SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                    FORM 20-F

[   ]   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THE
        SECURITIES EXCHANGE ACT OF 1934

or

[ X ]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                   For The Fiscal Year Ended December 31, 2004
                                       or

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

                        Commission file number 333-112898

                       MILLAR WESTERN FOREST PRODUCTS LTD.
           (Exact Name of the Registrant as Specified in its Charter)

                                 Alberta, Canada
                 (Jurisdiction of Incorporation or Organization)

                 16640 - 111 Avenue, Edmonton, Alberta, T5M 2S5
                    (Address of Principal Executive Offices)

     Securities registered or to be registered pursuant to
     Section 12(b) of the Act:                                      NONE

     Securities registered or to be registered pursuant to
     Section 12(g) of the Act:                                      NONE

     Securities for which there is a reporting obligation
     pursuant to Section 15(d) of the Act:                          7.75% Senior
                                                                    Notes due
                                                                    2013

     Indicate the number of outstanding shares of each of the       15,000,001
     issuer's classes of capital or common stock as of the          Common
     close of the period covered by the annual report.              Shares

     Indicate by check mark whether the Company: (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 Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                           YES   X    NO
                                ---       ---

     Indicate by check mark which financial statement item the Company has
elected to follow.

                           Item  17   Item 18   X
                                ---            ---

     Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                                 NOT APPLICABLE

<PAGE>

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                              Page
<S>                                                                                                            <C>
GLOSSARY OF CERTAIN TERMS AND DEFINITIONS........................................................................4

PART I...........................................................................................................6

        ITEM 1:     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS........................................7

        ITEM 2:     OFFER STATISTICS AND EXPECTED TIMETABLE......................................................7

        ITEM 3:     KEY INFORMATION..............................................................................7

        ITEM 4:     INFORMATION ON THE COMPANY..................................................................14

        ITEM 5:     OPERATING AND FINANCIAL REVIEW AND PROSPECTS................................................20

        ITEM 6:     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..................................................29

        ITEM 7:     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...........................................32

        ITEM 8:     FINANCIAL INFORMATION.......................................................................34

        ITEM 9:     THE OFFER AND LISTING.......................................................................35

        ITEM 10:    ADDITIONAL INFORMATION......................................................................35

        ITEM 11:    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................38

        ITEM 12:    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES......................................39

PART II.........................................................................................................39

        ITEM 13:    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.............................................39

        ITEM 14:    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS................39

        ITEM 15:    CONTROLS AND PROCEDURES.....................................................................39

        ITEM 16A:   AUDIT COMMITTEE FINANCIAL EXPERT............................................................40

        ITEM 16B:   CODE OF ETHICS..............................................................................40

        ITEM 16C:   PRINCIPAL ACCOUNTANT FEES AND SERVICES......................................................40

PART III........................................................................................................41

        ITEM 17:    FINANCIAL STATEMENTS........................................................................41

        ITEM 18:    FINANCIAL STATEMENTS........................................................................41

        ITEM 19:    EXHIBITS....................................................................................41
</TABLE>

                                       2
<PAGE>

As used in this annual report on Form 20-F, unless the context otherwise
indicates, the term "Millar Western" or the "Company" means Millar Western
Forest Products Ltd.

                            EXCHANGE RATE INFORMATION

Unless otherwise indicated, all monetary references herein are denominated in
Canadian dollars; references to "dollars" or "$" are to Canadian dollars and
references to "US$" or "U.S. dollars" are to United States dollars. As at
December 31, 2004, the inverse of the noon buying rate as quoted by the Federal
Reserve Bank of New York was $1.00 equals US$0.8310. (See Item 3 for further
exchange rate information to U.S. currency.) Except as otherwise indicated,
financial statements of, and information regarding, Millar Western are presented
in Canadian dollars.

                 STATEMENT REGARDING FORWARD LOOKING INFORMATION

Certain statements in this annual report under Item 4: Information on the
Company and Item 5: Operating and Financial Review and Prospects and elsewhere
in this annual report are "forward-looking statements" within the meaning of the
United States Private Securities Litigation Reform Act of 1995. These
forward-looking statements are not based on historical facts but, rather, on our
current expectations and our projections about future events, including our
current expectations regarding:

     o    the future demand for, and sales volumes of, our lumber and pulp
          products;

     o    future production volumes, efficiencies and operating costs;

     o    increases or decreases in the prices of our products;

     o    our future stability and growth prospects;

     o    our business strategies, the measures to implement those strategies
          and the benefits to be derived therefrom;

     o    our future profitability and capital needs, including capital
          expenditures;

     o    the outlook for and other future developments in our affairs or in the
          industries in which we participate; and

     o    the effect on us of new accounting releases.

These forward-looking statements generally can be identified by the use of
statements that include words such as "believe", "expect", "anticipate",
"intend", "plan", "likely", "will", "predicts", "estimates", "forecasts" or
other similar words or phrases. Similarly, statements that describe our
objectives, plans or goals are or may be forward-looking statements. These
forward-looking statements are subject to risks, uncertainties and other factors
that could cause our actual results to differ materially from the future results
expressed or implied by the forward-looking statements. These risks and
uncertainties are described under "Risk Factors".

Any written or oral forward-looking statements made by us or on our behalf are
subject to these factors. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this annual report on Form
20-F may not occur. Actual results could differ materially from those expressed
in any of our forward-looking statements. Other unknown or unpredictable factors
also could harm our future results. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements included in this annual report on
Form 20-F are made only as at the date of this annual report on Form 20-F. We do
not intend, and do not assume any obligation, to update these forward-looking
statements, except as required by law.

                                       3
<PAGE>

                    GLOSSARY OF CERTAIN TERMS AND DEFINITIONS

The following terms have the following meanings in this annual report on Form
20-F:

"AAC" means annual allowable cut, being the amount of timber that may be
harvested in any one year as stipulated in the pertinent forest management plan
for a Forest Management Unit as approved by the Minister of Sustainable Resource
Development of Alberta;

"ADMT" means air dried metric tonne, a unit of measurement of pulp volume, and
"MADMT" means one thousand air dried metric tonnes;

"BCTMP" means bleached chemi-thermo-mechanical pulp, which is pulp produced in a
process that uses mild chemicals, heat and mechanical action to separate
cellulose fibers;

"BHKP" means bleached hardwood kraft pulp;

"BSKP" means bleached softwood kraft pulp;

"coniferous" means a type of tree which is cone-bearing and has needles or
scale-like leaves, such as pine, spruce or fir;

"Coniferous Timber Quota" means the right to harvest a percentage share of the
AAC of coniferous timber within a Forest Management Unit, allocated on a 20-year
basis and renewable thereafter for additional 20-year periods;

"CTMP" means chemi-thermo-mechanical pulp;

"deciduous" means a type of tree with broad leaves that usually shed annually,
such as aspen;

"Deciduous Timber Allocation" means the right to harvest a specified volume of
deciduous timber within a designated area as approved by the Alberta Minister of
Sustainable Resource Development, allocated on a 20-year basis and renewable
thereafter for additional 20-year periods;

"dimension lumber" means standard commodity lumber, ranging, in the case of
Millar Western, from 1" x 3"s to 2" x 10"s in varying lengths, usually 8' to
16';

"FMA" means a forest management agreement between the Alberta Minister of
Sustainable Resource Development and a forest company, generally having a term
of 20 years and renewable thereafter for additional 20-year periods, and
providing rights to manage, establish, grow, harvest and remove timber in a
specified area;

"foot board measure" or "FBM" means a measure of lumber volume equivalent to a
one foot square board one inch thick; "MFBM" is one thousand board feet; "MMFBM"
is one million board feet; and "BFBM" is one billion board feet;

"Forest Management Unit" means an area of forest land designated by the Minister
of Sustainable Resource Development of Alberta as a management unit;

"hardwood" is wood obtained from deciduous species of trees, such as aspen;

"ISO" means the International Organization for Standardization, a worldwide
federation of national standards bodies from approximately 120 countries. "ISO
9002" is an international set of standards that provide a common approach for
documenting and maintaining a quality management system. "ISO 14001" is an
international set of standards that provide a common approach for documenting
and maintaining an environmental management system;

"kraft pulp" means pulp produced in a process that uses strong chemicals to
separate cellulose fibers;

                                       4
<PAGE>

"market pulp" means that portion of pulp production in excess of internal
requirements, which is sold in open competition with other producers;

"Meadow Lake Pulp Limited Partnership" means the partnership agreement between
Millar Western Industries Ltd. and its affiliate and the Government of
Saskatchewan, whereby Industries and its affiliate hold a 50% interest in the
Meadow Lake pulp mill and the Government of Saskatchewan holds a 50% interest;

"Millar Western FMA" means the FMA between the Minister of Sustainable Resource
Development of Alberta and the Company commencing May 14, 1997, in effect for 20
years and renewable thereafter for additional 20-year periods, pursuant to which
the Minister has granted rights to the Company to manage, establish, grow,
harvest and remove timber on a perpetual sustained yield basis in the Millar
Western forest management area;

"Millar Western forest management area" means the tract of forested land over
which the Company has been given rights to manage, establish, grow, harvest and
remove timber on a perpetual sustained yield basis for the term of the Millar
Western FMA;

"MSR" means machine stress rated, which is a rating given to lumber in North
America that describes its load bearing capability;

"NBHKP" means northern bleached hardwood kraft pulp;

"NBSKP" means northern bleached softwood kraft pulp;

"perpetual sustained yield" means the yield of timber that a forest can produce
continuously at a given intensity of management without impairment of the
productivity of the land;

"random length" means dimension lumber of varying lengths but greater than eight
feet, trimmed in two-foot increments;

"softwood" is wood obtained from coniferous species of trees, such as spruce,
pine or fir;

"SPF" means spruce, pine and balsam fir, a major category of softwood lumber;

"TMP" means thermo-mechanical pulp; and

"wood chips" means pieces of wood approximately one inch square by one-quarter
inch thick resulting from the cutting of logs in chippers or as a by-product of
the sawmill lumber manufacturing process and which are typically used as a
feedstock in the pulp making process.

                                       5
<PAGE>

                                     PART I
                                     ------

ITEM 1:  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.

Not applicable.

ITEM 2:  OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3:  KEY INFORMATION

        A.     Selected Financial Data

You should read the selected historical financial data set forth below in
conjunction with our financial statements and the related notes and other
information included elsewhere in this annual report on Form 20-F. The selected
historical financial data for the years ended and as at December 31, 2000, 2001,
2002, 2003 and 2004 are derived from our audited financial statements.

We prepare our financial statements in accordance with Canadian GAAP, which
differs in certain respects from U.S. GAAP. For a discussion of the principal
differences between Canadian GAAP and U.S. GAAP as they pertain to us, see note
21 to our audited financial statements included elsewhere in this annual report
on Form 20-F.

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                     -----------------------------------------------------------------
                                                       2000(1)       2001(1)       2002          2003         2004
                                                     ----------    -----------  ----------    ----------   -----------
                                                                              (in thousands)

Statements of earnings data:
Canadian GAAP
<S>                                                  <C>           <C>          <C>           <C>          <C>
Revenue(2)......................................     $  344,881    $  248,825   $  277,830    $  317,297   $  345,968
Cost of products sold...........................        199,410       161,863      177,354       197,072      212,451
Freight and other distribution costs (2)........         47,310        35,679       40,921        46,934       47,856
Countervailing and anti-dumping duties (2)......             --         2,268        2,944        11,811       13,657
Depreciation and amortization...................         15,807        16,184       16,731        16,601       15,119
General and administration......................         12,498        15,424       13,391        12,978       11,514
Severance costs.................................             --            --        2,298            --           --
Employees' profit sharing.......................          4,358            --           --           325        2,504
                                                     ----------    -----------  ----------    ----------   -----------
Operating earnings..............................         65,498        17,407       24,191        31,576       42,867
Financing expenses(3)...........................        (25,596)      (25,266)     (26,153)      (28,672)     (20,378)
Refinancing charges(4)..........................             --            --           --       (14,965)          --
Unrealized exchange gain (loss) on debt.........         (6,960)      (15,521)       2,208        47,768       15,751
Other (expense) income(5).......................         (2,664)       (4,415)         707         1,490           45
                                                     ----------    -----------  ----------    ----------   -----------
Earnings (loss) before income taxes.............         30,278       (27,795)         953        37,197       38,285
Income taxes (recovery).........................         14,279        (4,325)         445         1,635       10,032
                                                     ----------    -----------  ----------    ----------   -----------
Net earnings (loss).............................     $   15,999    $  (23,470)  $      508    $   35,562   $   28,253
                                                     ==========    ===========  ==========    ==========   ==========
U.S. GAAP
Operating earnings..............................     $   62,798    $   17,407   $   24,191    $   31,576   $   42,867
Net earnings (loss).............................     $   18,206    $  (28,038)  $    2,087    $   39,452   $   23,831

Other data:
Canadian GAAP
Cash provided by (used in):
 Operating activities...........................     $   50,794    $   20,649   $   23,136    $   12,452   $   43,250
 Investing activities...........................     $  (51,741)   $  (22,699)  $   (3,071)   $  (14,843)  $  (19,592)
 Financing activities...........................     $       --    $       --   $     (932)   $   39,687   $       --
</TABLE>

                                       6
<PAGE>

<TABLE>
<CAPTION>
                                                                            As at December 31,
                                                     -----------------------------------------------------------------
                                                      2000 (1)     2001 (1)      2002 (1)      2003 (1)       2004
                                                     ----------    -----------  ----------    ----------   -----------
                                                                              (in thousands)
Balance sheets data:
Canadian GAAP
<S>                                                  <C>          <C>           <C>           <C>          <C>
Cash.............................................    $   17,922   $   15,872    $   35,005    $   72,301   $   95,959
Total assets.....................................    $  331,165   $  316,678    $  321,640    $  345,697   $  362,757
Short-term debt..................................    $       --   $       --    $       --    $       --   $       --
Long-term debt, including current portion........    $  239,279   $  254,800    $  252,592    $  244,511   $  228,760
Shareholder's equity.............................    $   24,426   $    2,036    $    2,544    $   38,106   $   66,359
U.S. GAAP
Total assets.....................................    $  330,922   $  317,257    $  321,352    $  350,122   $  366,837
Shareholder's equity.............................    $   29,027   $      989    $    3,076    $   42,528   $   69,006
</TABLE>
____________
(1)  Comparative statement of earnings and balance sheet data have been restated
     to reflect the change in accounting policy with respect to unrealized
     foreign exchange gains or losses on the translation of long-term debt as
     well as the accounting for asset retirement obligations. See note 2 to our
     audited financial statements included elsewhere in this annual report on
     Form 20-F.

(2)  Freight and other distribution costs and countervailing and anti-dumping
     duties are separately presented as operating costs in the statement of
     earnings. Previously, these expenses were recorded as selling expenses that
     were deducted from gross revenue in accordance with industry practice.
     Accordingly, the presentation of prior periods' has been reclassified.

(3)  Financing expense consists of interest expense, amortization of deferred
     financing costs and foreign exchange gains or losses on U.S. dollar cash
     and working capital. See note 13 to our audited consolidated financial
     statements included elsewhere in this annual report on Form 20-F.

(4)  Refinancing charges relate to the repurchase and redemption of US$160
     million aggregate principal amount of our 9 7/8% Senior Notes due 2008. See
     note 14 to our audited consolidated financial statements included elsewhere
     in this annual report on Form 20-F.

(5)  Other (expense) income includes the gain or loss on disposal of property,
     plant and equipment, the provision for severance costs related to the new
     sawmill project and unrealized gain or loss on contracts. See note 18 to
     our audited financial statements included elsewhere in this annual report
     on Form 20-F.

                                       7
<PAGE>

EXCHANGE RATE DATA

The following tables set forth certain exchange rates based on the noon buying
rate in the city of New York for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate"). Such rates are set forth as U.S. dollars per $1.00 and are
the inverse of rates quoted by the Federal Reserve Bank of New York for Canadian
dollars per US$1.00. On December 31, 2004 the inverse of the Noon Buying Rate
was $1.00 equals US$0.8310.

<TABLE>
<CAPTION>

                                                            Years Ended December 31,
                                                            ------------------------
                                   2000             2001              2002             2003             2004
                                   ----             ----              ----             ----             ----
<S>                            <C>               <C>              <C>              <C>               <C>
Average(1)................      US$0.6725         US$0.6443        US$0.6368        US$0.7186         US$0.7701
</TABLE>


(1)  The average of the exchange rates on the last day of each month during the
     year indicated.

<TABLE>
<CAPTION>
                                                                          Month
                                                                          -----
<S>                             <C>            <C>            <C>            <C>             <C>             <C>
                                 Dec. 2004      Jan. 2005      Feb. 2005      March 2005      April 2005       May 2005
                                 ---------      ---------      ---------      ----------      ----------       --------
High........................     US$0.8434      US$0.8346      US$0.8134      US$0.8233       US$0.8322       US$0.8082
Low.........................     US$0.8063      US$0.8050      US$0.7962      US$0.8024       US$0.7957       US$0.7872
</TABLE>

     B.   Capitalization and Indebtedness

Not applicable.

     C.   Reasons for the Offer and Use of Proceeds

Not applicable.

     D.   Risk Factors

Our business is of a cyclical nature and prices of, and demand for, our products
and our results of operations may fluctuate significantly based on market
factors.

Our financial performance is principally dependent on the selling prices of, and
the demand for, the pulp and lumber products we sell. Prices and demand for such
products have fluctuated significantly in the past and may fluctuate
significantly in the future. The markets for pulp and lumber are highly cyclical
and affected by such factors as global economic conditions, demand for pulp and
paper, residential and commercial construction in North America and Asia,
changes in industry production capacity and inventory levels and other factors
beyond our control. Market conditions, demand and selling prices for our
products may decline from current levels. Any prolonged or severe weakness in
the market for any of our principal products would adversely affect our
business, financial condition, results of operations and cash flows.

Prices for lumber products, including our products, are higher than historical
averages, primarily due to increased demand in North America. Prices for pulp
products, including our products, are also higher than historical averages,
primarily due to increased paper demand in our primary markets and stronger
general economic conditions.

Duties imposed by the United States on Canadian softwood lumber products have
had and, until such duties are removed, will continue to have a negative effect
on our revenue and profitability.

The softwood lumber agreement, finalized in early 1996, addressed long-standing
disputes between United States and Canadian manufacturers of softwood lumber
products. Effective for five years commencing April 1, 1996, the softwood lumber
agreement permitted the annual export from British Columbia, Alberta, Ontario
and Quebec of 14.7 BFBM of softwood lumber to the United States without duty,
with additional volumes subject to payment of

                                       8
<PAGE>

graduated duties. Each company operating in British Columbia, Alberta, Ontario
and Quebec and exporting softwood lumber to the United States was allocated a
portion of the overall quota, based on historical shipments to the United
States. The agreement expired on March 31, 2001 and was not renewed.

Following the expiration of the softwood lumber agreement and in response to
complaints of a coalition of U.S.-based lumber producers, timber owners and
trade unions, the United States Department of Commerce and the United States
International Trade Commission rendered its final determinations contending that
Canadian softwood lumber imports threatened to injure the U.S. softwood lumber
industry. As a result of these determinations, effective May 22, 2002, we were
required to post cash deposits in respect of anti-dumping and countervailing
duties on our exports of softwood lumber to the United States at rates of 18.79%
and 8.43%, respectively. Our combined effective duty rate was 25.6% as the
anti-dumping duty rate was applied after deducting the countervailing duty.
Since May 2002, the Canadian government and affected industry participants have
initiated a series of challenges to these findings under the North American Free
Trade Agreement and before the World Trade Organization.

In September 2004, the United States International Trade Commission issued, in
response to a North American Free Trade Agreement remand decision, its finding
that the U.S. lumber industry was not threatened with material injury by reason
of lumber imports from Canada. The determination should have resulted in
revocation of the countervailing and anti-dumping duty orders by the United
States Department of Commerce and return of our duty deposits. Instead, on
November 24, 2004, the U.S. government launched an extraordinary challenge to
review the legality of the decision of the North American Free Trade Agreement
panel.

On December 20, 2004, the countervailing duty deposit rate was reduced to 17.18%
and the anti-dumping deposit rate was reduced to 4.03% as a result of the final
determination in the first administrative review. Effective December 20, 2004,
cash deposits have been remitted at these revised rates. Our combined effective
rate is 20.74% as the anti-dumping duty rate is applied after deducting the
countervailing duty.

The existence of the duties has had a negative effect on our profitability. Our
sales of lumber represented approximately 47% of our revenue for the year ended
December 31, 2004, and approximately 40% of lumber sales were made to customers
in the United States in that period. If the duty is not reduced further or if it
is increased, the profitability of our lumber operations will continue to suffer
and our lumber operations could, under certain circumstances, become
unprofitable, which would adversely affect our business, financial condition,
results of operations and cash flows.

Intense global competition could limit our ability to effectively market our,
products which could have a negative impact on our revenue and profitability.

We compete in North American and overseas export markets with numerous forest
products companies, including very large integrated firms that have greater
financial resources than we do. Our lumber segment also competes indirectly with
firms that manufacture substitutes for wood building materials. While the
principal basis for competition is price, we also compete on the basis of
customer service, quality and product type. Our competitive position is
influenced by the availability, quality and cost of fiber, energy and labor
costs, plant efficiencies and productivity and foreign currency fluctuations.
Some of our competitors may have lower fiber, energy, labor or other costs than
we do, or less stringent environmental and other governmental regulations to
comply with than we do. Other competitors may be less leveraged than we are and
therefore have greater financial flexibility than we do. In addition, variations
in the exchange rates between the Canadian dollar and the U.S. dollar, and
between the U.S. dollar and local currencies in each of our export markets, also
affect the relative competitive position of our products when compared to our
competitors outside of Canada. Our ability to compete in the markets to which we
export our products is also dependent upon free access and transportation costs
to such markets. If we are unable to compete effectively, our revenue could
decline, which would have a material adverse effect on our business, financial
condition, results of operations and cash flows.

We may not have the capital required to maintain our facilities and grow our
operations.

The production of lumber and pulp is capital intensive. We expect maintenance
capital expenditures to be approximately $8.0 million in 2005 and plan to make
maintenance capital expenditures of approximately $8.0 million per year on
average for the foreseeable future to fund maintenance capital at our existing
facilities. However,

                                       9
<PAGE>

our annual capital expenditures may vary due to fluctuations in requirements for
maintenance, unforeseen events and changes to environmental or other regulations
that require capital for compliance. Although we maintain our production
equipment with regular periodic and scheduled maintenance, key pieces of
equipment in our various production processes may need to be repaired or
replaced before such repair or replacement is scheduled. If we do not have
sufficient funds or such repairs or replacements are delayed, the costs of
repairing or replacing such equipment and the associated downtime of the
affected production line could have a material adverse effect on our business,
financial condition, results of operations and cash flows.

