##### 



---

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SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

Form 20-F*

|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|o  |  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
|   |  |                                                                                                 
|or
|   |  |                                                                                                 
|o  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934            

FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2002

or

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 333-8960

Millar Western Forest Products Ltd.

---

Alberta, Canada

---

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:                    |  | NONE                     
|                                                         |  |                          
|Indicate the number of outstanding shares of each of the |  | 15,000,001 Common Shares,
|issuers classes of capital or common stock as of the    |  | Without Par Value,       
|close of the period covered by the annual report.        |  | at December 31, 2002     

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  þ |  | NO  o

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

|           |  |           
|---------- |  | ----------
|Item 17  o |  | Item 18  þ

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



---

---

*     This report is
furnished on a voluntary basis.





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##### 



TABLE OF CONTENTS

|                                          |  |          |  |                                                                              |  |     
|----------------------------------------- |  | -------- |  | ---------------------------------------------------------------------------- |  | ----
|                                          |  |          |  |                                                                              |  | Page
|                                          |  |          |  |                                                                              |  |     
|GLOSSARY OF CERTAIN TERMS AND DEFINITIONS |  | 4       
|                                         
|PART I                                    |  |          |  |                                                                              |  | 6   
|                                         
|                                          |  | ITEM 1:  |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        |  | 6   
|                                         
|                                          |  | ITEM 2:  |  | OFFER STATISTICS AND EXPECTED TIMETABLE                                      |  | 6   
|                                         
|                                          |  | ITEM 3:  |  | KEY INFORMATION                                                              |  | 6   
|                                         
|                                          |  | ITEM 4:  |  | INFORMATION ON THE COMPANY                                                   |  | 12  
|                                         
|                                          |  | ITEM 5:  |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 |  | 22  
|                                         
|                                          |  | ITEM 6:  |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   |  | 30  
|                                         
|                                          |  | ITEM 7:  |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            |  | 34  
|                                         
|                                          |  | ITEM 8:  |  | FINANCIAL INFORMATION                                                        |  | 36  
|                                         
|                                          |  | ITEM 9:  |  | THE OFFER AND LISTING                                                        |  | 37  
|                                         
|                                          |  | ITEM 10: |  | ADDITIONAL INFORMATION                                                       |  | 38  
|                                         
|                                          |  | ITEM 11: |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |  | 41  
|                                         
|                                          |  | ITEM 12: |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       |  | 41  
|                                         
|PART II                                   |  |          |  |                                                                              |  | 42  
|                                         
|                                          |  | ITEM 13: |  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              |  | 42  
|                                         
|                                          |  | ITEM 14: |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |  | 42  
|                                         
|                                          |  | ITEM 15: |  | CONTROLS AND PROCEDURES                                                      |  | 42  
|                                         
|                                          |  | ITEM 16: |  | AUDIT COMMITTEE FINANCIAL EXPERT                                             |  | 42  
|                                         
|PART III                                  |  |          |  |                                                                              |  | 42  
|                                         
|                                          |  | ITEM 17: |  | FINANCIAL STATEMENTS                                                         |  | 42  
|                                         
|                                          |  | ITEM 18: |  | FINANCIAL STATEMENTS                                                         |  | 42  
|                                         
|                                          |  | ITEM 19: |  | EXHIBITS                                                                     |  | 43  

2



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##### 



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, 2002, the noon buying rate as quoted by the Federal Reserve Bank
of New York was $1.58 equals US$1.00. (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, including,
but not limited to, statements containing the words believes, anticipates,
expects, intends, estimates and words of similar import. All statements
other than statements of present or historical fact included in this annual
report are forward-looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company, or industry results
to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. These
risks and uncertainties include but are not limited to future changes in pulp
and lumber prices; the impact of changes in foreign currency exchange rates;
environmental risks; political risks and changes in government regulations and
policies, including trade laws and policies. The Company does not intend to
update these forward looking statements. The Company may make additional oral
or written forward-looking statements from time to time, and such statements
may be included in documents other than this annual report that are filed with
the Securities and Exchange Commission.

3



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##### 



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 Environment of
Alberta;

ADMT means air dried metric tonne, a unit of measurement of pulp volume;
MADMT means one thousand air dried metric tonnes; and MMADMT means one
million air dried metric tonnes;

average mill net means the average realized selling price in a specified time
period for pulp and lumber, net of transportation costs, commissions and
discounts;

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;

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, allocated on a 20-year basis and
renewable thereafter;

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 Government of Alberta and
a forest company, generally having a term of 20 years and renewable thereafter,
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;

4



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##### 



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

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, 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-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



---



##### 



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

Millar Western was incorporated on September 8, 1997 and acquired the
forest products operations of Millar Western Industries Ltd. (Industries) on
May 13, 1998. During the period between incorporation and May 12, 1998, Millar
Western was inactive. The selected historical financial data is presented as if
the forest products operations had been owned by the Company and such business
and assets had constituted a distinct operating entity during the entire period
for which such data is presented. Such data is not necessarily indicative of
the financial position or results of operations that would have been obtained
had the Company operated the forest products operations as a separate
stand-alone entity during the periods presented. The selected historical
financial data for the period January 1, 1998 to May 12, 1998, within the year
ended December 31, 1998, does not reflect a provision for income taxes because
income taxes were not allocated to the separate activities of the forest
products operations from the legal entities to which they historically
belonged. After May 13, 1998 the Company became subject to income and capital
taxes.

The selected historical financial data for the years ended December 31,
2000, 2001 and 2002 and as at December 31, 2001 and 2002 is derived from the
financial statements and the notes thereto (the Financial Statements)
included in Item 18 to this annual report. The selected historical financial
data for the years ended December 31, 1998 and 1999 and, as at December 31,
1998, 1999 and 2000 is taken from the audited financial statements of the
Company. The Company prepares its financial statements in accordance with
Canadian Generally Accepted Accounting Principles (Canadian GAAP). For a
discussion of the principal differences between Canadian GAAP and U.S.
Generally Accepted Accounting Principles (U.S. GAAP) as they relate to the
Company, see Note 20 to the Financial Statements at Item 18.

6



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##### 



Below is selected Millar Western historical financial information. The
following table should be read in conjunction with Item 5: Operating and
Financial Review and Prospects and the Financial Statements included in Item
18.

|                             |                                         |  |                                  |         |         |  |         |         |         |  |      |         |   |  |   |         |   |  |   |         |  
|---------------------------- | --------------------------------------- |  | -------------------------------- | ------- | ------- |  | ------- | ------- | ------- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                             |                                         |  | Years Ended December 31,        
|                             |                                         |  |                                 
|                             |                                         |  | 1998(1)                          |         | 1999(1) |  | 2000(1) |         | 2001(1) |  | 2002
|                             |                                         |  |                                  |         |         |  |         |         |         |  |     
|                             |                                         |  | (in thousands, except shipments)
|Statement of Earnings Data:  |                                         |  |                                  |         |         |  |         |         |         |  |      |         |   |  |   |         |   |  |   |        
|Canadian GAAP                |                                         |  |                                  |         |         |  |         |         |         |  |      |         |   |  |   |         |   |  |   |        
|                             | Net revenue                             |  | $                                | 204,078 |         |  | $       | 238,231 |         |  | $    | 297,571 |   |  | $ | 210,878 |   |  | $ | 233,965 |  
|                             | Cost of sales                           |  |                                  | 170,948 |         |  |         | 175,045 |         |  |      | 199,410 |   |  |   | 161,863 |   |  |   | 177,354 |  
|                             | Depreciation and amortization           |  |                                  | 15,185  |         |  |         | 17,363  |         |  |      | 15,807  |   |  |   | 16,184  |   |  |   | 16,731  |  
|                             | General and administration              |  |                                  | 11,154  |         |  |         | 13,457  |         |  |      | 12,498  |   |  |   | 15,424  |   |  |   | 13,391  |  
|                             | Severance costs                         |  |                                  |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   | 2,298   |  
|                             | Employees profit sharing               |  |                                  |        |         |  |         | 453     |         |  |      | 4,358   |   |  |   |        |   |  |   |        |  
|                             |                                         |  |                                  |         |         |  |         |         |         |  |      |         |   |  |   |         |   |  |   |        
|                             | Operating earnings                      |  |                                  | 6,791   |         |  |         | 31,913  |         |  |      | 65,498  |   |  |   | 17,407  |   |  |   | 24,191  |  
|                             | Financing expenses                      |  |                                  | 28,525  |         |  |         | 26,989  |         |  |      | 25,596  |   |  |   | 25,266  |   |  |   | 26,153  |  
|                             | Unrealized exchange (gain) loss on debt |  |                                  | 17,574  |         |  |         | (15,393 | )       |  |      | 6,960   |   |  |   | 15,521  |   |  |   | (2,208  | )
|                             | Other (income) expense                  |  |                                  | 7       |         |  |         | 10      |         |  |      | 2,664   |   |  |   | 4,415   |   |  |   | (707    | )
|                             |                                         |  |                                  |         |         |  |         |         |         |  |      |         |   |  |   |         |   |  |   |        
|                             | Earnings (loss) before income taxes     |  |                                  | (39,315 | )       |  |         | 20,305  |         |  |      | 30,278  |   |  |   | (27,795 | ) |  |   | 953     |  
|                             | Income taxes (recovery)                 |  |                                  | 500     |         |  |         | (2,893  | )       |  |      | 14,279  |   |  |   | (4,325  | ) |  |   | 445     |  
|                             |                                         |  |                                  |         |         |  |         |         |         |  |      |         |   |  |   |         |   |  |   |        
|                             | Net earnings (loss)                     |  | $                                | (39,815 | )       |  | $       | 23,198  |         |  | $    | 15,999  |   |  | $ | (23,470 | ) |  | $ | 508     |  
|                             |                                         |  |                                  |         |         |  |         |         |         |  |      |         |   |  |   |         |   |  |   |        
|U.S. GAAP                    |                                         |  |                                  |         |         |  |         |         |         |  |      |         |   |  |   |         |   |  |   |        
|                             | Operating earnings                      |  |                                  |         |         |  |         |         |         |  | $    | 62,798  |   |  | $ | 17,407  |   |  | $ | 24,191  |  
|                             | Net earnings (loss)                     |  |                                  |         |         |  |         |         |         |  | $    | 18,206  |   |  | $ | (28,038 | ) |  | $ | 2,087   |  
|Other Data:                  |                                         |  |                                  |         |         |  |         |         |         |  |      |         |   |  |   |         |   |  |   |        
|Canadian and U.S. GAAP       |                                         |  |                                  |         |         |  |         |         |         |  |      |         |   |  |   |         |   |  |   |        
|Cash provided from (used in) |                                         |  |                                  |         |         |  |         |         |         |  |      |         |   |  |   |         |   |  |   |        
|                             | Operating activities                    |  | $                                | (3,736  | )       |  | $       | 13,802  |         |  | $    | 50,794  |   |  | $ | 20,649  |   |  | $ | 23,136  |  
|                             | Investing activities                    |  | $                                | (6,565  | )       |  | $       | (4,389  | )       |  | $    | (51,741 | ) |  | $ | (22,699 | ) |  | $ | (3,071  | )
|                             | Financing activities                    |  | $                                | 56,011  |         |  | $       |        |         |  | $    |        |   |  | $ |        |   |  | $ | (932    | )
|Shipments                    |                                         |  |                                  |         |         |  |         |         |         |  |      |         |   |  |   |         |   |  |   |        
|                             | Pulp (MADMT)                            |  |                                  | 223     |         |  |         | 234     |         |  |      | 279     |   |  |   | 236     |   |  |   | 272     |  
|                             | Lumber (MMFBM)                          |  |                                  | 285     |         |  |         | 289     |         |  |      | 288     |   |  |   | 250     |   |  |   | 283     |  

|                    |                                           |  |                    |         |         |  |         |         |         |  |      |         |  |  |   |         |  |  |   |         | 
|------------------- | ----------------------------------------- |  | ------------------ | ------- | ------- |  | ------- | ------- | ------- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                    |                                           |  | As at December 31,
|                    |                                           |  |                   
|                    |                                           |  | 1998(1)            |         | 1999(1) |  | 2000(1) |         | 2001(1) |  | 2002
|                    |                                           |  |                    |         |         |  |         |         |         |  |     
|                    |                                           |  | (in thousands)    
|Balance Sheet Data: |                                           |  |                    |         |         |  |         |         |         |  |      |         |  |  |   |         |  |  |   |        
|Canadian GAAP       |                                           |  |                    |         |         |  |         |         |         |  |      |         |  |  |   |         |  |  |   |        
|                    | Non-cash working capital(2)               |  | $                  | 54,551  |         |  | $       | 63,306  |         |  | $    | 65,848  |  |  | $ | 58,346  |  |  | $ | 45,514  | 
|                    | Total assets                              |  |                    | 265,905 |         |  |         | 280,035 |         |  |      | 331,165 |  |  |   | 316,678 |  |  |   | 321,640 | 
|                    | Long-term debt, including current portion |  |                    | 247,712 |         |  |         | 232,319 |         |  |      | 239,279 |  |  |   | 254,800 |  |  |   | 252,592 | 
|                    | Retained earnings (deficit)               |  | $                  | (14,232 | )       |  | $       | 8,967   |         |  | $    | 24,966  |  |  |   | 1,496   |  |  |   | 2,004   | 
|U.S. GAAP           |                                           |  |                    |         |         |  |         |         |         |  |      |         |  |  |   |         |  |  |   |        
|                    | Retained earnings                         |  |                    |         |         |  |         |         |         |  |      |         |  |  | $ | 449     |  |  | $ | 2,536   | 

7



---



##### 





---

|(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  see Note 2 to
the audited financial statements.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Non-cash working capital excludes cash, bank indebtedness, the current
portion of long-term debt, and future income taxes.                                                                                                                                               

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 June 18, 2003 the inverse of the Noon Buying
Rate was $1.00 equals US$0.7492.

|           |  |                          |  |           |  |           |  |           |  |           |  |  |  |  |  |  |  |  |  | 
|---------- |  | ------------------------ |  | --------- |  | --------- |  | --------- |  | --------- |  |  |  |  |  |  |  |  |  | 
|           |  | Years Ended December 31,
|           |  |                         
|           |  | 1998                     |  | 1999      |  | 2000      |  | 2001      |  | 2002     
|           |  |                          |  |           |  |           |  |           |  |          
|Average(1) |  | US$0.6714                |  | US$0.6744 |  | US$0.6725 |  | US$0.6443 |  | US$0.6368



---

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

|     |  |           |  |           |  |           |  |            |  |            |  |           |  |  |  |  |  |  |  |  |  |  |  | 
|---- |  | --------- |  | --------- |  | --------- |  | ---------- |  | ---------- |  | --------- |  |  |  |  |  |  |  |  |  |  |  | 
|     |  | Month    
|     |  |          
|     |  | Dec. 2002 |  | Jan. 2003 |  | Feb. 2003 |  | March 2003 |  | April 2003 |  | May 2003 
|     |  |           |  |           |  |           |  |            |  |            |  |          
|High |  | US$0.6329 |  | US$0.6349 |  | US$0.6529 |  | US$0.6709  |  | US$0.6737  |  | US$0.7031
|Low  |  | US$0.6460 |  | US$0.6570 |  | US$0.6720 |  | US$0.6818  |  | US$0.6975  |  | US$0.7437



| | B. |  | Capitalization and Indebtedness          
| | -- |  | -----------------------------------------
|
| |    |  | Not applicable.                          
|
| | C. |  | Reasons for the Offer and Use of Proceeds
|
| |    |  | Not applicable.                          
|

8



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##### 





| | D. |  | Risk Factors
| | -- |  | ------------

Cyclical Earnings

The Companys financial performance is principally dependent on the
selling prices of its products. Prices for the Companys products have
fluctuated significantly in the past and may fluctuate significantly in the
future. The markets for pulp and wood products, including the Companys, are
highly cyclical and are characterized by periods of excess product supply due
to industry capacity additions, increased production and other factors and by
periods of insufficient demand due to weak general economic activity, inventory
destocking by customers and other factors. Demand for pulp and wood products is
influenced to a significant degree by the global level of economic activity. A
prolonged period of low product pricing could have a material adverse effect on
the Companys business, financial condition, results of operations and cash
flows. The Company is not able to predict with certainty market conditions and
selling prices for its products. There can be no assurance that prices for the
Companys products will not decline from current levels, or when such prices
may increase. Any prolonged or severe weakness in the market for any of the
Companys principal products in the future will adversely affect the Companys
revenues, results of operations, cash flows, and its ability to satisfy its
obligations under its indebtedness and its capital expenditure requirements.
See Item 5: Operating and Financial Review and Prospects.

Trade Tariffs

Since the early 1980s, United States producers of softwood lumber products
have alleged that Canadian producers receive countervailable subsidies because
they are able to obtain timber from publicly-owned lands at an unfairly low
cost. Under United States law, if exports to the United States are found to
benefit from countervailable subsidies, and if such exports are found to cause
or threaten injury to United States industry, countervailing duties are
permitted to be imposed. Under the Canada-U.S. Softwood Lumber Agreement signed
in 1996 (the Softwood Lumber Agreement), Canada received a commitment from
the United States government that it would not seek to impose a countervailing
duty on imports of Canadian softwood lumber for a period of five years, so long
as Canada would limit the volume of softwood lumber products exported fee-free
to the United States to 14.7 BFBM per annum. Volumes exported above this level
were subject to an export fee of US$54 per MFBM on the first 650 MMFBM and
US$108 per MFBM on any further volumes. In order to give effect to the Softwood
Lumber Agreement, Canada allocated export quotas among softwood lumber
producers and other exporters to the United States based upon historic export
volumes. These restrictions on exports to the United States resulted in
increased supply and competition in the domestic Canadian and overseas lumber
markets. The agreement expired on March 31, 2001 and has not been renewed.

The Companys sales of lumber represented approximately 43% of our net
revenue for the year ended December 31, 2002 and approximately 44% of lumber
sales were made to customers in the United States in that period. Following
the expiration of the Softwood Lumber Agreement in March 2001, the United
States Department of Commerce and the United States International Trade
Commission rendered preliminary determinations contending that Canadian
softwood lumber was subsidized and sold at less than fair value. As a result
of these determinations, the Company was required to post bonds in respect of
potential antidumping and countervailing duties on our exports of softwood
lumber to the United States at rates of 12.6% and 19.31%, respectively. In May
2002, the United States International Trade Commission issued its final
determination, which found that Canadian imports were injuring or threatening
to injure the U.S. softwood lumber industry, and imposed a 27.2% duty on the
Companys softwood lumber exports to the United States. As a result, the
Company is now required to post cash deposits in an amount equal to the duties
on its softwood lumber exports to the United States. The existence of the
duties has had a negative effect on the Companys profitability. Such duties
are subject to an appeal process before either a binational panel pursuant to
the North American Free Trade Agreement or the World Trade Organization. In
January 2003, legislation was introduced in the U.S. Congress that, if passed,
would increase the duty on the Companys U.S. softwood lumber exports to 45%.
If the duty is not reduced, the profitability of the Companys lumber
operations will continue to suffer and the lumber operations may, under certain
circumstances, become unprofitable. The Company is aware that discussions are
ongoing between representatives of the Canadian and the United States
governments with a view to resolving this trade dispute. The Company cannot
predict the outcome of these proceedings and discussions at this time.

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Leverage and Ability to Service Indebtedness

The Company has significant debt service obligations. As of December 31,
2002, the Company had $252.6 million (US$160 million)
outstanding under its 9 7/8%
senior notes, due 2008 (the Notes). In addition, subject to certain
limitations set forth in the indenture governing the Notes and the Companys
revolving credit facility, the Company may, from time to time, incur additional
indebtedness.

The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including the following: (i) its ability
to obtain additional financing for working capital, capital expenditures, debt
service requirements, acquisitions or general corporate purposes may be
limited; (ii) a substantial portion of the Companys cash flow from operations
must be dedicated to debt service, thereby reducing the funds available to the
Company for other purposes, including operations and future business
opportunities; (iii) the Company may be more leveraged than certain of its
competitors, which may place the Company at a competitive disadvantage; and
(iv) the Company may be hindered in its ability to adjust rapidly to changing
market conditions and may be vulnerable in the event of a downturn in general
economic conditions or in its business. See Item 5: Operating and Financial
Review and Prospects.

