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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 
  o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934-OR-ü
    
    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
December 31, 2004-OR-TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) for the transition period from
________ to _______Commission File Number: 333-07346
   AINSWORTH LUMBER CO. LTD. (Exact name of Registrant as specified in its charter)
 British Columbia, Canada(Jurisdiction of Incorporation) 3194 Bentall IV, P.O. Box 49307, 1055 Dunsmuir Street
Vancouver, British Columbia, V7X 1L3
CANADA (604) 661-3200(Address of Registrants principal executive offices)   Securities registered pursuant to Section 12(b) of the Act: None Securities 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
 
 Indicate the number of outstanding shares of each class of the issuers classes
of capital or common stock as of the close of the period covered by the annual
report. As at December 31, 2004,
14,649,140 common shares were issued and outstanding. Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes    
ü    No   o Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17   
o    Item 18    ü




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TABLE OF CONTENTS ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    1ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3.
    
    KEY INFORMATION
    
    
    2ITEM 4.
    
    INFORMATION ON THE REGISTRANT
    
    
    8ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    21ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    29ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    35ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    36ITEM 9.
    
    THE OFFER AND LISTING
    
    
    37ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    38ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    42ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    43ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    44ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    44ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    44ITEM 16.
    
    AUDIT COMMITTEE FINANCIAL EXPERT; CODE OF ETHICS; ACCOUNTANTS FEES AND SERVICES
    
    
    45ITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    46ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    46ITEM 19.
    
    EXHIBITS
    
    
    47




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PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS A. Directors and Senior Management. Information not required for annual report. B. Advisors. Information not required since we are not required to disclose the
information in a jurisdiction outside of the United States. C. Auditors. Deloitte & Touche LLP, of Vancouver, British Columbia have served as our
auditors since 1993. Deloitte & Touche LLP is a member of the Institute of
Chartered Accountants of British Columbia. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Information not required for annual report. 1




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ITEM 3. KEY INFORMATION A. Selected Financial Data. Selected Consolidated Financial Data and Other Data The following table sets forth, for the periods and dates indicated, selected historical
consolidated financial data and should be read in conjunction with our audited consolidated
financial statements (the Consolidated Financial Statements) and Managements Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in this annual report.
The statement of operations data for the fiscal years ended December 31, 2004, 2003 and 2002 and
the balance sheet data as at December 31, 2004 and 2003 have been derived from our audited
consolidated financial statements, which are included elsewhere in this annual report. The
statement of operations data for the fiscal years ended
December 31, 2002, 2001 and 2000 and the balance
sheet data as at December 31, 2002, 2001 and 2000 have been derived from our audited consolidated
financial statements, which are not included in this annual report. We prepare our financial
statements in accordance with Canadian GAAP, which differs in certain respects from U.S. GAAP. For
a discussion of the principal differences between Canadian GAAP and U.S. GAAP as they pertain to
us, see note 24 to our audited consolidated financial statements included elsewhere in this annual
report. Fiscal year ended December 31,2000(1)
    
    2001(1)(2)
    
    2002(1)
    
    2003(1)
    
    2004(1)(in millions except ratios, per share data and production data)Statement of Operational DataCanadian GAAPSales
    
    $
    401.1
    
    
    $
    388.7
    
    
    $
    430.3
    
    
    $
    543.0
    
    
    $
    909.9Cost of products sold
    
    
    280.5
    
    
    
    306.0
    
    
    
    338.2
    
    
    
    322.8
    
    
    
    498.2Selling and administration
    
    
    26.3
    
    
    
    22.7
    
    
    
    21.9
    
    
    
    18.2
    
    
    
    31.0Amortization of capital assets
    
    
    27.4
    
    
    
    30.4
    
    
    
    32.0
    
    
    
    33.0
    
    
    
    53.9Write-down of capital assets
    
    
    1.0
    
    
    
    3.3
    
    
    
    1.0
    
    
    
    13.7
    (3)
    
    
    0.8Operating Earnings
    
    
    65.9
    
    
    
    26.3
    
    
    
    37.2
    
    
    
    155.3
    
    
    
    326.0Interest
charges(4)(5)
    
    
    35.6
    
    
    
    51.7
    
    
    
    57.2
    
    
    
    51.2
    
    
    
    40.7Amortization of finance charges
    
    
    2.1
    
    
    
    8.3
    
    
    
    5.3
    
    
    
    4.9
    
    
    
    3.2Loss on repurchase of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    106.2Other (income) expense
    
    
    (4.3
    )
    
    
    (2.8
    )
    
    
    (2.9
    )
    
    
    0.5
    
    
    
    3.4Unrealized foreign exchange (gain) loss
on long term debt
    
    
    10.2
    
    
    
    17.4
    
    
    
    (4.3
    )
    
    
    (76.9
    )
    
    
    (73.8
    )Income (loss) before income taxes
    
    
    22.3
    
    
    
    (48.4
    )
    
    
    (18.1
    )
    
    
    175.6
    
    
    
    246.3Income tax expense (recovery)
    
    
    12.5
    
    
    
    (18.7
    )
    
    
    (0.3
    )
    
    
    51.9
    
    
    
    71.2Income (loss) from continuing
operations
    
    
    9.8
    
    
    
    (29.7
    )
    
    
    (17.9
    )
    
    
    123.7
    
    
    
    175.1Gain (loss) from discontinued operations
    
    
    (14.4
    )
    
    
    4.2
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (4.6
    )
    
    $
    (25.4
    )
    
    $
    (17.9
    )
    
    $
    123.7
    
    
    $
    175.1Basic and Diluted earnings
(loss) per share
    
    $
    (0.32
    )
    
    $
    (1.75
    )
    
    $
    (1.23
    )
    
    $
    8.49
    
    
    $
    11.98U.S. GAAPNet income (loss)
    
    $
    (8.0
    )
    
    $
    (25.8
    )
    
    $
    (17.0
    )
    
    $
    125.0
    
    
    $
    176.1Other Financial DataEBITDA(6)
    
    $
    98.6
    
    
    $
    62.8
    
    
    $
    73.0
    
    
    $
    201.6
    
    
    $
    377.3Capital
expenditures(7)
    
    
    133.8
    
    
    
    20.1
    
    
    
    14.1
    
    
    
    8.2
    
    
    
    18.0Ratio of
earnings to fixed charges(8)(9)
    
    
    1.6x
    
    
    
    
    
    
    
    
    
    
    
    4.1x
    
    
    
    5.0xOther Selected Operating DataOSB production volume (mmsf)
    
    
    972
    
    
    
    1,197
    
    
    
    1,284
    
    
    
    1,351
    
    
    
    2,039Specialty plywood production volume
(mmsf)
    
    
    94
    
    
    
    86
    
    
    
    98
    
    
    
    119
    
    
    
    144Average OSB
price realized ($  per msf)(10)
    
    
    263
    
    
    
    205
    
    
    
    202
    
    
    
    294
    
    
    
    393Average specialty plywood price
realized ($  per msf)(10)
    
    
    651
    
    
    
    683
    
    
    
    663
    
    
    
    601
    
    
    
    784
 As at December 31,2000
    
    2001
    
    2002
    
    2003
    
    2004Balance Sheet DataCanadian GAAPCash and cash equivalents
    
    $
    
    
    
    $
    87.0
    
    
    $
    80.2
    
    
    $
    194.1
    
    
    $
    212.6Total assets
    
    
    540.4
    
    
    
    578.0
    
    
    
    555.1
    
    
    
    627.7
    
    
    
    1,441.0Total debt,
including current maturities(11)
    
    
    303.7
    
    
    
    443.7
    
    
    
    440.4
    
    
    
    352.5
    
    
    
    916.9Shareholders equity
    
    
    91.6
    
    
    
    66.2
    
    
    
    48.4
    
    
    
    171.8
    
    
    
    300.3U.S. GAAPTotal assets
    
    $
    528.9
    
    
    $
    566.2
    
    
    $
    544.7
    
    
    $
    619.3
    
    
    $
    1,443.2Total debt,
including current maturities(11)
    
    
    303.7
    
    
    
    443.7
    
    
    
    440.4
    
    
    
    352.5
    
    
    
    916.9Shareholders equity
    
    
    84.4
    
    
    
    58.7
    
    
    
    35.2
    
    
    
    159.3
    
    
    
    286.3
  (1)
    Sales and costs of products sold figures reported
    in this table have been presented to include freight revenue and
    freight and other distribution costs. For the fiscal years ended
    December 31, 2000, 2001, 2002 and 2003, these items were
    netted from sales, consistent with industry practice at the time. The effect of the change in presentation is
summarized below: Fiscal year ended December 31,2000
    
    2001
    
    2002
    
    2003
    
    2004(in millions)Net sales
    
    $
    350.2
    
    
    $
    326.7
    
    
    $
    356.1
    
    
    $
    481.1
    
    
    $
    827.4Freight and other distribution costs
    
    
    50.9
    
    
    
    62.0
    
    
    
    74.2
    
    
    
    61.9
    
    
    
    82.5Gross sales
    
    $
    401.1
    
    
    $
    388.7
    
    
    $
    430.3
    
    
    $
    543.0
    
    
    $
    909.9Costs of products sold, excluding freight and
    other distribution costs
    
    $
    229.6
    
    
    $
    244.0
    
    
    $
    264.0
    
    
    $
    260.9
    
    
    $
    415.7Freight and other distribution costs
    
    
    50.9
    
    
    
    62.0
    
    
    
    74.2
    
    
    
    61.9
    
    
    
    82.5Cost of products sold, including freight and
    other distribution costs
    
    $
    280.5
    
    
    $
    306.0
    
    
    $
    338.2
    
    
    $
    322.8
    
    
    $
    498.2  (2)
    
    Operations at the High Level OSB facility commenced in October 2000 with income contributions being realized commencing in April 2001.(3)
    
    Includes a $13.3 million write-down of capital assets related to the previously planned expansion of the Grande Prairie OSB facility.(4)
    
    Interest charges includes interest expense for the period and
excludes all of the following: amortization of deferred financing costs, amortization of deferred debt discounts, amortization of consent and commitment fees, unrealized foreign exchange gains (losses) on long-term debt and realized foreign exchange losses upon repayment of principal.(5)
    
    Excludes $1.5 million of interest charges capitalized to the High Level project during fiscal 2000.(6)
    
    EBITDA represents operating earnings before amortization and write-down of capital assets,
plus interest and other income (expense). For more information
regarding EBITDA, see Presentation of Financial
Information. The following table shows a reconciliation of net
income (loss) to EBITDA. Year ended December 312000
    
    2001
    
    2002
    
    2003
    
    2004(in millions)Net income (loss)
    
    $
    (4.6
    )
    
    $
    (25.4
    )
    
    $
    (17.9
    )
    
    $
    123.7
    
    
    $
    175.1Add: Loss (gain) from discontinued operations
    
    
    14.4
    
    
    
    (4.2
    )
    
    
    
    
    
    
    
    
    
    
    Income tax (recovery) expense
    
    
    12.5
    
    
    
    (18.7
    )
    
    
    (0.3
    )
    
    
    51.9
    
    
    
    71.2Unrealized foreign exchange (gain) loss
    
    
    10.2
    
    
    
    17.4
    
    
    
    (4.3
    )
    
    
    (76.9
    )
    
    
    (73.8
    )Amortization of finance charges
    
    
    2.1
    
    
    
    8.3
    
    
    
    5.3
    
    
    
    4.9
    
    
    
    3.2Interest charges
    
    
    35.6
    
    
    
    51.7
    
    
    
    57.2
    
    
    
    51.2
    
    
    
    40.7Loss on repurchase of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    106.2Write-down of capital assets
    
    
    1.0
    
    
    
    3.3
    
    
    
    1.0
    
    
    
    13.7
    
    
    
    0.8Amortization of capital assets
    
    
    27.4
    
    
    
    30.3
    
    
    
    32.0
    
    
    
    33.0
    
    
    
    53.9EBITDA
    
    $
    98.6
    
    
    $
    62.8
    
    
    $
    73.0
    
    
    $
    201.6
    
    
    $
    377.3
  (7)
    
    Includes capital expenditures of $144.7 million related to the construction of the High Level OSB facility during the years ended December 31, 1999, 2000 and 2001.(8)
    
    For purposes of calculating the ratio of earnings to fixed charges (i) earnings consist of earnings (loss) from continuing operations before income taxes plus fixed charges during the period and (ii) fixed charges consist of interest expense on all debt, plus the portion of operating lease rental expense that is representative of the interest factor and amortization of finance charges.(9)
    
    For the fiscal years ended December 31, 2002 and 2001, pre-tax earnings from
continuing operations before fixed charges were insufficient to cover fixed charges under
Canadian GAAP by $18.1 and $48.4 million respectively and under U.S. GAAP by $17.2 and
$48.8 million respectively.(10)
    
    $ per msf (3/8)(11)
    
    Net of unamortized deferred discount. 2




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Exchange Rate Information We publish our consolidated financial statements in Canadian dollars. In
this document, except where otherwise indicated, all dollar amounts are
expressed in Canadian dollars. References to US$ are to United States dollars. The following table sets forth the
high and low exchange rates for each of
the previous six months, and the average rate for each of the five most
recently completed financial years, calculated by using the average of the
exchange rate on the last day of each month during the year, based on the
inverse of 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): Annual Data
    
    Average2004
    
    
    0.77022003
    
    
    0.71862002
    
    
    0.63692001
    
    
    0.64422000
    
    
    0.6724
 Monthly Data
    
    High
    
    LowFebruary,
2005
    
    
    0.8134
    
    
    
    0.7961January, 2005
    
    
    0.8346
    
    
    
    0.8050December,
2004
    
    
    0.8435
    
    
    
    0.8064November,
2004
    
    
    0.8493
    
    
    
    0.8155October, 2004
    
    
    0.8200
    
    
    
    0.7858September, 2004
    
    
    0.7906
    
    
    
    0.7651
 On March 31, 2005,
the inverse of the noon buying rate was US$0.8269 = $1.00.
Unless otherwise indicated, the exchange rate in this document used to
translate US$ to Canadian dollars is the inverse of the Noon Buying Rate on
such date. B. Capitalization and indebtedness. Information not required for annual report. C. Reasons for the offer and use of proceeds. Information not required for annual report. D. Risk factors. We have significant indebtedness, which
could adversely affect our financial condition and limit our
ability to fulfill our obligations related to our senior
notes. We currently have a
significant amount of indebtedness and
significant debt service obligations. As of December 31,
2004, we had $916.9 million
of indebtedness. In addition, as of December 31, 2004, we
had outstanding letters of credit of approximately
$6.6 million. Despite our current level of indebtedness,
our credit facility permits us to borrow up to
$50.0 million, subject to a borrowing base, and the
indentures governing our senior notes and our credit facility will
permit us and our subsidiaries to incur additional debt in the
future, subject to limitations, which would increase the risks
described below. This high degree of leverage could have important
consequences. For example, it could:  
    make it more difficult for us to satisfy our
    obligations with respect to the senior notes and other
    indebtedness;
    increase our vulnerability to adverse economic
    and industry conditions;
    require us to dedicate a substantial portion of
    cash from operations to service our indebtedness, thereby
    reducing the availability of cash to fund working capital,
    capital expenditures and other general corporate purposes;
    limit our ability to obtain financing for working
    capital, capital expenditures, general corporate purposes or
    acquisitions;
    place us at a disadvantage compared to our
    competitors that have a lower degree of leverage; and
    limit our flexibility in planning for, or
    reacting to, changes in our business and in the forest products
    industry. We may not generate cash flow sufficient to
service all of our obligations, including our obligations
related to the senior notes. Our ability to make payments on and to refinance
our indebtedness, including the senior notes, and to fund our
operations, working capital and capital expenditures, depends on
our ability to generate cash in the future. Our cash flow is
subject to general economic, industry, financial, competitive,
operating, regulatory and other factors that are beyond our
control. Our business may not generate cash flow in an amount
sufficient to enable us to repay our indebtedness, including the
senior notes, or to fund our other liquidity needs. We may
need to refinance all or a portion of our indebtedness,
including the senior notes, on or before maturity. Our ability to refinance our indebtedness or obtain
additional financing will depend on, among other things:  
    our financial condition at the time;
    restrictions in our indentures and the agreement
    governing our credit facility; and
    other factors, including the condition of the
    financial markets or the forest products industry, particularly
    the OSB market. As a result, we may not be able to refinance any
of our indebtedness, including the senior notes, on
commercially reasonable terms, or at all. If we do not generate
sufficient cash flow from operations, and additional borrowings
or refinancings or proceeds of asset sales are not available to
us, we may not have sufficient cash to enable us to meet all of
our obligations, including payments on the senior notes. The senior notes are subordinated to the indebtedness of our subsidiaries that are
not guarantors of the notes. Holders of our senior notes do not have any claim as a creditor against
any of our subsidiaries that are not subsidiary
guarantors of the senior notes. As a result, all indebtedness
and other liabilities, including trade payables, of
non-guarantor subsidiaries, whether secured or unsecured, will
have to be satisfied before any of the assets of non-guarantor
subsidiaries would be available for distribution, upon a
liquidation or otherwise, to us to meet our obligations with
respect to the senior notes. The senior notes are unsecured and
effectively subordinated to our future secured
indebtedness. The senior notes are senior unsecured
obligations, ranking effectively junior in right of payment to
all our future secured debt, including obligations under our
credit facility, to the extent of the collateral securing the
debt. In addition, the indentures governing the senior notes
permits the incurrence of additional debt, some of which may be
secured debt. If we are declared bankrupt, become insolvent or
are liquidated or reorganized, any secured indebtedness will be
entitled to be paid in full from our assets securing such
indebtedness before any payment may be made with respect to the
senior notes. Holders of the senior notes will participate
ratably in our remaining unencumbered assets with all holders of
our unsecured indebtedness that is deemed to rank equally with
the senior notes, and potentially with secured creditors (to
the extent that the collateral securing our indebtedness to them
is of insufficient value to satisfy that indebtedness), and with
all of the other general creditors (including trade creditors),
based upon the respective amounts owed to each holder or
creditor. If any of the foregoing events occur, there may be
insufficient assets to pay the full amounts due on the senior
notes. The agreements governing our indebtedness
contain significant restrictions that limit our operating and
financial flexibility.  The indentures and agreement governing our
senior notes and credit facility, respectively, contain
covenants that, among other things, limit our ability to:  
    incur additional indebtedness;
    pay dividends and make distributions;
    repurchase stock;
    make certain investments;  
    transfer or sell assets;
    create liens;
    enter into transactions with affiliates;
    issue or sell stock of subsidiaries;
    create dividend or other payment restrictions
    affecting restricted subsidiaries; and
    merge, consolidate, amalgamate or sell all or
    substantially all of our assets to another person. All of these restrictions may limit our ability
to execute our business strategy. Moreover, if our operating
results fall below current levels, we may be unable to comply
with these covenants. If that occurs, our lenders could accelerate our indebtedness. If our indebtedness is
accelerated, we may not be able to repay all of our
indebtedness, in which case the senior notes may not be fully
repaid, if at all. We may be unable to
purchase senior notes
in the event of a change of control. Upon the occurrence of a change of control, as
defined in the indentures, we will be required to make an offer
to purchase senior notes at a price equal to 101% of their
principal amount, plus accrued and unpaid interest, if any, to
the date of purchase. We may not have available funds to pay the
purchase price at the time of such an event. In addition, the
terms of our credit facility may prevent us from purchasing the
senior notes. Under our credit facility, a change of control
would constitute an event of default that would require us to
repay all amounts outstanding under the credit facility. We may
not have sufficient funds to repay our credit facility and make
the required offer to purchase at the time of such event. Any
future debt that we incur may also contain restrictions on the
purchase of the senior notes. Certain bankruptcy and insolvency laws may
impair the trustees ability to enforce remedies under the
senior notes. We are organized under the laws of the Province
of British Columbia and, in excess of 50% of our
assets are located in Canada. Under bankruptcy laws in the
United States, courts typically have jurisdiction over a
debtors property, wherever located, including property
situated in other countries. There can be no assurance, however,
that courts outside of the United States would recognize the
U.S. bankruptcy courts jurisdiction. Accordingly,
difficulties may arise in administering a U.S. bankruptcy
case involving a Canadian debtor like us with property located
outside of the United States, and any orders or judgments of a
bankruptcy court in the United States may not be enforceable in
Canada against us. The rights of the trustee under the indentures governing the senior
notes to enforce remedies may
be significantly impaired by the restructuring provisions of
applicable Canadian federal bankruptcy, insolvency and other
restructuring legislation if the benefit of such legislation is
sought with respect to us. For example, both the Bankruptcy and
Insolvency Act (Canada) and the Companies Creditors
Arrangement Act (Canada) contain provisions enabling an
insolvent person to obtain a stay of proceedings
against its creditors and others and to prepare and file a
proposal for consideration by all or some of its creditors to be
voted on by the various classes of its creditors. Such a
restructuring proposal, if accepted by the requisite majorities
of creditors and approved by the court, may be binding on
persons, such as holders of the senior notes, who may not
otherwise be willing to accept it. Moreover, this provision of
the legislation permits, in certain circumstances, an insolvent
debtor to retain possession and administration of its property,
even though it may be in default under the applicable debt
instrument. The powers of the court under the Bankruptcy and
Insolvency Act (Canada) and particularly under the
Companies Creditors Arrangement Act (Canada) have been
exercised broadly to protect a restructuring entity from actions taken
by creditors and other parties. Accordingly, if we were to seek
protection under such Canadian bankruptcy legislation following
commencement of or during such a proceeding, payments under the
senior notes may be discontinued, the trustee may be unable to
exercise its rights under the indentures and holders of the
senior notes may not be compensated for any delays in
payments, if any, of principal and interest. Further, the
holders of the senior notes may receive in exchange for their
claims a recovery that could be substantially less than the
amounts of their claims (potentially even nothing) and any such
recovery could be in the form of cash, new debt instruments or
some other security. Your ability to enforce civil liabilities
in Canada under U.S. securities laws may be
limited. We are organized under the laws of the Province
of British Columbia. All of our directors, controlling persons,
officers and the representatives of the experts named in this
annual report, are residents of Canada, and a substantial portion
of their assets and, currently, in excess of 50% of our assets
are located outside the United States. It may not be possible,
therefore, for you to effect service of process within the
United States upon us, our directors and officers or such
experts. There is uncertainty as to the enforceability in
Canadian courts of (1) an original action predicated solely
upon United States federal securities laws and (2) of
judgments of United States courts obtained in actions predicated
upon the civil liability provisions of United States federal
securities laws. Therefore, you may not be able to secure
judgment against us, our directors and officers or such experts
in a Canadian court or, if successful in securing a judgment
against us or them in a U.S. court, you may not be able to
enforce such judgment in Canada. Federal and state statutes in the United
States and federal and provincial statutes in Canada allow
courts, under specific circumstances, to void the guarantees and
require the holders of the senior notes to return payments
received from the guarantors. Under U.S. federal bankruptcy law and comparable
provisions of state fraudulent transfer laws, the guarantees
could be voided, or claims in respect of the guarantees could be
subordinated to all of a guarantors other debts if, among
other things,  
    such guarantor, at the time the debt evidenced by
    the guarantee was incurred, received less than reasonably
    equivalent value or fair consideration for the incurrence of
    such debt, or
    the guarantee (as the case may be) was incurred
    with the intent to hinder or delay any of such guarantors
    present or future creditors, and such guarantor:
    was insolvent or rendered insolvent by reason of
    such incurrence;
    was engaged in a business or transaction for
    which such guarantors remaining assets constituted
    unreasonably small capital; or
    intended to incur, or believed that it would
    incur, debts beyond its ability to pay such debts as they mature. In addition, any payment by a guarantor pursuant
to its guarantee could be voided and required to be returned to
us or such guarantor, or to a fund for the benefit of creditors
of such guarantor. Under Canadian federal bankruptcy law and
provincial fraudulent conveyance and preference laws, the
guarantees could be voided or voidable if, among other things:  
    the guarantee (as the case may be) was incurred
    at a time when the guarantor was in insolvent circumstances,
    unable to pay its debts in full or knew itself to be on the eve
    of insolvency and with intent to defeat, hinder, delay, defraud
    or prejudice one or more creditors, with intent to prefer one
    creditor over other creditors or which has the effect of
    preferring one creditor over other creditors;
    the guarantee (as the case may be) has the effect
    of preferring one creditor over other creditors and a proceeding
    is brought to set aside the guarantee, or the guarantor makes an
    assignment for the benefit of its creditors, within 60 days
    of the issuance of the guarantee;
    the guarantee (as the case may be) was incurred
    with intent to defeat, hinder, delay or defraud creditors or
    others of their just and lawful actions, suits, debts, accounts,
    damages, penalties or forfeitures; or
    the guarantee (as the case may be) was incurred
    with intent to prefer one creditor over other creditors, and
    within three months of the happening of an initial bankruptcy
    event (the filing of an assignment, a proposal or a notice of
    proposal by the guarantor, or the filing of a petition for a
    receiving order against the guarantor). If the guarantee is voided, any payment by a
guarantor pursuant to its guarantee could be required to be
returned to us or a creditor or creditors of such guarantor, or
to a fund for the benefit of creditors of such guarantor. The measures of insolvency for purposes of these
fraudulent transfer or preference laws will vary depending upon
the law applied in any proceeding to determine whether a
fraudulent transfer or preference has occurred. Generally,
however, a person would be considered insolvent if:  
    the sum of its debts, including contingent
    liabilities, were greater than the fair saleable value of all of
    its assets;
    the present fair saleable value of its assets
    were less than the amount that would be required to pay its
    probable liability on its existing debts, including contingent
    liabilities, as they become absolute and mature; or
    it could not pay its debts as they become due. Our business is of a cyclical nature and
prices of, and demand for, our products and our results of
operations may fluctuate significantly based on market
factors. The largest markets for OSB are commodity markets
in which manufacturers compete primarily on the basis of price.
Our financial performance is dependent on the selling prices of
our OSB products, which have fluctuated significantly in the
past. The markets for these products are highly cyclical and
characterized by (1) periods of excess product supply due
to industry capacity additions, increased production and other
factors, and (2) periods of insufficient demand due to weak
general economic conditions. Demand for our OSB products is
primarily driven by the residential and commercial construction
and repair and remodeling industries. These industries in turn
are affected by real estate prices, interest rates, credit
availability, tax policy, energy costs, weather conditions,
natural disasters and general economic conditions, all of which
are beyond our control. The prices of commodity sheathing OSB
and plywood have historically been unpredictable. For example,
during the past five years, monthly average prices for commodity
sheathing OSB have ranged from a low of US$131 per msf North
Central (7/16) to a high of US$508 per msf North Central
(7/16). We are unable to predict market conditions and
selling prices for our OSB products, which may decline from
current levels. Weakness in the market, particularly in North
America, could reduce our revenues and profitability and could
affect our ability to satisfy our obligations under our
indebtedness, including the senior notes. We cannot predict
with certainty what market conditions, demand and selling prices
for our products will be in the future and prices or demand for
our products may decline from current levels. Any prolonged or
severe weakness in the market for any of our principal products
would adversely affect our business, financial condition,
results of operations and cash flows. Intense competition could reduce our market
share and harm our financial performance. We compete in North America and in overseas
export markets with numerous forest products companies, ranging
from very large integrated firms, most of which are larger than
we are, to smaller firms that manufacture only a few products.
We also compete indirectly with firms that manufacture
substitutes for wood building materials. Our competitive
position is influenced by the availability, quality and cost of
raw materials, energy and labor costs, plant efficiencies and
productivity in relation to our competitors. Some of our
competitors may have lower fiber and labor costs and fewer
environmental and governmental regulations to comply with than
we do. Other competitors are less leveraged than we are and
therefore have greater financial resources than we do. 3




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We currently face substantial competition in the
OSB industry and may face increased competition in the years to
come if new manufacturing facilities are built in North America
and elsewhere. In addition, OSB capacity is constantly
increasing as a result of improvements to existing mills. In
periods of reduced demand, which lead to lower OSB prices, we
may not be able to compete with competitors who have greater
financial resources and who are better able to weather a
prolonged decline in prices. Because of our product concentration,
declines in demand or prices for OSB could have a significant
impact on our revenues and profitability. We are primarily a manufacturer of OSB and, to a
lesser extent, a producer of specialty overlaid plywood. For the
year ended December 31, 2004, we generated 88% of our
revenues from OSB sales. We expect that OSB will continue to
account for most of our sales in the foreseeable future. This
product concentration could increase our exposure to a decline
in demand or prices for OSB as a result of general economic
conditions affecting housing starts, renovations and remodeling
or industrial construction activity or the other factors
described above. We may incur unexpected costs or
liabilities as a result of our acquisition of Voyageur and our
acquisition of the Minnesota OSB facilities. Although we conducted what we believed to be a
prudent and thorough level of investigation in connection with
our acquisition of Voyageur and our acquisition of the Minnesota
OSB facilities, in each case, an unavoidable level of risk
remains regarding any undisclosed or unknown liabilities of or
issues concerning the Barwick facility and the Minnesota OSB
facilities. In the course of our operation of the Barwick and
Minnesota OSB facilities, we may discover that we have acquired
substantial undisclosed liabilities. The existence of
undisclosed liabilities at the Barwick facility or the Minnesota
OSB facilities could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. We are exposed to currency exchange risk
which could have a material adverse effect on us. Our operating results are sensitive to
fluctuations in the exchange rate of the Canadian dollar to the
U.S. dollar, as prices for our products are denominated in
U.S. dollars or linked to prices quoted in
U.S. dollars. In 2004, over 80% of our sales were denominated in U.S. dollars.
Although we purchase certain quantities of raw materials in
U.S. dollars, in excess of 50% of our operating costs are incurred in
Canadian dollars. Therefore, an increase in the value of the
Canadian dollar relative to the U.S. dollar reduces the
amount of revenue in Canadian dollar terms realized by us from
sales made in U.S. dollars, which reduces our operating
margin and the cash flow available to fund our operations. From
January 1, 2003 to December 31, 2004, the value of the
Canadian dollar relative to the U.S. dollar increased by
approximately US$0.20, or 31.3%. In addition, we are exposed to currency exchange
risk on our debt, including the exchange notes and interest
thereon, and assets denominated in U.S. dollars. Since we
present our financial statements in Canadian dollars, any change
in the value of the Canadian dollar relative to the
U.S. dollar during a given financial reporting period would
result in a foreign currency loss or gain on the translation of
our U.S. dollar-denominated debt and assets into Canadian
dollars. Consequently, our reported earnings could fluctuate
materially as a result of foreign exchange translation gains or
losses. We are not currently a party to any forward
foreign currency exchange contract, or other contract that could
serve to hedge our exposure to fluctuations in the U.S./Canadian
dollar exchange rate. 4




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We depend on timber tenures for access to
fiber for our OSB and plywood operations. A reduction in our
fiber supply or an increase in the related costs could have an
adverse effect on us. The allowable annual cut under our forest license
in British Columbia can supply approximately 80% of the current
timber requirements of our veneer and specialty overlaid plywood
operations either directly or through a long-term log trade
agreement with third parties. The forest license is renewable
and the current term extends until 2013. Under the terms of forest licenses granted in
British Columbia, the amount of commercial forest land available
to the forest industry is periodically assessed. We cannot
predict whether the amount of timber that we are allowed to
harvest will be reduced in the future. In 2003, the British
Columbia government introduced the Forestry Revitalization Act
which will result in significant changes to the provincial
forest management structure. The plan includes a 20% reduction
in harvesting rights for holders of long-term tenures and the
introduction of an auction-based timber pricing system. The
province has indicated that licensees will be fairly compensated
for the return of tenure and related costs such as roads and
bridges. Although the legislation has been enacted, the
regulations and basis for compensation for the 20% timber
reduction have not been published. The effect of the timber
take-back will result in a reduction of approximately 29,600 m3
of our existing allowable annual cut for which we will be
compensated. In Alberta, we obtain most of our fiber
requirements from our Forest Management Agreements, or FMAs, or
Deciduous Timber Allocations issued by the Alberta government,
each of which is issued for a period of 20 years. There is
no assurance that such quotas and allocations will be renewed or
extended on acceptable terms, if at all. In addition, the FMAs
and such quotas and allocations contain terms or conditions that
could, under certain circumstances, result in a reduction of the
amount of fiber available to us. Our Barwick facility requires approximately
735,000 m3 of timber annually when operating at its current
capacity of 480 mmsf per year. We have a current annual
commitment of 551,000 m3 of timber from Crown land under
long-term agreements with the Province of Ontario. Additional
wood is obtained from private sources in Ontario and Manitoba.
There is no assurance that we will be able to obtain a future
supply of wood from either Crown or private sources on terms
that are adequate to support our planned operation of our
Barwick facility. The Minnesota OSB facilities obtain their
wood fiber supply in open market transactions from various
governmental entities and private landowners. The open market
price of wood fiber may fluctuate as a result of various factors
that are beyond our control, such as the level of demand from
other forest products manufacturers, natural disasters,
industrial disputes and government legislation. A material
increase in the open market price for wood fiber could have a
material adverse effect on our business, financial condition,
results of operations and cash flows. The costs of our fiber, including any fees
charged for fiber, logging and transportation, and market prices
for purchased fiber have historically fluctuated and could
increase in the future. Any significant increase in the cost of
fiber could have a material adverse effect on our business,
financial condition, results of operations and cash flows. Our ability to harvest timber is subject to
natural events that are beyond our control. Our ability to harvest timber is subject to
natural events such as forest fires, adverse weather conditions,
insect infestation, disease and prolonged drought. The
occurrence of any of these events could adversely affect our
ability to harvest or source timber. We may need to curtail
production or purchase fiber from third parties, which could
increase our costs and reduce cash from operations, which could, in turn, have
a material adverse effect on our business, financial condition,
results of operations and cash flows. Government regulations relating to forest
management practices may adversely affect us and could increase
our costs of doing business. Legislation in British Columbia, Alberta, and
Ontario empower provincial regulatory agencies to develop
regulations, set policies and establish and maintain all aspects
of sustainable forest management. Changes to these regulations
and policies could have an effect on our access to fiber for our
OSB operations or could increase the cost of our fiber. Changes
to these laws or regulations, or the implementation of new laws
or regulations, could result in additional expenses, capital
expenditures and restrictions and delays in our activities,
which could impair our competitive position and have a material
adverse impact on our operations. In addition, if we fail to
comply with applicable legislation and regulations, our
operations could be interrupted and we could be subject to
significant liabilities, including fines and other penalties or
take remedial actions, any of which could entail significant
expenditure. 5




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Environmental, health and safety laws and
regulations could increase the cost of doing business or
restrict our ability to conduct our business. We are subject to a wide range of general and
industry-specific environmental, health and safety and other
laws and regulations imposed by federal, provincial and local
authorities in Canada, including those governing the use,
storage, handling, generation, treatment, emission, release,
discharge and disposal of certain hazardous materials and
wastes, the remediation of contaminated soil and groundwater,
and the health and safety of employees. The acquisition of the Minnesota OSB facilities
also subjects us to a wide range of general and
industry-specific environmental, health and safety laws
applicable in the United States and the State of Minnesota. If
we are unable to extend or renew a material approval, license or
permit required by such laws, or if there is a delay in renewing
any material approval, license or permit, our business,
financial condition, results of operations and cash flows could
be materially adversely affected. The process of obtaining
certain required approvals, including the completion of any
necessary environmental impact assessments, can be lengthy,
subject to public input, controversial and expensive. Our
failure to comply with applicable environmental, health and
safety requirements, including permits related thereto, could
result in civil or criminal fines or penalties or enforcement
actions, including regulatory or judicial orders enjoining or
curtailing operations or requiring corrective measures,
installation of equipment or remedial actions, any of which
could result in significant expenditures or reduced results of
operations. We believe that we are in substantial compliance
with all applicable environmental, health and safety laws and
regulations and we regularly incur capital and operating
expenditures to maintain such compliance. However, future events
such as any changes in these laws and regulations, including any
new legislation that might arise as a result of the Government
of Canadas ratification of the United Nations Kyoto
Protocol, or any change in their interpretation or enforcement,
or discovery of currently unknown conditions, may give rise to
additional expenditures or liabilities. These could have a
material adverse effect on our business, financial condition,
results of operations and cash flows. Work stoppages or other labor disruptions
at our facilities could have an adverse effect on our
operations. Any labor disruptions and any costs associated
with labor disruptions at our union or non-union facilities
could have a material adverse effect on our production levels
and results of operations. In 2003, we renewed our collective
bargaining agreements with the Industrial, Wood and Allied
Workers of Canada, or IWA, which had expired on June 30,
2003. The renewed agreements have six year terms expiring on
June 30, 2009, and cover approximately 500 employees at our
Lillooet, Savona and 100 Mile
House operations. In 2000, Voyageur entered into a collective
bargaining agreement with the Communications, Energy and
Paperworkers Union of Canada, or CEP. This contract
currently covers approximately 120 workers employed at the
Barwick facility and expires on August 31, 2005. In
September 2004 we entered into a collective bargaining agreement
with The Paper, Allied-Industrial, Chemical and Energy Workers
Union, or PACE. This contract currently covers approximately 130
employed at the Grand Rapids facility and expires on
October 14, 2005. Our inability to negotiate acceptable
contracts, following the expiration of the present collective
bargaining agreements with the CEP and PACE could result in a
strike or work stoppage by the affected workers and increased
operating costs as a result of higher wages or benefits paid to
unionized workers. Native land claims could have an adverse
effect on our timber supply in the future. Canadian courts have recognized that aboriginal
people may have unextinguished claims of aboriginal rights and
title to lands used or occupied by their ancestors in those
areas of British Columbia, constituting about 80% of the
province, where treaties have not yet been concluded. Aboriginal
rights may vary from limited rights of use for traditional
purposes to a right of aboriginal title, depending, among other
things, on the nature and extent of the prior aboriginal use and
occupation. Some of our timber supply areas are located within
areas where there are claims of aboriginal rights and title. The courts have said that the Crown has an
obligation to consult First Nations, and accommodate their
concerns, when there is a reasonable possibility that a Crown
authorized activity  such as a forest tenure  may
infringe asserted Aboriginal rights and title, even if those
claims have not yet been proven. If the Crown has not consulted
as required, the obligation to consult and accommodate may pass
to the corporation receiving the interest in Crown land. 6




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The courts have encouraged the federal and
provincial governments, together with aboriginal people, to
resolve claims of aboriginal rights and title through the
negotiation of treaties. A treaty process has been established
to settle native claims in British Columbia. Many First Nations
and tribal groups are participating in this process, which will
be ongoing for many years to come. The pace of the treaty-making
process will depend on the commitment of the parties, the
success of individual treaties, and whether First Nations
consider litigation to be a viable alternative to negotiations.
We cannot predict whether native land claims in British Columbia
will affect our existing forest licenses and timber tenures, or
our right to harvest timber to the full extent of those tenures,
or our ability to renew or secure other forest tenures in the
future. Even in provinces such as Alberta and Ontario,
which are entirely subject to treaties between Indian bands and
the federal Crown, natives may have a right to exercise treaty
rights on unoccupied Crown land, and have claimed a right to be
consulted in respect of activities on Crown land that may
interfere with their treaty rights. Our operations in Alberta
and Ontario are unencumbered by native land claims, but we
cannot predict whether claims, or what kind of claims, will be
made in the future. We face risks related to our international
sales. We have customers located outside Canada and the
United States. In 2004, sales outside of Canada and the United
States represented approximately 4% of our sales. Our
international operations present us with a number of risks and
challenges, including the effective marketing of our products in
other countries, tariffs and other trade barriers, and
recessionary environments in foreign economies. The co-ownership arrangement for High Level
could force us to either sell our 50% ownership interest or to
buy-out the co-owners 50% interest. The memorandum of agreement that governs the
co-ownership of the High Level OSB facility contains a buy-sell
provision, which provides that if one co-owner offers to buy the
other partys interest, the party must either accept the
offer or purchase the interest owned by the offering co-owner at
the same price and conditions. See Co-ownership
Arrangements for High Level. As a result, we could be
forced to sell our interest or purchase our co-owners
interests, which could affect our day-to-day operations and
growth strategy. If the co-owner of the High Level OSB
facility were to default on its obligations we may be forced to
fund the entire High Level operation. If the co-owner of the High Level OSB facility
fails to meet its funding obligations for the High Level OSB
facility, we may be required to fund the entire High Level
operation. We may not be able to make such additional cash
contributions if the co-owner were to default. If High Level
fails to operate at its design capacity, results of operations
may suffer. Such circumstances would lessen our ability to meet
our debt obligations. Members of the Ainsworth family control our
business and their interests may conflict with the interests of
our debtholders. Members of the Ainsworth family beneficially own
approximately 58% of our common shares, and consequently have
the ability to exercise control over our business and affairs
through their ability to elect all of our directors. These
family members also have the ability to control most matters
requiring shareholder approval. As with other shareholders, the
Ainsworth familys interests in our business, operations
and financial condition may not be aligned or may conflict, from
time to time, with your interests. 7




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ITEM 4. INFORMATION ON THE REGISTRANT A. History and Development of the Registrant Ainsworth was formed under the laws of British
Columbia on March 31, 1993, by the amalgamation of
Ainsworth Lumber Co. Ltd. and its parent company, Ainsworth
Enterprises Ltd. Ainsworth Lumber Co. Ltd., the amalgamating
company, was previously the result of the amalgamation on
December 3, 1970, of Ainsworth Lumber Co. Ltd., which was
incorporated in 1956, and Little Bridge Creek Logging Ltd.,
which was incorporated in 1963. Ainsworth was founded in 1950 by
David Ainsworth and originally consisted of a portable sawmill
operation that employed six people. In 1952, the initial sawmill
operation was relocated to 100 Mile House, British Columbia. We
built a permanent sawmill at 100 Mile House in 1957 and steadily
expanded its operations over a period of 12 years to
include lumber planing and drying facilities. This original
sawmill operation was consolidated into a larger, modernized
operation at Clinton, British Columbia in mid-1998. In 1975, we began construction of a second
sawmill near Clinton, British Columbia, and in 1979, added a
finger-joined facility at the 100 Mile House site to add value
to its off-grade and shorter-length lumber products. In 1986,
the finger-joined facility was relocated to Abbotsford, British
Columbia, where a milder climate extended the operating season. In 1987, we purchased from Evans Forest Products Limited
a sawmill and veneer mill at Lillooet, British Columbia, a
sawmill and a specialty overlaid plywood plant at Savona, British
Columbia, and two forest licenses. This acquisition
substantially diversified our product line and initiated our
entry into the specialty overlaid plywood business. The
additional timber supply from the forest licenses acquired from
Evans also enabled us to manage our overall timber supply more
effectively through the implementation of a comprehensive system
of log transfers among the facilities to achieve optimal use of
the available timber. In 1990, following a public call for tenders by
the British Columbia Ministry of Forests, we were granted
pulpwood harvesting rights for a 25-year term for the purpose of
operating an OSB facility at 100 Mile House. We subsequently
entered into a pulpwood agreement with the Ministry of Forests
on April 26, 1990. In May 1993, we completed an initial
public offering of 5.55 million common shares at $10 per
share. The $51.4 million net proceeds were used as partial
funding for the construction of the OSB plant at 100 Mile House.
The 100 Mile House OSB plant has been operating since August
1994. In 1994, the Alberta government submitted a
request for proposals for a deciduous timber allocation, or DTA,
near Grande Prairie, Alberta. Our proposal was accepted, and on
August 9, 1994, we were granted a DTA for a renewable
20-year term. Construction of our second OSB facility near
Grande Prairie began in October 1994, and production of the
first OSB panels commenced in December 1995. In addition,
equipment was installed in 1997 for further processing the OSB
and adding further value to the product lines. In 1996, the Alberta Lands and Forest Service
requested proposals for a DTA in the Footner Timber Development
Area in Northern Alberta. In January 1997, we made a joint
proposal with Grant Forest Products Corp., through Footner
Forest Products Ltd. to construct and operate an OSB plant near
High Level, Alberta upon receipt of a 20-year DTA. In September
1997, the Alberta government announced that the Footner proposal
had been selected. Construction of the High Level OSB facility
began in August 1999 and was completed in the fall of 2000. In February 2001, we transferred our interest in
Footner and the High Level OSB project to our wholly-owned
subsidiary, Steen River, in consideration for an assumption of
debt incurred in relation to the High Level OSB project and
common shares in Steen River. In connection with our offering of
senior notes in March 2004, we wound-up Steen River and
transferred all of Steen Rivers assets and liabilities to
us in order to simplify our corporate organizational structure
and provide access to the previously unavailable capital cost
allowance on the High Level assets. 8




