available to the Borrower as of the date of delivery thereof, accurately reflect all adjustments required to be made to give effect to the contribution of the Business and the Transactions and present fairly, in all material respects, on a pro forma basis, the estimated consolidated results of operations of Holdings and its consolidated subsidiaries for such periods.

(b)  Except (i) as disclosed in the Confidential Information Memorandum, (ii) unrealized losses in respect of Hedging Agreements and (iii) any plugging and abandonment liabilities, after giving effect to the contribution of the Business and the other Transactions to occur on or prior to the Effective Date, none of Holdings, the Borrower or the Subsidiaries will have, as of the Effective Date, any material contingent liabilities, unusual long-term commitments or unrealized losses.

(c)  The Borrower has heretofore furnished to the Lenders a reserve report prepared by DeGolyer & MacNaughton setting forth as of June 30, 2006, the proved and probable oil and gas reserves attributable to Oil and Gas Properties included in the Business, together with a projection of the rate of production and future revenues less severance and ad valorem taxes, operating expenses and capital expenditures with respect thereto as of such date.

SECTION 3.06.  No Material Adverse Change.  Since September 30, 2006, no event, change or condition has occurred that has had, or could reasonably be expected to have, a Material Adverse Effect.

SECTION 3.07.  Title to Properties; Possession Under Leases.  (a)  Each of the Borrower and the Subsidiaries has good and marketable title to, or valid leasehold interests in, all its material properties and assets (including Mortgaged Property), except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes.  Prior to the Closing Date, the Parent transferred good and marketable title to, or valid leasehold interests in, the Real Property included in the Business (other than the MMS Leases) to the Borrower or one of the Subsidiaries and true and complete copies of the instruments effecting such transfers were provided to the Agent prior to the Closing Date.

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(b)  Each of the Borrower and the Subsidiaries has complied in all material respects with all obligations under all material leases to which it is a party and all such leases are in full force and effect.  Each of the Borrower and the Subsidiaries enjoys peaceful and undisturbed possession under all such material leases.

(c)  As of the Effective Date, neither Holdings nor the Borrower has received any notice or has any knowledge of any pending or contemplated condemnation proceeding affecting the Leases or the Mortgaged Properties or any sale or disposition thereof in lieu of condemnation.

SECTION 3.08.  Subsidiaries.  Schedule 3.08 sets forth as of the Effective Date a list of all Subsidiaries and the percentage ownership interest of Holdings, the Borrower and any Subsidiary therein. The shares of capital stock or other Equity Interests so indicated on Schedule 3.08 are fully paid and are owned by Holdings or the Borrower, directly or indirectly, free and clear of all Liens (other than Liens created under the Loan Documents or the First Lien Loan Documents).

SECTION 3.09.  Litigation; Compliance with Laws.  (a)  Except as set forth on Schedule 3.09, there are no actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to the knowledge of Holdings or the Borrower, threatened against or affecting Holdings or the Borrower or any Subsidiary or any business, property or rights of any such person (i) that involve any Loan Document or the Transactions or (ii) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect.

(b)  Since the Closing Date, there has been no change in the status of the matters disclosed on Schedule 3.09 that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect.

(c)  None of Holdings, the Borrower or any of the Subsidiaries or any of their material properties or assets is in violation of, nor will the continued operation of their material properties and assets as currently conducted violate, any law, rule or regulation (including any zoning, building, Environmental Law, ordinance, code or approval or any building permits) or any restrictions of record or agreements affecting any Lease or Mortgaged Property, or is in default with respect to any judgment, writ, injunction, decree or order of any Governmental Authority, where such violation or default could reasonably be expected to result in a Material Adverse Effect.

SECTION 3.10.  Agreements.  (a)  None of Holdings, the Borrower or any of the Subsidiaries is a party to any agreement or instrument or subject to any corporate restriction that has resulted or could reasonably be expected to result in a Material Adverse Effect.

(b)  None of the Borrower or any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by

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which it or any of its properties or assets are or may be bound, where such default could reasonably be expected to result in a Material Adverse Effect.  None of the Borrower or any of the Subsidiaries is in material default under any Lease.

SECTION 3.11.  Federal Reserve Regulations.  (a)  None of Holdings, the Borrower or any of the Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock.

(b)  No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase or carry Margin Stock, or to refinance Indebtedness originally incurred for such purpose, or for any purpose that entails a violation of, or that is inconsistent with, the provisions of the Regulations of the Board, including Regulation T, U or X.

SECTION 3.12.  Investment Company Act.  None of Holdings, the Borrower or any Subsidiary is an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940.

SECTION 3.13.  Use of Proceeds.  The Borrower will use the proceeds of the Loans only for the purposes specified in the recitals to this Agreement.

SECTION 3.14.  Tax Returns.  Each of the Holdings, the Borrower and the Subsidiaries has filed or caused to be filed all Federal, state, local and foreign tax returns or materials required to have been filed by it and has paid or caused to be paid all taxes due and payable by it and all assessments received by it, except (a) taxes that are being contested in good faith by appropriate proceedings and for which Holdings, the Borrower or such Subsidiary, as applicable, shall have set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect.

SECTION 3.15.  No Material Misstatements.  None of (a) the Confidential Information Memorandum or (b) any other information, report, financial statement, exhibit or schedule furnished by or on behalf of Holdings or the Borrower to the Agent or any Lender in connection with the negotiation of any Loan Document or included therein or delivered pursuant thereto contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not materially misleading in light of the circumstances under which they were made; provided that to the extent any such information, report, financial statement, exhibit or schedule was based upon or constitutes a forecast or projection, each of Holdings and the Borrower represents only that it was prepared in good faith based upon (i) assumptions that were reasonable at the time made and at the time such information, report, financial statement, exhibit or schedule was furnished to the Agent or such Lender and (ii) accounting principles consistent with the accounting principles used to prepare the Parent’s historical audited financial statements (it being understood that projections concerning volumes attributable to the Oil and Gas Properties and production and cost

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estimates thereof are necessarily based upon professional opinions, estimates and projections).

SECTION 3.16.  Employee Benefit Plans.  Each Plan or Multiemployer Plan is in compliance in all material respects with the applicable provisions of ERISA and the Code and the regulations and published interpretations thereunder. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events, could reasonably be expected to result in material liability of the Borrower or any of its ERISA Affiliates. The present value of all benefit liabilities under all Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the last annual valuation date applicable thereto, exceed the fair market value of the assets of all Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) by an amount which, if it constituted a direct liability of the Borrower, could reasonably be expected to result in a Material Adverse Effect.

SECTION 3.17.  Environmental Matters.  (a)  Except as set forth in Schedule 3.17 and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, none of Holdings, the Borrower or any of the Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability.

(b)  Since the Closing Date, there has been no change in the status of the matters disclosed on Schedule 3.17 that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect.

SECTION 3.18.  Insurance.  The Borrower and the Subsidiaries have insurance in such amounts and covering such risks and liabilities as are in accordance with normal practice in their industry.  As of the Effective Date, the insurance maintained by, or on behalf of, the Borrower and the Subsidiaries is in full force and effect and all premiums currently due have been duly paid.

SECTION 3.19.  Security Documents.  (a)  The Collateral Agreement, upon execution and delivery thereof by the parties thereto, will create in favor of the Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Collateral Agreement) and the proceeds thereof and (i) when control of the Pledged Collateral (as defined in the Collateral Agreement) is obtained by the First Lien Agent (who will hold such Pledged Collateral as bailee for perfection for the Agent), the Lien created under Collateral Agreement shall constitute a perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in such Pledged Collateral and (ii) when financing statements in appropriate form are filed in the offices specified on Schedule 3.19(a), the Lien created under the Collateral Agreement will constitute a perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in such Collateral (other than Intellectual Property, as defined

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in the Collateral Agreement) to the extent perfection can be obtained by filing Uniform Commercial Code financing statements, in each case prior and superior in right to any other person (other than Liens expressly permitted by Section 6.02).

(b)  Upon the recordation of the Collateral Agreement (or a short-form security agreement in form and substance reasonably satisfactory to the Borrower and the Agent) with the United States Patent and Trademark Office and the United States Copyright Office, together with the financing statements in appropriate form filed in the offices specified on Schedule 3.19(a), the Lien created under the Collateral Agreement shall constitute a perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in the Intellectual Property (as defined in the Collateral Agreement) in which a security interest may be perfected by filing in the United States and its territories and possessions, in each case prior and superior in right to any other person (other than Liens expressly permitted by Section 6.02), it being understood that subsequent recordings in the United States Patent and Trademark Office and the United States Copyright Office may be necessary to perfect a Lien on registered trademarks and patents, trademark and patent applications and registered copyrights acquired by the Loan Parties after the Effective Date.

(c)  The Mortgages are effective to create in favor of the Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable Lien on all of the Loan Parties’ right, title and interest in and to the Mortgaged Properties and the proceeds thereof, and when the Mortgages are filed in the offices specified on Schedule 3.19(c), the Mortgages shall constitute perfected Liens on, and security interests in, all right, title and interest of the Loan Parties in such Mortgaged Properties and the proceeds thereof, in each case prior and superior in right to any other person (other than Liens expressly permitted by Section 6.02).

(d)  When Account Control Agreements in respect of deposit accounts and securities accounts of the Loan Parties are executed and delivered by the applicable Loan Parties, the applicable depositary banks or securities intermediaries and the Agent, the Account Control Agreements will constitute fully perfected Liens on, and security interests in, all right, title and interest of the Loan Parties in such deposit accounts and securities accounts, in each case prior and superior in right to any other person (other than Liens securing the First Lien Obligations).

SECTION 3.20.  Location of Real Property and Leased Premises.  (a)  Schedule 3.20(a) lists completely and correctly as of the Effective Date all Real Properties owned by the Borrower and the Subsidiaries.  As of the Effective Date, the Borrower and the Subsidiaries own in fee all the Real Properties set forth on Schedule 3.20(a).

(b)  Schedule 3.20(b) lists completely and correctly all Real Properties leased by the Borrower and the Subsidiaries as of the Effective Date and the MMS Leases.  As of the Effective Date, the Borrower and the Subsidiaries have valid leases in all the Real Properties set forth on Schedule 3.20(b).

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SECTION 3.21.  Labor Matters.  Except to the extent it could not reasonably be expected to cause a Material Adverse Effect, as of the Effective Date, there are no strikes, lockouts or slowdowns against Holdings, the Borrower or any Subsidiary pending or, to the knowledge of Holdings or the Borrower, threatened. The hours worked by and payments made to employees of Holdings, the Borrower and the Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters. All payments due from Holdings, the Borrower or any Subsidiary, or for which any claim may be made against Holdings, the Borrower or any Subsidiary, on account of wages and employee health and welfare insurance and other benefits, have been paid or accrued as a liability on the books of Holdings, the Borrower or such Subsidiary. The consummation of the Transactions will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which Holdings, the Borrower or any Subsidiary is bound.

SECTION 3.22.  Solvency.  Immediately after the consummation of the Transactions to occur on or prior to the Effective Date and immediately following the making of each Loan and after giving effect to the application of the proceeds of each Loan, (a) the fair value of the assets of each Loan Party, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise, (b) the present fair saleable value of the property of each Loan Party will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured, (c) each Loan Party will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured and (d) each Loan Party will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Effective Date.

SECTION 3.23.  Sanctioned Persons.  None of Holdings, the Borrower or any Subsidiary or, to the knowledge of the Borrower, any director, officer, agent, employee or Affiliate of Holdings, the Borrower or any Subsidiary is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and the Borrower will not directly or indirectly use the proceeds of the Loans or otherwise make available such proceeds to any person for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

SECTION 3.24.  Gas Imbalances; Prepayments.  Except as set forth in Schedule 3.24, on a net basis there are no gas imbalances, take-or-pay arrangements or other prepayments (including deferred production agreements or volumetric production payments) with respect to the Oil and Gas Properties or production therefrom that would require the Borrower or any Subsidiary to deliver Hydrocarbons either generally or produced from the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor.

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ARTICLE IV

Conditions of Lending

The obligations of the Lenders to make Loans are subject to the satisfaction of the following conditions:

(a)  The Agent shall have received from (i) each party hereto (A) a counterpart of this Agreement signed on behalf of such party or (B) written evidence reasonably satisfactory to the Agent (which may include a facsimile or other electronic imaging transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement and (ii) each party to the Intercreditor Agreement (A) a counterpart of the Intercreditor Agreement signed on behalf of such party or (B) written evidence reasonably satisfactory to the Agent (which may include a facsimile or other electronic imaging transmission of a signed signature page of the Intercreditor Agreement) that such party has signed a counterpart of the Intercreditor Agreement.

(b)  The representations and warranties set forth in Article III and in each other Loan Document shall be true and correct in all material respects on and as of the date of the Effective Date with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date.

(c)  At the time of and immediately after the making of the Loans, no Default or Event of Default shall have occurred and be continuing.

(d)  The Agent shall have received written opinions of Vinson & Elkins LLP, special counsel for Holdings and the Borrower, substantially to the effect set forth in Exhibit G, in each case (A) dated the Effective Date and (B) addressed to the Agent and the Lenders.

(e)  All legal matters incidental to this Agreement, the Borrowings and extensions of credit hereunder and the other Loan Documents shall be reasonably satisfactory to the Lenders and to the Agent.

(f)  The Agent shall have received such documents and certificates as the Agent or its counsel may reasonably request relating to the organization, existence and good standing of each Loan Party, the authorization of the Transactions and any other legal matters relating to the Loan Parties, the Loan Documents or the Transactions, all in form and substance reasonably satisfactory to the Agent and its counsel.

(g)  The Agent shall have received a certificate, dated the Effective Date and signed by a Financial Officer of the Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b), (c), (i), (n), (o) and (s) of this Article.

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(h)  The Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder or under any other Loan Document.

(i)  The Collateral and Guarantee Requirement shall have been satisfied and the Agent shall have received a completed Perfection Certificate dated the Effective Date and signed by an executive officer or Financial Officer of the Borrower, together with all attachments contemplated thereby, including the results of searches of (A) Uniform Commercial Code financing statements on file with the Secretary of State of the State of Delaware in the case of Holdings and the Borrower and with the Secretary of State of the State of New York in the case of the Parent and (B) real estate filings and Uniform Commercial Code financing statements on file with the various recording districts of the State of Alaska in which the Mortgaged Properties are situated, copies of such financing statements and real estate filings disclosed by such searches and evidence reasonably satisfactory to the Agent that the Liens indicated by such financing statements and real estate filings are permitted by Section 6.02 or have been or will be simultaneously released or terminated.

(j)  Except for approvals identified in the Parent Undertaking as to be obtained after the Effective Date, the Agent shall have received evidence that the Borrower and each applicable Subsidiary is qualified to own oil, gas and mineral leases and/or rights-of-way on Federal public lands and State lands in the State of Alaska, in accordance with all applicable laws, rules, regulations and orders of the Federal Bureau of Land Management and all applicable Governmental Authorities of the State of Alaska (including the Division of Oil and Gas within the State of Alaska Department of Natural Resources).

(k)  The Agent shall have received a copy of, or a certificate as to coverage under, the insurance policies required by Section 5.02, each of which shall be endorsed or otherwise amended to include a customary lender’s loss payable endorsement and to name the Agent as additional insured, in form and substance reasonably satisfactory to the Agent.

(l)  The Intercompany Services Agreement, the Tax Sharing Agreements and the Parent Undertaking shall be in full force and effect in the form certified by a Responsible Officer.

(m)  The Agent shall have received a final version of the Environmental and Safety Audit dated as of February 23-26, 2006 prepared by the Parent and the related Status Report dated as of June 8, 2006.

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(n)  The Hedging Agreements set forth on Schedule 1.01(a) shall be in full force and effect and shall have the effect of establishing minimum fixed prices or floors on a notional volume of crude oil and natural gas, calculated separately, equal to approximately 75% of Anticipated Production thereof that is not subject to fixed price contracts for each month in the period through and including the third anniversary of the Effective Date.

(o)  Immediately after giving effect to the Transactions to occur on or prior to the Effective Date, Holdings, the Borrower and the Subsidiaries shall have outstanding no Indebtedness or preferred Equity Interests other than (a) Indebtedness outstanding under this Agreement, (b) Indebtedness outstanding under the First Lien Credit Agreement, (c) Indebtedness set forth on Schedule 6.01 and (d) Hedging Agreements set forth on Schedule 1.01.