Global Competition

The markets for pulp and lumber are highly competitive, with a number of
major companies competing in each market. The Company competes globally in both
its pulp and lumber product lines. Certain of the Companys competitors have
greater financial resources than the Company. While the principal basis for
competition is price, the Company also competes on the basis of customer
service, quality, product type, manufacturing costs and currency exchange
rates. Variations in the exchange rate between the Canadian dollar and the U.S.
dollar, and the U.S. dollar and local currencies in each of the Companys
export markets affect the relative competitive position of the Companys
products when compared to its competitors outside of Canada. To mitigate the
impact of foreign exchange volatility on the Company earnings, the Company may,
from time to time, enter into foreign exchange and currency option contracts to
partially hedge its exposure to fluctuation in U.S. dollar revenues. There can
be no assurance that such hedging will be successful in the future in
materially reducing the Companys exposure to exchange rate fluctuations.

Fiber Supply

The Company obtains a significant portion of its fiber requirements from
the Millar Western FMA, Coniferous Timber Quotas and Deciduous Timber
Allocations issued by the Minister of Environment of Alberta, each of which are
issued for a period of 20 years. Existing agreements expire on various dates
between 2006 and 2017 and are renewable thereafter. There is no assurance that
the Millar Western FMA, quotas and allocations will be renewed or extended on
acceptable terms. In addition, the Millar Western FMA, quotas and allocations
contain terms or conditions which could, under certain circumstances, result in
a reduction of the amount of timber that may be harvested by the Company.

The forest products industry is subject to natural events such as forest
fires, adverse weather conditions, insect infestation, disease, prolonged
drought and other natural disasters. The occurrence of any of these events
could have a material adverse effect on the Companys business, financial
condition and results of operations.

Historically, the Company purchases approximately 21% of its fiber in the
open market. Accordingly, the Companys operations are affected by changes in
the supply and demand for, and the prices of, purchased fiber.

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Change in Stumpage Fees

The Government of Alberta imposes stumpage fees on all timber harvested on
Crown-owned land. The Company is unable to predict the impact on operations of
any changes to the stumpage rates applicable to the Millar Western FMA,
Coniferous Timber Quotas and Deciduous Timber Allocations. There can be no
assurance that material and adverse changes in stumpage regulations will not
occur in the future. Further changes in legislation or regulatory regimes of
the Government of Alberta may change 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. These
changes could have a material adverse effect on the Companys business,
financial condition and results of operations.

Impact of Environmental and Other Government Regulations

The Company is subject to a wide range of general and industry-specific
environmental 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. Failure by the Company to
comply with applicable environmental laws and regulations, and the permit
requirements related thereto, could result in civil or criminal fines or
penalties or enforcement actions thereunder, including regulatory or judicial
orders enjoining or curtailing operations or requiring corrective measures,
installation of pollution control equipment or remedial actions, any of which
could result in significant capital expenditures. The Company believes that it
is in substantial compliance with all applicable environmental laws and
regulations and regularly incurs capital and operating expenditures to maintain
such compliance. However, future events, such as changes in existing
environmental laws and regulations or their interpretation, or more vigorous
enforcement policies of regulatory agencies, may give rise to additional
expenditures or liabilities that could have a material adverse effect on the
Companys business, financial condition, results of operations and cash flows.

Capital Intensive Operations

The production of lumber and pulp is capital intensive. Although the
Company maintains its production equipment with regular periodic and scheduled
maintenance, there can be no assurance that key pieces of equipment in the
Companys various production processes will not need to be repaired or
replaced. The costs of repairing or replacing such equipment and the associated
downtime of the affected production line could have a material adverse effect
on the Companys business, financial condition and results of operations.

Control by Sole Shareholder

Industries hold 100% of the outstanding equity of the Company. By virtue
of ownership of such equity, Industries will have the power to control all
matters submitted to shareholders of the Company, to elect the Board of
Directors of the Company and to exercise control over the business, policies
and affairs of the Company. The interests of Industries as an equity holder may
differ from the interests of holders of the Notes.

Potential Inability to Enforce Certain Civil Liabilities

The enforcement by investors of civil liabilities under applicable U.S.
federal and state securities laws may be affected adversely by the fact that
the Company is incorporated under the laws of Alberta, Canada, that some or all
of the officers and directors of the Company may be residents of Canada or
other non-U.S. countries, that some or all of the experts named in this annual
report on Form 20-F may be residents of Canada or other non-U.S. countries, and
that all or a substantial portion of the assets of the Company and said persons
may be located outside the United States. As a result, it may be difficult or
impossible for U.S. investors to effect service of process within the United
States upon the Company or such person or to realize against them in the United
States upon judgments of courts of the United States predicated upon civil
liabilities of the Company or persons under applicable U.S. federal and state
securities laws. In addition, investors should not assume that courts in Canada
or in the countries where such persons reside or in which the assets of the
Company or such persons are located (i) would enforce judgments of U.S. courts
obtained in actions against the Company or persons predicated upon
the civil liability provisions of applicable U.S. federal and state securities laws
or (ii) would enforce, in original actions, liabilities against the Company or
persons predicated upon such laws.

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|ITEM 4: |  | INFORMATION ON THE COMPANY
|------- |  | --------------------------

HISTORY AND ORGANIZATION

Millar Western Forest Products Ltd., known commercially as Millar Western,
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, the Company acquired all
of the forest products operations of Industries and issued
US$160 million of 9 7/8
senior notes due 2008.

The head office of the Company is located at 16640  111 Avenue, Edmonton,
Alberta, T5M 2S5 and its registered office is located at 2900 Manulife Place,
10180  101 Street, Edmonton, Alberta, T5J 3V5. The Companys telephone and
facsimile numbers are (780) 486-8200 and (780) 486-8282, respectively. The
Companys authorized capital consists of an unlimited number of common shares
of which 15,000,001 were issued and outstanding as of December 31, 2002. The
Company does not have any subsidiaries.

GENERAL DESCRIPTION OF BUSINESS

General

Millar Western is a diversified forest products company that produces and
markets hardwood and softwood bleached chemi-thermo-mechanical pulp (BCTMP)
and softwood lumber. The Company owns and operates three production facilities
in the Province of Alberta: a BCTMP mill and sawmill at an integrated complex
in Whitecourt, and a sawmill in Boyle. The Company also manages the operations
of, and markets all pulp produced by, a BCTMP mill in Meadow Lake,
Saskatchewan, that is jointly owned by Industries and its affiliate and the
Province of Saskatchewan.

The Whitecourt pulp mill produces hardwood, softwood and blended wood
BCTMP and has an annual production capacity of 275,000 ADMT. The Meadow Lake
pulp mill has an annual production capacity of 280,000 ADMT of hardwood BCTMP.
The Companys BCTMP is sold internationally for use in the production of
printing and writing papers, paperboard, specialty paper, tissue, and toweling.

The Companys sawmills produce SPF dimension lumber for the residential
and commercial construction industries. The Whitecourt and Boyle sawmills have
an annual capacity of 210 MMFBM and 100 MMFBM, respectively. Each sawmill
produces a full range of lumber grades, including specialty grades for the
Japanese market. The Whitecourt sawmill also produces MSR lumber for load
bearing applications. Lumber from the sawmills is sold principally in Canada
and the United States.

The Company supplies its fiber needs primarily through timber sources held
under long-term tenure, 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 exchange
agreements with other companies, amount to 1.57 million cubic meters of fiber
annually and constitute 79% of the Companys fiber requirements. The balance
of the Companys fiber requirements is purchased on the open market.

Industry Overview

The Pulp Industry

Wood pulp is the main component used in the manufacture of paper and
paperboard products. Wood pulp types depend on two primary variables: the wood
type and the manufacturing process used to produce the pulp. The two major
types of wood are hardwood and softwood. Manufacturing processes range from
purely chemical processes, in which wood is processed into pulp using
chemicals, to the purely mechanical processes, in which wood is mechanically
ground into pulp. Within the chemical pulp sector the dominant process is the
kraft

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process. Within the mechanical pulp sector, there are a variety of
processes which utilize a combination of mechanical and chemical processes, and
produce a wide range of pulps, including TMP, CTMP and BCTMP. Each process
produces pulps with differing strength, brightness and other characteristics
which are suited to different end-use products.

BCTMP is used in a variety of paper and paperboard products, often as a
direct replacement for kraft pulps. Traditionally, softwood BCTMP has been used
in toweling, newsprint and paperboard products. The development of
high-quality hardwood BCTMP in the early 1990s opened the market for the use of
BCTMP in the production of fine printing and writing papers. While BCTMP is
widely used in Europe and Asia for printing and writing papers, it has not yet
had the same level of acceptance in North America, largely due to traditional
U.S. paper industry standards. However, changing U.S. standards are opening the
North American printing and writing paper market to allow broader use of BCTMP
woodfree papers.

BCTMP producers have an economic advantage compared to kraft pulp
producers in terms of wood costs because the BCTMP process achieves a higher
yield of pulp from wood. The BCTMP process for producing pulp differs from the
kraft process most significantly in how wood chips are processed. The kraft
process uses chemicals to separate cellulose fibers by dissolving lignin,
whereas BCTMP uses a combination of chemicals, steam and mechanical processes
to separate cellulose fibers, while retaining most of the lignin. The BCTMP
process converts approximately 85% to 90% of the wood into pulp whereas the
kraft process achieves a 45% to 55% yield. The high-yield BCTMP process
produces pulp that provides higher bulk, opacity and stiffness to paper
products, but is generally of lower strength than kraft pulp.

Historically, prices for all pulps, including BCTMP, have been cyclical.
Economic conditions and changes in industry capacity are the primary factors
affecting the demand and supply in the pulp market, and therefore the price of
pulp. Historically, BCTMP has sold at a discount to NBSKP, largely reflecting
the lower costs of producing the pulp, although the relative discount has
narrowed during strong pulp markets. BCTMP prices have historically ranged from
70% of the NBSKP price at the bottom of the cycle to as high as 87% of the
NBSKP price at the peak. However, in recent years, BCTMP pricing is more
directly referenced to eucalyptus kraft pulp pricing. The discount has been
reduced to $40 - $50/ADMT from historical levels of $70 - $100.

The Lumber Industry

Softwood lumber is used primarily in the residential and commercial
construction industries. Lumber demand is seasonal and cyclical and is
generally affected by the number of housing starts, expenditures on renovations
and remodeling and industrial construction activity. These variables are, in
turn, influenced by general economic conditions, interest rates and demographic
trends.

The majority of Canadas softwood lumber is sold into the United States.
Japan continues to be an important market for producers in both Alberta and
British Columbia because of changes in construction practices. North American
platform-frame style construction housing is being increasingly accepted in
Japan, although it still represents a small portion of total housing starts. It
therefore represents an opportunity for market expansion by softwood lumber
producers.

The Softwood Lumber Agreement, finalized in early 1996, addressed
long-standing disputes between Canadian and United States 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
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 has not been renewed.

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The Companys sales of lumber represented approximately 43% of net revenue
for the year ended December 31, 2002 and approximately 44% of lumber sales were
made in the United States in that period. Following the expiration in March
2001 of the softwood lumber agreement between Canada and the United States and
in response to complaints of U.S. based competitors and trade unions, the
United States Department of Commerce and the United States International Trade
Commission rendered preliminary determinations contending that Canadian
softwood lumber was subsidized and sold at less than fair value.

As a result of these determinations, the Company was required to post
bonds in respect of potential antidumping and countervailing duties on exports
of softwood lumber to the United States at rates of 12.6% and 19.31%,
respectively. In May 2002, the United States International Trade Commission
issued its final determination, which found that Canadian softwood lumber
imports are injuring or threatening to injure the U.S. softwood lumber industry
and imposed a 27.2% duty on the Companys softwood lumber exports to the United
States. As a result, the Company is now required to post cash deposits in an
amount equal to the duties on its U.S. softwood lumber exports. Such rates
could be subject to an appeal process before either the binational panel
pursuant to the North American Free Trade Agreement or the World Trade
Organization. The Company supports efforts to resolve the matter through such
international tribunals. The softwood lumber dispute remained unresolved in
2002 and, as a result, profitability of the lumber segment was negatively
affected. If these duties are not reduced, the profitability of the lumber
operations will continue to suffer and the duties may, under certain
circumstances, make the lumber operations unprofitable. The Company is aware
that discussions are ongoing between representatives of the Canadian and the
United States governments with a view to resolving this trade dispute. The
Company cannot predict the outcome of these proceedings and discussions at this
time.

Timber Supply and Forest Management in the Province of Alberta

The Government of Alberta grants rights to harvest timber through a
variety of tenure arrangements including FMAs, Coniferous Timber Quotas and
Deciduous Timber Allocations. An FMA grants to a holder the rights to manage,
establish, grow, harvest and remove timber in a forest management area and
provides that the Minister of Environment recognizes the holders rights to
grow and harvest timber as the primary use of the forest management area. Each
FMA is for a 20-year term, with provision for further 20-year renewal periods.
Each FMA requires the holder to conduct a forest inventory and prepare a
detailed forest management plan to determine the annual allowable cut (AAC)
of timber to be harvested from the forest management area, and to have annual
operating plans approved by Alberta Sustainable Resource Development before any
operations can commence.

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 Crown will compensate the holder
for certain costs and losses associated with such withdrawal.

A detailed forest management plan describes the resources of a forest
management area and the forest management and silvicultural practices to be
used by the holder to achieve and maintain a perpetual sustained yield of
timber from such area. A detailed forest management plan, updated every 10
years, includes a harvest schedule for a full rotation (80 to 100 years).

Coniferous Timber Quotas and Deciduous Timber Allocations grant holders
the right to harvest a specified percentage (in the case of Coniferous Timber
Quotas) or volume (in the case of Deciduous Timber Allocations) of the AAC
determined by the Alberta Minister of Sustainable Resource Development for a
Forest Management Unit during a period of 20 years, which is renewable
thereafter. A quota or allocation holder must obtain a timber license, which is
issued by the Alberta Minister of Sustainable Resource Development, and
describes the area planned for harvesting by the quota or allocation holder and
the time during which the timber may be harvested, usually for a three to
five-year period. The quota or allocation holder is responsible for the
submission of an annual operating plan. Quota and allocation holders with more
than 10,000 cubic meters per year of AAC must carry out reforestation of all
harvested areas to the Provincial regeneration standards.

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The Company supplies its manufacturing operations primarily from timber
resources held under long-term tenure providing security of supply and scope
for progressive, sustainable forest management practices. These forest
resources, together with fiber exchange agreements with other companies,
provide a cost-competitive and sustainable supply of timber to the Companys
production facilities. Approximately 79% of the fiber requirements for the
Companys pulp mill and sawmill facilities are supplied under the Millar
Western FMA, Coniferous Timber Quotas, Deciduous Timber Allocations, fiber
exchange agreements and a supply contract. The balance of the fiber
requirements for these facilities is purchased on the open market.

The Companys coniferous AAC from the Millar Western FMA and Coniferous
Timber Quotas is 803,000 cubic meters. The deciduous AAC from the Millar
Western FMA and Deciduous Timber Allocations is 291,000 cubic meters. In
addition, through log-for-wood-chip exchange agreements and a supply contract
with other companies, the Company receives 190,000 cubic meters of coniferous
timber and up to 140,000 cubic meters of deciduous timber annually. In
addition, the Company can harvest approximately 150,000 cubic meters of
incidental pulpwood annually from the Millar Western FMA and Coniferous Timber
Quotas that is not chargeable against the AAC and for which there is a nominal
stumpage fee. The following table sets out the Companys AAC under its current
tenure and fiber available under long-term exchange contracts:

Fiber Supply

|                                           |  |            |           |           |  |  |         | 
|------------------------------------------ |  | ---------- | --------- | --------- |  |  | ------- | 
|                                           |  | Coniferous |           | Deciduous
|                                           |  |            |           |          
|                                           |  | (m3)       |           | (m3)     
|                                           |  |            |           |          
|Forest Management Agreement(1)             |  |            | 291,000   |           |  |  | 216,000 | 
|Coniferous Timber Quotas(2)                |  |            | 508,000   |           |  |  |        | 
|Deciduous Timber Allocations(3)            |  |            |          |           |  |  | 75,000  | 
|Exchange Agreements and Supply Contract(4) |  |            | 190,000   |           |  |  | 100,000 | 
|Incidental Pulpwood                        |  |            | 150,000   |           |  |  |        | 
|                                           |  |            |           |           |  |  |         | 
|Total long-term fiber supply:              |  |            | 1,139,000 |           |  |  | 431,000 | 
|                                           |  |            |           |           |  |  |         | 



---

|(1) |  | Net of third party allocations. Expires 2017 and is renewable for
additional terms of 20 years.                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Expires 2006 and is renewable for additional terms of 20 years.                                                                                            
|   
|(3) |  | Expires 2007 and is renewable for additional terms of 20 years.                                                                                            
|   
|(4) |  | There are two Exchange Agreements, both of which are evergreen, with two
years notice required for termination, and a supply contract that expires
in 2010.

An additional 900,000 m3 of coniferous timber has been carried forward
from previous years and available for harvest over the period from 2003 to
2008. The carryover volume is equivalent to an additional 180,000 m3 available
annually for the next five years.

In 1995, the Companys Whitecourt forest, sawmill and pulp mill operations
became the first in Alberta to achieve certification under ForestCare, the
Alberta forest industrys comprehensive code of practices governing industry
activities in areas such as land use, harvesting and reforestation,
environmental protection, employee and public safety, and sustainable
development. The Boyle operations achieved ForestCare certification in 1996.
The Companys Whitecourt operations were recertified in 1998, and the Boyle
operations were recertified in 1999. The ForestCare program was modified in
2001 and the Whitecourt woodlands operation has achieved recertification in
2003 and the Whitecourt sawmill and pulp mill operations are expected to
achieve recertification later in 2003.

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Delivered Log Costs and Stumpage

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. 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.

As the benchmark price increases, an increasing proportion of total
stumpage is allocated to the Forest Resource Improvement Program (FRIP).
Funds from this program are used by the Company to enhance the forest resource
beyond the current regulated standards.

In February 1999 the Government of Alberta instituted a market-based
stumpage system for deciduous timber. Under this system, the Company pays 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. As this
benchmark price increases, an increasing proportion of total stumpage is
allocated to the FRIP program.

Capital Expenditures

The following table sets out capital expenditures for the main operating
segments of the Company for the periods indicated:

|                              |  |                         |        |      |  |      |        |  |  |   |       | 
|----------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ----- | 
|                              |  | Year Ended December 31,
|                              |  |                        
|                              |  | 2000                    |        | 2001 |  | 2002
|                              |  |                         |        |      |  |     
|                              |  | (thousands)            
|Pulp Mill                     |  | $                       | 3,093  |      |  | $    | 526    |  |  | $ | 893   | 
|Sawmills, Woodlands and Other |  |                         | 28,447 |      |  |      | 23,682 |  |  |   | 2,587 | 
|                              |  |                         |        |      |  |      |        |  |  |   |       | 
|Total                         |  | $                       | 31,540 |      |  | $    | 24,208 |  |  | $ | 3,480 | 
|                              |  |                         |        |      |  |      |        |  |  |   |       | 

In June 2001, the Company completed a modernization project of its
Whitecourt sawmill, which significantly improved its efficiency, increased the
quality of its products and reduced its manufacturing costs. A total of $42.6
million in capital was spent on this project.

Meadow Lake Agreements

The Company has agreements to provide administrative services to, and to
market all pulp produced by, the Meadow Lake pulp mill. These agreements are
for indefinite terms and may be cancelled on one to two months notice by the
Meadow Lake Pulp Limited Partnership (the Partnership) which is owned 50% by
Industries and an affiliate and 50% by the Government of Saskatchewan. The
management 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
reimbursed monthly to the Company on a cost plus basis, effectively reducing
the administrative costs of the Companys own operations. This arrangement also
works to the benefit of both the Meadow Lake pulp mill and the Whitecourt pulp
mill in terms of the sharing of technological advances and improvements and in
increasing the Companys purchasing power for raw materials used in the pulping
process. See Item 7: Major Shareholders and Related Party Transactions.

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The marketing agreement appoints the Company the exclusive marketing and
sales agent for all of the pulp produced at the Meadow Lake pulp mill. The
Company is paid a commission based on net sales revenue for the sale of pulp
produced by the Meadow Lake pulp mill. The combined production capacity of
555,000 ADMT of BCTMP per year from the Whitecourt and Meadow Lake pulp mills
is all sold under the Millar Western name. See Item 7: Major Shareholders and
Related Party Transactions.