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On April 24, 2001, we completed the sale of
our Clinton, British Columbia lumber operations to West Fraser
Mills Ltd. Following the sale of our Clinton lumber operations,
we classified our Abbotsford finger-joined operations as
discontinued operations. In February, 2002 a decision was made
to cease efforts to dispose of the Abbotsford operation,
reflecting our improved financial position and other changes in
circumstances. In 2004, we permanently closed the Abbotsford operation. On May 19, 2004, we acquired all of the
outstanding shares of Voyageur Panel Limited, a private Canadian
company owned by Boise Cascade Corporation (47% owner), Abitibi
Consolidated Company of Canada (21% owner), the Northwestern
Mutual Life Insurance Company (17% owner) and Allstate Insurance
Company (15% owner) for an aggregate purchase price of
US$206.7 million (which includes US$47.6 million of
net working capital). The acquisition required us to pay up
to US$10 million in additional consideration on
March 31, 2005 in the event that OSB produced by the
Barwick facility is sold at an average price that exceeds
Cdn$275 per msf (3/8 basis) between the closing of the
acquisition and December 31, 2004. We have estimated that
US$9.1 million is payable to the vendors. Voyageur owned and
operated an OSB facility located in Barwick, Ontario with a
current annual production capacity of 470 mmsf. Immediately
following our acquisition of Voyageur, Voyageur was amalgamated
with our wholly-owned subsidiary,
Ainsworth Engineered Corp., a Nova Scotia unlimited liability
company. In August 2004 we (1) completed an exchange offer
pursuant to which all of the US$210 million in aggregate
principal amount of 6.750% Senior Notes due March 15, 2014 that
we issued on March 3, 2004 were exchanged for an identical
aggregate principal amount of 6.750% Senior Notes representing the
same indebtedness due March 15, 2014, which were registered
under the Securities Act of 1933; and (2) completed an exchange
offer pursuant to which all of the US$110 million in aggregate
principal amount of 6.750% Senior Notes representing the same
indebtedness due March 15, 2014 that we issued on May 19,
2004 were exchanged for an identical aggregate principal amount of
6.750% Senior Notes due March 15, 2014, which were registered
under the Securities Act of 1933. On September 22, 2004, we acquired all of
the assets and certain related net working capital used by
Potlatch in the operation of three OSB facilities that are
located in the northern Minnesota towns of Bemidji, Cook and
Grand Rapids. The assets were acquired by Ainsworth
Engineered (USA), LLC, our wholly owned subsidiary. In
connection with the acquisition, we paid Potlatch a purchase
price of approximately US$455.5 million (including certain
adjustments upon closing). On December 24, 2004, Ainsworth Lumber Co.
Ltd. created Ainsworth Engineered Canada Limited Partnership.
This partnership was created to facilitate the integration of
the Canadian business operations under one entity. Ainsworth
Lumber Co. Ltd. and Ainsworth Engineered Corp. contributed the
use of its assets in exchange for interests in the partnership.
All Canadian business operations have been conducted by
Ainsworth Engineered Canada LP since January 1, 2005. Our corporate address is Suite 3194 Bentall IV, P.O. Box 49307, 1055
Dunsmuir Street, Vancouver, British Columbia, V7X 1L3. Our telephone number is
(604) 661-3200. 9




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B. Business overview Markets in Which We Operate Oriented Strand Board Market OSB is a structural panel used in building
applications, primarily as a substitute for plywood. Growth in
the structural panel industry, which includes plywood and OSB,
is primarily driven by residential and commercial construction
activity. The relative abundance of fast growing deciduous and
under-utilized coniferous trees, combined with an automated
manufacturing process, results in a significant cost advantage
for OSB over plywood. RISI estimates that in 2003 the average
variable cost production of OSB was $140 per msf in western
Canada, $161 per msf in the U.S. North Central region and
$142 per msf in Ontario and Quebec, compared to a 2003 average
variable cost of production of plywood of $265 per msf in
British Columbia and $263 in the southern United States.
Declining plywood-quality timber supplies are expected to
continue to limit the efficient production of plywood. We
believe OSBs lower cost and comparable performance
characteristics versus plywood will continue to drive the market
shift from plywood to OSB and support the growth of our
business. According to RISI, OSBs share of the North
American structural panel market has increased from 33% in 1994
to 57% in 2003 and is projected to grow to 68% of the market by
2008. Furthermore, RISI estimates that between 1994 and 2003,
annual consumption of OSB in North America grew at a 9%
compounded annual rate over the period. In addition to the
growing commodity sheathing market, OSB continues to penetrate
new markets through the use of new manufacturing techniques that
incorporate OSB into higher valued specialty industrial products
such as webstock, rimboard, radiant barrier sheathing and stair
systems. The following table shows a representative production
cost comparison between plywood and OSB: Plywood and OSB Production Cost
Comparison Plywood
    
    OSBWood
    
    $
    170
    
    
    $
    50Labor
    
    
    70
    
    
    
    28Energy
    
    
    14
    
    
    
    9Glue & Wax
    
    
    18
    
    
    
    32Supplies
    
    
    21
    
    
    
    21Gross Variable
    
    
    293
    
    
    
    140Residuals
    
    
    (33
    )
    
    
    Total Variable
    
    $
    260
    
    
    $
    140 
 Source: RISI, August 2004: 2003 Average Variable
Costs for Western Canadian OSB and Southern Yellow Pine Plywood
($ per msf 3/8 basis)
 Demand for structural panels has historically
been correlated to residential and commercial construction and
repair and remodeling industries in North America, Asia and
Europe. According to RISI, from 1991 through 2003,
U.S. housing starts grew at a 5% compounded annual growth
rate while residential improvements and repairs expenditures
grew at a 9% compounded annual growth rate. RISI has forecast
U.S. housing starts of 1.88 million in 2004, in line
with the 1.85 million started in 2003 and a 9.9% increase
over 2002. Low interest rates, rising consumer confidence and
strong household formation growth have bolstered
U.S. housing starts to a level not experienced since 1986.
We believe that housing starts will continue to be primarily
single-family construction, as opposed to multi-family homes,
which has accounted for nearly 80% of all homes built in the
last five years. In addition, according to RISI, the average
home size in 2003 was 2,340 square feet, over 10% larger than
the average home size in 1994. The demand for OSB is driven by structural panel
demand and the substitution of OSB for higher cost plywood
panels. OSB consumption and market share in the structural panel
market has increased over the last decade as a result of the
lower cost of OSB relative to plywood, increasing production
capacity to meet rising demand, a strong North American economy
and growth in OSB end-use applications. OSB is accepted by all
of the major North American building codes. OSB benchmark prices increased significantly in
2004, averaging US$369 per msf North Central
(7/16), a 25.9% increase over 2003 average OSB prices. This increase
resulted from tight supply and demand conditions in the
structural panels market, brought on by a robust new home
construction market. Structural panel market prices have
remained relatively high in 2005. In April 2004, OSB benchmark
prices reached a record high US$520 per msf North Central
(7/16). RISI is forecasting benchmark prices in 2005 to
average US$315 per msf North Central (7/16), a decrease of
approximately 17.1% over 2004 average
prices. According to RISI, North American housing starts, a
major driver of structural panel demand, are expected to average
2.0 million per year between 2004 and 2008, and OSB demand
is expected to grow at a 5.4% compounded annual growth rate over
the same period. 10




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The industry is consolidated with the top eight
suppliers controlling more than 88% of North American capacity.
Due to long lead times associated with the construction and ramp
up of new OSB mills, major capacity additions have traditionally
taken 18 months to come on line and several
additional months to reach full production levels. Given
these dynamics, RISI expects the demand capacity ratio for OSB
to average 87% from 2004 through 2008. North American structural panel prices fluctuated
considerably during the 1990s. Starting at recession lows in
1991, prices increased to record levels by 1994. The increase
was particularly pronounced for OSB, but plywood prices also
increased significantly. Due to large increases in OSB
production capacity, OSB prices declined from 1995 to 1997,
reaching a record low price of US$122 per msf North Central (7/16) in April 1997. In 1998, OSB prices started to
recover and reached historically high levels in July 1999 before
again declining to a cyclical low in 2001 and 2002. By mid-2003,
OSB benchmark prices had rebounded, peaking at a monthly average
record of US$465 per msf North Central (7/16) set in
October 2003, well above the previous monthly average record of
US$351 per msf North Central (7/16) set in July 1999. In
2004, new record monthly average prices were set in each of
February, March, April and May. The highest monthly average
price was reached in April 2004, at US$508 per msf North Central
(7/16). Export-Standard OSB Market Japan is the worlds second largest market
for wood construction materials, surpassed only by the United
States. New building regulations, such as the Housing Quality
Assurance Law, should encourage more builders to adopt
structural panels such as OSB for wall sheathing, a previously
atypical practice, to mitigate the adverse effects of
earthquakes. Although OSB currently represents only a very small
percentage of the Japanese panel market, we expect OSB demand to
grow considerably over the next decade. Other Pacific Rim
countries, including China and Korea, also show export growth
potential. Value-Added Industrial OSB
Market Since its market introduction, OSB has gained
acceptance as a low cost alternative to softwood plywood for use
in residential construction as roof, wall and floor sheathing.
Further development of process technology and advancements, such
as greater flexibility in press sizes, has allowed OSB to
penetrate new markets. In addition, higher demand and growing
environmental concerns have increased pressure on North American
timber supplies. More than ever, forest products manufacturers
are developing methods to utilize timber resources as
efficiently as possible. This is particularly evident in the
engineered wood products industry, where producers are employing
relatively new technologies to manufacture higher-valued
products as replacements for traditional wood products.
Engineered wood products are manufactured with lumber and panel
products in a manner that maximizes physical strength and
dimensional stability while minimizing the amount and cost of
wood used as raw material. OSB is now gaining market share in
these applications, which were previously restricted to materials such as lumber, plywood, medium density
fiberboard, particleboard, lumber and non-wood products. For
instance, wood I-beams or I-joists are a replacement product for
lumber joists used in residential and non-residential
construction. Value-added OSB products are generally sold at a
premium to commodity OSB sheathing and tend to exhibit more
stable demand characteristics. Specialty Overlaid Plywood Market Specialty overlaid plywood is manufactured with
resin impregnated paper sheets bonded onto one or both surfaces
of the specialty engineered plywood panels under heat and
pressure. The resulting product combines the strength of a
heavy-duty wood product with the superior wear characteristics
of an overlaid surface. These features effectively meet the
demanding requirements of concrete forming, equipment decking
and paint-grade signs. The principal application is in the
manufacture of concrete forms where the overlaid feature offers
a number of key benefits including a smooth concrete finish
without defects or wood grain patterns, ease of removal from the
cured concrete and durability. We believe that specialty
overlaid plywood forms currently account for an estimated 15% of
the total concrete forming market with the bulk of demand met
with commodity non-overlaid wood panels. Specialty overlaid
plywood is specified by contractors and architects in
applications requiring smooth visible concrete surfaces
including high rise and sports complex construction, water
treatment facilities, airports and highway infrastructure
projects. Our Savona mill has one of the two largest
overlaid plywood production output levels in North America. A
limited availability of high quality timber to produce specialty
overlaid plywood products is a barrier to entry for potential
new competitors in these markets. The value-added nature of
overlaid plywood results in premium pricing and more stable
demand characteristics versus standard plywood. Competition is
based on structural performance and reuse cycles that permit
multiple applications from a single form, effectively lowering
the end users cost. Our Business Overview We are a leading manufacturer of engineered wood
products including oriented strand board, or OSB, and specialty
overlaid plywood. We are currently the fifth largest
manufacturer of OSB in North America and we believe one of the
lowest-cost suppliers of OSB to the markets we serve. Following
our acquisition of the Minnesota OSB facilities we expect to
become the fourth largest manufacturer of OSB in North America.
Based in Vancouver, British Columbia, we own and operate three
modern, strategically located Canadian OSB manufacturing facilities, and
we maintain a 50% ownership interest in a fourth facility, the
High Level OSB facility. High Level has the largest design
capacity of any OSB facility in the world and we believe that
when production reaches design capacity it will be one of the
worlds lowest cost OSB facilities. In addition to our OSB
operations, we are one of the two largest manufacturers of
specialty overlaid plywood in North America. We have long-term timber tenure agreements with
the provincial governments of British Columbia, Alberta and
Ontario, and other long-term supply agreements that currently
provide approximately 85% of the wood fiber requirements for our
operations. We sell our products to North American and
offshore export markets, primarily Japan. We have a
well-established sales presence and long-standing customer
relationships in our largest markets. We are focused on increasing
the volume of AinsworthEngineered® value-added products
delivered to our customers,
including export-standard OSB and specialty industrial OSB and
plywood products. These products generally exhibit more stable
pricing and command a premium price over commodity OSB sheathing
and commodity plywood sheathing products. On May 19, 2004 we acquired all of the
shares of Voyageur, a private Canadian company that owned and
operated an OSB facility located in Barwick, Ontario, with an
annual production capacity of approximately 440 mmsf. Since
acquiring the Barwick facility, we have increased its annual
production capacity by approximately 9%, from 440 mmsf to
the current annual capacity of 480 mmsf. We have also
implemented key management changes and renegotiated several
commercial contracts on more favorable terms. On September 22, 2004, we acquired all of
the assets and certain related net working capital used by
Potlatch in the operation of three OSB facilities that are
located in the northern Minnesota towns of Bemidji, Cook and
Grand Rapids. The assets were acquired by Ainsworth
Engineered (USA), LLC, our wholly owned subsidiary. In
connection with the acquisition, we paid Potlatch a purchase
price of US$455.5 million. In connection with the terms of our
asset purchase agreement with Potlatch, Potlatch has agreed to
provide us with certain transitional services for a limited
period of time. The Minnesota OSB facilities consist of three
mills that are located near our existing OSB facility in
Barwick, Ontario. The combined annual production capacity of the
Minnesota OSB facilities was 1,350 mmsf, as of
December 31, 2004. The
Minnesota OSB facilities produce both commodity and value-added
OSB products, and primarily serve the Central and Western
regions of the United States. We believe that our acquisition of the Minnesota
OSB facilities has significantly enhanced our geographic
balance, flexibility and product diversity. We also believe that
the proximity of the Minnesota OSB facilities to each other and
to our existing Barwick facility will enable us to optimize our
overall efficiency and provide excellent service and flexibility
to our customers in the Central and Western regions of the
United States. Our acquisition of the Minnesota OSB facilities
has resulted in us obtaining additional intellectual property
that will enable us to access new specialty product markets
across our entire operations. Our common shares are traded on the Toronto Stock
Exchange and for the year ended December 31, 2004, we
generated revenues of $909.9 million, EBITDA of
$377.3 million and net income of $175.1 million. For
the year ended December 31, 2004, we generated 88% of our
revenues from OSB sales. 11




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Competitive Strengths and
Opportunities We believe that our business has the following
competitive strengths and opportunities: Established
Modern OSB Facilities Our existing four established Canadian OSB
facilities, 100 Mile House (British Columbia), Grande
Prairie (Alberta), High Level (Alberta) and Barwick (Ontario)
utilize modern automated equipment and have economies of scale
that increase efficiency and provide us with competitive
advantages. The High Level facility, which we jointly own with
another OSB producer, is the worlds largest OSB facility
at 860 mmsf per year design capacity, twice that of the
average North American single-line OSB facility. When High Level
reaches its design capacity, we expect it to be one of the
worlds lowest-cost OSB facilities, benefiting from
economies of scale, a low-cost wood supply and state-of-the-art
manufacturing equipment. High Level utilizes a continuous press
that results in greater production capacity, faster press times
and higher productivity. Our wholly-owned Grande Prairie
facility, the second largest capacity single-line facility in
the world after High Level, was recently benchmarked by an
independent forest products research firm against 18 other North
American OSB facilities and scored in the top quartile in a
number of key operational measures, including total production
costs, employee productivity and wood recovery. Production at
our wholly-owned 100 Mile House facility is focused on
value-added products that command premium pricing and generally
yield higher margins than commodity OSB sheathing. At current rates of production, the High Level,
Grande Prairie and 100 Mile House facilities will provide annual
OSB volumes of approximately 690 mmsf (of which 50% is
ours), 670 mmsf and 425 mmsf, respectively. The Barwick facility, which was completed in 1997, uses
modern automated equipment that allows us to obtain operating
cost efficiencies in a flexible manufacturing environment, which
means that we can adjust our relative production of commodity
and value-added OSB products to changes in market price and
customer demand. Our
acquisition of Voyageur has
allowed us to achieve improved economies of scale throughout our
operations and provided us with the opportunity to increase our
production, including our production of premium priced
value-added products. Additionally, we believe that the Barwick
facility provides us with the opportunity to achieve significant
additional production capacity without incurring significant
capital expenditures. The Barwick facility is expected to produce
480 mmsf in 2005. Proven OSB
Operators Our senior managers average over 20 years of
experience in the forest products industry and most of them have
played key roles in the design and implementation of the 100
Mile House, Grande Prairie and High Level OSB facilities. All
three of the OSB facilities that we constructed were completed
on-time and on-budget. We completed construction of 100 Mile
House in 1994 with a design capacity of 360 mmsf per year
and currently operate the mill at approximately 12




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425 mmsf per year, or 18% above original
design capacity. Similarly, we completed construction of the
Grande Prairie facility in 1995 with a design capacity of
540 mmsf per year and currently operate the mill at
approximately 670 mmsf per year, or 24% above original
design capacity. We also have improved our OSB profitability by
reducing production costs while manufacturing a greater
percentage of value-added products. Since acquiring the Barwick
facility on May 19, 2004, we have increased its production
capacity by approximately 9%. The Barwick facility currently has
an annual production capacity of 480 mmsf, which we believe
we can further increase to 500 mmsf by 2006. According to
an independent benchmarking study of 19 North American OSB
mills, we have one of the best asset utilization rates in the
industry, expressed in terms of OSB production per square foot
of press. The Minnesota OSB facilities have an aggregate
annual production capacity of 1,350 mmsf, which we believe
we can increase to 1,500 mmsf by the end of 2007.
 Leading
Market Positions We are a leader in the value-added markets we
serve, including export-standard OSB and specialty industrial
products. We have the largest installed capacity designed to
serve the growing Japanese OSB market. Both our 100 Mile House
and Grande Prairie facilities were specifically designed to
economically produce three-foot wide panels used in Japanese
construction, as compared with four-foot wide panels used in
North America. We are also a principal supplier of specialty
overlaid plywood used to manufacture long-lasting concrete
forming panels for the Canadian, United States and United
Kingdom construction markets. Growing
Value-Added Product Mix Our business strategy is to continue to increase
our revenues generated from value-added products including OSB
webstock and rimboard, export-standard OSB and specialty
overlaid plywood. These products command premium pricing,
particularly during cyclical lows for commodity products, which
enhances our profitability. Value-added products also exhibit
more stable pricing than commodity OSB. We plan to continue to
use our versatile manufacturing equipment to enhance our
offerings of high-quality AinsworthEngineered®
value-added products across our OSB and specialty plywood
businesses. We believe that our value-added product strategy
improves our financial results and helps us maintain
profitability through industry cycles. We also believe that our
acquisition of Voyageur provides us with a significant
opportunity to expand our value-added product mix. Approximately
17% of Voyageurs 2003 sales volume was value-added
products. We believe we will be able to increase output of
value-added products to approximately 40% of sales volume for
the Barwick facility by 2006. For the first six months of 2004,
approximately 24% of the Minnesota OSB facilities sales
volume was value-added products, which typically command premium
prices. We believe that we will be able to increase output of
value-added products to approximately 40% of sales volume for
the Minnesota OSB facilities by 2007. Strategically
Located OSB Facilities The 100 Mile House, Grande Prairie and High Level
facilities are within close proximity to western ports providing
us with a transportation cost and logistical advantage for
supplying the Japanese and western United States markets. For
example, the proximity of our 100 Mile House facility to the
port of Vancouver allows us to supply our Japanese customers
with less lead-time and at a lower cost than our competitors. In
addition, all three of our western OSB facilities have rail
access, which facilitates the cost-effective shipping of our
products into the western United States. The U.S. Census
Bureau has predicted the population in the western states we
serve will grow at nearly double the rate of the total
U.S. population over the next decade, which we believe will
further increase the demand for OSB to meet housing requirements
in some of the markets we serve. The Barwick facility, located
immediately adjacent to the U.S. border in Western Ontario, also has rail access, which
provides us with competitive access to the Central region of the
United States and a more diversified customer base. We believe
that the Minnesota OSB facilities, which are located in northern
Minnesota, near our Barwick facility, will allow us achieve
economies of scale, thereby optimizing our overall efficiency
and allowing us to provide excellent service and flexibility to
customers in the Central and Western regions of the United
States. 13




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Timber Supply Timber Tenure Agreements The following table presents information about
the long-term wood fiber supply agreements at each of our
Canadian OSB facilities: Annual
    
    Long-term Supply
    
    Percent ofRequirement (m3)
    
    Agreements (m3)
    
    Requirement100 Mile House
    
    
    638,000
    
    
    
    585,000
    
    
    
    92
    %(1)Grande Prairie
    
    
    1,000,000
    
    
    
    791,000
    (2)
    
    
    79
    (3)Barwick
    
    
    735,000
    
    
    
    551,000
    
    
    
    75High Level(4)
    
    
    1,323,000
    
    
    
    1,271,000
    
    
    
    92Total
    
    
    3,696,000
    
    
    
    3,198,000
    
    
    
    87
    % 
  (1)
    100% beginning in 2007 due to increased supply of
    timber.(2)
    984,000 m3 until 2007.(3)
    98% until 2007.(4)
    Assumes the High Level OSB facility is operated
    at or near design capacity of 860 mmsf per year. At the
    current rate of production, the facilitys available fiber
    supply is well over 100% of requirements. British
Columbia Forest
License We hold Forest License A18700 in British
Columbia. Our forest license covers the timber supply area of
Lillooet, British Columbia. The Lillooet timber supply area
consists of approximately 1.1 million hectares
(2.7 million acres) in the Kamloops, British Columbia
forest region and serves as the primary timber source for our
Lillooet veneer plant. The forest license is renewable and the
current term extends until 2013. We are currently entitled to
harvest an allowable annual cut, or AAC, of approximately
350,000 m3 under our forest license. The AAC of our forest
license can supply approximately 80% of the current timber
requirements of our veneer and specialty overlaid plywood
operations either directly or through a long-term log trade
agreement with third parties. The remaining percentage,
primarily fir peeler logs, can be met through purchases of
timber harvested from government-owned lands by other license
holders and through purchases of logs from private landowners,
farmers and woodlot owners. In 2003, the British Columbia government
introduced the Forestry Revitalization Act which will result in
significant changes to the provincial forest management
structure. The changes include a 20% reduction in harvesting
rights for holders of long-term tenures and the introduction of
an auction-based timber pricing system. The province has
indicated that licensees will be fairly compensated for the
return of tenure and related costs such as roads and bridges.
Although the legislation has been enacted, the regulations and
basis for compensation for the 20% timber reduction have not
been published. The effect of the timber take-back will result
in a reduction of approximately 29,600 m3 of our existing
allowable annual cut for which we will be compensated. Pulpwood
Agreement We hold Pulpwood Agreement No. 16 to support
our OSB operations at 100 Mile House, British Columbia. The
pulpwood agreement stipulates that before we can harvest any
pulpwood under the agreement, every reasonable effort must be
made to obtain the total suitable raw material requirements for
the OSB mill from (1) logging residues produced by us,
including the fiber produced by West Fraser Mills Ltd. in the
100 Mile House area pursuant to the terms of our fiber
supply agreements with West Fraser, and (2) logging
residues and pulpwood timber purchased from other sources within
the timber supply areas covered by the pulpwood 14




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agreement. If we are unable to meet our
requirements from these sources, then we are entitled to harvest
up to 330,000 m3 per year of the pulpwood stands within the
timber supply area covered by the pulpwood agreement. We estimate that in the long run, we will use all
of our 330,000 m3 of harvesting rights within the timber
supply area covered by the pulpwood agreement. Our agreements
with West Fraser ensure a long-term supply of 100,000 m3
per year through 2006 and 150,000 m3 starting 2006 through
2011. Our agreements with West Fraser may be subject to a
reduction as a result of West Frasers 20% take back as a
result of the Forestry Revitalization Act. In late 2003, we
secured long-term access to an additional 155,000 m3 per
year of pulpwood in the form of government tenures. The balance
of our annual requirement will be derived from market purchases
and shorter term agreements. Alberta Grande
Prairie Deciduous Timber Allocation In 1994, we were granted a deciduous timber
allocation, or DTA, in connection with our Grande Prairie OSB
facility. The Grande Prairie DTA is a renewable 20-year
certificate allowing for an annual harvest of approximately
791,000 m3 of deciduous timber, which expires in 2015. The
Alberta Ministry of Sustainable Resources issues timber licenses
that operate in conjunction with the DTA and specify where
timber harvesting will take place within a five-year period. As
the holder of the DTA, we were required to construct and operate
the Grande Prairie OSB facility and must process all timber
harvested under the DTA at these facilities. We are also
obligated to initiate a program of private log purchases and to
conduct our operations and forest management program in
accordance with provincial legislation and the requirements of
the Alberta Ministry of Sustainable Resource Development. In
addition, as a result of undercutting of the DTA allowable
harvest during the 1995 to 2000 period, we have rights under our
DTA certificate to harvest an additional 200,000 m3 per
year through 2006. Our Grande Prairie DTA is the primary source of
fiber for our Grande Prairie OSB facility, capable of supplying
approximately 100% of the plants fiber requirements at
full capacity during the period 2004 to 2006 and 82% in
subsequent years. The mills fiber requirement was 950,000 m3 for
the year ending December 31, 2004.
The balance of the Grande Prairie OSB plants requirements
can be purchased from other low-cost sources, including private
land and government purchases, industrial timber salvage,
incidental deciduous volumes generated by non-DTA harvesting
operations of other operators, and volume gained through
modified harvesting practices to increase utilization. High
Level Deciduous Timber Allocation and Forest Management
Agreement In 1996, the Alberta Lands and Forest Service
issued a call for proposals for a DTA located in the Footner
Timber Development Area. We made a joint proposal with another
OSB producer, through Footner Forest Products Ltd., to construct
and operate an OSB plant at High Level, Alberta. For more
information regarding the co-ownership of Footner, see the
section titled Co-Ownership Arrangements for High
Level. Footner was successful in its proposal. The timber
allocation is approx. 880,000 m3 of deciduous timber
annually for a period of 20 years and is supplied through a
joint Forest Management Agreement which supplies
701,000 m3, and three DTAs which supply 170,000 m3. In
2002, Footner, on behalf of us and the other co-owner entered
into a FMA with the Province of Alberta and Tolko Industries
Ltd. which provides us with a long-term agreement to establish,
grow, harvest and remove all deciduous timber on a sustained
yield basis within the area covered by the FMA. The FMA was
formally approved by the government of Alberta in July, 2002. We
received government approval in April 2004 to increase our
annual allowable cut on the FMA from the existing
677,000 m3 to 701,000 m3. Footner has also negotiated 20-year volume supply
agreements of approximately 390,000 m3 annually with
aboriginal groups who hold DTAs or own their land. The High Level FMA the DTA and the long-term
supply agreements with aboriginal groups are the primary fiber
source for the High Level OSB plant, supplying approximately 92%
of the plants anticipated fiber requirements once it
achieves design capacity. Other sources of fiber available to us
include purchases from private landowners and government,
industrial timber salvage and incidental deciduous volumes
generated by non-DTA harvesting operations of other operators. Ontario We have long-term timber supply agreements with
the Province of Ontario, that are administered through related
agreements with two major pulp and paper companies who hold
Sustainable Forest Licences, or SFLs, with the Province of
Ontario. These agreements ensure that defined timber volume will
be harvested solely for use by the Barwick facility. This timber
volume commitment from the Province of Ontario represents
551,000 m3 per year or approximately 75% of current fiber
requirements of the Barwick facility. Timber
Supply Agreement We have an existing timber supply agreement with
the Province of Ontario that provides for a direct license to
us, or to entities with related contracts to deliver timber to
us, to harvest from public land up to 310,000 m3 of timber
annually from the Crossroute Forest Crown Management Unit, or
CMU, located adjacent to the Barwick facility. This timber
supply agreement is renewable and the current term expires in
September 2015. The annual allowable cut, or AAC, of this
agreement can supply approximately 42% of the current fiber
requirements of the Barwick facility. We currently have a wood
supply services agreement with Abitibi Consolidated Inc., or
ACI, pursuant to which ACI manages the 310,000 m3 commitment
relating to our Barwick facility through ACIs SFL. Sustainable
Forest Licenses ACI, and Bowater, both major pulp and paper
producers with operations near the Barwick facility, are
directed by the terms of their respective SFLs with the Province
of Ontario to supply the Barwick facility with an annual harvest
of 165,000 m3 and 76,000 m3 of timber, respectively. The current
term of the SFLs held by both ACI and Bowater expire
March 31, 2017 and March 31, 2018, respectively. The
fiber that the Barwick facility is entitled to receive under the
SFLs held by ACI and Bowater represents a total of 241,000 m3
per year, or approximately 33% of the current fiber requirements
of the Barwick facility. Private
Wood Timber requirements for the Barwick facility
beyond the 551,000 m3 per year available from public lands
are currently satisfied through purchases of timber from private
lands in Ontario and Manitoba at open market prices. At an
annual OSB production rate of 480 mmsf, approximately 25%
of the current fiber requirements of the Barwick facility is
purchased on the open market. Minnesota The Minnesota OSB facilities use a mix of
hardwood tree species, predominantly aspen and birch, as well as
balsam, balm, basswood and pine, as the primary raw materials
for their products. The location of the mills in the forested
northern portion of Minnesota has enabled them to obtain an
adequate supply of wood fiber from within reasonable distances
of the mill sites. Minnesota has a very diverse and fragmented
land ownership demographic, and as a result Potlatch has
historically purchased wood fiber for the Minnesota OSB
facilities in open market transactions from various governmental
entities (federal, state and county) and private landowners. Upon
acquiring the Minnesota OSB facilities we entered in to a log supply
contract with Potlatch Corporation. Under the terms of the contract
Potlatch will supply a minimum of 95,000 green tons per year over the
next five years. The
mills generally do not enter into long-term wood fiber supply
contracts with third parties. Timber Harvesting and Forest
Management We are committed to responsible harvesting,
reforestation and sustainable forest management practices that
are sensitive to environmental and social considerations as well
as the need to preserve a varied forest species mix. Forest
management techniques are in accordance with governmental laws,
regulations and policies and promote the long-term viability of
the forest resource. British
Columbia Timber
Harvesting We have adopted a strategic timber harvesting
plan approved by the Ministry of Forests that integrates
harvesting from our forest license and pulpwood agreement with
timber volume supply agreements with West Fraser Mills Ltd. to
ensure that logs are directed to specific mills and end uses
that maximize the return on the timber resource. We manage these
resources on a sustained yield basis. Rationalization of the
flow of logs to our mills reduces our dependence on purchased
logs. Timber harvesting is planned and supervised by our
woodlands staff, while harvesting and log hauling are performed
by independent contractors. Most of these independent
contractors have long-standing relationships with us. At
100 Mile House, the temperate climate allows for year-round
logging, subject to periodic limitations resulting from adverse
weather conditions and other factors. Forest
Management Since early 2000 we have worked with other forest
tenure holders in our British Columbia timber supply area to
develop a sustainable forest management (SFM) plan based on the
Canadian Standards Association (CSA) certification system. Effective June 18, 2004, we achieved ISO 14001
Environmental Management System registrations, an environmental
management certification system for forestry related activities,
on both the Lillooet license and Pulpwood Agreement No. 16. Alberta Timber
Harvesting Our DTA at Grande Prairie and our FMA at High
Level are managed on a sustained yield basis. Harvesting under the DTAs is authorized under:  
    timber licenses, which create a five-year program
    of operations under the DTA; and
    annual operating plans, which authorize the
    harvesting of specific blocks of timber and impose operational
    requirements regarding such matters as riparian set-backs and
    cut-block boundaries. Timber licenses under the DTA and FMA are issued
as a right upon compliance with cut control and other regulatory
requirements. Logging operations at both the Grande Prairie and
the High Level facilities employ tree-length and cut-to-length
roadside logging methods. Year-round log deliveries are limited
by wet ground conditions and a lack of gravel for road ballast
and construction. Grande Prairie ground conditions and
infrastructure allow an approximate eight-month logging season.
At the High Level OSB facility, the logging season is compressed
into a 100-day period in the winter, with very limited options
for non-frozen ground operating conditions. Terrain in the
harvesting areas is flat to gently rolling, with the main road
systems previously put in place for oil and gas exploration and
past coniferous timber logging operations. Forest
Management We have developed a detailed forest management
plan for the Grande Prairie DTA and have committed to a
proactive public involvement program in the development of the
plan. The detailed forest management plan has received
governmental approval. We have also completed an independent
audit of our operations at Grande Prairie, the results of which
were submitted to 15




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the government and summaries made available to
the public. The audit established that we met or exceeded
government requirements. Our woodlands program in Grande Prairie
also received AFPA ForestCare certification in February 1999. In
November 2003, our Grande Prairie woodlands achieved
ISO 14001 registration, an environmental management system
that applies to forestry, logging, and related activities under
the DTA. At the High Level OSB facility, Footner, on
behalf of the co-owners, has in place a detailed integrated
forest management plan in the form of the Footner-Tolko joint
FMA. Footner is making the necessary preparations to achieve
ISO 14001 registrations for forestry, logging and related
activities under the FMA. Ontario We have a wood supply services agreement with ACI
under which ACI oversees timber harvesting on behalf of us on
public lands covered under certain of the timber supply
agreements relating to the Barwick facility. Under the wood
supply services agreement, wood fiber is allocated to ACI and us
on a basis that minimizes the aggregate average delivered cost
to both parties. Since the Barwick facility draws wood from the
same general region as ACIs Fort Frances pulp and paper
mill, we also benefit from accessing an established road network
and experienced timber harvesting and forest management
operations. Our current agreement with ACI is renewable at the
option of both parties beyond its current expiry date of
December 31, 2005. ACI also currently manages the private
wood supply required by the Barwick facility. Environmental Regulation In addition to the laws and regulations governing
the management and stewardship of the forests where we harvest
timber, we are subject to numerous environmental laws and
regulations of general application, including those relating to
air emissions, effluent discharges, waste management, and
remediation of contaminated soil and ground water. Environmental
laws and regulations may impose liability and responsibility on
present and former owners, operators or users of facilities and
sites for contamination at such facilities and sites without
regard to causation or knowledge of contamination. Compliance
with environmental laws and regulations can significantly
increase the costs of our operations and otherwise result in
significant costs and expenses. Violations of environmental laws
and regulations can subject us to additional costs and expenses,
including defense costs and expenses and civil and criminal
penalties. We have obtained, or are applying for amendments to,
the necessary environmental operating permits required to
conduct our business. These include, for example, permits for
emissions, land fills for disposal of boiler ash and beneficial
use of certain solid waste. We believe that all of our
operations are in substantial compliance with all operating
permits. Any future change in requirements or in the enforcement
of existing regulations could result in incremental cost and
potentially restrict our operations. We believe that the Minnesota OSB facilities are
currently in substantial compliance with applicable
environmental laws and regulations. In January 2004, Potlatch
reported to the Minnesota Pollution Control Agency a prior
non-compliance relating to the operation of certain pollution
control equipment for its co-generation facility at the Bemidji
mill. The matter is under discussion and it is not possible at
this time to estimate what, if any, fine will be imposed or
corrective action will be required. Any liability related to
this matter will remain with Potlatch pursuant to the asset
purchase agreement. The U.S. Environmental Protection
Agency is currently developing additional Maximum Achievable
Control Technology (MACT) standards, which will affect wood
products panel facilities, including the Minnesota OSB
facilities. Compliance with the final standards is expected to
be required by early 2007. We believe that capital expenditures
of approximately US$11 million will be necessary to bring
the Minnesota OSB facilities into compliance with the currently
proposed MACT standards. Transportation and Distribution Our finished products are generally marketed on a
delivered-price basis and transported by common carriers. Timely
and economical delivery of finished goods to customers are
important factors in our ability to compete effectively.
Virtually all sales are shipped directly to customers. A significant portion of the delivered cost of
our products is transportation costs. We have entered into
various rail, truck and ocean transportation agreements to
provide reliable and competitive transportation services. Our
operations have the flexibility to load their products onto
various types of rail and road equipment, enabling them to take
advantage of the most competitive rates. We also reduce freight
costs by shipping products from the most logistically
cost-effective mill. Our current North American transportation
strategy involves shipping approximately 75% of our total
production by rail, with the remainder shipped by truck. We 16




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continually test alternative transportation
options to minimize overall freight costs. Our significantly
large volume of annual shipments provides considerable leverage
for negotiating lower rates and more cost-effective transport
equipment. Inventory adjustments are regularly required to
manage short-term demand imbalances and to consistently meet
delivery schedules. Our practice is to ship production
immediately against an order file, however, our facility
warehouses can accommodate approximately five to seven
days production if there is an interruption in the
transportation links. Marketing and Sales The principal markets for our products are the
United States, Canada, Asia and the United Kingdom. In North
American markets, products are sold through our Vancouver sales
office to a large network of wholesale distributors, building
materials professionals and other integrated forest products
companies such as Louisiana-Pacific, Boise, Roseburg Forest
Products and Georgia-Pacific. Sales to Japan and other overseas
markets are handled by Interior Export Lumber Sales Ltd., or
Interex, a cooperative sales company owned by six western
Canadian forest product companies, including ourselves. Within
Interex, we are the sole wood panel producer, providing both OSB
and specialty overlaid plywood products. The combined volume and
mix of products provided by Interex enables the members to more
effectively compete against other large-scale, integrated forest
product companies than would be the case if each member
independently employed an export marketing program. Interex
maintains sales offices in Vancouver and Tokyo, Japan, and has
local representatives in other major markets. Interex receives a
commission on the sales that it consummates. Any commission
amounts exceeding Interexs operating costs are refunded to
its members on a yearly basis based on volumes shipped. We also
have sales agents in a number of overseas markets that service
key OSB and specialty overlaid plywood customers. The following table sets out our net sales by
region for the fiscal years 2002, 2003 and 2004. 2002
    
    2003
    
    2004(in thousands)Geographic sales information(1)Canada
    
    $
    83,508
    
    
    $
    94,277
    
    
    $
    106,837United States
    
    
    298,379
    
    
    
    410,212
    
    
    
    763,952Japan and other
    
    
    40,122
    
    
    
    30,431
    
    
    
    29,492Europe
    
    
    8,339
    
    
    
    8,067
    
    
    
    9,641Total
    
    $
    430,348
    
    
    $
    542,987
    
    
    $
    909,922    (1)
    Sales figures reported in this table have been
    presented to include freight revenue and freight and other
    distribution costs. Previously, these items were netted from
    sales consistent with industry practice at the time. A key component of our business strategy is to
target higher-end niche markets where products successfully
compete on the basis of superior quality and performance while
maintaining a low-cost position on commodity sheathing OSB
products. To this end, we have been active in understanding
customer needs as they relate to the growing acceptance of
engineered wood systems for housing construction. Additionally,
we continue to identify new market opportunities in
non-construction sectors and are responding by developing
products with the required performance attributes. See
Research and Development. Competition We compete in North America and in Japan with
numerous wood products companies, ranging from very large
integrated firms, several of which are larger than we are, to
smaller firms that manufacture only a few items. We also
compete indirectly with many firms that manufacture substitutes
for wood building materials. In the North American market for commodity
sheathing OSB, we compete principally with numerous plywood
sheathing producers and other North American OSB producers such
as Weyerhaeuser, Tolko, Canfor, Louisiana-Pacific and Grant
Forest Products, depending on market destination and producing
mill location. Factors including production costs, freight
charges and market dynamics between producing and consuming
regions have an impact on the competitive position of all
potential structural panel suppliers in a given market.
OSBs significant cost advantage over plywood continues to
support OSB market growth. In the value-added OSB product lines,
differentiation based on product quality, technical know-how and
customer service  along with our strategic brand
positioning  has sheltered us from intense competition
from other, mostly commodity-driven OSB producers. We sell
value-added AinsworthEngineered® webstock and
rimboard OSB to most engineered floor systems manufacturers
including Boise, Louisiana-Pacific, Roseburg Forest Products and
Pacific Wood Tech, enabling them to more effectively compete
with Trus Joist (a Weyerhaeuser business), currently the world
leader in engineered wood production and marketing. The introduction of OSB to the Japanese market is
relatively new. Although OSB currently represents only a small
proportion of the Japanese panel market, we expect OSB to
capture an increasing share of the structural panel market. We
had a leading position with an estimated 39% market share for OSB in the year ended December 31, 2004. Other North
American OSB producers have generally played only a peripheral
and opportunistic role in this market. Our principal competition
in Japan remains Indonesian and Malaysian plywood and domestic
softwood plywood. 17




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For the past several decades, Ainsworth and Olympic Panel (formerly Simpson Timber) have
been the predominant suppliers of specialty overlaid plywood to
the North American market. Olympic Panel is our primary
competitor and has a similar manufacturing and marketing
approach to our business. Over the years, opportunistic,
smaller-size producers have attempted to make inroads into this
market but have succeeded only to a very limited extent. We
believe that the current competition encountered from cheaper,
non-overlaid concrete-forming plywood will gradually erode as
end-users become educated about the benefits and the installed
cost-effectiveness of an initially more costly product line. Research and Development; Intellectual Property We focus our research and development efforts on
improving manufacturing efficiencies and developing new or
improved products designed to expand the offering of our
AinsworthEngineered® OSB and specialty plywood
products including our Pourform® brands of concrete
forming products. We also actively work with our customers to
develop customized engineered wood products using the modern,
versatile manufacturing equipment in place at our 100 Mile
House, Grande Prairie and Savona facilities. For instance, we
often test engineered strand wood products with enhanced
structural properties for certain North American customers that
may lead to new market opportunities by providing cost effective
alternatives to products offered by our competitors. Beyond our
immediate focus on our current customers needs, we are also
working to enhance strategic alliances with industry and
educational facilities to foster the development of longer-term
opportunities. We own several trademarks, trade names and
patents in connection with our OSB and specialty plywood
products. In connection with our acquisition of the
Minnesota OSB facilities, we acquired certain intellectual
property rights to the OSB-related technology owned by Potlatch.
We intend to apply this technology, together with our existing
intellectual property, to the production of value-added OSB
products across all of our facilities. We also intend to
continue research and development efforts commenced by Potlatch prior to our
acquisition of the Minnesota OSB facilities, to the extent that
we feel that such efforts will improve our production process or
expand our offering of meaningful value-added products. Legal Proceedings From time to time, we are involved in legal proceedings relating to claims
arising out of our operations in the ordinary course of business. We do not
believe there are any material proceedings pending or threatened against us or
any of our properties. C. Organizational Structure The Companys business and property interests are held either directly or
through wholly owned subsidiaries. D. Property, plant and equipment Overview We own and operate three modern,
strategically located Canadian OSB manufacturing facilities, and
we maintain a 50% ownership interest in a fourth Canadian
facility, the High Level OSB facility. We also own
and operate three OSB manufacturing facilities located in
northern Minnesota, as described more fully above. The company also owns a specialty plywood
plant at Savona, British Columbia, and a veneer plant in Lillooet, British
Columbia. 18




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Facilities Within the last 10 years we have been
involved in the construction of three OSB facilities in western
Canada, including 100 Mile House in British Columbia (completed
in 1994), Grande Prairie in Alberta (completed in 1995) and High
Level in Alberta (completed in 2000). We also operate a
specialty overlaid plywood mill in Savona, British Columbia and an
associated veneer plant in Lillooet, British Columbia. In 2004 we
acquired the Barwick and Minnesota OSB facilities. Our facilities represent
total annual capacity
of approximately 3,355 mmsf including the Barwick and Minnesota OSB
facilities and 155 mmsf of specialty overlaid plywood. We
have some of the most modern, productive manufacturing
facilities in North America. We believe our modern facilities
will require only modest maintenance capital expenditures for
the foreseeable future. In fiscal 2004, we had capital
expenditures of approximately $18 million to maintain
current operations. AnnualProductionCapacityOriented Strand Board (mmsf)100 Mile House, British Columbia
    
    
    425Grande Prairie, Alberta
    
    
    670Barwick, Ontario
    
    
    480High Level, Alberta (50%-owned by us)(1)
    