(p)  The Lenders shall have received the financial statements referred to in Section 3.05, none of which shall demonstrate a material adverse change in the financial condition of Holdings and its subsidiaries from (and shall not otherwise be materially inconsistent with) the financial statements or forecasts previously provided to the Lenders in the Confidential Information Memorandum.

(q)  The Lenders shall have received the Reserve Report referred to in Section 3.05, and such Reserve Report shall not be materially inconsistent with the versions thereof previously provided to the Lenders.

(r)  The Agent shall have received a solvency certificate from a Financial Officer of Holdings, substantially in the form set forth on Exhibit H, confirming the solvency of Holdings and its subsidiaries on a consolidated basis after giving the Transactions to occur on the Effective Date.

(s)  Except for approvals identified in the Parent Undertaking as to be obtained after the Effective Date, all material requisite Governmental Authorities and third parties shall have approved or consented to the transfer of the Business to the Borrower and the Subsidiaries, the Transactions and the other transactions contemplated hereby to the extent required, all applicable appeal periods shall have expired and there shall not be any pending or threatened litigation, governmental, administrative or judicial action that could reasonably be expected to restrain, prevent or impose burdensome conditions on the Transactions or the other transactions contemplated hereby.

(t)  The Lenders shall have received, to the extent requested, all documentation and other information required by regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the USA PATRIOT Act.

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The making of the Loans shall be deemed to constitute a representation and warranty by Holdings and the Borrower on the date of their making as to the matters specified in this Article.

ARTICLE V

Affirmative Covenants

Each of Holdings and the Borrower covenants and agrees with each Lender that so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all fees and all other expenses or amounts payable under any Loan Document shall have been paid in full, unless the Required Lenders shall otherwise consent in writing, each of Holdings and the Borrower will, and will cause each of the Subsidiaries to:

SECTION 5.01.  Existence; Compliance with Laws; Businesses and Properties.  (a)  Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except as otherwise expressly permitted under Section 6.05.

(b)  Do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect its rights, licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names, except for failures to do so that, in the aggregate, could not reasonably be expected to result in a Material Adverse Effect; maintain and operate such business in substantially the manner in which it is presently conducted and operated; comply in all material respects with all applicable laws, rules, regulations and decrees and orders of any Governmental Authority (including the qualification and bonding requirements of MMS and the State of Alaska), whether now in effect or hereafter enacted; and at all times maintain and preserve all its property and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times, except for failures to do so that, in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

SECTION 5.02.  Insurance.  (a)  Keep, or cause to be kept, its material insurable properties adequately insured at all times by financially sound and reputable insurers; maintain, or cause to be maintained, such other insurance, to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses operating in the same or similar locations, including public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by it; and maintain such other insurance as may be required by law.

(b)  Cause all such policies covering any Collateral to be endorsed or otherwise amended to include a customary lender’s loss payable endorsement, in form and

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substance satisfactory to the Agent, which endorsement shall provide that, from and after the Closing Date, if the insurance carrier shall have received written notice from the Agent of the occurrence of an Event of Default, the insurance carrier shall pay all proceeds otherwise payable to the Borrower or the Loan Parties under such policies directly to the Agent; cause all such policies to provide that neither the Borrower, the Agent nor any other party shall be a coinsurer thereunder and to contain a “Replacement Cost Endorsement”, without any deduction for depreciation, and such other provisions as the Agent may reasonably require from time to time to protect their interests; if requested, promptly deliver certified copies of all such policies to the Agent; cause each such policy to provide that it shall not be canceled, modified or not renewed (i) by reason of nonpayment of premium upon not less than 10 days’ prior written notice thereof by the insurer to the Agent (giving the Agent the right to cure defaults in the payment of premiums) or (ii) for any other reason upon not less than 30 days’ prior written notice thereof by the insurer to the Agent; deliver to the Agent, prior to the cancellation, modification or nonrenewal of any such policy of insurance, a copy of a renewal or replacement policy (or other evidence of renewal of a policy previously delivered to the Agent) together with evidence satisfactory to the Agent of payment of the premium therefor.

(c)  With respect to any Mortgaged Property, carry and maintain comprehensive general liability insurance including the “broad form CGL endorsement” and coverage on an occurrence basis against claims made for personal injury (including bodily injury, death and property damage) and umbrella liability insurance against any and all claims, subject to the terms and conditions of the insurance policies, in no event for a combined single limit of less than $1,000,000, naming the Agent as an additional insured, on forms satisfactory to the Agent.

(d)  Notify the Agent promptly whenever any separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section is taken out by any Loan Party; and, if requested, promptly deliver to the Agent a duplicate original copy of such policy or policies.

SECTION 5.03.  Obligations and Taxes.  Pay its obligations (other than Indebtedness) promptly and in accordance with their terms, including in the case of Taxes, by causing such Taxes to be paid in accordance with the Tax Sharing Agreements, and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become more than 60 days delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise that, if unpaid, might give rise to a Lien upon such properties or any part thereof; provided, however, that such payment and discharge shall not be required with respect to any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and the Holdings, Borrower or the applicable Subsidiary shall have set aside on its books adequate reserves with respect thereto in accordance with GAAP and such contest operates to suspend collection of the contested obligation, tax, assessment or charge and enforcement of a Lien and, in the case of a Mortgaged Property, there is no risk of forfeiture of such property.

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SECTION 5.04.  Financial Statements, Reports, etc.  In the case of the Holdings, furnish to the Agent, which shall furnish to each Lender:

(a)  within 90 days after the end of each fiscal year (or, in the case of the fiscal year ending on December 31, 2006, within 120 days after the end of such fiscal year), its consolidated balance sheet and related statements of income, members’ equity and cash flows showing the financial condition of Holdings and its subsidiaries as of the close of such fiscal year and the results of its operations and the operations of such subsidiaries during such year, together with comparative figures for the immediately preceding fiscal year (except for any such preceding fiscal year ended prior to December 31, 2006), all audited by independent public accountants of recognized national standing and accompanied by an opinion of such accountants (which opinion shall be without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements fairly present, in all material respects, the financial condition and results of operations of Holdings and its subsidiaries on a consolidated basis in accordance with GAAP consistently applied;

(b)  within 45 days after the end of each of the first three fiscal quarters of each fiscal year (or, in the case of the fiscal quarter ending on March 31, 2007, within 60 days after the end of such fiscal quarter), its consolidated balance sheet and related statements of income, members’ equity and cash flows showing the financial condition of Holdings and its subsidiaries as of the close of such fiscal quarter and the results of its operations and the operations of such Subsidiaries during such fiscal quarter and the then elapsed portion of the fiscal year, and comparative figures for the same periods in the immediately preceding fiscal year (except for any such preceding fiscal year ended prior to December 31, 2006), all certified by one of its Financial Officers as fairly presenting, in all material respects, the financial condition and results of operations of Holdings and its subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes;

(c)  concurrently with any delivery of financial statements under paragraph (a) or (b) above, a certificate of a Financial Officer of the Borrower, substantially in the form of Exhibit I hereto, (A) certifying that no Event of Default or Default has occurred or, if an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto, (B) setting forth computations in reasonable detail satisfactory to the Agent demonstrating compliance with the covenants contained in Sections 6.10, 6.11 and, in the case of a certificate delivered with the financial statements required by paragraph (a) above, 6.12, (C) setting forth a true and complete list as of the last day of the most recently completed fiscal quarter of all Hedging

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Agreement of the Borrower and the Subsidiaries, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the net mark-to-market value thereof, any new credit support agreements relating thereto not previously disclosed in writing to the Agent, any margin required or supplied under any credit support agreement and the counterparty to each such Hedging Agreement and (D) in the case of a certificate delivered with the financial statements required by paragraph (a) above, setting forth the Borrower’s calculation of Excess Cash Flow;

(d)  within 90 days after the end of each fiscal year (or, in the case of the fiscal year ending on December 31, 2006, within 120 days after the end of such fiscal year), an operating and capital expenditure budget for Holdings and its subsidiaries, in form reasonably satisfactory to the Agent and prepared by the Borrower for each of the four fiscal quarters of such fiscal year, accompanied by the statement of a Financial Officer of the Borrower to the effect, to the best of his knowledge, the budget is a reasonable estimate for the period covered thereby;

(e)  promptly after the receipt thereof by Holdings or any of its subsidiaries, a copy of any “management letter” received by any such person from its certified public accountants and the management’s response thereto;

(f)  promptly after the furnishing thereof, copies of any material financial statement, report or notice furnished to or by any person pursuant to the terms of any indenture, loan or credit or other similar agreement regarding or with respect to any Material Indebtedness (including with respect to the First Lien Loan Documents) not otherwise furnished to the Lenders pursuant to any other provision of this Agreement;

(g)  within 45 days after the end of each fiscal quarter (or, in the case of the fiscal quarter ending on March 31, 2007, within 60 days after the end of such fiscal quarter), a report setting forth, for each elapsed calendar month during the then current fiscal year, the volume of production and sales attributable to production (and the prices at which such sales were made and the revenues derived from such sales) for each such calendar month from the Oil and Gas Properties, and setting forth the related ad valorem, severance and production taxes and lease operating expenses attributable thereto and incurred for each such calendar month;

(h)  promptly after the request by any Lender, all documentation and other information that such Lender reasonably requests in order to comply with its ongoing obligations under applicable “know your customer” and anti-money laundering rules and regulations, including the USA PATRIOT Act;

(i)  promptly following receipt thereof, on and after the effectiveness of the Pension Act, copies of (i) any documents described in Section

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101(k)(1) of ERISA that the Borrower and any of its ERISA Affiliates has received following request thereof with respect to any Multiemployer Plan and (ii) any notices described in Section 101(l)(1) of ERISA that the Borrower or any of its ERISA Affiliates has received following request thereof with respect to any Multiemployer Plan; and

(j)  promptly, from time to time, such other information regarding the operations, business affairs and financial condition of Holdings, the Borrower or any Subsidiary, or compliance with the terms of any Loan Document, as the Agent or any Lender may reasonably request.

SECTION 5.05.  Litigation and Other Notices.  Furnish to the Agent and each Lender prompt written notice of the following:

(a)  any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) taken or proposed to be taken with respect thereto;

(b)  the filing or commencement of, or any threat or notice of intention of any person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against the Borrower or any Affiliate thereof that could reasonably be expected to result in a Material Adverse Effect;

(c)  the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of Holdings and its subsidiaries in an aggregate amount exceeding $7,500,000; and

(d)  any development that has resulted in, or could reasonably be expected to result in, a Material Adverse Effect.

SECTION 5.06.  Information Regarding Collateral.  (a)  Furnish to the Agent prompt written notice of any change (i) in any Loan Party’s legal name, as reflected in its organizational documents, (ii) in the jurisdiction of organization or formation of any Loan Party, (iii) if it is not a registered organization (as defined in the New York Uniform Commercial Code), in the location of its chief executive office or its principal place of business, (iv) in any Loan Party’s organizational form or (v) in any Loan Party’s Federal Taxpayer Identification Number or organizational identification number assigned by the jurisdiction of organization.  Holdings and the Borrower agree to promptly provide the Agent with certified organizational documents reflecting any of the changes described in the first sentence of this paragraph.  Holdings and the Borrower agree not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the Uniform Commercial Code or otherwise that are required in order for the Agent to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral. Holdings and the Borrower also agree promptly to notify the Agent if any material portion of the Collateral is damaged or destroyed.

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(b)  In the case of the Borrower, upon request by the Agent, at the time of delivery of annual financial statements pursuant to Section 5.04(a), deliver to the Agent a certificate of a Financial Officer of the Borrower setting forth the information required pursuant to Section 2 of the Perfection Certificate or confirming that there has been no change in such information since the date of the Perfection Certificate delivered on the Effective Date or the date of the most recent certificate delivered pursuant to this Section.

SECTION 5.07.  Maintaining Records; Access to Properties and Inspections.  Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of law are made of all dealings and transactions in relation to its business and activities. Each Loan Party will, and will cause each of its subsidiaries to, permit any representatives designated by the Agent or any Lender, upon reasonable prior notice, to visit and inspect the financial records and the properties of such person at reasonable times and as often as reasonably requested and to make extracts from and copies of such financial records, and permit any representatives designated by the Agent or any Lender to discuss the affairs, finances and condition of such person with the officers thereof and independent accountants therefor, all at the reasonable cost and expense of the Borrower.

SECTION 5.08.  Use of Proceeds.  Use the proceeds of the Loans only for the purposes specified in the recitals to this Agreement.

SECTION 5.09.  Employee Benefits.  Furnish to the Agent as soon as possible after, and in any event within ten days after any responsible officer of Holdings, the Borrower or any ERISA Affiliate knows or has reason to know that, any ERISA Event has occurred that, alone or together with any other ERISA Event, could reasonably be expected to result in liability of Holdings, the Borrower or any ERISA Affiliate in an aggregate amount exceeding $7,500,000, a statement of a Financial Officer of Holdings or the Borrower setting forth details as to such ERISA Event and the action, if any, that Holdings or the Borrower proposes to take with respect thereto.  Upon request by a Lender, promptly request (a) the documents described in Section 101(k)(1) of ERISA with respect to a Multiemployer Plan to which the Borrower or any of its ERISA Affiliates contributes and (b) notices described in Section 101(l)(1) of ERISA with respect to a Multiemployer Plan to which the Borrower or any of its ERISA Affiliates contributes.

SECTION 5.10.  Compliance with Environmental Laws.  Except to the extent it could not reasonably be expected to cause a Material Adverse Effect, (a) comply, and cause all lessees and other persons occupying its properties to comply, in all material respects with all Environmental Laws applicable to its operations and properties; obtain and renew all material permits, licenses or other approvals necessary for its operations and properties pursuant to any Environmental Law and (b) undertake and conduct any remedial action necessary to remove or clean up any Hazardous Materials from any of its current and former properties in accordance with Environmental Laws; provided, however, that none of Holdings, the Borrower or any Subsidiary shall be required to undertake any remedial action required by Environmental Laws to the extent that its obligation to do so is being contested in good faith and by proper proceedings and

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appropriate reserves are being maintained with respect to such circumstances in accordance with GAAP.

SECTION 5.11.  Preparation of Environmental Reports.  If a Default caused by reason of a breach of Section 3.17 or Section 5.10 shall have occurred and be continuing for more than 20 days without Holdings, the Borrower or any Subsidiary commencing activities reasonably likely to remediate the condition giving rise to such Default, at the written request of the Required Lenders through the Agent, provide to the Lenders within 45 days after such request, at the expense of the Loan Parties, an environmental site assessment report regarding the matters which are the subject of such Default prepared by an environmental consulting firm reasonably acceptable to the Agent and indicating compliance or non-compliance with Environmental Laws and the presence or absence of Hazardous Materials and the estimated cost of any corrective or remedial action in connection with such Default.

SECTION 5.12.  Further Assurances.  Execute any and all further documents, financing statements, agreements and instruments, and take all further action (including filing and recording of Uniform Commercial Code and other financing statements, fixture filings, mortgages and deeds of trust) that may be required under applicable law, or that the Required Lenders or the Agent may reasonably request, to cause the Collateral and Guarantee Requirement to be and remain satisfied at all times, all at the expense of the Loan Parties.  If any additional Subsidiary is formed or acquired after the Effective Date, the Borrower will, within 20 days after such Subsidiary is formed or acquired, notify the Agent and the Lenders thereof and cause the Collateral and Guarantee Requirement to be satisfied with respect to such Subsidiary and with respect to any Equity Interest in or Indebtedness of such Subsidiary owned by or on behalf of any Loan Party.  In addition, from time to time, each of Holdings and the Borrower will, at its cost and expense, promptly secure the Obligations by pledging or creating, or causing to be pledged or created, perfected Liens with respect to its and the Subsidiaries’ assets and properties as is necessary to cause the Collateral and Guarantee Requirement to be and remain satisfied at all times. Such security interests and Liens will be created under the Security Documents and other security agreements, mortgages, deeds of trust and other instruments and documents in form and substance satisfactory to the Agent, and the Borrower shall deliver or cause to be delivered to the Lenders all such instruments and documents (including legal opinions and lien searches) as the Agent shall reasonably request to evidence compliance with this Section. The Borrower agrees to provide such evidence as the Agent shall reasonably request as to the perfection and priority status of each such security interest and Lien.  In furtherance of the foregoing, the Borrower will give prompt notice to the Agent of the acquisition by it or any of the Subsidiaries of any real property (or any interest in real property) having a value in excess of $1,000,000.