Chetwynd Agreements

In April, 1999 the Company entered into agreements with Louisiana-Pacific
to manage the operations of, and market all pulp produced by, the hardwood
BCTMP mill located at Chetwynd, British Columbia. These agreements expired on
December 31, 2001. The management services provided under contract to the
Chetwynd pulp mill included transportation, finance and accounting, human
resources and information systems. The Company was paid a fixed fee for
providing these services.

The marketing agreement appointed the Company the exclusive marketing and
sales agent for all of the pulp produced at the Chetwynd pulp mill. The
Company was paid a commission of a fixed percentage of the net sales revenue
from all pulp produced by the Chetwynd pulp mill. In view of adverse market
conditions, Louisiana-Pacific decided to shut the Chetwynd pulp mill down in
April 2001.

Sales and Marketing

Pulp

The Company is a leader in the marketing of BCTMP and is proactive in
developing new markets for high-quality BCTMP. The following table shows the
approximate distribution of sales by end-use of pulp marketed by the Company
from the Whitecourt and Meadow Lake pulp mills:

Pulp Distribution by End Product (2002 Shipments)

|                    |  |  |    |  
|------------------- |  |  | -- | -
|Coated papers       |  |  | 44 | %
|Paperboard          |  |  | 24 | %
|Specialty and other |  |  | 12 | %
|Uncoated papers     |  |  | 11 | %
|Tissue and towel    |  |  | 9  | %

As the first BCTMP producer to offer significant quantities of 100%
aspen-based hardwood pulp grades, the Company pioneered the use of this product
in coated and specialty paper grades. The Company has committed itself to the
production of high quality BCTMP, so as to establish a differentiated product.
Management believes product development is an ongoing process necessary to meet
the specific needs of papermakers. The Company has focused its marketing
efforts on the technical and production staff within each paper mill to which
it sells product. This approach has enabled the development of
partnership-based relationships with its customers such that, in some cases,
the Company is the customers exclusive supplier of BCTMP.

The Companys 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. In 2002, the top
five pulp customers represented approximately 26% of all pulp marketed by the
Company, with its largest single customer representing approximately 14% of all
pulp marketed by the Company.

17



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Lumber Products

The principal markets for the Companys lumber products are the United
States, Canada and Japan. Lumber sales within North America are handled by
sales staff located in Edmonton, Canada, 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 the Company is a 20% owner.

The Company markets its lumber in North America mainly through wholesale
distributors that resell it to a large number of other customers. The Companys
top five lumber customers in 2002 accounted for approximately 58% of lumber
segment sales, with the largest customer accounting for approximately 17% of
lumber segment sales. The Companys sales of lumber represented approximately
43% of net revenue for the year ended December 31, 2002 and approximately 44%
of lumber sales were made in the United States in that period.

Following the expiration of the Softwood Lumber Agreement in March 2001,
the United States Department of Commerce and the United States International
Trade Commission rendered preliminary determinations contending that Canadian
softwood lumber was subsidized and sold at less than fair value. As a result
of these determinations, the Company was required to post bonds in respect of
potential antidumping and countervailing duties on our exports of softwood
lumber to the United States at rates of 12.6% and 19.31%, respectively. In May
2002, the United States International Trade Commission issued its final
determination, which found that Canadian imports are injuring or threatening to
injure the U.S. softwood lumber industry, and imposed a 27.2% duty on the
Companys softwood lumber exports to the United States. As a result, the
Company is now required to post cash deposits in the amount equal to the duties
on its softwood lumber exports. Such duties are subject to an appeal process
before either a binational panel pursuant to the North American Free Trade
Agreement or the World Trade Organization. In January 2003, legislation was
introduced in the U.S. Congress that, if passed, would increase the duty to
45%. If the duty is not reduced, the profitability of the Companys lumber
operations will continue to suffer and the lumber operations may, under certain
circumstances, become unprofitable. The Company is aware that discussions are
ongoing between representatives of the Canadian and the Untied States
governments with a view to resolving this trade dispute. The Company cannot
predict the outcome of these proceedings and discussions at this time.

A breakdown of the Companys pulp, lumber and other net revenue by
geographic market for the three previous fiscal years is as follows:

|                          |               |   |                          |      |      |   |       |      |  |   |       |      | 
|------------------------- | ------------- | - | ------------------------ | ---- | ---- | - | ----- | ---- |  | - | ----- | ---- | 
|                          |               |   | Years ended December 31,
|                          |               |   |                         
|                          |               |   | 2000                     |      | 2001 |   | 2002 
|                          |               |   |                          |      |      |   |      
|                          |               |   | (thousands)             
|Net revenue (in millions) |               |   |                          |      |      |   |       |      |  |   |       |     
|                          | Canada        |   | $                        | 55.0 |      |   | $     | 56.2 |  |   | $     | 61.5 | 
|                          | United States |   |                          | 70.5 |      |   |       | 50.2 |  |   |       | 56.9 | 
|                          | Europe        |   |                          | 87.4 |      |   |       | 56.6 |  |   |       | 38.8 | 
|                          | Asia          |   |                          | 83.8 |      |   |       | 46.2 |  |   |       | 76.1 | 
|                          | Other         |   |                          | 0.9  |      |   |       | 1.6  |  |   |       | 0.7  | 
|                          |               |   |                          |      |      |   |       |      |  |   |       |     
|                          |               | $ | 297.6                    |      |      | $ | 210.9 |      |  | $ | 234.0 |     
|                          |               |   |                          |      |      |   |       |      |  |   |       |     

For a breakdown of revenue by category of activity see: Item 5(A).

18



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Utilities and Chemicals

Power Electric power requirements for the manufacturing facilities at
Whitecourt and Boyle are provided through the Power Pool of Alberta at real
time market rates. The risk associated with exposure to market rate power has
been mitigated by obtaining power purchase rights. These rights represent the
Companys entitlement and obligation to purchase its electrical power
requirements at predetermined prices for a period of 20 years. On January 1,
2001, the Company entered into two Power Syndicate Agreements with four other
entities for the purpose of sharing the rights and responsibilities defined in
the Power Purchase Arrangements (PPA) acquired by Epcor Utilities Inc. in
accordance with the Power Auction Agreement in 2000. The PPAs are 20 year
agreements and give the holder the right to a specified capacity and the
associated electricity output from 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 PPAs. Through its participation in the syndicate, the Company has
the right to 80 megawatts of the generating capacity and will share pro-rata in
the obligations that arise under the PPAs.

Natural Gas Natural gas used in the Whitecourt facilities is supplied by
a major natural gas producer under annual supply contracts that are subject to
market prices. From time to time, the Company manages its gas price exposure
by entering into short-term forward contracts. Natural gas used at the Boyle
sawmill is supplied by the local gas cooperative under long-term contract.

Process Water Treated process water is supplied to the Whitecourt pulp
mill by the Town of Whitecourt under contract.

Chemicals Hydrogen peroxide is supplied from a plant located in Alberta
under a long-term pricing agreement which provides for stable pricing over the
term of the agreement. Caustic soda and other bleaching chemicals used in the
Whitecourt pulp mill are supplied by third parties under varying contract
terms. Magnesium sulphate used in the Whitecourt pulp mill is produced and
supplied by Industries pursuant to a long-term contract. See Item 7: Major
Shareholders and Related Party Transactions.

Transportation

Both the pulp and wood products operations are located adjacent to rail
lines serviced daily by Canadian National Railway, and near major highway
connections to both TransCanada and Interstate routes. The 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.

Environmental Matters

The Companys operations are regulated primarily by the Alberta
Environment and Enhancement Act (AEPEA) and the Federal Fisheries Act. The
Company is in compliance with all applicable environmental regulations.

Both the pulp and wood products operations at Whitecourt have been issued
renewable 10-year environmental approvals under AEPEA. The pulp mills approval
expires in November 2003, and the wood products operations approval expires in
February 2006. Environmental controls are in place to ensure that both
operations are in compliance with all regulated parameters of both provincial
and federal authorities.

The 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. Solid wood waste from the
Whitecourt pulp mill and sawmill is also sent to the electrical generating
station. Any excess biomass or wood waste is incinerated in a burner located at
a site approximately 22 kilometers north of Whitecourt. The Company has a
renewable environmental approval, which expires in April 2006, to operate the
burner.

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

The Boyle sawmill operation is also regulated under AEPEA and has been
issued a renewable 10-year environmental approval which expires in April 2005,
with the exception of the permit for the operations wood waste burner which
expired in January 2003 and has been extended until 2008. All wood waste from
the operation is currently incinerated in the burner.

All forest areas harvested by the Company have been reforested to Alberta
Environment standards. The Company accrued $6.1 million in new reforestation
obligations in 2002, compared to $9.8 million in 2001 and had reforestation
expenditures of $5.0 million in 2002, compared to $11.5 million in 2001.

19



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DESCRIPTION OF PROPERTY

The Company owns and operates three facilities in the Province of Alberta:
a BCTMP mill and sawmill at an integrated complex in Whitecourt and a sawmill
in Boyle. The Company also manages the operations of, and markets all pulp
produced by, the Meadow Lake pulp mill.

Pulp

The Companys 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, the Companys focus on mill optimization has increased the
capacity of the plant to 275,000 ADMT of BCTMP per year.

The Whitecourt pulp mill is a two-line mill that offers optimum
flexibility in meeting production demands. The Whitecourt pulp mill produces
chlorine-free hardwood (aspen), softwood (spruce, pine and fir) and blended
pulps for use in the production of printing and writing papers, paperboard,
specialty paper, tissue, and toweling. Process features include an alkaline
peroxide bleaching system, a state-of-the-art biological effluent treatment
system and a sophisticated mill-wide process control system. The high-yield
BCTMP process converts approximately 85% to 90% of wood input into pulp,
whereas the kraft process achieves a 45% to 55% yield. The two-line pulp mill
is certified to the ISO 9002 quality management standard and was 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.

The Millar Western pulp process has unique features that make it well
suited to the production of hardwood BCTMP for use in 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
that 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.

The availability of low-cost fiber, efficient use of energy, an advanced
bleaching process and a highly flexible and productive work force combine to
give the Company a competitive cost advantage over other BCTMP producers. See
Item 4: Information on the Company-Industry Overview.

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. The Company also purchases softwood chips on the open
market to supply the pulp mill and to use in connection with log-for-wood-chip
exchange agreements. Due to the Companys high degree of fiber self-sufficiency
and the availability of fiber in Alberta on the open market, the Company is not
significantly exposed to escalation in wood costs when the price of pulp rises.
The combined effect of low wood costs and higher pulp yields give the Companys
pulp mill a cost advantage compared to kraft pulp mills.

20



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Lumber Products

The Company owns and operates two sawmills located at Whitecourt and
Boyle, Alberta. The Whitecourt and Boyle sawmills have a combined annual
capacity of 310 MMFBM.

The Whitecourt sawmill, with an annual capacity of 210 MMFBM, manufactures
SPF lumber for North American and offshore markets. The product range includes
dimensions from 1 x 3 to 2 x 10 and in lengths from 8 to 16. Products
include MSR lumber for engineered roofing and load bearing applications,
special grades for export to the Japanese housing market and construction
lumber for North American residential and commercial markets. Residual timber
is sold to third parties for finger-jointed lumber. 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 in the Whitecourt
area.

In June 2001 the Company completed a modernization project for its
Whitecourt lumber operation at a total cost of $42.6 million which
significantly improved its efficiency, increased the quality of its products
and reduced its manufacturing costs by replacing the existing sawmill with a
new facility. This project was funded from operating cash flow. The new
sawmill at Whitecourt is a state-of-the-art 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. Short logs
are machine evaluated for best value 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 in-line thin kerf vertical gang edger, and
edger optimizer, a trimmer optimizer, and a J-Bar bin sorter. The finishing
process includes three 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.

The Company acquired the Boyle sawmill assets and related Coniferous
Timber Quotas in September 1993. The Boyle sawmill, with an annual capacity of
100 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 timber is sold for finger-jointed lumber and residual
wood chips are sold to a nearby pulp mill.

The Boyle mill is a two-line operation. The two primary machine centers
are a scragg saw 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. The Company uses computerized scanning technology to enhance the
performance of its equipment.

Production Summary

The following table shows the production of each of the Whitecourt pulp
mill, Whitecourt sawmill and Boyle sawmill for the periods indicated.

Production Summary

|                          |  |                          |     |         |  |      |     |             |  |  |     |  |  |  |     | 
|------------------------- |  | ------------------------ | --- | ------- |  | ---- | --- | ----------- |  |  | --- |  |  |  | --- | 
|                          |  | Years Ended December 31, |     |        
|                          |  |                          |     | Current
|                          |  | 2000                     |     | 2001    |  | 2002 |     | Capacity(1)
|                          |  |                          |     |         |  |      |     |            
|Whitecourt Pulp (MADMT)   |  |                          | 274 |         |  |      | 238 |             |  |  | 278 |  |  |  | 275 | 
|Whitecourt Lumber (MMFBM) |  |                          | 184 |         |  |      | 156 |             |  |  | 194 |  |  |  | 210 | 
|Boyle Lumber (MMFBM)      |  |                          | 102 |         |  |      | 97  |             |  |  | 100 |  |  |  | 100 | 



---

|(1) |  | Net shippable annual capacity using an average grade mix. Higher
capacities are possible using an optimum grade mix.
|--- |  | --------------------------------------------------------------------------------------------------------------------

21



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|ITEM 5: |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- |  | --------------------------------------------

Managements Discussion and Analysis (MD&A) set forth below is based
upon, and the Financial Statements have been prepared in accordance with,
Canadian GAAP. For a discussion of the principal differences between Canadian
GAAP and U.S. GAAP as they relate to the Company, see note 20 to the Financial
Statements.

A.     Operating Results

General

Millar Westerns two business 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, both producing SPF dimension lumber.
Millar Westerns other operations include management and marketing contracts
and corporate activities. The Companys operating results are affected
primarily by the prevailing market prices for its principal products, as well
as the Companys sales volumes and costs of production. Sales of the Companys
products are affected by global economic conditions and the economic conditions
of the pulp and paper markets, as well as the residential and commercial
construction industries in North America, Europe and Asia.

The availability of an economical timber supply is one of the most
important factors affecting the profitability of forest products companies.
Timber 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. The Company supplies its
manufacturing operations primarily from timber resources held under long-term
tenure, providing a secure supply of fiber on a sustainable basis.
Approximately 79% of the fiber requirements for the Companys pulp mill and
solid wood facilities is supplied by the Millar Western FMA, and the Companys
quotas, allocations, fiber exchange agreements and a supply contract. The
balance of the Companys fiber requirements is purchased on the open market.

The Company exports a majority of its products. A significant portion of
these export sales are denominated in U.S. dollars, while most of its operating
costs are incurred in Canadian dollars. Therefore, changes in the exchange rate
between Canadian and U.S. dollars affect the Companys financial results, as
more fully outlined in a subsequent section of this MD&A.

22



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The following table sets out segmented financial and operating information
for the Company for the periods indicated. This information should be read in
conjunction with the Financial Statements, including the reconciliation to U.S.
GAAP in Note 20 thereto, and the other financial and operating information
included elsewhere in this annual report on Form 20-F.

|                                   |                   |  |                                                |                          |      |  |      |       |   |  |   |       |  
|---------------------------------- | ----------------- |  | ---------------------------------------------- | ------------------------ | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                   |                   |  |                                                | Years ended December 31,
|                                   |                   |  |                                               
|                                   |                   |  | 2000                                           |                          | 2001 |  | 2002
|                                   |                   |  |                                                |                          |      |  |     
|                                   |                   |  | (in millions, except shipments and average net
|                                   |                   |  | realized selling price)                       
|Net Revenue                        |                   |  |                                                |                          |      |  |      |       |   |  |   |      
|                                   | Lumber            |  | $                                              | 96.3                     |      |  | $    | 82.6  |   |  | $ | 100.2 |  
|                                   | Pulp              |  |                                                | 187.5                    |      |  |      | 119.0 |   |  |   | 127.6 |  
|                                   | Other (1)         |  |                                                | 13.8                     |      |  |      | 9.3   |   |  |   | 6.1   |  
|                                   |                   |  |                                                |                          |      |  |      |       |   |  |   |      
|                                   | Total             |  | $                                              | 297.6                    |      |  | $    | 210.9 |   |  | $ | 233.9 |  
|                                   |                   |  |                                                |                          |      |  |      |       |   |  |   |      
|Operating Earnings (Loss)          |                   |  |                                                |                          |      |  |      |       |   |  |   |      
|                                   | Lumber            |  | $                                              | (6.5                     | )    |  | $    | (7.0  | ) |  | $ | 9.1   |  
|                                   | Pulp              |  |                                                | 76.3                     |      |  |      | 30.8  |   |  |   | 22.9  |  
|                                   | Other (1)         |  |                                                | (4.3                     | )    |  |      | (6.4  | ) |  |   | (7.8  | )
|                                   |                   |  |                                                |                          |      |  |      |       |   |  |   |      
|                                   | Total             |  | $                                              | 65.5                     |      |  | $    | 17.4  |   |  | $ | 24.2  |  
|                                   |                   |  |                                                |                          |      |  |      |       |   |  |   |      
|Shipments                          |                   |  |                                                |                          |      |  |      |       |   |  |   |      
|                                   | Lumber (MMFBM)    |  |                                                | 288                      |      |  |      | 250   |   |  |   | 283   |  
|                                   | Pulp (MADMT)      |  |                                                | 279                      |      |  |      | 236   |   |  |   | 272   |  
|Average net realized selling price |                   |  |                                                |                          |      |  |      |       |   |  |   |      
|                                   | Lumber (per MFBM) |  | $                                              | 334                      |      |  | $    | 330   |   |  | $ | 354   |  
|                                   | Pulp (ADMT)       |  |                                                | 672                      |      |  |      | 503   |   |  |   | 469   |  



---

|(1) |  | Represents primarily revenue from contracts with the Meadow Lake and
Chetwynd pulp mills and unallocated corporate expenses.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

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Year ended December 31, 2002 compared to December 31, 2001

Overview

Millar Westerns financial performance was stronger in 2002 despite the
continued difficult market conditions for both of our core products, lumber and
pulp and the negative effects of the ongoing softwood lumber trade dispute.
Increased sales volumes for both lumber and pulp contributed to a 11% increase
in net revenue, to $233.9 million in 2002 compared to $210.9 million in 2001.

Cost of sales increased by 10% to $177.4 million in 2002 compared to
$161.9 million in 2001, mainly due to higher sales volumes of both lumber and
pulp. Lumber manufacturing costs were lower in 2002 due to significant
productivity improvements in the new sawmill in Whitecourt during the year.
Pulp manufacturing costs increased as a result of higher energy costs after a
provincial government energy rebate program expired at the end of 2001.

Depreciation and amortization expense was $.5 million higher in 2002
reflecting a full years depreciation on the new sawmill in Whitecourt.

General and administration expense for the year decreased by 15% to $13.4
million in 2002 compared to $15.4 million in 2001 primarily as a result of
lower salary and travel costs.

The company implemented a work force reduction program in January 2002,
which resulted in a 6% reduction in the number of full time employees to 603.
A provision for severance costs of $2.3 million was recorded in 2002.

As a result of the increase in sales revenues and lower manufacturing and
administration costs, operating earnings were up by 39%, from $17.4 million in
2001 to $24.1 million in 2002. The Company recorded earnings before income
taxes of $1.0 million in 2002; however, there was no contribution to the
employee profit sharing program in 2002 because there was a net loss before the
unrealized exchange gain on debt. No contribution was made to the employee
profit sharing program in 2001 because there was a net loss before income taxes
for the year of $27.8 million.

Lumber

Net revenue for the lumber segment increased by 21% to $100.2 million in
2002, compared to $82.6 million in 2001, primarily as a result of higher lumber
shipments. The new sawmill in Whitecourt achieved better than expected levels
of productivity resulting in higher production volumes and lower manufacturing
costs for the year. Mill net realizations improved from 2001 levels, in part
due to a $2.3 million reversal of the 2001 countervailing and anti dumping
duties imposed by the United States Department of Commerce. On May 22, 2002,
duties totalling 27.2% were imposed on all softwood lumber exports to the U.S.,
resulting in a $5.2 million duty expense for 2002. See Item 3(D) Risk Factors
and Note 9 to the Financial Statements for a further discussion of the duties.
For the year, average mill nets were $354 per MFBM, which was $24 per MFBM
greater than last year. Lumber cost of sales averaged $300 per MFBM, $37 per
MFBM lower than last year. Overall, the lumber segment realized an operating
profit of $9.1 million compared to an operating loss of $7.1 million in 2001.