    
    430Bemidji
    
    
    535Cook
    
    
    440Grand Rapids
    
    
    375Total OSB production capacity
    
    
    3,355Specialty Overlaid Plywood (mmsf)Savona, British Columbia (Plywood)
    
    
    155 
  (1)
    This facility is in its ramp-up phase. Its design
    capacity is 860 mmsf per year and 50% of the production is ours.
    The mill is currently running at approximately 80% of design
    capacity. Oriented
Strand Board Canadian OSB Facilities We jointly own the OSB facility at High Level,
Alberta. This facility, which is designed to be the largest OSB
facility in the world at 860 mmsf per year design capacity,
is owned by the co-owners in equal one-half shares. The plant
site and log yard occupy approximately 643 acres of lands owned
by the co-owners and is directly serviced by rail. The High
Level OSB facility is operated for the co-owners by Footner
Forest Products Ltd. Footner is also jointly-owned in equal
shares by us and the co-owner. Footner is a service company that
operates the plant as the agent for the co-owners and not for
its own account. All of the costs incurred by Footner in so
doing are reimbursed by the co-owners and the co-owners take
away their respective one-half shares of production from the
plant for sale for their own account. We and the co-owner have each invested approximately
$145 million in the capital assets to construct the
facility. We believe the High Level OSB facility will be one of
the worlds lowest-cost producers of commodity sheathing
OSB once full production is achieved. At full capacity the plant
will consume about 1.3 million m3 of fiber annually. By
agreement between the co-owners, the plant primarily produces
commodity sheathing OSB for the North American market. High
Level utilizes modern technology with a 12-foot wide forming
line and continuous press. High Level has low-cost timber
allocations granted by the government of Alberta and long-term
volume supply agreements that together provide approximately 92%
of its timber needs at full capacity. This timber is secured
through 2016 at very competitive stumpage rates. The facility,
which commenced operations in October 2000, is now operating at
approximately 80% of full design capacity and continues to
ramp-up to design capacity. High Level contributed approximately
327 mmsf to our total OSB sales volume for the year ended
December 31, 2004, and we expect our share of production will
be increased to 430 mmsf per year once the facility is
operating at design capacity. For more details regarding the
co-ownership arrangements for the High Level plant, see
Co-Ownership Arrangements for High Level. In 2002, Footner, on behalf of the owners of High
Level, entered into a Forest Management Agreement with the
Province of Alberta and Tolko Industries Ltd. which provides
High Level with a long-term agreement to establish, grow,
harvest and remove all deciduous timber on a sustained yield
basis within the area covered by the FMA. Our OSB facility at Grande Prairie, Alberta,
which was completed in December 1995, is the second-largest
capacity single-line OSB facility (after the High Level OSB
facility) in the world. We originally built the Grande Prairie
facility with a design capacity of 540 mmsf per year and
currently operate the facility at approximately 670 mmsf per
year, or 24% above original design capacity. The operation
occupies approximately 160 acres of land owned by us and is
serviced by rail. The facility uses a 12-foot wide forming line
and press that provides the flexibility to produce, on a
cost-efficient basis, a variety of panel dimensions and grades
to suit both North American and Japanese markets. At full
capacity, the facility will consume approximately
1,000,000 m3 of fiber annually. Grande Prairies
low-cost position is supported by an abundant low-cost fiber
supply, economies of scale and superior up-time and on-grade
performance. In 2002, we invested approximately $9 million
in Grande Prairie to increase this facilitys productive
capacity and reduce production costs. Our OSB facility at 100 Mile House, British
Columbia was completed in August 1994. We originally built
100 Mile House with a design capacity of 360 mmsf per
year and currently operate the facility at approximately
425 mmsf per year, or 18% above original design capacity.
At full capacity, the facility consumes approximately
638,000 m3 of fiber annually. The operation occupies
approximately 57 acres of land owned by us and is directly
serviced by rail. This facility is our principal source of
value-added OSB products for both our North American and
Japanese customers. The
facilitys proximity to the port of Vancouver provides a
significant competitive advantage on shipping costs and delivery
time to the growing Japanese market, where we are the market
leader. This facility has the same product quality
certifications as our Grande Prairie facility. The 100 Mile
House facility was the first OSB facility to use a nine-foot
wide forming line and press that provides significant efficiency
advantages over the more traditional eight-foot wide press and
allows us to profitably serve the Japanese market where
three-foot board is the standard. In 2000, we were the first OSB
producer to install an inline panel stress rating machine to
meet quality assurance specifications for Japans premium
market. The 100 Mile House facility is certified by the
APA, the Engineered Wood Association, and its products meet all
applicable North American and Japanese Agricultural Standards
and building code specifications. Our 100 Mile House and Grande Prairie
facilities were designed to economically produce three-foot wide
panels used in Japanese construction. For example, Grande
Prairie is one of the few plants in the world that utilizes a
12-foot wide forming line and press, giving it the flexibility to efficiently produce either three-foot wide
panels for the Japanese market or four-foot wide panels for the
North American market. We
believe that our ability to effectively compete in Japan is a
result of:  
    our press sizes, which can economically produce
    three-foot wide panels;
    our proximity to western export terminals;
    the high quality of our products; and
    our experienced Japanese sales force. The construction of the Barwick facility was
completed in the second quarter of 1997 for a cost of
approximately US$123 million. It occupies approximately 238
acres of land owned by us. The facility has an 8-foot x 24-foot
x 14-opening Seimpelkamp press and forming line. It was built
with a design capacity of 375 mmsf per year and currently
operates at approximately 470 mmsf per year, or
approximately 25% above original design capacity. The facility
produced approximately 432 mmsf and 416 mmsf in 2003 and
2002, respectively. We believe that we will be able to improve
the facilitys efficiency and production to increase its
capacity to 500 mmsf per year by the end of 2006.
Approximately US$9 million in capital has been invested in
the Barwick facility since construction was completed, including
costs associated with the addition of a third strander in April
2002. Maintenance and environmental capital expenditures
relating to the Barwick facility have averaged less than
US$0.6 million per year over the past five years, with
total capital expenditures averaging approximately
US$1.5 million per year. The Barwick facility has demonstrated a strong
ability to produce high-quality, value-added OSB products. The
Barwick facility produces four types of OSB: commodity
sheathing, rimboard, premium floor and roof underlayment, and
webstock. The Barwick facility commenced production of commodity
sheathing in 1997, rimboard in 2000, premium underlayment in
2001 and webstock in 2003. Value-added products typically achieve sales price
premiums and exhibit a more stable price pattern, as compared to
commodity sheathing panels. We expect to increase the production
of value-added OSB manufactured at the Barwick facility from 17%
of sales volume in 2003 to 40% by 2006. The Barwick facility has a reputation in its
existing markets for producing high quality products. According
to an independent benchmarking study of 19 North American
OSB mills 2002 performance, the Barwick
facilitys level of on-grade product quality exceeded or
equaled all but four OSB facilities. All of the products
produced at the Barwick facility are certified by the APA-The
Engineered Wood Association and meet all applicable North
American building code specifications. Minnesota OSB Facilities The Bemidji facility was completed and commenced
production in 1981. A second OSB line was added in 1989, an
upgrade which approximately doubled the manufacturing capacity
of the facility, while also lowering per unit manufacturing
costs. The Bemidji facilitys two production lines had a
combined annual production capacity of 535 mmsf, as of
December 31, 2003. Production in the fiscal year ended
December 31, 2003 totaled 529 mmsf, of which approximately
80% was commodity products and approximately 20% was value-added
and over-sized products. Production for the period from completion of
the acquisition to December 31, 2004 was 153 mmsf. Adjacent to the Bemidji facility is a
12 megawatt cogeneration facility, which we are also acquiring
as part of our acquisition of the Minnesota OSB facilities. The Cook facility, a sister facility to the
Bemidji facility, was completed in 1983, and commenced
production in 1983. In January 2001, Potlatch completed a
modernization and expansion of the Cook facility, which resulted
in an increase in the annual production capacity of its single
production line from 250 mmsf to its December 31, 2003
production capacity of 440 mmsf, while also lowering per
unit manufacturing costs. Production in the fiscal year ended
December 31, 2003 totaled 436 mmsf, nearly all of
which was commodity OSB. Production for the period from completion of the
acquisition to December 31, 2004 was 119 mmsf. The Grand Rapids facility commenced OSB
production in 1985. It was acquired by Potlatch from Blandin
Paper in 1990. The Grand Rapids facility operates a single
forming line that had an annual production capacity of
375 mmsf, as of December 31, 2003. Production in the
fiscal year ended December 31, 2003 totaled 372 mmsf,
comprised of approximately 40% of commodity products and
approximately 60% of value-added and over-sized products. Production for the period from completion of the
acquisition to December 31, 2004 was 95 mmsf. The Minnesota OSB facilities have been well
maintained and are relatively modern facilities that we expect
we can operate with low ongoing maintenance expenditure
requirements. In addition, we have identified certain
improvements that we believe will result in enhancements to
existing production capacity at each of the facilities. We
expect to increase total annual production capacity at the
Minnesota OSB facilities from 1,350 mmsf as of
December 31, 2003, to 1,500 mmsf by the end of 2007. The majority of production at the Minnesota OSB
facilities consists of commodity grade structural and
underlayment OSB panel products. However, Potlatch has spent the
past several years developing and marketing a series of
specialty OSB products that are designed to meet specific
construction applications, such as providing a radiant heat
barrier, moisture resistance, insect resistance and fungal
resistance. These products can command a premium price relative to commodity panels. The value-added product
portfolio of the Minnesota OSB facilities includes the following
premium products:  
    OxTreme (a specialty flooring product);
    Luminox (a heat resistant product);
    OxTerminator (a termite resistant product);
    Stairtread (a specialty stairway product); and
    OxRimboard (a specialty flooring system product). We acquired certain intellectual property rights
to the OSB-related technology owned by Potlatch in connection
with our purchase of the Minnesota OSB facilities. We expect to
increase the production of value-added OSB products manufactured
at the Minnesota OSB facilities from 24% of sales volume in 2003
to 40% by 2007. 19




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Specialty Overlaid Plywood We own and operate a specialty overlaid plywood
mill in Savona, British Columbia, and an associated veneer plant
in Lillooet, British Columbia. Our Savona mill is the second largest producer of
specialty overlaid plywood panels in North America. Specialty
overlaid plywood is a high performance wood product used in
concrete forms, trailer decking and paint-grade signs and earns
premium prices over commodity plywood. The plant is located on a
64 acre site owned by us and is serviced by rail. Specialty
overlaid plywood products command premium prices that are less
volatile than conventional plywood sheathing and we have
typically been able to realize premium margins from our
specialty overlaid plywood product line. In addition, we have
continued to focus our efforts on developing new products in order to diversify our specialty overlaid plywood
product lines and to access broader international markets. Our Pourform® brands of concrete
forming products are recognized for their superior performance
characteristics and longevity. The primary
AinsworthEngineered® specialty overlaid plywood
product produced at Savona is a medium density overlay concrete
forming panel called Pourform-107®, which is used for
industrial concrete forming work, including high rise
construction, dams and highway infrastructure projects.
Pourform-107® is manufactured using a resin-impregnated
paper overlay that leaves an architectural finish on the
concrete, and enables the panel to be re-used multiple times.
The balance of Savonas production consists of high-density
overlaid panels used for concrete forming, decking material for
flat deck trailers, general purpose overlaid panels used for
paint grade sign material, panels designed specifically for use
in flat deck trailers, dry freight vans and intermodal container
systems, and commodity sheathing plywood. Savonas annual
capacity is 155 mmsf. Production of plywood at the Savona
mill for the fiscal year ended December 31, 2004 was
144 mmsf. All of the Savona
mills veneer requirements come from our veneer plant in
Lillooet. Our Lillooet veneer plant produces primarily high
quality veneer, principally for use in our Savona specialty
overlaid plywood mill. The Lillooet plant has the ability to
supply all of our Savona veneer needs; however we also sell
spruce, pine and fir veneer products to other plywood producers
and industrial veneer users depending on prevailing market
conditions. The Lillooet plant site occupies 89 acres and is
serviced directly by rail. The mill site is located on land
forming part of Lillooet Indian Reserve No. 1 and Cayoose
Creek Indian Reserve No. 1. The land is leased under a
long-term tenancy agreement with the Federal Department of
Indian Affairs and Northern Development. Under the terms of our
forest license for the Lillooet timber supply area, we are
obliged to operate the Lillooet veneer plant to process an
equivalent volume to the volume harvested under that license per
year. We invested approximately $21 million in our
Savona mill and Lillooet plant in the late 1990s to enhance our
product offerings and lower our operating costs. 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS A. Operating results Certain statements in our operating and financial review and prospects constitute
forward-looking statements that involve known business and economic risks,
uncertainties and other factors. These factors may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements and may affect the future results as set forth in
this discussion and analysis. Overview We are principally engaged in the production of
oriented strand board (OSB) and specialty plywood for sale
to markets in the United States, Canada, Asia and Europe. Our
operating results are affected by prevailing market prices for
our principal products, as well as our production volumes and
costs of production. Sales of our products are affected by
residential and commercial construction and repair and
remodeling industries in North America and Japan and, to a
lesser extent, the commercial construction industry in Europe.
These industries are highly cyclical and are affected by
numerous factors, including real estate prices, interest rates,
credit availability, tax policy, energy costs, weather
conditions, natural disasters and general economic conditions. In 2004, in connection with our growth strategy
within the engineered wood business sector, we acquired four OSB
plants located in the Central region of North America. The
May 19th acquisition of Voyageur Panel Limited and its OSB
facility in south western Ontario combined with the
September 22nd purchase of the three OSB manufacturing
facilities of Potlatch Corporation in Minnesota increased our
OSB designed production capacity to 3,355 million square
feet (mmsf), a capacity increase of over 100%. The acquisition
of these assets gives us increased diversification of our
customer base, plus enhanced access to the Central market region
of the United States. We also believe these acquisitions will
provide us with an opportunity to enhance our product diversity
and expand our sales of value added products. Excluding production from plants acquired in
2004, our preexisting manufacturing assets achieved higher
production volumes of both OSB and specialty plywood compared to
2003. OSB production volume was 1,389 mmsf in 2004 compared to
1,351 mmsf in 2003. The greatest OSB production increase
occurred at the High Level OSB facility, where 2004 OSB
production increased by 13.7% compared to 2003. Production at
the 100 Mile House and Grande Prairie OSB facilities was
marginally higher in 2004 compared to 2003. Meanwhile, specialty
plywood production volume increased to meet the higher demand
for concrete forming plywood products and commodity plywood
sheathing products. In 2004, overall plywood production was 144
mmsf, an increase of 21.3% compared to 2003. Veneer production
sold to third parties continues to diminish to immaterial levels
as veneer production is increasingly consumed internally in our
Savona plywood facility. There was no production of lumber in
2004 and the Abbotsford facility was permanently closed late in
the year. Our operating results are sensitive to
fluctuations in the exchange rate of the Canadian dollar to the
U.S. dollar, as prices for our products are denominated in U.S.
dollars. Offsetting this sensitivity are U.S. denominated
freight charges, some production expenses and all interest
charges. We have not hedged our exposure to fluctuations in the
U.S. dollar by entering into foreign exchange forward contracts. Our value-added OSB products, including our
export-standard OSB products, typically command premium prices,
generate greater margins than our commodity sheathing OSB 21




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##### 



products, and tend to mitigate, to some extent,
the impact of commodity cycles. As a result, these products
generally enhance our profitability through the economic cycle.
 Cost of products sold consists primarily of wood
fiber, resins, waxes, labor costs and energy. Wood fiber from
timber is the primary raw material used in our operations and is
the most significant cost of our manufacturing process. Fiber
supply self-sufficiency is a key competitive element, because
the direct control and management of fiber supplies partially
insulates an operator from fluctuations in the market price of
fiber. We supply our manufacturing operations primarily from
fiber resources held under long-term agreements with the
governments of British Columbia and Alberta, providing a secure
supply of fiber on a sustainable basis. Approximately 87% of the
fiber requirements for our Canadian OSB mills are supplied by
the provincial government quotas and allocations, and multi-year
fiber agreements with other forest products companies and
aboriginal groups. We purchase the balance of our fiber
requirements in the open market. All of our U.S. OSB facilities
purchase all of their fiber requirements on the open market. The year ended December 31, 2004 has seen a
significant increase in both the pricing and sales volume of OSB
products, which has increased our sales and improved our
operating earnings. The following table summarizes certain of our
results of operations: Year endedDecember 31,2002
    
    2003
    
    2004Sales:OSB
    
    $
    328.9
    
    
    $
    449.0
    
    
    
    799.4Specialty plywood, and other products
    
    
    101.4
    
    
    
    94.0
    
    
    
    110.5Total
    
    
    430.3
    
    
    
    543.0
    
    
    
    909.9Cost of products sold:OSB
    
    
    250.8
    
    
    
    241.6
    
    
    
    408.0Specialty plywood, and other products
    
    
    87.3
    
    
    
    81.3
    
    
    
    90.2Total
    
    
    338.2
    
    
    
    322.8
    
    
    
    498.2Selling and administration
    
    
    21.9
    
    
    
    18.2
    
    
    
    31.0Amortization of capital assets
    
    
    32.0
    
    
    
    33.0
    
    
    
    53.9Write-down of capital assets
    
    
    1.0
    
    
    
    13.7
    
    
    
    0.7Operating earnings
    
    
    37.2
    
    
    
    155.3
    
    
    
    326.1Finance expense
    
    
    62.5
    
    
    
    56.1
    
    
    
    150.2Interest and other (income) expense
    
    
    (2.9
    )
    
    
    0.5
    
    
    
    3.4Unrealized foreign exchange (gain) loss on
    long-term debt
    
    
    (4.3
    )
    
    
    (76.9
    )
    
    
    (73.8
    )Income (loss) before income tax
    
    
    (18.1
    )
    
    
    175.6
    
    
    
    246.3Income tax (recovery) expense
    
    
    (0.3
    )
    
    
    51.9
    
    
    
    71.2Net income (loss)
    
    $
    (17.9
    )
    
    $
    123.7
    
    
    $
    175.1 22




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##### 



Our geographic distribution of sales was as
follows: Year endedDecember 31,2002
    
    2003
    
    2004All ProductsUnited States
    
    
    69.4
    %
    
    
    75.4
    %
    
    
    84.0
    %Canada
    
    
    19.4
    
    
    
    17.5
    
    
    
    11.7Japan and other
    
    
    9.3
    
    
    
    5.5
    
    
    
    3.2Europe
    
    
    1.9
    
    
    
    1.6
    
    
    
    1.1100.0
    %
    
    
    100.0
    %
    
    
    100.0
    % Our Results of Operations  Fiscal Year ended December 31, 2004
    Compared to Fiscal Year ended December 31,
    2003 Net income for the year ended December 31,
2004 was $175.1 million compared to $123.7 million in
2003. The increase in net income was primarily attributable to a
$170.7 million or 110% increase in operating earnings less
a one time charge of $106.2 million that was associated
with our March 2004 debt refinancing. Sales Sales in fiscal 2004 were $909.9 million
compared to $543.0 million in fiscal 2003, representing an
increase of $366.9 million or 67.6%. OSB.Sales of OSB in
2004 were $799.4 million compared to $449.0 million in
2003, representing an increase of $350.4 million or 78.0%.
This increase was due to a 51.9% increase in shipment volumes,
from 1,341 mmsf in 2003 to 2,037 mmsf in fiscal 2004, and an
average price increase of 17.3%. The increased shipment volumes
were due primarily to the May 19th acquisition of Voyageur
Panel Limited and the September 22nd purchase of the OSB
manufacturing facilities of Potlatch Corporation. Benchmark OSB
market prices achieved an all-time average annual high in 2004. Specialty Overlaid Plywood and Other Products.Sales of specialty overlaid plywood
and other products were $110.5 million compared to $94.0
million in 2003, representing a increase of $16.5 million
or 17.6%. The increase in sales resulted from a 18.4% increase
in shipment volumes driven by higher market demand and a 5.4%
increase in average sales price. This higher average sales price
is largely attributable to a product mix comprised of an
increased proportion of relatively higher-priced commodity
plywood sheathing products. Cost
of Products Sold Cost of products sold in fiscal 2004 was
$498.2 million compared to $322.8 million in fiscal 2003,
representing an increase of $175.4 million or 54.3%. This
increase is due primarily to increased shipment volumes of OSB
and higher unit costs for wood fiber and resins. OSB.OSB cost of
products sold in fiscal 2004 was $408.0 million compared to
$241.6 million in fiscal 2003, representing an increase of
$166.4 million or 68.9%. This increase was due primarily to
a 58.7% increase in OSB shipment volumes attributable to the OSB
manufacturing assets acquired during 2004 and a 3.5% increase in
OSB shipment volumes generated at the OSB facilities that
existed prior to 2004. Additional unit cost increases are
attributable to higher prices for wood fiber and resins. 23




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##### 



Specialty Overlaid Plywood and Other Products.Specialty overlaid plywood and other
products cost of products sold in fiscal 2004 was
$90.2 million compared to $81.3 million in fiscal
2003, representing an increase of $8.9 million or 10.9%. This
increase was due primarily to an increased plywood shipment volume of
18.4%. Selling
and Administration Selling and administration expense in fiscal 2004
was $31.0 million compared to $18.2 million in fiscal
2003, representing an increase of $12.8 million or 70.3%. This
increase was due to ancillary costs associated with the 2004
acquisitions and refinancing initiatives, plus additional
executive and staff performance-based compensation associated
with the excellent business results achieved in 2004. Amortization
of Capital Assets Amortization of capital assets in fiscal 2004 was
$53.9 million compared to $33.0 million in fiscal
2003, representing an increase of $20.9 million or 63.3%.
Amortization expense increased primarily due to the inclusion of
the newly acquired OSB facilities in 2004. Finance
Expense Finance expense, including a one time charge of
$106.2 million associated with the March 2004 debt refinancing, for 2004
was $150.2 million (including $40.7 million of direct
interest expense) compared to $56.2 million (including
$51.2 million of direct interest expense) in 2003,
representing an increase of $94 million or 167.4%. We recorded a $73.8 million unrealized
foreign exchange gain on our U.S. dollar denominated long-term
debt for fiscal 2004 compared to an unrealized gain of
$76.9 million in 2003. The gain in 2004 reflects the appreciation of
the Canadian dollar relative to the U.S. dollar during the year. Interest and other expense for 2004 was
$3.4 million compared to income of $0.5 million in
2003. This decrease in other income (expense) was related
primarily to a $2.6 million charge relating to the employee
participation share plan. Income
Taxes Income tax expense in fiscal 2004 was
$71.2 million compared to an expense of $51.9 million
in fiscal 2003. Fiscal Year
ended December 31, 2003 Compared to Fiscal Year ended
December 31, 2002 Net income for the year ended December 31,
2003 was $123.7 million compared to a net loss of
$17.9 million in 2002. The increase in net income was
primarily attributable to a $118.1 million or 317.5%
increase in operating earnings and a $72.6 million increase
in the unrealized foreign exchange gain on U.S. dollar
denominated debt from $4.3 million in 2002 to
$76.9 million in 2003. Sales Sales in fiscal 2003 were $543.0 million
compared to $430.3 million in fiscal 2002, representing an
increase of $112.7 million or 26.2%. OSB.Sales of OSB in
2003 were $449.0 million compared to $328.9 million in
2002, representing an increase of $120.1 million or 36.5%.
This increase was due to an average price increase of 45.8% and
by a 3.3% increase in shipment volumes from 1,299 mmsf in fiscal
2002 to 1,341 mmsf in fiscal 2003. The increased unit
volume was due to capacity improvements at the 100 Mile House
and High Level facilities. Benchmark OSB prices increased
sharply beginning in mid-2003 and peaked at a record US$465 per
msf North Central ( 7/16) monthly average price in
October, well above the previous record of $351 per msf set in
July 1999. Specialty Overlaid Plywood and Other Products.Sales of specialty overlaid plywood
and other products were $94.0 million compared to
$101.4 million in 2002, representing a decrease of
$7.4 million or 7.3%. This decrease was due primarily to a
decrease in lumber and veneer sales only partially offset by an
increase in specialty overlaid plywood sales. Lumber revenue was
$17.0 million or 94.8% lower than 2002 because the
Abbotsford facility has been temporarily closed since December
2002 due to market conditions. Sales of specialty overlaid
plywood in 2003 were $71.8 million compared to
$61.1 million in 2002, representing an increase of
$10.7 million or 17.5%. Specialty plywood volume increased
29.2% from 92 mmsf in fiscal 2002 to 119 mmsf in fiscal 2003.
The increase in sales resulted from a 29.2% increase in shipment
volumes driven by higher market demand and a 9.1% decrease in
average sales price. This lower average sales price is largely
attributable to a product mix comprised of an increased
proportion of relatively lower-priced commodity plywood
sheathing products. Cost
of Products Sold Cost of products sold in fiscal 2003 was
$322.8 million compared to $338.2 million in fiscal
2002, representing a decrease of $15.4 million or 4.8%.
This decrease is primarily due to the closure of the Abbotsford
lumber facility throughout 2003 and was partially offset by
increased OSB and specialty plywood shipment volumes. OSB.OSB cost of
products sold in fiscal 2003 was $241.6 million compared to
$250.8 million in fiscal 2002, representing a decrease of
$9.2 million or 3.8%. This decrease was due primarily to
lower unit manufacturing costs resulting from higher production
levels. Specialty Overlaid Plywood and Other Products.Specialty overlaid plywood and other
products cost of goods sold in fiscal 2003 was
$81.3 million compared to $87.3 million in fiscal
2002, representing a decrease of $6.0 million or 7.4%. This
decrease was due primarily to a decrease in lumber shipments
only partially offset by an increase in specialty overlaid
plywood shipments. Selling
and Administration Selling and administration expense in fiscal 2003
was $18.2 million compared to $21.9 million in fiscal
2002, representing a decrease of $3.7 million or 16.9%.
This decrease was due to a number of management initiatives to
reduce administration costs. Amortization
of Capital Assets Amortization of capital assets in fiscal 2003 was
$33.0 million compared to $32.0 million in fiscal
2002, representing an increase of $1.0 million or 3.1%.
Amortization expense increased primarily due to increased
production volume at the High Level OSB facility. Increased
production volume has an impact on amortization as OSB
facilities are amortized using the units of production method. Finance
Expense Finance expense, excluding unrealized foreign
exchange gain on U.S. dollar denominated debt, for 2003 was
$56.1 million (including $51.2 million of direct
interest expense) compared to $62.5 million (including
$57.2 million of direct interest expense) in 2002,
representing a decrease of $6.4 million or 10.2%. This
decrease was primarily due to the year-over-year appreciation of
the Canadian dollar relative to the U.S. dollar and a
$0.1 million loss related to the redemption of some
outstanding 13.875% Notes and 12 1/2% Notes in December 2003. We recorded a $76.9 million unrealized
foreign exchange gain on our U.S. dollar denominated
long-term debt for fiscal 2003 compared to an unrealized gain of
$4.3 million in 2002, representing an increase of
$72.6 million. The gain in 2003 reflects the year-over-year
appreciation of the Canadian dollar relative to the
U.S. dollar. Interest and other expense for 2003 was
$0.5 million compared to income of $2.9 million in
2002. This decrease was related primarily to a foreign exchange
loss associated with our working capital. Write-down of capital assets for 2003 was
$13.7 million compared to $1.0 million in 2002. This
increase was primarily due to a $13.3 million write-down of
capital assets related to a planned 400 mmsf per year
expansion of the Grande Prairie OSB plant. The company has been
unsuccessful in its attempt to secure additional long-term
timber tenures. Without confirmation of a secured timber supply,
the company has decided not to pursue the expansion of the
Grande Prairie facility at this time. Income
Taxes Income tax expense in fiscal 2003 was
$51.9 million compared to an income tax recovery of
$0.3 million in fiscal 2002. This increase was due to the
substantial increase in pre-tax income. Outlook Strong homebuilding activity and low inventories
in key markets led to record high OSB prices in 2004 allowed us
to generate excellent operating earnings. We believe that OSB
pricing will remain strong in the near term as low mortgage
rates and improved economic growth will support a relatively
high number of North American housing starts and home
renovations. In 2005, we should also continue to benefit from
increased OSB production at our High Level OSB facility and from
having a full years production from the four OSB plants
acquired during 2004. Meanwhile, we will continue to maintain
our operational focus on productivity improvements, cost
reductions and increasing the volume of value-added
AinsworthEngineered® wood products.  24




---



##### 



Market Risk Market risk is the risk of loss arising from
adverse changes in market rates and prices, such as interest
rates and foreign currency exchange rates. Our existing senior
notes are not, and the new fixed rate notes will not be, subject
to interest rate fluctuations because the interest rate is fixed
for the term of the debt. The new floating rate notes will be
subject to interest rate fluctuation because the interest rate
is reset quarterly for the term of such notes. A significant portion of our products are sold in
U.S. dollars. The majority of our costs, other than interest
payable on the notes and production costs at our Minnesota OSB
facilities,
which are payable in U.S. dollars, will be payable in
Canadian dollars and, therefore, our financial results are
subject to foreign currency exchange rate fluctuations. A
significant appreciation in the value of the Canadian dollar in
terms of the U.S. dollar, while other factors remain
constant, will cause a relative decline in our revenues and our
cash flow will be diminished. We have not used derivative financial instruments
to mitigate the influence of market risk but we may do so in the
future. Significant Accounting Estimates and
Judgements Management has made certain judgments and
estimates that affect the reported amounts and other disclosures
in our financial statements. Valuation of Inventory.We closely monitor conditions that
could impact valuation of inventories or otherwise risk
impairment of our assets. Inventories of logs, OSB, specialty
plywood, veneer and lumber products are valued at the lower of
average cost and net realizable value. We base our estimate of
market value on sales orders that exist at balance sheet
reporting dates. Prices fluctuate over time and it is probable
that market values at the time of eventual sale will differ from
our estimates. Loss contingencies.Our estimates of our loss
contingencies for legal proceedings and product warranty claims
are based on various judgments and assumptions regarding the
potential resolution or disposition of the underlying claims and
associated costs. Valuation of Long-Lived Assets.On a quarterly basis, we review the
long-lived assets held and used by us (primarily property,
plant, and equipment, construction in progress and timber and
logging roads) for impairment. Assessing the appropriate
valuation of the affected assets requires us to make judgments,
assumptions and estimates. In general, write-downs for
impairment are recognized when the book values exceed our
estimate of the undiscounted future net cash flows associated
with the affected assets. During 2003, we recorded a
$13.3 million write-down of capital assets related to a
planned expansion of the Grande Prairie OSB plant. The planned
expansion involves the addition of a second manufacturing line
alongside the existing OSB plant to produce a further
400 mmsf per year of OSB and specialty products, and the
construction of a hardwood sawmill. The company has been
unsuccessful in its attempt to secure additional long-term
timber tenures. Without confirmation of a secured timber supply,
the company has decided not to pursue the expansion of the
Grande Prairie facility at this time. We reviewed the carrying
value of our other capital assets, including construction in
progress, at December 31, 2004, and believe that our
reported values are reasonable based on the current
circumstances. Amortization.Amortization of property, plant and
equipment is principally based on the units of production method
where the cost of equipment is amortized over the estimated
units that will be produced during a conservative estimate of
its useful life. Future Income Tax Assets.We record future income tax assets
including the potential tax benefit of operating loss
carry-forwards and future income tax liabilities. The amounts
that we record for these assets and liabilities are based upon
various judgments, assumptions and estimates, including
judgments regarding the tax rates that will be applicable to the
future income tax amounts, the likelihood that we will generate
sufficient taxable income or gain to utilize future income tax
assets. Due to the numerous variables associated with our
judgments, assumptions and estimates relating to the valuation
of our future income tax assets and liabilities, and the effects
of changes in circumstances affecting these valuations, both the
precision and reliability of the resulting estimates are subject
to uncertainties and, as additional information becomes known,
we may change our estimates. Goodwill.Goodwill
and other intangible assets that are deemed to have an
indefinite life are no longer amortized. However, these
indefinite life assets are tested for impairment on an annual
basis, and otherwise when indicators of impairment are
determined to exist, by applying a fair value based test. The
process of evaluating the potential impairment of goodwill is
highly subjective and requires significant judgments at many
points during the analysis. In testing for potential impairment, the estimated fair value of
the reporting unit, as determined based upon cash flow
forecasts, is compared to the book value of the reporting unit.
The key assumptions in estimating these cash flows include
future production volumes and pricing of commodity products and
future estimates of expenses to be incurred. Our assumptions
regarding pricing are based upon the average pricing over the
commodity cycle due to the inherent volatility of commodity
product pricing. These prices are estimated from information
gathered from industry research firms, research reports
published by investment analysts and other published forecasts.
Our estimates of expenses are based upon our long-range internal
planning models and our expectation that we will reduce product
costs that will offset inflationary impacts. 25




---



##### 



Due to the numerous variables associated with our
judgments and assumptions relating to the valuation of assets in
these circumstances, and the effects of changes in circumstances
affecting these valuations, both the precision and reliability
of the resulting estimates of the related impairment charges, if
any, are subject to substantial uncertainties and, as additional
information becomes known, we may change our estimates
significantly. Pension Plans.Most
of our Canadian employees and U.S. employees participate in
defined benefit pension plans sponsored by the company. We
account for the consequences of our sponsorship of these plans
in accordance with accounting principles generally accepted in
Canada and the U.S., which require us to make actuarial
assumptions that are used to calculate the related assets,
liabilities and expenses recorded in our financial statements.
While we believe we have a reasonable basis for these
assumptions, which include assumptions regarding long-term rates
of return on plan assets, life expectancies, rates of increase
in salary levels, rates at which future values should be
discounted to determine present values and other matters, the
amounts of our pension related assets, liabilities and expenses
recorded in our financial statements would differ if we used
other assumptions. See further discussion related to pension
plans below under the heading Defined Benefit Plans
and in Note 18 of the Notes to the consolidated financial
statements included elsewhere in this prospectus. U.S. GAAP Reconciliation Our consolidated financial statements have been prepared in accordance
with Canadian GAAP. To the extent applicable to our consolidated financial
statements, Canadian GAAP conforms in all material respects with U.S. GAAP,
except as described in note 24 to our consolidated financial statements
included elsewhere in this annual report. 26




---



##### 



B. Liquidity and Capital Resources In 2004, the Company generated cash flow from
operations after changes in non-cash working capital of
$364.4 million compared to $133.6 million in 2003. The
significant improvement in cash flow from operations is
explained by higher operating earnings in 2004 on account of the
significant increase in OSB shipments after the acquisitions
combined with stronger OSB prices relative to 2003. Non-cash
working capital decreased by $89.2 million in 2004 compared
to an increase of $12.7 million in 2003. The decrease in
non-cash working capital in 2004 is explained by a
$45.8 million increase in accounts payable and accrued
liabilities, a $37.7 million increase in income taxes
payable and a $14.2 million decrease in accounts receivable
partially offset by a $4.4 million increase in inventories
and a $4.2 million increase in prepaid expenses. The
increase in non-cash working capital in 2003 is explained by a
$6.7 million increase in accounts receivable, a
$6.6 million decrease in accounts payable and accrued
liabilities and a $0.8 million increase in prepaid expenses
partially offset by a $3.6 million increase in income taxes
payable. Net cash used for investing activities was
$849.5 million in 2004 compared to net cash used for
investing activities of $8.2 million in 2003. The increased
cash usage is primarily attributable to the purchase of Voyageur
Panel Limited ($296.3 million) and the acquisition of the
Potlatch OSB assets ($584.8 million). Capital expenditures
in 2004 were $18.0 million compared to $8.2 million in
2003. Our capital expenditures in 2004 were focused on several
small-scale maintenance of business and profit improvement
projects at all facilities. The majority of our 2003 capital
expenditures were on profit improvement projects at the Grande
Prairie and High Level OSB facilities. Cash flows from financing activities totaled
$503.6 million in 2004 compared to cash uses from financing
activities of $11.5 million in 2003. The increase in cash
flow from financing activities was due to proceeds from the
issue of Senior Secured Notes of $996.4 million partially
offset by $451.3 million in cash utilized for the
redemption of US$87.1 million of our 13.875% Senior Secured
Notes and US$182.2 million of our 12 1/2% Senior Secured
Notes. During the year, the Company issued a one time special
dividend to shareholders of $14.7 million. At December 31, 2004, we had
$212.6 million in cash and cash equivalents compared to
$194.1 million at December 31, 2003. Our cash flow is subject to general economic,
industry, financial, competitive, legislative, regulatory and
other factors, including economic conditions in North America,
that are beyond our control. Our business may not generate cash
flow in an amount sufficient to fund our liquidity needs, which
would severely curtail our ability to continue operations. If
our cash and operating cash flow is insufficient to meet our
operational expenses and debt service obligations we will have
to consider several options available to us including, raising
additional equity, sales of assets or seeking consent to incur
additional indebtedness. These options may not be available to
us at all or on satisfactory terms. C. Research and Development, Patents and Licenses We focus our research and development efforts on improving manufacturing
efficiencies and developing new or improved products designed to expand the
offering of our AinsworthEngineered® OSB and specialty plywood products
including our Pourform® brands of concrete forming products. We also actively
work with our customers to develop customized engineered wood products using
the modern, versatile manufacturing equipment in place at our 100 Mile House,
Grande Prairie and Savona facilities. For instance, we often test engineered
strand wood products with enhanced structural properties for certain North
American customers that may lead to new market opportunities by providing cost
effective alternatives to products offered by our competitors. Beyond our
immediate focus on our
current customers needs, we are also working to enhance strategic
alliances with industry and educational facilities to foster the development of
longer-term opportunities. We own several trademarks, trade names and patents
in connection with our OSB and specialty plywood products. As a result of our R&D effort, the CCMC (Canadian Construction Materials Center) report (13143-R)
was issued for 32mm
(11/4) 0.8E Durastrand Rimboard in January 2004; the City of Los Angeles
evaluation report (RR 25545) was issued in April 2004; and the ICC-ES (International Code Council -
Evaluation Service) evaluation report (ESR-1053) was issued on November 1, 2004 extending the use
of the
11/4 inch thick 0.8E Durastrand OSL (Oriented Strand Lumber) beyond rim board application to
beam, header, joist and rafter applications in the U.S.A. In
2004, as a result of our acquisition of the Minnesota OSB facilities,
we acquired a number
of patents, patent applications and licenses, including the patents
for Luminox, a wood-based composite panel with foil overlay, and
OxTerminator, a termite resistant and fungal resistant oriented strand
board. In
2005, we will continue to actively exploit our acquired intellectual
property and our
own proprietary technologies and knowledge in order to develop new
products, enhance product performance,
and gain production efficiencies. We will also continue to work with our customers to develop
customized engineered OSB and plywood products to meet their specific needs. 27




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##### 



Our
research and development efforts have resulted in several promising new
products that are undergoing field-testing, and we intend to release several
new products and brands in the future. In fiscal 2002, and 2003, 2004 we
spent, $210,830, $385,500, and $400,000 on research and development at the corporate level. D. Trend Information See information provided above in Item 5.A hereof. E. Off-Balance Sheet Arrangements We do not have any material off-balance sheet arrangements other than
letters of credit pledged for collateral in the amount of $6.6 million at
December 31, 2004. We do not believe that we have any off-balance sheet
arrangements that have, or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, results of
operation, liquidity or capital expenditures or resources that is material to
investors. F. Contractual Obligations The following table summarizes the timing of
payments for which we have contractual obligations as of
December 31, 2004: Payment due by PeriodContractual
    
    
    
    Less than
    
    
    
    AfterObligation(5)
    
    Total
    
    1 year
    
    2-3 years
    
    4-5 years
    
    5 years(in thousands of US$)7 1/4% Senior Notes(1)
    
    
    429,475
    
    
    
    19,938
    
    
    
    39,875
    
    
    
    39,875
    
    
    
    329,787Floating Rate Senior Notes(2)
    
    
    231,833
    
    
    
    9,888
    
    
    
    19,775
    
    
    
    19,775
    
    
    
    182,3956.750% Senior Notes(3)
    
    
    514,791
    
    
    
    21,600
    
    
    
    43,200
    
    
    
    43,200
    
    
    
    406,791Other Senior Notes(4)
    
    
    5,779
    
    
    
    571
    
    
    
    5,208
    
    
    
    
    
    
    
    Capital Lease Obligations
    
    
    228
    
    
    
    228
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations(6)
    
    
    11,040
    
    
    
    3,684
    
    
    
    5,140
    
    
    
    2,216
    
    
    
    Additional Acquisition Cost
    
    
    9,100
    
    
    
    9,100
    
    
    
    
    
    
    
    
    
    
    
    Purchase Commitments
    
    
    5,900
    
    
    
    3,900
    
    
    
    2,000
    
    
    
    
    
    
    
        (1)
    Under the indenture governing our outstanding 7
    1/4% senior notes, we are required to make interest payments in
    the amount of US$10.0 million each June 30 and
    December 30. Our 7 1/4% senior notes mature on
    October 1, 2012.(2)
    Under the indenture governing our outstanding
    floating rate senior notes, we are required to pay interest at a
    rate per annum, reset quarterly, equal to LIBOR plus 3.75%.
    Interest on our floating rate senior notes as payable each
    March 30, June 30, September 30 and
    December 30. For the purpose of the above table we have
    assumed a LIBOR of 1.9% in each period.(3)
    Under the indentures governing our outstanding
    6.750% senior notes, we are required to make interest payments
    in the amount of US$10.8 million each June 30 and
    December 30. Our 6.750% senior notes mature on
    March 15, 2014.(4)
    Under the indentures governing our other
    outstanding senior notes, we are required to make interest
    payments in the amount of US$0.2 million each
    January 15 and July 15 and in the amount of
    US$0.1 million each April 15 and October 15. All
    of our other senior notes, in the aggregate principal amount of
    US$4.4 million, mature on July 15, 2007.(5)
    The following are U.S. dollar equivalents
    using an exchange rate of US$0.8319 = $1.00, the exchange
    rate posted by the Bank of Canada on December 31, 2004.(6)
    We do not include operating lease obligations
    beyond five years in our financial statements. 28




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##### 



ITEM 6. Directors, Senior Management and Employees A. Directors and Senior Management The directors and executive officers of the Company are as indicated in
the following table. Each director holds office until the next annual general
meeting of shareholders of the Company or until his or her successor is elected
or appointed, or unless his or her office is earlier vacated under any of the
relevant provisions of the articles of the Company or the Company Act (British
Columbia). Executive Officers are appointed to serve at the pleasure of the
Board of Directors. Name
    
    Age
    
    TitleBrian E. Ainsworth
    
    
    62
    
    
    Chairman, Chief Executive Officer and Director since May 1993D. Allen Ainsworth
    
    
    63
    
    
    President and Director since May 1993Catherine E. Ainsworth
    
    
    46
    
    
    Chief Operating Officer, Secretary since November 2001 and Director since
May 1993Robert Allen
    
    
    47
    
    
    Chief Financial Officer since November 2003David Ainsworth
    
    
    84
    
    
    Director since May 1993 and co-founder of AinsworthSusan Ainsworth
    
    
    83
    
    
    Director since May 1993 and co-founder of AinsworthD. Michael Ainsworth
    
    
    42
    
    
    Executive Vice-President, since May 2002Kevin Ainsworth
    
    
    39
    
    
    Senior Vice-President, B.C. Timberlands and Solid Wood GroupDouglas Ainsworth
    
    
    40
    
    
    Senior Vice-President, MarketingK. Gordon Green(1)(2)
    
    
    70
    
    
    Director since May 1993. Until October 1993 he was a Vice President and
Director, RBC Dominion Securities IncMorley Koffman(2)
    
    
    75
    
    
    Director since May 1993. He is a lawyer with the law firm Koffman KalefW. Gordon Lancaster(1)(2)
    
    
    61
    
    
    Director since May 1993. He is Chief Financial Officer of Ivanhoe Energy IncRon B. Anderson (1)(2)
    
    
    52
    
    
    Director since May 12, 2003. He is President of North Point Capital Corp
    (1)
    
    Member of the Audit Committee and the Compensation Committee(2)
    