SECTION 5.13.  Compliance with Leases.  Maintain all Leases in full force and effect (other than as a result of their expiration in accordance with their terms), free of any material default by the Borrower or the applicable Subsidiary.

SECTION 5.14.  Interest Rate Protection Agreements.  As promptly as practicable and in any event within 120 days after the Closing Date, enter into, and for a

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period of not less than three years after the Closing Date maintain in effect, one or more Hedging Agreements, the effect of which is to fix or cap the interest rates applicable to at least 50% of the Indebtedness that is projected to be outstanding under the Loan Documents and the First Lien Loan Documents, in each case on terms and conditions reasonably acceptable, taking into account current market conditions, to the Agent.  Each such Hedging Agreement shall be entered into with a person that is reasonably acceptable to the Agent.

SECTION 5.15.  Commodity Price Hedging Program.  At all times maintain one or more Hedging Agreements with persons reasonably acceptable to the Agent, the effect of which is to establish minimum fixed prices or floors within $0.50/Mmbtu and $3.50/Bbl of the NYMEX strip prices (WTI and Henry Hub) available on the date of entry into such Hedging Agreements on a notional volume of crude oil and natural gas, calculated separately, equal to not less than 60% of Anticipated Production thereof that is not subject to fixed price contracts for each month in a period not shorter than the then ensuing 12 months.

SECTION 5.16.  Delivery of Reserve Reports.  (a)  On or prior to September 1 of each year, commencing September 1, 2007, the Borrower shall furnish to the Agent and the Lenders reserve reports prepared by or under the supervision of a reserve engineer of seniority reasonably acceptable to the Agent acting on behalf of the Borrower setting forth as of June 30 of such year, the proved and probable oil and gas reserves attributable to the Oil and Gas Properties, together with (i) a projection of the rate of production and future revenues less severance and ad valorem taxes, operating expenses and capital expenditures with respect thereto as of such date and (ii) a writing from a Responsible Officer of the Borrower, substantially in the form of Exhibit J hereto, certifying that (A) there are no statements or conclusions in such reserve reports which are based upon or include materially misleading information or fail to take into account material information regarding the matters reported therein (it being understood that projections concerning volumes attributable to the Oil and Gas Properties and production and cost estimates contained in each reserve report are necessarily based upon professional opinions, estimates and projections), (B) such reserve reports were prepared in accordance with the procedures used to prepare the reserve report as of June 30 of the immediately preceding year (or, in the case of the reserve report as of June 30, 2007, the reserve reports referred to in Section 3.05(c)) and (C) a writing from a Responsible Officer of the Borrower, substantially in the form of Exhibit K hereto, certifying that there are no gas imbalances, take-or-pay arrangements or other prepayments in excess of the volume specified in Schedule 3.24 or permitted by 6.16(b) with respect to the Oil and Gas Properties evaluated in such reserve reports which would require the Borrower or any Subsidiary to deliver Hydrocarbons either generally or produced from the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor.

(b)  On or prior to March 1 of each year, commencing March 1, 2007, the Borrower shall furnish to the Agent and the Lenders a reserve report prepared by an Independent Engineer setting forth as of December 31 of the immediately preceding year, the proved and probable oil and gas reserves attributable to the Oil and Gas Properties,

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together with (i) a projection of the rate of production and future revenues less severance and ad valorem taxes, operating expenses and capital expenditures with respect thereto as of such date, (ii) a writing from a Responsible Officer of the Borrower, substantially in the form of Exhibit J hereto, certifying that (x) there are no statements or conclusions in such reserve reports which are based upon or include materially misleading information or fail to take into account material information regarding the matters reported therein (it being understood that projections concerning volumes attributable to the Oil and Gas Properties and production and cost estimates contained in each reserve report are necessarily based upon professional opinions, estimates and projections) and (y) such reserve reports were prepared in accordance with the procedures used to prepare the reserve report as of December 31 of the immediately preceding year (or, in the case of the reserve report as of December 31, 2006, the reserve reports referred to in Section 3.05(c)) and (iii) a writing from a Responsible Officer of the Borrower, substantially in the form of Exhibit K hereto, certifying that there are no gas imbalances, take-or-pay arrangements or other prepayments in excess of the volume specified in Schedule 3.24 or permitted by 6.16(b) with respect to the Oil and Gas Properties evaluated in such reserve reports which would require the Borrower or any Subsidiary to deliver Hydrocarbons either generally or produced from the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor.

(c)  If requested by the Required Lenders, but not more than once during any 12 month period, the Borrower shall furnish to the Agent and the Lenders as soon as reasonably practicable, a reserve report prepared by or under the supervision of a reserve engineer of seniority reasonably acceptable to the Agent acting on behalf of the Borrower and audited by an Independent Engineer setting forth as of the date specified in such request, the proved and probable oil and gas reserves attributable to the Oil and Gas Properties, together with (i) a projection of the rate of production and future revenues less severance and ad valorem taxes, operating expenses and capital expenditures with respect thereto as of such date, (ii) a writing from a Responsible Officer of the Borrower, substantially in the form of Exhibit J hereto, certifying that (x) there are no statements or conclusions in such reserve reports which are based upon or include materially misleading information or fail to take into account material information regarding the matters reported therein (it being understood that projections concerning volumes attributable to the Oil and Gas Properties and production and cost estimates contained in each reserve report are necessarily based upon professional opinions, estimates and projections) and (y) such reserve reports were prepared in accordance with the procedures used to prepare the most recently delivered Reserve Report) and (iii) a writing from a Responsible Officer of the Borrower, substantially in the form of Exhibit K hereto, certifying that there are no gas imbalances, take-or-pay arrangements or other prepayments in excess of the volume specified in Schedule 3.24 or permitted by 6.16(b) with respect to the Oil and Gas Properties evaluated in such reserve reports which would require the Borrower or any Subsidiary to deliver Hydrocarbons either generally or produced from the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor.

SECTION 5.17.  Title Information.  (a)  On or prior to the delivery to the Agent of each Reserve Report required to be delivered by Section 5.16, the Borrower will

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deliver to the Agent title information, in form and substance reasonably acceptable to the Agent, that, together with title information previously delivered to the Agent, constitutes title information with respect to Oil and Gas Properties representing at least 80% of Proved PV-10% as of the date of such Reserve Report.

(b)  Within 90 days after notice from the Agent that material title defects or exceptions exist with respect to any Oil and Gas Properties for which title information was provided pursuant paragraph (a) of this Section, the Borrower shall either (i) cure any such material title defects or exceptions, (ii) create a fully perfected Lien on substitute Oil and Gas Properties with no material title defects or exceptions theretofore not composing the Mortgaged Properties that are reasonably acceptable to the Agent or (iii) deliver title information, in form and substance reasonably acceptable to the Agent, that, together with the title information previously delivered to the Agent, constitutes title information with respect to Oil and Gas Properties representing at least 80% of Proved PV-10% as of the date of the most recently delivered Reserve Report (it being understood that any Oil and Gas Property with material title defects or exceptions that have not been cured within 90 days after notice from the Agent pursuant to this paragraph shall be excluded from the determination of such Proved PV-10%).

(c)  If the Borrower is unable to comply with paragraph (b) of this Section, such failure to comply shall not constitute a Default.  Any Oil and Gas Property in respect of which paragraph (b) of this Section shall not have been complied with shall be excluded from the Oil and Gas Properties for purposes of calculating Proved PV-10%, Probable PV-10% and PDP PV-10% to the extent of such title defect until such time as the Borrower has complied with the paragraph (b) of this Section in respect of such Oil and Gas Property.

SECTION 5.18.  Title.  Take such actions as are reasonably requested by the Agent in order to vest good and marketable title or leasehold interest in the Real Properties purported to be owned or leased by the Borrower and the Subsidiaries as of the Closing Date.

ARTICLE VI

Negative Covenants

Each of Holdings and the Borrower covenants and agrees with each Lender that, so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all fees and all other expenses or amounts payable under any Loan Document have been paid in full, unless the Required Lenders shall otherwise consent in writing, neither Holdings nor the Borrower will, nor will they cause or permit any of the Subsidiaries to:

SECTION 6.01.  Indebtedness.  Incur, create, assume or permit to exist any Indebtedness, except:

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(a)  Indebtedness existing on the date hereof and set forth in Schedule 6.01 and any extensions or renewals of such Indebtedness to the extent the principal amount of such Indebtedness is not increased, neither the final maturity nor the weighted average life to maturity of such Indebtedness is decreased, such Indebtedness, if subordinated to the Obligations, remains so subordinated on terms no less favorable to the Lenders, and the original obligors in respect of such Indebtedness remain the only obligors thereon;

(b)  Indebtedness created under the Loan Documents;

(c)  Indebtedness created under the First Lien Loan Documents and any Permitted Refinancing Indebtedness used to Refinance such Indebtedness;

(d)  intercompany Indebtedness of the Borrower and the Subsidiaries to the extent permitted by Section 6.04(c); provided that any such Indebtedness shall not have been transferred or pledged to an third party;

(e)  Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition, construction or improvement of real property (other than Oil and Gas Properties), improvements thereto and equipment, and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof; provided that (i) such Indebtedness is incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement and (ii) the aggregate principal amount of Indebtedness permitted by this paragraph (e), when combined with the aggregate principal amount of all Capital Lease Obligations and Synthetic Lease Obligations incurred pursuant to Section  6.01(f) shall not exceed $17,500,000 at any time outstanding;

(f)  Capital Lease Obligations and Synthetic Lease Obligations in an aggregate principal amount, when combined with the aggregate principal amount of all Indebtedness incurred pursuant to Section 6.01(e), not in excess of $17,500,000 at any time outstanding;

(g)  Indebtedness under performance bonds or with respect to workers’ compensation claims, in each case incurred in the ordinary course of business;

(h)  Guarantees permitted under Section 6.04;

(i)  Indebtedness constituting Hedging Agreements permitted by this Agreement; and

(j)  other Indebtedness of the Borrower or the Subsidiaries in an aggregate outstanding principal amount not in excess $12,500,000 at any time.

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SECTION 6.02.  Liens.  Create, incur, assume or permit to exist any Lien on any property or assets (including Equity Interests in or other securities of any person, including the Borrower or any Subsidiary) now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except:

(a)  Liens on property or assets of the Borrower and its Subsidiaries existing on the date hereof and set forth in Schedule 6.02; provided that such Liens shall secure only those obligations which they secure on the date hereof and extensions, renewals and replacements thereof permitted hereunder;

(b)  any Lien created under the Loan Documents;

(c)  any Lien created under the First Lien Loan Documents and Liens securing Permitted Refinancing Indebtedness used to Refinance the Indebtedness under the First Lien Loan Documents;

(d)  Liens for taxes not yet due or which are being contested in compliance with Section 5.03;

(e)  carriers’, maritime, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business or Liens consisting of joint operating agreements, in each case securing obligations that are not due and payable or which are being contested in compliance with Section 5.03;

(f)  pledges and deposits made in the ordinary course of business in compliance with workmen’s compensation, unemployment insurance and other social security laws or regulations;

(g)  deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases (other than Capital Lease Obligations and Synthetic Lease Obligations), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;

(h)  zoning restrictions, easements, rights-of-way, restrictions on use of real property and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Borrower or any of its Subsidiaries;

(i)  purchase money security interests in real property (other than Oil and Gas Properties), improvements thereto or equipment hereafter acquired (or, in the case of improvements, constructed) by the Borrower or any Subsidiary; provided that (i) such security interests secure Indebtedness

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permitted by Section 6.01(e), (ii) such security interests are incurred, and the Indebtedness secured thereby is created, within 90 days after such acquisition (or construction), (iii) the Indebtedness secured thereby does not exceed the lesser of the cost or the fair market value of such real property, improvements or equipment at the time of such acquisition (or construction) and (iv) such security interests do not apply to any other property or assets of the Borrower or any Subsidiary;

(j)  Liens arising out of judgments or awards that do not constitute an Event of Default under clause (i) of Article VII; and

(k)  other Liens securing obligations of the Borrower or the Subsidiaries in an aggregate principal amount not in excess of $7,500,000 at any time.

SECTION 6.03.  Sale and Lease-Back Transactions.  Enter into any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred.

SECTION 6.04.  Investments, Loans and Advances.  Purchase, hold or acquire any Equity Interests, evidences of indebtedness or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment or any other interest in, any other person, except:

(a)  (i) investments by Holdings, the Borrower and the Subsidiaries existing on the Closing Date in the Equity Interests of the Borrower and the Subsidiaries and (ii) additional investments by Holdings, the Borrower and the Subsidiaries in Equity Interests in the Borrower and the Subsidiaries; provided that any such Equity Interests held by a Loan Party shall be pledged pursuant to the Collateral Agreement;

(b)  Permitted Investments;

(c)  loans or advances made by Holdings or the Borrower to any Subsidiary and made by any Subsidiary to Holdings, the Borrower or any other Subsidiary;

(d)  investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary course of business;

(e)  loans and advances in the ordinary course of business to employees so long as the aggregate principal amount thereof at any time outstanding (determined without regard to any write-downs or write-offs of such loans and advances) shall not exceed $1,500,000;

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(f)  Hedging Agreements permitted or required by this Agreement;

(g)  Permitted Acquisitions;

(h)  Investments in the form of non-cash consideration received as a result of asset sales permitted by Section 6.05(b);

(i)  Guarantees by the Borrower of Indebtedness and other obligations of any Subsidiary and Guarantees by any Subsidiary of Indebtedness and other obligations of the Borrower or any other Subsidiary; provided that a Subsidiary that has not Guaranteed the Obligations pursuant to the Collateral Agreement shall not Guarantee any Indebtedness or other obligations of any Loan Party;

(j)  investments in joint ventures for the purpose of exploration, development, gathering and processing Hydrocarbons in an amount not to exceed $12,500,000 in the aggregate during the term of this Agreement;

(k)  investments in Oil and Gas Properties (A) made during any fiscal year that, together with the total consideration paid in connection with any acquisitions pursuant to Section 6.04(g) (including any Indebtedness of the Acquired Entity that is assumed by the Borrower or any Subsidiary following such acquisition and any payments following such acquisition pursuant to earn-out provisions or similar obligations) made in such fiscal year, shall not in the aggregate exceed $20,000,000 and (B) made during the term of this Agreement that, together with the total consideration paid in connection with any acquisitions pursuant to Section 6.04(g) (including any Indebtedness of the Acquired Entity that is assumed by the Borrower or any Subsidiary following such acquisition and any payments following such acquisition pursuant to earn-out provisions or similar obligations) made during the term of this Agreement, shall not in the aggregate exceed $60,000,000; and

(l)  in addition to investments permitted by paragraphs (a) through (g) above, additional investments, loans and advances by the Borrower and the Subsidiaries so long as the aggregate amount invested, loaned or advanced pursuant to this paragraph (h) (determined without regard to any write-downs or write-offs of such investments, loans and advances) does not exceed $12,500,000 in the aggregate.

SECTION 6.05.  Mergers, Consolidations, Sales of Assets and Acquisitions.  (a)  Merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all the assets (whether now owned or hereafter acquired) of the Borrower or less than all the Equity Interests of any Subsidiary, or purchase, lease or otherwise acquire (in one transaction or a series of transactions) all or any substantial part of the assets of any other person, except that

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(i) the Borrower and any Subsidiary may purchase and sell inventory in the ordinary course of business and (ii) if at the time thereof and immediately after giving effect thereto no Event of Default or Default shall have occurred and be continuing (A) any wholly owned Subsidiary may merge into the Borrower in a transaction in which the Borrower is the surviving corporation, (B) any wholly owned Subsidiary may merge into or consolidate with any other wholly owned Subsidiary in a transaction in which the surviving entity is a wholly owned Subsidiary and no person other than the Borrower or a wholly owned Subsidiary receives any consideration (provided that if any party to any such transaction is a Loan Party, the surviving entity of such transaction shall be a Loan Party) and (C) the Borrower and the Subsidiaries may make Permitted Acquisitions (including through mergers of Subsidiaries).