24



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Pulp

Net revenues from the pulp segment increased from $119.0 million in 2001
to $127.6 million in 2002 as a result of higher pulp shipments. Strong demand
for BCTMP and a decline in world pulp inventories contributed to the higher
sales volumes and a recovery in prices during the year. Still, despite the
price improvements, average mill net realizations in 2002 were $35 per tonne
lower than in 2001. At $341 per tonne, pulp cost of sales were 4% higher than
last year, primarily the result of power cost increases offset by productivity
gains. The 2002 power costs included a $1.6 million provision resulting from a
reassessment of power rates for electricity consumed in 2000. The Company
received benefits from its long term power purchase rights of $5.9 million in
2002. Given the lower mill nets and power cost increases, the pulp segment
recorded an operating profit of $22.9 million in 2002, compared to $30.8
million in 2001.

Other

Net revenue from other operations decreased by $3.2 million to $6.1
million in 2002 as a result of the expiration of the management and marketing
contracts with the Chetwynd pulp mill on December 31, 2001. Consequently, the
operating loss in this segment increased by $1.5 million to $7.9 million in
2002, compared to a loss of $6.4 million in 2001.

Financing

Financing expenses increased by $.9 million in 2002 compared 2001
primarily due to a reduction in foreign exchange gains realized on working
capital balances during the year, offset by a reduction in short term interest
expense.

Unrealized exchange (gain) loss on debt

Effective January 1, 2002, the company 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. In accordance with this policy, the company recorded an
unrealized gain of $2.2 million on the translation of long term debt
denominated in U.S. dollars. The gain resulted from a stronger Canadian dollar
relative to the U.S. dollar at the end of 2002 compared to the exchange rate at
the end of 2001. In 2001, the company recorded an unrealized loss of $15.5
million as a result of a relatively weaker Canadian dollar at that point in
time.

Other Expense (Income)

Included in other expense (income) in 2002 is a recovery on an energy
contract of $.7 million before tax. In 2001, the company recorded a provision
for loss on this contract of $5.0 million before tax.

Income Taxes

Operating results for the year ended December 31, 2002 were subject to
income taxes at an effective rate of 35%. Variations from the effective rate
are detailed in Note 15 of the audited financial statements. The provision for
income taxes for the year consists of large corporation tax expense of $.5
million and a future income tax recovery of $0.1 million.

25



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Year ended December 31, 2001 compared to December 31, 2000

Overview

Millar Westerns financial performance in 2001 was negatively impacted by
the effects of the downturn in the global economy on the forest products
industry. Reduced demand for paper and an oversupply of lumber and pulp
resulted in difficult market conditions for both of our core products through
the year. The softwood lumber trade dispute, and the start up of the new
sawmill in Whitecourt also had a negative impact on net revenues. Net revenue,
which reached a record level of $297.6 million in 2000, decreased by 29%, to
$210.9 million.

Cost of sales decreased by $37.5 million or 19% compared to 2000, mainly
due to lower sales volumes of both lumber and pulp. Energy costs were
significantly lower in 2001 because of the benefits received from the power
purchase rights and a one-time cash rebate of electricity costs. The power
purchase rights were acquired for an initial investment of $20.7 million and
provide the Company with a long term hedge against the volatility of market
electricity prices.

Depreciation and amortization expense was $0.4 million higher in 2001
primarily as a result of the amortization of the Companys power purchase
rights, which commenced January 1, 2001.

General and administration expense for the year increased by $1.6 million
or 13% compared to 2000 primarily as a result of higher salary and travel
costs.

As a result of the decline in sales revenues, operating earnings were
down by 73%, from $65.5 million in 2000 to $17.4 million in 2001. There was no
contribution to the employee profit sharing program in 2001 because there was
a net loss before income taxes for the year of $27.8 million compared to
earnings before income taxes of $30.3 million in 2000.

Lumber

Net revenue for the lumber segment decreased by $13.7 million to $82.6
million, primarily as a result of lower lumber shipments. The start up of the
new mill in Whitecourt, combined with market-related downtime at the Boyle
operation reduced lumber shipments by 38 MMFBM or 13%. Housing starts in North
America showed surprising resiliency through the year and lumber prices moved
up in the second and third quarters; however, mill net realizations were
negatively impacted by the preliminary duties on shipments to the United States
after August 17. The Company has accrued $2.3 million as at December 31, 2001
for the preliminary duties. See Item 3(D) Risk Factors and note 9 to the
Financial Statements for a further discussion of the duties. For the year,
average mill nets were $330 per MFBM which was $4 per MFBM lower than last
year. Lumber manufacturing costs averaged $337 per MFBM, virtually unchanged
from 2000 in spite of the challenges of starting up a new mill. Overall, the
lumber segment realized an operating loss of $7.1 million compared to an
operating loss of $6.5 million in 2000.

Pulp

The pulp segment was significantly affected by the downturn in the global
economy and the resulting decline in the demand for paper products. Rising
global pulp inventories caused market prices to collapse in the first quarter
and they remained at low levels throughout the year. Net revenues from the pulp
segment decreased from a record level of $187.5 million in 2000 to $119.0
million in 2001 as a result of a 15% reduction in shipments and a 25% drop in
mill net realizations. Pulp manufacturing costs were lower than last year by
10% at $328 per tonne, primarily as a result of reduced power costs. The
Company received benefits of $22.1 million from the long term power purchase
rights which commenced January 1, 2001 and also received a $19.6 million cash
rebate which applied to all power consumers in the Province of Alberta for the
year 2001. Offsetting these benefits was a $4.2 million provision for a
potential retroactive charge for power consumed in 2000 which the company is
disputing. If the Company is not successful in its appeals, this amount will
be payable over the next two years. Given the weak market conditions, the pulp
segment achieved an operating profit of $30.8 million, compared to $76.3
million in 2000.

26



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Other

Net revenue from other operations showed a significant decrease over the
previous year as a result of decreased commission revenue from pulp sold under
marketing agreements with BCTMP mills in Meadow Lake, Saskatchewan, and
Chetwynd, British Columbia. The decreased revenue was a direct result of the
downturn in the pulp market in 2001, with both mills experiencing lower sales
volumes and lower price realizations than in 2000. The operating loss in this
segment increased by $2.1 million to $6.4 million in 2001, as a result of lower
commission revenue. The Chetwynd pulp operation discontinued production in
April 2001 and the management and marketing contracts expired on December 31,
2001.

Financing

Financing expenses decreased by $0.3 million in 2001 compared to 2000,
primarily due to the effects of changes in currency exchange rates. The
Canadian dollar declined from an average of $.6725 in 2000 to $.6443 in 2001
which resulted in an increase in the Canadian dollar interest cost on U.S.
dollar denominated debt, offset by an increase in foreign exchange gains on
U.S. dollar cash and working capital.

Unrealized exchange (gain) loss on debt

Effective January 1, 2002 the Company 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. In accordance with this policy, the Company recorded an
unrealized loss of $15.5 million on the translation of long term debt
denominated in US dollars resulting from a weaker Canadian dollar relative to
the US dollar. In 2000, the Company recorded an unrealized loss of $7.0
million as a result of a relatively weaker Canadian dollar.

Other Expense (Income)

Included in other expense in 2001 is a provision for loss on an energy
contract of $5.0 million before tax. In August 2000, the Company entered into
a fixed price contract to purchase 25 MW of electricity over the period January
1, 2002, through December 31, 2002. At December 31, 2001, the contract rate
was higher than the market rate as determined by the quoted forward rate for
the calendar year 2002. Management is of the opinion that the decline in value
in this investment is other than temporary and therefore, in accordance with
the Companys accounting policy for investments, a provision for loss on this
contract was recorded for the year ended December 31, 2001.

The expense in 2000 of $2.7 million includes the cost of a workforce
reduction, which occurred in 2001.

Income Taxes

Operating results for the year ended December 31, 2001 were subject to
income and capital taxes at an effective rate of 36%. Variations from the
effective rate are detailed in Note 15 of the audited financial statements. The
income tax recovery for the year consists of large corporation tax expense of
$0.6 million and a future income tax recovery of $4.9 million.

B.     Liquidity and Capital Resources

For the year ended December 31, 2002, the Company generated $23.1 million
of cash from operations after changes in working capital, compared to $20.6
million in 2001. The increased cash flow was primarily a result of improved
operating earnings and reduced reforestation expenditures. Cash generated from
working capital was $11.2 million in 2002 compared to $15.0 million in 2001.
Capital expenditures decreased from $24.2 million in 2001 to $3.5 million in
2002, all of which was spent on maintenance capital projects. Proceeds from
the sale of surplus equipment were $0.4 million for the year.

27



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##### 



At December 31, 2002, the Company had cash on hand of $35.0 million and an
additional $41.1 million available under its revolving credit facility that
expires in June, 2003. The company expects to renew this facility with similar
terms and a maturity date of June, 2004.

For the year ended December 31, 2001, the Company generated $20.6 million
of cash from operations after changes in working capital, compared to $50.8
million in 2000. The reduced cash flow was primarily a result of lower
operating earnings from the pulp segment. Cash generated from working capital
was $10.8 million in 2001 compared to a cash requirement for working capital of
$7.6 million in 2000, primarily due to reductions in accounts receivable and
inventories. Capital expenditures decreased from $31.5 million in 2000 to
$24.2 million in 2001, of which $20 million was spent on completing the new
sawmill in Whitecourt. Proceeds from the sale of surplus equipment were $1.6
million in 2001.

The Company expects to spend up to $8.0 million in 2003 for capital
expenditures to maintain the productivity of the Companys facilities. The
Companys facilities currently comply with all environmental requirements and
therefore no related environmental capital expenditures are anticipated in the
near future. Capital expenditures in 2000, 2001 and 2002 were $31.5 million,
$24.2 million and $3.5 million, respectively.

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

Risks and Uncertainties

Commodity Prices

The markets for the Companys two principal products of pulp and lumber
are highly competitive and cyclical in nature. These markets are affected by
global economic conditions, industry capacity and demand variables, all of
which are beyond the control of the Company. These factors all have a
significant impact on selling prices and the profitability of the Company.
Based upon 2003 planned sales volumes and forecasted exchange rates, the
following outlines the sensitivity of the Companys operating earnings to
changes in commodity prices.

|       |  |                |  |                     |      |               |  | 
|------ |  | -------------- |  | ------------------- | ---- | ------------- |  | 
|       |  | Change in      |  | Estimated Impact On
|       |  | Realized Price |  | Operating Earnings 
|       |  |                |  |                    
|       |  |                |  |                     |      | (in millions)
|Pulp   |  | US$50/ADMT     |  | $                   | 18.6 |              
|Lumber |  | US$50/MFBM     |  | $                   | 18.3 |              

Foreign Exchange

Millar Western sells the majority of its products outside of Canada in
U.S. dollars (73% of 2002 revenue; 2001  73%; 2000  78%). As such, the
relative strength of the Canadian dollar versus the U.S. dollar has a major
impact on sales and earnings. The Canadian dollar, expressed in U.S. dollars,
averaged $0.6368 in 2002, compared to $0.6443 in 2001.

28



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##### 



To reduce the impact on earnings of fluctuations in currency rates, the
Company has a policy of hedging a significant portion of its anticipated U.S.
dollar cash receipts with forward contracts of up to 12 months in duration.
Foreign currency derivative financial instruments are not used for speculative
purposes. In 2002, the Company sold US$72 million of U.S. dollar revenues
under the hedging program and realized a loss of $0.4 million on the contracts.
At December 31, 2002, the Company had US$66 million of forward contracts which
expire at various dates to December, 2003. The average rate of the contracts
is $0.6285.

Critical Accounting Estimates

Recoverability of Capital Assets

The Company assesses the recoverability of its capital assets by
projecting the future cash flows to be generated by the pulp and lumber mills.
These projections require estimates to be made, including ones regarding future
commodity prices, foreign currency exchange rates, sales volumes, and operating
costs. There is a high degree of uncertainty in estimating future cash flows
primarily as a result of the uncertainty regarding future prices for the
Companys commodities. Different assumptions for commodity prices could result
in a conclusion that the Company would not recover the carrying amount of its
capital assets, which could result in a material charge to earnings.

Reforestation Obligation

The Company accrues its reforestation obligations based on estimates of
future costs at the time the timber is harvested. The estimate of future
reforestation costs is based on a comprehensive analysis 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. The Company employs forestry experts who have the
specialized knowledge required to make such adjustments. 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

The Company values its 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
mill net realizations 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.



| | C. |  | Research and Development
| | -- |  | ------------------------
|
| |    |  | Not applicable.         
|
| | D. |  | Trend Information       

Lumber

The Companys financial performance in the lumber sector continues to be
largely influenced by commodity prices and the Canada  U.S. softwood lumber
dispute. Until this issue is resolved, it will continue to be difficult to
predict future trends in the lumber market. The current oversupply of lumber
will keep lumber prices at low levels. In this environment the Company will
continue to run its sawmill facilities at capacity. In particular, the Company
will add an additional shift to its Boyle sawmill in order to process
fire-damaged timber. The Company expects to reduce its manufacturing cost in
this sector from 2002 levels by managing production and taking advantage of
lower cost timber at its Boyle facility.

29



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Pulp

The pulp market has shown some signs of a recovery from the weak fourth
quarter of 2002. Price increase announcements in February, March and April,
2003 have resulted in an improvement in price of approximately US$90 per tonne
since the end of 2002. Further price adjustments in 2003 will be dependent on
the balance of supply and demand. The Company expects 2003 production and
shipment levels to be close to capacity levels. Manufacturing costs are
expected to increase slightly in 2003 as a result of higher energy and repair
and maintenance costs.



| | E. |  | Off-Balance Sheet Arrangements                                                                 
| | -- |  | -----------------------------------------------------------------------------------------------
|
| |    |  | Information not required for annual reports for fiscal years ending prior
to June 15, 2003.    
|
| | F. |  | Tabular Disclosure of Contractual Obligations                                                  
|
| |    |  | Information not required for annual reports for fiscal years ending prior to December 15, 2003.



|ITEM 6: |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|------- |  | ------------------------------------------



| | A. |  | Directors and Senior Management
| | -- |  | -------------------------------

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

|                                |  |     |    |          |  |                                                
|------------------------------- |  | --- | -- | -------- |  | -----------------------------------------------
|Name                            |  | Age |    | Position
|                                |  |     |    |         
|James B. Millar                 |  |     | 62 |          |  | Chairman and Director                          
|                                |  |     |    |          |  |                                                
|H. MacKenzie Millar(2)          |  |     | 56 |          |  | President, Chief Executive Officer and Director
|                                |  |     |    |          |  |                                                
|J. Craig Armstrong              |  |     | 51 |          |  | Executive Vice-President                       
|                                |  |     |    |          |  |                                                
|Carol Cotton, C.A.              |  |     | 45 |          |  | Senior Vice-President, Corporate               
|                                |  |     |    |          |  |                                                
|Joseph Costantino               |  |     | 54 |          |  | Senior Vice-President, Operations              
|                                |  |     |    |          |  |                                                
|Ronald J. Reis                  |  |     | 50 |          |  | Senior Vice-President, Engineering & Technology
|                                |  |     |    |          |  |                                                
|Joseph R. Concini, C.A.         |  |     | 41 |          |  | Chief Financial Officer                        
|                                |  |     |    |          |  |                                                
|Robert J. Turner, Q.C.(2)       |  |     | 56 |          |  | Secretary, General Counsel and Director        
|                                |  |     |    |          |  |                                                
|W. Kenneth Davidson             |  |     | 51 |          |  | Director                                       
|                                |  |     |    |          |  |                                                
|William D. Grace, F.C.A.(1) (2) |  |     | 67 |          |  | Director                                       
|                                |  |     |    |          |  |                                                
|Donald R. Ching(1)              |  |     | 61 |          |  | Director                                       
|                                |  |     |    |          |  |                                                
|Douglas G. Hall (1)             |  |     | 53 |          |  | Director                                       



---

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

30



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James B. Millarhas served as Chairman of the Board and Director of the
Company since its inception in September 1997. Since 1987, Mr. J.B. Millar has
also served as President of Industries. A graduate of the University of Alberta
(B.Sc. Civil Engineering), Mr. J.B. Millar joined the family business on a
full-time basis in 1963, working in the construction and forest products
divisions of Industries. Mr. J.B. 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. J.B. Millar has more than 40 years of
experience in the forest products industry. Mr. J.B. Millar is the brother of
H. MacKenzie Millar.

H. MacKenzie Millarhas served as President, Chief Executive Officer and
Director of the Company since its inception in September 1997. Since 1994, Mr.
H.M. Millar has also served as Senior Vice-President and Treasurer of
Industries. Mr. H.M. Millar previously served as President and Chief Executive
Officer of Millar Western Pulp (Whitecourt) Ltd. and Millar Western Pulp
(Meadow Lake) Ltd. Mr. H.M. Millar is a graduate of the University of Alberta
(B.A., B.Comm.) and served on the Business Advisory Council to the Faculty of
Business. Mr. H.M. 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. H.M. Millar joined the family business on a
full-time basis in 1970 and has more than 33 years of experience in the forest
products industry. Mr. H.M. Millar is the brother of James B. Millar.

J. Craig Armstronghas served as Executive Vice-President since July 1998.
Prior to this he served as Senior Vice-President, Marketing, of the Company
since its inception in 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 is a graduate of the University of Saskatchewan (B.Comm.) and has
more than 27 years of experience in the forest products industry.

Carol Cotton, C.A.was appointed Senior Vice-President, Corporate in
April 2002. Prior to this, Ms. Cotton served as Senior Vice-President and
Chief Financial Officer of the Company since its inception in 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
is a graduate of the University of Alberta (B.Comm.) and has been a member of
the Institute of Chartered Accountants of Alberta since 1982. Prior to 1988,
Ms. Cotton was a manager with Coopers & Lybrand, chartered accountants, where
she was employed for nine years.

Joseph Costantinohas served as Senior Vice President, Operations since
1998. Prior to this, he served as Vice President, Operations, of the Company
since its inception in 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 and has over 31 years experience in the forest products industry.

Ronald J. Reishas served as Senior Vice President, Engineering &
Technology since 1998. Prior to this, Mr. Reis served as Vice President,
Engineering and Technology of the Company since its inception in 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 the
Lakehead University (Professional Engineer) and has more than 27 years
experience in the forest products industry.

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

31



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Robert J. Turner, Q.C.has served as Secretary, General Counsel and a
Director of the Company since its inception in 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.

W. Kenneth Davidsonwas appointed Director of the Company in September
1997. He is currently an independent consultant and prior to becoming a
consultant, he was involved in the investment banking and banking industries.

William D. Grace, F.C.A.was appointed Director of the Company in
September 1997. Mr. Grace serves as a director of a number of public companies
in Alberta. Prior to May 1994, Mr. Grace was the managing partner of the
Edmonton office of Price Waterhouse, chartered accountants.

Donald R. Chingwas appointed Director of the Company in September 1997.
Mr. Ching is President of SaskTel, a communications company. From September
1995 to April 1996, Mr. Ching was an independent consultant. Prior to August
1995, Mr. Ching was President of Crown Investments Corporation of Saskatchewan.

Douglas G. Hallwas appointed Director of the Company in March 1999. Mr.
Hall is Vice-President and Managing Director of RBC Dominion Securities and is
responsible for corporate and investment banking activities in Atlantic Canada.
Mr. Hall is a graduate of the University of Western Ontario (M.B.A.) and
Queens University (B.A.) and is also a Chartered Financial Analyst.

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



| | B. |  | Compensation
| | -- |  | ------------

Executive Compensation in the Last Fiscal Year

Executive officers are appointed annually and serve at the discretion of
the Board of Directors. The aggregate amount of compensation paid by the
Company in 2002 to all directors and officers as a group for services in all
capacities was $2.2 million.

Millar Westerns policy provides that each non-employee director is
entitled to receive an annual fee of $13,000 and a fee of $950 for each board
or committee meeting attended. The chair of each committee of the Board of
Directors is entitled to an additional $2,500 per annum. The total compensation
paid to non-employee directors for the year ended December 31, 2002 was $0.1
million.