    Member of the Corporate Governance Committee Brian E.
Ainsworthhas served as Chairman
of our Board of Directors and Chief Executive Officer since May
1993. Mr. Ainsworth previously managed the woodlands
operations of Ainsworth Lumber Company, Ainsworths
predecessor corporation, for more than 30 years. D. Allen
Ainsworthhas served as our
President since May 1993. He has also been a Director since May
1993. Mr. Ainsworth served as our Chief Operating Officer
until November 2001. Mr. Ainsworth previously managed the
manufacturing and sales operations of Ainsworth Lumber Company
for more than 30 years. Catherine E.
Ainsworthhas served as our Chief
Operating Officer since November 2001, and has served as a
Director and our Secretary since May 1993. Previously,
Ms. Ainsworth served as our Chief Financial Officer from
May 1993 to November 2001. Robert Allenhas served as our Chief Financial Officer since November 2003.
Prior to joining us, Mr. Allen served as Chief Financial
Officer and Vice President of a startup, high technology
advertising company located in Vancouver. Previously,
Mr. Allen spent eight years working for Skeena Cellulose
Inc., a large integrated forest products company in British
Columbia, including his last position as Chief Financial Officer
and Vice President of finance from 2000 to 2002. Before joining
Skeena in 1994, Mr. Allen held a senior financial position
at Western Forest Products Ltd. for a three year period.
Mr. Allen also worked for the accounting firm of
Coopers & Lybrand from 1986 to 1991. Mr. Allen is
a graduate of the University of British Columbia and is a
Chartered Accountant. David
Ainsworthco-founded Ainsworth
Lumber Company in 1950. He has been a Director since May 1993.
Previously, Mr. Ainsworth served as our President. 29




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##### 



Susan
Ainsworthco-founded Ainsworth
Lumber Company in 1950. She has been a Director since May 1993. D. Michael
Ainsworthhas served as our
Executive Vice-President since May 2002. Previously, he served
as Vice-President, Marketing and Business Development since
November 1996. Mr. Ainsworth holds a Master of Science
degree in forest products marketing and a Bachelor of Science
degree in forestry, both of which he earned at the University of
British Columbia. Kevin
Ainsworthhas served as Senior
Vice-President, B.C. Timberlands and Specialty Plywood
since November 2002. He has held a number of investor relations
and woodlands management positions with Ainsworth since 1992.
Mr. Ainsworth holds a Master of Business Administration
degree and a Bachelor of Science degree in forestry, both of
which he earned at the University of British Columbia. Douglas I.
Ainsworthhas served as Senior
Vice-President, Marketing since November 2002. Previously, he
served as the General Manager, Business Development where he
managed the construction and operational start-up of the Grande
Prairie OSB facility. Mr. Ainsworth has held a number
of management positions with Ainsworth since 1989. Ron B.
Andersonhas been a director since
May 12, 2003. Currently he serves as President of North
Point Capital Corp., a Vancouver-based private merchant bank.
Previously, Mr. Anderson served as Senior Vice-President
Corporate Development of Parkside Developments LP, an affiliated
company involved in real estate development. Mr. Anderson
has over 20 years of experience in banking and corporate
acquisitions. He has a Bachelor of Commerce degree which he
earned at the University of British Columbia, and is a Certified
General Accountant. K. Gordon
Greenhas been a director since
May 1993. Mr. Green is a corporate director and an
independent financial consultant. Until October 1993 he was a
Vice-President and Director of RBC Dominion Securities
Inc., a Canadian financial services company. Mr. Green has
a Master of Business Administration degree, which he earned at
Harvard University, and a Bachelor of Science degree in
forestry, which he earned at the University of British Columbia. Morley
Koffmanhas been a director since
May 1993. Mr. Koffman is a lawyer with the Vancouver law
firm Koffman Kalef. He has been appointed Queens Counsel.
Mr. Koffman holds a Bachelor of Laws degree and a Bachelor
of Arts degree, both of which he earned at the University of
British Columbia. W. Gordon
Lancasterhas been a director
since May 1993. Mr. Lancaster, a Chartered Accountant,
currently serves as Chief Financial Officer of Ivanhoe Energy
Inc., a Vancouver-based international natural gas, oil and
energy company. Mr. Lancaster was with Deloitte &
Touche LLP for 20 years, including five years as
partner. He also has more than 20 years of experience in
senior financial positions serving as Chief Financial Officer of
First City Group, Vancouver International Airport Authority,
Lions Gate Entertainment Corp., Power Measurement Inc. and
Xantrex Technology Inc. Brian E. Ainsworth, D. Allen Ainsworth
and Catherine E. Ainsworth are the children of David
Ainsworth and Susan Ainsworth. D. Michael Ainsworth and
Douglas I. Ainsworth are the children of D. Allen
Ainsworth and Kevin Ainsworth is the son of Brian E.
Ainsworth. 30




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##### 



B. Compensation The following table provides a summary of
compensation for the fiscal year ended December 31, 2004
paid by us to our Chief Executive Officer and each of our four
other most highly compensated executive officers who were
serving as executive officers as at December 31, 2004, who
we refer to in this prospectus as our Named Executive Officers. Summary Compensation Table Long-term CompensationAwardsAnnual Compensation
    
    Securities
    
    Restricted
    
    PayoutsUnder
    
    Shares or
    
    Long-termOther Annual
    
    Options/SARs
    
    Restricted
    
    IncentiveSalary
    
    Bonus
    
    Compensation
    
    Granted
    
    Share Units
    
    Plan Payouts
    
    All OtherName and Principal Position
    
    Year
    
    ($)
    
    ($)
    
    ($)
    
    (#)
    
    ($)
    
    ($)
    
    CompensationBrian E. Ainsworth
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    $
    1,269,950
    (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chairman and Chief Executive OfficerD. Allen Ainsworth
    
    
    2004
    
    
    $
    412,500
    
    
    $
    793,766
    
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    PresidentCatherine E. Ainsworth
    
    
    2004
    
    
    $
    362,500
    
    
    $
    843,766
    
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief Operating Officer and SecretaryD. Michael Ainsworth
    
    
    2004
    
    
    $
    250,000
    
    
    $
    650,000
    
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Executive Vice-PresidentDouglas I. Ainsworth
    
    
    2004
    
    
    $
    250,000
    
    
    $
    650,000
    
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Senior Vice-President, Marketing 
  (1)
    The aggregate amount of all perquisites or other
    personal benefits paid to each of the executive officers named
    in the table in 2004 did not exceed 10% of his or her total base
    salary or compensation and bonus for the year.(2)
    Represents management fees in the amount of
    $500,000 plus a bonus of $737,466, and an automobile allowance
    of $32,484. See Employment Agreements. Compensation of Directors During the year ended December 31, 2004, our
non-employee, non-related directors were paid a retainer fee of
$20,000 per year and a meeting attendance fee of $2,000 per
directors meeting attended. In connection with
participation on committees of our board of directors,
non-employee directors were paid a meeting attendance fee of
$2,000 per committee meeting attended and non-employee directors
acting as chair of committees also earned $2,000 per year for
each committee chaired. A total of $210,000 was earned by our
non-employee directors as a group for this period. Our
non-employee directors are reimbursed for transportation and
other out-of-pocket expenses incurred for attendance at meetings
of the board of directors and committee meetings. Pension Benefits Retirement benefits for our executive officers
are provided under our pension plan for all salaried employees.
The pension plan benefits are based on career average earnings,
accrued at 1.5% of yearly maximum pensionable earnings, or YMPE,
plus 2% of gross earnings over YMPE. Benefits for all service
accrued to December 31, 1994 are based on this same
formula, but using average compensation over the previous
five-year period and the YMPE over the previous three-year period. Compensation covered by the plan is
the gross earnings as disclosed in the Summary Compensation
Table. The benefits are computed on a guaranteed five-year life
annuity, with no deduction for any other pension benefits or
other offset amount. 31




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##### 



We did not pay any pension benefits in the
financial year ended December 31, 2004 to the Named
Executive Officers. The actual credited years of service and
estimated annual benefits payable upon retirement at normal
retirement age (65 years) for the Named Executive Officers
are as follows: Credited Years
    
    Estimated
    
    Years of
    
    Estimatedof Service to
    
    Annual Benefit
    
    Credited Service
    
    Annual BenefitName
    
    12/31/2004
    
    at 12/31/2004
    
    to age 65
    
    at age 65Brian E. Ainsworth
    
    
    45
    
    
    $
    82,500
    
    
    
    48
    
    
    $
    96,200D. Allen Ainsworth
    
    
    45
    
    
    $
    82,500
    
    
    
    47
    
    
    $
    93,000Catherine E. Ainsworth
    
    
    25
    
    
    $
    45,100
    
    
    
    43
    
    
    $
    86,500D. Michael Ainsworth
    
    
    16
    
    
    $
    29,300
    
    
    
    39
    
    
    $
    78,800Douglas I. Ainsworth
    
    
    16
    
    
    $
    29,300
    
    
    
    41
    
    
    $
    81,700 C. Board Practices See Item 6A for information on the term of office of the Companys
directors and executive officers and the period served in such offices. Employment Agreements We do not have any employment or management contracts or termination
arrangements with any of the officers identified above in Item 6.A, other
members of our administrative, supervisory or management bodies, or our
directors, except as described below. On April 25, 1999, we entered into a management and consulting agreement
with 2468 Holdings Ltd., a company controlled by Brian Ainsworth, our Chairman
and Chief Executive Officer. The management and administrative services under
the agreement are to be performed by Brian Ainsworth or such other individual
as we and 2468 Holdings determine from time to time. In consideration for the
services, we must pay 2468 Holdings an annual fee, currently $500,000, plus
such annual bonus as may be determined by the compensation committee of our
board of directors. The agreement is for an indefinite term, subject to the
right of either party to terminate it in accordance with its provisions. 2468
Holdings may terminate the agreement on 30 days written notice to us. We may
terminate the agreement at any time for cause. We may also terminate the
agreement at any time without cause by payment of a cancellation payment equal
to two times the annual fee for the year in which the termination occurs plus
two times the last bonus payable prior to the termination. In any event, the
agreement is to terminate upon the death of Brian Ainsworth, unless 2468
Holdings is able to provide a replacement representative acceptable to us. Committees Of The Board Of Directors Our board of directors
have established an audit committee, compensation committee and
a corporate governance committee. Audit Committee The members of the audit committee are Ron B. Anderson, K. Gordon Green
and W. Gordon Lancaster. The Audit Committee is responsible for reviewing our
financial reporting obligations, approving our external audit plan and meeting
with our external auditors to review performances. This committee reviews
applicable accounting procedures and appropriate internal controls and
procedures. The audit committee meets with our external auditors at least once
each fiscal quarter, and reviews interim results and the annual financial
statements prior to their approval by the Board of Directors. It also
meets with the external auditors independently of management and is ultimately
responsible for retaining and remunerating the external auditors. Compensation Committee The members of the compensation committee are Ron B. Anderson, K. Gordon
Green and W. Gordon Lancaster. The compensation committee meets and makes
recommendations to the board of directors relating to the compensation for
senior executives and for directors fees. 32




---



##### 



Corporate Governance Committee The members of the corporate governance committee are Morley Koffman, Ron
B. Anderson, K. Gordon Green and W. Gordon Lancaster. The corporate governance
committee is responsible for making representations to the Board of Directors
with respect to developments in the area of corporate governance and the
practices of the Board of Directors. It is the responsibility of the Corporate
Governance Committee to review, interview and recommend new potential Board
members as well as review, interview and recommend new potential Board members
as well as reviewing on an annual basis the credentials of all nominees for
re-election to the Board. This Committee assesses the effectiveness of the
Board as a whole, the committees of the Board and the contributions of
individual directors. Orientation and education of new Board members is
conducted by meetings by any new Board member with the Chief Executive Officer,
the Chief Financial Officer and other long-standing Board members to assist any
new director in learning about our key assets and about the industry in which
we are involved. D. Employees We currently employ approximately
1,700 people. Our hourly employees in British Columbia are
covered under collective bargaining agreements with the
Industrial, Wood and Allied Workers of Canada, or IWA. In 2003,
we renewed our collective bargaining agreements with the IWA,
which had expired on June 30, 2003. The renewed agreements
have six year terms and expire on June 30, 2009, and cover
approximately 500 employees at our Lillooet, Savona and 100
Mile operations. Our hourly employees at the Barwick facility in
Ontario are covered under a collective bargaining agreement with
the Communications, Energy and Paper Workers Union of
Canada. This five year agreement covers approximately
120 employees and expires August 31, 2005. We also
have approximately 150 salaried employees in British
Columbia, engaged in sales, woodlands, manufacturing,
supervisory and administrative activities. We employ
approximately 200 people in our non-union Grande Prairie,
Alberta operations. In addition, Footner employs approximately
150 people at the jointly-owned non-union High Level OSB
facility. We also engage independent contractors in British
Columbia and Alberta, who provide logging, trucking and road
building services on a year-round basis. Hourly employees at the Grand Rapids facility
(approximately 130 individuals) are covered under a
collective bargaining agreement with the Paper,
Allied-Industrial, Chemical and Energy Workers International
Union. The current bargaining agreement is scheduled to expire
on October 14, 2005. E. Share Ownership Share Capital Structure We have an authorized capital consisting of 201,500,000 shares divided as
follows:  
    
    100,000,000 common shares without par value;  
    
    1,500,000 Class B Common Shares without par value, of which 350,000
are designated as Series 1 Class B Common Shares, 180,000 are designated
Series 2 Class B Common Shares and 187,500 are designated Series 3 Class
B Common Shares; and  
    
    100,000,000 preferred shares without par value, of which 300,000 are
designated as Series 1 Preferred Shares and 4,000,000 are designated as Series 2
Preferred Shares. Only the common shares carry voting rights, with each common share
carrying the right to one vote. As of December 31, 2004,
14,649,140 common shares
were issued and outstanding. 33




---



##### 



The following table sets out information as at
December 31, 2004 on ownership of our common shares by our
Named Executive Officers, directors and any person known by us
to beneficially own 5% or more of either class. No stock options
to purchase shares are outstanding. Common Sharesbeneficially ownedName and positions
    
    or controlled
    
    % of ClassBRIAN E. AINSWORTH
    
    
    2,507,186
    (1)
    
    
    17.11
    %Chairman, Chief Executive Officer and DirectorD. ALLEN AINSWORTH
    
    
    2,757,186
    (2)
    
    
    18.82
    %President and DirectorCATHERINE E. AINSWORTH
    
    
    61,013
    (3)
    
    
    0.42
    %Chief Operating Officer, Secretary and DirectorD. MICHAEL AINSWORTH
    
    
    
    
    
    
    Executive Vice PresidentDOUGLAS I. AINSWORTH
    
    
    150
    
    
    
    0.01
    %Senior Vice President, MarketingDAVID AINSWORTH
    
    
    3,129,188
    (4)
    
    
    21.36
    %DirectorSUSAN AINSWORTH
    
    
    13,636
    
    
    
    0.09
    %DirectorRON B. ANDERSON
    
    
    
    
    
    
    DirectorK. GORDON GREEN
    
    
    8,888
    
    
    
    0.06
    %DirectorMORLEY KOFFMAN
    
    
    7,888
    
    
    
    0.05
    %DirectorW. GORDON LANCASTER
    
    
    2,000
    
    
    
    0.01
    %DirectorGRANT FOREST PRODUCTS CORP.(5)
    
    
    4,849,600
    
    
    
    33.1
    % 
  (1)
    These shares are controlled through 2468 Holdings
    Ltd.(2)
    These shares are controlled through 5678
    Enterprises Ltd.(3)
    Catherine Ainsworth also owns 4% of the
    outstanding voting shares of 1234 Holdings Ltd., which owns
    3,108,188 common shares. The common shares owned by 1234
    Holdings Ltd. are to be voted by Catherine Ainsworth as that
    companys representative.(4)
    3,108,188 of these shares are beneficially owned
    through 1234 Holdings Ltd. and are to be voted by Catherine
    Ainsworth as that companys representative to proceedings
    of our shareholders.(5)
    Based on a report dated July 8, 2004
    generated using the Canadian Depository for Securities
    Ltd.s System for Electronic Disclosure by Insiders (SEDI). Stock Options We have separate stock option plans for employees
and non-employee directors. The plans provide that the board of
directors may grant options to purchase common shares on terms
that the directors may determine, within the limitations of the
plans and subject to the rules of applicable regulatory
authorities. The aggregate number of common shares reserved for
issuance under each plan is fixed at 500,000 common shares for
the employees plan and 75,000 common shares for the
directors plan. The exercise price for an option granted
under the plans will be determined by the board of directors but
may not be less than the closing price of our common shares on
the stock exchange on which our common shares principally traded
on the day immediately preceding the date of grant. Options
granted under the plans are not assignable, except by will or
the laws of descent and distribution. The options are
exercisable as to 20% of the optioned shares on the date of
grant and as to a further 20% of the optioned shares on each of
the first, second, third and fourth anniversaries following the
date of grant. The term of each option is five years, subject to
earlier termination in the event the optionee ceases to be a
director or employee by reason of death or termination of
directorship or employment. We do not provide any financial
assistance to optionees in order to facilitate the purchase of
common shares pursuant to the exercise of options granted under
the plans. There are currently no outstanding stock options
granted under the plans. 34




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##### 



Employee Participation Share Plan An aggregate of 1.5 million Class B
Common Shares are authorized for issuance of which 717,500 have
been designated for our employee participation share plan. The
plan is a significant element in compensation for our senior
executives and non-employee directors. It provides that the
board of directors may permit designated directors and senior
employees to acquire Class B Common Shares on the terms set
forth in the plan. The Class B Common Shares may be issued
in series under the plan and 1.5 million common shares have
been reserved for issuance to provide for the conversion of the
Class B Common Shares into common shares. The plan provides that each series of
Class B Common Shares will be exchanged automatically on a
date fixed by the board of directors for that number of common
shares that has value on the date of exchange equal to the
amount of any increase in the value from the date fixed by
resolution of the board of directors when authorizing the
issuance of the Class B Common Shares of an equal number of
common shares. In the event of termination of the employment and
offices of a holder of Class B Common Shares, the date of
exchange will be accelerated and the number of vested shares
held is subject to reduction. We can redeem Class B Common Shares issued pursuant to the
plan at any time upon payment of the amount paid up and any
declared but unpaid dividends. In 2001, the holders of the Class B Common
Shares issued on December 18, 1996 became entitled under
the plan to exchange their Class B Common Shares for common
shares. On January 16, 2003 we issued 3,162 common shares
at a deemed issue price of $4.99 per common share, in exchange
for the Class B common shares issued on December 18,
1996. In 2003, the holders of the Class B Common Shares
issued on August 11, 1998 became entitled under the plan to
exchange their Class B Common Shares for common shares. On
April 28, 2003 we issued 15,586 common shares at a deemed
issue price of $3.50 per common share, in exchange for
Class B common shares issued on August 11, 1998. We
then cancelled the Class B common shares issued pursuant to
the plan. On July 21st, we issued 600 common shares at a
deemed issue price of $3.80 per common share followed by the
issuance of 800 common shares on November 30th at a deemed
issue price of $6.47 per common share, in exchange for
Class B common shares issued on June 25, 1999. On March 29, 2004, we issued
95,116 common shares to the holders of 107,500 Class B
common shares issued on June 25, 1999 who became entitled,
under our Employee Participation Share Plan, to receive common
shares in exchange for those Class B common shares. As at
December 31, 2004, there were no issued and outstanding
Class B common shares. On June 29, 2004, the Company repurchased
10,924 common shares at a purchase price of $26.03 per share.
The excess of $0.2 million between the purchase price and
the weighted average cost was charged to retained earnings. 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders We have an authorized capital consisting of 201,500,000 shares divided as
follows:  
    
    100,000,000 common shares without par value;
    
    1,500,000 Class B Common Shares without par value, of which
350,000 are designated as Series 1 Class B Common Shares, 180,000 are
designated Series 2 Class B Common Shares and 187,500 are designated
Series 3 Class B Common Shares; and
    
    100,000,000 preferred shares without par value, of which
300,000 are designated as Series 1 Preferred Shares (all issued but
subsequently redeemed) and 4,000,000 are designated as Series 2
Preferred Shares. Only the common shares carry voting rights, with each common share
carrying the right to one vote. As of December 31, 2004,
14,649,140 common shares
were issued and outstanding. The shares held by our major shareholders do not
have different voting rights. As of March 30, 2005,
2.0% of our common shares
were held of record by 3 holders with addresses in the United States. To the knowledge of the directors or senior officers of the Company, no
person beneficially owns, directly or indirectly or exercises control or
direction over, common shares carrying more than 5% of the voting rights
attached to the Companys issued and outstanding common shares
as at March 31, 2005, except as follows: Percentage ofName
    
    Number of Shares
    
    Outstanding SharesGrant Forest Products Corp.
    
    
    4,849,600
    
    
    
    33.1
    %1234 Holdings Ltd.(1)
    
    
    3,108,188
    
    
    
    21.2
    %5678 Enterprises Ltd.(2)
    
    
    2,757,186
    
    
    
    18.82
    %2468 Holdings Ltd.(3)
    
    
    2,507,186
    
    
    
    17.11
    %
 35




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##### 



(1)
    
    96% of the outstanding voting shares of 1234 Holdings Ltd. are owned by
David Ainsworth and the remainder are owned by Catherine Ainsworth. The
Common Shares owned by 1234 Holdings Ltd. are voted by Catherine Ainsworth
as that companys representative in relation to proceedings of the
Companys shareholders.(2)
    
    98% of the outstanding voting shares of 5678 Enterprises Ltd. are owned
by D. Allen Ainsworth and the remainder are owned by his two sons.(3)
    
    95% of the outstanding voting shares of 2468 Holdings Ltd. are owned by
Brian E. Ainsworth and the remainder are owned by his son and a family
trust. B. Related Party Transactions The following table set outs information on indebtedness since January 1,
2004 to us of any person who served as an officer or director during the year
ended December 31, 2004, including their associates and companies controlled by
them. As at December 31, 2004, the aggregate indebtedness owed to us by these
persons was $490,236. Subsequent to year-end, the $490,236 due to the
Company was re-paid. Largest Amount
    
    Amount Outstanding as atInvolvement of Issuer or
    
    Outstanding During
    
    December 31,Name and Principal Position
    
    Subsidiary
    
    2004
    
    2004D. Allen Ainsworth(1)
    
    Lender
    
    $
    490,236
    
    
    $
    490,236
  (1)
    
    The indebtedness is of Snow Mountain Contracting Ltd., a company owned by
D. Allen Ainsworth. The advances bear interest at the same rate that we
receive on our bankers acceptances and are unsecured and repayable on
demand. During
the year ended December 31, 2004, we paid $120,000 in rental charges, for mobile
forestry and transportation equipment, to a company owned by persons related to
a director of the company. C. Interests of experts and counsel Information not required for annual report. 
 ITEM 8. FINANCIAL INFORMATION A. Consolidated Financial Statements and Other Financial Information See Item 18 36




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##### 



B. Significant Changes No significant changes have occurred since the date of the annual
financial statements provided herein. 
 ITEM 9. THE OFFER AND LISTING A. Offer and Listing Details Senior Notes There is currently no organized public market for the 7.25% Senior Notes, the Senior Floating Rate Notes, or the 6.75% Senior
Notes and the Company does not intend to apply for a listing of such securities on any securities exchange. The
7.25% Senior Notes and the Senior Floating Rate Notes were issued
under an Indenture dated September 22, 2004 between the Company and
the Bank of New York, as trustee. The 6.75% Senior Notes were issued under Indentures dated as of
March 3, 2004 and May 19, 2004 between the Company and the
Bank of New York, as trustee. Common Shares The Companys common shares are traded on The Toronto Stock Exchange under
the symbol ANS.TO. Using information from published sources the following
information shows the high and low trading values of the Companys common
shares for the periods indicated: Annual Share Price Information For the year ended
    
    High
    
    LowDecember 31, 2004
    
    $
    36.00
    
    
    $
    11.88December 31, 2003
    
    $
    12.66
    
    
    $
    3.00December 31, 2002
    
    $
    6.00
    
    
    $
    3.00December 31, 2001
    
    $
    6.25
    
    
    $
    3.10December 31, 2000
    
    $
    8.30
    
    
    $
    3.75
 Quarterly Share Price Information For the quarter ended
    
    High
    
    LowMarch 31, 2005
    
    $
    36.49
    
    
    $
    24.10December 31, 2004
    
    $
    34.00
    
    
    $
    21.98September 30, 2004
    
    $
    36.00
    
    
    $
    24.25June 30, 2004
    
    $
    27.51
    
    
    $
    27.50March 31, 2004
    
    $
    29.95
    
    
    $
    11.88December 31, 2003
    
    $
    12.66
    
    
    $
    6.20September 30, 2003
    
    $
    8.05
    
    
    $
    4.50June 30, 2003
    
    $
    4.40
    
    
    $
    3.00March 31,
2003
    
    $
    4.30
    
    
    $
    3.35
 Monthly Share Price Information For the month ended
    
    High
    
    LowFebruary 28, 2005
    
    $
    35.80
    
    
    $
    28.51January 31, 2005
    
    $
    32.00
    
    
    $
    24.10December 31, 2004
    
    $
    27.75
    
    
    $
    24.00November 30, 2004
    
    $
    28.50
    
    
    $
    21.98October 31, 2004
    
    $
    29.10
    
    
    $
    24.19September 30, 2004
    
    $
    34.00
    
    
    $
    26.11
 37




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##### 



B.
    
    Plan of DistributionInformation not required for annual report.C.
    
    MarketsThe Companys common shares are traded on The Toronto Stock Exchange under
the symbol ANS.TO.D.
    
    Selling ShareholdersInformation not required for annual report.E.
    
    DilutionInformation not required for annual report.F.
    
    Expenses of the issueInformation not required for annual report. 
 ITEM 10. ADDITIONAL INFORMATION  A.
    
    Share CapitalInformation not required for annual report.B.
    
    Memorandum and ArticlesInformation disclosed in Item 10.B of the annual report on Form 20-F for the
fiscal year ended December 31, 2001, as filed by the Company with the SEC on
May 17, 2002 is hereby incorporated by reference herein.C.
    
    Material contracts Contract No.
    
    Description
 38




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##### 



1.
    
    Indenture made as of the 3rd day of March 2004, among the Company and
The Bank of New York, as trustee .On March 3, 2004, we issued US$210,000,000 aggregate principal
amount of 6.750% Senior Notes due March 15, 2014 in a private
placement in the United States and outside the United States (the
Original Notes), under an indenture dated as of March 3, 2004,
among the Company and The Bank of New York, as trustee (the
Indenture). The Indenture restricts our ability and the ability of
certain of our subsidiaries to:
  a)
    
    incur additional indebtedness and issue equity;
make investments;b)
    
    declare or pay dividends or make other
distributions;c)
    
    incur payment restrictions that other parties
impose;d)
    
    conduct transactions with affiliates;e)
    
    make asset sales and use proceeds from permitted
asset sales;f)
    
    make capital expenditures;g)
    
    incur liens;h)
    
    consolidate or merge with or into, or transfer
all or substantially all of the Companys assets to another
person;  2.
    
    Exchange and Registration Rights Agreement made as of the 3rdday of March 2004, among
the Company and Goldman, Sachs & Co.Pursuant to an Exchange and Registration Rights Agreement dated March 3, 2004, among the Company
and Goldman, Sachs & Co., (the Registration Rights Agreement), the Company agreed that holders of
the Original Notes would be entitled to exchange the Original Notes for registered notes (the
Exchange Notes) with substantially identical terms. The Exchange Notes are governed by the
Indenture. The Registration Rights Agreement provided that the Company would: (i) file a
registration statement by June 1, 2004 regarding the exchange of the Original Notes for Exchange
Notes; (ii) use its reasonable best efforts to have the registration statement declared effective
by August 30, 2004; and (iii) complete the exchange offer within 45 days after the registration
statement is declared effective.
 3.
    
    Loan Agreement dated as of the 15th day of March 2004, among the Company
and GMAC Commercial Finance Corporation - CanadaOn March 15, 2004 we executed a credit agreement for a senior
secured revolving credit facility with a commercial lender. The new
credit facility is a five-year revolving credit facility permitting
maximum aggregate borrowings of $50.0 million, subject to a borrowing
base consisting of up to 85% of eligible accounts receivable plus up
to 65% of eligible raw material and finished goods inventory with
advances not to exceed 85% of the net orderly liquidation value of
the inventory.Up to $50.0 million is available to us under the new credit
facility, subject to the borrowing base, which may reduce the total
borrowings available to us. This credit facility is guaranteed by all
of our wholly-owned subsidiaries. This credit facility is secured by
all of our and any guarantors presently owned and hereafter acquired
accounts receivable and inventory. Liens and/or security interests on
our and any guarantors accounts receivable and inventory are
prohibited.This credit facility requires us to maintain at least $10.0 million
of excess availability of the borrowing base over actual borrowings
under the facility or a fixed charge coverage ratio of 1:1. In
addition, a borrowing base surplus of $5 million must be maintained
at all times.
 39




---



##### 



4.
    
    Share Purchase Agreement made as of the 14th day of April 2004, among
Boise Cascade Corporation, Abitibi Consolidated company of Canada, the
Northwestern Mutual Life Insurance Company, Allstate Insurance Company,
and Voyageur Panel Limited and Ainsworth Lumber Co. Ltd.On April 14, 2004, we entered into a definitive agreement to acquire
all of the outstanding shares of Voyageur Panel Limited, a private
Canadian company owned by Boise Cascade Corporation (47% owner),
Abitibi Consolidated Company of Canada (21% owner), the Northwestern
Mutual Life Insurance Company (17% owner) and Allstate Insurance
Company (15% owner). Our acquisition of Voyageur, which is expected
to close on May 19, 2004. In connection with the acquisition,
we will be required to pay the sellers a purchase price of
approximately US$159 million, and an additional amount of US$34
million for net working capital (subject to adjustment upon closing).
In addition, we may be required to pay up to US$10 million in
additional consideration on March 31, 2005 in the event that OSB
produced by the Voyageur facility is sold at an average price that
exceeds Cdn$275 per msf ( 3/8 basis) between the closing of the
acquisition and December 31, 2004.
  5.
    
    Indenture made as of the 19thday of May 2004, among the Company and The Bank of New
York, as trustee.On May 19, 2004, we issued US$110,000,000 aggregate principal amount of 6.750% Senior Notes due
March 15, 2014 in a private placement in the United States and outside the United States under an
indenture dated as of May 19, 2004, among the Company and the Bank of New York, as trustee (the
Indenture). The Indenture restricts our ability and the ability of certain of our subsidiaries
to:a)
    incur additional indebtedness and issue equity; make investments;b)
    declare or pay restrictions or make other distributions;c)
    incur payment restrictions that other parties impose;d)
    conduct transactions with affiliates;e)
    make asset sales and use proceeds from permitted asset sales;f)
    make capital expenditures;g)
    incur liens;h)
    consolidate or merge with or into, or transfer all or substantially all of
the Companys assets to another person;
  6.
    
    Exchange and Registration Rights Agreement made as of the 19thday of May 2004, among
the Company and Goldman, Sachs & Co.Pursuant to an Exchange and Registration Rights Agreement dated May 19, 2004, among the Company and
Goldman, Sachs & Co., (the Registration Rights Agreement), the Company agreed that holders of the
Original Notes would be entitled to exchange the Original Notes for registered notes (the Exchange
Notes) with substantially identical terms. The Exchange Notes are governed by the Indenture. The
Registration Rights Agreement provided that the Company would: (i) file a registration statement by
June 1, 2004 regarding the exchange of the Original Notes for Exchange Notes; (ii) use its
reasonable best efforts to have the registration statement declared
effective by August 30, 2004;
and (iii) complete the exchange offer within 45 days after the registration statement is declared
effective.
  7.
    
    Asset Purchase Agreement, dated as of the 25thday of August, 2004 between the Company
and Potlatch CorporationOn August 25th 2004, we entered into a definitive agreement to acquire all of the assets
and certain related net working capital used by Potlach Corporation (Potlatch) in the operation
of three OSB facilities that are located in the northern Minnesota towns of Bemidji, Cook and Grand
Rapids. The assets were acquired by Ainsworth Engineered (USA), LLC, our wholly owned subsidiary
on September 22, 2004. In connection with the acquisition, we paid Potlatch a purchase price of
approximately US$457.5 million (including certain adjustments upon closing). In connection with
the terms of our asset purchase agreement with Potlatch, Potlatch has agreed to provide us with
certain transitional services for a limited period of time.
  8.
    
    Indenture made as of the 22ndday of September, 2004, among the Company and The Bank of
New York, as trustee.On September 22, 2004, we issued US$275,000,000 aggregate principal amount of 7.25% Senior Notes
due 2012, and US$175,000,000 aggregate principal amount of Senior Floating Rate Notes due 2010 in a
private placement in the United States and outside the United States (together, the Original
Notes) under an Indenture dated as of September 22, 2004, among the Company and the Bank of New
York, as trustee (the Indenture). The Indenture restricts our ability and the ability of certain
of our subsidiaries to:i)
    incur additional indebtedness and issue equity; make investments;j)
    declare or pay restrictions or make other distributions;k)
    incur payment restrictions that other parties impose;l)
    conduct transactions with affiliates;m)
    make asset sales and use proceeds from permitted asset sales;n)
    make capital expenditures;o)
    incur liens;p)
    consolidate or merge with or into, or transfer all or substantially all of
the Companys assets to another person;
  9.
    
    Exchange and Registration Rights Agreement made as of the 22ndday of September 2004,
among the Company, Deutsche Bank Securities Inc., and Goldman, Sachs & Co.Pursuant to an Exchange and Registration Rights Agreement dated September 22, 2004, among the
Company, Deutsche Bank Securities Inc., and Goldman, Sachs & Co., (the Registration Rights
Agreement), the Company agreed that holders of the Original Notes would be entitled to exchange
the Original Notes for registered notes (the Exchange Notes) with substantially identical terms.
The Exchange Notes, when issued will be governed by the Indenture. The Registration Rights
Agreement provided that the Company would: (i) file a registration statement by November 22, 2004
regarding the exchange of the Original Notes for Exchange Notes; (ii) use its reasonable best
efforts to have the registration statement declared effective by February 21, 2005; and (iii)
complete the exchange offer within 45 days after the
registration statement is declared effective.
  D.
    
    Exchange Controls The Investment Canada Act generally prohibits implementation of a
reviewable investment by an individual, government or agency thereof,
corporation, partnership, trust or joint venture that is not a Canadian as
defined in the Investment Canada Act (a non-Canadian), unless after review,
the minister responsible for the Investment Canada Act is satisfied that the
investment is likely to be of net benefit to Canada. An investment in common
shares of the Company by a non-Canadian (other than a WTO investor as defined
in the Investment Canada Act) would be reviewable under the Investment Canada
Act if it was an investment to acquire direct control of the Company and the
value of the assets of the Company was $5,000,000 or more. With regard to an investment in common shares of the Company by a WTO
Investor, it would be reviewable under the Investment Canada Act if it was an
investment to acquire direct control of the Company and the value of the assets
of the Company equals or exceeds a specified amount (the Review Threshold),
which is revised every year. The Review Threshold is $250 million for
investments completed in 2005 and is indexed as of the first of January every
year. A non-Canadian, whether a WTO Investor or otherwise, would acquire control
of the Company for the purposes of the Investment Canada Act if he acquired a
majority of the common shares of the Company. The acquisition of less than a
majority but one-third or more of the common shares of the Company would be
presumed to be an acquisition of control of the Company unless it could be
established the Company was not controlled in fact by the acquirer through the
ownership of common shares. Certain transactions in relation to the common shares of the Company would
be exempt from the Investment Act, including:  
    
    an acquisition of common shares of the Company by a person in
the ordinary course of that persons business as a trader or dealer
in securities;  
    
    an acquisition of control of the Company in connection with the
realization of a security interest granted for a loan or other
financial assistance and not for any purpose related to the provision
of the Investment Canada Act; and  
    
    an acquisition of control of the Company by reason of an
amalgamation, merger, consolidation or corporate reorganization
following which the ultimate direct or indirect control in fact of
the Company, though the ownership of voting interests, remains
unchanged. The Companys ability to declare and pay dividends is significantly
restricted by the covenants in the indentures governing its Senior Notes and in the documentation relating to its credit facilities.  E.
    
    Taxation The following paragraphs set forth certain Canadian federal income tax
considerations in connection with the purchase, ownership and disposition of
the Senior Notes. The discussion is restricted to non-residents of
Canada who are residents of the United States and who hold such Senior
Notes as capital property. The tax considerations set forth below are based
upon the provisions of the Income Tax Act(Canada), and on the Convention
between Canada and the United States of America with Respect to Taxes on Income
and on Capital, as well as regulations, rulings, judicial decisions and
administrative and assessing practices now in
effect in Canada, all of 40




---



##### 



which are subject to change. This discussion
does not take into account provincial or territorial laws of Canada, or laws of
foreign jurisdictions. The Company is not required to withhold tax from interest paid by it on
Senior Notes to any non-resident of Canada with whom it is dealing at
arms length within the meaning of the Income Tax Act(Canada). Under such
laws and administrative assessing practices, no other tax on income (including
taxable capital gains) is payable in respect of the purchase, holding,
redemption or disposition of the Senior Notes or the receipt of
interest or any premium thereon by holders with whom the Company deals at arms
length and who are not residents, and who are not deemed to be residents, of
Canada in any taxation year in which they hold the Senior Notes, and
who do not use or hold, and are not deemed to use or hold, the Senior
Notes in connection with carrying on a business in Canada, except that in
certain circumstances holders who are non-resident insurers carrying on an
insurance business in Canada and elsewhere may be subject to such taxes. The above description of Canadian income tax considerations is of a
general nature only and should not be construed as advice to any particular
holder of Senior Notes. Holders should consult with their Canadian tax
advisers with respect to their particular tax position.  F.
    
    Dividends and Paying AgentsInformation not required for annual report.G.
    
    Statements by ExpertsInformation not required for annual report.H.
    
    Documents on Display Any documents referred to in this annual report shall be available for
review at the registered office of the Company located at 19th Floor, 885 West
Georgia Street, Vancouver, B.C., Canada V6C 3H4. The Company is subject to
certain of the informational requirements of the Securities Exchange Act of
1934, as amended (the Exchange Act), and in accordance therewith, files
reports and other information with the SEC. As a foreign private issuer, the
Company is exempt from the rules under the Exchange Act prescribing the
furnishing and content of proxy statements, and its officers, directors and
principal shareholders are exempt from the reporting and short-swing profit
recovery provisions contained in Section 16 of the Exchange Act. As a foreign
private issuer, the Company is not required to publish financial statements as
frequently or as promptly as United States companies. The Companys reports
and other information filed with the SEC may be inspected and copied at the
public reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SECs regional offices at
Northwestern Atrium Center, 500 West Madison Street, 14th Floor, Chicago,
Illinois 60661-2551. Copies of such material can also be obtained from the
principal office of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.  I.
    
    Subsidiary InformationThis disclosure item is not applicable. 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  A.
    
    Quantitative Information About Market Risk We do not invest in market risk sensitive instruments such as derivative
financial instruments or derivative commodity instruments. 41




---



##### 



B.
    
    Qualitative Information About Market Risk We are exposed to changes in foreign currency exchange and are subject to
price risk due to changes in the market value of OSB, lumber, veneer and
plywood, such changes could adversely affect our future sales and carrying
values relating to our finished goods. Foreign Currency Rate Sensitivity A
significant portion of our products are sold in U.S. dollars. The
majority of
our costs, other than interest payable on our senior notes and
production costs at our Minnesota OSB facilities, which are
payable in U.S. dollars, will be payable in Canadian dollars and, therefore,
our financial results are subject to foreign currency exchange rate
fluctuations. A significant appreciation in the value of the Canadian dollar in
terms of the U.S. dollar, while other factors remain constant, will cause a
relative decline in our revenues and our cash flow will be diminished. Given
that the value of the Canadian dollar was US$0.8319 at December 31,
2004, we estimate that had the value of the Canadian dollar increased by
US$0.01 to US$0.8419, the value of our US dollar denominated long-term debt as
at December 31, 2004 would have decreased by approximately
$11.0 million. We
also estimate that had the value of the Canadian dollar increased by US$0.01,
the annual interest payment amounts on our long-term debt as at December 31,
2004 would have decreased by approximately $0.7 million. We are not currently a party to any forward foreign currency exchange
contract, or other contract that could serve to hedge our exposure to
fluctuations in the U.S./Canada dollar exchange rate. Interest Rate Sensitivity Our
Senior Floating Rate Notes are subject in the near term to interest
rate fluctuations as interest is reset quarterly and payable at a rate of
LIBOR plus 3.75%. A 1% decrease in LIBOR would decrease our annual
interest payment amounts by US$1,750,000. Our
7.25% Senior Notes and 6.75% Senior Notes are not subject in the near term to interest
rate fluctuations because the interest rate is fixed for the term of the debt. Commodity Price Sensitivity The largest markets for OSB are commodity markets in which manufacturers
compete primarily on the basis of price. Our financial performance is dependent
on the selling prices of our OSB products, which have fluctuated significantly
in the past. The markets for these products are highly cyclical and
characterized by (1) periods of excess product supply due to industry capacity
additions, increased production and other factors, and (2) periods of
insufficient demand due to weak general economic conditions. Demand for our OSB
products is primarily driven by the residential and commercial construction and
repair and remodeling industries. These industries in turn are affected by real
estate prices, interest rates, credit availability, tax policy, energy costs,
weather conditions, natural disasters and general economic conditions, all of
which are beyond our control. In addition, an increased use of just in time
inventory management in the forest products distribution chain has led to
increased volatility due to uneven buying patterns and lower field inventories
held in consuming markets. The prices of commodity sheathing OSB and plywood
have historically been unpredictable. For example, during the past five years,
monthly average prices for North Central OSB have ranged from a low
of US$131;
per msf (7/16 inches) to a high of US$508; per msf (7/16 inches). We are unable
to predict market conditions and selling prices for our commodity sheathing OSB
products, which may decline from current levels. The current economic downturn
in North America has had an adverse affect on demand and prices for our
commodity sheathing OSB products. Continued weakness in the market could reduce
our revenues and profitability and could affect our ability to satisfy our
obligations under our indebtedness. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Information not required for annual report. 42




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##### 



PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES  A.
    
    Indebtedness There has been no material default in the payment of principal or interest
on our outstanding indebtedness since the date of filing of our last annual
report on Form 20-F.  B.
    
    Preferred Shares We currently have no preferred shares outstanding. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS  A.
    
    This disclosure item is not applicable.B.
    
    This disclosure item is not applicable.C.
    
    This disclosure item is not applicable.D.
    
    This disclosure item is not applicable.E.
    
    This disclosure item is not applicable.F.
    
    This disclosure item is not applicable. 
 ITEM 15. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Disclosure controls and procedures are defined by the Securities and
Exchange Commission as those controls and other procedures that are designed to
ensure that information that we are required to disclose in reports filed or
submitted by us under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms. Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, has
evaluated our disclosure controls and procedures as of the end of the period
covered by this report and determined that such disclosure controls and
procedures are effective. 43




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##### 



Internal Control Over Financial Reporting During
the twelve months ended December 31, 2004, we implemented
new financial systems and controls. We upgraded our sales and order
entry system, purchasing and maintenance management system, and our financial
management system. There were no major issues resulting from these
upgrades. Other than the foregoing, there was no change in
our internal controls over financial reporting that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting. 
 ITEM 16. AUDIT COMMITTEE FINANCIAL EXPERT; CODE OF ETHICS; ACCOUNTANT FEES AND SERVICES  A.
    
    Audit Committee Financial Expert The Board of Directors has determined that Mr. Gordon Lancaster, an
individual serving on the audit committee of the Companys Board of Directors,
is an audit committee financial expert, as that term is defined in Item
401(h)(2) of Regulation S-K under the Securities Exchange Act of 1934, as
amended. The Board of Directors has also determined that Mr. Lancaster is
independent.  B.
    
    Code of Ethics We have adopted a Code of Conduct that applies to all of our employees
including executives, senior officers and members of the board of directors.
We have attached a copy of the Code of Conduct as exhibit 11.1.  C.
    
    Principal Accountant Fees and Services Fees relating to the fiscal year ended December 31
    
    2003
    
    2004Audit Fees
    
    $
    175,000
    
    
    $
    397,500Audit-Related Fees
    
    
    29,000
    
    
    
    442,855Tax Fees
    
    
    21,000
    
    
    
    480,010Other Fees
    
    
    
    
    
    
    2,000Total
    
    $
    225,000
    
    
    $
    1,322,365
 The Audit Committee has adopted policies and procedures for the
pre-approval of audit related, tax services and other non-audit services
provided by the auditors. These policies and procedures are summarized below. The terms of engagement and scope of the annual audit of the financial
statements are agreed to by the Audit Committee in advance of the engagement of
the auditors in respect of the annual audit. The Audit Committee approves the
audit fees. The auditors are not permitted to provide non-audit services that would
compromise their independence or violate any laws or regulations that would
affect their appointment as auditors. They are eligible for selection to
provide non-audit services only to the extent that their skills and experience
make them a logical supplier of the services. The Audit Committee must
pre-approve the provision of all non-audit services by the auditors and will
consider regulatory guidelines in determining the scope of permitted services.
The Audit Committee has pre-approved non-audit services in respect of
individual assignments for permitted services that meet certain criteria.
Assignments outside these parameters must be specifically pre-approved by the
Audit Committee in advance of commissioning the work. In
2004, the Audit Committee of the Company approved all audit related,
tax services and other non-audit services performed by our auditors.  D.
    