We are exposed to currency exchange risk which could reduce our cash flow
available to fund our operations and cause our reported earnings to fluctuate
materially.

Our operating results are sensitive to fluctuations in the exchange rate of the
Canadian dollar to the U.S. dollar, as prices for our products are denominated
in U.S. dollars or linked to prices quoted in U.S. dollars. In 2004,
approximately 72% of our sales were denominated in U.S. dollars, while most of
our operating costs were incurred in Canadian dollars. Therefore, an increase in
the value of the Canadian dollar relative to the U.S. dollar reduces the amount
of revenue in Canadian dollar terms realized by us from sales made in U.S.
dollars, which reduces our operating margin and the cash flow available to fund
our operations. From January 1, 2003 to December 31, 2004 the value of the
Canadian dollar relative to the U.S. dollar increased by approximately US$0.20
or 31%. Based on sales revenue for the year ended December 31, 2004, the effect
of a US$0.01 change in the value of the Canadian dollar over the course of the
year would impact operating earnings by approximately $2.4 million.

In addition, we are exposed to currency exchange risk on our indebtedness and
assets denominated in U.S. dollars. Since we present our financial statements in
Canadian dollars, any change in the value of the Canadian dollar relative to the
U.S. dollar during a given financial reporting period would result in a foreign
currency loss or gain on the translation of our U.S. dollar-denominated debt and
assets into Canadian dollars. Consequently, our reported earnings could
fluctuate materially as a result of foreign exchange translation gains or
losses.

To mitigate the impact of foreign exchange volatility on our earnings, we
typically enter into foreign exchange forward contracts to partially hedge our
exposure to fluctuations in exchange rates. However, hedging transactions may
not be successful in materially reducing our exposure to exchange rate
fluctuations.

A reduction in our fiber supply available under government agreements or an
increase in our fiber costs could have a negative impact on our profitability.

We obtain approximately 78% of our fiber requirements, based on current
production capacity, from the Millar Western Forest Management Agreement, or
Millar Western FMA, Coniferous Timber Quotas and Deciduous Timber Allocations
issued by the Alberta Minister of Sustainable Resource Development, each of
which is issued for a period of 20 years. Some of our Coniferous Timber Quotas
and carry-over volume, representing approximately 21% of our fiber requirements,
expire in 2006, and one of our Deciduous Timber Allocations, representing
approximately 4% of our fiber requirements, expires in 2007. There is no
assurance that such quotas and allocations will be renewed or extended on
acceptable terms, if at all. In addition, the Millar Western FMA and such quotas
and allocations contain terms or conditions that could, under certain
circumstances, result in a reduction of the amount of fiber available to us.

We obtain approximately 22% of our fiber requirements under multi-year
agreements with other forest products companies. There is no assurance that such
agreements will be renewed or extended on acceptable terms, if at all.

The Government of Alberta imposes stumpage fees on all timber harvested on
government-owned land. Amendments to legislation or regulatory regimes of the
Government of Alberta may change stumpage fee structures payable in relation to
the harvesting of timber and may increase the costs through the imposition of
additional and more stringent reforestation and silvicultural standards. A
material increase to the stumpage rates applicable to the Millar Western FMA,
our Coniferous Timber Quotas or our Deciduous Timber Allocations could have a
material adverse effect on our business, financial condition, results of
operations and cash flows. The costs of our fiber, including any fees charged
for fiber, logging and transportation, and market prices for purchased fiber
have historically fluctuated and could increase in the future. Any significant
increase in the cost of fiber could have a material adverse effect on our
business, financial condition, results of operations and cash flows.

                                       10
<PAGE>

Our ability to harvest timber is subject to natural events that are beyond our
control and which could have a negative impact on our operations.

Our ability to harvest timber is subject to natural events such as forest fires,
adverse weather conditions, insect infestation, disease and prolonged drought.
The occurrence of any of these events could adversely affect our ability to
harvest timber, which could have a material adverse effect on our business,
financial condition, results of operations and cash flows. For example, on
average, about 1,000 forest fires occur each year in the Province of Alberta. If
a significant forest fire occurs in the areas from which we harvest our fiber,
our ability to supply fiber to our pulp and lumber operations could be impaired.

Environmental and other government regulations could increase the cost of doing
business or restrict our ability to conduct our business.

We are subject to a wide range of general and industry-specific environmental
and other laws and regulations imposed by federal, provincial and local
authorities in Canada, including those governing the use, storage, handling,
generation, treatment, emission, release, discharge and disposal of certain
hazardous materials and wastes, the remediation of contaminated soil and
groundwater, and the health and safety of employees. Our failure to comply with
applicable environmental and safety laws and regulations, and the permit
requirements related thereto, could result in civil or criminal fines or
penalties or enforcement actions, including regulatory or judicial orders
enjoining or curtailing operations or requiring corrective measures,
installation of equipment or remedial actions, any of which could result in
significant capital expenditures or reduced results of operations. We believe
that we are in substantial compliance with all applicable environmental and
other laws and regulations and we regularly incur capital and operating
expenditures to maintain such compliance. However, future events such as any
changes in environmental or other laws and regulations, including any new
legislation that might arise as a result of the Government of Canada's
ratification of the United Nations Kyoto Protocol, or any change in
interpretation or enforcement of laws and regulations, may give rise to
additional expenditures or liabilities. These could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.

If environmental or other regulatory approvals, licenses or permits are delayed,
restricted or not renewed, a variety of operations on our timberlands or at our
facilities could be delayed or restricted.

In connection with a variety of operations on our properties, we are required to
make regulatory filings with governmental agencies. Any of these agencies could
delay review of or reject any of our filings. Any delay associated with a filing
could result in a delay or restriction in operating our mills or logging
operations, any of which could have an adverse effect on our operating results.
For example, our lumber and pulp facilities at Whitecourt operate under
approvals granted by an agency of the Government of Alberta. These approvals
expire in February 2006 and November 2014, respectively. Our ability to operate
these facilities depends on maintaining these approvals. If we are unable to
extend or renew either approval or any other material license or permit, or if
there is a delay in renewing such approvals, licenses or permits, our business,
financial condition, results of operations and cash flows could be materially
adversely affected.

Our sole shareholder has the ability to direct our operations.

Our parent, Millar Western Industries Ltd., holds, directly and of record, all
of our outstanding common shares. Millar Western Industries Ltd. is wholly owned
by Hualkeith Investments Ltd., a corporation indirectly owned by our Chairman of
the board of directors, James B. Millar, and our President and Chief Executive
Officer, H. MacKenzie Millar, and other members of the Millar family. James B.
Millar and H. MacKenzie Millar together indirectly own 55.6% of the outstanding
equity of Hualkeith. The Millar family may have different interests than you
have and therefore may make decisions that are adverse to your interests.

Our business is subject to many operational risks for which we may not be
adequately insured.

Our business is subject to the risks of operating pulp mills and sawmills and
logging, such as unforeseen equipment breakdowns, power failures, fires,
environmental issues, severe weather or any other event, which could result in a
temporary or prolonged shutdown of any of our operations. A shutdown at any of
our operations could materially

                                       11
<PAGE>

adversely affect our business, financial condition, results of operations and
cash flows. Although we maintain insurance, including business interruption
insurance, we may incur losses beyond the limits of, or outside the coverage of,
such insurance. From time to time, various types of insurance for companies in
the pulp and lumber industries have not been available on commercially
acceptable terms or, in some cases, have been unavailable. For example, we do
not insure and cannot get insurance against losses of standing timber from any
cause, including fire, and insurance against certain environmental risks is not
available on commercially acceptable terms. In addition, premiums for our
existing coverage may increase substantially and we may be unable to maintain
our current insurance coverage.

The loss of our power purchase rights could adversely affect our profitability.

Effective January 1, 2001, we entered into two Power Syndicate Agreements, which
we refer to as our power purchase rights, with an affiliate of EPCOR Utilities
Inc. and three other industrial participants in Alberta for the purpose of
sharing the rights and responsibilities defined in two Power Purchase
Arrangements, which we refer to as the PPAs. The PPAs are 20-year agreements and
give the holder the right to the generation capacity and substantially all the
associated electricity output from certain existing generating units in the
Province of Alberta. The PPA holder is obligated to pay the owner of the
generating units the costs of maintaining and operating the units according to
cost schedules set out in the PPAs.

The power purchase rights effectively reduce our exposure to fluctuations in
market electricity rates. In 2004, we estimate that the power purchase rights
provided us savings of $11.8 million compared to what we would have paid at
market rates, and therefore comprised a meaningful component of our operating
performance. The agreements governing our power purchase rights contain
termination provisions which are effective upon the occurrence of a force
majeure event. If our power purchase rights were terminated, we would be exposed
to fluctuations in market electricity rates, which could have a material adverse
effect on our business, financial condition, results of operations and cash
flows. Although all parties to the PPAs, including us, have provided financial
commitments in relation to the agreements, the other parties to the agreements
may fail to perform their obligations over the term of the agreements, which
could diminish the benefits we receive from the arrangements. A failure by EPCOR
Utilities Inc., in particular, could adversely affect the savings we realize
from the power purchase rights.

Under the PPAs, our financial commitment requires us to provide a letter of
credit covering the shortfall that would occur if the net present value of the
cash flows associated with the power purchase rights were to fall below a
specified level. There has been no requirement to provide such a letter of
credit to date, but may be required to provide one in the future. If we are
required to provide such a letter of credit in a large amount, it would limit
the amount of credit available to us under our revolving credit facility, which
could have a material adverse effect on our liquidity.

We have significant indebtedness, which could weaken our financial condition and
limit our ability to fulfill our obligations.

We have a significant amount of indebtedness and significant debt service
obligations. The following table sets forth our total indebtedness, total
shareholder's equity, total capitalization and ratio of total indebtedness to
total capitalization as at December 31, 2004:

Total indebtedness................................................$228.8 million
Total shareholder's equity........................................  66.3 million
                                                                  --------------
Total capitalization..............................................$295.1 million
                                                                  ==============
Ratio of total indebtedness to total capitalization...............77.5%

This high degree of leverage could have important consequences. For example, it
could:

     o    make it more difficult for us to satisfy our obligations with respect
          to our indebtedness;

     o    increase our vulnerability to adverse economic and industry
          conditions;

                                       12
<PAGE>

     o    require us to dedicate a substantial portion of cash from operations
          to the payment of debt service, thereby reducing the availability of
          cash to fund working capital, capital expenditures and other general
          corporate purposes;

     o    limit our ability to obtain financing for working capital, capital
          expenditures, general corporate purposes or acquisitions;

     o    place us at a disadvantage compared to our competitors that have a
          lower degree of leverage; and

     o    limit our flexibility in planning for, or reacting to, changes in our
          business and in the forest products industry.

We may not generate cash flow sufficient to service all of our obligations.

Our ability to make payments on and to refinance our indebtedness and to fund
our operations, working capital and capital expenditures, depends on our ability
to generate cash in the future. Our cash flow is subject to general economic,
industry, financial, competitive, operating, regulatory and other factors that
are beyond our control. Our business may not generate cash flow in an amount
sufficient to enable us to repay our indebtedness or to fund our other liquidity
needs. We estimate that we will need to generate approximately $27 million of
cash to fund our interest and maintenance capital expenditure requirements for
the next twelve months. We may need to refinance all or a portion of our
indebtedness on or before maturity. Our ability to refinance our indebtedness or
obtain additional financing will depend on, among other things:

     o    our financial condition at the time;

     o    restrictions in agreements governing our indebtedness; and

     o    other factors, including the condition of the financial markets or the
          forest products industry.

If we do not generate sufficient cash flow from operations, and additional
borrowings or refinancings or proceeds of asset sales are not available to us,
we may not have sufficient cash to enable us to meet all of our obligations.

We may be able to incur additional indebtedness, which could further exacerbate
the risks associated with our substantial indebtedness.

Although the agreements governing our indebtedness contain restrictions on the
incurrence of additional indebtedness, additional indebtedness incurred in
compliance with these restrictions could be substantial. As at December 31,
2004, our revolving credit facility would have permitted additional borrowing of
up to $30.9 million, before taking into account $3.9 million reserved for
outstanding letters of credit. If we incur additional indebtedness or other
obligations, the related risks that we face could be magnified.

The agreements governing our indebtedness contain significant restrictions that
limit our operating and financial flexibility.

The agreements governing our indebtedness contain covenants that, among other
things, limit our ability to:

     o    incur additional indebtedness;

     o    pay dividends and make distributions;

     o    repurchase stock;

     o    make certain investments;

                                       13
<PAGE>

     o    transfer or sell assets;

     o    create liens;

     o    enter into transactions with affiliates;

     o    issue or sell stock of subsidiaries;

     o    create dividend or other payment restrictions affecting restricted
          subsidiaries; and

     o    merge, consolidate, amalgamate or sell all or substantially all of our
          assets to another person.

In addition, our revolving credit facility requires us to maintain specified
financial ratios, and we may be unable to meet such ratios. All of these
restrictions may limit our ability to execute our business strategy. Moreover,
if operating results fall below current levels, we may be unable to comply with
these covenants. If that occurs, our lenders could accelerate our indebtedness,
in which case, we may not be able to repay all of our indebtedness, if at all.

Your ability to enforce civil liabilities in Canada under U.S. securities laws
may be limited.

We are incorporated under the laws of the Province of Alberta and substantially
all of our assets are located in Canada. All of our directors and officers
reside in Canada and most of their assets are located in Canada. It may not be
possible, therefore, for you to effect service of process within the United
States upon us, our directors and officers. There is uncertainty as to the
enforceability (1) in an original action in Canadian courts of liabilities
predicated solely upon United States federal securities laws and (2) of
judgments of United States courts obtained in actions predicated upon the civil
liability provisions of United States federal securities laws in Canadian
courts. Therefore, you may not be able to secure judgment against us, our
directors and officers in a Canadian court or, if successful in securing a
judgment against us or them in a U.S. court, you may not be able to enforce such
judgment in Canada.

ITEM 4:  INFORMATION ON THE COMPANY

     A.   History and Development of the Company

Millar Western Forest Products Ltd. is a corporation incorporated under the
Business Corporations Act (Alberta, Canada) on September 8, 1997, which had no
operations or cash flows from September 8, 1997 to May 12, 1998. On May 13,
1998,we acquired all of the forest products operations of Industries. The
predecessor of Industries was first incorporated in 1919 and began lumber
operations in Whitecourt in 1923. Industries completed construction of the
Whitecourt pulp mill in 1988 and the Meadow Lake pulp mill in 1992 and acquired
the Boyle sawmill in 1993. We completed construction of the new Whitecourt
sawmill in 2001. We have no subsidiaries.

Our head office is located at 16640 - 111 Avenue, Edmonton, Alberta, T5M 2S5 and
our registered office is located at 2900 Manulife Place, 10180 - 101 Street,
Edmonton, Alberta, T5J 3V5. Our telephone and facsimile numbers are (780)
486-8200 and (780) 486-8282, respectively. Our authorized capital consists of an
unlimited number of common shares of which 15,000,001 were issued and
outstanding as at December 31, 2004.

     B.   Business Overview

We are an integrated forest products company in Alberta that produces and
markets hardwood and softwood bleached chemi-thermo-mechanical pulp, or BCTMP,
and softwood lumber. We are a global marketer of BCTMP, among the lowest-cost
producers of BCTMP in the world and among the lowest-cost lumber producers in
Canada. As a result of our low-cost positions, modern assets, low ongoing
capital requirements and high degree of fiber self-sufficiency, we believe we
are well positioned to benefit from any improvements in prices for market pulp
and lumber. For the year ended December 31, 2004, we had revenue of $346
million.

                                       14
<PAGE>

We own and operate three production facilities in Alberta: a BCTMP mill and a
sawmill at an integrated complex in Whitecourt and a sawmill in Boyle. We also
receive management fees and sales commissions for managing the operations of,
and marketing all pulp produced by, a BCTMP mill near Meadow Lake, Saskatchewan,
that is jointly owned by our parent, Industries, and the Province of
Saskatchewan. We believe that this relationship results in many benefits to us,
including a larger marketing presence, cost economies of scale and optimization
of operating practices.

The Whitecourt pulp mill is among the lowest-cost producers of BCTMP in the
world. This pulp mill produces hardwood, softwood and blended grades of pulp and
has an annual production capacity of 300,000 ADMT. The Meadow Lake pulp mill has
an annual production capacity of 325,000 ADMT of hardwood BCTMP. Our BCTMP is
sold internationally for use in the production of a diverse range of paper
products, including coated and uncoated printing and writing papers, paperboard,
specialty papers, tissue and toweling.

BCTMP offers product quality advantages for paper producers over other types of
pulp, including better opacity, formation and stiffness. It also offers added
bulk, which allows paper makers to use greater quantities of lower-cost
non-fiber fillers, without compromising the quality of the end product. BCTMP
has replaced kraft pulp in many paper and paperboard applications, and its use
in such applications continues to increase. In addition to these quality
advantages, BCTMP has several cost and environmental advantages, including a
high-yield chlorine-free production process that produces up to twice as much
pulp per tree compared to the kraft process, which results in lower unit fiber
costs.

Our sawmills produce kiln-dried, dimension lumber from spruce, pine and fir, or
SPF, for the residential and commercial construction industries. Our Whitecourt
and Boyle sawmills have an annual capacity of 225 MMFBM and 120 MMFBM,
respectively, and are among the lowest-cost sawmills in Canada. Our lumber
production is sold principally in Canada and the United States, with certain
higher-margin specialty grades sold in Japan. The Whitecourt sawmill also
produces higher-margin machine stress rated, or MSR, lumber for load bearing
applications. In June 2001, we completed construction of our new,
state-of-the-art Whitecourt sawmill for a total cost of $42.6 million, which we
funded from operating cash flow.

We supply our fiber needs primarily through timber resources held under
long-term agreements with the Government of Alberta, which provide a high degree
of fiber self-sufficiency, security of supply and scope for progressive,
sustainable forest management practices. These forest resources, together with
multi-year fiber agreements with other forest products companies, constitute
substantially all of our fiber requirements at existing production capacity
levels and provide a low-cost, sustainable supply of fiber to our facilities. We
purchase the balance of our fiber requirements in the open market.

Sales and Marketing

Pulp

We are a leading global marketer of BCTMP. As the first BCTMP producer to offer
significant quantities of 100% aspen-based hardwood pulp grades, we pioneered
the use of this product in coated and specialty paper grades. In order to
establish a differentiated product, we have committed ourselves to the
production of high quality BCTMP. We believe product development is an ongoing
process necessary to meet the changing needs of papermakers. We have focused our
marketing efforts on the technical and production staff within each paper mill
to which we sell our products. This approach has enabled us to develop
partnership-based relationships with our customers such that, in some cases, we
are the customer's exclusive supplier of BCTMP.

Our corporate marketing staff, supported by an international network of
independent sales agents, markets pulp from the Whitecourt and Meadow Lake pulp
mills to all major pulp consuming regions, including Europe, Asia, and North
America. In 2004, our top five pulp customers represented approximately 52% of
all pulp marketed by us, with our largest single customer representing
approximately 20% of all pulp marketed by us.

                                       15
<PAGE>

Lumber

The principal markets for our lumber products are the United States, Canada and
Japan. Lumber sales within North America are handled by sales staff located in
our Edmonton corporate office who sell the lumber primarily through a network of
wholesale distributors. All offshore sales are conducted through an
international marketing consortium, Interex Forest Products Ltd. of Vancouver,
of which we are a 17% owner.

We market our lumber in North America mainly through wholesale distributors that
resell it to a large number of other customers. Our top five lumber customers in
2004 accounted for approximately 54% of lumber segment sales, with our largest
customer accounting for approximately 16% of lumber sales.

Transportation

Our pulp and lumber operations are located adjacent to rail lines and near major
highway connections to both TransCanada and Interstate routes. Our operations
have the flexibility to load their products onto various types of road and rail
equipment, enabling them to take advantage of the most competitive rates.
Distribution arrangements covering rail and ocean transport, terminal handling
and storage are in place to provide competitive access to the markets served.

Fiber Supply and Forest Management

We supply our manufacturing operations primarily from timber resources held
under long-term agreements with the Government of Alberta, providing security of
supply and scope for progressive, sustainable forest management practices. These
forest resources, together with multi-year fiber exchange agreements and supply
contracts with other forest products companies, provide a cost-competitive and
sustainable supply of fiber to our production facilities and represent
substantially all of our annual fiber requirements.

In May 1997, we entered into an FMA with the Alberta Minister of Sustainable
Resource Development, which we refer to as the Millar Western FMA, pursuant to
which the Minister has granted us rights to manage, establish, grow, harvest and
remove timber on a perpetual sustained yield basis in designated areas, which we
refer to as the Millar Western forest management area. The Millar Western FMA is
in effect for 20 years and is renewable thereafter for additional 20-year terms.
The Millar Western FMA provides that the Alberta Minister of Sustainable
Resource Development may withdraw from the forest management area (i) any land
which cannot be harvested without causing substantial harm to the environment,
(ii) any land determined to be required for human or physical resource
development of the Province of Alberta, (iii) any land required for commercial
and industrial facilities and (iv) any land which is not capable of producing
timber. In the event of such withdrawal, the government will compensate the
holder for certain costs and losses associated with such withdrawal. There have
been no material withdrawals of land from the Millar Western FMA since its
inception.

Our coniferous annual allowable cut, or AAC, from the Millar Western FMA and
Coniferous Timber Quotas is 834,700 cubic meters. The deciduous AAC from the
Millar Western FMA and Deciduous Timber Allocations is 371,300 cubic meters. In
previous years, we did not harvest our full AAC under the Millar Western FMA,
our Coniferous Timber Quotas or our Deciduous Timber Allocations. This volume of
fiber is carried over and available to us to harvest in future years. Through a
log-for-wood-chip exchange agreement and supply contracts with other forest
product companies, we receive up to 308,000 cubic meters of coniferous timber
and up to 140,000 cubic meters of deciduous timber annually. The following table
sets out our AAC under our current long-term provincial tenure and fiber
available annually under our other fiber agreements:

                                                     Coniferous    Deciduous
                                                     ----------    ---------
                                                         (cubic meters)
Forest Management Agreement(1).......................   302,700       226,700
Coniferous Timber Quotas(2)..........................   532,000            --
Deciduous Timber Allocations(3)......................        --       144,600
Carry-over volume(4).................................   120,000        95,400
Exchange agreements and supply contract(5)...........   308,000       140,000
                                                     ----------    ----------
Total annual fiber supply:........................... 1,262,700       606,700
                                                     ==========    ==========

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<PAGE>

____________
(1)  Net of third party allocations. Expires 2017 and is renewable for
     additional terms of 20 years.

(2)  Expire 2006 to 2023 and are renewable for additional terms of 20 years.