The Company does not have a stock incentive plan and has never granted
stock appreciation rights to any of its directors, officers or employees. The
Company and Industries maintain a defined contribution pension plan for all of
their employees. The aggregate amount which the Company contributed to the
pension plan on behalf of the employees in 2002 was $1.2 million, of which $0.1
million represented contributions on behalf of the officers of the Company. All
employees of the Company and Industries are entitled to participate on a
voluntary basis in a retirement savings plan (RSP), under which the Company
and Industries match each employees RSP contribution. The aggregate amount of
matching RSP contributions which were paid by the Company in 2002 was $0.7
million, of which less than $10,000 represented matching contributions on
behalf of the officers of the Company.

32



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##### 



On January 1, 2000 the Company established a supplementary defined benefit
pension plan for its 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 other Registered Pension Plans of
the Company. The aggregate amount which the Company contributed to the
supplementary pension plan on behalf of the participants was $0.3 million in
2002.

In 1994, the Company and Industries instituted a performance bonus plan
for eleven executives and key employees. Under this plan, participants will be
entitled to a cash bonus in the tenth year from the date of initial
participation with the Company or Industries, payable in four equal annual
payments, if established performance goals are met. The performance bonuses do
not vest with the participant until the tenth year from the date of initial
participation with the Company or Industries.

In conjunction with the performance bonus plan, key man life insurance
contracts were established which are designed to provide the Company with
recovery of all after-tax costs of the performance bonus plan.

Employee Profit Sharing Plan

All full-time employees participate in a profit sharing plan which
distributes a percentage of earnings before income taxes and unrealized
exchange gains or losses on debt to employees on an annual basis. The
percentage of earnings before income taxes set aside for distribution under the
employee profit sharing plan is reviewed annually. For the years ended December
31, 2000, 2001 and 2002, the amount of earnings set aside for distribution was
$4.4 million, $Nil and $Nil, respectively.



| | C. |  | 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 three members:
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.



| | D. |  | Employees
| | -- |  | ---------

As of December 31, 2002, the Company employed 603 permanent, full-time
employees, all of whom were non-union:

|                            |       |              |     |     | 
|--------------------------- | ----- | ------------ | --- | --- | 
|Location                    |       | Employees(1)
|                            |       |             
|Corporate office (Edmonton) |       |              | 63  |    
|Whitecourt pulp mill        |       |              | 108 |    
|Whitecourt sawmill(2)       |       |              | 242 |    
|Whitecourt woodlands        |       |              | 27  |    
|Boyle sawmill and woodlands |       |              | 163 |    
|                            |       |              |     |    
|                            | Total |              |     | 603 | 
|                            |       |              |     |    

33



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---

|(1) |  | Does not include part-time or seasonal employees.                                     
|--- |  | --------------------------------------------------------------------------------------
|   
|(2) |  | Whitecourt sawmill includes sawmill, woodroom, log, chip and waste handling
employees.

In addition, approximately 85 independent contractors employing
approximately 500 employees are engaged on a seasonal basis to provide logging,
trucking, road building and forest regeneration services.



| | E. |  | 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
|------- |  | -------------------------------------------------



| | A. |  | Major Shareholders
| | -- |  | ------------------

Industries holds, directly and of record, 15,000,001 common shares,
representing 100% of the outstanding common shares of the Company. Industries
is a company with operations in construction, chemicals and other businesses.
Industries and its affiliate also hold the 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 the Company which may at a subsequent
date result in a change in control of the Company.

By virtue of its ownership of all of the issued and outstanding common
shares of the Company, Industries acting alone can elect the entire Board of
Directors of Millar Western and can approve any transaction requiring
shareholder approval.



| | B. |  | Related Party Transactions
| | -- |  | --------------------------

On May 13, 1998, the Company, Industries, and certain executive officers
of the Company entered into certain agreements, which are described in greater
detail below. Management of the Company 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 entered into a non-competition agreement (the Non-Competition
Agreement) whereby each agreed not to engage, without the consent of the
Company, 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 a
period of five years or for so long as Industries, James B. Millar and H.
MacKenzie Millar hold, in the aggregate, at least 10% of the outstanding common
shares of the Company. 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) and performance under the Corporate Services Agreement (as
defined). In addition, Industries, James B. Millar and H. MacKenzie Millar
agree not to disclose any confidential information or trade secrets concerning
the present and contemplated business of the Company.

34



---



##### 



Trademark Licensing AgreementIndustries is the registered owner of the
trademark MILLAR WESTERN and the logo in Canada, the trademarks Whitecote
and WHITECOTE in both Canada and the United States, the trademark ECO-PAPER
in Canada (collectively, the Trademarks). The Company and Industries entered
into a trademark licensing agreement (the Trademark Licensing Agreement)
which grants to the Company 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, the Company will be required to
maintain certain quality standards for wares and services set by Industries. In
addition, the Company may only use the Trademarks in its 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 the Company.

Corporate Services AgreementThe Company and Industries entered into a
corporate services agreement (the Corporate Services Agreement) regarding
office, managerial and aircraft services. Pursuant to the Corporate Services
Agreement, Industries has granted the Company a non-exclusive license to use
and occupy an office building owned by Industries for market rent. The Company
has 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 will pay to the Company
5% in excess of the costs incurred by the Company in providing such services.
All of the persons employed by Industries in forest products operations
remained employees of Industries until December 31, 1998, at which time they
became employees of the Company. Industries agreed to make such employees
available to the Company, continued to pay such employees and did not terminate
or alter any terms of employment. The Company reimbursed Industries for all
costs incurred by Industries related to those employees. Industries will make
its aircraft available to the Company on a standby basis and the Company will
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 the
Companys 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 the Company by Industries
on May 13, 1998. Management believes that such agreements involve the payment
of market rates or are on terms that the Company could have negotiated with
unaffiliated, third parties.

Meadow Lake AgreementsPursuant to the marketing agreement (the Marketing
Agreement), the Company will use its best efforts to arrange for sales of the
pulp produced by the Meadow Lake pulp mill on terms approved by the
Partnership. The Company will be required to distribute sales fairly between
the Meadow Lake pulp mill and the Whitecourt pulp mill. The Company will
receive between 1% and 3% of the net sales of pulp produced by the Meadow Lake
pulp mill as a commission. The Marketing Agreement may be terminated by the
Company upon two months notice if Industries and its affiliate no longer own
any equity interest in the Partnership. Industries and its affiliate and the
Government of Saskatchewan hold a joint interest in the Partnership which owns
the Meadow Lake pulp mill.

The administrative services agreement (the Administrative Services
Agreement) provides that the Company will manage, control, administer and
operate the business and affairs of the Partnership. This agreement also
provides that the Company will make its 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 will be
required to pay the expenses (including a proportional allocation of overhead
expenses) incurred by the Company in providing such personnel and facilities.
The Administrative Services Agreement may be terminated by the Company upon two
months notice to Industries if Industries and its affiliate no longer own any
equity interest in the Partnership.

Magnesium Sulphate Supply AgreementThe magnesium sulphate supply
agreement (the Magnesium Sulphate Supply Agreement) provides that Industries
will produce and supply, and the Company will purchase, all of the magnesium
sulphate requirements of the Companys pulp mills at a price based upon the
market rate. This agreement may be terminated by either party on two months
notice.

35



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##### 



Services provided by DirectorsRobert J. Turner, Secretary, General
Counsel and a Director of the Company, is a partner at the law firm of Fraser
Milner Casgrain LLP, which received compensation for services rendered to the
Company in 2000, 2001 and 2002. Such compensation did not exceed 5% of the
revenues of Fraser Milner Casgrain during 2000, 2001 or 2002.

Indebtedness of Directors and Officers. As at December 31, 2002, there
was no indebtedness outstanding to the Company by directors or executive
officers.



|ITEM 8: |  | FINANCIAL INFORMATION
|------- |  | ---------------------



| | A. |  | Consolidated Statements and Other Financial Information
| | -- |  | -------------------------------------------------------
|
| |    |  | See Item 18: Financial Statements.                     

Legal Proceedings

The Company is involved in various legal proceedings arising out of the
ordinary course of its business. The Company believes that the liabilities, if
any, arising from all pending legal proceedings in the aggregate will not have
a material adverse effect on the financial conditions or operations of the
Company.



| | B. |  | Significant Changes
| | -- |  | -------------------
|
| |    |  | Not applicable.    

36



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##### 





|ITEM 9: |  | THE OFFER AND LISTING
|------- |  | ---------------------



| | A. |  | Offer and Listing Details                                                                
| | -- |  | -----------------------------------------------------------------------------------------
|
| |    |  | There is no organized trading market, inside or outside the United States,
for the Notes.
|
| | B. |  | Plan of Distribution                                                                     
|
| |    |  | Not applicable.                                                                          
|
| | C. |  | Markets                                                                                  
|
| |    |  | The Notes are not listed on any stock exchange or other regulated market.                
|
| | D. |  | Selling Shareholders                                                                     
|
| |    |  | Not applicable.                                                                          
|
| | E. |  | Dilution                                                                                 
|
| |    |  | Not applicable.                                                                          
|
| | F. |  | Expenses of the Issue                                                                    
|
| |    |  | Not applicable.                                                                          

37



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##### 





|ITEM 10: |  | ADDITIONAL INFORMATION
|-------- |  | ----------------------



| | A. |  | Share Capital                         
| | -- |  | --------------------------------------
|
| |    |  | Not applicable.                       
|
| | B. |  | 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,                                                                                                       
|
| | (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:



| | (a) |  | each holder of a common share shall be
entitled to receive dividends as and when declared and
payable, and                      
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | dividends may be declared and paid on the
common shares to the complete exclusion of the other
classes of shares of the Company.

38



---



##### 



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.

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.



| | C. |  | Material Contracts
| | -- |  | ------------------
|
| |    |  | Not applicable.   
|
| | D. |  | 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.



| | E. |  | 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.

39



---



##### 



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 Customs and 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.



| | F. |  | Dividends and Paying Agents
| | -- |  | ---------------------------
|
| |    |  | Not applicable.            
|
| | G. |  | Statements by Experts      
|
| |    |  | Not applicable.            
|
| | H. |  | 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
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549, and at
the regional offices of the Commission located at 233 Broadway Avenue, New
York, New York 10279 and at 175 W. Jackson Boulevard, Suite 900, Chicago, IL
60604. Copies of such materials are also available from the Public Reference
Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C., 20549, at prescribed rates. 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; providedthat (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).

40



---



##### 





| | I. |  | Subsidiary Information
| | -- |  | ----------------------
|
| |    |  | Not applicable.       



|ITEM 11: |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------

In the normal course of its business, the Company is exposed to changes in
foreign currency exchange rates, interest rates and commodity prices which may
significantly affect its financial results. The Company regularly assesses
these risks and establishes policies to manage the effects of these exposures.

Foreign Exchange and Interest Rate Risk

The Company realized approximately 73% of its revenue for the fiscal year
ended December 31, 2002 (2001  73%; 2000  78%) in U.S. dollars. In order to
reduce the impact on revenue and operating earnings from short term
fluctuations in currency rates, the Company has a policy of hedging a
significant portion of the expected U.S. dollar revenue with forward exchange
contracts of up to one year. The Company does not utilize these financial
instruments for trading or other speculative purposes. As at December 31,
2002, the Company held US$66 million in forward exchange contracts at an
average rate of $1.5911 per US$1.00 expiring at various dates to December,
2003. At December 31, 2002 these contracts had an unrecognized gain of $0.8
million.

Based on 2003 planned sales volumes and forward exchange contracts held,
each U.S. one cent change in the value of the Canadian dollar will impact
operating earnings by $2.4 million.

The interest rate on the Companys US$160.0 million of Notes is fixed at
9.875%. The Company does not currently use any derivative instruments to
manage its exposure to changes in market interest rates, nor does it use any
instruments to manage its exposure to changes in foreign currency rates with
respect to this debt. At December 31, 2002, the fair value of this debt was
approximately $243.8 million, based upon the price at which the debt was
trading.

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. At
December 31, 2002, the Company had not entered into any material financial
instruments to mitigate its exposure to changes in the price of pulp or lumber.
See Item 5: Operating and Financial Review and Prospects  Risks and
Uncertainties  Commodity Prices.

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.

In 2000, the Company entered 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
this contract of $5.0 million based on its fair value at December 31, 2001.
The actual realized loss on this contract was $4.3 million.



|ITEM 12: |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- |  | ------------------------------------------------------



| |  | Not applicable.
| |  | ---------------

41



---



##### 



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                                                     

Evaluation of disclosure controls and procedures. The Companys principal
executive officer and its principal financial officer, after evaluating the
effectiveness of the Companys disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days
prior to the filing date of the report, have concluded that, as of such date,
the Companys disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within those entities.

Changes in internal controls. There were no significant changes in the
Companys internal controls or in other factors that could significantly affect
the Companys disclosure controls and procedures subsequent to the date of
their evaluation, nor were there any significant deficiencies or material
weaknesses in the Companys internal controls. As a result, no corrective
actions were required or undertaken.



|ITEM 16A: |  | AUDIT COMMITTEE FINANCIAL EXPERT                                                   
|--------- |  | -----------------------------------------------------------------------------------
|         
|          |  | Not required for annual reports for fiscal years ending prior to July 15, 2003.    
|         
|ITEM 16B: |  | CODE OF ETHICS                                                                     
|         
|          |  | Not required for annual reports for fiscal years ending prior to July 15, 2003.    
|         
|ITEM 16C: |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                             
|         
|          |  | Not required for annual reports for fiscal years ending prior to December 15, 2003.

PART III



|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 20 thereto.

42



---



##### 





|ITEM 19: |  | EXHIBITS
|-------- |  | --------

|    |  |                      |  |                                                                                                                                                                                  
|--- |  | -------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Financial Statements
|    |  |                      |  |                                                                                                                                                                                  
|    |  | (i)                  |  | Auditors Report.                                                                                                                                                                
|    |  |                      |  |                                                                                                                                                                                  
|    |  | (ii)                 |  | Balance Sheets as at December 31, 2001 and 2002.                                                                                                                                 
|    |  |                      |  |                                                                                                                                                                                  
|    |  | (iii)                |  | Statements of Earnings for the years ended December 31, 2000, 2001 and 2002.                                                                                                     
|    |  |                      |  |                                                                                                                                                                                  
|    |  | (iv)                 |  | Statements of Retained Earnings for the years ended December 31, 2000, 2001 and 2002.                                                                                            
|    |  |                      |  |                                                                                                                                                                                  
|    |  | (v)                  |  | Statements of Cash Flows for the years ended December 31,
2000, 2001 and 2002.                                                                                                   
|    |  |                      |  |                                                                                                                                                                                  
|    |  | (vi)                 |  | Notes to the Financial Statements.                                                                                                                                               
|    |  |                      |  |                                                                                                                                                                                  
|    |  | (vii)                |  | Financial Statement Schedules are omitted because they are
not applicable, not required or because the required information is
included in the Financial Statements filed herein.
|    |  |                      |  |                                                                                                                                                                                  
|(b) |  | Exhibits            
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 1.1*                 |  | Certificate, Articles of Incorporation and Articles of Amendment                                                                                                                 
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 1.2*                 |  | By-Laws                                                                                                                                                                          
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 2.1*                 |  | Indenture dated as of May 13, 1998 between the Company and
IBJ Schroder Bank & Trust Company                                                                                     
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 4.1*                 |  | Forest Management Agreement dated May 14, 1997 between the
Minister of Environmental Protection of Alberta and Millar Western
Industries Ltd.                                    
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 4.2*                 |  | Corporate Services Agreement dated as of May 13, 1998 between
the Registrant and Millar Western Industries Ltd.                                                                  
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 4.3*                 |  | Form of 1994 Performance Bonus Plan of the Registrant                                                                                                                            
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 4.4*                 |  | Non-Competition Agreement dated as of May 13, 1998 among the
Registrant, Millar Western Industries Ltd., James B. Millar and H.
MacKenzie Millar                                 
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 4.5*                 |  | Marketing Agreement dated as of November 1, 1990 among Millar
Western Management Ltd. and Meadow Lake Pulp Limited                                                               
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 4.6*                 |  | Administrative Services Agreement dated October 31, 1990
among Millar Western Management Ltd., Millar Western Pulp (Meadow
Lake) Ltd. and Meadow Lake Pulp Limited Partnership   
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 4.7*                 |  | Trademark Licensing Agreement dated May 13, 1998 between the
Registrant and Industries                                                                                           
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 4.8*                 |  | Credit Agreement dated as of May 7, 1998 between the
Registrant and Canadian Imperial Bank of Commerce                                                                           
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 4.9**                |  | PPA Auction Agreement dated July 14, 2000                                                                                                                                        
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 4.10***              |  | Power Syndicate Agreement (Battle River) dated January 1, 2001                                                                                                                   
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 4.11***              |  | Power Syndicate Agreement (Sundance C) dated January 1, 2001                                                                                                                     
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 12.1                 |  | Certification of the Chief Executive Officer, H. MacKenzie
Millar, pursuant 18 U.S.C. Section 1350, as enacted pursuant to
Section 906 of the Sarbanes-Oxley Act                 
|    |  |                      |  |                                                                                                                                                                                  
|    |  | 12.2                 |  | Certification of the Chief Financial Officer, Joseph R.
Concini, pursuant 18 U.S.C. Section 1350, as enacted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002           



---

|*   |  | Incorporated by reference from the Companys Form F-4 filed
with the Securities and Exchange Commission (Commission File No.
333-8960).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|   
|**  |  | Incorporated by reference from the Companys Form 20-F filed
with the Securities and Exchange Commission on June 27, 2001.             
|   
|*** |  | Incorporated by reference from the Companys Form 20-F filed
with the Securities and Exchange Commission on June 4, 2002.              

43



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##### 



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.
|                     |  |                                     |  |                        
|Date:  June 20, 2003 |  | /s/ J.R. Concini                   
|                     |  |                                    
|                     |  | Name:                               |  | J.R. Concini           
|                     |  | Title:                              |  | Chief Financial Officer



---



##### 



CERTIFICATIONS

I, H. MacKenzie Millar, certify that:

1.     I have reviewed this annual report on Form 20-F of Millar Western
Forest Products Ltd.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a)     Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

(b)     Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

(c)     Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (and persons performing the
equivalent function):

(a)     All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

(b)     Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
any other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

|                     |  |                         |  |                                      
|-------------------- |  | ----------------------- |  | -------------------------------------
|Date:  June 20, 2003 |  | /s/ H. MacKenzie Millar
|                     |  | Name:                   |  | H. MacKenzie Millar                  
|                     |  | Title:                  |  | President and Chief Executive Officer



---



##### 



I, Joseph R. Concini, certify that:

1.     I have reviewed this annual report on Form 20-F of Millar Western
Forest Products Ltd.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a)     Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

(b)     Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

(c)     Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (and persons performing the
equivalent function):

(a)     All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

(b)     Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
any other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

|                     |  |                       |  |                        
|-------------------- |  | --------------------- |  | -----------------------
|Date:  June 20, 2003 |  | /s/ Joseph R. Concini
|                     |  | Name:                 |  | Joseph R. Concini      
|                     |  | Title:                |  | Chief Financial Officer



---



##### 



Exhibit Index

|         |  |                                                                                                                                                                               
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  | Description                                                                                                                                                                   
|         |  |                                                                                                                                                                               
|1.1*     |  | Certificate, Articles of Incorporation and Articles of Amendment                                                                                                              
|         |  |                                                                                                                                                                               
|1.2*     |  | By-laws                                                                                                                                                                       
|         |  |                                                                                                                                                                               
|2.1*     |  | Indenture dated as of May 13, 1998 between the Company and IBJ
Schroder Bank & Trust Company                                                                                  
|         |  |                                                                                                                                                                               
|4.1*     |  | Forest Management Agreement dated May 14, 1997 between the
Minister of Environmental Protection of Alberta and Millar
Western Industries Ltd.                                 
|         |  |                                                                                                                                                                               
|4.2*     |  | Corporate Services Agreement dated May 13, 1998 between the
Registrant and Millar Western Industries Ltd.                                                                     
|         |  |                                                                                                                                                                               
|4.3*     |  | Form of 1994 Performance Bonus Plan of the Registrant                                                                                                                         
|         |  |                                                                                                                                                                               
|4.4*     |  | Non-Competition Agreement dated as of May 13, 1998 among the
Registrant, Millar Western Industries Ltd., James B. Millar and
H. MacKenzie Millar                              
|         |  |                                                                                                                                                                               
|4.5*     |  | Marketing Agreement dated as of November 1, 1990 among Millar
Western Management Ltd. and Meadow Lake Pulp Limited                                                            
|         |  |                                                                                                                                                                               
|4.6*     |  | Administrative Services Agreement dated October 31, 1990 among
Millar Western Management Ltd., Millar Western Pulp (Meadow
Lake) Ltd. and Meadow Lake Pulp Limited Partnership
|         |  |                                                                                                                                                                               
|4.7*     |  | Trademark Licensing Agreement dated May 13, 1998 between the
Registrant and Industries                                                                                        
|         |  |                                                                                                                                                                               
|4.8*     |  | Credit Agreement dated as of May 7, 1998 between the Registrant
and Canadian Imperial Bank of Commerce                                                                        
|         |  |                                                                                                                                                                               
|4.9**    |  | PPA Auction Agreement dated July 14, 2000                                                                                                                                     
|         |  |                                                                                                                                                                               
|4.10***  |  | Power Syndicate Agreement (Battle River) dated January 1, 2001                                                                                                                
|         |  |                                                                                                                                                                               
|4.11***  |  | Power Syndicate Agreement (Sundance C) dated January 1, 2001                                                                                                                  
|         |  |                                                                                                                                                                               
|12.1     |  | Certification of the Chief Executive Officer, H. MacKenzie
Millar, pursuant 18 U.S.C. Section 1350, as enacted pursuant to
Section 906 of the Sarbanes-Oxley Act              
|         |  |                                                                                                                                                                               
|12.2     |  | Certification of the Chief Financial Officer, Joseph R.
Concini, pursuant 18 U.S.C. Section 1350, as enacted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002        



---

|*   |  | Incorporated by reference from the Companys Form F-4 filed with the
Securities and Exchange Commission (Commission File No. 333-8960).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|   
|**  |  | Incorporated by reference from the Companys Form 20-F filed with the
Securities and Exchange Commission on June 27, 2001.             
|   
|*** |  | Incorporated by reference from the Companys Form 20-F filed with the
Securities and Exchange Commission on June 4, 2002.              