(b)  Make any Asset Sale otherwise permitted under paragraph (a) above unless (i) such Asset Sale is for consideration at least 75% of which is cash, (ii) such consideration is at least equal to the fair market value of the assets being sold, transferred, leased or disposed of and (iii) the fair market value of all assets sold, transferred, leased or disposed of pursuant to this paragraph (b) during any fiscal year shall not exceed an amount equal to 10% of the Proved PV-10% as of the end of the fiscal year most recently ended prior to the date of such sale, transfer, lease or disposition for which a Reserve Report has been delivered, calculated on a pro forma basis for acquisitions consummated since the end of such fiscal year in the manner specified in the definition of “Proved PV-10%”.

SECTION 6.06.  Restricted Payments; Payment of Certain Indebtedness; Restrictive Agreements.  (a)  Declare or make, or agree to declare or make, directly or indirectly, any Restricted Payment or enter into or be a party to any Synthetic Purchase Agreement, or incur any obligation (contingent or otherwise) to do so; provided, however, that (i) any Subsidiary may declare and pay dividends or make other distributions ratably to its equity holders, (ii) the Borrower may make Restricted Payments to Holdings (x) in an amount not to exceed $100,000 in any fiscal year, to the extent necessary to pay general corporate and overhead expenses incurred by Holdings in the ordinary course of business; provided, however, that all Restricted Payments made to Holdings pursuant to this clause (ii) are used by Holdings for the purposes specified herein within 20 days of the receipt thereof, (iii) the Borrower and Holdings may make the Distribution and (iv) the Borrower may make payments in accordance with the Intercompany Services Agreement or the Tax Sharing Agreements in accordance with their terms.

(b)  Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, make or agree to pay or make, directly or indirectly, any payment or other distribution (whether in cash, securities or other property) of or in respect of principal of or interest on any Indebtedness, or any payment or other distribution (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancelation or termination of any Indebtedness, except:

(i)  payment of Indebtedness created under the Loan Documents;

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(ii)  payment of scheduled interest and principal payments as and when due in respect of any Indebtedness;

(iii)  payment of Indebtedness created under the First Lien Loan Documents;

(iv)  payment when and as due of Indebtedness under Hedging Agreements permitted under this Agreement;

(v)  refinancings of Indebtedness to the extent permitted by Section 6.01; and

(vi)  payments of secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness.

(c)  Enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (i) the ability of Holdings, the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets to secure Indebtedness under the Loan Documents or (ii) the ability of any Subsidiary to pay dividends or other distributions with respect to any of its Equity Interests or to make or repay loans or advances to the Borrower or any other Subsidiary; provided that (A) the foregoing shall not apply to restrictions and conditions imposed by law or by any Loan Document or any First Lien Loan Document, (B) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (C) clause (i) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (D) clause (i) of the foregoing shall not apply to customary provisions in leases and other contracts restricting the assignment thereof.

SECTION 6.07.  Transactions with Affiliates.  Except for transactions between or among Loan Parties, sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except that the Borrower or any Subsidiary (a) may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties (including transactions on such terms and conditions with the Cook Inlet Pipeline Company) and (b) may make distributions and payments in accordance with the Intercompany Services Agreement as in effect on the Closing Date and the Tax Sharing Agreements in accordance with their terms (it being understood that distributions and payments made in accordance with the Intercompany Services Agreement, as the same may be amended or otherwise modified from time to time, that comply with clause (a) above shall not violate this Section).

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SECTION 6.08.  Business of Holdings, Borrower and Subsidiaries; No Foreign Subsidiaries.  (a)  With respect to Holdings, engage in any business activities or have any assets or liabilities other than its ownership of the Equity Interests in the Borrower and other assets and liabilities incidental thereto, including its liabilities under the Loan Documents and the First Lien Loan Documents.

(b)  With respect to the Borrower and the Subsidiaries, engage at any time in any business or business activity other than the business currently conducted by it and business activities reasonably related thereto.

(c)  Neither Holdings nor the Borrower shall acquire or own any Foreign Subsidiary.

SECTION 6.09.  Amendment of Certain Indebtedness and Agreements.  Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, amend, modify or waive any of its rights under (a) (i) the Intercompany Services Agreement, (ii) the Tax Sharing Agreements, (iii) the Master Conveyance or (iv) its certificate of incorporation, by-laws or other organizational documents, except, in each case, for amendments, modifications or waivers to any of the foregoing documents that, when taken together will all prior amendments, modifications and waivers to such document, are not material and adverse to the Borrower or the Subsidiaries or to the rights or interests of the Lenders or (b) the First Lien Loan Documents, except to the extent permitted under the Intercreditor Agreement.

SECTION 6.10.  Asset Coverage Ratios.  (a)  Proved Total Debt Coverage Ratio.  Permit the Proved Total Debt Coverage Ratio as of the last day of any fiscal quarter set forth below to be less than the ratio set forth below opposite such fiscal quarter:

Fiscal quarter ending on	Ratio
March 31, 2007	1.15 to 1.00
June 30, 2007	1.15 to 1.00
September 30, 2007	1.15 to 1.00
December 31, 2007	1.15 to 1.00
March 31, 2008	1.50 to 1.00
June 30, 2008	1.50 to 1.00
September 30, 2008	1.50 to 1.00
December 31, 2008	1.50 to 1.00
March 31, 2009	1.75 to 1.00
June 30, 2009	1.75 to 1.00
September 30, 2009	1.75 to 1.00
December 31, 2009	1.75 to 1.00
March 31, 2010	2.00 to 1.00
June 30, 2010	2.00 to 1.00
September 30, 2010	2.00 to 1.00
December 31, 2010	2.00 to 1.00
March 31, 2011	2.25 to 1.00
June 30, 2011	2.25 to 1.00
September 30, 2011 and thereafter	2.25 to 1.00

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(b)  PDP Total Debt Coverage Ratio.  Permit the PDP Total Debt Coverage Ratio as of the last day of any fiscal quarter to be less than 0.50 to 1.00.

SECTION 6.11.  Leverage Ratio.  Permit the Leverage Ratio as of the last day of any fiscal quarter set forth below to be greater than the ratio set forth opposite such fiscal quarter:

Fiscal quarter ending on	Ratio
March 31, 2007	6.000 to 1.00
June 30, 2007	6.000 to 1.00
September 30, 2007	6.000 to 1.00
December 31, 2007	6.000 to 1.00
March 31, 2008	5.625 to 1.00
June 30, 2008	5.250 to 1.00
September 30, 2008	4.875 to 1.00
December 31, 2008	4.500 to 1.00
March 31, 2009	4.250 to 1.00
June 30, 2009	4.000 to 1.00
September 30, 2009	3.750 to 1.00
December 31, 2009	3.500 to 1.00
March 31, 2010	3.400 to 1.00
June 30, 2010	3.400 to 1.00
September 30, 2010	3.250 to 1.00
December 31, 2010	3.250 to 1.00
March 31, 2011	2.750 to 1.00
June 30, 2011	2.750 to 1.00
September 30, 2011 and thereafter	2.750 to 1.00

SECTION 6.12.  Capital Expenditures.  (a)  1P Capital Expenditures.  Permit the aggregate amount of 1P Capital Expenditures made by the Borrower and the Subsidiaries in any fiscal year set forth below to the exceed the amount set forth below opposite such period:

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Fiscal year ending on	Amount
December 31, 2007	$	45,000,000
December 31, 2008	$	62,500,000
December 31, 2009	$	27,500,000
December 31, 2010	$	19,400,000
December 31, 2011	$	13,500,000

; provided that (i) to the extent the aggregate amount of 1P Capital Expenditures made by the Borrower and the Subsidiaries during any fiscal year set forth above is less than the amount set forth opposite such fiscal year, such shortfall (to the extent not used to make 2P Capital Expenditures as contemplated by paragraph (b) of this Section) may be carried forward and used to make 1P Capital Expenditures in the immediately subsequent fiscal year and (ii) the amount that was offered to the Lenders and the First Lien Lenders to prepay outstanding Loans pursuant to Section 2.12(c) and outstanding First Lien Loans pursuant to Section 2.12(c) of the First Lien Credit Agreement but was not accepted by either the Lenders or the First Lien Lenders in respect of any fiscal year may be carried forward and used to make 1P Capital Expenditures in the immediately subsequent fiscal year to the extent not used to make 2P Capital Expenditures as contemplated by paragraph (b) of this Section.

(b)  2P Capital Expenditures.  Permit the aggregate amount of 2P Capital Expenditures made by the Borrower and the Subsidiaries in any fiscal year to be greater than $5,000,000; provided that (i) to the extent the aggregate amount of 1P Capital Expenditures made by the Borrower and the Subsidiaries during any fiscal year is less than the amount permitted to be made under paragraph (a) of this Section, and such shortfall is not used to make 1P Capital Expenditures in the immediately subsequent fiscal year, 50% of such shortfall may be used to make 2P Capital Expenditures in such immediately subsequent fiscal year and (ii) the amount that was offered to the Lenders and the First Lien Lenders to prepay outstanding Loans pursuant to Section 2.12(c) and outstanding First Lien Loans pursuant to Section 2.12(c) of the First Lien Credit Agreement but was not accepted by either the Lenders or the First Lien Lenders in respect of any fiscal year may be carried forward and used to make 2P Capital Expenditures in the immediately subsequent fiscal year to the extent not used to make 1P Capital Expenditures as contemplated by paragraph (a) of this Section.

SECTION 6.13.  Fiscal Year.  With respect to Holdings and the Borrower, change their fiscal year-end to a date other than December 31.

SECTION 6.14.  Certain Equity Interests.  (a)  In the case of Holdings, issue any Equity Interest that is not Qualified Capital Stock.

(b)  In the case of the Borrower, issue any Equity Interests to any person other than Holdings.

(c)  In the case of any Subsidiary, issue any Equity Interests to any person other than the Borrower or another Subsidiary.

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SECTION 6.15.  Hedging Agreements.  (a)  Enter into any Hedging Agreement, other than (i) Hedging Agreements required by Sections 5.14 and 5.15 and (ii) subject to paragraph (b), Hedging Agreements entered into in the ordinary course of business (and not for speculative purposes) to hedge or mitigate risks to which the Borrower or any Subsidiary is exposed in the conduct of its business or the management of its liabilities.

(b)  Maintain at any time one or more Hedging Agreements with persons reasonably acceptable to the Agent or fixed price contracts, the effect of which is to establish maximum fixed prices or caps on a notional volume of crude oil and natural gas, calculated separately, greater than 80% of Anticipated Production thereof for each month in the then ensuing 12 month period.

(c)  For purposes of this Section, a basis differential hedging agreement will not be considered to be a Hedging Agreement.

SECTION 6.16.  Take-or-Pay or Other Prepayments.  (a)    Except as set forth in Schedule 3.24, allow take-or-pay arrangements or prepayments (including deferred production agreements or volumetric production payments) with respect to the Oil and Gas Properties or production therefrom that could require the Borrower or any Subsidiary to deliver Hydrocarbons either generally or produced from the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor.

(b)  Allow, on a net basis, any gas imbalances that would require the Borrower or any Subsidiary to deliver Hydrocarbons either generally or produced from the Oil and Gas Properties in excess of 200 MMcf at some future time without then or thereafter receiving full payment therefor.

ARTICLE VII

Events of Default

In case of the happening of any of the following events (“Events of Default”):

(a)  any representation or warranty made or deemed made in or in connection with any Loan Document or the borrowings hereunder, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished in connection with or pursuant to any Loan Document or the Transactions, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished;

(b)  default shall be made in the payment of any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise;

(c)  default shall be made in the payment of any interest on any Loan or any fee or any other amount (other than an amount referred to in

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(b) above) due under any Loan Document when and as the same shall become due and payable and such default shall continue unremedied for a period of three Business Days;

(d)  default shall be made in the due observance or performance by Holdings, the Borrower or any Subsidiary of any covenant, condition or agreement contained in Section 2.21, 5.01(a), 5.05 or 5.08 or in Article VI (other than Section 6.15(b));

(e)  default shall be made in the due observance or performance by Holdings, the Borrower or any Subsidiary of any covenant, condition or agreement contained in any Loan Document (other than those specified in (b), (c) or (d) above) and such default shall continue unremedied for a period of 30 days after notice thereof from the Agent or any Lender to the Borrower;

(f)  (i)  Holdings, the Borrower or any Subsidiary shall fail to pay any principal, interest or other amount due in respect of any Material Indebtedness when and as the same shall become due and payable or (ii) any other event or condition shall occur that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof prior to its scheduled maturity or that results in the termination or permits any counterparty to terminate any Hedging Agreement the obligations under which constitute Material Indebtedness; provided that this clause (ii) shall not apply to (A) secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness and (B) Indebtedness that becomes due as a result of a condition described in clause (c) of the definition of “Change in Control” as long as the Borrower shall have advised the Lenders at the time of the Change in Control offer that such event constitutes an event of default under such Material Indebtedness; and provided further, that if any event or condition described in this clause (f) occurs in respect of the First Lien Loans, such event or condition shall not be an Event of Default unless such event or condition has not been waived or cured within 45 days after its first occurrence;

(g)  an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of Holdings, the Borrower or any Subsidiary, or of a substantial part of the property or assets of Holdings, the Borrower or a Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian,

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sequestrator, conservator or similar official for Holdings, the Borrower or any Subsidiary or for a substantial part of the property or assets of Holdings, the Borrower or a Subsidiary or (iii) the winding-up or liquidation of Holdings, the Borrower or any Subsidiary; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered;

(h)  Holdings, the Borrower or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (g) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holdings, the Borrower or any Subsidiary or for a substantial part of the property or assets of Holdings, the Borrower or any Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing;

(i)  one or more judgments shall be rendered against Holdings, the Borrower, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of Holdings, the Borrower or any Subsidiary to enforce any such judgment and such judgment either (i) is for the payment of money in an aggregate amount in excess of $7,500,000 or (ii) is for injunctive relief and could reasonably be expected to result in a Material Adverse Effect;

(j)  an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other such ERISA Events, could reasonably be expected to result in liability of the Borrower and its ERISA Affiliates in an aggregate amount exceeding $7,500,000;

(k)  any Guarantee under the Collateral Agreement for any reason shall cease to be in full force and effect (other than in accordance with the terms of the Loan Documents), or any Guarantor shall deny in writing that it has any liability under the Collateral Agreement (other than as a result of the discharge of such Guarantor in accordance with the terms of the Loan Documents);

(l)  any security interest purported to be created by any Security Document shall cease to be, or shall be asserted by the Borrower or any other

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Loan Party not to be, a valid, perfected, second priority (except as otherwise expressly provided in this Agreement or such Security Document) security interest in the securities, assets or properties covered thereby, except as a result of the sale, transfer or other disposition of such assets in a transaction permitted by the Loan Documents;

(m)  any Loan Document or, except during any period during which the Borrower and the Subsidiaries are capable of performing with their own employees and assets all the activities performed for them under the Intercompany Services Agreement, the Intercompany Services Agreement shall cease to be in full force and effect;

(n)  the Parent Undertaking shall terminate prior to satisfaction of the Parent’s obligations thereunder or there shall occur a material breach under the Parent Undertaking;

then, and in every such event (other than an event with respect to Holdings or the Borrower described in paragraph (g) or (h) above), and at any time thereafter during the continuance of such event, the Agent shall, at the request of the Required Lenders, by notice to the Borrower, take either or both of the following actions, at the same or different times:  (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding; and in any event with respect to Holdings or the Borrower described in paragraph (g) or (h) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding.

ARTICLE VIII

The Agent

Each of the Lenders hereby irrevocably appoints the Agent as its administrative agent and collateral agent and authorizes the Agent to take such actions on its behalf and to exercise such powers as are delegated to the Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto.  Without limiting the generality of the foregoing, the Agent is hereby expressly authorized to execute any and all documents (including releases) with respect to the Collateral and

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the rights of the Secured Parties with respect thereto, as contemplated by and in accordance with the provisions of this Agreement and the Security Documents.