(3)  Expire 2007 and 2023 and are renewable for additional terms of 20 years.

(4)  Carry-over volume for coniferous is the average volume of fiber available
     for harvest annually to 2006. Carry-over volume for deciduous is the
     average volume of fiber available for harvest annually to 2012.

(5)  The exchange agreements are evergreen, one that requires two years' notice
     for termination and one that expires in 2019. There is one supply contract,
     that expires in 2010.

The Government of Alberta imposes stumpage fees on all timber harvested on
government-owned land. The timber on such land is owned by the Province of
Alberta, and stumpage fees are a form of harvest tax that is assessed on a
market-based fee structure. Under the stumpage system for coniferous timber, the
amount of the stumpage fee increases or decreases with the benchmark lumber
price of Western SPF 2" x 4", random length, standard and better. This
relationship effectively lowers our stumpage costs when lumber prices are low.
The stumpage system applies to all logs harvested from the Millar Western FMA
and Coniferous Timber Quotas. Reduced stumpage rates apply to marginal timber,
pulpwood and timber affected by fire or insects. Stumpage rates do not apply to
wood harvested from private lands.

In February 1999, the Government of Alberta instituted a market-based stumpage
system for deciduous timber. Under this system, we pay a base rate of dues of
$0.20 per cubic meter until the benchmark pulp price of hardwood kraft pulp
exceeds $750 per tonne. The amount of stumpage then increases as the benchmark
price increases above $750 per tonne.

Energy Supply

We use both electricity and natural gas as sources of energy in our pulp and
lumber operations. Electricity is used primarily in the pulp operation and,
based on 2004 costs, represents approximately 24% of the total manufacturing
cost of pulp and 2% of the total manufacturing cost of lumber. Natural gas is
used for heating and in the drying process for both pulp and lumber and, based
on 2004 costs, represents approximately 7% of the total manufacturing cost of
pulp and 2% of the total manufacturing cost of lumber.

Electricity. Effective January 1, 2001, we entered into two Power Syndicate
Agreements, which we refer to as our power purchase rights, with an affiliate of
EPCOR Utilities Inc. and three other industrial participants in Alberta for the
purpose of sharing the rights and responsibilities defined in two Power Purchase
Arrangements, which we refer to as the PPAs. We invested $20.8 million to
acquire a 5.83% share in the PPAs, which were previously acquired by EPCOR in
accordance with the Power Auction Agreement in 2000 during the deregulation of
the electricity market in Alberta.

The PPAs are 20-year agreements and give the holder the right to the generation
capacity and substantially all the associated electricity output from certain
existing generating units in the Province of Alberta. The PPA holder is
obligated to pay the owner of the generating units the costs of maintaining and
operating the units according to cost schedules set out in the PPAs. There are
no net settlement provisions in the PPAs.

Through our participation in the syndicate, we have indirect control over
electrical generating capacity of approximately 584,000 megawatt hours annually
over the first 13 years of our power purchase rights and 472,000 megawatt hours
annually for the balance of the 20-year period. This represents approximately
89% of our electricity requirements at existing levels of production capacity
for the first 13 years and 72% of our requirements for the remaining period. To
this extent, our electricity costs are the costs specified in the schedules to
the PPAs plus transmission costs, which mitigates our exposure to the
fluctuations in market electricity rates.

                                       17
<PAGE>

Natural Gas. Natural gas used in our Whitecourt facilities is supplied by a
major natural gas producer under annual supply contracts that are subject to
market prices. From time to time, we manage our gas price exposure by entering
into commodity price forward contracts.

Other Commodities

Water. Water is supplied to our Whitecourt pulp mill by the Town of Whitecourt
under an agreement which expires no earlier than 2008 and thereafter may only be
terminated with two years' notice.

Chemicals. Our Whitecourt pulp mill's requirements for hydrogen peroxide, which
is the main chemical used in our pulp bleaching process, are supplied from a
plant located in Alberta under an agreement, which expires in 2014. This
agreement provides us with relatively stable pricing over the term of the
agreement. Caustic soda and other bleaching chemicals used in our Whitecourt
pulp mill are supplied by third parties under varying contract terms. Magnesium
sulphate used in our Whitecourt pulp mill is produced and supplied by
Industries, pursuant to a contract. See "Related Party Transactions".

Environmental Matters

Our operations are regulated primarily by the Environmental Protection and
Enhancement Act (Alberta), which we refer to as the AEPEA, and the Fisheries Act
(Canada). We have instituted environmental controls to monitor our operations to
confirm they are in compliance with regulated parameters of both provincial and
federal authorities.

Both the pulp and lumber operations at Whitecourt have been issued renewable
10-year environmental approvals under AEPEA. The pulp mill's approval expires on
November 1, 2014, and the lumber operation's approval expires in February 2006.

Our Whitecourt pulp mill does not use chlorine compounds and therefore does not
generate any chlorinated by-products such as dioxins or furans. The pulp mill
has an extended aeration activated biomass wastewater treatment system. The
biomass produced as a waste product from the system is used as a soil
conditioner on agricultural and forest lands, and as fuel at a local wood
waste-fueled electrical generating station. Wood waste from the Whitecourt pulp
mill and sawmill is also sent to the electrical generating station.

In 1995, our Whitecourt pulp mill became the first manufacturing facility in
North America to achieve British Standard 7750 certification of its
environmental management system. In 1996, our Whitecourt pulp mill became the
first manufacturing facility in North America and the second pulp mill in the
world to achieve ISO 14001 certification for its environmental management
system.

Our Boyle sawmill operation is also regulated under AEPEA and was issued a
renewable 10-year environmental approval which expires in April 2005. The
environmental approval has been extended indefinitely until a new sawmill code
of practice is in place. The permit for the operation's wood waste burner,
expires in 2008. All wood waste from the operation is sold to a nearby pulpmill.

All forest areas we harvest are reforested to the standards required under the
Timber Management Regulations (Alberta). Since the beginning of 1999, we have
spent $44.4 million on reforestation and as at December 31, 2004, have an
accrued liability of $7.6 million for future reforestation.

Meadow Lake

We market all of the pulp produced by, and manage the operations of, the Meadow
Lake pulp mill. The Meadow Lake pulp mill is a BCTMP pulp mill with an annual
capacity of 325,000 ADMT of hardwood BCTMP. The Meadow Lake pulp mill is owned
by the Meadow Lake Pulp Limited Partnership, which we refer to as the
Partnership, which is itself owned 50% by our parent, Industries, and its
affiliate and 50% by the Government of Saskatchewan. The management and
administrative services provided under contract to the Meadow Lake pulp mill
include executive management, transportation, finance and accounting, human
resources and information systems. The cost of providing these services,
including a portion of overhead, is allocated to the Meadow Lake pulp mill and

                                       18
<PAGE>

reimbursed monthly to us on a cost plus basis, effectively reducing the
administrative costs of our operations. This arrangement also works to the
benefit of both the Meadow Lake pulp mill and our Whitecourt pulp mill in terms
of the sharing of technological advances and improvements and in increasing our
purchasing power for raw materials used in the pulping process.

The marketing agreement appoints us as the exclusive marketing and sales agent
for all of the pulp produced at the Meadow Lake pulp mill. We are paid a
commission based on revenue for the sale of pulp produced by the Meadow Lake
pulp mill. The combined production capacity of 625,000 ADMT of BCTMP per year
from the Whitecourt and Meadow Lake pulp mills is all sold under the Millar
Western name. See "Related Party Transactions".

     C.   Organizational Structure

Not applicable.

     D.   Property, Plants and Equipment

We own and operate three production facilities in Alberta: a BCTMP mill and a
sawmill at an integrated complex in Whitecourt and a sawmill in Boyle.

Pulp

Our BCTMP mill located at Whitecourt, Alberta, commenced commercial production
in July 1988. The pulp mill was constructed at a cost of approximately $205
million and was designed to produce 210,000 ADMT per year. Since start up, our
focus on mill optimization and continuous improvement has increased the
production capacity of the plant to 300,000 ADMT per year, a 43% increase.

Our Whitecourt pulp mill is a two-line mill that offers flexibility in meeting
customer and production demands. The Whitecourt pulp mill uses a technologically
and environmentally advanced process to produce chlorine-free hardwood (aspen),
softwood (SPF), and blended pulps for use in the production of coated and
uncoated printing and writing papers, paperboard, specialty paper, tissue and
toweling. Process features include an alkaline peroxide bleaching system, which
is much more environmentally friendly than the chlorine-bleaching systems used
by kraft pulp mills, a biological effluent treatment system, and a
sophisticated, automated mill-wide process control system. The pulp mill is
certified to the ISO 9002 quality management standard and was the first
manufacturing facility in North America and the second pulp mill in the world to
achieve the ISO 14001 environmental management certification.

In the Whitecourt mill pulp process, wood chips enter the mill and are
pre-steamed before undergoing mild chemical impregnation and subsequent
two-stage refining. Steam generated during refining is recovered for use in the
chip pre-steaming bins. After refining, the pulp is screened and cleaned before
being pumped into a storage tower. From this tower, the pulp is delivered to
wash presses in preparation for entry into the two-stage bleaching process. The
bleaching process consists of a medium-consistency bleach tower and wash press,
followed by a high-consistency bleach tower and wash press. The pulp is then
ready for a final de-watering stage prior to drying. After drying in natural
gas-fired flash dryers, the pulp is baled and wrapped for shipment to markets
around the world.

Our pulp process has features that make it well suited to the production of
hardwood BCTMP for use in coated and uncoated printing and writing papers,
replacing hardwood kraft pulp in many applications. These features include the
three-stage chip impregnation system that allows the enhancement of the key pulp
characteristics of bulk and opacity and reduces the amount of energy required
for refining, and the two-stage post-bleaching washing process, which improves
pulp cleanliness while reducing water usage. As well, the Whitecourt pulp mill
has the capability of blending hardwood and softwood chips to meet specific pulp
characteristics, and the two-line production system offers flexibility in
meeting market demands.

All hardwood chips are produced on site and the majority of the softwood chips
used by the Whitecourt pulp mill are supplied by the Whitecourt sawmill, located
on the same site. We also purchase softwood chips in the open market to supply
the pulp mill and to use in connection with log-for-wood-chip exchange
agreements.

                                       19
<PAGE>

Lumber

We own and operate two sawmills located at Whitecourt and Boyle, Alberta. The
Whitecourt and Boyle sawmills have a combined annual capacity of 345 MMFBM.

At Whitecourt, we have an annual capacity of 225 MMFBM, which includes 210 MMFBM
at our new sawmill and 15 MMFBM at our old sawmill, which runs periodically to
process oversized logs. We manufacture SPF lumber for North American and
offshore markets in dimensions from 1" x 3" to 2" x 10" and lengths from 8' to
16'. Products include construction lumber for North American residential and
commercial markets, MSR lumber for engineered roofing and load bearing
applications and special grades for export to the Japanese housing market.
Residual wood chips are used by the Whitecourt pulp mill and wood shavings are
sold to a nearby wood products company for the production of medium density
fiberboard. Remaining wood waste is consumed by an electrical generating station
owned by a third party in the Whitecourt area.

In June 2001, we completed construction of our Whitecourt sawmill at a total
cost of $42.6 million, which was funded from operating cash flow. This project
significantly improved the efficiency of the Whitecourt lumber operation,
increased the quality of its products and reduced its manufacturing costs. The
new sawmill, which operates on a 24-hour-per-day, seven-day-per-week schedule,
is a single-line mill designed to handle logs with diameters from 3 to 22
inches. The sawmill comprises a portal crane used to unload trucks and to
forward logs to a computerized log merchandising system, and two optimized
short-log feed systems. The log preparation area utilizes three 22-inch
debarkers and two high-speed cut-off saws. Cut logs are laser-scanned to
determine the highest-value cutting pattern, and sent to four log-sorting bins
or to a whole log chipping system. The primary machine center consists of a
double length in-feed canter quad band, and an in-line thin-kerf vertical gang
edger. A board edger/optimizer, a trimmer optimizer, and a J-Bar bin sorter
complete the rough lumber process. The finishing process includes four
natural-gas-fired dry kilns, a high-speed planer mill, and a J-Bar sorting
system. The facility also utilizes the latest in scanning technology to maximize
wood recovery and an advanced, automated process control system.

We acquired the Boyle sawmill assets and related Coniferous Timber Quotas in
September 1993. Our post-acquisition capital expenditure program significantly
improved the sawmill's competitiveness and profitability, including increasing
its capacity by approximately 100%. The Boyle sawmill, with an annual capacity
of 120 MMFBM, manufactures SPF lumber for North American and offshore markets.
The major product is dimension lumber for North American residential and
commercial construction markets, ranging in size from 1" x 3" to 2" x 10" and in
length from 8' to 16'. A higher grade of lumber is produced for export to the
Japanese housing market. Residual wood chips and all of our wood waste is sold
to a nearby pulp mill.

The Boyle mill is a two-line operation. The two primary machine centers are a
small log line and a headrig. Other major equipment includes a gang-edger, an
edger-optimizer, a trimmer- optimizer, a J-bar bin sorter, two dry kilns and a
planer mill that uses computerized scanning technology to enhance the
performance of its equipment. In late 2004, we began installing a new primary
breakdown unit for small logs as well as installing a new hog processing system
for handling wood waste that will be used as a fuel source by a neighboring pulp
mill. These capital projects were completed and became operational in early
2005.

Capital Expenditures

Our capital expenditures can be categorized into two types: maintenance capital
and discretionary expenditures. We consider capital expenditures that are
required to maintain the production capacity of our facilities at current
levels, or expenditures that address safety or environmental matters, to be
maintenance capital expenditures. Capital expenditures that enhance the
productivity or profitability of our operations are considered to be
discretionary. From 2000 to 2004, maintenance capital expenditures averaged $5.1
million per year. In that same period, an additional $60.6 million of
discretionary expenditures were made, of which 70% was related to the new
sawmill in Whitecourt. We estimate that maintenance capital expenditures will
average approximately $8.0 million per year for the foreseeable future.

ITEM 5:  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

                                       20
<PAGE>

The following discussion of our financial condition and results of operations is
based upon and should be read in conjunction with our financial statements and
the accompanying notes included elsewhere in this annual report on Form 20-F.
Our financial statements have been prepared in accordance with Canadian GAAP,
which differ from financial statements prepared in accordance with U.S. GAAP.
For a further discussion of these differences, see note 21 to our audited
financial statements included elsewhere in this annual report on Form 20-F.

     E.   Operating Results

General

Our two operating segments are pulp and lumber. The pulp segment consists of a
BCTMP mill at Whitecourt, Alberta, that produces hardwood, softwood and blended
pulps. The lumber segment consists of two sawmills located at Whitecourt and
Boyle, Alberta, that produce SPF dimension lumber. Our corporate and other
activities include management and marketing services provided to the Meadow Lake
BCTMP mill and other corporate business.

Our operating results are generally influenced by the following factors: pulp
and lumber prices, U.S.-Canadian dollar exchange rates, production volumes,
freight and other distribution costs, fiber costs and electricity costs.

Our operating results are largely affected by the prevailing market prices for
pulp and lumber. The markets for pulp and lumber are highly cyclical and
affected by such factors as global economic conditions, demand for paper,
residential and commercial construction in North America and Asia, changes in
industry production capacity and inventory levels. In addition, Canadian lumber
markets and our results have been significantly impacted by the softwood lumber
dispute. In 2004, we sold 40% of our lumber in the United States. Since May 22,
2002, we recorded combined anti-dumping and countervailing duties at an
effective rate of 25.6% on all softwood lumber exports to the United States.
Effective December 20, 2004, we have recorded anti-dumping and countervailing
duties at a combined effective rate of 20.7%. See note 10 to our audited
financial statements for a further discussion of the duties.

Our operating results are sensitive to fluctuations in the exchange rate of the
Canadian dollar to the U.S. dollar, as prices for our products are denominated
in U.S. dollars or linked to prices quoted in U.S. dollars and we have incurred
substantially all of our debt in U.S. dollars. In 2004, approximately 72% of our
revenue was denominated in U.S. dollars, while most of our operating costs were
incurred in Canadian dollars. In order to mitigate the impact of foreign
exchange volatility on our operating results, we have entered into foreign
exchange forward contracts to partially hedge our exposure to fluctuations in
U.S. dollar revenue and we have incurred substantially all of our debt in U.S.
dollars. Effective January 1, 2002, we retroactively adopted a new accounting
policy of the Canadian Institute of Chartered Accountants with respect to the
recognition of unrealized foreign exchange gains or losses. Under the new
policy, exchange gains or losses that arise on translation of long-term debt
denominated in a foreign currency are included in income in the current period.
See note 2 to our audited financial statements for a further discussion of the
change in accounting policy.

Pulp and lumber production volumes have a direct impact on our operating
results. Our Whitecourt pulp mill's production capacity has increased from a
design capacity of 210,000 tonnes per year to the current capacity of 300,000
tonnes per year through operating improvements and capital expenditures. Through
the optimization of the new sawmill at Whitecourt and the implementation of an
extra shift at Boyle, the production capacity of our lumber segment has also
increased in the past two years.

Freight and other distribution costs have an impact on our operating results as
the majority of our products are exported. In 2004, 73% of our revenue was
derived from shipments to customers outside of Canada. Our ability to compete in
the markets to which we export our products is dependent upon efficient and cost
effective transportation to such markets.

The availability of an economical fiber supply is one of the most important
factors affecting the profitability of forest products companies. Fiber supply
self-sufficiency is a key competitive element, because the direct control and
management of timber resources partially insulates an operator from fluctuations
in the market price of fiber. We supply our manufacturing operations primarily
from fiber resources held under long-term agreements with the

                                       21
<PAGE>

Government of Alberta, which provides a secure supply of fiber and stable costs
on a sustainable basis. Substantially all of the fiber requirements for our pulp
mill and sawmill facilities are supplied by the Millar Western FMA, our
provincial quotas and allocations, and multi-year fiber agreements with other
forest products companies. We purchase the balance of our fiber requirements in
the open market.

Electricity costs represent approximately 24% of our manufacturing costs for
pulp and approximately 2% for lumber, based on 2004 costs, and fluctuations in
the price of electricity affect our costs. In January 2001, we acquired
long-term power purchase rights to insulate our pulp and lumber operations from
volatility in the electricity market.

OUR RESULTS OF OPERATIONS

The following table sets out our segmented financial and operating information
for the periods indicated.

<TABLE>
<CAPTION>
                                                                                         Year ended December 31,
                                                                                       ----------------------------
                                                                                         2002      2003      2004
                                                                                       --------  --------  --------
Revenue
<S>                                                                                    <C>       <C>       <C>
 Lumber...........................................................................     $  110.9  $  125.7  $  162.1
 Pulp.............................................................................        160.8     185.4     177.5
 Corporate and other(1)...........................................................          6.1       6.2       6.4
                                                                                       --------  --------  --------
Total.............................................................................     $  277.8  $  317.3  $  346.0
                                                                                       ========  ========  ========
Operating earnings (loss)
 Lumber...........................................................................     $    9.1  $    4.9  $   20.0
 Pulp.............................................................................         22.9      34.2      31.2
 Corporate and other(1)...........................................................         (7.8)     (7.5)     (8.3)
                                                                                       --------  --------  --------
Total.............................................................................     $   24.2  $   31.6  $   42.9
                                                                                       ========  ========  ========
Shipments
 Lumber (MMFBM)...................................................................          283       342       354
 Pulp (MADMT).....................................................................          272       292       299
Average revenue
 Lumber ($ per MFBM)..............................................................          392       368       458
 Pulp ($ per ADMT)................................................................          591       635       594
</TABLE>
____________

(1)  Primarily represents revenue from management and marketing contracts, the
     related costs and unallocated corporate expenses.

Virtually all of our pulp and a substantial portion of our lumber products are
sold outside of Canada. Our geographic distribution of revenue for the periods
indicated is as follows:

<TABLE>
<CAPTION>
                                                                                              Year ended December 31,
                                                                                        -----------------------------------
                                                                                            2002         2003        2004
                                                                                         ----------   ---------   ---------
                                                                                                   (in millions)
<S>                                                                                      <C>          <C>         <C>
Canada..............................................................................     $    62.8    $    64.3   $    92.3
United States.......................................................................          69.4         86.1        95.5
Europe..............................................................................          53.1         54.5        34.4
Asia................................................................................          91.7        111.1       123.4
Other...............................................................................           0.8          1.3         0.4
                                                                                         ----------   ---------   ---------
                                                                                         $   277.8    $   317.3   $   346.0
                                                                                         ==========   =========   =========
</TABLE>

Year ended December 31, 2004 compared to year ended December 31, 2003

Overview

Revenue increased by $28.7 million, or 9.0%, to $346.0 million in 2004, compared
to $317.3 million in 2003. The increase in revenue was predominantly due to
higher revenue from the lumber segment. Revenue from the lumber segment was up
29% in 2004 compared to the same period last year, as a result of higher sales
volumes and selling prices. The increase in revenue from the lumber segment was
partially offset by lower revenue from the pulp segment. A strengthening
Canadian dollar, which has appreciated by approximately 6% over the past 12
months, has had a negative impact on revenue.

                                       22
<PAGE>

The effects of the strengthened Canadian dollar were partly mitigated by our
currency hedging program, which covered approximately 67% of our U.S. dollar
revenue for 2004. As a result of our hedging program, we realized benefits of
$6.3 million in 2004 compared to a benefit of $14.7 million in 2003.

Operating earnings increased by $11.3 million, or 35.8%, to $42.9 million in
2004, compared to $31.6 million in 2003. The improvement in operating earnings
was mainly due to higher prices for lumber and lower operating costs from the
pulp segment. Operating earnings included a charge of $2.5 million for the
employees' profit sharing plan, compared to a charge of $0.3 million for 2003.

Depreciation and amortization expense decreased by $1.5 million compared to 2003
primarily as a result of revising the useful life of process equipment.

General and administration expense decreased by $1.5 million in 2004 compared to
2003, primarily as a result of lower consulting and professional fees as well as
higher interest income.