---



##### 







MILLAR WESTERN FOREST PRODUCTS LTD.



FINANCIAL STATEMENTS



FOR THE YEAR ENDED DECEMBER 31, 2002





---





---



##### 



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, 2002, and 2001, and the statements of earnings, retained earnings
and cash flows for each of the years in the three-year period ended December
31, 2002. 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 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 Millar Western Forest Products Ltd. as at
December 31, 2002 and 2001 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2002 in
accordance with generally accepted accounting principles in Canada.

/s/ PricewaterhouseCoopers LLP
Chartered Accountants

Edmonton, Canada
February 21, 2003

Comments by Auditor for U.S. Readers on Canada-U.S. Reporting Difference

In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the companys financial statements, such as the change described in Note 2
to the financial statements. Our report to the shareholder dated February 21,
2003 is expressed in accordance with Canadian reporting standards which do not
require a reference to such a change in accounting principles in the auditors
report when the change is properly accounted for and adequately disclosed in
the financial statements.

/s/ PricewaterhouseCoopers LLP
Chartered Accountants

Edmonton, Canada
February 21, 2003





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

BALANCE SHEETS

|                                       |                                          |   |                                    |        |      |   |                   |        | 
|-------------------------------------- | ---------------------------------------- | - | ---------------------------------- | ------ | ---- | - | ----------------- | ------ | 
|                                       |                                          |   | December 31,                      
|                                       |                                          |   |                                   
|                                       |                                          |   | 2002                               |        | 2001
|                                       |                                          |   |                                    |        |      |   | (restatednote 2)
|                                       |                                          |   |                                    |        |     
|                                       |                                          |   | (in thousands of Canadian dollars)
|ASSETS                                 |                                          |   |                                    |        |      |   |                   |       
|Current assets                         |                                          |   |                                    |        |      |   |                   |       
|                                       | Cash                                     |   | $                                  | 35,005 |      |   | $                 | 15,872 | 
|                                       | Accounts receivable                      |   |                                    | 33,931 |      |   |                   | 33,443 | 
|                                       | Inventories (note 3)                     |   |                                    | 61,236 |      |   |                   | 61,092 | 
|                                       | Prepaid expenses                         |   |                                    | 3,849  |      |   |                   | 2,427  | 
|                                       | Future income taxes (note 15)            |   |                                    | 1,599  |      |   |                   | 3,555  | 
|                                       |                                          |   |                                    |        |      |   |                   |       
|                                       |                                          |   | 135,620                            |        |      |   | 116,389           |       
|Property, plant and equipment (note 4) |                                          |   | 159,407                            |        |      |   | 171,745           |       
|Other assets (note 5)                  |                                          |   | 26,613                             |        |      |   | 28,544            |       
|                                       |                                          |   |                                    |        |      |   |                   |       
|                                       |                                          | $ | 321,640                            |        |      | $ | 316,678           |       
|                                       |                                          |   |                                    |        |      |   |                   |       
|LIABILITIES AND SHAREHOLDERS EQUITY   |                                          |   |                                    |        |      |   |                   |       
|Current liabilities                    |                                          |   |                                    |        |      |   |                   |       
|                                       | Accounts payable and accrued liabilities |   | $                                  | 46,984 |      |   | $                 | 38,616 | 
|                                       | Deferred revenue                         |   |                                    | 6,518  |      |   |                   |       | 
|                                       |                                          |   |                                    |        |      |   |                   |       
|                                       |                                          |   | 53,502                             |        |      |   | 38,616            |       
|Long-term debt (note 7)                |                                          |   | 252,592                            |        |      |   | 254,800           |       
|Other obligations (note 8)             |                                          |   | 6,712                              |        |      |   | 10,582            |       
|Future income taxes (note 15)          |                                          |   | 6,830                              |        |      |   | 8,916             |       
|Contingent liability (note 10)         |                                          |   |                                   |        |      |   | 2,268             |       
|                                       |                                          |   |                                    |        |      |   |                   |       
|                                       |                                          |   | 319,636                            |        |      |   | 315,182           |       
|Shareholders equity                   |                                          |   |                                    |        |      |   |                   |       
|                                       | Share capital (note 9)                   |   |                                    |       |      |   |                   |       | 
|                                       | Retained earnings                        |   |                                    | 2,004  |      |   |                   | 1,496  | 
|                                       |                                          |   |                                    |        |      |   |                   |       
|                                       |                                          | $ | 321,640                            |        |      | $ | 316,678           |       
|                                       |                                          |   |                                    |        |      |   |                   |       

On behalf of the Board:



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

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





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

STATEMENTS OF EARNINGS

|                                        |  |                                    |         |      |  |                   |         |                   |  |   |         | 
|--------------------------------------- |  | ---------------------------------- | ------- | ---- |  | ----------------- | ------- | ----------------- |  | - | ------- | 
|                                        |  | Year Ended December 31,           
|                                        |  |                                   
|                                        |  | 2002                               |         | 2001 |  | 2000             
|                                        |  |                                    |         |      |  | (restated-note 2) |         | (restated-note 2)
|                                        |  |                                    |         |      |  |                  
|                                        |  | (in thousands of Canadian Dollars)
|Gross revenue                           |  | $                                  | 277,830 |      |  | $                 | 248,825 |                   |  | $ | 344,881 | 
|Selling expenses                        |  |                                    | 43,865  |      |  |                   | 37,947  |                   |  |   | 47,310  | 
|                                        |  |                                    |         |      |  |                   |         |                   |  |   |         | 
|Net revenue                             |  |                                    | 233,965 |      |  |                   | 210,878 |                   |  |   | 297,571 | 
|Cost of sales (note 11)                 |  |                                    | 177,354 |      |  |                   | 161,863 |                   |  |   | 199,410 | 
|Depreciation and amortization           |  |                                    | 16,731  |      |  |                   | 16,184  |                   |  |   | 15,807  | 
|General and administration              |  |                                    | 13,391  |      |  |                   | 15,424  |                   |  |   | 12,498  | 
|Severance costs (note 12)               |  |                                    | 2,298   |      |  |                   |        |                   |  |   |        | 
|Employees profit sharing               |  |                                    |        |      |  |                   |        |                   |  |   | 4,358   | 
|                                        |  |                                    |         |      |  |                   |         |                   |  |   |         | 
|Operating earnings                      |  |                                    | 24,191  |      |  |                   | 17,407  |                   |  |   | 65,498  | 
|Financing expenses (note 13)            |  |                                    | 26,153  |      |  |                   | 25,266  |                   |  |   | 25,596  | 
|Unrealized exchange (gain) loss on debt |  |                                    | (2,208  | )    |  |                   | 15,521  |                   |  |   | 6,960   | 
|Other expense (income) (note 14)        |  |                                    | (707    | )    |  |                   | 4,415   |                   |  |   | 2,664   | 
|                                        |  |                                    |         |      |  |                   |         |                   |  |   |         | 
|Earnings (loss) before income taxes     |  |                                    | 953     |      |  |                   | (27,795 | )                 |  |   | 30,278  | 
|Income taxes (recovery) (note 15)       |  |                                    | 445     |      |  |                   | (4,325  | )                 |  |   | 14,279  | 
|                                        |  |                                    |         |      |  |                   |         |                   |  |   |         | 
|Net earnings (loss)                     |  | $                                  | 508     |      |  | $                 | (23,470 | )                 |  | $ | 15,999  | 
|                                        |  |                                    |         |      |  |                   |         |                   |  |   |         | 

STATEMENTS OF RETAINED EARNINGS

|                                                 |  |                                    |         |      |  |      |         |   |  |   |        |  
|------------------------------------------------ |  | ---------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                 |  | Year Ended December 31,           
|                                                 |  |                                   
|                                                 |  | 2002                               |         | 2001 |  | 2000
|                                                 |  |                                    |         |      |  |     
|                                                 |  | (in thousands of Canadian Dollars)
|Retained earnings, beginning of year             |  | $                                  | 21,878  |      |  | $    | 31,852  |   |  | $ | 9,605  |  
|Change in accounting policy (note 2)             |  |                                    | (20,382 | )    |  |      | (6,886  | ) |  |   | (638   | )
|                                                 |  |                                    |         |      |  |      |         |   |  |   |        |  
|Retained earnings, beginning of year as restated |  |                                    | 1,496   |      |  |      | 24,966  |   |  |   | 8,967  |  
|Net earnings (loss)                              |  |                                    | 508     |      |  |      | (23,470 | ) |  |   | 15,999 |  
|                                                 |  |                                    |         |      |  |      |         |   |  |   |        |  
|Retained earnings, end of year                   |  | $                                  | 2,004   |      |  | $    | 1,496   |   |  | $ | 24,966 |  
|                                                 |  |                                    |         |      |  |      |         |   |  |   |        |  

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





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

STATEMENTS OF CASH FLOWS

|                                                  |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |         |  
|------------------------------------------------- | ----------------------------------------------------- | - | ---------------------------------- | ------ | ---- | - | ----------------- | ------- | ----------------- | - | ------- | ------- | -
|                                                  |                                                       |   | Year Ended December 31,           
|                                                  |                                                       |   |                                   
|                                                  |                                                       |   | 2002                               |        | 2001 |   | 2000             
|                                                  |                                                       |   |                                    |        |      |   | (restated-note 2) |         | (restated-note 2)
|                                                  |                                                       |   |                                    |        |      |   |                  
|                                                  |                                                       |   | (in thousands of Canadian Dollars)
|Cash provided from (used in)                      |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|Operating activities                              |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|                                                  | Net earnings (loss)                                   |   | $                                  | 508    |      |   | $                 | (23,470 | )                 |   | $       | 15,999  |  
|                                                  | Items not affecting cash:                             |   |                                    |        |      |   |                   |         |                   |   |         |         |  
|                                                  | Depreciation and amortization                         |   |                                    | 16,731 |      |   |                   | 16,184  |                   |   |         | 15,807  |  
|                                                  | Future income taxes (recovery)                        |   |                                    | (130   | )    |   |                   | (4,925  | )                 |   |         | 13,679  |  
|                                                  | Amortization of deferred financing costs              |   |                                    | 919    |      |   |                   | 1,057   |                   |   |         | 1,253   |  
|                                                  | Unrealized foreign exchange (gain) loss on debt       |   |                                    | (2,208 | )    |   |                   | 15,521  |                   |   |         | 6,960   |  
|                                                  | Reforestation expense                                 |   |                                    | 4,659  |      |   |                   | 7,024   |                   |   |         | 13,145  |  
|                                                  | Provision for contingent liability (note 10)          |   |                                    | (2,268 | )    |   |                   | 2,268   |                   |   |         |        |  
|                                                  | Other                                                 |   |                                    | (1,249 | )    |   |                   | 3,403   |                   |   |         | 4,285   |  
|                                                  |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|                                                  |                                                       |   | 16,962                             |        |      |   | 17,062            |         |                   |   | 71,128  |        
|Reforestation expenditures                        |                                                       |   | (4,982                             | )      |      |   | (11,455           | )       |                   |   | (12,759 | )      
|                                                  |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|                                                  |                                                       |   | 11,980                             |        |      |   | 5,607             |         |                   |   | 58,369  |        
|                                                  |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|Changes in non-cash components of working capital |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|                                                  | Accounts receivable                                   |   |                                    | (488   | )    |   |                   | 9,275   |                   |   |         | (7,053  | )
|                                                  | Inventories                                           |   |                                    | 791    |      |   |                   | 10,272  |                   |   |         | (7,130  | )
|                                                  | Prepaid expenses                                      |   |                                    | (1,422 | )    |   |                   | 366     |                   |   |         | (1,714  | )
|                                                  | Accounts
payable and accrued liabilities              |   |                                    | 5,757  |      |   |                   | (4,871  | )                 |   |         | 8,322   |  
|                                                  | Deferred revenue                                      |   |                                    | 6,518  |      |   |                   |        |                   |   |         |        |  
|                                                  |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|                                                  |                                                       |   | 11,156                             |        |      |   | 15,042            |         |                   |   | (7,575  | )      
|                                                  |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|                                                  |                                                       |   | 23,136                             |        |      |   | 20,649            |         |                   |   | 50,794  |        
|                                                  |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|Investing activities                              |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|                                                  | Additions to property, plant and equipment            |   |                                    | (3,480 | )    |   |                   | (24,208 | )                 |   |         | (31,540 | )
|                                                  | Proceeds on disposal of property, plant and equipment |   |                                    | 439    |      |   |                   | 1,581   |                   |   |         | 242     |  
|                                                  | Increase in other assets                              |   |                                    | (30    | )    |   |                   | (72     | )                 |   |         | (20,443 | )
|                                                  |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|                                                  |                                                       |   | (3,071                             | )      |      |   | (22,699           | )       |                   |   | (51,741 | )      
|                                                  |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|Financing activity                                |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|                                                  | Repayment of other obligations                        |   |                                    | (932   | )    |   |                   |        |                   |   |         |        |  
|                                                  |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|Increase (decrease) in cash                       |                                                       |   | 19,133                             |        |      |   | (2,050            | )       |                   |   | (947    | )      
|Cash, beginning of year                           |                                                       |   | 15,872                             |        |      |   | 17,922            |         |                   |   | 18,869  |        
|Cash, end of year                                 |                                                       | $ | 35,005                             |        |      | $ | 15,872            |         |                   | $ | 17,922  |        
|                                                  |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|Supplemental cash flow information                |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|Interest paid                                     |                                                       | $ | 25,341                             |        |      | $ | 25,693            |         |                   | $ | 24,599  |        
|                                                  |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        
|Income taxes paid                                 |                                                       | $ | 590                                |        |      | $ | 704               |         |                   | $ | 534     |        
|                                                  |                                                       |   |                                    |        |      |   |                   |         |                   |   |         |        

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





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(Tabular amounts in thousands of Canadian dollars)



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | 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                                                                                                                                                                                                                                                       
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Cash is defined as cash on deposit and term deposits in 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 declining balance basis to amortize the cost of these
assets, less salvage value, over their estimated useful lives, at the
following annual rates:             

|                               |  |  |           |  
|------------------------------ |  |  | --------- | -
|Buildings                      |  |  | 5         | %
|Process equipment              |  |  | 15        | %
|Mobile equipment               |  |  | 30        | %
|Furniture and office equipment |  |  | 10% or 20 | %



| |  |  | 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, as
follows:
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  |  |  |   |  
|----------------- |  |  | - | -
|Buildings         |  |  | 3 | %
|Process equipment |  |  | 5 | %



| |     |  | Timber rights are recorded at cost and are amortized on the basis of the
volume of timber harvested.                                                                                               
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The recoverability of property, plant and equipment is assessed annually
or when changes in circumstances indicate that the carrying value may not
be recoverable from estimated future cash flows.
|
| | (d) |  | Deferred financing costs                                                                                                                                                                           
|
| |     |  | Financing costs are deferred and amortized on a straight-line basis over
the term of the related debt.                                                                                             
|
| | (e) |  | 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.                                                                  





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(Tabular amounts in thousands of Canadian dollars)



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|-- |  | ------------------------------------------------------



| | (f) |  | Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company records its investment in energy contracts at cost. Any
impairment in the value of these investments is recorded when there is a
decline in value that is other than temporary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (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 and title has passed to the
customer. Revenue received in advance of shipment is deferred and
recognized when goods are shipped and title has passed to the customer.
Transportation costs are included in selling expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (i) |  | Interest capitalization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | Interest on the construction of property, plant and equipment is
capitalized on specific borrowings required to finance the construction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |     |  | The Company has no operations outside of Canada.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |     |  | 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 net revenue in the
same period as the foreign currency denominated revenue is recorded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (l) |  | 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.