The bank serving as the Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with Holdings, the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Agent hereunder.

The Agent shall not have any duties or obligations except those expressly set forth in the Loan Documents.  Without limiting the generality of the foregoing, (a) the Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Agent is instructed in writing to exercise by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.08) and (c) except as expressly set forth in the Loan Documents, the Agent shall not have any duty to disclose, nor shall it be liable for the failure to disclose, any information relating to Holdings, the Borrower or any of the Subsidiaries that is communicated to or obtained by the bank serving as the Agent or any of its Affiliates in any capacity.  The Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.08) or in the absence of its own gross negligence or willful misconduct.  The Agent shall not be deemed to have knowledge of any Default unless and until written notice thereof is given to the Agent by Holdings, the Borrower or a Lender, and the Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to the Agent.

The Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper person.  The Agent may also rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper person, and shall not incur any liability for relying thereon.  The Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

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The Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by it.  The Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers by or through their Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Agent and any such sub-agent, and shall apply to their activities in connection with the syndication of the credit facilities contemplated hereby as well as activities as the Agent.  Without limiting the generality of the foregoing, JPMorgan Chase Bank, N.A. shall act as sub-collateral agent for purposes of the BLM Leases (the “BLM Sub-Collateral Agent”).  The BLM Sub-Collateral Agent shall act at the direction of the Collateral Agent and shall have no liability to Holdings, the Borrower, any Lender or any of their Related Persons for any actions taken by it in accordance with such direction.

Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After an Agent’s resignation hereunder, the provisions of this Article and Section 9.05 shall continue in effect for the benefit of such retiring Agent, its sub-agents and their Related Parties in respect of any actions taken or omitted to be taken by any of them while acting as Agent.

Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or any document furnished hereunder or thereunder.

Notwithstanding anything herein to the contrary, neither the Syndication Agent nor any arranger, bookrunner or documentation agent listed on the cover page hereof shall have, in any such capacity, any duty or responsibility under any Loan Document.

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ARTICLE IX

Miscellaneous

SECTION 9.01.  Notices.  Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by fax, as follows:

(a)  if to the Borrower or Holdings, to it at 707 Seventeeth Street, Suite 3600, Denver, Colorado 80202, Attention of Cyrus Marter, Vice President and Secretary  (Fax No. (303) 812-1445), with a copy to 707 Seventeeth Street, Suite 3600, Denver, Colorado 80202, Attention of Michael Kennedy, Treasurer (Fax No. (303) 812-1510);

(b)  if to the Agent, to Credit Suisse, Eleven Madison Avenue, New York, NY 10010, Attention of Agency Group (Fax No. (212) 325-8304); and

(c)  if to a Lender, to it at its address (or fax number) set forth on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto.

All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by fax or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section or in accordance with the latest unrevoked direction from such party given in accordance with this Section. As agreed to among Holdings, the Borrower, the Agent and the applicable Lenders from time to time, notices and other communications may also be delivered by e-mail to the e-mail address of a representative of the applicable person provided from time to time by such person.

SECTION 9.02.  Survival of Agreement.  All covenants, agreements, representations and warranties made by the Borrower or Holdings herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Lenders and shall survive the making by the Lenders of the Loans, regardless of any investigation made by the Lenders or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid and so long as the Commitments have not been terminated. The provisions of Sections 2.13, 2.15, 2.19, 9.05 and, until the first anniversary of the Maturity Date, 9.16 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the invalidity or unenforceability of any term or provision of this

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Agreement or any other Loan Document or any investigation made by or on behalf of the Agent or any Lender.

SECTION 9.03.  Binding Effect.  This Agreement shall become effective when it shall have been executed by the Borrower, Holdings and the Agent and when the Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto.

SECTION 9.04.  Successors and Assigns.  (a)  Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower, Holdings, the Agent or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their successors and assigns.

(b)  Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it), with notice to the Borrower by the Agent and, except in the case of an assignment to a Lender, to an Affiliate of a Lender or to a Related Fund (which will require prior written notice to the Agent), the prior written consent of the Agent (not to be unreasonably withheld or delayed); provided, however, that (i) the amount of the Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall be in an integral multiple of, and not less than, $1,000,000 (or, if less, the entire remaining amount of such Lender’s Commitment or Loans); provided that the principal amount of concurrent assignments to any assignee and its Related Funds shall be aggregated for purposes of determining compliance with the foregoing minimum assignment amount, (ii) the parties to each such assignment shall execute and deliver to the Agent an Assignment and Acceptance via an electronic settlement system acceptable to the Agent (or, if previously agreed with the Agent, manually), and shall pay to the Agent a processing and recordation fee of $3,500 (which fee may be waived or reduced in the sole discretion of the Agent), (iii) the assignee, if it shall not be a Lender, shall deliver to the Agent an Administrative Questionnaire and all applicable tax forms and (iv) failure to deliver notice to the Borrower shall not affect the effectiveness of such assignment.  Upon acceptance and recording pursuant to paragraph (e) of this Section, from and after the effective date specified in each Assignment and Acceptance, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.13, 2.15, 2.19 and 9.05, as well as to any fees accrued for its account and not yet paid).

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(c)  By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows:  (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitment and the outstanding balances of its Loans, in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto, or the financial condition of the Borrower or any Subsidiary or the performance or observance by the Borrower or any Subsidiary of any of its obligations under this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements referred to in Section 3.05(a) or delivered pursuant to Section 5.04 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender.

(d)  The Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”).  The entries in the Register shall be conclusive and the Borrower, the Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary.  The Register shall be available for inspection by the Borrower, the Agent and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

(e)  Upon its receipt of, and consent to, a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above, if applicable, and the written consent of the Agent and any applicable tax forms, the

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Agent shall promptly (i) accept such Assignment and Acceptance and (ii) record the information contained therein in the Register. No assignment shall be effective unless it has been recorded in the Register as provided in this paragraph (e).

(f)  Each Lender may without the consent of the Borrower or the Agent sell participations to one or more banks or other persons in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided, however, that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other persons shall be entitled to the benefit of the cost protection provisions contained in Sections 2.13, 2.15 and 2.19 to the same extent as if they were Lenders (but, with respect to any particular participant, to no greater extent than the Lender that sold the participation to such participant) and (iv) the Borrower, the Agent and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrower relating to the Loans and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable to such participating bank or person hereunder or the amount of principal of or the rate at which interest is payable on the Loans in which such participating bank or person has an interest, extending any scheduled principal payment date or date fixed for the payment of interest on the Loans in which such participating bank or person has an interest, increasing or extending the Commitments in which such participating bank or person has an interest or releasing any Guarantor (other than in connection with the sale of such Guarantor in a transaction permitted by Section 6.05) or all or substantially all of the Collateral).  A participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.19 unless the Borrower is notified of the participation sold to such participant and such participant agrees, for the benefit of the Borrower, to comply with Section 2.19(e) as though it were a Lender.

(g)  Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure of information designated by the Borrower as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information on terms no less restrictive than those applicable to the Lenders pursuant to Section 9.16.

(h)  Any Lender may at any time assign all or any portion of its rights under this Agreement to secure extensions of credit to such Lender or in support of obligations owed by such Lender; provided that no such assignment shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto.

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(i)  Notwithstanding anything to the contrary contained herein, any Lender (a “Granting Lender”) may grant to a special purpose funding vehicle (an “SPC”), identified as such in writing from time to time by the Granting Lender to the Agent and the Borrower, the option to provide to the Borrower all or any part of any Loan that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to make any Loan and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof.  The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender.  Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Lender).  In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof.  In addition, notwithstanding anything to the contrary contained in this Section, any SPC may (i) with notice to, but without the prior written consent of, the Borrower and the Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Granting Lender or to any financial institutions (consented to by the Borrower and Agent) providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of Loans and (ii) disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC.

(j)  Neither Holdings nor the Borrower shall assign or delegate any of its rights or duties hereunder without the prior written consent of the Agent and each Lender, and any attempted assignment without such consent shall be null and void.

SECTION 9.05.  Expenses; Indemnity.  (a)  The Borrower and Holdings agree, jointly and severally, to pay all reasonable out-of-pocket expenses incurred by the Agent, the co-lead arrangers listed on the cover page of this Agreement, the Syndication Agent or the Affiliates of the foregoing in connection with the arrangement and syndication of the credit facilities contemplated hereby and the preparation and administration of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof or incurred by the Agent or any Lender in connection with the enforcement or protection of its rights in connection with this Agreement and the other Loan Documents, including the fees, charges and disbursements of Cravath, Swaine & Moore LLP and Guess & Rudd P.C., counsel for the Agent, and, in connection with any such enforcement or protection, the fees, charges and disbursements of any other counsel for the Agent or any Lender.

(b)  The Borrower and Holdings agree, jointly and severally, to indemnify the Agent, each co-lead arranger listed on the cover page of this Agreement, the Syndication

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Agent, each Lender and each Related Party of any of the foregoing persons (each such person being called an “Indemnitee”) against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties thereto of their obligations thereunder or the consummation of the Transactions and the other transactions contemplated hereby or thereby (including the syndication of the credit facilities contemplated hereby), (ii) the use of the proceeds of the Loans, (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto (and regardless of whether such matter is initiated by a third party or by the Borrower, any other Loan Party or any of their Affiliates) or (iv) any actual or alleged presence or Release of Hazardous Materials on, at, under or from any property currently or formerly owned or operated by the Borrower or any of the Subsidiaries, or any Environmental Liability related in any way to the Borrower or the Subsidiaries; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted primarily from the gross negligence or wilful misconduct of such Indemnitee.

(c)  To the extent that Holdings and the Borrower fail to pay any amount required to be paid by them to the Agent under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Agent such Lender’s pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Agent in its capacity as such.  For purposes hereof, a Lender’s “pro rata share” shall be determined based upon its share of the outstanding Loans and unused Commitments at the time.

(d)  To the extent permitted by applicable law, neither Holdings nor the Borrower shall assert, and each hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof.

(e)  The provisions of this Section shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Agent or any Lender.  All amounts due under this Section shall be payable on written demand therefor.

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SECTION 9.06.  Right of Setoff.  If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, except to the extent prohibited by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower or Holdings against any of and all the obligations of the Borrower or Holdings now or hereafter existing under this Agreement and other Loan Documents held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured.  The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have.

SECTION 9.07.  Applicable Law.  THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (OTHER THAN AS EXPRESSLY SET FORTH IN OTHER LOAN DOCUMENTS) SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

SECTION 9.08.  Waivers; Amendment.  (a)  No failure or delay of the Agent or any Lender in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power.  The rights and remedies of the Agent and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have.  No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by the Borrower or any other Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given.  No notice or demand on the Borrower or Holdings in any case shall entitle the Borrower or Holdings to any other or further notice or demand in similar or other circumstances.

(b)  Neither this Agreement nor any other Loan Document nor any provision hereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by the Borrower, Holdings and the Required Lenders or, in the case of any other Loan Document, pursuant to an agreement or agreements in writing entered into by the Agent and the Loan Parties that are parties thereto, in each case with the consent of the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any Loan, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan, without the prior written consent of each Lender directly adversely affected thereby, (ii) increase or extend the Commitment or decrease the amount, or extend the date for payment of, any fees of any Lender without the prior written consent of each Lender directly affected thereby, (iii) amend or modify the pro rata requirements of Section 2.16, any other provision of any Loan Document requiring that Loans be made by, or payments of Commitment reductions be allocated

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among, the Lenders on a pro rata basis, the provisions of Section 9.04(j) or the provisions of this Section or release substantially all the Guarantors (determined based on the fair market value of the Guarantors) (other than in connection with the sale of any Guarantor in a transaction permitted by Section 6.05) or all or substantially all of the Collateral, without the prior written consent of each Lender, (iv) modify the protections afforded to an SPC pursuant to the provisions of Section 9.04(i) without the written consent of such SPC or (v) reduce the percentage contained in the definition of the term “Required Lenders” or any other provision of any Loan Document specifying the number or percentage of Lenders required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder, without the prior written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Agent or under any other Loan Document without the prior written consent of the Agent.

SECTION 9.09.  Interest Rate Limitation.  Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender.

SECTION 9.10.  Entire Agreement.  This Agreement, the Administrative Agent Fee Letter and the other Loan Documents constitute the entire contract between the parties relative to the subject matter hereof.  Any other previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Loan Documents.  Nothing in this Agreement or in the other Loan Documents, expressed or implied, is intended to confer upon any person (other than the parties hereto and thereto, their successors and assigns permitted hereunder, the Indemnitees and, to the extent expressly contemplated hereby, the Related Parties of each of the Agent and the Lenders) any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents.

SECTION 9.11.  WAIVER OF JURY TRIAL.  EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS.  EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS

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REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

SECTION 9.12.  Severability.  In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction).  The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

SECTION 9.13.  Counterparts.  This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original but all of which when taken together shall constitute a single contract, and shall become effective as provided in Section 9.03.  Delivery of an executed signature page to this Agreement by facsimile transmission or other electronic imaging means shall be as effective as delivery of a manually signed counterpart of this Agreement.

SECTION 9.14.  Headings.  Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement.

SECTION 9.15.  Jurisdiction; Consent to Service of Process.  (a)  Each of Holdings and the Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court.  Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.  Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against the any other party or their properties in the courts of any jurisdiction.

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(b)  Each of Holdings and the Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or Federal court (it being understood that such waiver shall not require any suit, action or proceeding initiated in any court to be remanded or removed to any New York State court or any Federal court of the United States of America sitting in New York City).  Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(c)  Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01.  Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

SECTION 9.16.  Confidentiality.  Each of the Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates’ officers, directors, employees and agents, including accountants, legal counsel and other advisors (it being understood that the persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority or quasi-regulatory authority (such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) in connection with the exercise of any remedies hereunder or under the other Loan Documents or any suit, action or proceeding relating to the enforcement of its rights hereunder or thereunder, (e) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any actual or prospective assignee of or participant in any of its rights or obligations under this Agreement and the other Loan Documents or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower or any Subsidiary or any of their respective obligations, (f) with the consent of the Borrower or (g) to the extent such Information becomes publicly available other than as a result of a breach of this Section.  For the purposes of this Section, “Information” shall mean all information received from the Borrower or Holdings and related to the Borrower or Holdings or their business, other than any such information that was available to the Agent or any Lender on a nonconfidential basis prior to its disclosure by the Borrower or Holdings; provided that, in the case of Information received from the Borrower or Holdings after the date hereof, such information is clearly identified at the time of delivery as confidential.  Any person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such person has exercised the same degree of care to maintain the confidentiality of such Information as such person would accord its own confidential information.

SECTION 9.17.  Termination or Release.  (a)  Each Security Document, the guarantees made therein and the security interests granted thereunder shall terminate

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when all the Loan Document Obligations have been indefeasibly paid in full in cash and the Commitments have expired or been terminated.

(b)  A Subsidiary Loan Party shall automatically be released from its obligations under the Loan Documents, the guarantee of such Subsidiary Loan Party made under the Collateral Agreement shall automatically be released and the security interests granted in the Collateral of such Subsidiary Loan Party under the Security Documents shall automatically be released upon the consummation of any transaction permitted by this Agreement as a result of which such Subsidiary Loan Party ceases to be a Subsidiary pursuant to the terms of this Agreement.

(c)  Upon any sale or other transfer by any Loan Party of any Collateral that is permitted under this Agreement to any person (other than a Loan Party or an Affiliate of a Loan Party), or upon the effectiveness of any written consent pursuant to Section 9.08 to the release of any security interest granted in any Collateral of such Loan Party under to the Security Documents, the security interests granted in such Collateral under the Security Documents shall be automatically released.

(d)  In connection with any termination or release pursuant to this Section, the Agent shall execute and deliver to the applicable Loan Party, at such Loan Party’s expense, all documents that such Loan Party shall reasonably request to evidence such release or termination.  Any execution and delivery of documents pursuant to this Section shall be without recourse to or warranty by the Agent.

SECTION 9.18.  USA PATRIOT Act Notice.  Each Lender and the Agent (for itself and not on behalf of any Lender) hereby notifies Holdings and the Borrower that pursuant to the requirements of the USA PATRIOT Act, it is required to obtain, verify and record information that identifies Holdings and the Borrower, which information includes the name and address of Holdings and the Borrower and other information that will allow such Lender or the Agent, as applicable, to identify Holdings and the Borrower in accordance with the USA PATRIOT Act.