Lumber

Revenue from the lumber segment increased by $36.4 million, or 29.0%, to $162.1
million in 2004, compared to $125.7 million in 2003. The significant increase in
revenue was a direct result of higher average revenue per unit and higher sales
volumes. Average revenue per unit increased by $90 per thousand board feet, or
24.5%, to $458 per thousand board feet in 2004, compared to $368 per thousand
board feet in 2003, as a result of higher selling prices. Sales volumes improved
by 12 million board feet, or 3.5%, in 2004 compared to 2003 due to increased
production at our sawmills and continued strong demand. Countervailing and
anti-dumping duty payments increased by $1.8 million, or 15.6%, in 2004 compared
to 2003, largely as a result of higher average selling prices. In 2004, we
realized a foreign exchange benefit of $1.6 million as a result of our currency
hedging program, compared to a foreign exchange benefit of $3.4 million in 2003.

Operating earnings from the lumber segment increased by $15.1 million, to $20.0
million, in 2004 compared to $4.9 million in 2003. The increase in operating
earnings was primarily the result of higher revenue, partially offset by higher
manufacturing costs. Cost of sales increased by $37 per thousand board feet, or
13.9%, in 2004 compared to 2003 due to increased fiber costs related to higher
reforestation expense at our Boyle operations, which returned to harvesting
non-fire-damaged timber, as well as higher timber dues, which are assessed
according to the benchmark price of lumber. Lumber cost of sales reflected
savings from our power purchase rights, in terms of lower electricity rates
compared to market rates, of $0.8 million for 2004, compared to $1.2 million for
the prior year.

Pulp

Revenue from the pulp segment decreased by $7.9 million, or 4.3%, to $177.5
million in 2004, compared to $185.4 million in 2003. The decrease in revenue was
largely a result of a stronger Canadian dollar that was partly offset by higher
sales volumes. Sales volumes increased by 7,000 tonnes, or 2.4%, in 2004
compared to the prior year primarily as a result of increasing demand for our
product, especially in Asian markets. Although pulp prices improved in 2004
compared to the prior year, average revenue per unit decreased by $41, or 6.5%,
as a result of the appreciation in the value of the Canadian dollar in relation
to the U.S. dollar. The negative impact of foreign exchange fluctuations was
partly mitigated by our currency hedging program, which resulted in benefits of
$4.7 million in 2004 compared to benefits of $11.3 million in 2003.

Operating earnings from the pulp segment decreased by $3.0 million, or 8.8%, to
$31.2 million in 2004, compared to $34.2 million in 2003. The decrease in
operating earnings in 2004 compared to the prior year was mainly due to lower
revenue that was partially offset by lower manufacturing costs and depreciation
expense. Cost of sales decreased by $1.9 million compared to 2003. Pulp cost of
sales were $16 per tonne, or 4.4%, lower in 2004 compared to the prior year,
largely as a result of lower natural gas costs and lower repairs and maintenance
costs. Depreciation expense for 2004 was $4.1 million lower compared to 2003, as
a result of revising the useful life of process equipment. Freight and other
distribution costs in 2004 were virtually unchanged at $119 per tonne. Pulp cost
of sales also reflected savings from our power purchase rights of $11.0 million
in 2004, compared to $16.4 million for the prior year.

                                       23
<PAGE>

Corporate and Other

Revenue from corporate and other activities increased by $0.2 million compared
to 2003, as a result of increased sales commissions from the marketing agreement
with the Meadow Lake pulp mill.

The operating loss from this segment increased by $0.8 million in 2004 compared
to the prior year. The increased loss in 2004 is largely a result of a higher
accrual for the employees' profit sharing plan, which was partially offset by
lower general and administration expense.

Financing Expenses

Financing expenses decreased by $8.3 million in 2004 compared to 2003, primarily
as a result of foreign exchange rate fluctuations. The Canadian dollar - U.S.
dollar exchange rate at December 31, 2002, December 31, 2003 and December 31,
2004 was 1.5787, 1.2869 and 1.204 respectively. The appreciation in value of the
Canadian dollar relative to the U.S. dollar since the end of 2003 resulted in a
foreign exchange loss of $0.5 million on U.S. dollar cash and working capital in
2004 compared to a loss of $6.8 million in 2003. Interest expense was also $1.7
million lower in 2004 compared to the previous year due to the stronger Canadian
dollar as well as interest accruing on our long-term debt at a rate of 7 3/4%
for the full year, compared to accruing at a rate of 9 7/8% to November 2003.

Refinancing Charges

In the fourth quarter of 2003, we incurred $15.0 million in refinancing charges
associated with the purchase and redemption of our 9 7/8% Senior Notes due 2008.
The refinancing charges consist of premiums of $10.8 million as well as the
write-off of deferred financing costs of $4.2 million. No such charges were
incurred in 2004.

Unrealized Exchange (Gain) Loss on Debt

Unrealized foreign exchange gain on U.S. dollar Senior Notes amounted to $15.8
million in 2004, as a result of the appreciation in the value of the Canadian
dollar compared to the U.S. dollar since the end of 2003. In 2003, unrealized
foreign exchange gain on debt amounted to $47.8 million for the year, due to the
appreciation in the relative value of the Canadian dollar since the end of 2002.
These gains were unrealized and had no impact on our cash flows and were
excluded from the calculation of the employees' profit sharing plan.

Income Taxes

Operating results for 2004 were subject to income and capital taxes at a
statutory rate of 41%. The effective tax rate for the year varied significantly
from the statutory rate, primarily as a result of the non-taxable portion of
unrealized exchange gains on long-term debt. Variations from the statutory rate
are detailed in note 15 of the audited financial statements. Income tax expense
for 2004 consisted of large-corporations capital tax of $0.4 million and future
income tax expense of $9.6 million, compared to large-corporations capital tax
of $0.6 million and future income tax expense of $1.0 million in 2003.

Year ended December 31, 2003 compared to year ended December 31, 2002

Overview

Revenue increased by $39.5 million, or 14.2%, to $317.3 million in 2003,
compared to $277.8 million in 2002. The increase in revenue in 2003, was due to
higher revenue from both the pulp and lumber segments. Revenue from the lumber
segment increased by 13% in 2003 compared to the prior year largely as a result
of higher sales volumes. Revenue from the pulp segment increased by 15% as a
result of higher average prices and sales volumes. A strengthening Canadian
dollar, which has appreciated by approximately 22% relative to the U.S. dollar
in 2003, has had a negative impact on revenue. However, the negative impact has
been partly mitigated by our currency hedging program, which hedged
approximately 61% of our U.S. dollar revenue in 2003. The program's benefits
amounted to $14.7 million in 2003.

                                       24
<PAGE>

Operating earnings increased by $7.4 million, to $31.6 million in 2003, compared
to $24.2 million in 2002. The improvement in operating earnings in 2003 was
largely due to stronger operating results from the pulp segment. While revenue
for pulp and lumber were strong in 2003, operating earnings from the lumber
segment continued to be negatively impacted by higher duties on sales of lumber
to the United States. Duty expense for 2003 amounted to $11.9 million, compared
to $2.9 million in 2002. Duties in the prior year did not commence until May 22
and included a $2.3 million reduction as a result of a reversal of duties that
were previously accrued. Both the lumber and pulp segments continued to generate
positive cash flow as a result of low manufacturing costs.

Depreciation and amortization expense of $16.6 million in 2003 was unchanged
from 2002.

General and administration expense decreased by $0.4 million, to $13.0 million
in 2003, compared to $13.4 million in 2002 primarily as a result of lower salary
and benefit costs.

In 2002, we implemented a workforce reduction program and recorded a provision
for severance costs of $2.3 million. There was no such provision in the current
year.

In 2003, we recorded $0.3 million for distribution under the employees' profit
sharing plan. This plan distributes on an annual basis a percentage of earnings
before income taxes and unusual items, such as unrealized gains or losses.

Lumber

Revenue from the lumber segment increased by $14.8 million, or 13.3%, to $125.7
in 2003, compared to $110.9 million in 2002. The increase in revenue was largely
due to higher sales volumes partially offset by lower average revenue per unit.
Sales volumes improved by 59 million board feet, or 20.8%, in 2003 compared to
2002 due to higher production at our sawmills and continued strong demand. While
sales volumes increased, average revenue per unit decreased by $24 per thousand
board feet, or 6.1%, in 2003 compared to 2002, as a result of lower average
prices. Countervailing and anti-dumping duties for 2003 increased by $9.0
million compared to the prior year. Duties in 2002 did not commence until May 22
and included a $2.3 million reduction as a result of a reversal of duties that
were previously accrued.

Operating earnings for the lumber segment decreased by $4.2 million, or 46.2%,
to $4.9 million in 2003, compared to $9.1 million in 2002. The decrease in
operating earnings in 2003 was largely the result of higher countervailing and
anti-dumping duties. Higher revenue in the second half of the year was not
enough to offset the weak first half of 2003, which experienced lower pricing
and higher duty expenses compared to the first half of 2002. Cost of sales
decreased by $33 per thousand board feet from 2002 as a result of higher
production at both sawmills, as well as lower fiber costs at Boyle stemming from
the utilization of fire-damaged timber. Lumber cost of sales reflects savings
from our power purchase rights, in terms of lower electricity rates compared to
market rates, of $1.2 million in 2003.

Pulp

Revenue from the pulp segment increased by $24.6 million, or 15.3%, to $185.4
million in 2003, compared to $160.8 million in 2002, as a result of higher sales
volumes and higher average revenue per unit. As a result of higher pulp prices
in 2003, average revenue per unit improved by $44 per tonne, or 7.4%. In
addition, sales volumes increased by 20,000 tonnes, or 7.4%, compared to 2002.

Operating earnings from the pulp segment increased by $11.3 million, or 49.3%,
to $34.2 million in 2003 compared to $22.9 million in 2002, which was largely
the result of higher revenues, partially offset by higher repair and maintenance
costs and higher natural gas costs. Pulp cost of sales reflects savings from our
power purchase rights of $16.4 million in 2003.

Corporate and Other

Revenue from our corporate and other activities in 2003 was relatively stable.
Operating earnings in this segment improved by $0.3 million in 2003, compared to
2002, largely as a result of lower salary and benefit costs, partially offset by
an accrual for the employees' profit sharing plan.

                                       25
<PAGE>

Financing Expenses

Financing expenses increased by $2.5 million in 2003, compared to 2002,
primarily due to exchange rate fluctuations. The value of the Canadian dollar
increased from an average of US$0.6368 in 2002 to US$0.7186 in 2003. The
significant appreciation in the value of the Canadian dollar relative to the
U.S. dollar in 2003 resulted in lower interest expense on long-term debt of $4.1
million, but an increase in foreign exchange losses on U.S. dollar cash and
working capital of $6.9 million.

Refinancing Charges

In the fourth quarter of 2003, we incurred $15.0 million in refinancing charges
associated with the purchase and redemption of our 9 7/8% Senior Notes due 2008.
The refinancing charges consist of premiums of $10.8 million as well as the
write-off of deferred financing costs of $4.2 million.

Unrealized Exchange (Gain) Loss on Debt

Unrealized foreign exchange gains on our U.S. dollar 9 7/8% Senior Notes due
2008, which have been purchased or redeemed, and our U.S. dollar 7.75% Senior
Notes due 2013 amounted to $47.8 million in 2003, as a result of the increasing
value of the Canadian dollar compared to the U.S. dollar since the end of 2002.
In 2002, unrealized foreign exchange gains on debt amounted to $2.2 million.
These gains were unrealized and had no impact on our cash flows.

Income Taxes

Operating results in 2003 were subject to income and capital taxes at a
statutory rate of 42%. Variations from the statutory rate are detailed in note
15 of the audited financial statements. In 2003, income tax expense consisted of
a large-corporations capital tax of $0.6 million and future income taxes of $1.0
million, compared to large-corporations capital tax of $0.5 million and a future
income tax recovery of $0.1 million in 2002. The effective tax rate in 2003
varied significantly from the statutory rate, primarily because of the
non-taxable portion of unrealized exchange gains on debt and the recognition of
previously unrecognized tax benefits. In 2003, we recorded $3.6 million of
previously unrecognized tax benefits related to the translation of foreign
currency debt.

     F.   Liquidity and Capital Resources

In 2004, we generated cash of $43.3 million from operations, including changes
in working capital, compared to $12.5 million in 2003. The increase in cash
generated from operations was primarily due to the significant increase in
operating earnings.

Net capital expenditures increased by $10.9 million in 2004 compared to 2003.
Capital expenditures in 2004 included the purchase of a small coniferous timber
allocation, construction of a small log line at Boyle as well as the
implementation of an integrated management information system. Capital
expenditures in 2005 are expected to be approximately $8 million.

At December 31, 2004, we had cash of $96.0 million compared to cash of $72.3
million at December 31, 2003. An additional $30.9 million was available under
our revolving credit facility, of which $3.9 million was committed for letters
of credit. Borrowings under our revolving credit facility are subject to a
borrowing base calculation based on our accounts receivable and inventory. As at
December 31, 2004, the borrowing base was $30.9 million. The interest rate on
the revolving credit facility is floating and may, at our option, be based upon
the Bank Prime Rate, U.S. Base Rate, Bankers Acceptance Rates, or LIBOR plus, in
each case, a borrowing margin. Collateral for the facility is a first charge on
all of our accounts receivable and inventory.

In 2003, we generated cash of $12.5 million from operations, compared to $23.1
million in 2002. The reduced cash flow from operations in 2003 was largely a
result of lower cash provided from changes in working capital. The decrease in
cash generated from working capital changes in 2003 compared to 2002 resulted
from increased accounts receivable and a reduction in deferred revenue in 2003
that more than offset cash generated from

                                       26
<PAGE>

reductions in inventories and prepaid expenses and an increase in accounts
payable and accrued liabilities during the same period. The reduction in
deferred revenue of $6.5 million reflected the recognition in income in 2003 of
cash received in December 2002.

Net capital expenditures increased by $5.4 million in 2003, compared to 2002.
After a year of reduced spending, capital expenditures returned to more regular
levels in 2003 and included the construction of a new dry kiln at Whitecourt and
the purchase of a small hardwood timber allocation.

Based on our current level of operations, we believe that our cash flows from
operations, together with existing cash balances and availability under our
revolving credit facility, will provide sufficient liquidity to meet our
scheduled interest payments, anticipated capital expenditures and working
capital needs over the next 12 months. However, our future operating performance
may be adversely affected by prevailing economic conditions and by financial,
market and other factors, many of which may be beyond our control.

Critical Accounting Estimates

Recoverability of Property, Plant and Equipment and Other Long-Lived Assets

We assess the recoverability of our property, plant and equipment and other
long-lived assets by projecting the future cash flows to be generated by our
pulp and lumber mills. These projections require estimates to be made regarding,
among other things, future commodity prices, foreign currency exchange rates,
sales volumes, operating costs and renewal of licenses and permits. There is a
high degree of uncertainty in estimating future cash flows, primarily as a
result of the uncertainty regarding future prices for our commodities. Different
assumptions for commodity prices could result in a conclusion that we would not
recover the carrying amount of our property, plant and equipment and other
long-lived assets, which could result in a material charge to earnings.

Reforestation Obligation

We accrue our reforestation obligations based on estimates of future costs at
the time the timber is harvested. The estimate of future reforestation costs is
based on comprehensive analyses for all areas that have been logged, the
treatments required for each specific area, the number and size of seedlings to
be planted and the expected timing and success rate of the planned activities.
We employ forestry experts who have the specialized knowledge required to make
such analyses. Actual conditions relating to such factors as weather patterns
and forest fires could result in material revisions to our estimates of future
costs.

Valuation of Inventory

We value our finished product inventory at the lower of cost and net realizable
value. The valuation of inventory is assessed for both pulp and lumber
inventories. Net realizable value is determined by reviewing the actual average
revenue per unit of transactions occurring in the periods immediately before and
after the reporting date. When the net realizable value is below the average
cost of inventory, a write down is charged to earnings in the period. The
determination of net realizable value is both objective and verifiable; however,
downward movement in commodity prices could result in a material write down of
inventories in any given period.

Adoption of New Accounting Pronouncements

In 2002, the Canadian Accounting Standards Board issued a new standard on Asset
Retirement Obligations. Effective January 1, 2004, we adopted this guideline and
retroactively adjusted the carrying value of our reforestation obligations that
were previously reported on a non-discounted basis. The impact of adopting the
new standard was a net decrease in the liability and an increase in retained
earnings of $0.5 million, as described in note 2 to the audited financial
statements included elsewhere in this annual report on Form 20-F.

In 2002, the Canadian Accounting Standards Board issued amended accounting
guideline 13, "Hedging Relationships". The guideline, which sets strict
conditions that must be met before a company can apply hedge accounting, is
effective for fiscal years beginning on or after July 1, 2003. We have adopted
the guideline effective

                                       27
<PAGE>

January 1, 2004 and have met the conditions so that there is no change to our
current accounting policy related to hedge accounting for forward exchange
contracts.

In April 2003, the Canadian Accounting Standards Board issued new Canadian
Standard 3063, "Impairment of Long-Lived Assets". The section establishes
standards for the recognition, measurement and disclosure of the impairment of
long-lived assets held for use. It applies to non-monetary long-lived assets,
including property, plant and equipment, intangible assets with finite useful
lives, deferred pre-operating costs and long-term prepaid assets. The standard
is to be applied prospectively for years beginning on or after April 1, 2003. We
have adopted the new standard effective January 1, 2004, and determined that
there was no indication of impairment to our long-lived assets.

In early 2003, the Financial Accounting Standards Board ("FASB") issued FIN 46,
"Consolidation of Variable Interest Entities" ("VIEs"). FASB subsequently issued
FIN 46-R, a revised interpretation that supplements FIN 46. For the purpose of
determining the effective dates of FIN 46 and FIN 46-R, we are considered a
"Non-public Entity". For all VIEs created before January 31, 2003, we are not
required to adopt FIN 46 or FIN 46-R but are required to adopt FIN 46-R by
January 1, 2005. For VIEs created after January 31, 2003, we must apply the
provisions of FIN 46 or FIN 46-R as at the date we first became involved with
the VIE. This did not result in the consolidation of any VIE's. We will adopt
FIN 46-R effective January 1, 2005.

In June 2003, the Canadian Accounting Standards Board issued Accounting
Guideline 15, "Consolidation of Variable Interest Entities" ("AcG-15"), which is
very similar to FIN 46. AcG-15 is effective for years beginning on or after
November 1, 2004. We expect to adopt AcG-15 effective January 1, 2005.

FIN 46-R and AcG-15 require the application of consolidation principles to
certain entities that are subject to control on a basis other than ownership of
voting interests. We have considered the application of the recommendations of
FIN 46-R and AcG-15 with respect to contractual arrangements in existence at
January 31, 2003 and do not expect that adoption will have a material impact on
our financial statements

     G.   Research and Development

Not applicable.

     H.   Trend Information

Lumber

The lumber division continues to see improvement in its financial performance as
a result of strong demand and thus higher average prices. Prices for lumber
remained high in the first quarter of 2005 as housing starts have been strong.
However, if interest rates rise as some analysts predict, the demand for lumber
is likely to decline in the second half of 2005. The lumber segment continues to
face uncertainty surrounding the Canada-U.S. softwood lumber dispute and until
this issue is resolved it will continue to be difficult to predict future trends
in the lumber market. We expect that manufacturing costs will likely increase as
a result of higher costs for fiber.

Pulp

The pulp division continues to be negatively impacted by foreign exchange
fluctuations. While prices for pulp have been improving, the strong Canadian
dollar in relation to the U.S. dollar continues to have a greater negative
impact on revenue. Moreover, the benefits of our hedging program are expected to
be significantly lower in the second half of 2005 than they have been in the
past two years. Price increase announcements were made in January and March,
2005 resulting in an improvement of price of approximately US$60 per tonne since
the end of 2004. We expect 2005 production and shipment levels to be close to
capacity levels. Manufacturing costs are expected to increase slightly in 2005
as a result of higher costs for chemicals and an increase in repair and
maintenance costs. Freight and distribution costs are expected to increase in
2005 as a result of higher fuel costs and a shortage of rail cars.

                                       28
<PAGE>

Recent Developments

In May, 2005 we declared and paid a $15,000,000 dividend to our parent,
Industries.

     I.   Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements other than $3.9 million
committed for letters of credit under our credit facility.

     J.   Tabular Disclosure of Contractual Obligations

The table below summarizes our contractual obligations as at December 31, 2004.

<TABLE>
<CAPTION>
                                                                                           Payment due by period
                                                                           ---------------------------------------------------------
Contractual Obligations                                                                  Less than   1-3       3-5       More than
(in $ millions)                                                              Total       1 year     years     years      5 years
---------------                                                            --------      ---------  -------   -------   ----------
<S>                                                                        <C>           <C>         <C>       <C>       <C>
Long-term debt.........................................................    $  228.8      $   --      $   --    $   --    $ 228.8
Fixed rate interest(1).................................................       157.8        17.7        35.5      35.5       69.1
Power purchase rights(2)...............................................       341.4        22.0        40.7      42.0      236.7
Natural gas purchase contracts.........................................         5.9         3.3         2.6        --         --
Reforestation..........................................................         7.6         4.0         1.5       0.7        1.4
Other..................................................................         3.3         1.0         2.3        --         --
                                                                           --------      ------     -------   -------   --------
Total..................................................................    $  744.8      $ 48.0      $ 82.6    $ 78.2    $ 536.0
                                                                           ========      ======     =======   =======   ========
</TABLE>
____________
(1)  Based on annual interest of US$14.7 million converted at a rate of 1.204.

(2)  Based on management's reasonable estimate of future maintenance and
     operating costs. See Item 4B.

ITEM 6:  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     K.   Directors and Senior Management

The following table sets forth certain information with respect to the
directors, executive officers and key employees of the Company.

<TABLE>
<CAPTION>
Name                                      Age         Position
----                                      ---         --------
<S>                                       <C>         <C>
James B. Millar........................   64          Chairman and Director
H. MacKenzie Millar(2).................   59          President, Chief Executive Officer and Director
J. Craig Armstrong.....................   53          Executive Vice-President
Joseph R. Concini, C.A.................   43          Chief Financial Officer
Carol Cotton, C.A......................   48          Senior Vice-President, Corporate
Joseph Costantino......................   56          Senior Vice-President, Operations
Ronald J. Reis.........................   52          Senior Vice-President, Engineering & Technology
Robert J. Turner, Q.C.(2)..............   58          Secretary, General Counsel and Director
W. Kenneth Davidson....................   54          Director
William D. Grace, F.C.A.(1) (2)........   69          Director
Donald R. Ching(1).....................   64          Director
Douglas G. Hall (1) (2)................   55          Director
--------------
</TABLE>

(1)  Member of Audit Committee
(2)  Member of Executive Compensation Committee

James B. Millar has served as our Chairman of the Board and a Director since
September 1997. Mr. Millar has also served as President of Industries since
1987. Mr. Millar joined the family business on a full-time basis in 1963,

                                       29
<PAGE>

working in the construction and forest products divisions of our parent,
Industries. Mr. Millar is a past president of the Alberta Roadbuilders
Association and served on the board of trustees of the University of Alberta
Hospitals Foundation. Mr. Millar has a B.Sc. in Civil Engineering from the
University of Alberta. Mr. Millar is the brother of H. MacKenzie Millar.