    Exemptions From Listing Standards for Audit CommitteesThis disclosure item is not applicable.E.
    
    Purchases of Equity Securities by the Issuer and its AffiliatesThis disclosure item is not applicable. 44




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##### 



PART III 
 ITEM 17. FINANCIAL STATEMENTS We have elected to provide financial statements for the financial year
ended December 31, 2004 and the related information pursuant to Item 18. 
 ITEM 18. FINANCIAL STATEMENTS Our financial statements have been prepared on the basis of accounting
principles generally accepted in Canada and comply in all material respects
with accounting principles generally accepted in the United States, except as
set forth in Selected Financial Data and Note 24 to the Consolidated
Financial Statements. Page No.Consolidated Financial Statements of Ainsworth
    Lumber Co. Ltd.Audited Consolidated Financial StatementsReport of Independent Registered Chartered
    Accountants
    
    
    F-2Consolidated Balance Sheets as at
    December 31, 2003 and 2004
    
    
    F-3Consolidated Statements of Operations and
    Retained Earnings (Deficit) for the years ended
    December 31, 2002, 2003 and 2004
    
    
    F-4Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, 2003 and 2004
    
    
    F-5Notes to the Consolidated Financial Statements
    
    
    F-6Financial Statements of Voyageur Panel
    LimitedAudited Financial StatementsIndependent Auditors Report of KPMG LLP
    
    
    F-30Balance Sheets as at December 31, 2002 and
    2003
    
    
    F-31Statements of Earnings (Loss) for the years ended
    December 31, 2002 and 2003
    
    
    F-32Statements of Shareholders Equity for the
    years ended December 31, 2002 and 2003
    
    
    F-33Statements of Cash Flows for the years ended
    December 31, 2002 and 2003
    
    
    F-34Notes to Financial Statements
    
    
    F-35Unaudited Financial StatementsBalance Sheets as at March 31, 2003 and 2004
    
    
    F-45Statements of Earnings for the three months ended
    March 31, 2003 and 2004
    
    
    F-46Statements of Shareholders Equity for the
    three months ended March 31, 2003 and 2004
    
    
    F-47Statements of Cash Flows for the three months
    ended March 31, 2003 and 2004
    
    
    F-48Notes to the Unaudited Financial Statements
    
    
    F-49Financial Statements relating to the Minnesota
    OSB FacilitiesAudited Financial StatementsIndependent Auditors Report of KPMG LLP
    
    
    F-58Balance Sheets as at December 31, 2002 and
    2003
    
    
    F-59Statements of Operations for the years ended
    December 31, 2001, 2002 and 2003
    
    
    F-60Statements of Parents Equity for the years
    ended December 31, 2001, 2002 and 2003
    
    
    F-61Statements of Cash Flows for the years ended
    December 31, 2001, 2002 and 2003
    
    
    F-62Notes to Financial Statements
    
    
    F-63Unaudited Financial StatementsBalance Sheets as at June 30, 2003 and 2004
    
    
    F-72Statements of Operations for the six months ended
    June 30, 2003 and 2004
    
    
    F-73Statements of Cash Flows for the six months ended
    June 30, 2003 and 2004
    
    
    F-74Notes to the Unaudited Financial Statements
    
    
    F-75Unaudited Pro Forma Financial
    InformationPro Forma Consolidated Statement of Operations
    for the year ended December 31, 2004
    
    
    F-81Notes to Pro Forma Consolidated Statement of
    Operations
    
    
    F-82
 45




---



##### 



ITEM 19. EXHIBITS ExhibitNumber
    
    Title1.1
    
    Articles of Incorporation of Ainsworth Lumber Co. Ltd.1.2
    
    By-laws of Ainsworth Lumber Co. Ltd.1.3
    
    Certificate of Amalgamation of Ainsworth
    Engineered Corp.1.4
    
    Articles of Association of Ainsworth Engineered
    Corp.1.5
    
    Certificate of Formation of Ainsworth Engineered
    (USA), LLC1.6
    
    Certificate of Formation of Ainsworth Engineered
    (USA), LLC*2.1
    
    First Supplemental Indenture made
as of the 14th day of February 2001 among Ainsworth Lumber Co. Ltd., Steen River Forest Products
Ltd. (Steen River) and the Bank of New York, as trustee*2.2
    
    Security Agreement and Floating Charge dated February 12, 2001 between Steen River and the Trust Company of Bank of
Montreal, as trustee (the Security Trustee)*2.3
    
    Security Pledge Agreement dated
February 12, 2001 between Ainsworth Lumber Co. Ltd. and the Security Trustee*2.4
    
    Assignment of Agreement dated February 12, 2001 between Ainsworth Lumber Co. Ltd. and Steen River, as borrowers and the Security
Trustee**2.5
    
    Indenture dated December 20, 2001, among Ainsworth Lumber Co. Ltd., Steen River and the Bank of Nova Scotia Trust Company of New
York**2.6
    
    Exchange and Registration Rights Agreement dated December 20, 2001, among Ainsworth Lumber Co. Ltd., Steen River and Goldman, Sachs
& Co.2.7
    
    Indenture dated as of March 3, 2004 between
    Ainsworth Lumber Co. Ltd and The Bank of New York2.8
    
    Exchange and Registration Rights
Agreement, dated as of March 3, 2004, among Ainsworth Lumber Co. Ltd. and
Goldman, Sachs & Co.2.9
    
    First Supplemental Indenture, dated as of
    May 19, 2004 to the Indenture dated as of March 3, 20042.10
    
    Second Supplemental Indenture, dated as of
    September 22, 2004, to the Indenture dated as of
    March 3, 20042.11
    
    Indenture, dated as of May 19, 2014, between
    Ainsworth Lumber Co. Ltd. and The Bank of New York2.12
    
    Exchange and Registration Rights
Agreement, dates as of May 19, 2004, among Ainsworth Lumber Co. Ltd. and
Goldman, Sachs & Co.2.13
    
    First Supplemental Indenture, dated as of
    May 19, 2004, to the Indenture dated as of May 19, 20042.14
    
    Second Supplemental Indenture, dated as of
    September 22, 2004, to the Indenture dated as of
    May 19, 20042.15
    
    Indenture dated as of September 22, 2004
    among Ainsworth Lumber Co. Ltd., Ainsworth Engineered Corp. and the Bank of
    New York2.16
    
    First Supplemental Indenture dated as of
    September 22, 2004 to the Indenture dated as of
    September 22, 20042.17
    
    Exchange and Registration Rights Agreement, dated
    as of September 22, 2004, among Ainsworth Lumber Co. Ltd., Deutsche
    Bank Securities Inc. and Goldman, Sachs & Co.*4.1
    
    Loan Agreement dated February 12, 2001 between Ainsworth Lumber Co. Ltd. and Steen River, as borrowers, and HSBC Capital (Canada)
Inc. and B.C. Pacific Capital Corporation, as lenders.***4.2
    
    Memorandum of Agreement dated December 9, 1999, between Ainsworth Lumber Co. Ltd. and Grant Forest Products Corp.**4.3
    
    Promissory Note in favor of Ainsworth Lumber Co. Ltd. from Snow Mtn. Contracting Ltd. in the amount of Cdn$554,216
dated February 12, 2002**4.4
    
    Promissory Note in favor of Ainsworth Lumber Co. Ltd. from 2468 Holdings Ltd. in the amount of US$259,195 dated
February 12, 2002**4.5
    
    Management and Consulting Agreement between Ainsworth Lumber Co. Ltd. and 2468 Holding Ltd. dated April 25, 19994.6
    
    Pulpwood Agreement No. 16, dated April 26, 1990 and made between the Minister of Forests of British Columbia, on
behalf of Her Majesty the Queen in Right of the Province of British Columbia and Ainsworth Lumber Co. Ltd., as
amended.***4.7
    
    Forest Licence A18700 dated March 24, 1998 and made between The Regional Manager, on behalf of Her Majesty the Queen
in Right of the Province of British Columbia and Ainsworth Lumber Co. Ltd.**4.8
    
    Letter Agreement with the Province of Alberta, dated July 16, 1999, with respect to High Level Timber Allocation**4.9
    
    Deciduous Timber Allocation No. DTAF 510001 with respect to High Level***4.10
    
    Amended Deciduous Timber Allocation No. DTAC 910001 with respect to Grande Prairie**4.11
    
    Deciduous Timber Permit DTPG 910001 with respect to Grande Prairie*4.12
    
    Asset Purchase Agreement with West Fraser Mills Ltd. dated February 8, 20014.13
    
    Deciduous Timber Allocation No. DTAF 110001
    with respect to High Level4.14
    
    Deciduous Timber Allocation No. DTAF 110002
    with respect to High Level4.15
    
    Forest Management Agreement, dated June 25,
    2002, and made between Her Majesty the Queen in the Right of the
    Province of Alberta, Tolko Industries Ltd. and Footner Forest
    Products Ltd.±4.16
    
    Inter-Creditor Agreement dated December 20, 2001, among Ainsworth Lumber Co. Ltd., Steen River, the Trust Company of Bank of
Montreal and Computershare Trust Company of Canada±4.17
    
    Company Security Debenture dated December 20, 2001, between Ainsworth Lumber Co. Ltd. and Computershare Trust Company
of Canada±4.18
    
    Guarantor Security Debenture dated December 20, 2001, between Steen River Forest Products Ltd. and
Computershare Trust Company of Canada±4.19
    
    Securities Pledge Agreement dated December 20, 2001, between Ainsworth Lumber Co. Ltd. and Computershare Trust
Company of Canada±4.20
    
    Assignment of Memorandum of Agreement dated December 20, 2001, among Ainsworth Lumber Co. Ltd., Steen River and Computershare Trust
Company of Canada*4.21
    
    Assignment of Agreement dated February 12, 2001, as amended on December 20, 2001, among Ainsworth Lumber Co. Ltd., Steen River and
the Trust Company of the Bank of Montreal*4.22
    
    Security Agreement and Floating Charge dated
    February 12, 2001 between Steen River and the Trust Company
    of Bank of Montreal, as trustee (the Security
    Trustee)*4.23
    
    Security Pledge Agreement dated February 12,
    2001 between Ainsworth Lumber Co. Ltd. and the Security trustee4.24
    
    Loan Agreement dated March 15,
2004 between Ainsworth Lumber Co. Ltd. and GMAC Commercial Finance Corporation 
Canada, as amended on May 19, 2004.4.25
    
    Share Purchase Agreement dated
April 14, 2004, among Boise Cascade Corporation Abitibi Consolidated Company of
Canada, the Northwestern Mutual Life Insurance Company, Allstate Insurance Company, and Voyageur Panel Limited and
Ainsworth Lumber Co. Ltd.±±4.26
    
    Executive Employment Agreement between Ainsworth Lumber Co. Ltd. and James Logan dated December 1, 20018.1
    
    List of Material Subsidiaries11.1
    
    Ainsworth Code of Ethics31.1
    
    Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 46




---



##### 



ExhibitNumber
    
    Title32.1
    
    Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
   
    
    Incorporated by reference to Amendment No. 2 to the Registration
Statement on Form F-4 filed by the Registrant and Ainsworth
Lumber Inc. on October 29, 1997 (No. 333-7346).
    
    Incorporated by reference to Amendment No. 1 to the Registration Statement on
Form F-4 filed by the Registrant and Ainsworth Engineered Corp.
on July 15, 2004 (No. 333-116068).
    
    Incorporated by reference to the Registration
Statement on Form F-4 filed by the Registrant, Ainsworth
Engineered Corp. and Ainsworth Engineered (USA), LLC on
October 18, 2004 (No. 333-119812).*
    
    Incorporated by reference to the Registrants
Annual Report on Form 20-F for the fiscal year ended
December 31, 2000, filed with the Commission on June 8,
2001.**
    
    Incorporated by reference to the Registration Statement on Form F-4 filed
by the Registrant and Steen River Forest Products Ltd. on
February 19, 2002 (No. 333-83230).***
    
    Incorporated by reference to the Registrants
Annual Report on Form 20-F for the fiscal year ended
December 31, 1999, filed with the Commission on May 19,
2000.
    
    Incorporated by reference to the Registration
Statement on Form F-4, filed by the Registrant on June 2,
2004 (No. 333-116068).
    
    Incorporated by reference to the
Registrants Annual Report on Form 20-F for the fiscal year
ended December 31, 2003, filed with the Commission on
May 26, 2004.±
    
    Incorporated by reference to Amendment No. 1 to the Registration
Statement on Form F-4 filed by the Registrant and Steen
River Forest Products Ltd. on March 29, 2002
(No. 333-83230).±±
    
    Incorporated by reference to Amendment No. 2 to the Registration
Statement on Form F-4 filed by the Registrant and Steen
River Forest Products Ltd. on April 15, 2002
(No. 333-83230). 47




---



##### 



SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized. March 31,
2005AINSWORTH LUMBER CO. LTD.By:
    
    /s/ Robert AllenRobert AllenChief Financial Officer
 48




---



##### 



INDEX TO EXHIBITS ExhibitNumber
    
    Title1.1
    
    Articles of Incorporation of Ainsworth Lumber Co. Ltd.1.2
    
    By-laws of Ainsworth Lumber Co. Ltd.1.3
    
    Certificate of Amalgamation of Ainsworth
    Engineered Corp.1.4
    
    Articles of Association of Ainsworth Engineered
    Corp.1.5
    
    Certificate of Formation of Ainsworth Engineered
    (USA), LLC1.6
    
    Certificate of Formation of Ainsworth Engineered
    (USA), LLC*2.1
    
    First Supplemental Indenture made
as of the 14th day of February 2001 among Ainsworth Lumber Co. Ltd., Steen River Forest Products
Ltd. (Steen River) and the Bank of New York, as trustee*2.2
    
    Security Agreement and Floating Charge dated February 12, 2001 between Steen River and the Trust Company of Bank of
Montreal, as trustee (the Security Trustee)*2.3
    
    Security Pledge Agreement dated
February 12, 2001 between Ainsworth Lumber Co. Ltd. and the Security Trustee*2.4
    
    Assignment of Agreement dated February 12, 2001 between Ainsworth Lumber Co. Ltd. and Steen River, as borrowers and the Security
Trustee**2.5
    
    Indenture dated December 20, 2001, among Ainsworth Lumber Co. Ltd., Steen River and the Bank of Nova Scotia Trust Company of New
York**2.6
    
    Exchange and Registration Rights Agreement dated December 20, 2001, among Ainsworth Lumber Co. Ltd., Steen River and Goldman, Sachs
& Co.2.7
    
    Indenture dated as of March 3, 2004 between
    Ainsworth Lumber Co. Ltd and The Bank of New York2.8
    
    Exchange and Registration Rights
Agreement, dated as of March 3, 2004, among Ainsworth Lumber Co. Ltd. and
Goldman, Sachs & Co.2.9
    
    First Supplemental Indenture, dated as of
    May 19, 2004 to the Indenture dated as of March 3, 20042.10
    
    Second Supplemental Indenture, dated as of
    September 22, 2004, to the Indenture dated as of
    March 3, 20042.11
    
    Indenture, dated as of May 19, 2014, between
    Ainsworth Lumber Co. Ltd. and The Bank of New York2.12
    
    Exchange and Registration Rights
Agreement, dates as of May 19, 2004, among Ainsworth Lumber Co. Ltd. and
Goldman, Sachs & Co.2.13
    
    First Supplemental Indenture, dated as of
    May 19, 2004, to the Indenture dated as of May 19, 20042.14
    
    Second Supplemental Indenture, dated as of
    September 22, 2004, to the Indenture dated as of
    May 19, 20042.15
    
    Indenture dated as of September 22, 2004
    among Ainsworth Lumber Co. Ltd., Ainsworth Engineered Corp. and the Bank of
    New York2.16
    
    First Supplemental Indenture dated as of
    September 22, 2004 to the Indenture dated as of
    September 22, 20042.17
    
    Exchange and Registration Rights Agreement, dated
    as of September 22, 2004, among Ainsworth Lumber Co. Ltd., Deutsche
    Bank Securities Inc. and Goldman, Sachs & Co.*4.1
    
    Loan Agreement dated February 12, 2001 between Ainsworth Lumber Co. Ltd. and Steen River, as borrowers, and HSBC Capital (Canada)
Inc. and B.C. Pacific Capital Corporation, as lenders.***4.2
    
    Memorandum of Agreement dated December 9, 1999, between Ainsworth Lumber Co. Ltd. and Grant Forest Products Corp.**4.3
    
    Promissory Note in favor of Ainsworth Lumber Co. Ltd. from Snow Mtn. Contracting Ltd. in the amount of Cdn$554,216
dated February 12, 2002**4.4
    
    Promissory Note in favor of Ainsworth Lumber Co. Ltd. from 2468 Holdings Ltd. in the amount of US$259,195 dated
February 12, 2002**4.5
    
    Management and Consulting Agreement between Ainsworth Lumber Co. Ltd. and 2468 Holding Ltd. dated April 25, 19994.6
    
    Pulpwood Agreement No. 16, dated April 26, 1990 and made between the Minister of Forests of British Columbia, on
behalf of Her Majesty the Queen in Right of the Province of British Columbia and Ainsworth Lumber Co. Ltd., as
amended.***4.7
    
    Forest Licence A18700 dated March 24, 1998 and made between The Regional Manager, on behalf of Her Majesty the Queen
in Right of the Province of British Columbia and Ainsworth Lumber Co. Ltd.**4.8
    
    Letter Agreement with the Province of Alberta, dated July 16, 1999, with respect to High Level Timber Allocation**4.9
    
    Deciduous Timber Allocation No. DTAF 510001 with respect to High Level***4.10
    
    Amended Deciduous Timber Allocation No. DTAC 910001 with respect to Grande Prairie**4.11
    
    Deciduous Timber Permit DTPG 910001 with respect to Grande Prairie*4.12
    
    Asset Purchase Agreement with West Fraser Mills Ltd. dated February 8, 20014.13
    
    Deciduous Timber Allocation No. DTAF 110001
    with respect to High Level4.14
    
    Deciduous Timber Allocation No. DTAF 110002
    with respect to High Level4.15
    
    Forest Management Agreement, dated June 25,
    2002, and made between Her Majesty the Queen in the Right of the
    Province of Alberta, Tolko Industries Ltd. and Footner Forest
    Products Ltd.±4.16
    
    Inter-Creditor Agreement dated December 20, 2001, among Ainsworth Lumber Co. Ltd., Steen River, the Trust Company of Bank of
Montreal and Computershare Trust Company of Canada±4.17
    
    Company Security Debenture dated December 20, 2001, between Ainsworth Lumber Co. Ltd. and Computershare Trust Company
of Canada±4.18
    
    Guarantor Security Debenture dated December 20, 2001, between Steen River Forest Products Ltd. and
Computershare Trust Company of Canada±4.19
    
    Securities Pledge Agreement dated December 20, 2001, between Ainsworth Lumber Co. Ltd. and Computershare Trust
Company of Canada±4.20
    
    Assignment of Memorandum of Agreement dated December 20, 2001, among Ainsworth Lumber Co. Ltd., Steen River and Computershare Trust
Company of Canada*4.21
    
    Assignment of Agreement dated February 12, 2001, as amended on December 20, 2001, among Ainsworth Lumber Co. Ltd., Steen River and
the Trust Company of the Bank of Montreal*4.22
    
    Security Agreement and Floating Charge dated
    February 12, 2001 between Steen River and the Trust Company
    of Bank of Montreal, as trustee (the Security
    Trustee)*4.23
    
    Security Pledge Agreement dated February 12,
    2001 between Ainsworth Lumber Co. Ltd. and the Security trustee4.24
    
    Loan Agreement dated March 15,
2004 between Ainsworth Lumber Co. Ltd. and GMAC Commercial Finance Corporation 
Canada, as amended on May 19, 2004.4.25
    
    Share Purchase Agreement dated
April 14, 2004, among Boise Cascade Corporation Abitibi Consolidated Company of
Canada, the Northwestern Mutual Life Insurance Company, Allstate Insurance Company, and Voyageur Panel Limited and
Ainsworth Lumber Co. Ltd.±±4.26
    
    Executive Employment Agreement between Ainsworth Lumber Co. Ltd. and James Logan dated December 1, 20018.1
    
    List of Material Subsidiaries11.1
    
    Ainsworth Code of Ethics31.1
    
    Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 49




---



##### 



ExhibitNumber
    
    Title32.1
    
    Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
   
    
    Incorporated by reference to Amendment No. 2 to the Registration
Statement on Form F-4 filed by the Registrant and Ainsworth
Lumber Inc. on October 29, 1997 (No. 333-7346).
    
    Incorporated by reference to Amendment No. 1 to the Registration Statement on
Form F-4 filed by the Registrant and Ainsworth Engineered Corp.
on July 15, 2004 (No. 333-116068).
    
    Incorporated by reference to the Registration
Statement on Form F-4 filed by the Registrant, Ainsworth
Engineered Corp. and Ainsworth Engineered (USA), LLC on
October 18, 2004 (No. 333-119812).*
    
    Incorporated by reference to the Registrants
Annual Report on Form 20-F for the fiscal year ended
December 31, 2000, filed with the Commission on June 8,
2001.**
    
    Incorporated by reference to the Registration Statement on Form F-4 filed
by the Registrant and Steen River Forest Products Ltd. on
February 19, 2002 (No. 333-83230).***
    
    Incorporated by reference to the Registrants
Annual Report on Form 20-F for the fiscal year ended
December 31, 1999, filed with the Commission on May 19,
2000.
    
    Incorporated by reference to the Registration
Statement on Form F-4, filed by the Registrant on June 2,
2004 (No. 333-116068).
    
    Incorporated by reference to the
Registrants Annual Report on Form 20-F for the fiscal year
ended December 31, 2003, filed with the Commission on
May 26, 2004.±
    
    Incorporated by reference to Amendment No. 1 to the Registration
Statement on Form F-4 filed by the Registrant and Steen
River Forest Products Ltd. on March 29, 2002
(No. 333-83230).±±
    
    Incorporated by reference to Amendment No. 2 to the Registration
Statement on Form F-4 filed by the Registrant and Steen
River Forest Products Ltd. on April 15, 2002
(No. 333-83230). 50




---



##### 



Report of Independent Registered Chartered
Accountants

To the Shareholders of

Ainsworth Lumber Co. Ltd.


We have audited the consolidated balance sheets
of Ainsworth Lumber Co. Ltd. as at December 31, 2004 and
2003 and the consolidated statements of operations and retained
earnings and cash flows for each of the years in the three year
period ended December 31, 2004. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
Canadian generally accepted auditing standards and standards of
the Public Company Accounting Oversight Board (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. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of the Company as at
December 31, 2004 and December 31, 2003 and the
results of its operations and its cash flows for each of the
years in the three year period ended December 31, 2004 in
accordance with Canadian generally accepted accounting
principles.

The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly we express no such opinion.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants


Vancouver, British Columbia


February 28, 2005


F-2



---



##### 



AINSWORTH LUMBER CO. LTD.

Consolidated Balance Sheets

As at December 31

(Thousands of Canadian dollars)


|                                         |                                                                                       |      |           |      |  |      |         |         |  |   |           |         | 
|---------------------------------------- | ------------------------------------------------------------------------------------- | ---- | --------- | ---- |  | ---- | ------- | ------- |  | - | --------- | ------- | 
|                                         |                                                                                       | Note |           | 2003 |  | 2004
|                                         |                                                                                       |      |           |      |  |     
|ASSETS                                   |                                                                                       |      |           |      |  |      |         |         |  |   |           |        
|CURRENT ASSETS                           |                                                                                       |      |           |      |  |      |         |         |  |   |           |        
|                                         | Cash and cash equivalents                                                             |      |           | 4    |  |      | $       | 194,054 |  |   | $         | 212,624 | 
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $320 (2003  $320) |      |           |      |  |      |         | 30,242  |  |   |           | 55,034  | 
|                                         | Inventories                                                                           |      |           | 5    |  |      |         | 53,153  |  |   |           | 87,582  | 
|                                         | Investment tax credit recoverable                                                     |      |           | 6    |  |      |         | 30,060  |  |   |           |        | 
|                                         | Prepaid expenses                                                                      |      |           |      |  |      |         | 3,433   |  |   |           | 8,349   | 
|                                         |                                                                                       |      |           |      |  |      |         |         |  |   |           |        
|                                         |                                                                                       |      |           |      |  |      | 310,942 |         |  |   | 363,589   |        
|CAPITAL ASSETS                           |                                                                                       |      | 7         |      |  |      | 293,502 |         |  |   | 926,204   |        
|OTHER ASSETS                             |                                                                                       |      | 9         |      |  |      | 23,277  |         |  |   | 47,702    |        
|GOODWILL                                 |                                                                                       |      | 2         |      |  |      |        |         |  |   | 103,516   |        
|                                         |                                                                                       |      |           |      |  |      |         |         |  |   |           |        
|                                         |                                                                                       |      |           |      |  | $    | 627,721 |         |  | $ | 1,441,011 |        
|                                         |                                                                                       |      |           |      |  |      |         |         |  |   |           |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY |                                                                                       |      |           |      |  |      |         |         |  |   |           |        
|CURRENT LIABILITIES                      |                                                                                       |      |           |      |  |      |         |         |  |   |           |        
|                                         | Accounts payable                                                                      |      |           |      |  |      | $       | 17,985  |  |   | $         | 42,973  | 
|                                         | Accrued liabilities                                                                   |      |           |      |  |      |         | 29,776  |  |   |           | 60,207  | 
|                                         | Income taxes payable                                                                  |      |           |      |  |      |         | 3,494   |  |   |           | 41,181  | 
|                                         | Current portion of long-term debt                                                     |      |           | 12   |  |      |         | 250     |  |   |           | 274     | 
|                                         |                                                                                       |      |           |      |  |      |         |         |  |   |           |        
|                                         |                                                                                       |      |           |      |  |      | 51,505  |         |  |   | 144,635   |        
|REFORESTATION OBLIGATION                 |                                                                                       |      | 11        |      |  |      | 4,802   |         |  |   | 4,470     |        
|LONG-TERM DEBT                           |                                                                                       |      | 12        |      |  |      | 352,227 |         |  |   | 916,625   |        
|FUTURE INCOME TAXES                      |                                                                                       |      | 15        |      |  |      | 47,396  |         |  |   | 74,949    |        
|                                         |                                                                                       |      |           |      |  |      |         |         |  |   |           |        
|                                         |                                                                                       |      |           |      |  |      | 455,930 |         |  |   | 1,140,679 |        
|                                         |                                                                                       |      |           |      |  |      |         |         |  |   |           |        
|COMMITMENTS AND CONTINGENCIES            |                                                                                       |      | 17 and 19 |      |  |      |         |         |  |   |           |        
|SHAREHOLDERS EQUITY                     |                                                                                       |      |           |      |  |      |         |         |  |   |           |        
|Capital stock                            |                                                                                       |      | 13        |      |  |      | 53,110  |         |  |   | 55,827    |        
|Contributed surplus                      |                                                                                       |      |           |      |  |      | 118     |         |  |   |          |        
|Cumulative translation adjustment        |                                                                                       |      | 1(b)      |      |  |      |        |         |  |   | (34,237   | )      
|Retained earnings                        |                                                                                       |      |           |      |  |      | 118,563 |         |  |   | 278,742   |        
|                                         |                                                                                       |      |           |      |  |      |         |         |  |   |           |        
|                                         |                                                                                       |      |           |      |  |      | 171,791 |         |  |   | 300,332   |        
|                                         |                                                                                       |      |           |      |  |      |         |         |  |   |           |        
|                                         |                                                                                       |      |           |      |  | $    | 627,721 |         |  | $ | 1,441,011 |        
|                                         |                                                                                       |      |           |      |  |      |         |         |  |   |           |        

See Accompanying Notes to the Consolidated
Financial Statements

F-3



---



##### 



AINSWORTH LUMBER CO. LTD.

Consolidated Statements of Operations and
Retained Earnings (Deficit)

Years ended December 31

(Thousand of Canadian Dollars, except per share
data)


|                                               |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |          |  
|---------------------------------------------- | ------------------------------ | ---- | -- | ---- |  | ---- | ---------- | ------- | - | - | ---------- | ------- | - | - | ---------- | -------- | -
|                                               |                                | Note |    | 2002 |  | 2003 |            | 2004   
|                                               |                                |      |    |      |  |      |            |        
|SALES                                          |                                |      |    |      |  | $    | 430,348    |         |   | $ | 542,987    |         |   | $ | 909,922    |         
|                                               |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |         
|COSTS AND EXPENSES                             |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |         
|                                               | Costs of products sold         |      |    |      |  |      |            | 338,261 |   |   |            | 322,829 |   |   |            | 498,246  |  
|                                               | Selling and administration     |      |    |      |  |      |            | 21,908  |   |   |            | 18,167  |   |   |            | 31,014   |  
|                                               | Amortization of capital assets |      |    | 7    |  |      |            | 31,960  |   |   |            | 32,972  |   |   |            | 53,852   |  
|                                               | Write-down of capital assets   |      |    | 7    |  |      |            | 1,044   |   |   |            | 13,696  |   |   |            | 793      |  
|                                               |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |         
|                                               |                                |      |    |      |  |      | 393,173    |         |   |   | 387,664    |         |   |   | 583,905    |         
|                                               |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |         
|OPERATING EARNINGS                             |                                |      |    |      |  |      | 37,175     |         |   |   | 155,323    |         |   |   | 326,017    |         
|FINANCE EXPENSE                                |                                |      | 14 |      |  |      |            |         |   |   |            |         |   |   |            |         
|                                               | Interest charges               |      |    |      |  |      |            | (57,151 | ) |   |            | (51,177 | ) |   |            | (40,723  | )
|                                               | Amortization charges           |      |    |      |  |      |            | (5,349  | ) |   |            | (4,867  | ) |   |            | (3,234   | )
|                                               | Loss on repurchase of debt     |      |    | 12   |  |      |            |        |   |   |            | (81     | ) |   |            | (106,198 | )
|                                               |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |         
|                                               |                                |      |    |      |  |      | (62,500    | )       |   |   | (56,125    | )       |   |   | (150,155   | )       
|OTHER INCOME (EXPENSE)                         |                                |      |    |      |  |      | 2,901      |         |   |   | (508       | )       |   |   | (3,351     | )       
|FOREIGN EXCHANGE GAIN ON LONG TERM DEBT        |                                |      |    |      |  |      | 4,279      |         |   |   | 76,932     |         |   |   | 73,815     |         
|                                               |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |         
|INCOME (LOSS) BEFORE INCOME TAXES              |                                |      |    |      |  |      | (18,145    | )       |   |   | 175,622    |         |   |   | 246,326    |         
|                                               |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |         
|INCOME TAX EXPENSE (RECOVERY)                  |                                |      | 15 |      |  |      |            |         |   |   |            |         |   |   |            |         
|                                               | Current                        |      |    |      |  |      |            | 1,777   |   |   |            | 11,876  |   |   |            | 85,597   |  
|                                               | Future                         |      |    |      |  |      |            | (2,049  | ) |   |            | 40,096  |   |   |            | (14,353  | )
|                                               |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |         
|                                               |                                |      |    |      |  |      | (272       | )       |   |   | 51,972     |         |   |   | 71,244     |         
|                                               |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |         
|NET INCOME (LOSS)                              |                                |      |    |      |  |      | (17,873    | )       |   |   | 123,650    |         |   |   | 175,082    |         
|RETAINED EARNINGS (DEFICIT), BEGINNING OF YEAR |                                |      |    |      |  |      | 12,786     |         |   |   | (5,087     | )       |   |   | 118,563    |         
|DIVIDENDS PAID                                 |                                |      | 16 |      |  |      |           |         |   |   |           |         |   |   | (14,660    | )       
|REPURCHASE OF CAPITAL STOCK                    |                                |      | 13 |      |  |      |           |         |   |   |           |         |   |   | (243       | )       
|                                               |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |         
|RETAINED EARNINGS (DEFICIT), END OF YEAR       |                                |      |    |      |  | $    | (5,087     | )       |   | $ | 118,563    |         |   | $ | 278,742    |         
|                                               |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |         
|BASIC AND DILUTED EARNINGS (LOSS) PER SHARE    |                                |      |    |      |  | $    | (1.23      | )       |   | $ | 8.49       |         |   | $ | 11.98      |         
|                                               |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |         
|WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING  |                                |      |    |      |  |      | 14,544,800 |         |   |   | 14,558,707 |         |   |   | 14,612,506 |         
|                                               |                                |      |    |      |  |      |            |         |   |   |            |         |   |   |            |         

See Accompanying Notes to the Consolidated
Financial Statements

F-4



---



##### 



AINSWORTH LUMBER CO. LTD.

Consolidated Statements of Cash
Flows

Years ended December 31

(Thousands of Canadian dollars)


|                                                                           |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |          |         |  
|-------------------------------------------------------------------------- | ---------------------------------------------------- | ----------------------------------------------------------- |  | ---- | - | ---- | ------- | ------- | ------ | - | ------- | ------- | ------- | - | -------- | -------- | ------- | -
|                                                                           |                                                      | Note                                                        |  | 2002 |   | 2003 |         | 2004   
|                                                                           |                                                      |                                                             |  |      |   |      |         |        
|CASH FLOWS FROM OPERATING ACTIVITIES                                       |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         
|                                                                           | Income (Loss) from continuing operations             |                                                             |  |      |   |      | $       | (17,873 | )      |   | $       | 123,650 |         |   | $        | 175,082  |        
|                                                                           | Amounts not requiring an outlay of cash              |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |          |        
|                                                                           |                                                      | Amortization of capital assets                              |  |      | 7 |      |         |         | 31,960 |   |         |         | 32,972  |   |          |          | 53,852  |  
|                                                                           |                                                      | Amortization of financing costs                             |  |      |   |      |         |         | 2,567  |   |         |         | 2,568   |   |          |          | 1,869   |  
|                                                                           |                                                      | Amortization of debt discount                               |  |      |   |      |         |         | 854    |   |         |         | 852     |   |          |          | 1,109   |  
|                                                                           |                                                      | Unrealized foreign exchange (gain) loss;
    long-term debt |  |      |   |      |         |         | (4,279 | ) |         |         | (76,932 | ) |          |          | (73,815 | )
|                                                                           |                                                      | Loss on repurchase of debt                                  |  |      |   |      |         |         |       |   |         |         | 81      |   |          |          | 106,198 |  
|                                                                           |                                                      | Amortization of consent and commitment fees                 |  |      |   |      |         |         | 1,929  |   |         |         | 1,447   |   |          |          | 257     |  
|                                                                           |                                                      | Non-cash stock based compensation                           |  |      |   |      |         |         | 29     |   |         |         | (230    | ) |          |          | 2,640   |  
|                                                                           |                                                      | Loss (gain) on disposal of capital assets                   |  |      |   |      |         |         | 7      |   |         |         | 400     |   |          |          | 25      |  
|                                                                           |                                                      | Writedown of capital assets                                 |  |      | 7 |      |         |         | 1,044  |   |         |         | 13,296  |   |          |          | 793     |  
|                                                                           |                                                      | Write-off of security deposits on lease
    termination     |  |      |   |      |         |         | 980    |   |         |         |        |   |          |          |        |  
|                                                                           |                                                      | Adjustment to deferred pension assets                       |  |      |   |      |         |         | 9      |   |         |         | 803     |   |          |          | (8,141  | )
|                                                                           |                                                      | Change in non-current reforestation obligation              |  |      |   |      |         |         | (218   | ) |         |         | 168     |   |          |          | (332    | )
|                                                                           |                                                      | Utilization of investment tax credit                        |  |      | 6 |      |         |         |       |   |         |         | 7,120   |   |          |          | 30,060  |  
|                                                                           |                                                      | Future income taxes                                         |  |      |   |      |         |         | (2,049 | ) |         |         | 40,096  |   |          |          | (14,353 | )
|                                                                           | Change in non-cash operating working capital         |                                                             |  | 22   |   |      |         | (7,530  | )      |   |         | (12,669 | )       |   |          | 89,184   |        
|                                                                           |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         
|Cash provided by operating activities                                      |                                                      |                                                             |  |      |   |      | 7,430   |         |        |   | 133,622 |         |         |   | 364,428  |         
|                                                                           |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         
|CASH FLOWS FROM INVESTING ACTIVITIES                                       |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         
|                                                                           | Investment in Voyageur Panel Limited                 |                                                             |  | 2    |   |      |         |        |        |   |         |        |         |   |          | (296,300 | )      
|                                                                           | Acquisition of Cash of Voyageur Panel Limited        |                                                             |  |      |   |      |         |        |        |   |         |        |         |   |          | 51,142   |        
|                                                                           | Investment in Minnesota OSB Facilities               |                                                             |  | 3    |   |      |         |        |        |   |         |        |         |   |          | (584,847 | )      
|                                                                           | Additions to capital assets                          |                                                             |  |      |   |      |         | (14,113 | )      |   |         | (8,236  | )       |   |          | (17,987  | )      
|                                                                           | Decrease (increase) in other assets                  |                                                             |  |      |   |      |         | (161    | )      |   |         | (144    | )       |   |          | (1,555   | )      
|                                                                           | Proceeds on disposals of capital assets              |                                                             |  |      |   |      |         | 38      |        |   |         | 151     |         |   |          | 40       |        
|                                                                           |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         
|Cash used in investing activities                                          |                                                      |                                                             |  |      |   |      | (14,236 | )       |        |   | (8,229  | )       |         |   | (849,507 | )       
|                                                                           |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         
|CASH FLOWS FROM FINANCING ACTIVITIES                                       |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         
|                                                                           | Proceeds from issue of Senior Secured Notes          |                                                             |  | 12   |   |      |         |        |        |   |         |        |         |   |          | 996,387  |        
|                                                                           | Redemption of Senior Secured Notes                   |                                                             |  | 12   |   |      |         |        |        |   |         | (11,985 | )       |   |          | (451,305 | )      
|                                                                           | Financing costs                                      |                                                             |  | 12   |   |      |         |        |        |   |         |        |         |   |          | (26,214  | )      
|                                                                           | Dividends Paid                                       |                                                             |  | 16   |   |      |         |        |        |   |         |        |         |   |          | (14,660  | )      
|                                                                           | Repurchase of Common shares                          |                                                             |  | 13   |   |      |         |         |        |   |         |         |         |   |          | (284     | )      
|                                                                           | Increase (decrease) in capital lease
    obligations |                                                             |  |      |   |      |         | 39      |        |   |         | 451     |         |   |          | (275     | )      
|                                                                           |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         
|Cash (used in) provided by financing activities                            |                                                      |                                                             |  |      |   |      | 39      |         |        |   | (11,534 | )       |         |   | 503,649  |         
|                                                                           |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         
|NET CASH INFLOW (OUTFLOW)                                                  |                                                      |                                                             |  |      |   |      | (6,767  | )       |        |   | 113,859 |         |         |   | 18,570   |         
|CASH AND CASH EQUIVALENTS, BEGINNING OF
    YEAR                           |                                                      |                                                             |  |      |   |      | 86,962  |         |        |   | 80,195  |         |         |   | 194,054  |         
|                                                                           |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         
|CASH AND CASH EQUIVALENTS, END OF
    YEAR                                 |                                                      |                                                             |  |      |   | $    | 80,195  |         |        | $ | 194,054 |         |         | $ | 212,624  |         
|                                                                           |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                          |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         
|Interest (including commitment, redemption
    premium and loan fees) paid |                                                      |                                                             |  |      |   | $    | 58,316  |         |        | $ | 52,974  |         |         | $ | 138,351  |         
|                                                                           |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         
|Income taxes paid                                                          |                                                      |                                                             |  |      |   | $    | 726     |         |        | $ | 1,567   |         |         | $ | 16,443   |         
|                                                                           |                                                      |                                                             |  |      |   |      |         |         |        |   |         |         |         |   |          |         

See Accompanying Notes to the Consolidated
Financial Statements

F-5



---



##### 



AINSWORTH LUMBER CO. LTD.

Notes to the Consolidated Financial
Statements

Years ended December 31

(Figures in tables are in thousands of Canadian
dollars unless indicated otherwise)


1. SIGNIFICANT ACCOUNTING
POLICIES

These consolidated financial statements have been
prepared in Canadian dollars in accordance with Canadian
generally accepted accounting principles (Canadian
GAAP) and include estimates and assumptions made by
management. These estimates and assumptions affect the reported
amounts of assets and liabilities and other disclosures in these
consolidated financial statements. Actual results may differ
from those estimates.

Canadian GAAP differs in certain respects from
accounting principles generally accepted in the United States
(U.S. GAAP) as explained in Note 24.

The significant accounting policies are:

(a) Basis
of consolidation

These consolidated financial statements include
the accounts Ainsworth Lumber Co. Ltd. (the Company)
and all of its wholly-owned subsidiaries which include Ainsworth
Engineered Corp. (amalgamated with Voyageur Panel Limited on
May 19, 2004), Ainsworth Engineered (USA), LLC and
Ainsworth Engineered Canada Limited Partnership (Note 27).
Ainsworth Engineered Corp. was amalgamated with Voyageur Panel
Limited on May 19, 2004. Ainsworth Engineered (USA), LLC
owns and operates the Minnesota OSB facilities which were
acquired on September 22, 2004.

The Company accounts for its 50% interest in the
High Level Project (Note 8) on a proportionate
consolidation basis.

(b) Foreign
Currency Translation

The operations of Ainsworth Engineered (USA), LLC
are considered to be a self-sustaining foreign operation and the
financial statements are translated using the current rate
method. Assets and liabilities are translated at the rate of
exchange in effect at the balance sheet date and revenue and
expense items are translated at average exchange rates
prevailing during the period that the transactions occurred.
Unrealized translation gains and losses are deferred and
included, as a separate component of shareholders equity. For
the year ended December 31, 2004, the Company recorded an
unrealized translation loss of $34,237,000.

(c) Cash
and cash equivalents

Cash and cash equivalents generally consist of
cash balances with banks and investments in high grade
commercial paper and bank notes with original maturities of less
than three months.

(d) Inventories

Logs, lumber and panel products are valued at the
lower of average cost and net realizable value. Materials and
supplies are valued at cost.

F-6



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



1. SIGNIFICANT ACCOUNTING
POLICIES (Continued)


(e) Capital
Assets

Property, plant and equipment are stated at cost,
including interest incurred for major projects during the period
of construction, and start-up costs. The cost of renewals and
betterments that extend the useful life of the property, plant
and equipment is also capitalized. The cost of repairs and
replacements is charged to expense as incurred. Oriented strand
board facilities are amortized on the units-of-production method
based on the estimated useful life of the assets at normal
production levels over 15 years. Other panel product mills,
the lumber remanufacturing plant and other assets are amortized
on the declining balance basis at annual rates based on the
estimated useful lives of the assets as follows:

|                        |  |      |           | 
|----------------------- |  | ---- | --------- | 
|Asset                   |  | Rate
|                        |  |     
|Buildings               |  |      | 5%        | 
|Machinery and equipment |  |      | 12% - 20% | 
|Office equipment        |  |      | 15%       | 

Timber rights and logging roads are stated at
cost and are amortized on the basis of the volume of timber cut.
The Company reviews the carrying values of its capital assets on
a regular basis, by reference to estimated future operating
results and undiscounted net cash flows. If the carrying value
of these assets exceeds estimated net recoverable amounts, a
provision for impairment will be made.

(f) Financing
and debt discount costs

Costs relating to long-term debt are deferred and
amortized on the straight-line basis over the term of the
related debt.

(g) Reforestation
obligation

Timber is harvested under various licenses issued
by the Provinces of British Columbia and Alberta. The future
estimated reforestation obligation is accrued and charged to
earnings on the basis of the volume of timber cut.

(h) Foreign
currency transactions

Transactions denominated in U.S. dollars have
been translated into Canadian dollars at the approximate rate of
exchange prevailing at the time of the transaction. Monetary
assets and liabilities denominated in foreign currencies have
been translated into Canadian dollars at the year-end exchange
rate. Exchange gains and losses, including unrealized foreign
exchange gains and losses on long-term debt, are included in
earnings.