SECTION 9.19.  No Fiduciary Relationship.  Each of Holdings and the Borrower, on behalf of itself and the Subsidiaries, agrees that in connection with all aspects of the transactions contemplated hereby or by the other Loan Documents and any communications in connection therewith, the Borrower, the Subsidiaries and their Affiliates, on the one hand, and the Agent, the Lenders and their Affiliates, on the other hand, will have a business relationship that does not create, by implication or otherwise, any fiduciary duty on the part of the Agent the Lenders or their Affiliates, and no such duty will be deemed to have arisen in connection with any such transaction or communications.

SECTION 9.20.  Intercreditor Agreement.  Reference is made to the Intercreditor Agreement.  Each Lender (a) acknowledges that it has received a copy of the Intercreditor Agreement, (b) acknowledges and agrees to Credit Suisse acting as the Agent and the First Lien Agent, (c) consents to the subordination of Liens provided for in the Intercreditor Agreement, (d) agrees that it will be bound by and will take no actions

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contrary to the provisions of the Intercreditor Agreement and (e) authorizes and instructs Credit Suisse to enter into the Intercreditor Agreement as collateral agent for such Lender.  The foregoing provisions are intended as an inducement to the First Lien Lenders to permit the incurrence of Indebtedness under this Agreement and to extend credit to the Borrower and such First Lien Lenders are intended third party beneficiaries of such provisions.

SECTION 9.21.  Security Documents.  Reference is made to the Security Documents.  Each Lender authorizes and instructs Credit Suisse to enter into (a) the Security Documents as collateral agent for such Lender and (b) the Parent Undertaking as administrative agent for such Lender.

SECTION 9.22.  Parent Liability.  Except for the Parent Undertaking, the Lenders agree for themselves and their successors and assigns, that no claim arising against Holdings, the Borrower or any Subsidiary under any Loan Document shall be asserted against the Parent (or any stockholder, manager, officer, director, employee or agent of the Parent) and no judgment, order or execution entered in any suit, action or proceeding, whether legal or equitable, on this Agreement or any of the other Loan Documents shall be obtained or enforced against the Parent (or any stockholder, manager, officer, director, employee or agent of the Parent) or its assets for the purpose of obtaining satisfaction and payment of Indebtedness or any claims arising under this Agreement or any other Loan Document, any right to proceed against the Parent (or any stockholder, manager, officer, director, employee or agent of the Parent) individually or its assets being hereby expressly waived, renounced and remitted by the Lenders for themselves and their successors and assigns.  Nothing in this Section, however, shall be construed so as to prevent the Agent or any Lender from commencing any action, suit or proceeding with respect to or causing legal papers to be served upon the Parent for the purpose of (i) obtaining jurisdiction over Holdings or the Borrower or (ii) obtaining judgment, order or execution against the Parent, in each case (A) arising out of any fraud or intentional misrepresentation by the Parent in connection with the Loan Documents, the arrangement of the credit facility provided for herein or the Transactions, (B) for recovery of moneys received by the Parent in violation of the terms of this Agreement or constituting property of the Borrower or insurance proceeds in respect of Collateral and (C) as a result of the exercise of rights under the Parent Undertaking.

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IN WITNESS WHEREOF, the parties hereto have caused this Second Lien Credit Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

FOREST ALASKA OPERATING LLC,
	by
		Name:
		Title:
FOREST ALASKA HOLDING LLC,
	by
		Name:
		Title:
CREDIT SUISSE, Cayman Islands branch, as Administrative Agent, Collateral Agentand Lender,
	by
		Name:
		Title:
	by
		Name:
		Title:
JPMORGAN CHASE BANK, N.A., as Syndication Agent and Lender,
	by
		Name:
		Title:

EX-10.32

Exhibit 10.32

FOREST OIL CORPORATION

EXECUTIVE DEFERRED COMPENSATION PLAN

As Amended and Restated
Effective as of January 1, 2005

TABLE OF CONTENTS

ARTICLE		PAGE
I.	DEFINITIONS AND CONSTRUCTION	I-1
II.	PARTICIPATION	II-1
III.	ACCOUNT CREDITS AND ALLOCATIONS OF INCOME OR LOSS	III-1
IV.	DEEMED INVESTMENT OF FUNDS	IV-1
V.	IN-SERVICE DISTRIBUTIONS	V-1
VI.	TERMINATION BENEFITS	VI-1
VII.	ADMINISTRATION OF THE PLAN	VII-1
VIII.	ADMINISTRATION OF FUNDS	VIII-1
IX.	NATURE OF THE PLAN	IX-1
X.	MISCELLANEOUS	X-1

i

FOREST OIL CORPORATION

EXECUTIVE DEFERRED COMPENSATION PLAN

W I T N E S S E T H :

WHEREAS, Forest Oil Corporation (the “Company”) has heretofore adopted the FOREST OIL CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN (the “Plan”) for the benefit of its eligible employees; and

WHEREAS, the Company desires to restate the Plan and to amend the Plan in several respects, intending thereby to provide an uninterrupted and continuing program of benefits;

NOW THEREFORE, the Plan is hereby restated in its entirety as follows with no interruption in time, effective as of January 1, 2005, except as otherwise indicated herein:

ii

I.

Definitions and Construction

1.1Definitions.  The capitalized words or terms used in the Plan and which are not otherwise defined herein shall have the same meanings as such words or terms have in the Retirement Savings Plan of Forest Oil Corporation, as the same may be amended from time to time.  Where the following words and phrases appear in the Plan, they shall have the respective meanings set forth below, unless their context clearly indicates to the contrary.

(1)Account(s):  A Member’s Grandfathered Account and/or Deferral Account and the amounts credited thereto.  A Member shall have a 100% nonforfeitable interest in his Accounts at all times.

(2)Affiliate:  With respect to a person, any other person with whom the person would be considered a single employer under section 414(b) of the Code (employees of controlled group of corporations), and any other person with whom the person would be considered a single employer under section 414(c) of the Code (employees of partnerships, proprietorships, etc., under common control).

(3)Change of Control:  The occurrence of any one or more of the following events: (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company); (ii) the Company sells, leases or exchanges all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary of the Company); (iii) the Company is to be dissolved and liquidated; (iv) any person or entity, including a “group” as contemplated by section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company’s voting stock (based upon voting power); or (v) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Company’s Board of Directors.  Notwithstanding the foregoing, the term “Change of Control” shall not include any reorganization, merger or consolidation involving solely the Company and one or more previously wholly-owned subsidiaries of the Company.

(4)Code:  The Internal Revenue Code of 1986, as amended.

(5)Committee:  The Compensation Committee of the Board of Directors of the Company.

(6)Company: Forest Oil Corporation.

(7)Compensation: Amounts equal to a Member’s “Compensation,” as such term is defined under the Retirement Savings Plan, including amounts a Member could have received in cash in lieu of Compensation deferrals pursuant to Section 3.1, and without regard to the maximum dollar limitation of section 401(a)(17) of the Code.

I-1

(8)Deferral Account:  An individual account for each Member to which is credited, from and after the Effective Date, his Compensation deferrals pursuant to Section 3.1, the Employer Deferrals made on his behalf pursuant to Section 3.2, and which reflects such Account’s allocation of earnings and/or changes in value as provided in Section 3.3.

(9)Directors:  The Board of Directors of the Company.

(10)Discretionary Contribution Percentage:  For each Plan Year and with respect to each Member, the percentage obtained by dividing (i) the Employer Discretionary Contribution, if any, allocated to such Member’s Employer Contribution Account under the Retirement Savings Plan for such Plan Year by (ii) the amount of such Member’s “Compensation” (as such term is defined in the Retirement Savings Plan) that was considered under the Retirement Savings Plan to determine such allocation for such Plan Year.

(11)Effective Date:  January 1, 2005, as to this restatement of the Plan, except as otherwise indicated in specific provisions of the Plan.  The original effective date of the Plan was July 1, 1994.

(12)Employer: The Company and any other adopting entity that adopts the Plan pursuant to the provisions of Section 2.3.

(13)Employer Deferrals:  Deferrals made by the Employer on a Member’s behalf pursuant to Section 3.2.

(14)Entry Date:  The first day of each Plan Year.

(15)Funds:  The investment funds designated from time to time for the deemed investment of Accounts pursuant to Article IV.

(16)Grandfathered Account:  An individual account for each Member to which is credited all amounts, if any, deferred under the Plan by or on behalf of such Member prior to the Effective Date plus all allocations of earnings on such amounts prior to the Effective Date.  From and after the Effective Date, a Member’s Grandfathered Account shall not be credited with any Compensation deferrals pursuant to Section 3.1 or any Employer Deferrals pursuant to Section 3.2, but such Account shall be adjusted to reflect such Account’s allocation of earnings and/or changes in value as provided in Section 3.3.

(17)Match Compensation:  Amounts equal to a Member’s Compensation plus amounts of base salary that a Member elects to defer pursuant to the Salary Deferral Plan.

(18)Member: Each individual who has been selected for participation in the Plan and who has become a Member pursuant to Article II.

(19)Plan:  The Forest Oil Corporation Executive Deferred Compensation Plan, as amended from time to time.

(20)Plan Year:  The twelve-consecutive month period commencing January 1 of each year.

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(21)Retirement Savings Plan:  The Retirement Savings Plan of Forest Oil Corporation, as amended from time to time.

(22)Salary Deferral Plan:  The Forest Oil Corporation Salary Deferral Deferred Compensation Plan.

(23)Termination of Service:  A Member’s separation from service with the Employer and its Affiliates within the meaning of section 409A(a)(2)(A)(i) of the Code (and applicable administrative guidance thereunder).

(24)Trust:  The trust, if any, established under the Trust Agreement.

(25)Trust Agreement:  The agreement, if any, entered into between the Company and the Trustee pursuant to Article IX.

(26)Trust Fund:  The funds and properties, if any, held pursuant to the provisions of the Trust Agreement, together with all income, profits and increments thereto.

(27)Trustee:  The trustee or trustees qualified and acting under the Trust Agreement at any time.

(28)Valuation Dates:  December 31, 2004 and, for the period beginning on the Effective Date through December 31, 2006, the last day of each calendar month.  From and after January 1, 2007, each calendar day shall be a Valuation Date.

1.2Number and Gender.  Wherever appropriate herein, words used in the singular shall be considered to include the plural and words used in the plural shall be considered to include the singular.  The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender.

1.3Headings.  The headings of Articles and Sections herein are included solely for convenience, and if there is any conflict between such headings and the text of the Plan, the text shall control.

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II.

Participation

2.1          Participation.  Prior to each Entry Date, the Committee, in its sole discretion, shall select and notify those management or highly compensated employees of the Employer who shall be eligible to become Members as of such Entry Date.  Any such eligible employee may become a Member on such Entry Date by executing and filing with the Committee, prior to such Entry Date, the form prescribed by the Committee.  Such form shall include, among other things prescribed by the Committee, the consent of such Member to be subject to all of the terms and provisions of the Plan including, without limitation, the Compensation deferral provisions set forth in Section 3.1.  Subject to the provisions of Section 2.2, a Member shall remain eligible to defer Compensation hereunder and receive an allocation of Employer Deferrals for each Plan Year following his initial year of participation in the Plan.  By participating in the Plan for a Plan Year that begins after December 31, 2006, a Member agrees that he shall not make any changes during such Plan Year to his deferral election with respect to Before-Tax Contributions for such Plan Year under the Retirement Savings Plan.

2.2          Cessation of Active Participation.  Notwithstanding any provision herein to the contrary, an individual who has become a Member of the Plan shall cease to be entitled to defer Compensation hereunder or receive an allocation of Employer Deferrals effective as of the Entry Date of any subsequent Plan Year designated by the Committee.  Any such Committee action shall be communicated to the affected individual prior to such Entry Date.  Further, an individual who has become a Member of the Plan may cancel his Compensation deferrals hereunder and his right to receive an allocation of Employer Deferrals, effective as of the Entry Date of any subsequent Plan Year, by executing and delivering to the Employer the form prescribed by the Committee prior to such Entry Date and within the time period prescribed by the Committee.  An individual described in the preceding provisions of this Section may again become entitled to defer Compensation hereunder and receive an allocation of Employer Deferrals beginning on any subsequent Entry Date selected by the Committee in its sole discretion.

2.3          Adopting Entities.  It is contemplated that other entities may adopt the Plan and thereby become an Employer.  Any such entity, whether or not presently existing, may become a party hereto by appropriate action of its officers without the need for approval of its board of directors or of the Committee or the Directors; provided, however, that such entity must be an Affiliate of the Company.  The provisions of the Plan shall apply separately and equally to each Employer and its employees in the same manner as is expressly provided for the Company and its employees, except that (a) the power to appoint or otherwise affect the Trustee and the power to amend or terminate the Plan or amend the Trust Agreement shall be exercised by the Committee alone and (b) the determination of whether a Change of Control has occurred shall be made based solely on the Company.  Any Employer may, by appropriate action of its officers without the need for approval of its board of directors (or noncorporate counterpart) or the Committee or the Directors, terminate its participation in the Plan effective immediately prior to the start of any subsequent Plan Year.  Moreover, the Committee may, in its discretion, terminate an Employer’s Plan participation effective immediately prior to the start of any subsequent Plan Year; provided, however, that if an Employer ceases to be an Affiliate of the Company, such

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Employer’s Plan participation may be terminated by the Committee effective immediately upon such cessation.

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III.

Account Credits and Allocations of Income or Loss

3.1Member Deferrals.

(a)For each payroll period in which a Member’s Before-Tax Contributions under the Retirement Savings Plan are limited as a result of the limitations contained in section 401(a)(17) and/or 402(g) of the Code, the Employer shall withhold from such Member’s Compensation for such payroll period and the Member shall defer hereunder the amount by which such Member’s Before-Tax Contributions to the Retirement Savings Plan are reduced solely because of the application of such limitations; provided, however, that (i) any amount withheld and deferred pursuant to this sentence shall be determined based upon the assumption that the Member’s election with respect to the percentage rate of his Before-Tax Contributions under the Retirement Savings Plan in effect during such payroll period is equal to the percentage rate of his Before-Tax Contributions in effect on the first day of the Plan Year in which such payroll period occurs and (ii) the limitation contained in section 402(g) of the Code for a Plan Year beginning after December 31, 2006, shall be determined by including in such limitation the “catch-up contributions”, if any, a Member is eligible to defer under the Retirement Savings Plan for such Plan Year pursuant to section 414(v) of the Code.  For purposes of determining the amount of a Member’s Compensation to be withheld and deferred under the preceding sentence (for each payroll period in which a Member’s Before-Tax Contributions under the Retirement Savings Plan are limited as described in the preceding sentence), the amount of the Member’s Compensation shall be deemed to be the Member’s Match Compensation.  Notwithstanding the foregoing, the maximum amount that may be withheld and deferred for any payroll period shall be the amount of 80% of the Member’s Compensation for such period.

(b)For each Plan Year in which a Member’s Before-Tax Contributions under the Retirement Savings Plan are limited as a result of the limitations contained in section 401(k)(3) and/or 415 of the Code, the Company shall withhold from such Member’s Compensation and the Member shall defer hereunder an amount equal to the reduction in such Member’s Before-Tax Contributions to the Retirement Savings Plan as a result solely of the application of such limitations.

(c)A Member’s compensation deferrals shall become effective as of the Entry Date which is coincident with or next following the date the Member executes and files with the Committee the form described in Section 2.1.  A Member’s compensation deferrals shall remain in force and effect unless and until such deferrals are to cease in accordance with the provisions of Section 2.2.  Compensation for a Plan Year not deferred by a Member pursuant to the above paragraphs shall be received by such Member in cash.  Compensation deferrals made by a Member shall be credited to such Member’s Deferral Account as of the date upon which the Compensation deferred would have been received by such Member in cash had no deferral been made pursuant to this Section 3.1.

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3.2Employer Deferrals.