H. MacKenzie Millar has served as our President, Chief Executive Officer and a
Director since September 1997. Mr. Millar has also served as Senior
Vice-President and Treasurer of Industries since 1994. Mr. Millar previously
served as President and Chief Executive Officer of Millar Western Pulp
(Whitecourt) Ltd. and Millar Western Pulp (Meadow Lake) Ltd. Mr. Millar is a
past president of the Alberta Forest Products Association and has served on the
boards of Forintek Canada, Canadian Wood Council, Alberta Research Council and
the Forest Sector Advisory Council to the Government of Canada. Mr. Millar
joined the family business on a full-time basis in 1970. Mr. Millar has a B.A.
and a Bachelor of Commerce from the University of Alberta and has served on the
Business Advisory Council to the Faculty of Business of the University of
Alberta. Mr. Millar is the brother of James B. Millar.

J. Craig Armstrong has served as Executive Vice-President since July 1998. Prior
to this, Mr. Armstrong had served as our Senior Vice-President, Marketing, since
September 1997. Mr. Armstrong joined Industries in 1987 as Director of Sales and
Marketing and was appointed Senior Vice-President, Marketing, in 1994. Prior to
1987, Mr. Armstrong spent eight years with St. Anne Pulp Sales and five years as
head of sales for Prince Albert Pulp Co. Mr. Armstrong has a Bachelor of
Commerce from the University of Saskatchewan.

Joseph R. Concini, C.A. was appointed Chief Financial Officer in April 2002.
Prior to this, Mr. Concini had served as our Vice-President, Finance, since
September 1997. Mr. Concini joined Industries in 1992 as Corporate Controller
and was appointed Vice-President, Finance, in 1996. Mr. Concini has been a
member of the Institute of Chartered Accountants of Alberta since 1988, and
prior to 1992, he was a principal with Coopers & Lybrand, chartered accountants,
where he was employed for eight years. Mr. Concini has a Bachelor of Commerce
from the University of Alberta.

Carol Cotton, C.A. was appointed Senior Vice-President, Corporate, in April
2002. Prior to this, Ms. Cotton had served as our Senior Vice-President and
Chief Financial Officer since September 1997. Ms. Cotton joined Industries in
1988 as Vice-President, Finance, and was appointed Senior Vice-President and
Chief Financial Officer in 1996. Ms. Cotton has been a member of the Institute
of Chartered Accountants of Alberta since 1982 and prior to 1988, she was a
manager with Coopers & Lybrand, chartered accountants, where she was employed
for nine years. Ms. Cotton has a Bachelor of Commerce from the University of
Alberta.

Joseph Costantino has served as Senior Vice-President, Operations, since 1998.
Prior to this, he had served as our Vice-President, Operations, since September
1997. Mr. Costantino joined Industries in 1989 as Corporate Technical Director
and was appointed Vice-President, Operations, in 1992. Prior to 1989, Mr.
Costantino spent 17 years with MacMillan Bloedel Limited. Mr. Costantino is a
graduate of the British Columbia Institute of Technology.

Ronald J. Reis has served as Senior Vice-President, Engineering & Technology,
since 1998. Prior to this, Mr. Reis had served as our Vice-President,
Engineering and Technology, since September 1997. Mr. Reis joined Industries in
1987 as Corporate Technical Director and was appointed Vice President,
Engineering and Technology in 1992. Prior to 1987, Mr. Reis spent 12 years with
BC Forest Products. Mr. Reis is a graduate of Lakehead University.

Robert J. Turner, Q.C. has served as our Secretary, General Counsel and a
Director since September 1997. Since May 1994, Mr. Turner has also served as
Secretary and General Counsel of Industries. Mr. Turner is a partner and
Vice-Chairman of Fraser Milner Casgrain LLP, a law firm. Mr. Turner has a
Bachelor of Commerce from the University of Calgary and an L.L.B. from the
University of Alberta. Mr. Turner is also a director of EPCOR Preferred Equity
Inc.

W. Kenneth Davidson was appointed a Director in September 1997. He is currently
an independent consultant.

William D. Grace, F.C.A. was appointed a Director in September 1997. Mr. Grace
also serves as a director of Stantec Inc., the Forzani Group Ltd., and Melcor
Developments Ltd.

                                       30
<PAGE>

Donald R. Ching was appointed a Director in September 1997. Mr. Ching is
President and Chief Executive Officer of COGEMA Resources Inc.

Douglas G. Hall was appointed a Director in March 1999. Mr. Hall also serves as
a director of Nova Scotia Business Inc. and is a member of the Advisory Board
for Ajustable Rate MBS Trust. Mr. Hall has an M.B.A. from the University of
Western Ontario and a B.A. from Queen's University and is also a Chartered
Financial Analyst.

Certain of our directors and officers are also directors and officers of
Industries and are therefore in positions involving possible conflicts of
interest. Specifically, James B. Millar, Chairman and a Director, is also
President and a Director of Industries; H. MacKenzie Millar, President, Chief
Executive Officer and a Director, is also the Senior Vice President, Treasurer
and a Director of Industries; Carol Cotton, Senior Vice-President, Corporate, is
also Senior Vice-President, Corporate, of Industries; Joseph R. Concini, Chief
Financial Officer, is also Chief Financial Officer of Industries; and Robert J.
Turner, Secretary, General Counsel and a Director, is also Secretary and General
Counsel of Industries. Our directors and officers are subject to fiduciary
obligations to act in our best interests. Individuals who are directors and
officers of both Millar Western and Industries have agreed with us that they
will dedicate a substantial majority of their time to us in order to perform
their duties as our directors and officers.

     L.   Compensation

Executive officers are appointed annually and serve at the discretion of the
Board of Directors. The aggregate amount of compensation paid by us in 2004 to
all directors and officers as a group for services in all capacities was $3.9
million.

Our policy provides that each non-employee director is entitled to receive an
annual fee of $15,000 and a fee of $1,200 for each board or committee meeting
attended. The chair of each committee of the Board of Directors is entitled to
an additional $3,500 per annum. The total compensation paid to non-employee
directors for the year ended December 31, 2004 was $0.1 million.

We do not have a stock incentive plan and have never granted stock appreciation
rights to any of our directors, officers or employees. We maintain a defined
contribution pension plan for all of our employees. The aggregate amount which
we contributed to the pension plan on behalf of the employees in 2004 was $1.8
million, of which $0.2 million represented contributions on behalf of our
officers. All of our employees are entitled to participate on a voluntary basis
in a retirement savings plan, or a RSP, under which we match each employee's RSP
contribution. The aggregate amount of matching RSP contributions which were paid
by us in 2004 was $0.7 million, of which less than $5,000 represented matching
contributions on behalf of our officers.

On January 1, 2000, we established a supplementary defined benefit pension plan
for our executives and certain key employees. Under this plan, participants will
be entitled to a target level of retirement benefits in combination with the
Canada Pension Plan and our other Registered Pension Plans. The aggregate amount
which we contributed to the supplementary pension plan on behalf of the
participants was $0.3 million in 2004.

In 1994, we instituted a performance bonus plan for eleven executives and key
employees. Under this plan, participants are entitled to a bonus commencing in
December 31, 2003, payable in four equal annual payments. In conjunction with
the performance bonus plan, key man life insurance contracts were established
which were designed to provide us with recovery of after-tax costs of the
performance bonus plan.

All full-time employees participate in a profit sharing plan which distributes
to employees on an annual basis a percentage of earnings before income taxes and
unusual items, such as unrealized exchange gains or losses on debt. The
percentage of such earnings set aside for distribution under the employee profit
sharing plan is reviewed annually. For the years ended December 31, 2002, 2003
and 2004, the amount of such earnings set aside for distribution was nil, $0.3
million and $2.5 million, respectively.

                                       31
<PAGE>

     M.   Board Practices

In accordance with its articles of incorporation and by-laws, the Company's
Board of Directors may consist of up to ten directors and the Company's current
Board of Directors consists of seven directors. Each director holds office until
the next annual general shareholders' meeting or until the election of his or
her successor, unless the director resigns or the office becomes vacant by
reason of the Director's death, removal or other cause. The start of each
director's and executive officer's term of service is set forth in Item 6(A)
above. No directors have service contracts providing for benefits upon
termination of employment.

The Audit Committee of the Board of Directors currently consists of independent
directors: William D. Grace, Donald R. Ching and Douglas G. Hall. The Audit
Committee is responsible for reviewing the Company's financial statements and
its internal controls, reviewing the work of the Company's independent auditors,
monitoring other financial matters and making recommendations for approval
thereon to the Board of Directors.

The Executive Compensation Committee currently consists of four members: Douglas
G. Hall, William D. Grace, H. MacKenzie Millar and Robert J. Turner. The
Executive Compensation Committee is responsible for reviewing compensation
levels of senior management and other executive compensation matters.

     N.   Employees

As at December 31, 2004, we employed 636 full-time employees, all of whom are
non-unionized.

<TABLE>
<CAPTION>
Location                                                                                                  Employees(1)
-----------                                                                                               ------------
<S>                                                                                                             <C>
Corporate office (Edmonton)..........................................................................           68
Whitecourt pulp mill.................................................................................          110
Whitecourt sawmill(2)................................................................................          248
Whitecourt woodlands.................................................................................           32
Boyle sawmill and woodlands..........................................................................          178
                                                                                                               ---
Total................................................................................................          636
                                                                                                               ===
</TABLE>
____________
(6)  Does not include part-time or seasonal employees.

(7)  Whitecourt sawmill includes sawmill, woodroom, log, chip and waste handling
     employees.

In addition, we employ independent contractors to provide logging, trucking,
road building and forest regeneration services.

We believe we have excellent relations with our employees, demonstrated by
exceptionally low absenteeism and turnover rates. Further, we have never
experienced a labor disruption. Our compensation initiatives have been
successful in enhancing employee commitment to our operating strategy, while
employee training in technical, leadership and business skills has resulted in
ongoing improvements in productivity. Employee safety is a priority at all our
operations, which is reflected in our low safety incident rates. For 2003, our
Whitecourt and Boyle sawmills received awards as the safest mills in Alberta in
their respective size categories. Our Boyle sawmill received the continuing
excellence in health and safety awards in their category for their performance
over a five year period. Our highly motivated employees are key contributors to
the efficiency, productivity and safety that characterize our operations.

     O.   Share Ownership

As the Company is 100% owned by Industries, none of the individuals described
above owns shares in the Company or has options to purchase any shares.

ITEM 7:  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

                                       32
<PAGE>

     P.   Major Shareholders

Industries holds, directly and of record, 15,000,001 common shares, representing
100% of our outstanding common shares. Industries is a company with operations
in construction, chemicals and other businesses. Industries and its affiliate
also hold a 50% interest in the Meadow Lake pulp mill. Industries is owned 100%
by Hualkeith Investments Ltd., Hualkeith, a corporation indirectly owned 100% by
James B. Millar, H. MacKenzie Millar and other members of the Millar family.
James B. Millar and H. MacKenzie Millar together control 55.6% of the
outstanding equity of Hualkeith. The registered office of Industries is located
at 2900 ManuLife Place, 10180 -101 Street, Edmonton, Alberta, T5J 3V5 and its
executive offices are located at 16640 -111 Avenue, Edmonton, Alberta, T5M 2S5.

There are no arrangements known to us that may at a subsequent date result in a
change in control of us.

By virtue of its ownership of all of our issued and outstanding common shares,
Industries acting alone can elect our entire board of directors and can approve
any transaction requiring shareholder approval.

     Q.   Related Party Transactions

On May 13, 1998, we, Industries, and certain of our executive officers entered
into certain agreements, which are described in greater detail below. Management
believes that such agreements are equivalent to those that could have been
negotiated with unaffiliated, third parties.

Non-Competition Agreement

Industries, James B. Millar and H. MacKenzie Millar have entered into a
non-competition agreement, whereby each agreed not to engage, without our
consent, in the operation of or have any financial interest in any business
operation in the forest products industry in Canada or the United States for so
long as Industries, James B. Millar and H. MacKenzie Millar hold, in the
aggregate, at least 10% of our outstanding common shares. The non-competition
agreement does not apply to the ownership of any equity interest in the Meadow
Lake pulp mill, the purchase of less than a controlling interest of a publicly
traded company engaged in the forest products industry, selling goods or
products to businesses in the forest products industry (provided that the
relationship is strictly supplier-purchaser) or performance under the Corporate
Services Agreement described below. In addition, Industries, James B. Millar and
H. MacKenzie Millar have agreed not to disclose any confidential information or
trade secrets concerning our present and contemplated business.

Trademark Licensing Agreement

Industries is the registered owner in Canada of the trademark "MILLAR WESTERN",
the Millar Western logo and the trademark "WHITECOTE". We and Industries entered
into a trademark licensing agreement, which we refer to as the Trademark
Licensing Agreement, which grants to us a non-exclusive, non-transferable
license to use the trademarks in Canada and, where applicable, in the United
States, and wherever else in the world the trademarks are registered, in
association with the sale of salt, lumber, wood chips, pulp, construction
services, and paper and paper products. Under the license, we will be required
to maintain certain quality standards for wares and services set by Industries.
In addition, we may only use the trademarks in our business or tradename and not
as or in any other corporate, business or tradename. The Trademark Licensing
Agreement may be terminated by either party upon six months' notice to the other
party or by Industries in the event of a material breach of the Trademark
Licensing Agreement by us.

Corporate Services Agreement

We entered into a corporate services agreement, which we refer to as the
Corporate Services Agreement, with Industries in 1998, regarding office,
managerial and aircraft services. Pursuant to the Corporate Services Agreement,
Industries has granted us a non-exclusive license to use and occupy an office
building owned by Industries for market rent. We have agreed to supply to
Industries, on a non-exclusive basis, management, finance and accounting,
information systems, purchasing and human resource services as the needs of
Industries dictate. Industries pays us 5% in excess of the costs we incur in
providing such services. All of the persons employed by Industries in forest

                                       33
<PAGE>

products operations remained employees of Industries until December 31, 1998, at
which time they became our employees. Industries agreed to make such employees
available to us, continued to pay such employees and did not terminate or alter
any terms of employment. We reimbursed Industries for all costs incurred by
Industries related to those employees. Industries makes its aircraft available
to us on a standby basis and we pay a standby fee equal to 100% of the fixed
costs of the aircraft and a proportionate amount of the variable costs equal to
the portion of our use of the aircraft in relation to the total use of the
aircraft. The Corporate Services Agreement may be terminated by either party
upon six months' notice.

The agreements described below were assigned to us by Industries on May 13,
1998. Management believes that such agreements involve the payment of market
rates or are on terms that we would have negotiated with unaffiliated, third
parties.

Meadow Lake Agreements

Pursuant to a marketing agreement with the Meadow Lake Pulp Limited Partnership,
or the Partnership, we must use our best efforts to arrange for sales of the
pulp produced by the Meadow Lake pulp mill on terms approved by the Partnership.
We are required to distribute sales fairly between the Meadow Lake pulp mill and
the Whitecourt pulp mill. We receive 3% of the net sales value of pulp produced
by the Meadow Lake pulp mill as a commission. This agreement can be terminated
upon two months' notice.

Pursuant to an administrative services agreement with the Partnership, we must
make our executive officers, administrative personnel and facilities available
to the Partnership on a non-exclusive basis to the extent reasonably required by
the Partnership. The Partnership is required to pay the expenses (including a
proportional allocation of overhead expenses) we incur in providing such
personnel and facilities. This agreement can be terminated upon two months'
notice.

Magnesium Sulphate Supply Agreement

Pursuant to a magnesium sulphate supply agreement, Industries produces and
supplies, and we purchase, all of the magnesium sulphate requirements of the
Whitecourt and Meadow Lake pulp mills at a price based upon the market rate.
This agreement may be terminated by either party on two months' notice.

Services Provided by Directors

Robert J. Turner, Secretary, General Counsel and a Director of Millar Western,
is a partner at the law firm of Fraser Milner Casgrain LLP, which received fees
of $449,140, $318,821 and $329,793 for general corporate legal advice provided
to us in 2002, 2003 and 2004, respectively. Such compensation did not exceed 5%
of the revenues of Fraser Milner Casgrain LLP during 2002, 2003 or 2004.

Indebtedness of Directors and Officers

     As at December 31, 2004, there was no indebtedness outstanding to us by
directors or executive officers.

     R.   Interests of Experts and Counsel

Not applicable.

ITEM 8:  FINANCIAL INFORMATION

     S.   Consolidated Statements and Other Financial Information

See Item 18:  Financial Statements.

                                       34
<PAGE>

Legal Proceedings

We are involved in various legal proceedings arising out of the ordinary course
of our business. We believe that the liabilities, if any, arising from all
pending legal proceedings in the aggregate will not have a material adverse
effect on our financial condition or operations.

     T.   Significant Changes

Not applicable.

ITEM 9:  THE OFFER AND LISTING

     U.   Offer and Listing Details

There is no organized trading market, inside or outside the United States, for
the Notes covered by this annual report on Form 20-F.

     V.   Plan of Distribution

Not applicable.

     W.   Markets

The Notes covered by this annual report on Form 20-F are not listed on any stock
exchange or other regulated market.

     X.   Selling Shareholders

Not applicable.

     Y.   Dilution

Not applicable.

     Z.   Expenses of the Issue

Not applicable.

ITEM 10: ADDITIONAL INFORMATION

     AA.  Share Capital

Not applicable.

     BB.  Memorandum and Articles of Association

Under the Business Corporations Act (Alberta), a director may vote on a
proposal, arrangement or contract in which he or she is interested, if the
contract is:

     (a)      an arrangement by way of security for money lent to or obligations
          undertaken by that director, or by a body corporate in which he has an
          interest, for the benefit of the Company,

     (b)      a contract relating primarily to that director's remuneration as a
          director,

                                       35
<PAGE>


     (c)      a contract for indemnity or liability insurance, and

     (d)      a contract with an affiliate.

In the absence of an independent quorum, a director may not vote compensation to
himself or herself. The directors may, without authorization of the
shareholders,

     (a)  borrow money on the credit of the Company,

     (b)  subject to certain conditions, give a guarantee on behalf of the
          Company to secure performance of an obligation of any person, and

     (c)  mortgage, hypothecate, pledge or otherwise create a security interest
          in all or any property of the Company, owned or subsequently acquired,
          to secure any obligation of the Company.

Such borrowing powers can only be varied by a special resolution of the
shareholders (not less than two-thirds of the votes).

The Company's directors are not subject to any age limit requirement, and no
shares are required for director's qualification.

The following are the rights, preferences and restrictions attaching to the
Company's common shares:

Dividend Rights. The Board of Directors may from time to time declare dividends
payable to shareholders according to their respective rights and interests in
the Company. Dividends may be paid, in money or property or by issuing
fully paid shares of the Company.

Subject to the rights of the holders of any shares of the Company having rights
or privileges superior to the common shares with respect to any priority in the
payment of dividends:

     (e)      each holder of a common share shall be entitled to receive
          dividends as and when declared and payable, and

     (f)      dividends may be declared and paid on the common shares to the
          complete exclusion of the other classes of shares of the Company.

Rights to Share in Profits or Surplus on Liquidation. Subject to the rights of
the holders of any shares of the Company having rights or privileges superior to
the common shares with respect to priority of distribution on a liquidation,
dissolution or winding-up, each holder of a common share shall be entitled to
receive, on a proportionate basis, the remaining property of the Company in the
event of a liquidation, dissolution or winding-up of the Company, whether
voluntary or involuntary. Any remaining property shall be paid or distributed in
equivalent amount per share on each outstanding common share and any shares of
the Company whose entitlement on a liquidation, dissolution or winding-up ranks
equally with the common shares.

Rights of Retraction. Subject to holders' of shares of a class or series right
to vote separately as a class or series, a special resolution is required to
change the rights of holders of shares of any class or series of shares of the
Company. These are no more significant than required by law.

Shareholders Meeting. Subject to the Business Corporations Act (Alberta), the
annual meeting of shareholders is held at such time, and on such day in each
year, and at such place or places as the board of directors, the chairman of the
board, the managing director, or the president may from time to time determine.

The board of directors has the power to call a special meeting of shareholders
at any time.

                                       36
<PAGE>

The only persons entitled to be present at a meeting of shareholders shall be
those entitled to vote thereat, the directors and auditors of the Company, and
others who, although not entitled to vote, are entitled or required under any
provision of the Business Corporations Act (Alberta) or articles or by-laws to
be present at the meeting. Any other person may be admitted only by invitation
of the chairman of the meeting, or with the consent of the meeting.

There are currently no limitations on the right of foreign or non-resident
owners of Notes to hold or vote such securities imposed by Canadian law or the
Company's articles or other constituent documents.

There are no provisions of the Company's articles or other constituent documents
that would delay, defer or prevent a change of control and that would operate
only with respect to a merger, acquisition or corporate restructuring involving
the Company.

The Company's articles and other constituent documents do not contain provisions
governing changes in capital that are more stringent than required by law.

     CC.  Material Contracts

Not applicable.

     DD.  Exchange Controls

There are currently no limitations imposed by Canadian laws, decrees or
regulations that restrict the import or export of capital, including foreign
exchange controls, or that affect the remittance of dividends, and interest or
other payments to nonresident holders of the Company's securities.

     EE.  Taxation

The following is a summary of the principal Canadian federal income tax
consequences generally applicable to a holder of Notes who, for the purposes of
the Income Tax Act (Canada) (the "Act"), and at all relevant times is a
non-resident of Canada, deals at arm's length with the Company and holds the
Notes as capital property other than capital property used in carrying on a
business in Canada. For the purposes of the Act, related persons (as therein
defined) are deemed not to deal at arm's length and it is a question of fact as
to whether persons not related to each other deal at arm's length. This summary
does not address the special tax consequences which may apply to a holder of
Notes who is an insurer carrying on business in Canada for the purposes of the
Act.

