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Recent withdrawal of the U.S. military from the Republic of Panama has exposed 64,000 ha of lowland forest in the former Canal Zone to possible development. The forests form a 16-km-wide strip reaching 65 km from the Caribbean Sea to the Pacific Ocean and function as the water supply for the canal and as home to one of the world's richest terrestrial biotas. We present an overview of the distribution of bird diversity in the forests of the canal area based on 10 years of inventories. A total of 498 terrestrial species has been recorded, of which 177 occur only in lowland forests. More species reside in Caribbean- than in Pacific-slope forests and in the largest forest tracts. The Panamanian government, recognizing the importance of the forests for protection of biodiversity and for proper functioning of the canal, has created two national parks and a national monument in the canal area. One large park, Soberania National Park, currently contains 92% of the region's forest-dwelling species. Two large tracts on the Caribbean coast, the Achiote Road forest and the Fort Sherman forest, are not designated as national parks but are recognized as important forest areas. Those two forests harbor species found nowhere else in the canal corridor. Extensive fragmentation, disconnection of forested corridors between foothills and lowlands, and anthropogenic degradation of forests near towns have altered regional bird-community dynamics. Some dynamics occur on large spatial scales, such as the poorly understood movements of elevational and transisthmian migrants. Long-term maintenance of bird species diversity in the canal area will require preservation of the large forest tracts and reestablishment of a forested connection from the canal corridor lowlands to the Chagres lowlands and foothills in the east. Such conservation activities will be challenging to execute given the region's growing human population and desires for a stronger national economy. We recommend protection of remaining forests and active enforcement of protection laws to reduce hunting and further intrusions. [ABSTRACT FROM AUTHOR]