(i) Earnings
per share

Earnings per share is calculated by dividing net
income (loss) by the weighted average number of voting
common shares outstanding during the year.

F-7



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



1. SIGNIFICANT ACCOUNTING
POLICIES (Continued)


(j) Income
taxes

Income taxes are accounted for using the asset
and liability method. Future income taxes reflect the tax
effect, using substantively enacted tax rates, of differences
between the financial statement carrying amount and their
respective tax bases of assets and liabilities and the
anticipated benefit of losses carried forward for income tax
purposes.

The Companys research and development
activities may be eligible to earn Investment Tax Credits. When
there is reasonable assurance that the Investment Tax Credits
will be received, they are accounted for using the cost
reduction method whereby such credits are deducted from the
expenditures or assets to which they relate.

(k) Revenue
recognition

Revenue is recognized when the significant risks
and rewards of ownership are transferred, which is generally at
the time of shipment at agreed prices to credit-approved
customers.

The Company has presented freight and other
distribution costs as sales and costs of products sold in the
statement of operations and reclassified prior periods
presentation accordingly. Previously these costs were presented
as a reduction of sales in accordance with industry practice at
the time. The effect of the change was to increase sales and
cost of sales by $82,468,500 for the year ended
December 31, 2004, $61,913,500 for 2003, and $74,293,000
for 2002.

(l) Employee
Benefit Plans

The Company has two defined benefit plans
providing pension benefits to its British Columbia salaried
employees and employees of the Minnesota Oriented Strand Board
(OSB) facilities. The Company accrues the costs and
related obligations for the defined benefit plans using the
projected benefit actuarial method prorated on service and
managements best estimates of expected plan investment
performance, salary escalation, and other relevant factors. The
difference between costs of employee benefits charged against
earnings and the Companys contributions to the plans,
which are made in accordance with actuarial recommendations and
pension commission regulations, is included in accrued benefit
asset on the balance sheet. In determining pension expense, the
unrecognized pension surplus or liability, adjustments arising
from changes in actuarial assumptions, and the excess of net
actuarial gains or losses over 10% of the greater of the benefit
obligation and the market value of the plan assets is amortized
on a straight-line basis over the expected average remaining
service life of the employee group. The plan assets are valued
at market values.

(m) Goodwill

Goodwill represents the excess cost of an
investment over the fair value of the net assets acquired.
Goodwill is not amortized and is subject to an annual assessment
for impairment primarily by applying a fair value based test at
the reporting unit level. The fair value of the reporting unit
is estimated using the expected present value of future
discounted cash flows. The Company also considers projected
future operating results, trends and other circumstances in
making such evaluations. An impairment loss would be recognized
to the extent the carrying amount of goodwill exceeds the fair
value of goodwill. The Company did not recognize any impairment
to goodwill in 2004.

F-8



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



1. SIGNIFICANT ACCOUNTING
POLICIES (Continued)


(n) Comparative
figures

Certain comparative figures have been
reclassified to conform to the current year presentation.

2. ACQUISITION OF VOYAGEUR PANEL
LIMITED

On May 19, 2004, the Company completed the
acquisition of 100% of the voting shares of Voyageur Panel
Limited (Voyageur) for a purchase price of
US$206.7 million (CDN$284.5 million) paid in cash plus
additional consideration, based on realization of oriented
strand board sales prices and volumes at Voyageur between
closing the transaction and December 31, 2004. Management
has estimated that US$9.1 (CDN$11.8 million) has accrued to
the vendors and this has been recognized as a cost of the
acquisition.

The acquisition of Voyageur has been accounted
for using the purchase method, and the operating results are
included in the consolidated statement of operations from the
date of the acquisition. The amounts allocated to specific
identifiable tangible and intangible assets and liabilities at
May 19, 2004 are as follows.

|                                 |                             |   |         |         | 
|-------------------------------- | --------------------------- | - | ------- | ------- | 
|Net Assets acquired:             |                             |  
|                                 |                             |  
|                                 | Current assets              |   | $       | 76,937  | 
|                                 | Other assets                |   |         | 1,170   | 
|                                 | Capital assets              |   |         | 166,084 | 
|                                 |                             |   |         |        
|Total assets acquired            |                             |   | 244,191 |        
|                                 |                             |   |         |        
|                                 | Current liabilities         |   |         | 9,470   | 
|                                 | Future income taxes         |   |         | 41,905  | 
|                                 | Other long term liabilities |   |         | 32      | 
|                                 |                             |   |         |        
|Total liabilities acquired       |                             |   | 51,407  |        
|                                 |                             |   |         |        
|Net identifiable assets acquired |                             |   | 192,784 |        
|Goodwill                         |                             |   | 103,516 |        
|                                 |                             |   |         |        
|Total purchase price             |                             | $ | 296,300 |        
|                                 |                             |   |         |        

3. ACQUISITION OF THE MINNESOTA OSB
FACILITIES

On September 22, 2004, the Company acquired
from Potlatch Corporation the assets and certain related working
capital associated with three OSB manufacturing facilities (the
Minnesota OSB facilities) located in the northern
Minnesota towns of Bemidji, Cook and Grand Rapids at a purchase
price of approximately US$455.5 million (approximately
CAD$584.8 million).

The acquisition of the Minnesota OSB facilities
has been accounted for using the purchase method, and the
operating results are included in the consolidated statement of
operations from

F-9



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



3. ACQUISITION OF THE MINNESOTA OSB
FACILITIES  (Continued)


the date of the acquisition. The amounts
allocated to specific identifiable tangible and intangible
assets and liabilities at September 22, 2004 are as follows.

|                           |                |   |         |         | 
|-------------------------- | -------------- | - | ------- | ------- | 
|Net Assets acquired:       |                |  
|                           |                |  
|                           | Current assets |   | $       | 48,127  | 
|                           | Capital assets |   |         | 536,720 | 
|                           |                |   |         |        
|Total assets acquired      |                |   | 584,847 |        
|Total liabilities acquired |                |   |        |        
|                           |                |   |         |        
|Total purchase price       |                | $ | 584,847 |        
|                           |                |   |         |        

4. CASH AND CASH EQUIVALENTS

|                 |  |      |         |      |  |   |         | 
|---------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                 |  | 2003 |         | 2004
|                 |  |      |         |     
|Cash             |  | $    | 2,506   |      |  | $ | 76,040  | 
|Cash equivalents |  |      | 191,548 |      |  |   | 136,584 | 
|                 |  |      |         |      |  |   |         | 
|                 |  | $    | 194,054 |      |  | $ | 212,624 | 
|                 |  |      |         |      |  |   |         | 

5. INVENTORIES

|                       |  |      |        |      |  |   |        | 
|---------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                       |  | 2003 |        | 2004
|                       |  |      |        |     
|Logs                   |  | $    | 21,362 |      |  | $ | 23,339 | 
|Panel products         |  |      | 12,598 |      |  |   | 23,152 | 
|Materials and supplies |  |      | 19,193 |      |  |   | 41,091 | 
|                       |  |      |        |      |  |   |        | 
|                       |  | $    | 53,153 |      |  | $ | 87,582 | 
|                       |  |      |        |      |  |   |        | 

6. INVESTMENT TAX CREDIT
RECOVERABLE

At December 31 2003, the Company recognized
an unclaimed special investment tax credit in respect of its
investment in the Grande Prairie wood processing facilities. The
Company recorded the tax credit as a $37,180,000 reduction in
the capital cost of the Grande Prairie assets. In 2004,
$30,060,000 (2003  $7,120,000) was utilized as a
reduction to federal taxes payable.

F-10



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)

7. CAPITAL ASSETS

|                                    |  |          |         |      |  |              |           |          |  |   |         |  |  |   |         | 
|----------------------------------- |  | -------- | ------- | ---- |  | ------------ | --------- | -------- |  | - | ------- |  |  | - | ------- | 
|                                    |  |          |         |     
|                                    |  | 2003     |         | 2004
|                                    |  |          |         |     
|                                    |  | Net Book |         |      |  | Accumulated  |           | Net Book
|                                    |  | Value    |         | Cost |  | Depreciation |           | Value   
|                                    |  |          |         |      |  |              |           |         
|Property, plant and equipment       |  |          |         |      |  |              |           |          |  |   |         |  |  |   |         | 
|Panel product mills                 |  | $        | 273,178 |      |  | $            | 1,205,743 |          |  | $ | 320,772 |  |  | $ | 884,971 | 
|Land                                |  |          | 1,964   |      |  |              | 3,819     |          |  |   |        |  |  |   | 3,819   | 
|Other                               |  |          | 3,158   |      |  |              | 21,748    |          |  |   | 14,218  |  |  |   | 7,530   | 
|Construction in progress            |  |          | 1,030   |      |  |              | 10,338    |          |  |   |        |  |  |   | 10,338  | 
|                                    |  |          |         |      |  |              |           |          |  |   |         |  |  |   |         | 
|                                    |  |          | 279,330 |      |  |              | 1,241,648 |          |  |   | 334,990 |  |  |   | 906,658 | 
|                                    |  |          |         |      |  |              |           |          |  |   |         |  |  |   |         | 
|Timber and logging roads            |  |          |         |      |  |              |           |          |  |   |         |  |  |   |         | 
|Timber rights and development costs |  |          | 11,055  |      |  |              | 24,229    |          |  |   | 8,110   |  |  |   | 16,119  | 
|Logging roads                       |  |          | 3,117   |      |  |              | 12,029    |          |  |   | 8,602   |  |  |   | 3,427   | 
|                                    |  |          |         |      |  |              |           |          |  |   |         |  |  |   |         | 
|                                    |  |          | 14,172  |      |  |              | 36,258    |          |  |   | 16,712  |  |  |   | 19,546  | 
|                                    |  |          |         |      |  |              |           |          |  |   |         |  |  |   |         | 
|                                    |  | $        | 293,502 |      |  | $            | 1,277,906 |          |  | $ | 351,702 |  |  | $ | 926,204 | 
|                                    |  |          |         |      |  |              |           |          |  |   |         |  |  |   |         | 

|                                  |                               |      |        |        |  |      |        |        |  |   |        |        | 
|--------------------------------- | ----------------------------- | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                  |                               | 2002 |        | 2003   |  | 2004
|                                  |                               |      |        |        |  |     
|Amortization expense for the year |                               |      |        |        |  |      |        |        |  |   |        |       
|                                  | Property, plant and equipment |      | $      | 29,560 |  |      | $      | 31,128 |  |   | $      | 51,853 | 
|                                  | Timber and logging roads      |      |        | 2,400  |  |      |        | 1,844  |  |   |        | 1,729  | 
|                                  |                               |      |        |        |  |      |        |        |  |   |        |       
|                                  |                               | $    | 31,960 |        |  | $    | 32,972 |        |  | $ | 53,582 |       
|                                  |                               |      |        |        |  |      |        |        |  |   |        |       

In December 2003, the Company provided a
write-down of capital assets of $13.3 million in costs
relating to the construction and design for a proposed expansion
of the Grande Prairie OSB operations. The Company had been
unsuccessful in its attempt to secure additional long-term
timber tenure. Without confirmation of a secure timber supply,
the Company decided not to pursue the expansion of the Grande
Prairie facility at this time.

8. THE HIGH LEVEL PROJECT

The Company jointly developed and operates an
oriented strand board (OSB) facility in High Level,
Alberta. The Companys proportionate (50%) share of major
assets including plant and equipment is held by a bare trustee
corporation, on behalf of the Company, together with the 50%
interest of a co-venturer in such assets.

Once the OSB production process at the High Level
facility is complete, the production is allocated to the
respective venturers at cost. Each respective venturer then
sells their respective production to third parties. The venture
does not generate revenue or net income.

F-11



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



8. THE HIGH LEVEL
PROJECT (Continued)


The following is a summary of the Companys
proportionate interest in the financial position of the High
Level Project:

|                    |                                            |      |   |         |  |  |   |         | 
|------------------- | ------------------------------------------ | ---- | - | ------- |  |  | - | ------- | 
|                    |                                            | 2003 |   | 2004   
|                    |                                            |      |   |        
|Assets              |                                            |      |   |         |  |  |   |        
|                    | Receivables                                |      | $ | 752     |  |  | $ | 1,294   | 
|                    | Inventories                                |      |   | 7,641   |  |  |   | 8,923   | 
|                    | Prepaid expenses                           |      |   | 366     |  |  |   | 393     | 
|                    | Capital assets                             |      |   | 123,676 |  |  |   | 125,171 | 
|Current Liabilities |                                            |      |   |         |  |  |   |        
|                    | Excess of cheques issued over cash in bank |      |   | 1,814   |  |  |   | 1,558   | 
|                    | Accrued liabilities and accounts payable   |      |   | 3,609   |  |  |   | 2,906   | 

By agreement between the Company and its
co-venturer, if the co-venturer does not pay its share of
accounts payable and accrued liabilities, the Company may pay
such amounts and recover them from the co-venturers share
of production. The co-venturers share of accounts payable
and accrued liabilities amounted to $2,906,000 as at
December 31, 2004 and $3,609,000 as at December 31,
2003.

9. OTHER ASSETS

|                                        |  |      |        |      |  |   |        | 
|--------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                        |  | 2003 |        | 2004
|                                        |  |      |        |     
|Advances and deposits                   |  | $    | 5,537  |      |  | $ | 7,092  | 
|Accrued pension benefit asset (Note 18) |  |      | 4,156  |      |  |   | 12,297 | 
|Unamortized financing costs             |  |      | 13,584 |      |  |   | 28,313 | 
|                                        |  |      |        |      |  |   |        | 
|                                        |  | $    | 23,277 |      |  | $ | 47,702 | 
|                                        |  |      |        |      |  |   |        | 

10. LOAN FACILITIES

As at December 31, 2004 the Company had
outstanding letters of credit of $6,561,000 (2003 
$6,228,000) to support the Companys ongoing business
operations. The Company had an unutilized $7,250,000 foreign
exchange and future contract credit facility at
December 31, 2004.

11. REFORESTATION OBLIGATION

|                                         |  |      |        |      |  |   |        |  
|---------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                         |  | 2003 |        | 2004
|                                         |  |      |        |     
|Balance at beginning of year             |  | $    | 5,679  |      |  | $ | 6,064  |  
|Expense for the year                     |  |      | 2,227  |      |  |   | 1,157  |  
|                                         |  |      |        |      |  |   |        |  
|                                         |  |      | 7,906  |      |  |   | 7,221  |  
|Paid during the year                     |  |      | (1,842 | )    |  |   | (1,593 | )
|                                         |  |      |        |      |  |   |        |  
|Balance at end of year                   |  | $    | 6,064  |      |  | $ | 5,628  |  
|                                         |  |      |        |      |  |   |        |  
|Current, included in accrued liabilities |  | $    | 1,262  |      |  | $ | 1,158  |  
|Long-term                                |  |      | 4,802  |      |  |   | 4,470  |  
|                                         |  |      |        |      |  |   |        |  
|                                         |  | $    | 6,064  |      |  | $ | 5,628  |  
|                                         |  |      |        |      |  |   |        |  

F-12



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)

12. LONG-TERM DEBT

On March 3, 2004, the Company completed a
refinancing of its Senior Secured Notes and issued
US$210 million 6.75% Senior Unsecured Notes. Financing
costs of $6.2 million relating to this debt have been
deferred in other assets and amortized over the life of the
debt. Together with its existing cash balance, the Company
utilized the proceeds from the notes to repurchase
US$87.1 million of its 13.875% notes and US$182.2 million
of its 12.5% Notes realizing a total loss of
$106.2 million. The loss is comprised of a
$15.5 million write-off of deferred debt discount and
financing costs, an $83.5 million redemption premium, and
payment of consent fees of $7.2 million.

On May 19, 2004, the Company issued
US$110 million 6.75% Senior Unsecured Notes at a discount
of US$11 million. Financing costs of $4.9 million
relating to this debt have been deferred in other assets and
amortized over the term of the debt.

On September 22, 2004, the Company issued
US$275 million 7.25% Senior Unsecured Notes and
US$175 million Senior Unsecured Floating Rate Notes.
Financing costs of $15.1 million relating to this debt have
been deferred in other assets and amortized over the term of the
debt.

The Companys long-term debt is guaranteed
by Ainsworth Engineered Corp., Ainsworth Engineered (USA), LLC,
and Ainsworth Engineered Canada Limited Partnership (Note 26).
The details of the outstanding long term debt at
December 31, 2004 are as follows:

|                                                                                                                                                                   |  |      |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- |  | - | ------- | -
|                                                                                                                                                                   |  | 2003 |         | 2004
|                                                                                                                                                                   |  |      |         |     
|U.S.$275,000,000 Senior Unsecured Notes due
    October 1, 2012 with interest payable semi-annually at
    7.25% per annum                                         |  | $    |        |      |  | $ | 330,550 |  
|U.S.$175,000,000 Senior Unsecured Notes due
    October 1, 2010 with interest payable quarterly at LIBOR
    plus 3.75% per annum                                  |  |      |        |      |  |   | 210,350 |  
|U.S.$210,000,000 Senior Unsecured Notes due
    March 15, 2014 with interest payable semi-annually at 6.75%
    per annum                                          |  |      |        |      |  |   | 252,420 |  
|U.S.$110,000,000 Senior Unsecured Notes due
    March 15, 2014 with interest payable semi-annually at 6.75%
    per annum                                          |  |      |        |      |  |   | 132,220 |  
|U.S.$2,351,000 (2003 
    U.S.$184,600,000) Senior Unsecured Notes due July 15, 2007
    with interest payable semi-annually at 12.5% per annum                   |  |      | 239,334 |      |  |   | 2,826   |  
|U.S.$2,000,000 (2003  U.S.$89,085,000
    Senior Unsecured Notes due July 15, 2007 with interest
    payable with interest payable quarterly at 13.875% per annum |  |      | 115,499 |      |  |   | 2,404   |  
|Capital lease obligations                                                                                                                                          |  |      | 549     |      |  |   | 274     |  
|                                                                                                                                                                   |  |      |         |      |  |   |         |  
|                                                                                                                                                                   |  |      | 355,382 |      |  |   | 931,044 |  
|Unamortized deferred debt discount                                                                                                                                 |  |      | (2,905  | )    |  |   | (14,145 | )
|                                                                                                                                                                   |  |      |         |      |  |   |         |  
|                                                                                                                                                                   |  |      | 352,477 |      |  |   | 916,899 |  
|Current portion                                                                                                                                                    |  |      | (250    | )    |  |   | (274    | )
|                                                                                                                                                                   |  |      |         |      |  |   |         |  
|                                                                                                                                                                   |  | $    | 352,227 |      |  | $ | 916,625 |  
|                                                                                                                                                                   |  |      |         |      |  |   |         |  

Credit Facility

On March 15, 2004, the Company established a
five-year $50,000,000 revolving credit facility with interest
rates of prime plus 0.5% or the bankers acceptance rate
plus 2.0%. At December 31, 2004 this facility was
unutilized.

F-13



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)

13. CAPITAL STOCK

(a) The Companys authorized share
capital is as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) 100,000,000 common shares without par
    value;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (ii) 1,500,000 Class B non-voting
    common shares without par value, of which 717,500 have been
    designated for an employee participation share plan. The
    designated Class B common shares are convertible into the
    number of common shares equivalent to the ratio of a) the
    greater of future appreciation in market value of the common
    shares from the date the Board of Directors of the Company
    resolve to issue the Class B common shares and the issue
    price of the Class B common shares, divided by b) the
    market value of the common shares when the conversion and
    completion of vesting occurs on the fifth anniversary of
    issuance of the Class B common shares. Vesting occurs
    equally upon the third, fourth and fifth anniversaries; and
|
| | (iii) 100,000,000 preferred shares without
    par value, of which 300,000 have been designated Series 1
    and 4,000,000 have been designated Series 2. The
    Series 1 preferred shares are non-voting, redeemable at the
    issue price of $10 and are entitled to a 6% non-cumulative
    dividend. The Series 2 preferred shares are non-voting with
    a cumulative dividend rate equal to 72% of bank prime rate and
    are redeemable by the Company at any time or retractable by the
    holder any time after five years from the date of issue.                                                                                                                                                                                                                                      

(b) The Companys issued share capital
is as follows:

|                             |                                                         |               |            |               |   |        |        |        |  |        |         |          |   |   |    |     |   |   |        |       |  
|---------------------------- | ------------------------------------------------------- | ------------- | ---------- | ------------- | - | ------ | ------ | ------ |  | ------ | ------- | -------- | - | - | -- | --- | - | - | ------ | ----- | -
|                             |                                                         |               |            |               |   |        |        |       
|                             |                                                         |               |            | Class B       |   |       
|                             |                                                         | Common Shares |            | Common Shares |   |       
|                             |                                                         |               |            |               |   | Total 
|Issued Share Capital         |                                                         | Shares        |            | Amount        |   | Shares |        | Amount |  | Amount
|                             |                                                         |               |            |               |   |        |        |        |  |       
|Balance at December 31, 2002 |                                                         |               | 14,544,800 |               |   | $      | 53,016 |        |  |        | 447,500 |          |   | $ | 67 |     |   | $ | 53,083 |      
|                             | Exchange of Class B common shares for common
    shares |               |            | 20,148        |   |        |        | 78     |  |        |         | (222,500 | ) |   |    | (33 | ) |   |        | 45    |  
|                             | Cancellation of Class B common shares                   |               |            |              |   |        |        |       |  |        |         | (117,500 | ) |   |    | (18 | ) |   |        | (18   | )
|                             |                                                         |               |            |               |   |        |        |        |  |        |         |          |   |   |    |     |   |   |        |      
|Balance at December 31, 2003 |                                                         |               | 14,564,948 |               |   | $      | 53,094 |        |  |        | 107,500 |          |   | $ | 16 |     |   | $ | 53,110 |      
|                             | Exchange of Class B common shares for common
    shares |               |            | 95,116        |   |        |        | 2,733  |  |        |         | (107,500 | ) |   |    | (16 | ) |   |        | 2,717 |  
|                             | Repurchase of common shares                             |               |            | (10,924       | ) |        |        |       |  |        |         |         |   |   |    |    |   |   |        |      |  
|                             |                                                         |               |            |               |   |        |        |        |  |        |         |          |   |   |    |     |   |   |        |      
|Balance at December 31, 2004 |                                                         |               | 14,649,140 |               |   | $      | 55,827 |        |  |        |        |          |   | $ |   |     |   | $ | 55,827 |      
|                             |                                                         |               |            |               |   |        |        |        |  |        |         |          |   |   |    |     |   |   |        |      

(c) Repurchase of Common Shares

On June 29, 2004, the Company repurchased
10,924 common shares at a purchase price of $26.03 per share.
The excess of $0.2 million between the purchase price and
the weighted average cost was charged to retained earnings.

(d) Employee Participation Share Plan

On March 29, 2004, the Company issued 95,116
common shares to the holders of 107,500 Class B common
shares issued on June 25, 1999 who became entitled under
the Employee Participation Share Plan to receive common shares
in exchange for those Class B common shares. The issue of
the common shares resulted in a charge to earnings of
$2,640,000. As at December 31, 2004, there are no issued
and outstanding Class B common shares.

F-14



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



13. CAPITAL
STOCK (Continued)


During the year ended December 31, 2003, the
Company issued 20,148 common shares to the holders of 222,500
Class B common shares issued on December 18, 1996 and
August 11, 1998 who became entitled under the Employee
Participation Share Plan to receive common shares in exchange
for those Class B common shares. The Company then cancelled
55,000 Class B common shares issued on December 18,
1996 and August 11, 1998 pursuant to the Plan and also
cancelled 62,500 Class B common shares issued on
June 25, 1999.

14. FINANCE EXPENSE

|                                     |  |      |        |      |  |      |        |  |  |   |         | 
|------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------- | 
|                                     |  | 2002 |        | 2003 |  | 2004
|                                     |  |      |        |      |  |     
|Current debt                         |  | $    | 276    |      |  | $    | 35     |  |  | $ | 746     | 
|Loss on Repurchase of Debt (Note 12) |  |      |       |      |  |      | 81     |  |  |   | 106,198 | 
|Long-term debt                       |  |      | 62,224 |      |  |      | 56,009 |  |  |   | 43,211  | 
|                                     |  |      |        |      |  |      |        |  |  |   |         | 
|                                     |  | $    | 62,500 |      |  | $    | 56,125 |  |  | $ | 150,155 | 
|                                     |  |      |        |      |  |      |        |  |  |   |         | 

Finance expense on long-term debt includes the
amortization of deferred financing costs, amortization of
deferred debt discounts, and amortization of consent and
commitment fees as follows: $1,868,923, $1,108,511, and $256,550
respectively, for the year ended December 31, 2004;
$2,568,062, $852,275, and $1,446,281 respectively, for the year
ended December 31, 2003; and $2,566,750, $853,692, and
$1,929,035 respectively, for the year ended December 31,
2002.

15. INCOME TAXES

Reconciliation of the Companys effective
income tax rate from Canadian statutory tax rates are as follows:

|                                                        |                     |      |        |        |   |      |       |   |  |      |         |        |  |  |      |  |  |   |         |         |   |  |      |   | 
|------------------------------------------------------- | ------------------- | ---- | ------ | ------ | - | ---- | ----- | - |  | ---- | ------- | ------ |  |  | ---- |  |  | - | ------- | ------- | - |  | ---- | - | 
|                                                        |                     | 2002 |        | %      |   | 2003 |       | % |  | 2004 |         | %     
|                                                        |                     |      |        |        |   |      |       |   |  |      |         |       
|Income tax expense (recovery) at statutory rate         |                     | $    | (6,841 | )      |   |      | (37.7 | ) |  | $    | 61,995  |        |  |  | 35.3 |  |  | $ | 86,953  |         |   |  | 35.3 |  
|Large corporation tax                                   |                     |      | 1,777  |        |   |      | 9.8   |   |  |      | 1,123   |        |  |  | 0.6  |  |  |   |        |         |   |  |     |  
|Non-taxable foreign exchange gain on long-term
    debt |                     |      | (807   | )      |   |      | (4.4  | ) |  |      | (13,578 | )      |  |  | 7.7  |  |  |   | (12,996 | )       |   |  | (5.5 | )
|Reduction in statutory income tax rates                 |                     |      |       |        |   |      |      |   |  |      |        |        |  |  |     |  |  |   | (700    | )       |   |  | (0.3 | )
|Rate differentials between jurisdictions                |                     |      |       |        |   |      |      |   |  |      |        |        |  |  |     |  |  |   | (3,033  | )       |   |  | (1.3 | )
|Other non (taxable) deductible items                    |                     |      | 5,599  |        |   |      | 30.9  |   |  |      | 2,432   |        |  |  | 1.4  |  |  |   | 1,020   |         |   |  | 1.3  |  
|                                                        |                     |      |        |        |   |      |       |   |  |      |         |        |  |  |      |  |  |   |         |         |   |  |      |  
|Tax expense (recovery)                                  |                     | $    | (272   | )      |   |      | (1.4  | ) |  | $    | 51,972  |        |  |  | 45.0 |  |  | $ | 71,244  |         |   |  | 29.5 |  
|                                                        |                     |      |        |        |   |      |       |   |  |      |         |        |  |  |      |  |  |   |         |         |   |  |      |  
|Comprised of:                                           |                     |      |        |        |   |      |       |   |  |      |         |        |  |  |      |  |  |   |         |         |   |  |      |  
|                                                        | Current taxes       |      | $      | 1,777  |   |      |       |   |  |      | $       | 11,876 |  |  |      |  |  |   | $       | 85,597  |   |  |      |   | 
|                                                        | Future income taxes |      |        | (2,049 | ) |      |       |   |  |      |         | 40,096 |  |  |      |  |  |   |         | (14,353 | ) |  |      |   | 
|                                                        |                     |      |        |        |   |      |       |   |  |      |         |        |  |  |      |  |  |   |         |         |   |  |      |  
|                                                        |                     | $    | (272   | )      |   |      |       |   |  | $    | 51,972  |        |  |  |      |  |  | $ | 71,244  |         |   |  |      |  
|                                                        |                     |      |        |        |   |      |       |   |  |      |         |        |  |  |      |  |  |   |         |         |   |  |      |  

F-15



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



15. INCOME
TAXES (Continued)


Temporary timing differences and tax loss
carryforwards which give rise to the net future income tax
liability are as follows:

|                                 |                                         |      |        |        |  |   |         |         | 
|-------------------------------- | --------------------------------------- | ---- | ------ | ------ |  | - | ------- | ------- | 
|                                 |                                         | 2003 |        | 2004  
|                                 |                                         |      |        |       
|Temporary timing differences     |                                         |      |        |        |  |   |         |        
|Future income tax assets         |                                         |      |        |        |  |   |         |        
|                                 | Eligible capital expenditures           |      | $      | 3,454  |  |   | $       | 3,305   | 
|                                 | Accruals not currently deductible       |      |        | 2,298  |  |   |         | 3,231   | 
|                                 | Acquisition costs                       |      |        |       |  |   |         | 2,707   | 
|                                 | Loss on repurchase of long term debt    |      |        |       |  |   |         | 22,963  | 
|                                 | Tax loss carryforwards                  |      |        | 1,950  |  |   |         | 18,753  | 
|                                 |                                         |      |        |        |  |   |         |        
|Future income tax assets         |                                         |      | 7,702  |        |  |   | 48,252  |        
|                                 |                                         |      |        |        |  |   |         |        
|Future income tax liabilities    |                                         |      |        |        |  |   |         |        
|                                 | Depreciable capital assets              |      |        | 45,679 |  |   |         | 103,907 | 
|                                 | Deferred pension costs                  |      |        | 1,463  |  |   |         | 4,270   | 
|                                 | Foreign exchange gain on long term debt |      |        |       |  |   |         | 14,577  | 
|                                 | Financing costs                         |      |        | 7,956  |  |   |         | 447     | 
|                                 |                                         |      |        |        |  |   |         |        
|Future income tax liabilities    |                                         |      | 55,098 |        |  |   | 123,201 |        
|                                 |                                         |      |        |        |  |   |         |        
|Future income tax liability, net |                                         | $    | 47,396 |        |  | $ | 74,949  |        
|                                 |                                         |      |        |        |  |   |         |        

The company has non-capital tax loss
carryforwards of approximately $54,000,000 which expire as
follows:

|     |  |   |        | 
|---- |  | - | ------ | 
|2008 |  | $ | 21,191 | 
|2009 |  |   | 20,871 | 
|2010 |  |   | 11,938 | 
|     |  |   |        | 
|     |  | $ | 54,000 | 
|     |  |   |        | 

16. DIVIDENDS

On September 7, 2004 the Company paid a cash
dividend of $1.00 per common share to holders of record of
common shares as of the close of business on August 24,
2004.

F-16



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)

17. COMMITMENTS

The Company is committed to capital and operating
lease payments in respect of premises and equipment as follows:

|                             |  |         |     |           |  |   |        | 
|---------------------------- |  | ------- | --- | --------- |  | - | ------ | 
|                             |  | Capital |     | Operating
|                             |  | Leases  |     | Leases   
|                             |  |         |     |          
|2004                         |  | $       | 296 |           |  | $ | 4,428  | 
|2005                         |  |         |    |           |  |   | 3,859  | 
|2006                         |  |         |    |           |  |   | 2,320  | 
|2007                         |  |         |    |           |  |   | 1,423  | 
|2008                         |  |         |    |           |  |   | 1,241  | 
|                             |  |         |     |           |  |   |        | 
|Total minimum lease payments |  | $       | 296 |           |  | $ | 13,271 | 
|                             |  |         |     |           |  |   |        | 
|Imputed Interest             |  |         | 22  |           |  |   |        | 
|                             |  |         |     |           |  |   |        | 
|Capital lease obligations    |  | $       | 274 |           |  |   |        | 
|                             |  |         |     |           |  |   |        | 

Rent expense was $5,627,000, $4,317,298 and
$4,823,044 for 2002, 2003 and 2004, respectively.

The Company has entered into agreements with
suppliers of energy. The Companys Grande Prairie and High
Level OSB facilities have established fixed price contracts to
purchase 7.25 megawatts (MW) in 2005 and 3.5 MW in
2006. The total commitment arising from these agreements is
$2,900,000 in 2005 and $1,300,000 in 2006.

During 2003, the Company entered into a fixed
price propane supply agreement which expires September 30,
2006. Based on the current annual consumption, the estimated
obligation in 2005 is $1,725,000 and $1,365,000 in 2006.

18. PENSION PLANS

The Company maintains two defined benefit pension
plans for certain salaried and certain hourly employees in
British Columbia and Minnesota. The Company was required to
set-up a defined benefit pension plan for employees of its
Minnesota OSB operations subsequent to the acquisition of the
Minnesota OSB facilities.

The Company also participates in a multi-employer
pension plan for hourly employees who are subject to a
collective bargaining agreement and sponsors a Group Registered
Retirement Savings Plan (RRSP) at two of its operations. The
Company made Group RRSP contributions of $1,155,000 for 2002,
$1,164,000 for 2003 and $1,413,500 for 2004.

The Company measures its accrued benefit
obligations and the fair value of plan assets for accounting
purposes as at December 31 of each year. The most recent
actuarial valuation of the British Columbia pension plan for
funding purposes was as of December 31, 2004, and the next
required valuation will be as of December 31, 2007. The
Company is currently having an actuarial valuation of the
Minnesota plan as at September 30, 2004 completed.

F-17



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



18. PENSION
PLANS (Continued)


Information about the Companys defined
benefit pension plans is as follows:

|                                               |                                           |                              |        |        |      |      |        |        |      |   |         |         |      |  
|---------------------------------------------- | ----------------------------------------- | ---------------------------- | ------ | ------ | ---- | ---- | ------ | ------ | ---- | - | ------- | ------- | ---- | -
|                                               |                                           | 2002                         |        | 2003   |      | 2004
|                                               |                                           |                              |        |        |      |     
|PLAN ASSETS                                    |                                           |                              |        |        |      |      |        |        |      |   |         |        
|                                               | Fair value at beginning of year           |                              | $      | 27,718 |      |      | $      | 25,801 |      |   | $       | 26,900  |     
|                                               | Return on plan assets                     |                              |        | 1,923  |      |      |        | 1,757  |      |   |         | 1,926   |     
|                                               | Employer contributions                    |                              |        | 1,701  |      |      |        | 1,466  |      |   |         | 11,713  |     
|                                               | Benefits paid                             |                              |        | (2,185 | )    |      |        | (2,865 | )    |   |         | (2,130  | )   
|                                               | Experience (loss) gain                    |                              |        | (3,356 | )    |      |        | 741    |      |   |         | 122     |     
|                                               |                                           |                              |        |        |      |      |        |        |      |   |         |        
|                                               | Fair value at end of year                 |                              |        | 25,801 |      |      |        | 26,900 |      |   |         | 38,531  |     
|                                               |                                           |                              |        |        |      |      |        |        |      |   |         |        
|ACCRUED BENEFIT OBLIGATION                     |                                           |                              |        |        |      |      |        |        |      |   |         |        
|                                               | Balance at beginning of year              |                              |        | 28,934 |      |      |        | 30,760 |      |   |         | 33,659  |     
|                                               | Current service cost                      |                              |        | 1,419  |      |      |        | 1,506  |      |   |         | 2,221   |     
|                                               | Interest cost                             |                              |        | 2,048  |      |      |        | 2,158  |      |   |         | 2,549   |     
|                                               | Benefits paid                             |                              |        | (2,185 | )    |      |        | (2,865 | )    |   |         | (2,130  | )   
|                                               | Plan improvement cost                     |                              |        | 544    |      |      |        |       |      |   |         | 2,057   |     
|                                               | Minnesota OSB Facilities Plan Acquisition |                              |        |       |      |      |        |       |      |   |         | 7,329   |     
|                                               | Adjustment to discount rate               |                              |        |       |      |      |        | 2,100  |      |   |         | 2,968   |     
|                                               | Actuarial gain                            |                              |        |       |      |      |        |       |      |   |         | 1,450   |     
|                                               |                                           |                              |        |        |      |      |        |        |      |   |         |        
|                                               | Balance at end of year                    |                              |        | 30,760 |      |      |        | 33,659 |      |   |         | 50,102  |     
|                                               |                                           |                              |        |        |      |      |        |        |      |   |         |        
|NET DEFICIT, END OF YEAR                       |                                           | $                            | (4,959 | )      |      | $    | (6,759 | )      |      | $ | (11,571 | )      
|                                               |                                           |                              |        |        |      |      |        |        |      |   |         |        
|ACCRUED PENSION BENEFIT ASSET IS COMPRISED OF: |                                           |                              |        |        |      |      |        |        |      |   |         |        
|                                               | Funded Status  Plan Deficit              |                              | $      | (4,959 | )    |      | $      | (6,759 | )    |   | $       | (11,571 | )   
|                                               | Unamortized net actuarial loss            |                              |        | 11,619 |      |      |        | 12,476 |      |   |         | 16,186  |     
|                                               | Unamortized transitional obligation       |                              |        | (2,245 | )    |      |        | (2,070 | )    |   |         | (1,897  | )   
|                                               | Unamortized past service cost             |                              |        |       |      |      |        | 509    |      |   |         | 9,579   |     
|                                               | Plan improvement cost                     |                              |        | 544    |      |      |        |       |      |   |         |        |     
|                                               |                                           |                              |        |        |      |      |        |        |      |   |         |        
|                                               | Accrued Pension Benefit Asset (Note 9)    |                              | $      | 4,959  |      |      | $      | 4,156  |      |   | $       | 12,297  |     
|                                               |                                           |                              |        |        |      |      |        |        |      |   |         |        
|FUNDED STATUS  PLAN DEFICIT                   |                                           |                              |        |        |      |      |        |        |      |   |         |        
|                                               | Accrued benefit obligation                |                              | $      | 30,760 |      |      | $      | 33,659 |      |   | $       | 50,102  |     
|                                               | Fair value of plan assets                 |                              |        | 25,801 |      |      |        | 26,900 |      |   |         | 38,531  |     
|                                               |                                           |                              |        |        |      |      |        |        |      |   |         |        
|                                               |                                           | $                            | (4,959 | )      |      | $    | (6,759 | )      |      | $ | (11,571 | )      
|                                               |                                           |                              |        |        |      |      |        |        |      |   |         |        
|PENSION EXPENSE IS COMPRISED OF:               |                                           |                              |        |        |      |      |        |        |      |   |         |        
|                                               | Accrual for Services                      |                              | $      | 1,419  |      |      | $      | 1,506  |      |   | $       | 2,221   |     
|                                               | Interest on accrued benefits              |                              |        | 2,048  |      |      |        | 2,158  |      |   |         | 2,549   |     
|                                               | Interest on pension fund assets           |                              |        | (1,923 | )    |      |        | (1,757 | )    |   |         | (1,926  | )   
|                                               | Amortization amounts                      |                              |        |        |      |      |        |        |      |   |         |        |     
|                                               |                                           | Unfunded liability (surplus) |        |        | (173 | )    |        |        | (173 | ) |         |         | (173 | )
|                                               |                                           | Experience gains and losses  |        |        | 336  |      |        |        | 503  |   |         |         |     |  
|                                               |                                           | Past service costs           |        |        |     |      |        |        | 32   |   |         |         | 318  |  
|                                               | Gain (Loss) on Settlement                 |                              |        |       |      |      |        |       |      |   |         | 584     |     
|                                               |                                           |                              |        |        |      |      |        |        |      |   |         |        
|                                               |                                           | $                            | 1,707  |        |      | $    | 2,269  |        |      | $ | 3,573   |        
|                                               |                                           |                              |        |        |      |      |        |        |      |   |         |        

F-18



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



18. PENSION
PLANS (Continued)


|            |                               |      |        |       |  |      |        |        |  |   |        |        | 
|----------- | ----------------------------- | ---- | ------ | ----- |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|            |                               | 2002 |        | 2003  |  | 2004
|            |                               |      |        |       |  |     
|PLAN ASSETS |                               |      |        |       |  |      |        |        |  |   |        |       
|            | Cash                          |      | $      |      |  |      | $      |       |  |   | $      | 8,420  | 
|            | Canadian bonds and debentures |      |        | 9,870 |  |      |        | 14,203 |  |   |        | 15,352 | 
|            | Canadian Common Shares        |      |        | 8,282 |  |      |        | 6,932  |  |   |        | 8,728  | 
|            | Canadian pooled equity funds  |      |        | 2,225 |  |      |        | 523    |  |   |        |       | 
|            | Global pooled equity funds    |      |        | 2,583 |  |      |        | 2,254  |  |   |        | 3,349  | 
|            | US Common Shares              |      |        |      |  |      |        |       |  |   |        | 2,682  | 
|            | US pooled equity funds        |      |        | 2,841 |  |      |        | 2,988  |  |   |        |       | 
|            |                               |      |        |       |  |      |        |        |  |   |        |       
|            |                               | $    | 25,801 |       |  | $    | 26,900 |        |  | $ | 38,531 |       
|            |                               |      |        |       |  |      |        |        |  |   |        |       

The significant weighted-average actuarial
assumptions adopted in measuring the Companys accrued
benefit obligations as at December 31 included the
following:

|                                                 |  |      |      |      |  |      |      |  |  |  |      | 
|------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                                                 |  | 2002 |      | 2003 |  | 2004
|                                                 |  |      |      |      |  |     
|Discount rate                                    |  |      | 7.0% |      |  |      | 7.0% |  |  |  | 6.0% | 
|Expected long-term rate of return on plan assets |  |      | 8.0% |      |  |      | 7.0% |  |  |  | 7.0% | 
|Rate of compensation increase                    |  |      | 4.5% |      |  |      | 4.5% |  |  |  | 4.0% | 

The significant weighted-average actuarial
assumptions adopted in measuring the Companys benefit
costs as at December 31 included the following:

|                                                 |  |      |      |      |  |      |      |  |  |  |      | 
|------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                                                 |  | 2002 |      | 2003 |  | 2004
|                                                 |  |      |      |      |  |     
|Discount rate                                    |  |      | 7.0% |      |  |      | 7.0% |  |  |  | 6.5% | 
|Expected long-term rate of return on plan assets |  |      | 8.0% |      |  |      | 7.0% |  |  |  | 7.0% | 
|Rate of compensation increase                    |  |      | 4.5% |      |  |      | 4.5% |  |  |  | 4.0% | 

Total cash payments for employee future benefits
for 2004, consisting of cash contributed by the Company to its
defined benefit pension plans and cash payments directly to
beneficiaries, was $5,486,400 (2003-$3,964,000).

19. CONTINGENCIES

Due to the nature of its business, the Company is
involved in various legal actions. In the opinion of management,
none of the claims are significant and any resulting liability
would not have a material adverse effect on the Companys
financial position or results of operations.

F-19



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)

20. RELATED PARTY TRANSACTIONS

The Company had transactions with companies owned
by or related to its officers and directors as follows:

|                                                                                                          |  |      |     |      |  |      |     |  |  |   |     | 
|--------------------------------------------------------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                                                                                          |  | 2002 |     | 2003 |  | 2004
|                                                                                                          |  |      |     |      |  |     
|Rental charges for mobile forestry and
    transportation equipment at normal commercial terms and prices |  | $    | 120 |      |  | $    | 120 |  |  | $ | 120 | 
|Acquisition of capital assets                                                                             |  |      | 22  |      |  |      |    |  |  |   |    | 
|Amounts due from officers and companies with
    directors in common included in other assets             |  |      | 466 |      |  |      | 479 |  |  |   | 490 | 
|Amounts due to companies with directors in common
    included in accounts payable                        |  |      | 2   |      |  |      |    |  |  |   |    | 

Subsequent to year-end, the $490,000 due to the
Company at December 31, 2004 was repaid.

21. SEGMENTED INFORMATION

The Company operates principally in Canada and
the United States in one business segment, manufacturing wood
panel products.