(a)As of the last day of each calendar month, the Employer shall credit a Member’s Deferral Account with an amount which equals a specified percentage (the “Match Percentage”) of the deferrals made by such Member pursuant to Section 3.1(a) (determined without regard to the final sentence thereof, which provides that the maximum amount that may be withheld and deferred for any payroll period shall be the amount of 80% of the Member’s Compensation for such period) and Section 3.1(b) during such month that are not in excess of a specified percentage (the “Compensation Percentage”) of such Member’s Match Compensation for such month.  For purposes of the preceding sentence, the Match Percentage and the Compensation Percentage for a particular month shall be determined based on the formula used for determining the amount of Employer Matching Contributions under the Retirement Savings Plan for such month.  For example, if the Retirement Savings Plan provides that the Employer Matching Contributions for a month shall equal 100% of the Before-Tax Contributions that were made by a participant during such month that were not in excess of 7% of such participant’s compensation for such month, then the Match Percentage for such month shall equal 100%, and the Compensation Percentage for such month shall equal 7%.

(b)As of the last day of each Plan Year, the Employer shall credit a Member’s Deferral Account with an amount equal to the difference, if any, between (i) the Discretionary Contribution Percentage applicable to such Member for such Plan Year multiplied by such Member’s Compensation for such Plan Year, and (ii) the Employer Discretionary Contribution allocated to such Member’s Employer Contribution Account under the Retirement Savings Plan for such Plan Year.  Further, as of the last day of each Plan Year in which the Employer Matching Contributions and/or Employer Discretionary Contributions under the Retirement Savings Plan on behalf of a Member are limited as a result of the limitations contained in section 401(m)(2) and/or 415 of the Code, the Employer shall credit such Member’s Deferral Account with an amount equal to the reduction in such Member’s share of such contributions to the Retirement Savings Plan as a result solely of the application of such limitations.

(c)As of any date selected by the Committee, the Employer may credit a Member’s Deferral Account with such amount, if any, as the Committee shall determine in its sole discretion.  Such credits may be made on behalf of some Members but not others, and such credits may vary in amount among individual Members.

3.3Earnings Credits; Valuation of Accounts.

(a)As of each Valuation Date that occurs during the period beginning on the Effective Date and ending on December 31, 2005, the Employer shall credit each Account of a Member with an amount that equals 1% of the balance in such Account as of the next preceding Valuation Date.

(b)As of each Valuation Date that occurs during the period beginning on January 1, 2006, and ending on December 31, 2006, the Employer shall credit each Account of a Member with an amount that equals one-half of 1% of the balance in such Account as of the next preceding Valuation Date.

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(c)From and after January 1, 2007, all amounts credited to a Member’s Accounts shall be deemed invested as soon as administratively feasible among the Funds as provided in Article IV, and the balance of each Account shall reflect the result of daily pricing of the assets in which such Account is deemed invested from time to time until the time of distribution.

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IV.

Deemed Investment of Funds

The provisions of this Article IV shall be effective from and after January 1, 2007.

Each Member shall designate, in accordance with the procedures established from time to time by the Committee, the manner in which the amounts allocated to his Accounts shall be deemed to be invested from among the Funds made available from time to time for such purpose by the Committee.  Such Member may designate one of such Funds for the deemed investment of all the amounts allocated to his Accounts or he may split the deemed investment of the amounts allocated to his Accounts between such Funds in such increments as the Committee may prescribe.  If a Member fails to make a proper designation, then his Accounts shall be deemed to be invested in the Fund or Funds designated by the Committee from time to time in a uniform and nondiscriminatory manner.

A Member may change his deemed investment designation for future deferrals to be allocated to his Accounts.  Any such change shall be made in accordance with the procedures established by the Committee, and the frequency of such changes may be limited by the Committee.

A Member may elect to convert his deemed investment designation with respect to the amounts already allocated to his Accounts.  Any such conversion shall be made in accordance with the procedures established by the Committee, and the frequency of such conversions may be limited by the Committee.

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V.

In-Service Distributions

5.1          Domestic Relations Order.  The Plan shall permit such acceleration of the time or schedule of a payment to an individual other than a Member as may be necessary to fulfill a domestic relations order (as defined in section 414(p)(1)(B) of the Code).

5.2          No Other In-Service Distributions.  Except as provided in Section 5.1, in-service distributions shall not be permitted under the Plan.  Members shall not be permitted to make withdrawals from the Plan prior to a Termination of Service.  Members shall not, at any time, be permitted to borrow from the Trust Fund.  Following a Member’s Termination of Service, the amounts credited to such Member’s Accounts shall be payable to such Member in accordance with the provisions of Article VI.

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VI.

Termination Benefits

6.1Amount of Benefit.  Upon a Member’s Termination of Service, the Member, or, in the event of the Member’s death, the Member’s designated beneficiary (as determined under Section 6.3), shall become entitled to receive a benefit equal in value to the aggregate balance in the Member’s Accounts.  With respect to distributions made prior to January 1, 2007, the value of a Member’s Accounts shall be deemed to be equal to the balance in his Accounts as of the Valuation Date next preceding the date of the payment of the Member’s benefit pursuant to Section 6.2.  With respect to distributions made on or after January 1, 2007, the value of a Member’s Accounts shall be determined as of the Valuation Date next preceding the date of the payment of the Member’s benefit pursuant to Section 6.2.

6.2Time of Payment.

(a)Subject to the delayed payment restriction of Section 6.2(b), a Member’s benefit under Section 6.1 shall be paid in a single lump sum, cash payment on one of the following dates irrevocably elected by such Member in writing on the form prescribed by the Committee on or before the date he becomes a Member of the Plan:

(1)the first day of the second calendar month following the month in which the Member’s Termination of Service occurs; or

(2)February 1 of the year following the calendar year in which the Member’s Termination of Service occurs.

In the event such Member fails to timely elect the date upon which his benefit payment is to be made, such benefit payment shall be made at the time provided in clause (1) of the preceding sentence.

(b)With respect to a Member who is identified as a specified employee within the meaning of section 409A(a)(2)(B)(i) of the Code (and applicable administrative guidance thereunder), (1) payment of the portion of the Member’s Section 6.1 benefit that is attributable to his Grandfathered Account shall be paid at the time provided in Section 6.2(a) and (2) payment of the portion of the Member’s Section 6.1 benefit that is attributable to his Deferral Account shall not be paid until the later of (i) the time provided in Section 6.2(a) or (ii) the earlier of (A) the date that is six months after the Member’s Termination of Service or (B) the date of death of the Member.  For purposes of identifying a specified employee, the Plan’s identification date is December 31.

6.3Designation of Beneficiaries.

(a)Each Member shall have the right to designate the beneficiary or beneficiaries to receive payment of his benefit in the event of his death.  Each such designation shall be made by executing the beneficiary designation form prescribed by the Committee and

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filing same with the Committee.  Any such designation may be changed at any time by execution of a new designation in accordance with this Section.

(b)If no such designation is on file with the Committee at the time of the death of the Member or such designation is not effective for any reason as determined by the Committee, then the designated beneficiary or beneficiaries to receive such benefit shall be as follows:

(i)If a Member leaves a surviving spouse, his benefit shall be paid to such surviving spouse;

(ii)If a Member leaves no surviving spouse, his benefit shall be paid to such Member’s executor or administrator, or to his heirs at law if there is no administration of such Member’s estate.

6.4Accelerated Pay-Out of Certain Benefits.  The Plan shall permit such acceleration of the time or schedule of a payment to an individual other than a Member as may be necessary to fulfill a domestic relations order (as defined in section 414(p)(1)(B) of the Code).

6.5Payment of Benefits.  To the extent the Trust Fund has sufficient assets, the Trustee shall pay benefits to Members or their beneficiaries, except to the extent the Employer pays the benefits directly and provides adequate evidence of such payment to the Trustee.  To the extent the Trustee does not or cannot pay benefits out of the Trust Fund, the benefits shall be paid by the Employer.  Any benefit payments made to a Member or for his benefit pursuant to any provision of the Plan shall be debited to such Member’s Accounts.  All benefit payments pursuant to any provision of the Plan shall be made in cash to the fullest extent practicable.

6.6Unclaimed Benefits.  In the case of a benefit payable on behalf of a Member, if the Committee is unable to locate the Member or beneficiary to whom such benefit is payable, upon the Committee’s determination thereof, such benefit shall be forfeited to the Employer.  Notwithstanding the foregoing, if subsequent to any such forfeiture the Member or beneficiary to whom such benefit is payable makes a valid claim for such benefit, such forfeited benefit (without any adjustment for earnings or loss after the time of such forfeiture) shall be restored to the Plan by the Employer and paid in accordance with the Plan.

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VII.

Administration of the Plan

7.1The Committee.  The general administration of the Plan shall be vested in the Committee.

7.2Self-Interest of Members.  No member of the Committee shall have any right to vote or decide upon any matter relating solely to himself under the Plan or to vote in any case in which his individual right to claim any benefit under the Plan is particularly involved.  In any case in which a Committee member is so disqualified to act and the remaining members cannot agree, the Directors shall appoint a temporary substitute member to exercise all the powers of the disqualified member concerning the matter in which he is disqualified.

7.3Committee Powers and Duties.  The Committee shall supervise the administration and enforcement of the Plan according to the terms and provisions hereof and shall have all powers necessary to accomplish these purposes, including, but not by way of limitation, the right, power, and authority:

(a)To make rules, regulations, and bylaws for the administration of the Plan that are not inconsistent with the terms and provisions hereof, and to enforce the terms of the Plan and the rules and regulations promulgated thereunder by the Committee;

(b)To construe in its discretion all terms, provisions, conditions, and limitations of the Plan;

(c)To correct any defect or to supply any omission or to reconcile any inconsistency that may appear in the Plan in such manner and to such extent as it shall deem in its discretion expedient to effectuate the purposes of the Plan;

(d)To employ and compensate such accountants, attorneys, investment advisors, and other agents, employees, and independent contractors as the Committee may deem necessary or advisable for the proper and efficient administration of the Plan;

(e)To determine in its discretion all questions relating to eligibility;

(f)To determine whether and when a Member has incurred a Termination of Service, and the reason for such termination;

(g)To make a determination in its discretion as to the right of any person to a benefit under the Plan and to prescribe procedures to be followed by distributees in obtaining benefits hereunder;

(h)To receive and review reports from the Trustee as to the financial condition of the Trust Fund, including its receipts and disbursements; and

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(i)To establish or designate Funds as investment options as provided in Article IV.

7.4Claims Review.

(a)Definitions.  For purposes of this Section, the following terms, when capitalized, will be defined as follows:

(1)Act:  The Employee Retirement Income Security Act of 1974, as amended.

(2)Adverse Benefit Determination:  Any denial, reduction or termination of or failure to provide or make payment (in whole or in part) for a Plan benefit, including any denial, reduction, termination or failure to provide or make payment that is based on a determination of a Claimant’s eligibility to participate in the Plan.  Further, any invalidation of a claim for failure to comply with the claim submission procedure will be treated as an Adverse Benefit Determination.

(3)Benefits Administrator:  The Company’s Benefits Supervisor, or such other person or office to whom the Committee has delegated day-to-day Plan administration responsibilities and who, pursuant to such delegation, processes Plan benefit claims in the ordinary course.

(4)Claimant:  A Member or beneficiary or an authorized representative of such Member or beneficiary who has filed or desires to file a claim for a Plan benefit.

(b)Filing of Benefit Claim.  To file a benefit claim under the Plan, a Claimant must obtain from the Benefits Administrator the information and benefit election forms, if any, provided for in the Plan and otherwise follow the procedures established from time to time by the Committee or the Benefits Administrator for claiming Plan benefits.  If, after reviewing the information so provided, the Claimant needs additional information regarding his Plan benefits, he may obtain such information by submitting a written request to the Benefits Administrator describing the additional information needed.  A Claimant may only request a Plan benefit by fully completing and submitting to the Benefits Administrator the benefit election forms, if any, provided for in the Plan and otherwise following the procedures established from time to time by the Committee or the Benefits Administrator for claiming Plan benefits.

(c)Processing of Benefit Claim.  Upon receipt of a fully completed benefit claim from a Claimant, the Benefits Administrator shall determine if the Claimant’s right to the requested benefit, payable at the time or times and in the form requested, is clear and, if so, shall process such benefit claim without resort to the Committee.  If the Benefits Administrator determines that the Claimant’s right to the requested benefit, payable at the time or times and in the form requested, is not clear, it shall refer the benefit claim to the Committee for review and determination, which referral shall include:

(1)All materials submitted to the Benefits Administrator by the Claimant in connection with the claim;

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(2)A written description of why the Benefits Administrator was of the view that the Claimant’s right to the benefit, payable at the time or times and in the form requested, was not clear;

(3)A description of all Plan provisions pertaining to the benefit claim;

(4)Where appropriate, a summary as to whether such Plan provisions have in the past been consistently applied with respect to other similarly situated Claimants; and

(5)Such other information as may be helpful or relevant to the Committee in its consideration of the claim.

If the Claimant’s claim is referred to the Committee, the Claimant may examine any relevant document relating to his claim and may submit written comments or other information to the Committee to supplement his benefit claim.  Within 90 days of receipt of a fully completed benefit claim form from a Claimant that has been referred to the Committee by the Benefits Administrator (or such longer period as may be necessary due to unusual circumstances or to enable the Claimant to submit comments, but in any event not later than will permit the Committee sufficient time to fully and fairly consider the claim and make a determination within the time frame provided in Section 7.4(d)), the Committee shall consider the referral regarding the claim of the Claimant and make a decision as to whether it is to be approved, modified or denied.  If the claim is approved, the Committee shall direct the Benefits Administrator to process the approved claim as soon as administratively practicable.

(d)Notification of Adverse Benefit Determination.  In any case of an Adverse Benefit Determination of a claim for a Plan benefit, the Committee shall furnish written notice to the affected Claimant within a reasonable period of time but not later than 90 days after receipt of such claim for Plan benefits (or within 180 days if special circumstances necessitate an extension of the 90-day period and the Claimant is informed of such extension in writing within the 90-day period and is provided with an extension notice consisting of an explanation of the special circumstances requiring the extension of time and the date by which the benefit determination will be rendered).  Any notice that denies a benefit claim of a Claimant in whole or in part shall, in a manner calculated to be understood by the Claimant:

(1)State the specific reason or reasons for the Adverse Benefit Determination;

(2)Provide specific reference to pertinent Plan provisions on which the Adverse Benefit Determination is based;

(3)Describe any additional material or information necessary for the Claimant to perfect the claim and explain why such material or information is necessary; and

(4)Describe the Plan’s review procedures and the time limits applicable to such procedures, including a statement of the Claimant’s right to bring a civil action under section 502(a) of the Act following an Adverse Benefit Determination on review.

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(e)Review of Adverse Benefit Determination.  A Claimant has the right to have an Adverse Benefit Determination reviewed in accordance with the following claims review procedure:

(1)The Claimant must submit a written request for such review to the Committee not later than 60 days following receipt by the Claimant of the Adverse Benefit Determination notification;

(2)The Claimant shall have the opportunity to submit written comments, documents, records, and other information relating to the claim for benefits to the Committee;

(3)The Claimant shall have the right to have all comments, documents, records, and other information relating to the claim for benefits that have been submitted by the Claimant considered on review without regard to whether such comments, documents, records or information were considered in the initial benefit determination; and

(4)The Claimant shall have reasonable access to, and copies of, all documents, records, and other information relevant to the claim for benefits free of charge upon request, including (i) documents, records or other information relied upon for the benefit determination, (ii) documents, records or other information submitted, considered or generated without regard to whether such documents, records or other information were relied upon in making the benefit determination, and (iii) documents, records or other information that demonstrates compliance with the standard claims procedure.

The decision on review by the Committee will be binding and conclusive upon all persons, and the Claimant shall neither be required nor be permitted to pursue further appeals to the Committee.

(f)Notification of Benefit Determination on Review.  Notice of the Committee’s final benefit determination regarding an Adverse Benefit Determination will be furnished in writing or electronically to the Claimant after a full and fair review.  Notice of an Adverse Benefit Determination upon review will:

(1)State the specific reason or reasons for the Adverse Benefit Determination;

(2)Provide specific reference to pertinent Plan provisions on which the Adverse Benefit Determination is based;

(3)State that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant’s claim for benefits including (i) documents, records or other information relied upon for the benefit determination, (ii) documents, records or other information submitted, considered or generated without regard to whether such documents, records or other information were relied upon in making the benefit

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determination, and (iii) documents, records or other information that demonstrates compliance with the standard claims procedure; and

(4)Describe the Claimant’s right to bring an action under section 502(a) of the Act.