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(Tabular amounts in thousands of Canadian dollars)



|2. |  | CHANGE IN ACCOUNTING POLICY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Effective January 1, 2002, the Company adopted a new standard issued by the
Canadian Institute of Chartered Accountants 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. The following table outlines the increase (decrease) in the
prior financial statements:

|                                        |  |              |         |              |  |   |        |  
|--------------------------------------- |  | ------------ | ------- | ------------ |  | - | ------ | -
|                                        |  | Year Ended  
|                                        |  |             
|                                        |  | December 31, |         | December 31,
|                                        |  | 2001         |         | 2000        
|                                        |  |              |         |             
|Long-term debt                          |  | $            | 20,382  |              |  | $ | 6,886  |  
|Retained earnings                       |  |              | (20,382 | )            |  |   | (6,886 | )
|Financing expenses                      |  |              | (2,025  | )            |  |   | (712   | )
|Unrealized exchange (gain) loss on debt |  |              | 15,521  |              |  |   | 6,960  |  



|   |  | The Company has not recognized the tax benefit related to cumulative
unrealized exchange losses on the translation of foreign currency
denominated long-term debt. Recognition of the benefit of these losses is
dependent upon the realization of taxable capital gains in the future.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | INVENTORIES                                                                                                                                                                                                                                                                            

|                                   |  |      |        |      |  |   |        | 
|---------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                   |  | 2002 |        | 2001
|                                   |  |      |        |     
|Logs                               |  | $    | 25,764 |      |  | $ | 30,701 | 
|Pulp                               |  |      | 17,487 |      |  |   | 13,675 | 
|Lumber                             |  |      | 9,824  |      |  |   | 8,609  | 
|Operating and maintenance supplies |  |      | 8,161  |      |  |   | 8,107  | 
|                                   |  |      |        |      |  |   |        | 
|                                   |  | $    | 61,236 |      |  | $ | 61,092 | 
|                                   |  |      |        |      |  |   |        | 



|4. |  | PROPERTY, PLANT AND EQUIPMENT
|-- |  | -----------------------------

|                             |                                |   |         |         |              |   |             |         |     |   |         |        | 
|---------------------------- | ------------------------------ | - | ------- | ------- | ------------ | - | ----------- | ------- | --- | - | ------- | ------ | 
|                             |                                |   | 2002   
|                             |                                |   |        
|                             |                                |   |         |         |              |   | Accumulated |         | Net
|                             |                                |   | Cost    |         | Depreciation |   | Book Value 
|                             |                                |   |         |         |              |   |            
|Lumber mills                 |                                |   |         |         |              |   |             |         |     |   |         |       
|                             | Buildings                      |   | $       | 26,044  |              |   | $           | 7,972   |     |   | $       | 18,072 | 
|                             | Process equipment              |   |         | 90,425  |              |   |             | 46,802  |     |   |         | 43,623 | 
|                             | Mobile equipment               |   |         | 8,544   |              |   |             | 6,249   |     |   |         | 2,295  | 
|                             | Furniture and office equipment |   |         | 7,106   |              |   |             | 4,553   |     |   |         | 2,553  | 
|Pulp mill                    |                                |   |         |         |              |   |             |         |     |   |         |       
|                             | Buildings                      |   |         | 21,834  |              |   |             | 9,401   |     |   |         | 12,433 | 
|                             | Process equipment              |   |         | 181,091 |              |   |             | 111,018 |     |   |         | 70,073 | 
|Land                         |                                |   | 2,086   |         |              |   |            |         |     |   | 2,086   |       
|Capital projects in progress |                                |   | 909     |         |              |   |            |         |     |   | 909     |       
|                             |                                |   |         |         |              |   |             |         |     |   |         |       
|                             |                                |   | 338,039 |         |              |   | 185,995     |         |     |   | 152,044 |       
|Timber rights                |                                |   | 15,036  |         |              |   | 7,673       |         |     |   | 7,363   |       
|                             |                                |   |         |         |              |   |             |         |     |   |         |       
|                             |                                | $ | 353,075 |         |              | $ | 193,668     |         |     | $ | 159,407 |       
|                             |                                |   |         |         |              |   |             |         |     |   |         |       





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(Tabular amounts in thousands of Canadian dollars)



|4. |  | PROPERTY, PLANT AND EQUIPMENT (Continued)
|-- |  | -----------------------------------------

|                             |                                |   |         |         |              |   |             |         |     |   |         |        | 
|---------------------------- | ------------------------------ | - | ------- | ------- | ------------ | - | ----------- | ------- | --- | - | ------- | ------ | 
|                             |                                |   | 2001   
|                             |                                |   |        
|                             |                                |   |         |         |              |   | Accumulated |         | Net
|                             |                                |   | Cost    |         | Depreciation |   | Book Value 
|                             |                                |   |         |         |              |   |            
|Lumber mills                 |                                |   |         |         |              |   |             |         |     |   |         |       
|                             | Buildings                      |   | $       | 25,009  |              |   | $           | 7,202   |     |   | $       | 17,807 | 
|                             | Process equipment              |   |         | 85,860  |              |   |             | 43,422  |     |   |         | 42,438 | 
|                             | Mobile equipment               |   |         | 9,318   |              |   |             | 6,361   |     |   |         | 2,957  | 
|                             | Furniture and office equipment |   |         | 5,937   |              |   |             | 4,080   |     |   |         | 1,857  | 
|Pulp mill                    |                                |   |         |         |              |   |             |         |     |   |         |       
|                             | Buildings                      |   |         | 21,834  |              |   |             | 8,668   |     |   |         | 13,166 | 
|                             | Process equipment              |   |         | 179,994 |              |   |             | 102,012 |     |   |         | 77,982 | 
|Land                         |                                |   | 2,086   |         |              |   |            |         |     |   | 2,086   |       
|Capital projects in progress |                                |   | 5,424   |         |              |   |            |         |     |   | 5,424   |       
|                             |                                |   |         |         |              |   |             |         |     |   |         |       
|                             |                                |   | 335,462 |         |              |   | 171,745     |         |     |   | 163,717 |       
|Timber rights                |                                |   | 15,001  |         |              |   | 6,973       |         |     |   | 8,028   |       
|                             |                                |   |         |         |              |   |             |         |     |   |         |       
|                             |                                | $ | 350,463 |         |              | $ | 178,718     |         |     | $ | 171,745 |       
|                             |                                |   |         |         |              |   |             |         |     |   |         |       



|5. |  | OTHER ASSETS
|-- |  | ------------

|                                   |  |      |        |      |  |   |        |  
|---------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                   |  | 2002 |        | 2001
|                                   |  |      |        |     
|Power purchase rights  at cost    |  | $    | 20,837 |      |  | $ | 20,837 |  
|Less: accumulated amortization     |  |      | (2,084 | )    |  |   | (1,042 | )
|                                   |  |      |        |      |  |   |        |  
|                                   |  |      | 18,753 |      |  |   | 19,795 |  
|                                   |  |      |        |      |  |   |        |  
|Deferred financing costs  at cost |  |      | 10,193 |      |  |   | 10,193 |  
|Less: accumulated amortization     |  |      | (5,213 | )    |  |   | (4,294 | )
|                                   |  |      |        |      |  |   |        |  
|                                   |  |      | 4,980  |      |  |   | 5,899  |  
|                                   |  |      |        |      |  |   |        |  
|Notes receivable (note 17(a))      |  |      | 2,431  |      |  |   | 2,488  |  
|Other                              |  |      | 449    |      |  |   | 362    |  
|                                   |  |      |        |      |  |   |        |  
|                                   |  | $    | 26,613 |      |  | $ | 28,544 |  
|                                   |  |      |        |      |  |   |        |  



| |  | Amortization of power purchase rights for the year was $1,042,000 (2001 
$1,042,000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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, 2002 a letter of credit
was not required under this arrangement.





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(Tabular amounts in thousands of Canadian dollars)



|6. |  | REVOLVING CREDIT FACILITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company has a $50 million revolving credit facility that expires in June
2003 which was undrawn at December 31, 2002, and December 31, 2001. The
facility is subject to a borrowing formula based upon the levels of
inventory and accounts receivable. The amount available at December 31,
2002 under the facility was $43.4 million (2001  $43.5 million) of which
$2.3 million (2001  $2.3 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                       |  |      |         |      |  |   |         | 
|-------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                       |  | 2002 |         | 2001
|                                       |  |      |         |     
|Unsecured Senior Notes  U.S. $160,000 |  | $    | 252,592 |      |  | $ | 254,800 | 
|                                       |  |      |         |      |  |   |         | 



|   |  | The Unsecured Senior Notes are due May 15, 2008, and bear interest at a rate
of 9 7/8%, payable semi-annually on May 15 and November 15 of each year.
The notes are unsecured obligations of the Company and rank equally and
ratably 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.
|  
|8. |  | OTHER OBLIGATIONS                                                                                                                                                                                                                                                                                                                                                      

|                             |                                                        |   |       |        |      |   |        |         |  
|---------------------------- | ------------------------------------------------------ | - | ----- | ------ | ---- | - | ------ | ------- | -
|                             |                                                        |   | 2002  |        | 2001
|                             |                                                        |   |       |        |     
|Reforestation obligations    |                                                        |   |       |        |      |   |        |        
|                             | Balance, beginning of year                             |   | $     | 6,800  |      |   | $      | 8,415   |  
|                             | Accrual for the year                                   |   |       | 6,125  |      |   |        | 9,840   |  
|                             | Expenditures during the year                           |   |       | (4,982 | )    |   |        | (11,455 | )
|                             |                                                        |   |       |        |      |   |        |        
|                             | Balance, end of year                                   |   |       | 7,943  |      |   |        | 6,800   |  
|                             | Less: current portion, included in accrued liabilities |   |       | (4,554 | )    |   |        | (1,944  | )
|                             |                                                        |   |       |        |      |   |        |        
|                             |                                                        |   | 3,389 |        |      |   | 4,856  |        
|Power obligation (note 11)   |                                                        |   |      |        |      |   | 2,100  |        
|Deferred revenue  U.S. $600 |                                                        |   |      |        |      |   | 956    |        
|Other                        |                                                        |   | 3,323 |        |      |   | 2,670  |        
|                             |                                                        |   |       |        |      |   |        |        
|                             |                                                        | $ | 6,712 |        |      | $ | 10,582 |        
|                             |                                                        |   |       |        |      |   |        |        



|9. |  | SHARE CAPITAL                     
|-- |  | ----------------------------------
|  
|   |  | Authorized                        
|  
|   |  | Unlimited number of common shares.
|  
|   |  | Issued and fully paid             

|                                             |  |      |   |      |  |   |   | 
|-------------------------------------------- |  | ---- | - | ---- |  | - | - | 
|                                             |  | 2002 |   | 2001
|                                             |  |      |   |     
|15,000,001 common shares (2001  15,000,001) |  | $    |  |      |  | $ |  | 
|                                             |  |      |   |      |  |   |   | 





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(Tabular amounts in thousands of Canadian dollars)



|10. |  | CONTINGENT LIABILITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Countervailing and antidumping duties:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | On April 2, 2001, petitions for the imposition of antidumping and
countervailing duties on softwood lumber from Canada were filed with the U.S.
Department of Commerce (USDOC) and the U.S. International Trade Commission
(USITC), by certain U.S. industry and trade groups (the Petitioners).                                                                                                                                                                                                                                                                                                     
|   
|    |  | In response to the petitions, the USDOC conducted separate antidumping and
countervailing duty investigations and the USITC conducted an investigation
to determine whether the lumber industry in the United States was materially
injured or threatened with material injury by reason of softwood lumber
imports from Canada.                                                                                                                                                                                                                                                                           
|   
|    |  | Countervailing duty                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | On August 9, 2001, the USDOC made a preliminary countervailing duty
determination, imposing a bonding requirement at the rate of 19.31% on
Canadian softwood lumber shipped to the U.S. During 2001, the Company
accrued $1.4 million for the period from August 17, 2001 to December 15, 2001
when preliminary countervailing duties effectively expired. The Company
posted bonds to cover the liability.                                                                                                                                                                                                
|   
|    |  | On March 22, 2002, the USDOC announced its final determination in the
countervailing duty investigation, adjusting the rate from 19.31% to 19.34%
and subsequently, corrected for ministerial errors, to 18.79%. The USDOC
also determined that no critical circumstances existed and, accordingly, the
countervailing duty would not apply retroactively to May 19, 2001.                                                                                                                                                                                                                                 
|   
|    |  | On May 16, 2002, the USITC announced it had found no current injury, but a
threat of injury to the U.S. lumber industry, effectively removing the
requirement to remit the accrued countervailing duty for lumber shipped to
the U.S. prior to December 15, 2001. During the quarter ended June 30, 2002,
the Company reversed $1.7 million it had accrued from August 17, 2001 to
December 15, 2001. The bonds posted to cover the liability were also
cancelled.                                                                                                                                         
|   
|    |  | The finding of threat of injury by the USITC resulted in the USDOC issuing an
order to collect cash deposits of estimated countervailing duties on a going
forward basis. Effective May 22, 2002, the Companys exports to the United
States of softwood lumber have been subject to a countervailing duty cash
deposit rate of 18.79%. A charge of $3.6 million was incurred during 2002
relating to countervailing duty on lumber shipped to the U.S. between May 22,
2002 and December 31, 2002. The Company is currently remitting cash deposits
to cover the applicable estimated countervailing duty.
|   
|    |  | Antidumping duty                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | On October 31, 2001, the USDOC made a preliminary antidumping determination,
imposing a bonding requirement at the rate of 12.6% on the Companys
shipments of Canadian softwood lumber to the U.S. During 2001, the Company
accrued $0.9 million relating to shipments to the U.S. from November 6, 2001
to December 31, 2001. The Company posted bonds to cover the liability.                                                                                                                                                                                                                           
|   
|    |  | On March 22, 2002, the USDOC announced its final determination in the
antidumping investigation, adjusting the Companys rate from 12.6% to 9.67%,
and subsequently corrected to 8.43% for ministerial errors.                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | On May 16, 2002, the USITC announced it had found no current injury, but a
threat of injury, to the U.S. lumber industry, effectively removing the
requirement to remit the accrued antidumping duty for lumber shipped to the
U.S. prior to May 16, 2002. During the quarter ended June 30, 2002, the
Company reversed $1.6 million it had accrued from November 6, 2001 to March
31, 2002. The bonds posted to cover the liability were also cancelled.                                                                                                                                                  
|   
|    |  | The finding of threat of injury by the USITC resulted in the USDOC issuing an
order to collect cash deposits of estimated antidumping duties on a going
forward basis. Effective May 22, 2002, the Companys exports to the United
States of covered softwood lumber have been subject to an antidumping duty
cash deposit rate of 8.43%. A charge of $1.6 million was incurred during
2002 relating to antidumping duty on lumber shipped to the U.S. between May
22, 2002 and December 31, 2002. The Company is currently remitting cash
deposits to cover the applicable estimated antidumping duty.    





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(Tabular amounts in thousands of Canadian dollars)



|10. |  | CONTINGENT LIABILITY (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Antidumping duty (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | The expense or reversal for countervailing and antidumping duties is recorded
as an adjustment to selling expenses in the Companys financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | The final amount, if any, of countervailing and antidumping duties that may
be assessed on Canadian softwood lumber exports to the U.S. cannot be
determined at this time and will depend on determinations yet to be made by
the North American Free Trade Agreement (NAFTA) or World Trade Organization
(WTO) panels to which those determinations have been appealed. Should
these appeals not result in the outright termination of the antidumping and
countervailing duty orders, the final amount of countervailing and
antidumping duties to be assessed on the Companys exports of softwood lumber
to the U.S. will not be determined by the USDOC in administrative reviews of
these orders until 2004.                                                
|   
|11. |  | COST OF SALES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | Costs of sales in the current year and in 2001 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. In 2001, the Company also
recorded $4.2 million in electricity costs related to preliminary 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. At
December 31, 2002, accounts payable include $4.3 million related to the
costs accrued and this amount is repayable in monthly installments over the
next twelve months.
|   
|    |  | In 2001, the Company received consumption based electricity rebates that
reduced its cost of sales in that year by $19.6 million. This rebate
program ended December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|12. |  | SEVERANCE COSTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | As a result of a corporate-wide review of operating requirements and
staffing levels, the Company implemented a workforce reduction program in
January, 2002. The majority of the position reductions were achieved
voluntarily. The cost of this program was $2.3 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|13. |  | FINANCING EXPENSES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                                               |                |   |        |        |      |   |        |        |  |   |        |        | 
|-------------------------------------------------------------- | -------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                               |                |   | 2002   |        | 2001 |   | 2000  
|                                                               |                |   |        |        |      |   |       
|Interest expense                                               |                |   |        |        |      |   |        |        |  |   |        |       
|                                                               | Long-term debt |   | $      | 24,765 |      |   | $      | 25,031 |  |   | $      | 24,058 | 
|                                                               | Other          |   |        | 545    |      |   |        | 857    |  |   |        | 627    | 
|Amortization of deferred financing costs                       |                |   | 919    |        |      |   | 1,057  |        |  |   | 1,253  |       
|Foreign exchange gains on U.S. dollar cash
and working capital |                |   | (76    | )      |      |   | (1,679 | )      |  |   | (342   | )     
|                                                               |                |   |        |        |      |   |        |        |  |   |        |       
|                                                               |                | $ | 26,153 |        |      | $ | 25,266 |        |  | $ | 25,596 |       
|                                                               |                |   |        |        |      |   |        |        |  |   |        |       



|14. |  | OTHER EXPENSE (INCOME)                                                                                                                                                                                                                                                                        
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Included in other expense in 2001 is a loss on an energy contract of $5.0
million (see note 18(c)). In 2000 the Company recorded a provision of $2.7
million for costs associated with the reduction of its workforce as a result
of a capital project to replace one of the Company sawmills.





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(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.

|                                          |                                                                               |   |      |      |      |   |         |         |   |   |        |        |  
|----------------------------------------- | ----------------------------------------------------------------------------- | - | ---- | ---- | ---- | - | ------- | ------- | - | - | ------ | ------ | -
|                                          |                                                                               |   | 2002 |      | 2001 |   | 2000   
|                                          |                                                                               |   |      |      |      |   |        
|Earnings (loss) before income taxes       |                                                                               | $ | 953  |      |      | $ | (27,795 | )       |   | $ | 30,278 |       
|                                          |                                                                               |   |      |      |      |   |         |         |   |   |        |       
|Income taxes (recovery) based on combined |                                                                               |   |      |      |      |   |         |         |   |   |        |       
|                                          | Federal and Provincial income tax rates of
42.2% (2001  43.1%, 2000  44.6%) |   | $    | 402  |      |   | $       | (11,980 | ) |   | $      | 13,504 |  
|Increase (decrease) resulting from:       |                                                                               |   |      |      |      |   |         |         |   |   |        |       
|                                          | Manufacturing and processing deduction                                        |   |      | (67  | )    |   |         | 2,082   |   |   |        | (2,422 | )
|                                          | Large corporations tax                                                        |   |      | 575  |      |   |         | 600     |   |   |        | 600    |  
|                                          | Non-deductible unrealized (gain) loss on debt                                 |   |      | (389 | )    |   |         | 2,404   |   |   |        | 1,144  |  
|                                          | Non-deductible expenses and other items                                       |   |      |     |      |   |         | 448     |   |   |        | 309    |  
|                                          | Effect of reduction in income tax rate                                        |   |      | (25  | )    |   |         | (249    | ) |   |        |       |  
|                                          | Change in valuation allowance                                                 |   |      | (51  | )    |   |         | 2,370   |   |   |        | 1,144  |  
|                                          |                                                                               |   |      |      |      |   |         |         |   |   |        |       
|                                          |                                                                               |   | 41   |      |      |   | 7,655   |         |   |   | 775    |       
|                                          |                                                                               |   |      |      |      |   |         |         |   |   |        |       
|Income taxes                              |                                                                               | $ | 445  |      |      | $ | (4,325  | )       |   | $ | 14,279 |       
|                                          |                                                                               |   |      |      |      |   |         |         |   |   |        |       
|Income taxes  current                    |                                                                               | $ | 575  |      |      | $ | 600     |         |   | $ | 600    |       
|Future income taxes (recovery)            |                                                                               |   | (130 | )    |      |   | (4,925  | )       |   |   | 13,679 |       
|                                          |                                                                               |   |      |      |      |   |         |         |   |   |        |       
|Income taxes (recovery)                   |                                                                               | $ | 445  |      |      | $ | (4,325  | )       |   | $ | 14,279 |       
|                                          |                                                                               |   |      |      |      |   |         |         |   |   |        |       



| |  | Significant components of the Companys future tax assets and liabilities
are as follows:
| |  | -----------------------------------------------------------------------------------------

|                                  |                                  |   |        |        |      |   |         |         |  
|--------------------------------- | -------------------------------- | - | ------ | ------ | ---- | - | ------- | ------- | -
|                                  |                                  |   | 2002   |        | 2001
|                                  |                                  |   |        |        |     
|Future income tax assets          |                                  |   |        |        |      |   |         |        
|                                  | Reforestation costs              |   | $      | 2,790  |      |   | $       | 2,422   |  
|                                  | Accrued loss on energy contract  |   |        |       |      |   |         | 1,775   |  
|                                  | Accrued softwood lumber duties   |   |        | 52     |      |   |         | 808     |  
|                                  | Accrued severance payments       |   |        | 250    |      |   |         | 120     |  
|                                  | Unrealized foreign exchange loss |   |        | 3,943  |      |   |         | 4,392   |  
|                                  | Valuation allowance              |   |        | (3,579 | )    |   |         | (3,630  | )
|                                  |                                  |   |        |        |      |   |         |        
|                                  |                                  |   | 3,456  |        |      |   | 5,887   |        
|                                  |                                  |   |        |        |      |   |         |        
|Future income tax liabilities     |                                  |   |        |        |      |   |         |        
|                                  | Property, plant and equipment    |   |        | (7,867 | )    |   |         | (10,954 | )
|                                  | Other                            |   |        | (820   | )    |   |         | (294    | )
|                                  |                                  |   |        |        |      |   |         |        
|                                  |                                  |   | (8,687 | )      |      |   | (11,248 | )      
|                                  |                                  |   |        |        |      |   |         |        
|Net future income tax liability   |                                  | $ | (5,231 | )      |      | $ | (5,361  | )      
|                                  |                                  |   |        |        |      |   |         |        
|As reported on the balance sheet: |                                  |   |        |        |      |   |         |        
|                                  | Future income tax assets         |   | $      | 1,599  |      |   | $       | 3,555   |  
|                                  | Future income tax liabilities    |   |        | (6,830 | )    |   |         | (8,916  | )
|                                  |                                  |   |        |        |      |   |         |        
|                                  | Net future income tax liability  |   | $      | (5,231 | )    |   | $       | (5,361  | )
|                                  |                                  |   |        |        |      |   |         |        