This summary is based on the current provisions of the Act and the regulations
thereunder, counsel's understanding of the current published administrative
practices of the Canada Revenue Agency, and all specific proposals to amend the
Act and the regulations announced by the Minister of Finance prior to the date
hereof. This summary does not otherwise take into account or anticipate changes
in the law, whether by judicial, governmental or legislative decisions or
action, nor does it take into account tax legislation or considerations of any
province or territory of Canada or any jurisdiction other than Canada.

The payment of interest, principal or premium, if any, on the Notes and the
redemption or disposition of the Notes, will be exempt from Canadian withholding
tax.

No other income tax consequences (including taxable capital gains or allowable
capital losses) will arise under the Act solely as a consequence of the
ownership, exchange, redemption or disposition of the Notes including the
receipt of interest, principal or premium, if any, thereon.

THIS SUMMARY IS OF A GENERAL NATURE ONLY AND DOES NOT CONSTITUTE LEGAL OR LEGAL
TAX ADVICE TO ANY PARTICULAR HOLDER OF NOTES. NO REPRESENTATION IS MADE WITH
RESPECT TO THE TAX CONSEQUENCES TO ANY PARTICULAR HOLDER, CONSEQUENTLY, HOLDERS
OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THEIR PARTICULAR
CIRCUMSTANCES.

                                       37
<PAGE>

     FF.  Dividends and Paying Agents

Not applicable.

     GG.  Statements by Experts

Not applicable.

     HH.  Documents on Display

The Company's registration statement on Form F-4 and its annual and periodic
reports filed with the U.S. Securities and Exchange Commission may be inspected
and copied at the Commission's public reference facilities in Room 5080, 100F
Street, N.E., Washington, D.C., 20549, and at the regional offices of the
Commission. The Commission may be reached at 1-800-SEC-0330 for further
information on the public reference rooms. These Commission filings are also
available to the public from commercial document retrieval services. Reports
furnished by the Company with the Commission since November 26, 2002 are also
maintained electronically on the Commission's website, www.sec.gov. In addition,
if the Company is not required to file such information pursuant to the Exchange
Act, it shall provide the Trustee and the holders of Notes with all annual and
quarterly financial information that would be required to be contained in a
filing with the Commission on Forms 20-F, 40-F and 6-K, as applicable, if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
to the annual financial information, a report thereon by the Company's chartered
accountants; provided that (x) such quarterly financial information shall be
furnished within 60 days following the end of each fiscal quarter of the Company
and (y) such annual financial information shall be furnished within 180 days
following the end of the fiscal year of the Company. In addition, whether or not
required by the rules and regulations of the Commission, the Company will file a
copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing).

     II.  Subsidiary Information

Not applicable.

ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Prices

The markets for pulp and lumber are highly cyclical and affected by such factors
as global economic conditions, demand for pulp and paper, residential and
commercial construction in North America and Asia, changes in industry
production capacity and inventory levels. In addition, Canadian lumber markets
and our results have been significantly impacted by the softwood lumber dispute.
These factors all have a significant impact on selling prices and our
profitability. The following outlines the sensitivity of our operating earnings
over the course of a year to changes in commodity prices.


<TABLE>
<CAPTION>
                                                                                         Change in            Estimated impact on
                                                                                     realized price(1)       operating earnings(2)
                                                                                     ------------------     ----------------------
                                                                                                  (in millions)
<S> <C>                                                                                <C>                     <C>
Pulp(3)............................................................................  US$50/ADMT                $   16.4
Lumber(4)..........................................................................  US$50/MFBM                $   19.9
</TABLE>
____________
(1)  Assumed exchange rate of US$0.80 = $1.00.

(2)  Before impact of profit sharing plan.

                                       38
<PAGE>

(3)  Based on annual shipments of 300,000 ADMT.

(4)  Based on annual shipments of 345 MMFBM and combined softwood lumber duties
     of 20.74%.

Foreign Exchange

We sell the majority of our products outside of Canada in U.S. dollars (72% of
2004 revenue; 76% of 2003 revenue; and 73% of 2002 revenue). Consequently, the
value of the Canadian dollar versus the U.S. dollar has a major impact on
revenue and profitability. The value of the Canadian dollar was US$0.8310 as at
December 31, 2004, compared to US$0.7738 as at December 31, 2003.

The impact on earnings of fluctuations in currency rates is somewhat offset by
the corresponding fluctuations in our debt service payments, substantially all
of which are denominated in U.S. dollars. To further reduce the impact on
earnings of fluctuations in currency rates, we have a policy of hedging up to
75% of our anticipated U.S. dollar cash receipts with foreign exchange forward
contracts of up to 12 months in duration. Foreign currency derivative financial
instruments are not used for speculative purposes. In 2004, we utilized US$96
million of U.S. dollar foreign exchange forward contracts under the hedging
program, or approximately 67% of our U.S. dollar revenue, and realized benefits
of $6.3 million. As at December 31, 2004, we had US$29 million of foreign
exchange forward contracts which expire at various dates to August 31, 2005. The
average rate of the contracts is US$0.7437 = $1.00. As at December 31, 2004,
these contracts had an unrecognized gain of $4.1 million. Based on sales revenue
for the year ended December 31, 2004, the effect of a US$0.01 change in the
value of the Canadian dollar over the course of the year would impact operating
earnings by approximately $2.4 million.

Interest Rate

The interest rate on our existing US$190.0 million aggregate principal amount of
7.75% Senior Notes due 2013 is fixed. We do not currently use any derivative
instruments to manage our exposure to changes in market interest rates, nor do
we use any instruments to manage our exposure to changes in foreign currency
rates with respect to our U.S. dollar denominated debt, nor do we intend to with
respect to the Notes.

ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II
-------

ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
         PROCEEDS

Not applicable.

ITEM 15: CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Our principal executive officer and
principal financial officer, after evaluating the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c)) as of the end of the period covered by this report, have
concluded that, as at such date, our disclosure controls and procedures were
effective in timely alerting them to material information relating to us
required to be disclosed in our reports filed or submitted under the Exchange
Act. Notwithstanding the foregoing, there can be no assurance that our
disclosure controls and procedures will detect or uncover all failures within
our company to disclose all material information otherwise required to be set
forth in our periodic reports.

                                       39
<PAGE>


Changes in Internal Control Over Financial Reporting. There was no change in our
internal control over financial reporting that occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT

William D. Grace is an "audit committee financial expert" as such term is
defined under the rules and regulations of the New York Stock Exchange.

ITEM 16B: CODE OF ETHICS

We have adopted a code of ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer and persons
fulfilling similar functions. The code of ethics is filed as an exhibit to this
annual report on Form 20-F for the year ended December 31, 2004. A copy of the
code of ethics will be provided to any person without charge upon such person's
request in writing to our Chief Financial Officer at the address set forth on
the cover of this annual report on Form 20-F.

ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES

We paid the following fees to PricewaterhouseCoopers LLP fees in each of the
years ended December 31, 2003 and 2004 for professional services:

<TABLE>
<CAPTION>
Fees                                                     2003                           2004
<S>                                                      <C>                           <C>
Audit Fees(1)                                            $95,500                       $122,570
Audit-Related Fees(2)                                     74,500                          5,000
Tax Fees(3)                                               19,700                              -
All Other Fees(4)                                         11,750                              -
                                             ----------------------------- -------------------------------
Total                                                  $201,450                       $127,570
                                             ============================= ===============================
</TABLE>

1    Audit fees comprise professional services for the audit of our annual
     financial statements, review of our interim financial statements, and
     services normally provided in connection with our statutory and regulatory
     filings.

2    Audit-Related Fees comprise amounts paid for the audit of expenditures
     under our FRIP program, consultations on accounting developments and the
     accounting for potential corporate transactions.

3    Tax Fees comprise amounts paid for tax compliance and advisory services.

4    All Other Fees in 2003 and 2004 comprise amounts paid relating to
     benchmarking consultations.

Our audit committee approved 100% of the fees paid to PricewaterhouseCoopers LLP
in 2003 and 2004 and has adopted a pre-approval policy with respect to permitted
non-audit services. Under this policy, subject to certain conditions, specified
audit-related services, tax compliance, audit services and tax services may be
presented to the Audit Committee for pre-approval as a category of services on
an annual or project basis. On an annual basis, management is required to update
the audit committee in respect of the actual amount of fees in comparison to the
pre-approved estimate. All non-audit services not otherwise pre-approved by the
audit committee must be pre-approved by the audit committee on an individual
basis.

ITEM 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not Applicable

                                       40
<PAGE>

ITEM 16E: PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Not Applicable

PART II
-------

ITEM 17: FINANCIAL STATEMENTS

Not applicable.

ITEM 18: FINANCIAL STATEMENTS

     The Auditor's Report and Financial Statements for the Company are attached
hereto as itemized under Item 19(a) and are incorporated herein by reference.
Such Financial Statements have been prepared on the basis of Canadian GAAP. A
reconciliation to United States GAAP appears in note 21 thereto.

ITEM 19A:         EXHIBITS

(a)  Financial Statements

     (i)  Auditors' Report.
     (ii) Balance Sheets as at December 31, 2003 and 2004.
     (iii) Statements of Earnings for the years ended December 31, 2002, 2003
          and 2004.
     (iv) Statements of Retained Earnings for the years ended December 31, 2002,
          2003 and 2004.
     (v)  Statements of Cash Flows for the years ended December 31, 2002, 2003
          and 2004.
     (vi) Notes to the Financial Statements.
     (vii) Financial Statement Schedule s are omitted because they are not
          applicable, not required or because the required information is
          included in the Financial Statements filed herein.

(b)  Exhibits
     --------

Exhibit Number                                      Description of Exhibit
1.1*          Certificate, Articles of Incorporation and Articles of Amendment
1.2*          By-laws
2.1****       Indenture dated as of November 25, 2003 between the Company and
              The Bank of New York
2.2****       Registration Rights Agreement between the Company and Goldman,
              Sachs & Co. dated November 25, 2003
2.3****       Form of old note (included in Exhibit 4.1)
2.4****       Form of new note (included in Exhibit 4.1)
4.1****       Purchase Agreement between the Company and Goldman, Sachs & Co.
              dated November 20, 2003.
4.2*          Forest Management Agreement dated May 14, 1997 between the
              Minister of Environmental Protection of Alberta and Millar
              Western Industries Ltd.
4.3*          Corporate Services Agreement dated May 13, 1998 between the
              Registrant and Millar Western Industries Ltd.
4.4*          Form of 1994 Performance Bonus Plan of the Registrant
4.5*          Non-Competition Agreement dated as of May 13, 1998 among the
              Registrant, Millar Western Industries Ltd., James B. Millar and
              H. MacKenzie Millar
4.6*          Marketing Agreement dated as of November 1, 1990 among Millar
              Western Management Ltd. and Meadow Lake Pulp Limited
4.7*          Administrative Services Agreement dated October 31, 1990 among
              Millar Western Management Ltd., Millar Western Pulp (Meadow Lake)
              Ltd. and Meadow Lake Pulp Limited Partnership
4.8*          Trademark Licensing Agreement dated May 13, 1998 between the
              Registrant and Industries

                                       41
<PAGE>

4.9****       Credit Agreement dated as of June 27, 2001, as amended, between
              the Registrant and Canadian Imperial Bank of Commerce
4.10**        PPA Auction Agreement dated July 14, 2000
4.11***       Power Syndicate Agreement (Battle River) dated January 1, 2001
4.12***       Power Syndicate Agreement (Sundance C) dated January 1, 2001
11.1*****     Code of Ethics
12.1*****     Certification of the Chief Executive Officer, H. MacKenzie Millar
              required by 17 CFR 240.15d-14(a).
12.2*****     Certification of the Chief Financial Officer, Joseph R. Concini
              required by 17 CFR 240.15d-14(a).
13.1*****     Certification of the Chief Executive Officer, H. MacKenzie Millar
              required by 17 CFR 240.15d-14(b) and 18 U.S.C. Section 1350.
13.2*****     Certification of the Chief Financial Officer, Joseph R. Concini
              required by 17 CFR 240.15d-14(b) and 18 U.S.C. Section 1350.
---------------
*             Incorporated by reference from the Registrant's Form F-4 filed
              with the Securities and Exchange Commission (Commission File No.
              333-8960).
**            Incorporated by reference from the Registrant's Form 20-F filed
              with the Securities and Exchange Commission on June 27, 2001.
***           Incorporated by reference from the Registrant's Form 20-F filed
              with the Securities and Exchange Commission on June 4, 2002.
****          Incorporated by reference from the Registrant's Form F-4 filed
              with the Securities and Exchange Commission (Commission File No.
              333-112898).
*****         Filed herewith.

                                       42
<PAGE>

                                    SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.

                                             MILLAR WESTERN FOREST PRODUCTS LTD.

Dated:  June 24, 2005                        By:   /s/ Joseph R. Concini
                                                   -----------------------------
                                                    Joseph R. Concini
                                                    Chief Financial Officer
<PAGE>

                                                      PricewaterhouseCoopers LLP
                                                           Chartered Accountants
                                                            Suite 1501, TD Tower
                                                              10088 - 102 Avenue
                                                               Edmonton, Alberta
                                                                 Canada  T5J 3N5

Auditors' Report

To the Shareholder of
Millar Western Forest Products Ltd.

We have audited the balance sheets of Millar Western Forest Products Ltd. as at
December 31, 2004 and 2003 and the statements of earnings, retained earnings and
cash flows for each of the years in the three-year period ended December 31,
2004. 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 audits.

We conducted our audits in accordance with Canadian generally accepted auditing
standards in Canada and the United States. Those standards require that we plan
and perform an audit to obtain reasonable assurance 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.

In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Millar Western Forest Products Ltd. as
at December 31, 2004 and 2003 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2004 in
accordance with Canadian generally accepted accounting principles.

                              /s/ PricewaterhouseCoopers LLP

                                                  Chartered Accountants
                                                    Edmonton, Canada
                                                    February 21, 2005

<PAGE>



                       MILLAR WESTERN FOREST PRODUCTS LTD.

                              FINANCIAL STATEMENTS
                      FOR THE YEAR ENDED DECEMBER 31, 2004


--------------------------------------------------------------------------------

<PAGE>

                       MILLAR WESTERN FOREST PRODUCTS LTD.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                         -----------------------------------

                                                                                                2004            2003

                                                                                                           (restated-note 2)
                                                                                         ----------------  -----------------

                                                                                         (in thousands of Canadian dollars)

                                                          ASSETS
<S>                                                                                     <C>               <C>

Current assets
    Cash and cash equivalents..........................................................  $     95,959      $   72,301
    Accounts receivable................................................................        25,805          34,605
    Inventories (note 3)...............................................................        46,144          47,595
    Prepaid expenses...................................................................        10,854           8,271
    Future income taxes (note 15)......................................................           806           3,526
                                                                                         --------------   ------------
                                                                                              179,568         166,298
Property, plant and equipment (note 4).................................................       157,626         152,446
Other assets (note 5)..................................................................        25,563          26,953
                                                                                         --------------   ------------
                                                                                          $   362,757      $  345,697
                                                                                         ==============   ============

</TABLE>


                                       LIABILITIES AND SHAREHOLDER'S EQUITY

<TABLE>
<CAPTION>
<S>                                                                                     <C>               <C>
Current liabilities
    Accounts payable and accrued liabilities...........................................   $    45,023      $   47,593


Long-term debt (note 7)................................................................       228,760         244,511
Other obligations (note 8).............................................................         5,642           5,394
Future income taxes (note 15)..........................................................        16,973          10,093
                                                                                         --------------   ------------
                                                                                              296,398         307,591

Shareholder's equity
    Share capital (note 9).............................................................             -               -
    Retained earnings..................................................................        66,359          38,106
                                                                                         --------------   ------------
                                                                                          $   362,757      $  345,697
                                                                                         ==============   ============

</TABLE>


On behalf of the Board:



-----------------------------              -------------------------------------
J.B. Millar                                H.M. Millar
Chairman                                   President and Chief Executive Officer


    The accompanying notes are an integral part of the financial statements.


<PAGE>

                       MILLAR WESTERN FOREST PRODUCTS LTD.

                             STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                     --------------------------------------------------

                                                                         2004              2003               2002
                                                                     ------------   ----------------   ----------------

                                                                             (in thousands of Canadian dollars)
<S>                                                                  <C>                <C>              <C>
Revenue (note 1)...................................................  $   345,968        $   317,297      $   277,830
Cost of products sold (note 11)....................................      212,451            197,072          177,354
Freight and other distribution costs...............................       47,856             46,934           40,921
Countervailing and anti-dumping duties (note 10)...................       13,657             11,811            2,944
Depreciation and amortization......................................       15,119             16,601           16,731
General and administration.........................................       11,514             12,978           13,391
Severance costs (note 12)..........................................            -                  -            2,298
Employees' profit sharing..........................................        2,504                325                -
                                                                     ------------       ------------     ------------
Operating earnings.................................................       42,867             31,576           24,191
Financing expenses (note 13).......................................      (20,378)           (28,672)         (26,153)
Refinancing charges (note 14)......................................            -            (14,965)               -
Unrealized exchange gain on long-term debt.........................       15,751             47,768            2,208
Other income (note 18(c))..........................................           45              1,490              707
                                                                     ------------       ------------     ------------
Earnings before income taxes.......................................       38,285             37,197              953
Income taxes (note 15).............................................       10,032              1,635              445
                                                                     ------------       ------------     ------------
Net earnings.......................................................  $    28,253         $   35,562       $      508
                                                                     ============       ============     ============
</TABLE>



                         STATEMENTS OF RETAINED EARNINGS

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                     --------------------------------------------------

                                                                         2004              2003               2002
                                                                     ------------   ----------------   ----------------

                                                                             (in thousands of Canadian dollars)
<S>                                                                  <C>                <C>              <C>
Retained earnings, beginning of year..............................   $    37,566         $    2,004       $   21,878
Adoption of new accounting standards (note 2).....................           540                540          (19,842)
                                                                     ------------       ------------     ------------
Retained earnings, beginning of year as restated..................        38,106              2,544            2,036
Net earnings......................................................        28,253             35,562              508
                                                                     ------------       ------------     ------------
Retained earnings, end of year....................................   $    66,359         $   38,106       $    2,544
                                                                     ============       ============     ============
</TABLE>



    The accompanying notes are an integral part of the financial statements.

<PAGE>

                       MILLAR WESTERN FOREST PRODUCTS LTD.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                         2004              2003               2002
                                                                     ------------   ----------------   ----------------

                                                                             (in thousands of Canadian dollars)
<S>                                                                  <C>                <C>              <C>
Cash provided from (used in)
Operating activities
 Net earnings.....................................................   $    28,253         $   35,562       $      508
 Items not affecting cash:
 Depreciation and amortization....................................        15,119             16,601           16,731
 Future income taxes (recovery)...................................         9,600              1,046             (130)
 Amortization of deferred financing costs.........................           660              5,034              919
 Unrealized exchange gain on long-term debt.......................       (15,751)           (47,768)          (2,208)
 Reforestation expense............................................         6,069              3,736            4,659
 Provision for duties.............................................             -                  -           (2,268)
 Other............................................................            64             (1,404)          (1,249)
                                                                     ------------       ------------     ------------
                                                                          44,014             12,807           16,962
 Reforestation expenditures.......................................        (5,051)            (4,909)          (4,982)
 Payment of other long-term obligations...........................        (1,044)                 -                -
 Increase in other obligations....................................           500                  -                -
                                                                     ------------       ------------     ------------
                                                                          38,419              7,898           11,980
                                                                     ------------       ------------     ------------

Changes in non-cash components of working capital

 Accounts receivable..............................................         8,800               (674)            (488)
 Inventories......................................................         1,451              7,077              791
 Prepaid expenses.................................................        (2,112)             3,046           (1,422)
 Accounts payable and accrued liabilities.........................        (3,308)             1,623            5,757
 Deferred revenue.................................................             -             (6,518)           6,518
                                                                     ------------       ------------     ------------
                                                                           4,831              4,554           11,156
                                                                     ------------       ------------     ------------
                                                                           43,250            12,452           23,136
                                                                     ------------       ------------     ------------

Investing activities
 Additions to property, plant and equipment.......................       (19,354)            (8,795)          (3,480)
 Proceeds on disposal of property, plant and equipment............            73                368              439
 Increase in other assets.........................................          (311)            (6,416)             (30)
                                                                     ------------       ------------     ------------
                                                                         (19,592)           (14,843)          (3,071)
                                                                     ------------       ------------     ------------

Financing activities
 Increase in long-term debt.......................................             -            249,888                -
 Repayments of long-term debt.....................................             -           (210,201)               -
 Repayment of other obligations...................................             -                  -             (932)
                                                                     ------------       ------------     ------------
                                                                               -             39,687             (932)
                                                                     ------------       ------------     ------------
Increase in cash and cash equivalents.............................        23,658             37,296           19,133
Cash and cash equivalents, beginning of year......................        72,301             35,005           15,872
                                                                     ------------       ------------     ------------
Cash and cash equivalents, end of period..........................   $    95,959         $   72,301       $   35,005
                                                                     ============       ============     ============

Supplemental cash flow information

Interest paid.....................................................   $    18,931         $   22,200       $   25,341
                                                                     ============       ============     ============
                                                                     $       686         $      588       $      590
Income taxes paid.................................................   ============       ============     ============
</TABLE>


    The accompanying notes are an integral part of the financial statements.

<PAGE>

                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

1.   BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Prior to January 1, 2004, the Company, along with other companies in the
     forest products industry, presented freight and other distribution costs
     and countervailing and anti-dumping duties as selling expenses that were
     deducted from gross revenue in the statement of earnings. Effective January
     1, 2004, the Canadian Institute of Chartered Accountants ("CICA")
     introduced new standards for the application of generally accepted
     accounting principles ("GAAP") which provide guidance on alternate sources
     to consult with when an issue is not specifically addressed by Canadian
     GAAP. As a result of applying the new standards, the Company has presented
     freight and other distribution costs and countervailing and anti-dumping
     duties as operating costs in the statement of earnings and reclassified the
     prior period presentation accordingly.

     The financial statements have been prepared by management in accordance
     with accounting principles generally accepted in Canada. Because the
     precise determination of many assets and liabilities is dependent upon
     future events, the preparation of financial statements for a period
     necessarily involves the use of estimates and approximations which affect
     the reported amounts of assets and liabilities and disclosure of contingent
     assets and liabilities at the dates of the financial statements and the
     reported amounts of revenue and expenses during the reporting periods.
     Actual results could differ from these estimates. The financial statements
     have, in management's opinion, been properly prepared within reasonable
     limits of materiality and within the framework of the accounting policies
     summarized below.