The Committee shall notify a Claimant of its determination on review with respect to the Adverse Benefit Determination of the Claimant within a reasonable period of time but not later than 60 days after the receipt of the Claimant’s request for review unless the Committee determines that special circumstances require an extension of time for processing the review of the Adverse Benefit Determination.  If the Committee determines that such extension of time is required, written notice of the extension (which shall indicate the special circumstances requiring the extension and the date by which the Committee expects to render the determination on review) shall be furnished to the Claimant prior to the termination of the initial 60-day review period.  In no event shall such extension exceed a period of 60 days from the end of the initial 60-day review period.  In the event such extension is due to the Claimant’s failure to submit necessary information, the period for making the determination on a review will be tolled from the date on which the notification of the extension is sent to the Claimant until the date on which the Claimant responds to the request for additional information.

(g)Exhaustion of Administrative Remedies.  Completion of the claims procedures described in this Section will be a condition precedent to the commencement of any legal or equitable action in connection with a claim for benefits under the Plan by a Claimant or by any other person or entity claiming rights individually or through a Claimant; provided, however, that the Committee may, in its sole discretion, waive compliance with such claims procedures as a condition precedent to any such action.

(h)Payment of Benefits.  If the Benefits Administrator or Committee determines that a Claimant is entitled to a benefit hereunder, payment of such benefit will be made to such Claimant (or commence, as applicable) as soon as administratively practicable after the date the Benefits Administrator or Committee determines that such Claimant is entitled to such benefit or on such other date as may be established pursuant to the Plan provisions.

(i)Authorized Representatives.  An authorized representative may act on behalf of a Claimant in pursuing a benefit claim or an appeal of an Adverse Benefit Determination.  An individual or entity will only be determined to be a Claimant’s authorized representative for such purposes if the Claimant has provided the Committee with a written statement identifying such individual or entity as his authorized representative and describing the scope of the authority of such authorized representative.  In the event a Claimant identifies an individual or entity as his authorized representative in writing to the Committee but fails to describe the scope of the authority of such authorized representative, the Committee shall assume that such authorized representative has full powers to act with respect to all matters pertaining to the Claimant’s benefit claim under the Plan or appeal of an Adverse Benefit Determination with respect to such benefit claim.

7.5Employer to Supply Information.  The Employer shall supply full and timely information to the Committee, including, but not limited to, information relating to each

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Member’s Compensation, age, retirement, death, or other cause of Termination of Service and such other pertinent facts as the Committee may require.  The Employer shall advise the Trustee of such of the foregoing facts as are deemed necessary for the Trustee to carry out the Trustee’s duties under the Plan and the Trust Agreement.  When making a determination in connection with the Plan, the Committee shall be entitled to rely upon the aforesaid information furnished by the Employer.

7.6Indemnity.  To the extent permitted by applicable law, the Company shall indemnify and save harmless the Directors and each member of the Committee against any and all expenses, liabilities and claims (including legal fees incurred to defend against such liabilities and claims) arising out of their discharge in good faith of responsibilities under or incident to the Plan.  Expenses and liabilities arising out of willful misconduct shall not be covered under this indemnity.  This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, as such indemnities are permitted under applicable law.

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VIII.

Administration of Funds

8.1          Payment of Expenses.  All expenses incident to the administration of the Plan and Trust, including but not limited to, legal, accounting, Trustee fees, and expenses of the Committee, may be paid by the Employer and, if not paid by the Employer, shall be paid by the Trustee from the Trust Fund, if any.

8.2          Trust Fund Property.  All income, profits, recoveries, contributions, forfeitures and any and all moneys, securities and properties of any kind at any time received or held by the Trustee, if any, shall be held for investment purposes as a commingled Trust Fund pursuant to the terms of the Trust Agreement.  The Committee shall maintain one or more Accounts in the name of each Member, but the maintenance of an Account designated as the Account of a Member shall not mean that such Member shall have a greater or lesser interest than that due him by operation of the Plan and shall not be considered as segregating any funds or property from any other funds or property contained in the commingled fund.  No Member shall have any title to any specific asset in the Trust Fund, if any.

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IX.

Nature of the Plan

The Employer intends and desires by the adoption of the Plan to recognize the value to the Employer of the past and present services of employees covered by the Plan and to encourage and assure their continued service with the Employer by making more adequate provision for their future retirement security.  The establishment of the Plan is, in part, made necessary by certain benefit limitations which are imposed on the Retirement Savings Plan by the Code.  The Plan is intended to constitute an unfunded, unsecured plan of deferred compensation for a select group of management or highly compensated employees of the Employer.  Plan benefits herein provided are a contractual obligation of the Employer and shall be paid out of the Employer’s general assets.  Nevertheless, subject to the terms hereof and of the Trust Agreement, the Employer may transfer money or other property to the Trustee to provide Plan benefits hereunder, and the Trustee shall pay Plan benefits to Members and their beneficiaries out of the Trust Fund.

The Committee, in its sole discretion, may establish the Trust and direct the Employer to enter into the Trust Agreement.  Notwithstanding the foregoing, immediately prior to the occurrence of a Change of Control, the Employer shall enter into the Trust Agreement and shall fund the Trust with money or other property having an aggregate value equal to not less than the aggregate balance in the Accounts maintained under the Plan on behalf of all Members and beneficiaries (determined as of the day immediately preceding the date of such funding of the Trust); provided, however, that the Employer shall not be required to take the actions described in this sentence if such actions would result in adverse tax consequences to one or more of the Members pursuant to Section 409A(b) of the Code.  If the Employer enters into the Trust Agreement, then the Employer shall remain the owner of all assets in the Trust Fund and the assets shall be subject to the claims of the Employer’s creditors if the Employer ever becomes insolvent.  For purposes hereof, the Employer shall be considered “insolvent” if (a) the Employer is unable to pay its debts as such debts become due or (b) the Employer is subject to a pending proceeding as a debtor under the United Sates Bankruptcy Code (or any successor federal statute).  The chief executive officer of the Employer and its board of directors shall have the duty to inform the Trustee in writing if the Employer becomes insolvent. Such notice given under the preceding sentence by any party shall satisfy all of the parties’ duty to give notice.  When so informed, the Trustee shall suspend payments to the Members and hold the assets for the benefit of the Employer’s general creditors.  If the Trustee receives a written allegation that the Employer is insolvent, the Trustee shall suspend payments to the Members and hold the Trust Fund for the benefit of the Employer’s general creditors, and shall determine in the manner specified in the Trust Agreement whether the Employer is insolvent.  If the Trustee determines that the Employer is not insolvent, the Trustee shall resume payments to the Members.  No Member or beneficiary shall have any preferred claim to, or any beneficial ownership interest in, any assets of the Trust Fund, and, upon commencement of participation in the Plan, each Member shall have agreed to waive his priority credit position, if any, under applicable state law with respect to the assets of the Trust Fund.

IX-1

X.

Miscellaneous

10.1        Not Contract of Employment.  The adoption and maintenance of the Plan shall not be deemed to be a contract between the Employer and any person or to be consideration for the employment of any person.  Nothing herein contained shall be deemed to (a) give any person the right to be retained in the employ of the Employer, (b) restrict the right of the Employer to discharge any person at any time, (c) give the Employer the right to require any person to remain in the employ of the Employer, or (d) restrict any person’s right to terminate his employment at any time.

10.2        Alienation of Interest Forbidden.  The interest of a Member or his beneficiary or beneficiaries hereunder may not be sold, transferred, assigned, or encumbered in any manner, either voluntarily or involuntarily, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be null and void; neither shall the benefits hereunder be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person to whom such benefits or funds are payable, nor shall they be an asset in bankruptcy or subject to garnishment, attachment or other legal or equitable proceedings.  Notwithstanding the foregoing, the Plan shall comply with the terms of a domestic relations order as provided in Sections 5.1 and 6.4.

10.3        Withholding.  All Compensation deferrals and Employer Deferrals and payments provided for hereunder shall be subject to applicable withholding and other deductions as shall be required of the Employer under any applicable local, state or federal law.

10.4        Amendment and Termination. The Committee may from time to time, in its discretion, amend, in whole or in part, any or all of the provisions of the Plan; provided, however, that no amendment may be made that would impair the rights of a Member with respect to amounts already allocated to his Accounts.  The Committee may terminate the Plan at any time.  In the event that the Plan is terminated, the balance in a Member’s Accounts shall be paid to such Member or his designated beneficiary at the time specified by the Committee in a single lump sum, cash payment in full satisfaction of all of such Member’s or beneficiary’s benefits hereunder.  Notwithstanding the preceding provisions of this Section, (a) to the extent required by section 409A of the Code, the Plan may not be amended or terminated in a manner that would give rise to an impermissible acceleration of the time or form of a payment of a benefit under the Plan pursuant to section 409A(a)(3) of the Code and any regulations or guidance issued thereunder and (b) if the Committee determines that the terms of the Plan do not, in whole or in part, satisfy the requirements of section 409A of the Code, then the Committee may, in its sole discretion, amend the Plan (without obtaining the consent of any Member) in such manner as the Committee deems appropriate to comply with section 409A of the Code and any regulations or guidance issued thereunder.

10.5        Severability.  If any provision of the Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions hereof; instead, each

X-1

provision shall be fully severable and the Plan shall be construed and enforced as if said illegal or invalid provision had never been included herein.

10.6        Guaranty.  Notwithstanding any provisions of the Plan to the contrary, in the event any Affiliate of the Company that adopts the Plan pursuant to Section 2.3 hereof fails to make payment of the benefits due under the Plan on behalf of its Members, whether directly or through the Trust, the Company shall, during the period that such entity is an Affiliate of the Company, be liable for and shall make payment of such benefits due as a guarantor of such entity’s obligations hereunder.  The guaranty obligations provided herein shall (a) be satisfied directly and not through the Trust and (b) terminate with respect to a particular entity as of the date such entity ceases to be an Affiliate of the Company.

10.7        Governing Laws.  All provisions of the Plan shall be construed in accordance with the laws of Colorado except to the extent preempted by federal law.

X-2

EXECUTED this 30th day of November, 2006.

FOREST OIL CORPORATION
By:	/s/ CYRUS D. MARTER IV
	Name:	Cyrus D. Marter IV
	Title:	Vice President, General Counsel and Secretary

iii

EX-21.1

Exhibit 21.1

FOREST OIL CORPORATION

List of Subsidiaries of the Registrant

As of December 31, 2006

	State of Incorporation
U.S. Subsidiaries
Forest Alaska Operating LLC	Delaware
Forest Oil Panhandle Resources L.P.	Texas
Forest Oil Permian Corporation	Delaware
Canadian Subsidiary
Canadian Forest Oil Ltd.	Alberta

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in (i) the Registration Statement (No. 333-48440) on Form S-8 of Forest Oil Corporation — 1992 Stock Option Plan of Forest Oil Corporation, (ii) the Registration Statement (No. 333-49376) on Form S-8 of Forest Oil Corporation — Forcenergy 1999 Stock Plan filed as Post Effective Amendment No. 1 to the Registration Statement of Forest Oil Corporation on Form S-4, (iii) the Registration Statements (Nos. 333-05497 and 333-89174) on Form S-8 of Forest Oil Corporation — Stock Incentive Plan, (iv) the Registration Statement (Nos. 333-81529 and 333-127873) on Form S-8 of Forest Oil Corporation — Employee Stock Purchase Plan, (v) the Registration Statements (Nos. 333-62408 and 333-108267) on Form S-8 of Forest Oil Corporation — 2001 Stock Incentive Plan, and (vi) the Registration Statement (No. 333-108271) on Form S-8 of Forest Oil Corporation — Employee Benefit Plan, of our report dated February 27, 2007 with respect to the consolidated balance sheets of Forest Oil Corporation and subsidiaries as of December 31, 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended, Forest Oil Corporation management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, and the effectiveness of internal control over financial reporting as of December 31, 2006 of Forest Oil Corporation, included in this annual report on Form 10-K for the year ended December 31, 2006.

Ernst and Young

Denver, Colorado
February 27,  2007

EX-23.2

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Forest Oil Corporation:

We consent to the incorporation by reference in (i) the Registration Statement (No. 333-48440) on Form S-8 of Forest Oil Corporation — 1992 Stock Option Plan of Forest Oil Corporation, (ii) the Registration Statement (No. 333-49376) on Form S-8 of Forest Oil Corporation — Forcenergy 1999 Stock Plan filed as Post Effective Amendment No. 1 to the Registration Statement of Forest Oil Corporation on Form S-4, (iii) the Registration Statements (Nos. 333-05497 and 333-89174) on Form S-8 of Forest Oil Corporation — Stock Incentive Plan, (iv) the Registration Statements (Nos. 333-81529 and 333-127873) on Form S-8 of Forest Oil Corporation — Employee Stock Purchase Plan, (v) the Registration Statements (Nos. 333-62408 and 333-108267) on Form S-8 of Forest Oil Corporation — 2001 Stock Incentive Plan, and (vi) the Registration Statement (No. 333-108271) on Form S-8 of Forest Oil Corporation — Employee Benefit Plan, of our report dated March 13, 2006 with respect to the consolidated balance sheet of Forest Oil Corporation and subsidiaries as of December 31, 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2005, which reports appear in the December 31, 2006 annual report on Form 10-K of Forest Oil Corporation.

KPMG LLP

Denver, Colorado
February 27,  2007

EX-23.3

Exhibit 23.3

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS

We hereby consent to the use of our name and the information regarding our review of Forest’s estimates of reserves in the section Independent Audit of Reserves in the Annual Report on Form 10-K of Forest Oil Corporation (the “Company”) for the year ended December 31, 2006, and to the incorporation by reference thereof into the Company’s Registration Statements as follows:   (i) the Registration Statement (No. 333-48440) on Form S-8 of Forest Oil Corporation — 1992 Stock Option Plan of Forest Oil Corporation, (ii) the Registration Statement (No. 333-49376) on Form S-8 of Forest Oil Corporation-Forcenergy 1999 Stock Plan filed as Post Effective Amendment No. 1 to the Registration Statement of Forest Oil Corporation on Form S-4, (iii) the Registration Statements (Nos. 333-05497 and 333-89174) on Form S-8 of Forest Oil Corporation — Stock Incentive Plan, (iv) the Registration Statements (Nos. 333-81529 and 333-127873) on Form S-8 of Forest Oil Corporation — Employee Stock Purchase Plan, (v) the Registration Statements (Nos. 333-62408 and  333-108267) on Form S-8 of Forest Oil Corporation — 2001 Stock Incentive Plan, and (vi) the Registration Statement (No. 333-108271) on Form S-8 of Forest Oil Corporation — Employee Benefit Plan.

DEGOLYER AND MACNAUGHTON

February 23, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, H. Craig Clark, certify that:

1.I have reviewed this annual report on Form 10-K of Forest Oil Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ H. CRAIG CLARK
February 28, 2007	H. Craig Clark
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, David H. Keyte, certify that:

1.I have reviewed this annual report on Form 10-K of Forest Oil Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ DAVID H. KEYTE
February 28, 2007	David H. Keyte
	Executive Vice President and
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF

CHIEF EXECUTIVE OFFICER

OF FOREST OIL CORPORATION

PURSUANT TO 18 U.S.C. SECTION 1350

Pursuant to 18 U.S.C. Section 1350 and in connection with the accompanying report on Form 10-K for the year ended December 31, 2006 that is being filed concurrently with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of Forest Oil Corporation (the “Company”) hereby certifies that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ H. CRAIG CLARK
February 28, 2007	H. Craig Clark
	President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF

CHIEF FINANCIAL OFFICER

OF FOREST OIL CORPORATION

PURSUANT TO 18 U.S.C. SECTION 1350

Pursuant to 18 U.S.C. Section 1350 and in connection with the accompanying report on Form 10-K for the year ended December 31, 2006 that is being filed concurrently with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of Forest Oil Corporation (the “Company”) hereby certifies that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ DAVID H. KEYTE
February 28, 2007	David H. Keyte
	Chief Financial Officer