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(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:

|                                 |  |      |       |      |  |      |       |  |  |   |       | 
|-------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                 |  | 2002 |       | 2001 |  | 2000
|                                 |  |      |       |      |  |     
|Plans providing pension benefits |  | $    | 1,772 |      |  | $    | 1,840 |  |  | $ | 1,941 | 
|                                 |  |      |       |      |  |      |       |  |  |   |       | 



| |  | Defined benefit plan                                                                                              
| |  | ------------------------------------------------------------------------------------------------------------------
|
| |  | On January 1, 2000 the Company established a supplementary defined benefit
pension plan for certain key employees.
|
| |  | Information regarding this plan is as follows:                                                                    

|                                             |                                    |  |      |       |      |  |   |       |  
|-------------------------------------------- | ---------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                             |                                    |  | 2002 |       | 2001
|                                             |                                    |  |      |       |     
|Change in benefit obligation:                |                                    |  |      |       |      |  |   |      
|                                             | Obligation at beginning of year    |  | $    | 1,322 |      |  | $ | 1,138 |  
|                                             | Actuarial loss                     |  |      | 105   |      |  |   |      |  
|                                             | Current service cost               |  |      | 97    |      |  |   | 102   |  
|                                             | Interest cost                      |  |      | 93    |      |  |   | 82    |  
|                                             |                                    |  |      |       |      |  |   |      
|                                             | Obligation at end of year          |  | $    | 1,617 |      |  | $ | 1,322 |  
|                                             |                                    |  |      |       |      |  |   |      
|Change in plan assets, at fair market value: |                                    |  |      |       |      |  |   |      
|                                             | Plan assets at beginning of year   |  | $    | 490   |      |  | $ |      |  
|                                             | Employer contributions             |  |      | 264   |      |  |   | 492   |  
|                                             | Actual return on plan assets       |  |      | (16   | )    |  |   | (2    | )
|                                             |                                    |  |      |       |      |  |   |      
|                                             | Plan assets at end of year         |  | $    | 738   |      |  | $ | 490   |  
|                                             |                                    |  |      |       |      |  |   |      
|Reconciliation of funded status:             |                                    |  |      |       |      |  |   |      
|                                             | Plan deficit                       |  | $    | (879  | )    |  | $ | (832  | )
|                                             | Unamortized past service costs     |  |      | 785   |      |  |   | 851   |  
|                                             | Unamortized actuarial loss         |  |      | 154   |      |  |   | 11    |  
|                                             |                                    |  |      |       |      |  |   |      
|                                             | Net pension asset                  |  | $    | 60    |      |  | $ | 30    |  
|                                             |                                    |  |      |       |      |  |   |      
|Components of pension expense:               |                                    |  |      |       |      |  |   |      
|                                             | Current service costs              |  | $    | 97    |      |  | $ | 102   |  
|                                             | Interest costs                     |  |      | 93    |      |  |   | 82    |  
|                                             | Amortization of past service costs |  |      | 66    |      |  |   | 66    |  
|                                             | Expected return on plan assets     |  |      | (22   | )    |  |   | (9    | )
|                                             |                                    |  |      |       |      |  |   |      
|                                             | Net expense                        |  | $    | 234   |      |  | $ | 241   |  
|                                             |                                    |  |      |       |      |  |   |      



| |  | The actuarial assumptions used in measuring the Companys benefit plan
obligations are as follows:
| |  | --------------------------------------------------------------------------------------------------

|                                                 |  |  |     |   |  |  |     |  
|------------------------------------------------ |  |  | --- | - |  |  | --- | -
|Discount rate                                    |  |  | 6.5 | % |  |  | 7   | %
|Rate of compensation increase                    |  |  | 4   | % |  |  | 4   | %
|Expected long-term rate of return on plan assets |  |  | 3.5 | % |  |  | 3.5 | %





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(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 earned revenue from Meadow and has
related accounts receivable as follows:
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                              |  |      |       |      |  |      |       |  |  |   |       | 
|------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                              |  | 2002 |       | 2001 |  | 2000
|                                                              |  |      |       |      |  |     
|Commissions                                                   |  | $    | 3,754 |      |  | $    | 3,111 |  |  | $ | 5,454 | 
|Administration fees                                           |  | $    | 1,726 |      |  | $    | 2,029 |  |  | $ | 1,901 | 
|Included in accounts receivable related to these transactions |  | $    | 2,511 |      |  | $    | 1,961 |  |  | $ | 1,787 | 



| |     |  | Other assets at December 31, 2002 includes a $2,100,000 (2001 
$2,100,000) note receivable from Meadow. This note bears interest at prime
plus 1% (5.5% at December 31, 2002; 5.0% at December 31, 2001; 8.50% at
December 31, 2000) 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. No interest income has been accrued in 2002, 2001 or 2000.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | The Company also earned revenue from other companies controlled by
Industries parent as follows:                                                                                                                                                                                                                                                                                                                                         

|                                                               |  |      |     |      |  |      |     |  |  |   |     | 
|-------------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                                               |  | 2002 |     | 2001 |  | 2000
|                                                               |  |      |     |      |  |     
|Administration fees                                            |  | $    | 590 |      |  | $    | 893 |  |  | $ | 924 | 
|                                                               |  |      |     |      |  |      |     |  |  |   |     | 
|Included in accounts receivable relating to these transactions |  | $    | 254 |      |  | $    | 253 |  |  | $ | 192 | 
|                                                               |  |      |     |      |  |      |     |  |  |   |     | 



| | (c) |  | The Company incurred costs charged by Industries as follows:
| | --- |  | ------------------------------------------------------------

|                                                            |  |      |       |      |  |      |       |  |  |   |       | 
|----------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                            |  | 2002 |       | 2001 |  | 2000
|                                                            |  |      |       |      |  |     
|Chemical purchases and other services                       |  | $    | 2,674 |      |  | $    | 3,475 |  |  | $ | 2,629 | 
|                                                            |  |      |       |      |  |      |       |  |  |   |       | 
|Included in accounts payable relating to these transactions |  | $    | 438   |      |  | $    | 957   |  |  | $ | 823   | 
|                                                            |  |      |       |      |  |      |       |  |  |   |       | 





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(Tabular amounts in thousands of Canadian dollars)



|18. |  | FINANCIAL INSTRUMENTS
|--- |  | ---------------------



| | (a) |  | Foreign currency risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company realized approximately 73% of its 2002 revenue (2001  73%;
2000  78%) in U.S. dollars and at December 31, 2002 the Company had
$10,991,000 (2001  $12,677,000; 2000  $19,100,000) 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, 2002, the Company held contracts to deliver US$66,000,000 (2001 
US$54,000,000; 2000-US$76,000,000) at an average rate of 1.5911 (2001 
1.5624; 2000-1.5042) expiring at various dates to December 31, 2003. The
market rate at December 31, 2002, was 1.5787 (2001  1.5925). As at
December 31, 2002, the amount of unrecognized gain on forward exchange
contracts was $820,000 (2001  loss of $1,626,000).
|
| | (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 2002, 2001 and 2000, 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. The actual realized loss on these contracts in 2002
was $4.3 million.                                                                                                                                                                                                                                                                                                                                 
|
| | (d) |  | Fair value                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |     |  | The fair value of the Companys cash, 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 the Companys notes receivable has not been estimated as
the notes are not marketable and are not subject to terms and conditions
that would otherwise be available from arms length parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |     |  | The fair value of the Companys long-term debt at December 31, 2002, is
estimated to be $243,751,000 (2001  $248,400,000) based upon the price at
which the debt was trading.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(Tabular amounts in thousands of Canadian dollars)



|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, roofing shake operation and
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.                                                                                                                                                                                                                                                                                                     
|   
|    |  | Product Segment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                 |  |        |         |      |  |      |        |   |  |   |        |  
|-------------------------------- |  | ------ | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                 |  | Lumber
|                                 |  |       
|                                 |  | 2002   |         | 2001 |  | 2000
|                                 |  |        |         |      |  |     
|Net revenue                      |  | $      | 100,202 |      |  | $    | 82,562 |   |  | $ | 96,262 |  
|Cost of sales and administration |  |        | 84,668  |      |  |      | 84,318 |   |  |   | 97,100 |  
|Depreciation and amortization    |  |        | 5,709   |      |  |      | 5,298  |   |  |   | 5,697  |  
|Severance costs                  |  |        | 681     |      |  |      |       |   |  |   |       |  
|                                 |  |        |         |      |  |      |        |   |  |   |        |  
|Operating earnings (loss)        |  | $      | 9,144   |      |  | $    | (7,054 | ) |  | $ | (6,535 | )
|                                 |  |        |         |      |  |      |        |   |  |   |        |  

|                                 |  |      |         |      |  |      |         |  |  |   |         | 
|-------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                 |  | Pulp
|                                 |  |     
|                                 |  | 2002 |         | 2001 |  | 2000
|                                 |  |      |         |      |  |     
|Net revenue                      |  | $    | 127,643 |      |  | $    | 118,993 |  |  | $ | 187,475 | 
|Cost of sales and administration |  |      | 92,686  |      |  |      | 77,539  |  |  |   | 101,716 | 
|Depreciation and amortization    |  |      | 10,708  |      |  |      | 10,580  |  |  |   | 9,473   | 
|Severance costs                  |  |      | 1,340   |      |  |      |        |  |  |   |        | 
|                                 |  |      |         |      |  |      |         |  |  |   |         | 
|Operating earnings               |  | $    | 22,909  |      |  | $    | 30,874  |  |  | $ | 76,286  | 
|                                 |  |      |         |      |  |      |         |  |  |   |         | 

|                                 |  |                     |        |      |  |      |        |   |  |   |        |  
|-------------------------------- |  | ------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                 |  | Corporate and Other
|                                 |  |                    
|                                 |  | 2002                |        | 2001 |  | 2000
|                                 |  |                     |        |      |  |     
|Net revenue                      |  | $                   | 6,120  |      |  | $    | 9,323  |   |  | $ | 13,834 |  
|Cost of sales and administration |  |                     | 13,391 |      |  |      | 15,430 |   |  |   | 13,092 |  
|Depreciation and amortization    |  |                     | 314    |      |  |      | 306    |   |  |   | 637    |  
|Severance costs                  |  |                     | 277    |      |  |      |       |   |  |   |       |  
|Employees profit sharing        |  |                     |       |      |  |      |       |   |  |   | 4,358  |  
|                                 |  |                     |        |      |  |      |        |   |  |   |        |  
|Operating loss                   |  | $                   | (7,862 | )    |  | $    | (6,413 | ) |  | $ | (4,253 | )
|                                 |  |                     |        |      |  |      |        |   |  |   |        |  





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(Tabular amounts in thousands of Canadian dollars)



|19. |  | SEGMENTED INFORMATION (Continued)
|--- |  | ---------------------------------

|                                 |  |       |         |      |  |      |         |  |  |   |         | 
|-------------------------------- |  | ----- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                 |  | Total
|                                 |  |      
|                                 |  | 2002  |         | 2001 |  | 2000
|                                 |  |       |         |      |  |     
|Net revenue                      |  | $     | 233,965 |      |  | $    | 210,878 |  |  | $ | 297,571 | 
|Cost of sales and administration |  |       | 190,745 |      |  |      | 177,287 |  |  |   | 211,908 | 
|Depreciation and amortization    |  |       | 16,731  |      |  |      | 16,184  |  |  |   | 15,807  | 
|Severance costs                  |  |       | 2,298   |      |  |      |        |  |  |   |        | 
|Employees profit sharing        |  |       |        |      |  |      |        |  |  |   | 4,358   | 
|                                 |  |       |         |      |  |      |         |  |  |   |         | 
|Operating earnings               |  | $     | 24,191  |      |  | $    | 17,407  |  |  | $ | 65,498  | 
|                                 |  |       |         |      |  |      |         |  |  |   |         | 



| |  | Cost of sales for the lumber segment are net of chip transfers to the pulp
segment of $4,926,000 (2001  $4,076,000; 2000  $2,947,000).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------

|                                              |                     |   |                         |       |      |   |        |        |  |   |        |        | 
|--------------------------------------------- | ------------------- | - | ----------------------- | ----- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                              |                     |   | Year Ended December 31,
|                                              |                     |   |                        
|                                              |                     |   | 2002                    |       | 2001 |   | 2000  
|                                              |                     |   |                         |       |      |   |       
|Expenditures on property, plant and equipment |                     |   |                         |       |      |   |        |        |  |   |        |       
|                                              | Lumber              |   | $                       | 2,110 |      |   | $      | 23,079 |  |   | $      | 27,471 | 
|                                              | Pulp                |   |                         | 893   |      |   |        | 526    |  |   |        | 3,093  | 
|                                              | Corporate and other |   |                         | 477   |      |   |        | 603    |  |   |        | 976    | 
|                                              |                     |   |                         |       |      |   |        |        |  |   |        |       
|                                              |                     | $ | 3,480                   |       |      | $ | 24,208 |        |  | $ | 31,540 |       
|                                              |                     |   |                         |       |      |   |        |        |  |   |        |       

|                    |                     |   |              |         |      |   |         |         |  |   |         |         | 
|------------------- | ------------------- | - | ------------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                    |                     |   | December 31,
|                    |                     |   |             
|                    |                     |   | 2002         |         | 2001 |   | 2000   
|                    |                     |   |              |         |      |   |        
|Identifiable assets |                     |   |              |         |      |   |         |         |  |   |         |        
|                    | Lumber              |   | $            | 117,624 |      |   | $       | 124,305 |  |   | $       | 114,282 | 
|                    | Pulp                |   |              | 143,664 |      |   |         | 152,115 |  |   |         | 177,773 | 
|                    | Corporate and other |   |              | 60,352  |      |   |         | 40,258  |  |   |         | 39,110  | 
|                    |                     |   |              |         |      |   |         |         |  |   |         |        
|                    |                     | $ | 321,640      |         |      | $ | 316,678 |         |  | $ | 331,165 |        
|                    |                     |   |              |         |      |   |         |         |  |   |         |        

|                 |               |   |                         |        |      |   |         |        |  |   |         |        | 
|---------------- | ------------- | - | ----------------------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                 |               |   | Year ended December 31,
|                 |               |   |                        
|                 |               |   | 2002                    |        | 2001 |   | 2000   
|                 |               |   |                         |        |      |   |        
|Geographic Sales |               |   |                         |        |      |   |         |        |  |   |         |       
|Net revenue      |               |   |                         |        |      |   |         |        |  |   |         |       
|                 | Canada        |   | $                       | 61,502 |      |   | $       | 56,206 |  |   | $       | 55,043 | 
|                 | United States |   |                         | 56,929 |      |   |         | 50,249 |  |   |         | 70,495 | 
|                 | Europe        |   |                         | 38,794 |      |   |         | 56,619 |  |   |         | 87,358 | 
|                 | Asia          |   |                         | 76,115 |      |   |         | 46,198 |  |   |         | 83,790 | 
|                 | Other         |   |                         | 625    |      |   |         | 1,605  |  |   |         | 885    | 
|                 |               |   |                         |        |      |   |         |        |  |   |         |       
|                 |               | $ | 233,965                 |        |      | $ | 210,878 |        |  | $ | 297,571 |       
|                 |               |   |                         |        |      |   |         |        |  |   |         |       





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(Tabular amounts in thousands of Canadian dollars)



|20. |  | 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, 2002, 2001, and 2000.
|   
|    |  | 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:
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                        |                                                          |   |       |       |      |   |                    |        |                    |   |        |        |  
|------------------------------------------------------- | -------------------------------------------------------- | - | ----- | ----- | ---- | - | ------------------ | ------ | ------------------ | - | ------ | ------ | -
|                                                        |                                                          |   | 2002  |       | 2001 |   | 2000              
|                                                        |                                                          |   |       |       |      |   | (re-stated-note 2) |        | (re-stated-note 2)
|                                                        |                                                          |   |       |       |      |   |                   
|Net earnings (loss) for the year under Canadian GAAP    |                                                          | $ | 508   |       |      | $ | (23,470            | )      |                    | $ | 15,999 |       
|U.S. GAAP adjustments                                   |                                                          |   |       |       |      |   |                    |        |                    |   |        |       
|                                                        | Unrealized gain (loss) on forward exchange contracts (b) |   |       | 2,446 |      |   |                    | (2,287 | )                  |   |        | (1,043 | )
|                                                        | Unrealized gain (loss) on energy contract (c)            |   |       |      |      |   |                    | (4,895 | )                  |   |        | 4,895  |  
|                                                        | Effect on income taxes (d)                               |   |       | (867  | )    |   |                    | 2,614  |                    |   |        | (1,645 | )
|                                                        |                                                          |   |       |       |      |   |                    |        |                    |   |        |       
|Net earnings (loss) for the year under U.S. GAAP        |                                                          |   | 2,087 |       |      |   | (28,038            | )      |                    |   | 18,206 |       
|Shareholders equity under U.S. GAAP, beginning of year |                                                          |   | 449   |       |      |   | 28,487             |        |                    |   | 10,281 |       
|                                                        |                                                          |   |       |       |      |   |                    |        |                    |   |        |       
|Shareholders equity under U.S. GAAP, end of year       |                                                          | $ | 2,536 |       |      | $ | 449                |        |                    | $ | 28,487 |       
|                                                        |                                                          |   |       |       |      |   |                    |        |                    |   |        |       



| | (b) |  | Under U.S. GAAP, the unrealized gains or losses on forward exchange
contracts at year-end must be recorded in earnings because the
requirements for hedge accounting under U.S. GAAP are not met.                                                                                                                                                       
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (c) |  | Under U.S. GAAP, the unrealized gains or losses on energy contracts
(see note 18(c)) at year-end are recorded in earnings. The unrealized
gain of $4,895,000 recorded for U.S. GAAP in 2000 had fully reversed by
December 31, 2001. At December 31, 2001 the Company accrued an
unrealized loss of $4,984,000 for both Canadian and U.S. GAAP purposes.
|
| | (d) |  | Under U.S. GAAP, after the adjustments noted above, the future
current tax asset would be $1,311,000 (2001  $4,134,000).                                                                                                                                                                                                                               
|
| | (e) |  | Under U.S. GAAP, the estimated costs in 2000 of $2,700,000 for the
planned reduction in workforce would be recorded as a reduction of
operating earnings. Under U.S. GAAP, transportation costs of
$31,258,000 (2001  $26,798,000; 2000  $30,710,000) would not be netted
against gross revenue, but would be recorded as an operating expense.       





---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(Tabular amounts in thousands of Canadian dollars)



|20. |  | UNITED STATES ACCOUNTING PRINCIPLES (Continued)
|--- |  | -----------------------------------------------



| | (f) |  | Included in general and administrative expenses are bad debt expenses
of $Nil in 2002 (2001  $Nil; 2000  $142,000).
| | --- |  | ---------------------------------------------------------------------------------------------------------------------



| |  | Balance Sheet                                                       
| |  | --------------------------------------------------------------------
|
| |  | The disclosure of the following amounts is required under U.S. GAAP:

|                            |  |      |        |      |  |   |        | 
|--------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                            |  | 2002 |        | 2001
|                            |  |      |        |     
|Trade accounts payable      |  | $    | 35,489 |      |  | $ | 30,039 | 
|Interest payable            |  | $    | 3,118  |      |  | $ | 3,149  | 
|Salary and benefits payable |  | $    | 2,601  |      |  | $ | 2,212  | 
|Severance costs payable     |  | $    | 189    |      |  | $ |       | 



|    |  | Recent accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations. This Statement is effective
for fiscal years beginning after June 15, 2002 and the Company will adopt the
Statement effective January 1, 2003. In 2002, the Canadian Accounting
Standards Board issued a new Canadian accounting standard on Asset Retirement
Obligations. The new standard is effective for fiscal years beginning on or
after January 1, 2004. The Company has not yet determined the impact of
these standards on the Companys financial statements.
|   
|    |  | In 2002, the Financial Accounting Standards Board issued SFAS No 146,
Accounting for Costs Associated with Exit or Disposal Activities. This
statement is effective for exit or disposal activities initiated after
December 31, 2002 and retroactive application of this statement is
prohibited. The Company has adopted the standard and there is no impact on
the Companys financial statements.                                                                                                                                                                                            
|   
|    |  | 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. The Company
will adopt the guideline effective January 1, 2004. The Company has not yet
determined the impact of this guideline on the Companys financial
statements.                                                                                                                               
|   
|21. |  | COMPARATIVE FIGURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | Certain 2000 and 2001 comparative figures have been reclassified to conform
with the financial statement presentation adopted for 2002.