     (a)  Cash and cash equivalents

          Cash and cash equivalents is defined as cash on deposit and
          money-market instruments with maturity dates of less than three months
          from the date they are acquired.

     (b)  Inventories

          Pulp, lumber and log inventories are recorded at the lower of cost,
          determined on a first in, first out or average cost basis, and net
          realizable value. Operating and maintenance supplies are recorded at
          the lower of average cost and replacement cost.

     (c)  Property, plant and equipment

          Property, plant and equipment for lumber mills is recorded at cost and
          is depreciated on a straight-line basis to amortize the cost of these
          assets, less salvage value, over their estimated useful lives.
          Property, plant and equipment for lumber mills was previously
          depreciated on a declining balance basis. This change in accounting
          policy did not have a significant impact on current or prior year's
          depreciation. Effective January, 2004, the Company implemented the
          results of a useful life study of the assets which resulted in the
          following depreciation rates:

             Buildings............................................            5%
             Process equipment....................................            7%
             Mobile equipment.....................................    13% or 20%
             Furniture, office, and computer equipment............    10% or 20%

<PAGE>



                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

1.   BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     (Continued)

     (c)  Property, plant and equipment - continued

          Property, plant and equipment for the pulp mill is recorded at cost
          and is depreciated on a straight-line basis to amortize the cost of
          these assets, less salvage value, over their estimated useful lives.
          The implementation of a useful life study of the assets resulted in
          the following depreciation rates:

                Buildings...........................................          3%
                Process equipment...................................          4%

          Timber rights are recorded at cost and are amortized on the basis of
          the volume of timber harvested.

     (d)  Impairment of long-lived assets

          In the event that facts and circumstances indicate that the carrying
          value of the Company's long lived assets, which include property,
          plant and equipment, power purchase rights, and timber rights, may be
          impaired, the Company performs a recoverability evaluation. If the
          evaluation indicates that the carrying amount of the asset is not
          recoverable from the undiscounted cash flows, then an impairment loss
          is measured by comparing the carrying amount of the asset to its fair
          value.

     (e)  Deferred financing costs

          Financing costs are deferred and amortized on a straight-line basis
          over the term of the related debt.

     (f)  Power purchase rights

          Power purchase rights are recorded at cost and are amortized on a
          straight-line basis over the life of the underlying agreements.

     (g)  Reforestation obligation

          The estimated reforestation obligation is accrued and charged to
          earnings on the basis of the volume of timber harvested.

     (h)  Revenue recognition

          Revenue is recognized when goods are shipped, title has passed to the
          customer, amounts are known and collection is reasonably assured.
          Revenue received in advance of shipment is deferred and recognized
          when goods are shipped and title has passed to the customer.

     (i)  Interest capitalization

          Interest on the construction of property, plant and equipment is
          capitalized on specific borrowings required to finance the
          construction and interest is charged to earnings over the life of the
          asset as described in note 1(c).

     (j)  Income taxes

          The Company follows the asset and liability method of accounting for
          income taxes. Under this method, future tax assets and liabilities are
          recognized for the future tax consequences attributable to the
          differences between the financial statement carrying amounts of
          existing assets and liabilities and their respective tax bases. Future
          income tax liabilities or assets are measured using substantively
          enacted rates anticipated to apply in the periods that the differences
          are expected to reverse. The effect of a change in tax rates on future
          income tax liabilities and assets is recognized in earnings in the
          period that the change occurs.

     (k)  Foreign currency translation and related financial instruments

          The Company has no operations outside of Canada, however, the Company
          does have a significant exposure to foreign currency exchange rate
          movements as a result of its long-term debt and export sales
          denominated in U.S. dollars.

<PAGE>


                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

1.   BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     (Continued)

     (k)  Foreign currency translation and related financial instruments
          - continued

          Monetary assets and liabilities denominated in U.S. dollars are
          translated into Canadian dollars at the year-end exchange rate.
          Revenues and expenses denominated in U.S. dollars are translated at
          the average exchange rate of the month during which transactions take
          place. Gains and losses from translation are included in earnings.

          The Company enters into forward exchange contracts to hedge a portion
          of its expected foreign currency denominated revenue over periods of
          up to twelve months into the future. The Company accounts for these
          contracts as a hedge, with resulting gains or losses included in
          revenue in the same period as the foreign currency denominated revenue
          is recorded.

     (1)  Employee benefit plans

          The Company has defined contribution plans providing pension benefits
          to most of its employees. Effective January 1, 2000, the Company
          established a supplementary defined benefit pension plan for certain
          key employees. The Company accrues its obligations under the defined
          benefit plan and the related costs, net of plan assets. The cost of
          pensions under this plan is determined using the projected benefit
          method pro rated on service and management's best estimates of
          expected plan investment performance, salary increases and retirement
          ages of employees in the plan. The discount rate used to determine the
          interest cost on the accrued benefit obligation is a market rate based
          on the yield of high quality debt instruments at the beginning of the
          year. Past service costs from plan initiation are amortized on a
          straight-line basis over the average remaining service period of
          employees. The expected return on plan assets is based on the fair
          value of plan assets. Cumulative actuarial gains and losses in excess
          of 10% of the greater of the accrued benefit obligation and the market
          value of the plan assets are amortized over the expected average
          remaining service lifetime of active plan members (13 years).

2.   ADOPTION OF NEW ACCOUNTING STANDARDS

     Effective January 1, 2004, the Company adopted a new standard issued by the
     CICA with respect to accounting for asset retirement obligations which
     requires that such obligations be measured at fair value. The result of
     adopting the new standard was a change in the Company's accounting for
     reforestation obligations. The Company has retroactively adjusted the
     carrying value of its reforestation obligations, previously reported on a
     non-discounted basis, which resulted in a net decrease in the liability and
     an increase in retained earnings of $0.5 million at January 1, 2002. The
     cumulative effect of adopting this standard was not material to the
     Company's 2002 or 2003 statement of earnings.

     Effective January 1, 2002, the Company adopted a new standard issued by the
     CICA with respect to the recognition of unrealized foreign exchange gains
     or losses. Under the new standard, exchange gains or losses that arise on
     translation of long-term debt denominated in a foreign currency are
     included in the determination of earnings for the current period. The
     Company has adopted the new recommendations retroactively and restated
     prior years' financial statements. Prior to this change, gains or losses
     arising from translation of foreign currency denominated long-term debt
     were deferred and amortized over the remaining term of the debt. The
     unamortized balance of the deferred exchange loss was netted against
     long-term debt in the Company's financial statements. As a result of the
     adoption of this recommendation, retained earnings decreased by $20.4
     million as of January 1, 2002.

3.   INVENTORIES
<TABLE>
<CAPTION>
                                                                         2004              2003
                                                                     ------------      -------------
<S>                                                                  <C>                <C>
     Logs........................................................... $     9,998         $   15,015
     Pulp...........................................................      15,962             14,284
     Lumber.........................................................      10,650              9,405
     Operating and maintenance supplies.............................       9,534              8,891
                                                                     ------------       ------------
                                                                     $    46,144         $   47,595
                                                                     ============       ============
</TABLE>

<PAGE>

                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

4.   PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
                                                                                           2004
                                                                     --------------------------------------------------
                                                                                      Accumulated
                                                                         Cost         Depreciation      Net Book Value
                                                                     ------------   ----------------   ----------------
<S>                                                                  <C>                <C>              <C>
     Lumber mills
       Buildings...................................................  $    26,477         $   10,551       $   15,926
       Process equipment...........................................       85,297             48,293           37,004
       Mobile equipment............................................        8,815              6,625            2,190
       Furniture, office and computer equipment....................       17,046              8,091            8,955
     Pulp mill
       Buildings...................................................       23,081             11,448           11,633
       Process equipment...........................................      186,308            123,783           62,525
     Land..........................................................        2,086                  -            2,086
     Capital projects in progress..................................        8,603                  -            8,603
                                                                     ------------    ---------------     ------------
                                                                         357,713            208,791          148,922
     Timber rights.................................................       17,428              8,724            8,704
                                                                     ------------    ---------------     ------------
                                                                         375,141            217,515          157,626
                                                                     ============    ===============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                           2003
                                                                     --------------------------------------------------
                                                                                      Accumulated
                                                                         Cost         Depreciation      Net Book Value
                                                                     ------------   ----------------   ----------------
<S>                                                                  <C>                <C>              <C>
     Lumber mills
       Buildings...................................................  $    26,451         $    7,904       $   18,547
       Process equipment...........................................       84,939             44,631           40,308
       Mobile equipment............................................        8,080              5,957            2,123
       Furniture, office and computer equipment....................        7,223              5,117            2,106
     Pulp mill
       Buildings...................................................       22,997             10,987           12,010
       Process equipment...........................................      189,583            125,766           63,817
     Land..........................................................        2,086                  -            2,086
     Capital projects in progress..................................        3,210                  -            3,210
                                                                     ------------       ------------     ------------
                                                                         344,569            200,362          144,207
     Timber rights...................................................     16,284              8,045            8,239
                                                                     ------------       ------------     ------------
                                                                     $   360,853         $  208,407       $  152,446
                                                                     ============       ============     ============
</TABLE>


5.   OTHER ASSETS
<TABLE>
<CAPTION>
                                                                                           2004               2003
                                                                                        ------------     --------------
<S>                                                                                     <C>              <C>
     Power purchase rights - at cost..............................................       $   20,837       $   20,837
     Less: accumulated amortization...............................................           (4,167)          (3,126)
                                                                                        ------------     ------------
                                                                                             16,670           17,711
                                                                                        ------------     ------------
     Deferred financing costs - at cost...........................................            6,768            6,519
     Less: accumulated amortization...............................................             (714)             (54)
                                                                                        ------------     ------------
                                                                                              6,054            6,465
                                                                                        ------------     ------------
     Notes receivable (note 17(a))................................................            2,410            2,465
     Other........................................................................              429              312
                                                                                        ------------     ------------
                                                                                         $   25,563       $   26,953
                                                                                        ============     ============
</TABLE>
     Amortization of power purchase rights for the year was $1,041,000 (2003 -
     $1,042,000; 2002 - $1,042,000).

<PAGE>




                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

5.   OTHER ASSETS (Continued)

     Power purchase rights

     The Company invested $20.8 million in 2000 to acquire the rights to a
     portion of the electricity to be generated from two power plants in Alberta
     commencing January 1, 2001. These rights represent the Company's
     entitlement and obligation to purchase approximately 80 megawatts of
     electrical power, which represents the Company's estimated electrical power
     requirements at existing capacity for a period of thirteen years and
     approximately 80% of its requirements for a further seven years at largely
     predetermined prices. The Company also has the right to resell any
     electricity not consumed under this arrangement, at prevailing market
     prices. The Company has agreed that if the present value of the projected
     cash flows associated with the Power Purchase Rights fall below a certain
     level, the Company will provide a letter of credit to make up such
     shortfall. At December 31, 2004 a letter of credit was not required under
     this arrangement.

     Deferred financing costs

     In November 2003, the Company expensed $4.1 million of deferred financing
     costs as a result of repaying U.S. $160 million of Unsecured Senior Notes.
     The charge of $4.1 million is included in refinancing charges (see note
     14). In 2003, the Company capitalized $6.5 million of financing costs
     relating to the issuance of U.S. $190 million of Unsecured Senior Notes.

6.   REVOLVING CREDIT FACILITY

     The Company has a $50 million revolving credit facility that expires on
     November 30, 2005 with an option for the Company to extend the maturity for
     an additional 364 days. The credit facility was undrawn at December 31,
     2004, and December 31, 2003. The facility is subject to a borrowing formula
     based upon the levels of inventory and accounts receivable. The amount
     available at December 31, 2004 under the facility was $30.9 million (2003 -
     $37.9 million) of which $3.9 million (2003 - $4.5 million) was committed
     for letters of credit. The interest rate on this facility is floating and
     may, at the Company's option, be based upon the Bank Prime Rate, U.S. Base
     Rate, Bankers Acceptance rates, or LIBOR. Collateral for the facility is a
     first charge on all accounts receivable and inventory of the Company.

7.   LONG-TERM DEBT
                                                            2004          2003
                                                        -----------  -----------
     Unsecured Senior Notes - U.S. $190,000.............$  228,760    $  244,511
                                                        ===========  ===========

     In 2003, the Company repaid $210 million (U.S. $160 million) of Unsecured
     Senior Notes bearing interest at a rate of 9 7/8%. Also in 2003, the
     Company paid a call premium of $10.8 million (U.S. $8.2 million) that is
     included in refinancing charges (see note 14).

     On November 25, 2003, the Company issued $250 million (U.S. $190 million)
     of Unsecured Senior Notes due November 15, 2013 that bear interest at a
     rate of 7.75%, payable semi-annually on May 15 and November 15 of each
     year. The notes are unsecured obligations of the Company and rank equally
     and ratebly with all existing and future unsecured indebtedness of the
     Company.

     The indenture governing the Unsecured Senior Notes contains restrictions on
     the ability of the Company to incur additional indebtedness, pay dividends
     or distributions, make investments, issue or repurchase share capital,
     create liens, or engage in sale and leaseback transactions, mergers,
     consolidations and sales of assets and transactions with affiliates.

<PAGE>


                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

8.   OTHER OBLIGATIONS
<TABLE>
<CAPTION>
                                                                                           2004               2003
                                                                                        ------------     --------------
<S>                                                                                     <C>              <C>
     Reforestation obligations
          Balance, beginning of year................................................     $    6,247       $    7,113
          Accrual for the year......................................................          6,368            4,043
          Expenditures during the year..............................................         (5,051)          (4,909)
                                                                                        ------------     ------------
          Balance, end of year......................................................     $    7,564            6,247
          Less: current portion, included in accrued liabilities....................         (4,214)          (3,539)
                                                                                        ------------     ------------
                                                                                              3,350            2,708

     Other..........................................................................          3,325            4,002
     Less: current portion, included in accrued liabilities.........................         (1,033)          (1,316)
                                                                                        ------------     ------------
                                                                                              2,292            2,686
                                                                                        ------------     ------------
                                                                                         $    5,642    $       5,394
                                                                                        ============     ============
</TABLE>

9.   SHARE CAPITAL

     Authorized

     Unlimited number of common shares.

     Issued and fully paid                                 2004          2003
                                                        -----------  -----------
      15,000,001 common shares (2003 - 15,000,001)       $       -    $       -
                                                        ===========  ===========
10.  COUNTERVAILING AND ANTI-DUMPING DUTIES

     In 2002, the U.S. Department of Commerce ("USDOC") issued its final
     determination in the countervailing and antidumping investigations, which
     resulted in a countervailing duty ("CVD") rate of 18.79% and an
     anti-dumping duty ("ADD") rate of 8.43%, both to be posted by cash deposits
     effective from May 22, 2002.

     Since that date, the Canadian government and affected industry participants
     have initiated a series of challenges to these findings under the North
     American Free Trade Agreement ("NAFTA") and before the World Trade
     Organization (the "WTO").

     On September 10, 2004, the U.S. International Trade Commission ("ITC")
     issued, in response to a NAFTA remand decision, a determination finding
     that the U.S. lumber industry was not threatened with material injury by
     reason of lumber imports from Canada. This determination should have
     resulted in revocation of the CVD and ADD order by the USDOC and return of
     the duty deposits. Instead, on November 24, 2004 the U.S. government
     launched an extraordinary challenge to review the legality of the decision
     of the NAFTA panel. A decision on that review is expected in 2005.

     The CVD deposit rate was reduced to 17.18% effective December 20, 2004 as a
     result of the final determination in the first administrative review. Also
     effective December 20, 2004, the ADD deposit rate was reduced to 4.03%.

     The Company has recorded an expense for CVD and ADD equal to the amount
     paid as cash deposits throughout applicable periods. A refund of deposits
     will be recorded as income in the period received. As at December 31, 2004,
     the total amount on deposit from May 22, 2002 related to CVD and ADD was
     U.S. $15.2 million and U.S. $6.8 million respectively.

<PAGE>


                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

10.  COUNTERVAILING AND ANTI-DUMPING DUTIES (Continued)

     The Company and other Canadian forest products companies, the Canadian
     federal and provincial governments (collectively the "Canadian Interests")
     categorically deny the U.S. allegations and strongly disagree with the
     final countervailing and dumping determinations made by the ITC and the
     USDOC. The Canadian Interests continue to aggressively defend the Canadian
     industry in this trade dispute. Canadian Interests have appealed these
     decisions to NAFTA panels and the WTO. The final amount of CVD and ADD
     duties that may be assessed on Canadian softwood lumber exports to the U.S.
     cannot be determined at this time and will depend on the results of these
     appeals. Notwithstanding the cash deposit rates established in the
     investigations, the final liability for the assessment of CVD and ADD
     duties will not be determined until each annual administrative review
     process is complete.

11.  COST OF PRODUCTS SOLD

     Cost of products sold in 2002 include electricity related items of a
     significant and non-recurring nature. In 2002, the Company recorded $1.6
     million in electricity costs related to final rate adjustments for
     electricity consumed in the 2000 year. The Company continues to appeal the
     final regulatory ruling on the year 2000 power rates and has disputed
     approximately $1.9 million of the costs accrued.

12.  SEVERANCE COSTS

     In 2002, as a result of a corporate-wide review of operating requirements
     and staffing levels, the Company implemented a workforce reduction program
     and recorded $2.3 million in severance costs. The majority of the position
     reductions were achieved voluntarily.

13.  FINANCING EXPENSES
<TABLE>
<CAPTION>
                                                                         2004              2003               2002
                                                                     ------------     --------------    ---------------
<S>                                                                  <C>                <C>              <C>
     Interest expense
          Long-term debt...........................................  $    18,797         $   20,617       $   24,765
          Other....................................................          454                360              545
     Amortization of deferred financing costs......................          660                897              919
     Foreign exchange loss (gains) on U.S. dollar cash
       and working capital.........................................          467              6,798              (76)
                                                                     ------------       ------------     ------------
                                                                     $    20,378         $   28,672       $   26,153
                                                                     ============       ============     ============
</TABLE>

14.  REFINANCING CHARGES

     During the year ended December 31, 2003, the Company incurred the following
     refinancing charges relating to the redemption of U.S. $160 million of
     Unsecured Senior Notes:

     Premium on redemption of long-term debt.......................  $    10,828
     Amortization of deferred financing costs......................        4,137
                                                                    ------------
                                                                     $    14,965
                                                                    ============
<PAGE>

                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

15.  INCOME TAXES

     The following analysis describes the difference between the effective tax
     rate reflected in the provision for income taxes and the statutory rates
     applicable to the Company.
<TABLE>
<CAPTION>

                                                                         2004              2003               2002
                                                                     ------------      -------------    --------------
<S>                                                                  <C>               <C>               <C>
     Earnings before income taxes .................................. $    38,285         $   37,197       $      953
                                                                     ============      =============     ============

     Income taxes based on combined
       Federal and Provincial income tax rates of 40.6% ............
         (2003 - 41.7%, 2002 - 42.2%)............................... $    15,551         $   15,511       $      402

     Increase (decrease) resulting from:
       Manufacturing and processing deduction ......................      (2,680)            (2,604)             (67)
       Large corporations tax ......................................         523                589              575
       Non-taxable unrealized gain on debt .........................      (3,047)            (4,417)            (389)
       Non-taxable realized gain on debt ...........................           -             (3,459)               -
       Non-taxable income and other items ..........................         (56)              (452)               -
        Effect of reduction in income tax rate .....................        (259)                46              (25)
        Change in valuation allowance ..............................           -             (3,579)             (51)
                                                                     ------------       ------------     ------------
                                                                          (5,519)           (13,876)              43
                                                                     ------------       ------------     ------------
     Income taxes .................................................   $   10,032         $    1,635       $      445
                                                                     ============      =============     ============

     Income taxes - current .......................................   $      432         $      589       $      575
     Future income taxes (recovery) ...............................        9,600              1,046             (130)
                                                                     ------------       ------------     ------------
     Income taxes..................................................   $   10,032         $    1,635       $      445
                                                                     ============      =============     ============
</TABLE>

     Significant components of the Company's future tax assets and liabilities
     are as follows:

<TABLE>
<CAPTION>
                                                                                           2004               2003
                                                                                        ------------     --------------
<S>                                                                                     <C>              <C>
     Future income tax assets
          Reforestation costs........................................................    $    1,789       $    1,569
          Premium on redemption of debt..............................................             -            2,590
          Other accrued liabilities..................................................           673            1,175
          Other......................................................................           268              169
                                                                                        ------------     ------------
                                                                                         $    2,730       $    5,503
                                                                                        ------------     ------------
     Future income tax liabilities
          Property, plant and equipment..............................................       (14,662)        (10,645)
          Unrealized foreign exchange gain...........................................        (3,549)           (943)
          Deferred financing costs...................................................          (686)           (482)
                                                                                        ------------     ------------
                                                                                            (18,897)        (12,070)
                                                                                        ------------     ------------

     Net future income lax liability.................................................    $  (16,167)      $  (6,567)
                                                                                        ============     ============
     As reported on the balance sheet:
          Future income tax assets...................................................   $       806       $   3,526
          Future income tax liabilities..............................................       (16,973)        (10,093)
                                                                                        ------------     ------------
          Net future income tax liabilities..........................................   $   (16,167)      $  (6,567)
                                                                                        ============     ============
</TABLE>

<PAGE>


                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

16.  EMPLOYEE BENEFIT PLANS

     Defined contribution plans

     The total expense for the Company's defined contribution plans is as
     follows:
                                                       2004      2003     2002
                                                     --------  -------- --------

     Plans providing pension benefits................$  2,555  $  2,003 $  1,772
                                                     ========  ======== ========

     Defined benefit plan

     On January 1, 2000 the Company established a supplementary defined benefit
     pension plan for certain key employees. The Company measures its plans
     assets and obligations on December 31.