Sales attributed to countries based on location
of customer are as follows:

|                              |                 |      |         |         |  |      |         |         |  |   |         |         | 
|----------------------------- | --------------- | ---- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                              |                 | 2002 |         | 2003    |  | 2004
|                              |                 |      |         |         |  |     
|Geographic sales information: |                 |      |         |         |  |      |         |         |  |   |         |        
|                              | Canada          |      | $       | 83,508  |  |      | $       | 94,277  |  |   | $       | 106,837 | 
|                              | U.S.A.          |      |         | 298,379 |  |      |         | 410,212 |  |   |         | 763,952 | 
|                              | Europe          |      |         | 8,339   |  |      |         | 8,067   |  |   |         | 9,641   | 
|                              | Japan and other |      |         | 40,122  |  |      |         | 30,431  |  |   |         | 29,492  | 
|                              |                 |      |         |         |  |      |         |         |  |   |         |        
|                              |                 | $    | 430,348 |         |  | $    | 542,987 |         |  | $ | 909,922 |        
|                              |                 |      |         |         |  |      |         |         |  |   |         |        

Capital assets attributed to the countries based
on location are as follows:

|              |  |      |         |      |  |   |         | 
|------------- |  | ---- | ------- | ---- |  | - | ------- | 
|              |  | 2003 |         | 2004
|              |  |      |         |     
|Canada        |  | $    | 293,502 |      |  | $ | 433,424 | 
|United States |  |      |        |      |  |   | 492,780 | 
|              |  |      |         |      |  |   |         | 
|Total         |  | $    | 293,502 |      |  | $ | 926,204 | 
|              |  |      |         |      |  |   |         | 

Goodwill of $103,516,000 (Note 2) is attributable
to the Acquisition of Voyageur Panel Canada Limited which is
located in Canada.

F-20



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)

22. CHANGE IN NON-CASH OPERATING WORKING
CAPITAL

|                                         |  |      |        |      |  |      |         |   |  |   |        |  
|---------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                         |  | 2002 |        | 2003 |  | 2004
|                                         |  |      |        |      |  |     
|Accounts receivable                      |  | $    | (1,388 | )    |  | $    | (6,650  | ) |  | $ | 14,236 |  
|Inventories                              |  |      | (5,440 | )    |  |      | (2,247  | ) |  |   | (4,358 | )
|Prepaid expenses                         |  |      | (1,655 | )    |  |      | (778    | ) |  |   | (4,168 | )
|Accounts payable and accrued liabilities |  |      | 3,325  |      |  |      | (6,608  | ) |  |   | 45,787 |  
|Income taxes payable                     |  |      | (2,372 | )    |  |      | 3,614   |   |  |   | 37,687 |  
|                                         |  |      |        |      |  |      |         |   |  |   |        |  
|Total                                    |  | $    | (7,530 | )    |  | $    | (12,669 | ) |  | $ | 89,184 |  
|                                         |  |      |        |      |  |      |         |   |  |   |        |  

23. FINANCIAL INSTRUMENTS

(a) Financial
and credit risk

The financial risk is the risk that the value of
the Companys financial instruments will vary due to
fluctuations in interest rates and foreign exchange rates, and
the degree of volatility of these rates.

The Company does not have a significant exposure
to any individual customer or counterparty. Concentrations of
credit risk on trade accounts receivable are with customers in
the forestry industry which are located in Canada and the United
States.

(b) Fair
values

The fair value of the Companys accounts
receivable, accounts payable and accrued liabilities is
estimated to approximate their carrying value due to the
immediate or short term maturity of these financial instruments.

The fair value of the long-term debt is
determined using quoted market values for the Companys
Senior Secured Notes. The estimated fair value may differ from
the amount which could be realized in an immediate settlement of
the instruments.

The carrying value and fair value of the long
term debt are as follows:

|               |                |          |         |         |  |          |         |         |  |   |         |         |  |   |         |         | 
|-------------- | -------------- | -------- | ------- | ------- |  | -------- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|               |                |          |         |        
|               |                | 2003     |         | 2004   
|               |                |          |         |        
|               |                | Carrying |         | Fair    |  | Carrying |         | Fair   
|               |                | Value    |         | Value   |  | Value    |         | Value  
|               |                |          |         |         |  |          |         |        
|LONG-TERM DEBT |                |          |         |         |  |          |         |         |  |   |         |         |  |   |         |        
|               | Senior notes   |          | $       | 354,833 |  |          | $       | 414,041 |  |   | $       | 916,625 |  |   | $       | 961,697 | 
|               | Capital leases |          |         | 549     |  |          |         | 549     |  |   |         | 274     |  |   |         | 274     | 
|               |                |          |         |         |  |          |         |         |  |   |         |         |  |   |         |        
|               |                | $        | 355,382 |         |  | $        | 414,590 |         |  | $ | 916,899 |         |  | $ | 961,971 |        
|               |                |          |         |         |  |          |         |         |  |   |         |         |  |   |         |        

F-21



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)

24. U.S. GAAP
RECONCILIATION

As indicated in Note 1, these consolidated
financial statements have been prepared in accordance with
Canadian GAAP, which, in the case of the Company, conforms in
all material respects with U.S. GAAP, except as set forth
below:

(a) Adjustments
to assets, liabilities and shareholders equity

|                                                                            |                                            |      |         |        |   |      |         |        |   |   |           |        |  
|--------------------------------------------------------------------------- | ------------------------------------------ | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | --------- | ------ | -
|                                                                            |                                            | 2002 |         | 2003   |   | 2004
|                                                                            |                                            |      |         |        |   |     
|Total assets in accordance with Canadian GAAP                               |                                            | $    | 555,052 |        |   | $    | 627,721 |        |   | $ | 1,441,011 |       
|Write-off of capitalized start-up costs(1)                                  |                                            |      | (10,380 | )      |   |      | (8,966  | )      |   |   | (7,361    | )     
|Intangible asset, arising from minimum pension
    liability calculation(2) |                                            |      |        |        |   |      | 509     |        |   |   | 9,579     |       
|                                                                            |                                            |      |         |        |   |      |         |        |   |   |           |       
|Total assets in accordance with U.S. GAAP                                   |                                            | $    | 544,672 |        |   | $    | 619,264 |        |   | $ | 1,443,229 |       
|                                                                            |                                            |      |         |        |   |      |         |        |   |   |           |       
|Total liabilities in accordance with Canadian GAAP                          |                                            | $    | 506,681 |        |   | $    | 455,930 |        |   | $ | 1,140,679 |       
|Future income taxes relating to write-off:                                  |                                            |      |         |        |   |      |         |        |   |   |           |       
|                                                                            | of capitalized start-up costs(1)           |      |         | (3,700 | ) |      |         | (3,194 | ) |   |           | (2,622 | )
|Minimum pension liability, net of tax effect(2)                             |                                            |      | 6,447   |        |   |      | 7,273   |        |   |   | 18,867    |       
|                                                                            |                                            |      |         |        |   |      |         |        |   |   |           |       
|Total liabilities in accordance with U.S. GAAP                              |                                            | $    | 509,428 |        |   | $    | 460,009 |        |   | $ | 1,156,924 |       
|                                                                            |                                            |      |         |        |   |      |         |        |   |   |           |       
|Total shareholders equity in accordance
    with Canadian GAAP             |                                            | $    | 48,371  |        |   | $    | 171,791 |        |   | $ | 300,332   |       
|Change in retained earnings relating to:                                    |                                            |      |         |        |   |      |         |        |   |   |           |       
|                                                                            | Write-off of capitalized start-up costs(1) |      |         | (6,680 | ) |      |         | (5,772 | ) |   |           | (4,739 | )
|                                                                            | Accumulated other comprehensive loss(2)    |      |         | (6,447 | ) |      |         | (6,764 | ) |   |           | (9,288 | )
|                                                                            |                                            |      |         |        |   |      |         |        |   |   |           |       
|Total shareholders equity in accordance
    with U.S. GAAP                 |                                            | $    | 35,244  |        |   | $    | 159,255 |        |   | $ | 286,305   |       
|                                                                            |                                            |      |         |        |   |      |         |        |   |   |           |       

(b) Adjustments
to earnings

|                                                                                           |  |      |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                           |  | 2002 |         | 2003 |  | 2004
|                                                                                           |  |      |         |      |  |     
|Net income (loss) in accordance with
    Canadian GAAP                                     |  | $    | (17,873 | )    |  | $    | 124,355 |   |  | $ | 175,082 |  
|Reversal of amortization of capitalized start-up
    costs, net of future income taxes (1) |  |      | 874     |      |  |      | 677     |   |  |   | 1,033   |  
|                                                                                           |  |      |         |      |  |      |         |   |  |   |         |  
|Net income (loss) in accordance with U.S.
    GAAP                                         |  |      | (16,999 | )    |  |      | 125,032 |   |  |   | 176,115 |  
|Minimum pension liability, net of tax
    (Note 24(c)(i)                                   |  |      | (2,427  | )    |  |      | (317    | ) |  |   | (2,524  | )
|Cumulative translation adjustment                                                          |  |      |        |      |  |      |        |   |  |   | (34,237 | )
|                                                                                           |  |      |         |      |  |      |         |   |  |   |         |  
|Comprehensive income (loss) in accordance with
    U.S. GAAP (Note 24(c)(i)                |  | $    | (19,426 | )    |  | $    | 124,715 |   |  | $ | 139,354 |  
|                                                                                           |  |      |         |      |  |      |         |   |  |   |         |  
|Basic and diluted earnings (loss) per share in
    accordance with U.S. GAAP               |  | $    | (1.17   | )    |  | $    | 8.59    |   |  | $ | 12.05   |  
|                                                                                           |  |      |         |      |  |      |         |   |  |   |         |  

F-22



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)





24. U.S. GAAP
RECONCILIATION (Continued)




---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | Under U.S. GAAP, the direct operating losses
    arising during the start-up phase of the oriented strand board
    facilities, which were capitalized under Canadian GAAP, are
    charged against earnings.                                                                                                                                                                                                                                                                    
|  
|2. | Under U.S. GAAP, the Company would recognize the
    difference between the unfunded accumulated pension benefit
    obligation and the accrued benefit asset (Note 18) as an
    additional minimum pension liability, and an equal amount as an
    intangible asset, subject to the following. If the additional
    liability exceeded unrecognized past service cost, the excess
    would be recognized as other comprehensive loss, net of any
    resulting tax benefits.

(c) Other
Information Regarding U.S. GAAP

(i) Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive
Income, issued under U.S. GAAP, requires the reporting and
display of comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income is
net income plus certain other items that are recorded directly
to shareholders equity such as foreign currency
translation adjustments and minimum pension liability. There is
currently no requirement to disclose comprehensive income under
Canadian GAAP.

Comprehensive loss arising from minimum pension
liability:

|                                                            |  |      |        |      |  |      |       |   |  |   |        |  
|----------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                                            |  | 2002 |        | 2003 |  | 2004
|                                                            |  |      |        |      |  |     
|Amount arising in year                                      |  | $    | 3,734  |      |  | $    | 488   |   |  | $ | 3,883  |  
|Future income tax (recovery)                                |  |      | (1,307 | )    |  |      | (171  | ) |  |   | (1,359 | )
|                                                            |  |      |        |      |  |      |       |   |  |   |        |  
|                                                            |  |      | 2,427  |      |  |      | 317   |   |  |   | 2,524  |  
|Accumulated other comprehensive loss, beginning
    of year |  |      | 4,020  |      |  |      | 6,447 |   |  |   | 6,764  |  
|                                                            |  |      |        |      |  |      |       |   |  |   |        |  
|Accumulated other comprehensive loss, end of year           |  | $    | 6,447  |      |  | $    | 6,764 |   |  | $ | 9,288  |  
|                                                            |  |      |        |      |  |      |       |   |  |   |        |  

(ii) In December 2004, the FASB issued SFAS
No. 123(R), Share-Based Payment, which establishes
accounting standards for all transactions in which an entity
exchanges its equity instruments for goods and services. SFAS
No. 123(R) focuses primarily on accounting for transactions
with employees, and carries forward without change prior
guidance for share-based payments for transactions with non
employees.

SFAS No. 123(R) eliminates the intrinsic
value measurement objective in APB Opinion 25 and generally
requires us to measure the cost of employee services received in
exchange for an award of equity instruments based on the fair
value of the award on the date of the grant. The standard
requires grant date fair value to be estimated using either an
option-pricing model which is consistent with the terms of the
award or a market observed price, if such a price exists. Such
cost must be recognized over the period during which an employee
is required to provide service in exchange for the
award  the requisite service period (which is usually
the vesting period). The standard also requires us to estimate
the number of instruments that will ultimately be issued, rather
than accounting for forfeitures as they occur.

We are required to apply SFAS No. 123(R) to
all awards granted, modified or settled in our first reporting
period under U.S. GAAP after June 15, 2005. We are
also required to use either the modified prospective
method or the modified retrospective method.

Under the modified prospective method, we must
recognize compensation cost for all awards granted after we
adopt the standard and for the unvested portion of previously
granted awards that are outstanding on that date.

F-23



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)





24. U.S. GAAP
RECONCILIATION (Continued)


Under the modified retrospective method, we must
restate our previously issued financial statements to recognize
the amounts we previously calculated and reported on a pro forma
basis, as if the prior standard had been adopted. Under both
methods, we are permitted to use either a straight line or an
accelerated method to amortize the cost as an expense for awards
with graded vesting. The standard permits and encourages early
adoption. Management is analyzing the requirements of this new
Statement and believes that its adoption will not have any
significant impact on the Companys financial position,
results of operations or cash flows.

(iii) In November 2004, the FASB issued SFAS
No. 151, Inventory Costs an amendment of ARB No. 43,
Chapter 4, which amends Chapter 4 of ARB No. 43
that deals with inventory pricing. The Statement clarifies the
accounting for abnormal amounts of idle facility expenses,
freight, handling costs, and spoilage. Under previous guidance,
paragraph 5 of ARB No. 43, chapter 4, items such as idle
facility expense, excessive spoilage, double freight, and
rehandling costs might be considered to be so abnormal, under
certain circumstances, as to require treatment as current period
charges. This Statement eliminates the criterion of so
abnormal and requires that those items be recognized as
current period charges. Also, this Statement requires that
allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005,
although earlier application is permitted for fiscal years
beginning after the date of issuance of this Statement.
Retroactive application is not permitted. Management is
analyzing the requirements of this new Statement and believes
that its adoption will not have any significant impact on the
Companys financial position, results of operations or cash
flows.

(iii) In December 2004, the FASB issued SFAS
No. 153, Exchanges of Non-monetary Assets an amendment of
APB No. 29. This Statement amends Opinion 29 to eliminate
the exception for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. The
Statement specifies that a non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement
is effective for non-monetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges
occurring in fiscal periods beginning after the date this
Statement is issued. Retroactive application is not permitted.
Management is analyzing the requirements of this new Statement
and believes that its adoption will not have any significant
impact on the Companys financial position, results of
operations or cash flows.



|    |                                                                            
|--- | ---------------------------------------------------------------------------
|25. | SEPARATE FINANCIAL INFORMATION OF SUBSIDIARY
    GUARANTORS OF INDEBTEDNESS

On March 3, 2004, the Company issued
US$210 million of 6.75% Senior Unsecured Notes to refinance
its outstanding indebtedness at the time. On May 19, 2004,
the Company issued US$110 million of 6.75% Senior Unsecured
Notes to finance the acquisition of Voyageur. On
September 22, 2004 the Company issued US$275 million
in aggregate principal amount of 7.25% Senior Unsecured Notes
and US$175 million in aggregate principal amount of Senior
Unsecured Floating Rate Notes to finance the acquisition of the
Minnesota OSB facilities. Under the terms of the Senior Notes
referred to above, Ainsworth Engineered (USA), LLC, Ainsworth
Engineered Corp. (formerly Voyageur) and Ainsworth Engineered
Canada Limited Partnership became joint and several guarantors
of the indebtedness (the Guarantors). The guarantee
is a full and unconditional guarantee.

F-24



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|25. | SEPARATE FINANCIAL INFORMATION OF SUBSIDIARY
    GUARANTORS OF INDEBTEDNESS (Continued)

Additionally, if at any time a subsidiary of the
Company constitutes a significant subsidiary, then such
subsidiary will also become a guarantor of the indebtedness. If
the Company were to fail to make a payment of interest or
principal on its due date, the Guarantors are obligated to pay
the outstanding indebtedness. At December 31, 2004, the
Company had the following outstanding amounts related to the
guaranteed indebtedness:

|                                                                                                                                  |  |   |         | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- | 
|U.S.$275,000,000 Senior Unsecured Notes due
    October 1, 2012 with interest payable semi-annually at
    7.25% per annum        |  | $ | 330,550 | 
|U.S.$175,000,000 Senior Unsecured Notes due
    October 1, 2010 with interest payable quarterly at LIBOR
    plus 3.75% per annum |  |   | 210,350 | 
|U.S.$210,000,000 Senior Unsecured Notes due
    March 15, 2014 with interest payable semi-annually at 6.75%
    per annum         |  |   | 252,420 | 
|U.S.$110,000,000 Senior Unsecured Notes due
    March 15, 2014 with interest payable semi-annually at 6.75%
    per annum         |  |   | 132,220 | 
|                                                                                                                                  |  |   |         | 
|                                                                                                                                  |  | $ | 925,540 | 
|                                                                                                                                  |  |   |         | 

The following condensed consolidating financial
information reflects the summarized financial information of the
Company and its Guarantors:

Condensed Consolidated Balance Sheet

as at December 31, 2004


|                         |  |                  |           |            |  |            |         |              |  |                 |         |  |  |   |          |   |  |   |           | 
|------------------------ |  | ---------------- | --------- | ---------- |  | ---------- | ------- | ------------ |  | --------------- | ------- |  |  | - | -------- | - |  | - | --------- | 
|                         |  | Ainsworth        |           | Ainsworth  |  | Ainsworth  |         |              |  | Ainsworth      
|                         |  | Lumber Co Ltd.   |           | Engineered |  | Engineered |         |              |  | Lumber Co. Ltd.
|                         |  | Non-Consolidated |           | (USA) LLC  |  | Corp.      |         | Eliminations |  | Consolidated   
|                         |  |                  |           |            |  |            |         |              |  |                
|                         |  | Parent Issuer    |           | Subsidiary |  | Subsidiary |         |              |  |                
|                         |  |                  |           | Guarantor  |  | Guarantor  |         |              |  |                
|ASSETS                   |  |                  |           |            |  |            |         |              |  |                 |         |  |  |   |          |   |  |   |           | 
|CASH                     |  | $                | 193,521   |            |  | $          | 16,543  |              |  | $               | 2,560   |  |  | $ |         |   |  | $ | 212,624   | 
|OTHER CURRENT ASSETS     |  |                  | 112,041   |            |  |            | 28,057  |              |  |                 | 10,867  |  |  |   |         |   |  |   | 150,965   | 
|CAPITAL ASSETS           |  |                  | 280,085   |            |  |            | 495,656 |              |  |                 | 88,913  |  |  |   | 61,550   |   |  |   | 926,204   | 
|OTHER ASSETS             |  |                  | 43,673    |            |  |            | 4,029   |              |  |                 |        |  |  |   |         |   |  |   | 47,702    | 
|GOODWILL                 |  |                  |          |            |  |            |         |              |  |                 |        |  |  |   | 103,516  |   |  |   | 103,516   | 
|DUE FROM PARENT COMPANY  |  |                  |          |            |  |            | 32,315  |              |  |                 | 106,057 |  |  |   | (138,372 | ) |  |   |          | 
|INVESTMENT IN SUBSIDIARY |  |                  | 921,841   |            |  |            |        |              |  |                 |        |  |  |   | (921,841 | ) |  |   |          | 
|                         |  |                  |           |            |  |            |         |              |  |                 |         |  |  |   |          |   |  |   |           | 
|                         |  | $                | 1,551,161 |            |  | $          | 576,600 |              |  | $               | 208,397 |  |  | $ | (895,147 | ) |  | $ | 1,441,011 | 
|                         |  |                  |           |            |  |            |         |              |  |                 |         |  |  |   |          |   |  |   |           | 

F-25



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|25. | SEPARATE FINANCIAL INFORMATION OF SUBSIDIARY
    GUARANTORS OF INDEBTEDNESS (Continued)

|                                                                               |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |        |  
|------------------------------------------------------------------------------ | ------------------------------------------ | ---------------- | --------- | ---------- | - | ---------- | ------- | ------------ |  | --------------- | ------- | - |  | - | -------- | - |  | - | --------- | ------ | -
|                                                                               |                                            | Ainsworth        |           | Ainsworth  |   | Ainsworth  |         |              |  | Ainsworth      
|                                                                               |                                            | Lumber Co Ltd.   |           | Engineered |   | Engineered |         |              |  | Lumber Co. Ltd.
|                                                                               |                                            | Non-Consolidated |           | (USA) LLC  |   | Corp.      |         | Eliminations |  | Consolidated   
|                                                                               |                                            |                  |           |            |   |            |         |              |  |                
|                                                                               |                                            | Parent Issuer    |           | Subsidiary |   | Subsidiary |         |              |  |                
|                                                                               |                                            |                  |           | Guarantor  |   | Guarantor  |         |              |  |                
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                       |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |       
|CURRENT LIABILITIES                                                            |                                            |                  | 125,466   |            |   |            | 3,491   |              |  |                 | 15,678  |   |  |   |         |   |  |   | 144,635   |       
|REFORESTATION OBLIGATION                                                       |                                            |                  | 4,470     |            |   |            |        |              |  |                 |        |   |  |   |         |   |  |   | 4,470     |       
|DUE TO PARENT COMPANY                                                          |                                            |                  | 138,372   |            |   |            |        |              |  |                 |        |   |  |   | (138,372 | ) |  |   |          |       
|LONG TERM DEBT                                                                 |                                            |                  | 916,625   |            |   |            |        |              |  |                 |        |   |  |   |         |   |  |   | 916,625   |       
|FUTURE INCOME TAXES                                                            |                                            |                  | 31,659    |            |   |            | 580     |              |  |                 | 19,237  |   |  |   | 23,473   |   |  |   | 74,949    |       
|                                                                               |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |       
|                                                                               |                                            |                  | 1,216,592 |            |   |            | 4,071   |              |  |                 | 34,915  |   |  |   | (114,899 | ) |  |   | 1,140,679 |       
|PREFERRED SHARES                                                               |                                            |                  |          |            |   |            |        |              |  |                 | 25,999  |   |  |   | (25,999  | ) |  |   |          |       
|SHAREHOLDERS EQUITY                                                           |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |       
|Capital stock (Note 5)                                                         |                                            |                  | 55,827    |            |   |            | 1       |              |  |                 | 55,419  |   |  |   | (55,420  | ) |  |   | 55,827    |       
|Contributed Surplus                                                            |                                            |                  |          |            |   |            | 587,431 |              |  |                 |        |   |  |   | (587,431 | ) |  |   |          |       
|Cumulative translation adjustment                                              |                                            |                  |          |            |   |            | (34,237 | )            |  |                 |        |   |  |   |         |   |  |   | (34,237   | )     
|Retained earnings                                                              |                                            |                  | 278,742   |            |   |            | 19,334  |              |  |                 | 92,064  |   |  |   | (111,398 | ) |  |   | 278,742   |       
|                                                                               |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |       
|                                                                               |                                            |                  | 334,569   |            |   |            | 572,529 |              |  |                 | 147,483 |   |  |   | (754,249 | ) |  |   | 300,332   |       
|                                                                               |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |       
|                                                                               |                                            | $                | 1,551,161 |            |   | $          | 576,600 |              |  | $               | 208,397 |   |  | $ | (895,147 | ) |  | $ | 1,441,011 |       
|                                                                               |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |       
|Total assets in accordance with Canadian GAAP                                  |                                            | $                | 1,551,161 |            |   | $          | 576,600 |              |  | $               | 208,397 |   |  | $ | (895,147 | ) |  | $ | 1,441,011 |       
|Write-off of capitalized start-up costs(1)                                     |                                            |                  | (7,361    | )          |   |            |        |              |  |                 |        |   |  |   |          |   |  |   | (7,361    | )     
|Intangible asset, arising from minimum pension
    liability calculation(2)    |                                            |                  | 9,579     |            |   |            |        |              |  |                 |        |   |  |   |          |   |  |   | 9,579     |       
|                                                                               |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |       
|Total assets in accordance with U.S. GAAP                                      |                                            | $                | 1,553,379 |            |   | $          | 576,600 |              |  | $               | 208,397 |   |  | $ | (895,147 | ) |  | $ | 1,443,229 |       
|                                                                               |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |       
|Total liabilities in accordance with Canadian GAAP                             |                                            |                  | 1,216,592 |            |   |            | 4,071   |              |  |                 | 34,915  |   |  |   | (114,899 | ) |  |   | 1,140,679 |       
|Future income taxes relating to write-off of
    capitalized start-up costs(1) |                                            |                  | (2,622    | )          |   |            |        |              |  |                 |        |   |  |   |          |   |  |   | (2,622    | )     
|Minimum pension liability, net of tax effect(2)                                |                                            |                  | 18,867    |            |   |            |        |              |  |                 |        |   |  |   |          |   |  |   | 18,867    |       
|                                                                               |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |       
|                                                                               |                                            | $                | 1,232,837 |            |   |            | 4,071   |              |  |                 | 34,915  |   |  |   | (114,899 | ) |  | $ | 1,156,924 |       
|                                                                               |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |       
|Total shareholders equity in accordance
    with Canadian GAAP                |                                            | $                | 300,332   |            |   | $          | 572,529 |              |  | $               | 147,483 |   |  | $ | (754,249 | ) |  | $ | 300,332   |       
|Change in retained earnings relating to:                                       |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |       
|                                                                               | Write-off of capitalized start-up costs(1) |                  |           | (4,739     | ) |            |         |             |  |                 |         |  |  |   |          |   |  |   |           | (4,739 | )
|                                                                               | Accumulated other comprehensive loss(2)    |                  |           | (9,288     | ) |            |         |             |  |                 |         |  |  |   |          |   |  |   |           | (9,288 | )
|                                                                               |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |       
|                                                                               |                                            | $                | 286,305   |            |   | $          | 572,529 |              |  | $               | 147,483 |   |  | $ | (754,249 | ) |  | $ | 286,305   |       
|                                                                               |                                            |                  |           |            |   |            |         |              |  |                 |         |   |  |   |          |   |  |   |           |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Under U.S. GAAP, the direct operating losses
    arising during the start-up phase of the oriented strand board
    facilities, which were capitalized under Canadian GAAP, are
    charged against earnings.                                                                                                                                                                                                                                                             
|   
|(2) | Under U.S. GAAP the Company would recognize
    the difference between the unfunded accumulated pension benefit
    obligation and the accrued benefit obligation as an additional
    minimum pension liability, and an equal amount as an intangible
    asset, subject to the following. If the additional liability
    exceeded unrecognized past service cost the excess would be
    recognized as other comprehensive loss, net of any resulting tax
    benefits.

F-26



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|25. | SEPARATE FINANCIAL INFORMATION OF SUBSIDIARY
    GUARANTORS OF INDEBTEDNESS (Continued)

Condensed Consolidated Statement of
Operations

For the year ended December 31,
2004


|                                                                                          |                                      |                  |          |                |   |            |         |              |  |                 |        |        |  |   |         |   |  |   |          |          |  
|----------------------------------------------------------------------------------------- | ------------------------------------ | ---------------- | -------- | -------------- | - | ---------- | ------- | ------------ |  | --------------- | ------ | ------ |  | - | ------- | - |  | - | -------- | -------- | -
|                                                                                          |                                      | Ainsworth        |          | Ainsworth      |   | Ainsworth  |         |              |  | Ainsworth      
|                                                                                          |                                      | Lumber Co Ltd.   |          | Engineered     |   | Engineered |         |              |  | Lumber Co. Ltd.
|                                                                                          |                                      | Non-Consolidated |          | (USA), LLC (a) |   | Corp.(b)   |         | Eliminations |  | Consolidated   
|                                                                                          |                                      |                  |          |                |   |            |         |              |  |                
|                                                                                          |                                      | Parent Issuer    |          | Subsidiary     |   | Subsidiary |         |              |  |                
|                                                                                          |                                      |                  |          | Guarantor      |   | Guarantor  |         |              |  |                
|SALES                                                                                     |                                      | $                | 702,407  |                |   | $          | 109,096 |              |  | $               | 98,419 |        |  |   |         |   |  | $ | 909,922  |         
|                                                                                          |                                      |                  |          |                |   |            |         |              |  |                 |        |        |  |   |         |   |  |   |          |         
|COSTS AND EXPENSES                                                                        |                                      |                  |          |                |   |            |         |              |  |                 |        |        |  |   |         |   |  |   |          |         
|                                                                                          | Costs of products sold               |                  |          | 365,584        |   |            |         | 77,966       |  |                 |        | 54,216 |  |   |         |   |  |   |          | 497,766  |  
|                                                                                          | Selling and administration           |                  |          | 29,030         |   |            |         | 1,613        |  |                 |        | 851    |  |   |         |   |  |   |          | 31,494   |  
|                                                                                          | Amortization of capital assets       |                  |          | 40,736         |   |            |         | 6,559        |  |                 |        | 6,557  |  |   |         |   |  |   |          | 53,852   |  
|                                                                                          | Write-down of capital assets         |                  |          | 793            |   |            |         |             |  |                 |        |       |  |   |         |  |  |   |          | 793      |  
|                                                                                          |                                      |                  |          |                |   |            |         |              |  |                 |        |        |  |   |         |   |  |   |          |         
|                                                                                          |                                      |                  | 436,143  |                |   |            | 86,138  |              |  |                 | 61,624 |        |  |   |        |   |  |   | 583,905  |         
|                                                                                          |                                      |                  |          |                |   |            |         |              |  |                 |        |        |  |   |         |   |  |   |          |         
|OPERATING EARNINGS                                                                        |                                      |                  | 266,264  |                |   |            | 22,958  |              |  |                 | 36,795 |        |  |   |        |   |  |   | 326,017  |         
|FINANCE EXPENSE                                                                           |                                      |                  |          |                |   |            |         |              |  |                 |        |        |  |   |         |   |  |   |          |         
|                                                                                          | Interest charges                     |                  |          | (40,723        | ) |            |         |             |  |                 |        |       |  |   |         |   |  |   |          | (40,723  | )
|                                                                                          | Amortization of finance charges      |                  |          | (3,234         | ) |            |         |             |  |                 |        |       |  |   |         |   |  |   |          | (3,234   | )
|                                                                                          | Loss on repurchase of long term debt |                  |          | (106,198       | ) |            |         |             |  |                 |        |       |  |   |         |   |  |   |          | (106,198 | )
|                                                                                          |                                      |                  |          |                |   |            |         |              |  |                 |        |        |  |   |         |   |  |   |          |         
|                                                                                          |                                      |                  | (150,155 | )              |   |            |        |              |  |                 |       |        |  |   |        |   |  |   | (150,155 | )       
|EQUITY IN EARNINGS OF SUBSIDIARY                                                          |                                      |                  | 38,110   |                |   |            |         |              |  |                 |        |        |  |   | (38,110 | ) |  |   |          |         
|OTHER INCOME (EXPENSE)                                                                    |                                      |                  | (4,163   | )              |   |            | 715     |              |  |                 | 97     |        |  |   |         |   |  |   | (3,351   | )       
|FOREIGN EXCHANGE GAIN ON LONG TERM DEBT                                                   |                                      |                  | 73,815   |                |   |            |         |              |  |                 |       |        |  |   |         |   |  |   | 73,815   |         
|                                                                                          |                                      |                  |          |                |   |            |         |              |  |                 |        |        |  |   |         |   |  |   |          |         
|INCOME BEFORE INCOME TAXES                                                                |                                      |                  | 223,871  |                |   |            | 23,673  |              |  |                 | 36,892 |        |  |   | (38,110 | ) |  |   | 246,326  |         
|INCOME TAX EXPENSE (RECOVERY)                                                             |                                      |                  | 48,789   |                |   |            | 4,339   |              |  |                 | 18,116 |        |  |   |        |   |  |   | 71,244   |         
|                                                                                          |                                      |                  |          |                |   |            |         |              |  |                 |        |        |  |   |         |   |  |   |          |         
|NET INCOME                                                                                |                                      | $                | 175,082  |                |   | $          | 19,334  |              |  | $               | 18,776 |        |  | $ | (38,110 | ) |  | $ | 175,082  |         
|                                                                                          |                                      |                  |          |                |   |            |         |              |  |                 |        |        |  |   |         |   |  |   |          |         
|Net income in accordance with Canadian GAAP                                               |                                      | $                | 175,082  |                |   | $          | 19,334  |              |  | $               | 18,776 |        |  | $ | (38,110 | ) |  | $ | 175,082  |         
|Reversal of amortization of capitalized start-up
    costs, net of future income taxes(1) |                                      |                  | 1,033    |                |   |            |        |              |  |                 |       |        |  |   |        |   |  |   | 1,033    |         
|                                                                                          |                                      |                  |          |                |   |            |         |              |  |                 |        |        |  |   |         |   |  |   |          |         
|Net income in accordance with U.S. GAAP                                                   |                                      | $                | 176,115  |                |   | $          | 19,334  |              |  | $               | 18,776 |        |  | $ | (38,110 | ) |  | $ | 176,115  |         
|                                                                                          |                                      |                  |          |                |   |            |         |              |  |                 |        |        |  |   |         |   |  |   |          |         



---



|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(a) | Statement of operations for the period from
    September 22, 2004 to December 31, 2004.



|    |                                                                                   
|--- | ----------------------------------------------------------------------------------
|(b) | Statement of operations for the period from
    May 19, 2004 to December 31, 2004.



|    |                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Under U.S. GAAP, the direct operating losses
    arising during the start-up phase of the oriented strand board
    facilities, which were capitalized under Canadian GAAP, are
    charged against earnings.

F-27



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|25. | SEPARATE FINANCIAL INFORMATION OF SUBSIDIARY
    GUARANTORS OF INDEBTEDNESS (Continued)

Condensed Consolidated Statement of Cash
Flows

For the year ended December 31,
2004


|                                                |                                               |                                                |                |                |         |            |        |              |       |                 |        |        |       |  |   |         |         |   |          |          |         |         |  
|----------------------------------------------- | --------------------------------------------- | ---------------------------------------------- | -------------- | -------------- | ------- | ---------- | ------ | ------------ | ----- | --------------- | ------ | ------ | ----- |  | - | ------- | ------- | - | -------- | -------- | ------- | ------- | -
|                                                |                                               | Ainsworth                                      |                | Ainsworth      |         | Ainsworth  |        |              |       | Ainsworth      
|                                                |                                               | Lumber Co Ltd.                                 |                | Engineered     |         | Engineered |        |              |       | Lumber Co. Ltd.
|                                                |                                               | Non-Consolidated                               |                | (USA), LLC (a) |         | Corp. (b)  |        | Eliminations |       | Consolidated   
|                                                |                                               |                                                |                |                |         |            |        |              |       |                
|                                                |                                               | Parent Issuer                                  |                | Subsidiary     |         | Subsidiary |        |              |       |                
|                                                |                                               |                                                |                | Guarantor      |         | Guarantor  |        |              |       |                
|CASH FLOWS FROM OPERATING ACTIVITIES            |                                               |                                                |                |                |         |            |        |              |       |                 |        |        |       |  |   |         |         |   |          |         
|                                                | Income (Loss) from continuing operations      |                                                | $              | 175,082        |         |            | $      | 19,334       |       |                 | $      | 18,776 |       |  | $ | (38,110 | )       |   | $        | 175,082  |        
|                                                | Amounts not requiring an outlay of cash       |                                                |                |               |         |            |        |              |       |                 |        |        |       |  |   |         |         |   |          |         |        
|                                                |                                               | Amortization of capital assets                 |                |                | 40,736  |            |        |              | 6,559 |                 |        |        | 6,557 |  |   |         |        |   |          |          | 53,852  |        
|                                                |                                               | Amortization of financing costs                |                |                | 1,869   |            |        |              |       |                 |        |        |       |  |   |         |        |   |          |          | 1,869   |        
|                                                |                                               | Amortization of debt discount                  |                |                | 1,109   |            |        |              |       |                 |        |        |       |  |   |         |        |   |          |          | 1,109   |        
|                                                |                                               | Unrealized foreign exchange (gain) loss;       |                |                |         |            |        |              |       |                 |        |        |       |  |   |         |        |   |          |          |         |        
|                                                |                                               |                                                | long-term debt |                |         | (73,815    | )      |              |       |                 |        |        |       |  |   |         |         |  |          |          |         | (73,815 | )
|                                                |                                               | Loss on repurchase of debt                     |                |                | 106,198 |            |        |              |       |                 |        |        |       |  |   |         |        |   |          |          | 106,198 |        
|                                                |                                               | Amortization of consent and commitment fees    |                |                | 257     |            |        |              |       |                 |        |        |       |  |   |         |        |   |          |          | 257     |        
|                                                |                                               | Non-cash stock based compensation              |                |                | 2,640   |            |        |              |       |                 |        |        |       |  |   |         |        |   |          |          | 2,640   |        
|                                                |                                               | Loss (gain) on disposal of capital assets      |                |                | 25      |            |        |              |       |                 |        |        |       |  |   |         |        |   |          |          | 25      |        
|                                                |                                               | Writedown of capital assets                    |                |                | 793     |            |        |              |       |                 |        |        |       |  |   |         |        |   |          |          | 793     |        
|                                                |                                               | Adjustment to deferred pension assets          |                |                | (8,141  | )          |        |              |       |                 |        |        |       |  |   |         |        |   |          |          | (8,141  | )      
|                                                |                                               | Change in non-current reforestation obligation |                |                | (332    | )          |        |              |       |                 |        |        |       |  |   |         |        |   |          |          | (332    | )      
|                                                |                                               | Equity in earnings of subsidiary               |                |                | (38,110 | )          |        |              |       |                 |        |        |       |  |   |         | (38,110 | ) |          |          |        |        
|                                                |                                               | Future income taxes                            |                |                | (14,353 | )          |        |              |       |                 |        |        |       |  |   |         |        |   |          |          | (14,353 | )      
|                                                |                                               | Utilization of investment tax credit           |                |                | 30,060  |            |        |              |       |                 |        |        |       |  |   |         |         |   |          |          | 30,060  |        
|                                                | Change in non-cash operating working capital  |                                                |                | 34,077         |         |            |        | 22,965       |       |                 |        | 32,142 |       |  |   |        |         |   |          | 89,184   |        
|                                                |                                               |                                                |                |                |         |            |        |              |       |                 |        |        |       |  |   |         |         |   |          |         
|Cash provided by (used in) operating activities |                                               |                                                | 258,095        |                |         |            | 48,858 |              |       |                 | 57,475 |        |       |  |  |         |         |   | 364,428  |         
|                                                |                                               |                                                |                |                |         |            |        |              |       |                 |        |        |       |  |   |         |         |   |          |         
|CASH FLOWS FROM INVESTING ACTIVITIES            |                                               |                                                |                |                |         |            |        |              |       |                 |        |        |       |  |   |         |         |   |          |         
|                                                | Investment in Voyageur Panel Limited          |                                                |                | (296,300       | )       |            |        |             |       |                 |        |       |       |  |   |        |         |   |          | (296,300 | )      
|                                                | Acquisition of Cash of Voyageur Panel Limited |                                                |                | 51,142         |         |            |        |             |       |                 |        |       |       |  |   |        |         |   |          | 51,142   |        
|                                                | Investment in Minnesota OSB Facilities        |                                                |                | (587,847       | )       |            |        |             |       |                 |        |       |       |  |   |        |         |   |          | (587,847 | )      
|                                                | Additions to capital assets                   |                                                |                | (17,987        | )       |            |        |             |       |                 |        |       |       |  |   |        |         |   |          | (17,987  | )      
|                                                | Decrease (increase) in other assets           |                                                |                | (1,555         | )       |            |        |             |       |                 |        |       |       |  |   |         |         |   |          | (1,555   | )      
|                                                | Proceeds on disposals of capital assets       |                                                |                | 40             |         |            |        |             |       |                 |        |       |       |  |   |         |         |   |          | 40       |        
|                                                |                                               |                                                |                |                |         |            |        |              |       |                 |        |        |       |  |   |         |         |   |          |         
|Cash used in investing activities               |                                               |                                                | (849,507       | )              |         |            |       |              |       |                 |       |        |       |  |  |         |         |   | (849,507 | )       
|                                                |                                               |                                                |                |                |         |            |        |              |       |                 |        |        |       |  |   |         |         |   |          |         

F-28



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Consolidated Financial
Statements  (Continued)



|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|25. | SEPARATE FINANCIAL INFORMATION OF SUBSIDIARY
    GUARANTORS OF INDEBTEDNESS (Continued)

|                                                    |                                                      |                  |         |                |   |            |         |              |   |                 |          |          |   |   |   |          |   |   |         |          |  
|--------------------------------------------------- | ---------------------------------------------------- | ---------------- | ------- | -------------- | - | ---------- | ------- | ------------ | - | --------------- | -------- | -------- | - | - | - | -------- | - | - | ------- | -------- | -
|                                                    |                                                      | Ainsworth        |         | Ainsworth      |   | Ainsworth  |         |              |   | Ainsworth      
|                                                    |                                                      | Lumber Co Ltd.   |         | Engineered     |   | Engineered |         |              |   | Lumber Co. Ltd.
|                                                    |                                                      | Non-Consolidated |         | (USA), LLC (a) |   | Corp. (b)  |         | Eliminations |   | Consolidated   
|                                                    |                                                      |                  |         |                |   |            |         |              |   |                
|                                                    |                                                      | Parent Issuer    |         | Subsidiary     |   | Subsidiary |         |              |   |                
|                                                    |                                                      |                  |         | Guarantor      |   | Guarantor  |         |              |   |                
|CASH FLOWS FROM FINANCING ACTIVITIES                |                                                      |                  |         |                |   |            |         |              |   |                 |          |          |   |   |   |          |   |   |         |         
|                                                    | Proceeds from issue of Senior Secured Notes          |                  |         | 996,387        |   |            |         |             |   |                 |          |         |   |   |   |         |   |   |         | 996,387  |  
|                                                    | Redemption of Senior Secured Notes                   |                  |         | (451,305       | ) |            |         |             |   |                 |          |         |   |   |   |         |   |   |         | (451,305 | )
|                                                    | Financing costs                                      |                  |         | (26,214        | ) |            |         |             |   |                 |          |         |   |   |   |         |   |   |         | (26,214  | )
|                                                    | Dividends Paid                                       |                  |         | (14,660        | ) |            |         |             |   |                 |          |         |   |   |   |         |   |   |         | (14,660  | )
|                                                    | Advances to Parent Company                           |                  |         |               |   |            |         | (32,315      | ) |                 |          | (106,057 | ) |   |   | 138,372  |   |   |         |         |  
|                                                    | Advances from Subsidiary Company                     |                  |         | 138,372        |   |            |         |             |   |                 |          |         |   |   |   | (138,372 | ) |   |         |         |  
|                                                    | Repurchase of Common shares                          |                  |         | (284           | ) |            |         |             |   |                 |          |         |   |   |   |         |   |   |         | (284     | )
|                                                    | Increase (decrease) in capital lease
    obligations |                  |         | (275           | ) |            |         |             |   |                 |          |         |   |   |   |         |   |   |         | (275     | )
|                                                    |                                                      |                  |         |                |   |            |         |              |   |                 |          |          |   |   |   |          |   |   |         |         
|Cash (used in) provided by
    financing activities |                                                      |                  | 642,021 |                |   |            | (32,315 | )            |   |                 | (106,057 | )        |   |   |  |          |   |   | 503,649 |         
|                                                    |                                                      |                  |         |                |   |            |         |              |   |                 |          |          |   |   |   |          |   |   |         |         
|NET CASH INFLOW (OUTFLOW)                           |                                                      |                  | 50,609  |                |   |            | 16,543  |              |   |                 | (48,582  | )        |   |   |  |          |   |   | 18,570  |         
|CASH AND CASH EQUIVALENTS, BEGINNING OF
    YEAR    |                                                      |                  | 142,912 |                |   |            |        |              |   |                 | 51,142   |          |   |   |  |          |   |   | 194,054 |         
|                                                    |                                                      |                  |         |                |   |            |         |              |   |                 |          |          |   |   |   |          |   |   |         |         
|CASH AND CASH EQUIVALENTS, END OF
    YEAR          |                                                      | $                | 193,521 |                |   | $          | 16,543  |              |   | $               | 2,560    |          |   | $ |  |          |   | $ | 212,624 |         
|                                                    |                                                      |                  |         |                |   |            |         |              |   |                 |          |          |   |   |   |          |   |   |         |         



---



|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(a) | Statement of Cash Flows for the period from
    September 22, 2004 to December 31, 2004.



|    |                                                                                   
|--- | ----------------------------------------------------------------------------------
|(b) | Statement of Cash Flows for the period from
    May 19, 2004 to December 31, 2004.



|    |                  
|--- | -----------------
|26. | SUBSEQUENT EVENTS

On December 24, 2004, the Company created
Ainsworth Engineered Canada Limited Partnership. This
partnership was created to facilitate the integration of the
Canadian business operations under one entity. Beginning on
January 1, 2005 Ainsworth Lumber Co. Ltd. and Ainsworth
Engineered Corp. contributed the use of certain of their assets
to the partnership.