     Information regarding this plan is as follows:

<TABLE>
<CAPTION>
                                                                                           2004               2003
                                                                                        ------------     --------------
<S>                                                                                     <C>              <C>
     Change in benefit obligation:
          Obligation at beginning of year..............................................  $    1,772       $    1,617
          Actuarial gain (loss)........................................................          63              (33)
          Current service cost.........................................................          84               83
          Interest cost................................................................         106              105
                                                                                        ------------     ------------
          Obligation at end of year....................................................  $    2,025       $    1,772
                                                                                        ============     ============

     Change in plan assets, at fair market value:
          Plan assets at beginning of year.............................................  $    1,046       $      738
          Employer contributions.......................................................         277              271
          Actual return on plan assets.................................................          44               37
                                                                                        ------------     ------------
          Plan assets at end of year...................................................  $    1,367            1,046
                                                                                        ============     ============

     Reconciliation of funds status:
          Plan deficit.................................................................  $     (658)      $     (726)
          Unamortized past service costs...............................................         653              719
          Unamortized actuarial loss...................................................         176              115
                                                                                        ------------     ------------
          Net pension asset............................................................  $      171       $      108
                                                                                        ============     ============

     Components of pension expense:
          Current service costs.......................................................   $       84       $       83
          Interest costs..............................................................          106              105
          Amortization of past service costs...........................................          66               66
          Expected return on plan assets..............................................          (42)             (31)
                                                                                        ------------     ------------
          Net expense..................................................................  $      214       $      223
                                                                                        ============     ============

     Plan assets by asset category:
          Equity securities...........................................................           31%              30%
          Debt securities.............................................................           21%              21%
          Other.......................................................................           48%              49%
                                                                                        ------------     ------------
          Total.......................................................................          100%             100%
                                                                                        ============     ============
</TABLE>

     The actuarial assumptions used in measuring the Company's benefit plan
     obligations are as follows:
<TABLE>
<CAPTION>
                                                                                           2004               2003
                                                                                        ------------     --------------
<S>                                                                                             <C>               <C>
     Discount rate.......................................................................       5.8%              6.0%
     Rate of compensation increase.......................................................       4.0%              4.0%
     Expected long-term rate of return on plan assets....................................       3.5%              3.5%
</TABLE>


<PAGE>

                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

17.  RELATED PARTY TRANSACTIONS

     Related party transactions are recorded at the transacted amount.
     Management is unable to determine whether the transacted amounts noted
     below are different from amounts which would have been recorded on similar
     transactions with unrelated parties.

     (a)  Millar Western Industries Ltd. ("Industries"), the parent of the
          Company, has significant influence over Meadow Lake Pulp Limited
          Partnership ("Meadow"). The Company incurred the following
          transactions with Meadow:

<TABLE>
<CAPTION>
                                                                             2004          2003           2002
                                                                          -----------  ------------  -----------
<S>                                                                        <C>          <C>           <C>
          Commission revenue.............................................  $   4,050    $   3,789     $   3,754
          Administration fee revenue.....................................  $   1,834    $   1,719     $   1,726
          Other expense..................................................  $     655    $       -     $       -
          Included in accounts receivable related to these transactions..  $     471    $   1,833     $   2,511
          Included in accounts payable related to these transactions.....  $     655    $       -     $       -
</TABLE>

          Other assets at December 31, 2004 includes a $2,100,000 (2003 -
          $2,100,000) note receivable from Meadow. This note bears interest at
          prime plus 1% (5.25% at December 31, 2004; 5.5% at December 31, 2003;
          5.5% at December 31, 2002) and is collateralized by a third charge on
          the assets of Meadow. Repayment of the loan is dependent upon the
          future cash flows of Meadow, the timing and amount of which are not
          certain. As a result, the carrying value of the note receivable could
          vary by a material amount in the near term. No interest income has
          been accrued in 2004, 2003 or 2002.

     (b)  The Company also earned revenue from other companies controlled by
          Industries' parent as follows:

<TABLE>
<CAPTION>
                                                                             2004          2003           2002
                                                                          -----------  ------------  -----------
<S>                                                                        <C>          <C>           <C>
          Administration fees.............................................  $    527     $    663      $    590
                                                                          ===========  ============  ===========
          Included in accounts receivable relating to these transactions..  $    101     $     47      $    254
                                                                          ===========  ============  ===========
</TABLE>

     (c)  The Company incurred costs charged by Industries as follows:
<TABLE>
<CAPTION>
                                                                             2004          2003           2002
                                                                          -----------  ------------  -----------
<S>                                                                        <C>          <C>           <C>
          Chemical purchases and other services........................... $   2,727     $  2,803      $  2,674
                                                                          ===========  ============  ===========
          Included in accounts payable relating to these transactions..... $     188     $    451      $    438
                                                                          ===========  ============  ===========
</TABLE>

18.  FINANCIAL INSTRUMENTS

     (a)  Foreign currency risk

          The Company realized approximately 72% of its 2004 revenue (2003 -
          76%; 2002 - 73%) in U.S. dollars and at December 31, 2004 the Company
          had $11,342,000 (2003 - $12,168,000) in U.S. dollar denominated
          accounts receivable.

          In order to reduce foreign currency risk, the Company borrows
          primarily in U.S. dollars. The Company also enters into forward
          exchange contracts to manage its foreign currency risk. The Company
          does not hold or issue foreign currency financial instruments for
          trading purposes. At December 31, 2004, the Company held contracts to
          deliver U.S. $29,000,000 (2003 - U.S. $77,000,000) at an average rate
          of 1.3447 (2003 - 1.3754) expiring at various dates to August 31,
          2005. The market rate at December 31, 2004, was 1.2040 (2003 -
          1.2869). As at December 31, 2004, the amount of unrecognized gain on
          forward exchange contracts was $4,080,000 (2003 - $6,815,000).

<PAGE>



                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

18.  FINANCIAL INSTRUMENTS (Continued)

     (b)  Credit risk

          The Company does not have a significant exposure to any individual
          customer or counterparty. On product sales from the pulp and lumber
          segments, the Company may require payment guarantees, such as letters
          of credit, and obtains credit insurance coverage on a significant
          portion of its sales.

     (c)  Commodity and other risks

          The Company operates in the forest products sector which is highly
          competitive and cyclical in nature. The markets for the Company's
          commodities of pulp and lumber are affected by the global supply and
          demand for these products. The Company is exposed to market pricing
          for its commodities. During the years 2004, 2003 and 2002, the Company
          did not enter into any material financial instruments to mitigate its
          exposure to changes in the price of pulp or lumber.

          In 2000, the Company entered into an energy contract for the purchase
          of power from January 1, 2002 until December 31, 2002 that was surplus
          to the Company's electricity requirements. In 2001, the Company
          accrued an unrealized loss on these contracts of $5.0 million based on
          their fair value at year-end. In 2002, the actual realized loss on
          these contracts was $4.3 million. The impact of these contracts on
          earnings is included in other income.

     (d)  Fair value

          The fair value of cash and cash equivalents, accounts receivable,
          accounts payable and accrued liabilities is estimated to approximate
          carrying value due to the immediate or short-term maturity of these
          financial instruments.

          The fair value of notes receivable have not been estimated as the
          notes are not marketable and are not subject to terms and conditions
          that would otherwise be available from arm's length parties.

          The fair value of long-term debt at December 31, 2004, is estimated to
          be $244,773,000 (2003 - $253,680,000) based upon the price at which
          the debt was trading.

19.  SEGMENTED INFORMATION

     The Company's operations are located in Canada. The Company's reportable
     segments are strategic business units that manufacture and sell different
     products. They are managed separately as each business requires different
     technology and marketing strategies. The Company has two reportable
     segments: lumber and pulp. The lumber segment manufactures dimension lumber
     for sale primarily in Canada, the United States and Asia. The pulp segment
     manufactures bleached chemi-thermo-mechanical pulp for sale to paper makers
     worldwide. Included in corporate and other are the combined results from
     the Company's management and marketing services, unallocated corporate and
     other expenses.

     The accounting policies of the segments are the same as those described in
     Note 1. The Company evaluates the performance of each segment based upon
     operating earnings. The Company does not allocate financing expenses, other
     income or expense, and income taxes to its business segments. The Company
     accounts for inter-segment revenue and transfers as if the transfers were
     to third parties at current market prices.

<PAGE>



                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

19.  SEGMENTED INFORMATION (Continued)

     Product Segment
<TABLE>
<CAPTION>
                                                                                            Lumber
                                                                        -----------------------------------------------
                                                                             2004            2003            2002
                                                                        --------------  -------------   ---------------
<S>                                                                      <C>            <C>              <C>
     Revenue.........................................................     $   162,081    $  125,721       $  110,876
     Cost of products sold...........................................         108,551        91,247           84,668
     Freight and other distribution costs............................          12,181        12,384            7,730
     Countervailing and anti-dumping duties..........................          13,657        11,811            2,944
     Depreciation and amortization...................................           7,695         5,379            5,709
     Severance costs.................................................               -             -              681
                                                                        --------------  -------------   ---------------
     Operating earnings..............................................     $    19,997    $    4,900       $    9,144
                                                                        ==============  =============   ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                                             Pulp
                                                                        -----------------------------------------------
                                                                             2004            2003            2002
                                                                        --------------  -------------   ---------------
<S>                                                                      <C>            <C>              <C>
     Revenue..........................................................    $   177,475    $  185,404       $  160,834
     Cost of products sold............................................        103,900       105,825           92,686
     Freight and other distribution costs.............................         35,675        34,550           33,191
     Depreciation and amortization....................................          6,706        10,787           10,708
     Severance costs..................................................              -             -            1,340
                                                                        --------------  -------------   ---------------
     Operating earnings...............................................    $     31,194   $   34,242       $   22,909
                                                                        ==============  =============   ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                                      Corporate and Other
                                                                        -----------------------------------------------
                                                                             2004            2003            2002
                                                                        --------------  -------------   ---------------
<S>                                                                      <C>            <C>              <C>
     Revenue..........................................................    $     6,412   $     6,172       $    6,120
     General and administration.......................................         11,514        12,978           13,391
     Depreciation and amortization....................................            718           435              314
     Severance costs..................................................              -             -              277
     Employees' profit sharing........................................          2,504           325                -
                                                                        --------------  -------------   ---------------
     Operating loss...................................................    $    (8,324)   $   (7,566)      $   (7,862)
                                                                        ==============  =============   ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                                            Total
                                                                        -----------------------------------------------
                                                                             2004            2003            2002
                                                                        --------------  -------------   ---------------
<S>                                                                      <C>            <C>              <C>
     Revenue.........................................................     $   345,968    $  317,297       $  277,830
     Cost of products sold and administration........................         223,965       210,050          190,745
     Freight and other distribution costs............................          47,856        46,934           40,921
     Countervailing and anti-dumping duties..........................          13,657        11,811            2,944
     Depreciation and amortization...................................          15,119        16,601           16,731
     Severance costs.................................................               -             -            2,298
     Employees' profit sharing.......................................           2,504           325                -
                                                                        --------------  -------------   ---------------
     Operating earnings..............................................     $    42,867    $   31,576       $   24,191
                                                                        ==============  =============   ===============
</TABLE>
     Cost of sales for the lumber segment are net of chip transfers to the pulp
     segment of $4,996,000 (2003 - $3,868,000; 2002 - $4,926,000).


<PAGE>



                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

19.   SEGMENTED INFORMATION (Continued)
<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                        -----------------------------------------------
                                                                             2004            2003            2002
                                                                        --------------  -------------   ---------------
<S>                                                                      <C>            <C>              <C>

     Expenditures on property, plant and equipment
       Lumber.........................................................    $     9,952    $    5,802       $    2,110
       Pulp...........................................................          1,902         1,628              893
       Corporate and other............................................          7,500         1,365              477
                                                                        --------------  -------------   ---------------
                                                                          $    19,354    $    8,795       $    3,480
                                                                        ==============  =============   ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                        --------------------------------
                                                                             2004            2003
                                                                        --------------  -------------
<S>                                                                      <C>            <C>
     Identifiable assets
       Lumber.........................................................    $   117,733    $  112,791
       Pulp...........................................................        127,241       130,970
       Corporate and other............................................        117,783       101,936
                                                                        --------------  -------------
                                                                          $   362,757    $  345,697
                                                                        ==============  =============
</TABLE>

     The Company's assets are all located in Canada. Revenue is attributed to
     geographic locations based on shipping destination as follows:

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                        -----------------------------------------------
                                                                             2004            2003            2002
                                                                        --------------  -------------   ---------------
<S>                                                                      <C>            <C>              <C>
      Geographic Sales
      Revenue
       Canada.........................................................   $     92,319    $   64,251       $   62,755
       United States..................................................         95,480        86,137           69,394
       Europe.........................................................         34,356        54,445           53,150
       Asia...........................................................        123,367       111,129           91,703
       Other..........................................................            446         1,335              828
                                                                        --------------  -------------   ---------------
                                                                         $    345,968    $  317,297       $  277,830
                                                                        ==============  =============   ===============
</TABLE>

20.  COMMITMENTS

     Under long-term purchase contracts, the Company has committed to purchase
     natural gas at pre-determined pricing in amounts totaling:

     Year                                                                 Amount

     2005.................................................................$3,330
     2006.................................................................$2,605

21.  RECONCILIATION OF FINANCIAL STATEMENTS FROM CANADIAN GAAP TO UNITED STATES
     GAAP

     The financial statements of the Company have been prepared in accordance
     with Canadian generally accepted accounting principles (Canadian GAAP). The
     following adjustments and/or additional disclosures would be required in
     order to present the financial statements in accordance with U.S. GAAP and
     with practices prescribed by the United States Securities and Exchange
     Commission for the three years ended December 31, 2004, 2003, and 2002.

<PAGE>

                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

21.  RECONCILIATION OF FINANCIAL STATEMENTS FROM CANADIAN GAAP TO UNITED STATES
     GAAP (Continued)

     Net earnings and shareholder's equity

     (a)  The following summary sets out the material adjustments to the
          Company's reported earnings and shareholder's equity which would be
          made in order to conform to U.S. GAAP:

<TABLE>
<CAPTION>
                                                                             2004            2003            2002
                                                                                                       (re-stated note 2)
                                                                        --------------  -------------   ---------------
<S>                                                                      <C>            <C>              <C>

          Net earnings for the year under Canadian GAAP...............    $    28,253    $   35,562       $      508
          U.S. GAAP adjustments
            Unrealized gain (loss) on forward exchange contracts (b)           (6,815)        5,995            2,446
            Effect on income taxes (c)..................................        2,393        (2,105)            (867)
                                                                        --------------  -------------   ---------------
          Net earnings for the year under U.S. GAAP...................         23,831        39,452            2,087
            Unrealized gain on forward exchange contracts (d)...........        2,647             -                -
                                                                        --------------  -------------   ---------------
          Comprehensive income (d)....................................         26,478        39,452            2,087
          Shareholder's equity under U.S. GAAP, beginning of year......        42,528         3,076              989
                                                                        --------------  -------------   ---------------
          Shareholder's equity under U.S. GAAP, end of year...........    $    69,006    $   42,528            3,076
                                                                        ==============  =============   ===============
          Shareholder's equity under Canadian GAAP, end of year........   $    66,359    $   38,106       $    2,544
                                                                        ==============  =============   ===============
</TABLE>
     (b)  Under U.S. GAAP, the unrealized gains or losses on forward exchange
          contracts at December 31, 2003 and 2002 were recorded in earnings for
          those years because the requirements for hedge accounting under U.S.
          GAAP were not met. Effective January 1, 2004, the Company met the
          conditions of Accounting Guideline 13, "Hedging Relationships". As a
          result of adopting the guideline, the adjustment necessary to
          reconcile Canadian and U.S. GAAP earnings in 2004 is the amount of the
          gain that was recognized in U.S. GAAP earnings in 2003 but deferred at
          December 31, 2003 under Canadian GAAP and therefore recognized in
          Canadian GAAP earnings in 2004. After the adjustment, accounts
          receivable under U.S. GAAP for 2003 would be $41,420,000 (2002 -
          $34,751,000).

     (c)  Under U.S. GAAP, after the adjustments noted above, the future current
          tax asset would be $1,136,000 for 2003 (2002 - future current tax
          asset of $1,311,000).

     (d)  Under U.S. GAAP, SFAS No. 130 requires that companies report
          comprehensive income as a measure of overall performance.
          Comprehensive income includes all changes in equity during a period
          except those resulting from investments by owners and distributions to
          owners. The only component of comprehensive income that currently
          affects the Company's performance is unrecognized gains on forward
          exchange contracts (as described in Note 18(a)). The amount of
          deferred gain on forward exchange contracts at December 31, 2004, in
          the amount of $4,080,000, is shown as a component of comprehensive
          income, net of related income tax in the amount of $1,433,000. As a
          result of applying SFAS No. 130, assets under U.S. GAAP would be
          $366,837,000 and the future tax liability would be $18,406,000.

     (e)  Included in general and administrative expenses are bad debt expenses
          of $Nil in 2004 (2003 - $Nil; 2002 - $Nil).

<PAGE>


                       MILLAR WESTERN FOREST PRODUCTS LTD.

                          NOTES TO FINANCIAL STATEMENTS
              For the Years Ended December 31, 2004, 2003 and 2002
               (Tabular amounts in thousands of Canadian dollars)

21.  RECONCILIATION OF FINANCIAL STATEMENTS FROM CANADIAN GAAP TO UNITED STATES
     GAAP (Continued)

     Balance Sheet

          The disclosure of the following amounts is required under U.S. GAAP:

<TABLE>
<CAPTION>
                                                                            2004            2003
                                                                        --------------  -------------
<S>                                                                      <C>            <C>
          Trade accounts payable........................................  $    33,297    $   36,739
          Interest payable..............................................  $     2,216    $    1,895
          Salary and benefits payable...................................  $     3,088    $    2,699
          Current portion of reforestation obligation...................  $     4,214    $    3,539
          GSTpayable ...................................................  $     1,175    $    1,174
          Current portion of other obligations..........................  $     1,033    $    1,316
          Severance costs payable.......................................  $         -    $      214
          Other.........................................................  $         -    $       17
                                                                        --------------  -------------
                                                                          $    45,023    $   47,593
                                                                        --------------  -------------


          Trade accounts receivable...................................... $    17,655    $   20,453
          Inter-company accounts receivable.............................. $       695    $    1,935
          GST recoverable................................................ $     2,491    $    2,891
          Other.......................................................... $     4,964    $    9,326
                                                                        --------------  -------------
                                                                          $    25,805    $   34,605
                                                                        --------------  -------------
</TABLE>

     Recent accounting pronouncements

     In early 2003, the Financial Accounting Standards Board ("FASB") issued FIN
     46, "Consolidation of Variable Interest Entities" ("VIEs"). FASB
     subsequently issued FIN 46-R, a revision of FIN 46. For the purpose of
     determining the effective date of FIN 46-R, the Company is considered a
     "Non-public Entity". For all VIEs created before January 3 1, 2003, the
     Company is not required to adopt Fin 46-R but is required to adopt FIN 46-R
     by January 1, 2005. For VIEs created after January 31, 2003, the Company
     must apply the provisions of FIN 46 or FIN 46-R as of the date the Company
     first became involved with the VIE. This did not result in the
     consolidation of any VIE's. The Company will adopt FIN 46-R effective
     January 1, 2005.

     The Canadian Accounting Standards Board ("AcSB") has issued Accounting
     Guideline 15, "Consolidation of Variable Interest Entities" ("AcG-15"),
     which is very similar to FIN 46-R. ACG-15 is effective for years beginning
     on or after November 1, 2004. The Company expects to adopt AcG-15 effective
     January 1, 2005.

     FIN 46-R and AcG-15 require the application of consolidation principles to
     certain entities that are subject to control on a basis other than
     ownership of voting interests. The Company has considered the application
     of the recommendations of FIN 46-R and AcG- 15 with respect to contractual
     arrangements in existence at January 31, 2004 and does not expect that
     adoption will have a material impact on the Company's financial statements.

22.  COMPARATIVE FIGURES

     Certain 2003 and 2002 comparative figures have been reclassified to conform
     with the financial statement presentation adopted for 2004.

<PAGE>


Exhibit Number                                      Description of Exhibit
1.1*          Certificate, Articles of Incorporation and Articles of Amendment
1.2*          By-laws
2.1****       Indenture dated as of November 25, 2003 between the Company and
              The Bank of New York
2.2****       Registration Rights Agreement between the Company and Goldman,
              Sachs & Co. dated November 25, 2003
2.3****       Form of old note (included in Exhibit 4.1)
2.4****       Form of new note (included in Exhibit 4.1)
4.1****       Purchase Agreement between the Company and Goldman, Sachs & Co.
              dated November 20, 2003.
4.2*          Forest Management Agreement dated May 14, 1997 between the
              Minister of Environmental Protection of Alberta and Millar
              Western Industries Ltd.
4.3*          Corporate Services Agreement dated May 13, 1998 between the
              Registrant and Millar Western Industries Ltd.
4.4*          Form of 1994 Performance Bonus Plan of the Registrant
4.5*          Non-Competition Agreement dated as of May 13, 1998 among the
              Registrant, Millar Western Industries Ltd., James B. Millar and
              H. MacKenzie Millar
4.6*          Marketing Agreement dated as of November 1, 1990 among Millar
              Western Management Ltd. and Meadow Lake Pulp Limited
4.7*          Administrative Services Agreement dated October 31, 1990 among
              Millar Western Management Ltd., Millar Western Pulp (Meadow Lake)
              Ltd. and Meadow Lake Pulp Limited Partnership
4.8*          Trademark Licensing Agreement dated May 13, 1998 between the
              Registrant and Industries
4.9****       Credit Agreement dated as of June 27, 2001, as amended, between
              the Registrant and Canadian Imperial Bank of Commerce
4.10**        PPA Auction Agreement dated July 14, 2000
4.11***       Power Syndicate Agreement (Battle River) dated January 1, 2001
4.12***       Power Syndicate Agreement (Sundance C) dated January 1, 2001
11.1*****     Code of Ethics
12.1*****     Certification of the Chief Executive Officer, H. MacKenzie Millar
              required by 17 CFR 240.15d-14(a).
12.2*****     Certification of the Chief Financial Officer, Joseph R. Concini
              required by 17 CFR 240.15d-14(a).
13.1*****     Certification of the Chief Executive Officer, H. MacKenzie Millar
              required by 17 CFR 240.15d-14(b) and 18 U.S.C. Section 1350.
13.2*****     Certification of the Chief Financial Officer, Joseph R. Concini
              required by 17 CFR 240.15d-14(b) and 18 U.S.C. Section 1350.

*             Incorporated by reference from the Registrant's Form F-4 filed
              with the Securities and Exchange Commission (Commission File No.
              333-8960).
**            Incorporated by reference from the Registrant's Form 20-F filed
              with the Securities and Exchange Commission on June 27, 2001.
***           Incorporated by reference from the Registrant's Form 20-F filed
              with the Securities and Exchange Commission on June 4, 2002.
****          Incorporated by reference from the Registrant's Form F-4 filed
              with the Securities and Exchange Commission (Commission File No.
              333-112898).
*****         Filed herewith.