F-29



---



##### 



AUDITORS REPORT

To the Board of Directors of 
 Voyageur Panel Limited

We have audited the balance sheets of Voyageur
Panel Limited as at December 31, 2003 and 2002 and the
statements of earnings (loss), shareholders equity and
cash flows for years then ended. These financial statements are
the responsibility of the companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
Canadian generally accepted auditing standards and generally
accepted auditing standards in the United States of America.
Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation.

In our opinion, these financial statements
present fairly, in all material respects, the financial position
of the company as at December 31, 2003 and 2002 and the
results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting
principles.

/s/ KPMG LLP

Chartered Accountants


Winnipeg, Canada


April 27, 2004


F-30



---



##### 



VOYAGEUR PANEL LIMITED

BALANCE SHEETS

|                                           |                                          |                                |         |         |       |   |         |         |       | 
|------------------------------------------ | ---------------------------------------- | ------------------------------ | ------- | ------- | ----- | - | ------- | ------- | ----- | 
|                                           |                                          |                               
|                                           |                                          | December 31                   
|                                           |                                          |                               
|                                           |                                          | 2002                           |         | 2003   
|                                           |                                          |                                |         |        
|                                           |                                          |                               
|                                           |                                          | (expressed in                 
|                                           |                                          | thousands of                  
|                                           |                                          | Canadian dollars)             
|ASSETS                                     |                                          |                                |         |         |       |   |         |        
|Current                                    |                                          |                                |         |         |       |   |         |        
|                                           | Cash                                     |                                | $       | 6,132   |       |   | $       | 42,989  |      
|                                           | Receivables                              |                                |         |         |       |   |         |         |      
|                                           |                                          | Affiliated company (note 10)   |         |         | 6,005 |   |         |         | 7,034 | 
|                                           |                                          | Other                          |         |         | 317   |   |         |         | 976   | 
|                                           | Inventory (note 3)                       |                                |         | 5,166   |       |   |         | 6,225   |      
|                                           | Prepaid expenses                         |                                |         | 11      |       |   |         | 13      |      
|                                           |                                          |                                |         |         |       |   |         |        
|                                           |                                          |                                | 17,631  |         |       |   | 57,237  |        
|                                           |                                          |                                |         |         |       |   |         |        
|Property, plant and equipment (note 4)     |                                          |                                | 111,017 |         |       |   | 100,037 |        
|Other assets (note 5)                      |                                          |                                | 1,754   |         |       |   | 1,208   |        
|                                           |                                          |                                |         |         |       |   |         |        
|                                           |                                          | $                              | 130,402 |         |       | $ | 158,482 |        
|                                           |                                          |                                |         |         |       |   |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY        |                                          |                                |         |         |       |   |         |        
|Current                                    |                                          |                                |         |         |       |   |         |        
|                                           | Accounts payable and accrued liabilities |                                |         |         |       |   |         |         |      
|                                           |                                          | Trade                          |         | $       | 3,340 |   |         | $       | 3,869 | 
|                                           |                                          | Affiliated companies (note 10) |         |         | 2,564 |   |         |         | 4,132 | 
|Income taxes payable                       |                                          |                                |        |         |       |   | 7,975   |        
|Current portion of long-term debt (note 6) |                                          |                                | 8,176   |         |       |   |        |        
|                                           |                                          |                                |         |         |       |   |         |        
|                                           |                                          |                                | 14,080  |         |       |   | 15,976  |        
|                                           |                                          |                                |         |         |       |   |         |        
|Other                                      |                                          |                                |         |         |       |   |         |        
|                                           | Future income taxes (note 9)             |                                |         | 13,538  |       |   |         | 16,469  |      
|                                           | Other long-term liabilities              |                                |         | 22      |       |   |         | 26      |      
|                                           |                                          |                                |         |         |       |   |         |        
|                                           |                                          |                                | 13,560  |         |       |   | 16,495  |        
|                                           |                                          |                                |         |         |       |   |         |        
|Preferred Class A shares (note 7)          |                                          |                                | 64,619  |         |       |   | 80,869  |        
|                                           |                                          |                                |         |         |       |   |         |        
|Shareholders equity                       |                                          |                                |         |         |       |   |         |        
|                                           | Common stock (note 8)                    |                                |         | 55,419  |       |   |         | 55,419  |      
|                                           | Deficit                                  |                                |         | (17,276 | )     |   |         | (10,277 | )    
|                                           |                                          |                                |         |         |       |   |         |        
|                                           |                                          |                                | 38,143  |         |       |   | 45,142  |        
|                                           |                                          |                                |         |         |       |   |         |        
|Contingencies (note 12)                    |                                          |                                |         |         |       |   |         |        
|Subsequent event (note 14)                 |                                          | $                              | 130,402 |         |       | $ | 158,482 |        
|                                           |                                          |                                |         |         |       |   |         |        

See accompanying notes to financial
statements.

F-31



---



##### 



VOYAGEUR PANEL LIMITED

STATEMENTS OF EARNINGS (LOSS)

|                                                                  |                               |                         |        |        |        |   |         |         |        | 
|----------------------------------------------------------------- | ----------------------------- | ----------------------- | ------ | ------ | ------ | - | ------- | ------- | ------ | 
|                                                                  |                               |                        
|                                                                  |                               | Years Ended            
|                                                                  |                               | December 31            
|                                                                  |                               |                        
|                                                                  |                               | 2002                    |        | 2003  
|                                                                  |                               |                         |        |       
|                                                                  |                               |                        
|                                                                  |                               | (expressed in          
|                                                                  |                               | thousands of           
|                                                                  |                               | Canadian dollars)      
|Revenues                                                          |                               |                         |        |        |        |   |         |        
|                                                                  | Sales                         |                         |        |        |        |   |         |         |       
|                                                                  |                               | Trade                   |        | $      | 39,249 |   |         | $       | 48,460 | 
|                                                                  |                               | Related party (note 10) |        |        | 60,454 |   |         |         | 95,231 | 
|                                                                  |                               |                         |        |        |        |   |         |        
|                                                                  |                               |                         | 99,703 |        |        |   | 143,691 |        
|                                                                  |                               |                         |        |        |        |   |         |        
|Costs and expenses                                                |                               |                         |        |        |        |   |         |        
|                                                                  | Operating expenses            |                         |        | 80,697 |        |   |         | 85,377  |       
|                                                                  | Sales commissions (note 10)   |                         |        | 3,386  |        |   |         | 5,163   |       
|                                                                  | Management fees (note 10)     |                         |        | 1,746  |        |   |         | 1,601   |       
|                                                                  | Depreciation and amortization |                         |        | 12,639 |        |   |         | 12,156  |       
|                                                                  |                               |                         |        |        |        |   |         |        
|                                                                  |                               |                         | 98,468 |        |        |   | 104,297 |        
|                                                                  |                               |                         |        |        |        |   |         |        
|Earnings from operations                                          |                               |                         | 1,235  |        |        |   | 39,394  |        
|                                                                  |                               |                         |        |        |        |   |         |        
|Interest income                                                   |                               |                         | 123    |        |        |   | 126     |        
|Interest expense                                                  |                               |                         | (675   | )      |        |   | (201    | )      
|Foreign exchange gain (loss)                                      |                               |                         | 79     |        |        |   | (2,036  | )      
|Unrealized increase in fair value of preferred
    Class A shares |                               |                         | (6,719 | )      |        |   | (16,250 | )      
|                                                                  |                               |                         |        |        |        |   |         |        
|                                                                  |                               |                         | (7,192 | )      |        |   | (18,361 | )      
|                                                                  |                               |                         |        |        |        |   |         |        
|Earnings (loss) before income taxes                               |                               |                         | (5,957 | )      |        |   | 21,033  |        
|Income taxes (note 9)                                             |                               |                         |        |        |        |   |         |        
|                                                                  | Current                       |                         |        | (756   | )      |   |         | (11,103 | )     
|                                                                  | Future                        |                         |        | (1,052 | )      |   |         | (2,931  | )     
|                                                                  |                               |                         |        |        |        |   |         |        
|                                                                  |                               |                         | (1,808 | )      |        |   | (14,034 | )      
|                                                                  |                               |                         |        |        |        |   |         |        
|Net earnings (loss)                                               |                               | $                       | (7,765 | )      |        | $ | 6,999   |        
|                                                                  |                               |                         |        |        |        |   |         |        

See accompanying notes to financial
statements.

F-32



---



##### 



VOYAGEUR PANEL LIMITED

STATEMENTS OF SHAREHOLDERS
EQUITY

|                           |                                   |                              |         |          |  |             |       |   |  |   |         |        | 
|-------------------------- | --------------------------------- | ---------------------------- | ------- | -------- |  | ----------- | ----- | - |  | - | ------- | ------ | 
|                           |                                   |                             
|                           |                                   | Year Ended December 31, 2003
|                           |                                   |                             
|                           |                                   | December 31                  |         | Net      |  | December 31
|                           |                                   | 2002                         |         | Earnings |  | 2003       
|                           |                                   |                              |         |          |  |            
|                           |                                   |                             
|                           |                                   | (expressed in thousands of  
|                           |                                   | Canadian dollars)           
|Common stock               |                                   |                              |         |          |  |             |       |   |  |   |         |       
|                           | Boise Cascade Corporation         |                              | $       | 38,314   |  |             | $     |  |  |   | $       | 38,314 | 
|                           | Rainy River
    OSB Holdings Inc. |                              |         | 17,105   |  |             |       |  |  |   |         | 17,105 | 
|                           |                                   |                              |         |          |  |             |       |   |  |   |         |       
|                           |                                   |                              | 55,419  |          |  |             |      |   |  |   | 55,419  |       
|                           |                                   |                              |         |          |  |             |       |   |  |   |         |       
|Deficit                    |                                   |                              | (17,276 | )        |  |             | 6,999 |   |  |   | (10,277 | )     
|                           |                                   |                              |         |          |  |             |       |   |  |   |         |       
|Balance at end of the year |                                   | $                            | 38,143  |          |  | $           | 6,999 |   |  | $ | 45,142  |       
|                           |                                   |                              |         |          |  |             |       |   |  |   |         |       

|                           |                               |                              |        |        |  |             |        |   |  |   |         |        | 
|-------------------------- | ----------------------------- | ---------------------------- | ------ | ------ |  | ----------- | ------ | - |  | - | ------- | ------ | 
|                           |                               |                             
|                           |                               | Year Ended December 31, 2002
|                           |                               |                             
|                           |                               | December 31                  |        | Net    |  | December 31
|                           |                               | 2001                         |        | Loss   |  | 2002       
|                           |                               |                              |        |        |  |            
|                           |                               |                             
|                           |                               | (expressed in thousands of  
|                           |                               | Canadian dollars)           
|Common stock               |                               |                              |        |        |  |             |        |   |  |   |         |       
|                           | Boise Cascade Corporation     |                              | $      | 38,314 |  |             | $      |  |  |   | $       | 38,314 | 
|                           | Rainy River OSB Holdings Inc. |                              |        | 17,105 |  |             |        |  |  |   |         | 17,105 | 
|                           |                               |                              |        |        |  |             |        |   |  |   |         |       
|                           |                               |                              | 55,419 |        |  |             |       |   |  |   | 55,419  |       
|                           |                               |                              |        |        |  |             |        |   |  |   |         |       
|Deficit                    |                               |                              | (9,511 | )      |  |             | (7,765 | ) |  |   | (17,276 | )     
|                           |                               |                              |        |        |  |             |        |   |  |   |         |       
|Balance at end of the year |                               | $                            | 45,908 |        |  | $           | (7,765 | ) |  | $ | 38,143  |       
|                           |                               |                              |        |        |  |             |        |   |  |   |         |       

See accompanying notes to financial
statements.

F-33



---



##### 



VOYAGEUR PANEL LIMITED

STATEMENTS OF CASH FLOWS

|                                       |                                                             |                                                                   |         |         |        |   |        |        |        | 
|-------------------------------------- | ----------------------------------------------------------- | ----------------------------------------------------------------- | ------- | ------- | ------ | - | ------ | ------ | ------ | 
|                                       |                                                             |                                                                  
|                                       |                                                             | Years Ended                                                      
|                                       |                                                             | December 31                                                      
|                                       |                                                             |                                                                  
|                                       |                                                             | 2002                                                              |         | 2003   
|                                       |                                                             |                                                                   |         |        
|                                       |                                                             |                                                                  
|                                       |                                                             | (expressed in                                                    
|                                       |                                                             | thousands of                                                     
|                                       |                                                             | Canadian dollars)                                                
|Cash provided by (used for) operations |                                                             |                                                                   |         |         |        |   |        |       
|                                       | Net earnings (loss)                                         |                                                                   | $       | (7,765  | )      |   | $      | 6,999  |       
|                                       | Items in net earnings (loss) not using
    (providing) cash |                                                                   |         |         |        |   |        |        |       
|                                       |                                                             | Depreciation                                                      |         |         | 11,883 |   |        |        | 11,779 | 
|                                       |                                                             | Amortization of deferred financing costs                          |         |         | 756    |   |        |        | 377    | 
|                                       |                                                             | Future income taxes                                               |         |         | 1,052  |   |        |        | 2,931  | 
|                                       |                                                             | Unrealized foreign exchange gain                                  |         |         | (102   | ) |        |        |       | 
|                                       |                                                             | Unrealized increase in fair value of preferred
    Class A shares |         |         | 6,719  |   |        |        | 16,250 | 
|                                       | Receivables                                                 |                                                                   |         | 91      |        |   |        | (1,688 | )     
|                                       | Inventory                                                   |                                                                   |         | (888    | )      |   |        | (1,059 | )     
|                                       | Accounts payable and accrued liabilities                    |                                                                   |         | (908    | )      |   |        | 2,097  |       
|                                       | Income taxes payable                                        |                                                                   |         | 973     |        |   |        | 7,975  |       
|                                       | Other                                                       |                                                                   |         | (1,240  | )      |   |        | 171    |       
|                                       |                                                             |                                                                   |         |         |        |   |        |       
|Cash provided by operations            |                                                             |                                                                   | 10,571  |         |        |   | 45,832 |       
|                                       |                                                             |                                                                   |         |         |        |   |        |       
|Cash provided by (used for) investment |                                                             |                                                                   |         |         |        |   |        |       
|                                       | Expenditures for property, plant and equipment              |                                                                   |         | (3,011  | )      |   |        | (799   | )     
|                                       |                                                             |                                                                   |         |         |        |   |        |       
|Cash used for investment               |                                                             |                                                                   | (3,011  | )       |        |   | (799   | )     
|                                       |                                                             |                                                                   |         |         |        |   |        |       
|Cash provided by (used for) financing  |                                                             |                                                                   |         |         |        |   |        |       
|                                       | Payments of long-term debt                                  |                                                                   |         | (16,207 | )      |   |        | (7,636 | )     
|                                       |                                                             |                                                                   |         |         |        |   |        |       
|Cash used for financing                |                                                             |                                                                   | (16,207 | )       |        |   | (7,636 | )     
|                                       |                                                             |                                                                   |         |         |        |   |        |       
|Effect of exchange rate change on cash |                                                             |                                                                   | (349    | )       |        |   | (540   | )     
|                                       |                                                             |                                                                   |         |         |        |   |        |       
|Increase (decrease) in cash            |                                                             |                                                                   | (8,996  | )       |        |   | 36,857 |       
|Cash, beginning of year                |                                                             |                                                                   | 15,128  |         |        |   | 6,132  |       
|                                       |                                                             |                                                                   |         |         |        |   |        |       
|Cash, end of year                      |                                                             | $                                                                 | 6,132   |         |        | $ | 42,989 |       
|                                       |                                                             |                                                                   |         |         |        |   |        |       
|Supplementary information              |                                                             |                                                                   |         |         |        |   |        |       
|                                       | Income taxes paid, net                                      |                                                                   | $       | (219    | )      |   | $      | 2,110  |       
|                                       | Interest paid                                               |                                                                   |         | 675     |        |   |        | 201    |       
|                                       |                                                             |                                                                   |         |         |        |   |        |       

See accompanying notes to financial
statements.

F-34



---



##### 



VOYAGEUR PANEL LIMITED

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2003 AND
2002

1. ORGANIZATION AND PURPOSE

Voyageur Panel Limited (the
Corporation), doing business in the province of
Ontario, Canada, was formed October 12, 1995, pursuant to
the Unanimous Shareholders Agreement
(Shareholders Agreement) between Boise Cascade
Corporation (Boise), Rainy River Forest Products
Inc. (Rainy), Rainy River OSB Holdings Inc.
(Rainy Sub), a wholly owned subsidiary of Rainy, the
Northwestern Mutual Life Insurance Company
(Northwestern), and Allstate Insurance Company
(Allstate). Boise and Rainy Sub hold common shares;
Northwestern and Allstate hold preferred shares
(Class A shares) (see note 7). In November
1995, Rainy amalgamated with Stone-Consolidated Corporation and
the new company, also named Stone-Consolidated Corporation
(Stone), succeeded to Rainys interest in Rainy
Sub and to Rainys contractual rights and obligations. On
May 30, 1997, Stone and Abitibi-Price Inc. amalgamated and
the new company, named Abitibi-Consolidated, Inc., succeeded to
Stones contractual rights and obligations. Effective
January 1, 2004, Rainy Sub was liquidated and its assets
and liabilities transferred to its parent, Abitibi-Consolidated
Company of Canada (Abitibi). The share certificates
in the name of Rainy Sub have been cancelled and a new
certificate for the same number of shares has been issued by
Voyageur to Abitibi. Each shareholder is entitled to vote the
total number of shares held by the shareholder on all matters
requiring shareholder approval as if the Class A shares and
common shares were one class.

The principal business of the Corporation is to
operate a 440 million square feet (MMSF) per
year oriented strand board (OSB) plant in Barwick,
Ontario, Canada. The Corporation is prohibited from engaging in
any other business activity by the terms of agreements among the
shareholders,

Under the terms of a Stock Purchase Agreement,
each shareholder contributed its equity contributions to the
Corporation at the times specified. Under the terms of the
Shareholders Agreement, additional capital, if needed, may
be called for, but no shareholder can be required to contribute.
No additional contributions have been called for.

The Shareholders Agreement provides that
neither Boise nor Abitibi are permitted to transfer their
shares, other than to an affiliate, prior to the fifth
anniversary of the closing date except with approval of
shareholders holding 85% of the outstanding shares. It also
provides that holders of the Class A shares may transfer
shares, other than to a competitor engaged in the manufacture of
wood products, at any time, without the consent of any party.
Additionally, it provides that holders of the Class A
shares may transfer shares to a competitor, at any time, with
the approval of shareholders holding 85% of the outstanding
shares. Any transfer by Abitibi or a holder of Class A
shares shall be subject to Boises right of first offer.
After the fifth anniversary of the closing date, and if certain
conditions are met, the holders of Class A shares may
exercise a Put Right that will initiate an appraisal process to
sell their shares to the Corporation at the then fair market
value. Boise may exercise a Call Right to purchase shares
available pursuant to the Put Right. The fifth anniversary date
was reached October 12, 2000. As at December 31, 2003,
these rights had not been exercised. Following the eighth
anniversary of the closing date, Boise may purchase all
Class A shares at fair market value. The eighth anniversary
date was reached October 12, 2003. As at December 31,
2003, these rights had not been exercised. The
Shareholders Agreement also defines other liquidation
rights of equity holders, and other standard terms and
conditions.

Boise manages the business and affairs of the
Corporation pursuant to the Operating and Marketing Agreement,
subject to limitations imposed by the Shareholders
Agreement. Certain

F-35



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

YEARS ENDED DECEMBER 31, 2003 AND
2002



1. ORGANIZATION AND
PURPOSE  (Continued)


matters, as defined in the Shareholders
Agreement, require shareholder approval. Under the terms of the
Operating and Marketing Agreement, Boise will provide to the
Corporation all engineering, financial, accounting, legal, and
general management services necessary to operate the plant and
will market all products produced by the plant. Product sales
prices to both unaffiliated customers and to related parties
will be based on then prevailing market prices. The term of this
agreement is through December 31, 2020, subject to early
termination if Boise were to liquidate its interest in the
Corporation. The marketing services include provisions for a
sales force and offices, marketing and sales plans, sales entry
and billing, invoicing, collection, customer selection and
credit, customer service, and claims services.

Under the terms of a Wood Supply Service
Agreement, Abitibi will exercise the rights of the Corporation
under various wood procurement agreements and will acquire wood
from private lands. Abitibi will pay all costs incurred by it in
performing the agreement including all Crown charges, stumpage
payments to private landowners, logging and hauling costs, and
all other expenses incurred in delivering. Abitibi will be
compensated for its costs. The initial term of this agreement
ends December 31, 2005, and is renewable year to year
thereafter.

2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

BASIS OF PRESENTATION. These financial statements
are expressed in Canadian dollars and are prepared in accordance
with Canadian generally accepted accounting principles
(Canadian GAAP). These financial statements differ in
certain respects from those prepared in accordance with United
States generally accepted accounting principles (U.S.
GAAP) and are not intended to provide certain disclosures
which would be found in U.S. GAAP financial statements. These
measurement differences are described in note 13
Differences between Canadian and United States generally
accepted accounting principles.

USE OF ESTIMATES. The preparation of financial
statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and
expenses for the reporting period. Actual results may vary from
those estimates.

FOREIGN CURRENCY TRANSLATION. Monetary assets and
liabilities that are denominated in U.S. dollars are translated
into Canadian dollars at the rate of exchange in effect at the
balance sheet date. Revenues and expenses that are denominated
in US. dollars are translated into Canadian dollars at average
monthly exchange rates prevailing during the year. Resulting
translation adjustments are included in the Statements of
Earnings (Loss) under the caption Foreign exchange gain
(loss).

FINANCIAL INSTRUMENTS. The estimated fair values
of financial instruments including cash, receivables, accounts
payable and accrued liabilities, income taxes payable, current
portion of long-term debt and other long-term liabilities are
approximately the same as their carrying values. The preferred
Class A shares are recorded at fair value as at the end of
the reporting period. The change in the fair value of the
preferred Class A shares between reporting periods is
recorded in the Statements of Earnings (Loss).

F-36



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

YEARS ENDED DECEMBER 31, 2003 AND
2002



2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  (Continued)


REVENUE RECOGNITION. Revenue is recognized when
persuasive evidence of an arrangement exists, the sales price is
fixed and determinable, title transfers, and risk of loss has
passed to the customer.

INVENTORY. The Corporation values inventory at
the lower of cost or market with cost based on average costing.
Manufactured inventories include costs for materials, labor, and
factory overhead.

PROPERTY, PLANT AND EQUIPMENT. Property, plant
and equipment is recorded at cost. Cost includes expenditures
for major improvements and replacements and the net amount of
interest cost associated with significant capital additions. No
interest was capitalized in 2003 or 2002. Depreciation is
determined using the straight-line method. Gains and losses from
sales and retirements are included in income as they occur.
Estimated service lives of principal items of property, plant
and equipment are 40 years for buildings and range from 3
to 20 years for machinery and equipment.

OTHER ASSETS. At December 31, 2003, other
assets consisted of deposits. At December 31, 2002, other
assets consisted primarily of deposits and financing costs
incurred by the Corporation. Financing costs were amortized on a
straight-line basis over the term of the loan.

INCOME TAXES. The Corporation uses the asset and
liability method of accounting for income taxes. Under the asset
and liability method, future tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases.
Future tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on future tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the date of enactment or
substantive enactment. A valuation allowance is recorded against
any future income tax asset if it is more likely than not that
the asset will not be realized in its entirety.

3. INVENTORY

|                                   |  |               |       |      |  |   |       | 
|---------------------------------- |  | ------------- | ----- | ---- |  | - | ----- | 
|                                   |  |              
|                                   |  | December 31  
|                                   |  |              
|                                   |  | 2002          |       | 2003
|                                   |  |               |       |     
|                                   |  |              
|                                   |  | (expressed in
|                                   |  | thousands of 
|                                   |  | Canadian     
|                                   |  | dollars)     
|Finished goods and work in process |  | $             | 924   |      |  | $ | 691   | 
|Logs                               |  |               | 1,631 |      |  |   | 2,669 | 
|Other raw materials and supplies   |  |               | 2,611 |      |  |   | 2,865 | 
|                                   |  |               |       |      |  |   |       | 
|                                   |  | $             | 5,166 |      |  | $ | 6,225 | 
|                                   |  |               |       |      |  |   |       | 

F-37



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

YEARS ENDED DECEMBER 31, 2003 AND
2002

4. PROPERTY, PLANT AND
EQUIPMENT

|                           |  |                            |         |              |  |     |        |  |  |   |         | 
|-------------------------- |  | -------------------------- | ------- | ------------ |  | --- | ------ |  |  | - | ------- | 
|                           |  |                           
|                           |  | December 31, 2003         
|                           |  |                           
|                           |  |                            |         | Accumulated  |  |    
|                           |  | Cost                       |         | Depreciation |  | Net
|                           |  |                            |         |              |  |    
|                           |  |                           
|                           |  | (expressed in thousands of
|                           |  | Canadian dollars)         
|Land                       |  | $                          | 587     |              |  | $   |       |  |  | $ | 587     | 
|Buildings and improvements |  |                            | 33,058  |              |  |     | 7,222  |  |  |   | 25,836  | 
|Machinery and equipment    |  |                            | 138,898 |              |  |     | 65,284 |  |  |   | 73,614  | 
|                           |  |                            |         |              |  |     |        |  |  |   |         | 
|                           |  | $                          | 172,543 |              |  | $   | 72,506 |  |  | $ | 100,037 | 
|                           |  |                            |         |              |  |     |        |  |  |   |         | 

|                           |  |                            |         |              |  |     |        |  |  |   |         | 
|-------------------------- |  | -------------------------- | ------- | ------------ |  | --- | ------ |  |  | - | ------- | 
|                           |  |                           
|                           |  | December 31, 2002         
|                           |  |                           
|                           |  |                            |         | Accumulated  |  |    
|                           |  | Cost                       |         | Depreciation |  | Net
|                           |  |                            |         |              |  |    
|                           |  |                           
|                           |  | (expressed in thousands of
|                           |  | Canadian dollars)         
|Land                       |  | $                          | 587     |              |  | $   |       |  |  | $ | 587     | 
|Buildings and improvements |  |                            | 32,801  |              |  |     | 5,982  |  |  |   | 26,819  | 
|Machinery and equipment    |  |                            | 138,356 |              |  |     | 54,745 |  |  |   | 83,611  | 
|                           |  |                            |         |              |  |     |        |  |  |   |         | 
|                           |  | $                          | 171,744 |              |  | $   | 60,727 |  |  | $ | 111,017 | 
|                           |  |                            |         |              |  |     |        |  |  |   |         | 

5. OTHER ASSETS

|                         |  |                   |        |      |  |   |       | 
|------------------------ |  | ----------------- | ------ | ---- |  | - | ----- | 
|                         |  |                  
|                         |  | December 31      
|                         |  |                  
|                         |  | 2002              |        | 2003
|                         |  |                   |        |     
|                         |  |                  
|                         |  | (expressed in    
|                         |  | thousands of     
|                         |  | Canadian dollars)
|Deferred financing costs |  | $                 | 3,396  |      |  | $ |      | 
|Accumulated amortization |  |                   | (3,019 | )    |  |   |      | 
|                         |  |                   |        |      |  |   |       | 
|                         |  |                   | 377    |      |  |   |      | 
|Deposits                 |  |                   | 1,377  |      |  |   | 1,208 | 
|                         |  |                   |        |      |  |   |       | 
|                         |  | $                 | 1,754  |      |  | $ | 1,208 | 
|                         |  |                   |        |      |  |   |       | 

6. LONG-TERM DEBT

In October 1995, the Corporation entered into a
variable rate lending commitment which included a non-revolving
progress draw term credit facility (Credit B),
of up to US$65,000,000, denominated in U.S. dollars. The
Credit B facility provided funds for construction. Interest
rate options available to the Corporation included rates based
on the London Interbank Offering Rate, or the U.S. Base
Rate. At December 31, 2002, $8,176,000 (US$5,200,000) of
borrowings were outstanding with a variable interest rate of
3.17%. Full and final payment of the Credit B facility was
made in May, 2003.

F-38



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

YEARS ENDED DECEMBER 31, 2003 AND
2002

7. PREFERRED CLASS A
SHARES

On October 12, 1995, the Corporation
authorized 19,000,000 preferred Class A shares, US$1.00 par
value. At December 31, 2003 and 2002, 10,000,000
Class A shares to Northwestern, and 9,000,000 Class A
shares to Allstate were outstanding. After the fifth anniversary
of the closing date, and if certain conditions are met, the
holders of Class A shares may exercise a Put Right that
will initiate an appraisal process to sell their shares to the
Corporation at the then fair market value. The fair market value
was $80,869,000 and $64,619,000 at December 31,2003 and
2002, and was determined based on the Class A shareholders
portion of an estimated U.S. dollar purchase price
translated at the applicable current exchange rate. Boise may
exercise a Call Right to purchase shares available pursuant to
the Put Right. The fifth anniversary date was reached
October 12, 2000. As at December 31, 2003, these
rights had not been exercised. Following the eighth anniversary
of the closing date, Boise may purchase all Class A shares
at fair market value. The eighth anniversary date was reached
October 12, 2003. As at December 31, 2003, these
rights had not been exercised.

Dividends will be paid on a semiannual basis by
the Corporation, unless otherwise agreed. The Class A
shares will be entitled to a 12% per annum dividend, preference
over the common shares in dividend payments, and unpaid
Class A share dividends will compound semi-annually. No
dividends have been paid through December 31, 2003. At
December 31, 2003 and 2002, the cumulative Class A
dividend in arrears was $33,792,000 (US$25,753,000) and
$32,752,000 (US$20,830,000). Class A shares may participate
in additional dividend distributions if certain conditions are
met. The policy of the Corporation is to distribute all
available cash not required for other purposes.

8. COMMON STOCK

|           |                                                    |                   |   |        |  |  |   |        | 
|---------- | -------------------------------------------------- | ----------------- | - | ------ |  |  | - | ------ | 
|           |                                                    |                  
|           |                                                    | December 31      
|           |                                                    |                  
|           |                                                    | 2002              |   | 2003  
|           |                                                    |                   |   |       
|           |                                                    |                  
|           |                                                    | (expressed in    
|           |                                                    | thousands of     
|           |                                                    | Canadian dollars)
|Authorized |                                                    |                   |   |        |  |  |   |       
|           | 40,500,000 common voting shares, US$1.00 par value |                   |   |        |  |  |   |        | 
|Issued     |                                                    |                   |   |        |  |  |   |       
|           | 40,500,000 common voting shares                    |                   | $ | 55,419 |  |  | $ | 55,419 | 

Dividends will be paid on a semiannual basis by
the Corporation, unless otherwise agreed. The Class A
shares will be entitled to preference over the common shares in
dividend payments. No dividends have been paid through
December 31, 2003.

F-39



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

YEARS ENDED DECEMBER 31, 2003 AND
2002

9. INCOME TAXES

The overall income tax provision differs from the
amount that would be obtained by applying the combined statutory
income tax rate to earnings as a result of manufacturing and
processing credit, large corporation taxes, and changes in tax
rates as follows:

|                                                                                                 |  |                   |        |      |  |   |         |  
|------------------------------------------------------------------------------------------------ |  | ----------------- | ------ | ---- |  | - | ------- | -
|                                                                                                 |  |                  
|                                                                                                 |  | Year Ended       
|                                                                                                 |  | December 31      
|                                                                                                 |  |                  
|                                                                                                 |  | 2002              |        | 2003
|                                                                                                 |  |                   |        |     
|                                                                                                 |  |                  
|                                                                                                 |  | (expressed in    
|                                                                                                 |  | thousands of     
|                                                                                                 |  | Canadian dollars)
|Earnings (loss) before income taxes                                                              |  | $                 | (5,957 | )    |  | $ | 21,033  |  
|Combined federal and provincial income tax rate                                                  |  |                   | 38.6   | %    |  |   | 36.6    | %
|                                                                                                 |  |                   |        |      |  |   |         |  
|Income tax expense based on statutory income tax
    rate                                        |  |                   | 2,299  |      |  |   | (7,698  | )
|Permanent difference from unrealized increases in
    the fair value of preferred Class A shares |  |                   | (2,593 | )    |  |   | (5,948  | )
|Manufacturing and processing credit                                                              |  |                   | 42     |      |  |   | 1,298   |  
|Large corporation tax                                                                            |  |                   | (756   | )    |  |   | 204     |  
|Change in tax rate                                                                               |  |                   | (788   | )    |  |   | (1,591  | )
|Other                                                                                            |  |                   | (12    | )    |  |   | (299    | )
|                                                                                                 |  |                   |        |      |  |   |         |  
|                                                                                                 |  | $                 | (1,808 | )    |  | $ | (14,034 | )
|                                                                                                 |  |                   |        |      |  |   |         |  

Future income taxes are provided for temporary
differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured for
tax purposes. The components of the net future income tax
liability in the Balance Sheets are as follows:

|                                                                                               |  |                   |        |      |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ----------------- | ------ | ---- |  | - | ------ | -
|                                                                                               |  |                  
|                                                                                               |  | Year Ended       
|                                                                                               |  | December 31      
|                                                                                               |  |                  
|                                                                                               |  | 2002              |        | 2003
|                                                                                               |  |                   |        |     
|                                                                                               |  |                  
|                                                                                               |  | (expressed in    
|                                                                                               |  | thousands of     
|                                                                                               |  | Canadian dollars)
|Non-capital loss carry forwards                                                                |  | $                 | (2,624 | )    |  | $ |       |  
|Capital loss carry forwards                                                                    |  |                   | (2,364 | )    |  |   | (4,462 | )
|Unrealized foreign exchange loss on long-term debt                                             |  |                   | (1,210 | )    |  |   |       |  
|Excess of carrying value of property, plant and
    equipment and other assets over tax values |  |                   | 17,923 |      |  |   | 19,006 |  
|Other temporary differences                                                                    |  |                   | (1,578 | )    |  |   | (1,795 | )
|Valuation allowance                                                                            |  |                   | 3,391  |      |  |   | 3,720  |  
|                                                                                               |  |                   |        |      |  |   |        |  
|                                                                                               |  | $                 | 13,538 |      |  | $ | 16,469 |  
|                                                                                               |  |                   |        |      |  |   |        |  

At December 31, 2003, the Corporation had
$1,751,000 of Ontario corporation minimum tax credits which
expire in 2006 through 2011.

F-40



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

YEARS ENDED DECEMBER 31, 2003 AND
2002

10. RELATED PARTY TRANSACTIONS

Pursuant to the Operating and Marketing
Agreement, Boise is entitled to reimbursement for certain
materials and services provided during construction and
operation of the facility and will receive an annual fee
escalating at 3% per year. Boise will also receive a commission
equaling 4% of the net selling price on sales for which Boise
acts as agent. See the table below.

Under the terms of the Wood Supply Services
Agreement, the Corporation will pay to Abitibi all costs
incurred by it in performing the agreement plus a management fee
of $500,000 per year beginning at the start of operations. In
addition, if renewal charges for hardwood exceed the amount
covered by Crown charges, the Corporation will pay a
proportionate share of these charges. See the table below.

Boise and Abitibi have received reimbursement for
the following operating, development, and other costs:

|                                                                      |                   |                   |        |        |  |   |        |        | 
|--------------------------------------------------------------------- | ----------------- | ----------------- | ------ | ------ |  | - | ------ | ------ | 
|                                                                      |                   |                  
|                                                                      |                   | Year Ended       
|                                                                      |                   | December 31      
|                                                                      |                   |                  
|                                                                      |                   | 2002              |        | 2003  
|                                                                      |                   |                   |        |       
|                                                                      |                   |                  
|                                                                      |                   | (expressed in    
|                                                                      |                   | thousands of     
|                                                                      |                   | Canadian dollars)
|Paid to Boise:                                                        |                   |                   |        |        |  |   |        |       
|                                                                      | Management fees   |                   | $      | 1,746  |  |   | $      | 1,601  | 
|                                                                      | Sales commissions |                   |        | 3,386  |  |   |        | 5,163  | 
|                                                                      | Freight           |                   |        | 14,368 |  |   |        | 14,261 | 
|                                                                      |                   |                   |        |        |  |   |        |       
|                                                                      |                   | $                 | 19,500 |        |  | $ | 21,025 |       
|                                                                      |                   |                   |        |        |  |   |        |       
|Paid to Abitibi:                                                      |                   |                   |        |        |  |   |        |       
|                                                                      | Management fees   |                   | $      | 590    |  |   | $      | 607    | 
|                                                                      | Wood purchases    |                   |        | 28,818 |  |   |        | 31,126 | 
|                                                                      |                   |                   |        |        |  |   |        |       
|                                                                      |                   | $                 | 29,408 |        |  | $ | 31,733 |       
|                                                                      |                   |                   |        |        |  |   |        |       
|Sales to Boise                                                        |                   | $                 | 60,454 |        |  | $ | 95,231 |       
|                                                                      |                   |                   |        |        |  |   |        |       
|Receivables from affiliated company Boise                             |                   | $                 | 6,005  |        |  | $ | 7,034  |       
|                                                                      |                   |                   |        |        |  |   |        |       
|Accounts payable and accrued liabilities to
    affiliated companies: |                   |                   |        |        |  |   |        |       
|                                                                      | Abitibi           |                   | $      | 2,123  |  |   | $      | 3,578  | 
|                                                                      | Boise             |                   |        | 441    |  |   |        | 554    | 
|                                                                      |                   |                   |        |        |  |   |        |       
|                                                                      |                   | $                 | 2,564  |        |  | $ | 4,132  |       
|                                                                      |                   |                   |        |        |  |   |        |       

These transactions are in the normal course of
operations and are measured at the exchange amount which is the
amount of consideration established and agreed to by the related
parties.

F-41



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

YEARS ENDED DECEMBER 31, 2003 AND
2002

11. MAJOR CUSTOMERS

A substantial portion of the net sales of the
Corporation are made to a limited number of customers. During
the years ended December 31, 2003 and 2002, two such
customers accounted for 79% and 75% of sales, respectively.
Substantially all of the Corporations sales to related
parties and to unaffiliated customers were into the United
States.

12. CONTINGENCIES

The Corporation is involved in litigation and
administrative proceedings primarily arising in the normal
course of Corporation business. In the opinion of management,
the Corporations recovery, if any, or liability, if any,
under any pending litigation or administrative proceeding would
not materially affect the Corporations financial condition
or results of operations.

13. DIFFERENCES BETWEEN CANADIAN AND
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The Corporations financial statements have
been prepared in accordance with Canadian GAAP which, in the
case of the Corporation, are in conformity in all material
respects with U.S. GAAP, with the following exceptions:

Reconciliation
of Canadian and U.S. GAAP

Under U.S. GAAP, future income tax assets
and liabilities are revalued for enacted changes in tax rates.
Under Canadian GAAP, future income tax assets and liabilities
are revalued for all enacted or substantially enacted changes in
tax rates.

Under US. GAAP, changes in the fair value of
redeemable securities are treated in the same manner as a
dividend and are charged against retained earnings, or in the
absence of retained earnings, as charges against paid-in
capital. Under Canadian GAAP, changes in the fair value of
redeemable securities are charged to income.

The following information is presented in
accordance with U.S. GAAP, reflecting these adjustments.

Effect on net earnings (loss):

|                                        |                                                                        |             |        |       |   |   |        |        | 
|--------------------------------------- | ---------------------------------------------------------------------- | ----------- | ------ | ----- | - | - | ------ | ------ | 
|                                        |                                                                        |            
|                                        |                                                                        | Year Ended 
|                                        |                                                                        | December 31
|                                        |                                                                        |            
|                                        |                                                                        | 2002        |        | 2003 
|                                        |                                                                        |             |        |      
|Net earnings (loss) under Canadian GAAP |                                                                        | $           | (7,765 | )     |   | $ | 6,999  |       
|Adjustments:                            |                                                                        |             |        |       |   |   |        |       
|                                        | Unrealized increases in the fair value of
    preferred Class A shares |             |        | 6,719 |   |   |        | 16,250 | 
|                                        | Future income taxes                                                    |             |        | (86   | ) |   |        | 1,102  | 
|                                        |                                                                        |             |        |       |   |   |        |       
|Net earnings (loss) under U.S. GAAP     |                                                                        | $           | (1,132 | )     |   | $ | 24,351 |       
|                                        |                                                                        |             |        |       |   |   |        |       

F-42



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

YEARS ENDED DECEMBER 31, 2003 AND
2002



13. DIFFERENCES BETWEEN CANADIAN AND
UNITED STATES GENERALLY ACCEPTED
ACCOUNTING       PRINCIPLES 
(Continued)


Effect on balance sheets:

|                                                   |                                        |             |        |        |   |   |         |   | 
|-------------------------------------------------- | -------------------------------------- | ----------- | ------ | ------ | - | - | ------- | - | 
|                                                   |                                        |            
|                                                   |                                        | December 31
|                                                   |                                        |            
|                                                   |                                        | 2002        |        | 2003  
|                                                   |                                        |             |        |       
|Total liabilities under Canadian GAAP              |                                        | $           | 92,259 |        |   | $ | 113,340 |  
|Adjustment:                                        |                                        |             |        |        |   |   |         |  
|                                                   | Future income taxes                    |             |        | 1,102  |   |   |         |  | 
|                                                   |                                        |             |        |        |   |   |         |  
|Total liabilities under U.S. GAAP                  |                                        | $           | 93,361 |        |   | $ | 113,340 |  
|                                                   |                                        |             |        |        |   |   |         |  
|Total shareholders equity under Canadian
    GAAP |                                        | $           | 38,143 |        |   | $ | 45,142  |  
|Adjustment:                                        |                                        |             |        |        |   |   |         |  
|                                                   | Total shareholders equity adjustments |             |        | (1,102 | ) |   |         |  | 
|                                                   |                                        |             |        |        |   |   |         |  
|Total shareholders equity under
    U.S. GAAP     |                                        | $           | 37,041 |        |   | $ | 45,142  |  
|                                                   |                                        |             |        |        |   |   |         |  



| |                      
| | ---------------------
| | Recent Pronouncements

In November 2002, the Financial Accounting
Standards Board (FASB) issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others. This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor
recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of Interpretation
No. 45 became effective for periods ending after
December 15, 2002. The recognition and measurement
provisions of Interpretation No. 45 became effective
January 1, 2003. This statement had no impact on the
Corporations financial position or results of operations.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities. In
December 2003, the FASB issued a revised Interpretation
No. 46. This interpretation, as revised, requires that an
enterprises consolidated financial statements include
subsidiaries in which the enterprise has a controlling financial
interest. This statement had no impact on the Corporations
financial position or results of operations.

Effective January 1, 2003, the Corporation
adopted the provisions of SFAS No. 143, Accounting for
Asset Retirement Obligations, which affects the way landfill
closure costs are accounted for. This statement requires an
asset and a liability (discounted) be recorded for estimated
closure and closed-site monitoring costs and the asset to be
depreciated over the landfills useful life. This statement
had no impact on the Corporations financial position or
results of operations.

Effective January 1, 2003, the Corporation
adopted the provisions of SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. This
statement requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is
incurred, as opposed to the date of an entitys commitment
to an exit plan. It also establishes that fair value is the
objective for initial measurement of the liability. This
statement had no impact on the Corporations financial
position or results of operations.

F-43



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

YEARS ENDED DECEMBER 31, 2003 AND
2002

14. SUBSEQUENT EVENT

On April 15, 2004, the Corporations
shareholders announced that they had reached an agreement with
Ainsworth Lumber Co. Ltd. for its purchase of the Corporation
for approximately US$193,000,000, plus as much as US$10,000,000
more based on OSB prices between closing the transaction and
December 31,2004. The transaction is expected to close in
second quarter 2004.

F-44



---



##### 



VOYAGEUR PANEL LIMITED

BALANCE SHEETS

(Unaudited)


|                                         |                                            |                                |         |         |       |   |         |        |        | 
|---------------------------------------- | ------------------------------------------ | ------------------------------ | ------- | ------- | ----- | - | ------- | ------ | ------ | 
|                                         |                                            |                               
|                                         |                                            | March 31                      
|                                         |                                            |                               
|                                         |                                            | 2003                           |         | 2004   
|                                         |                                            |                                |         |        
|                                         |                                            |                               
|                                         |                                            | (expressed in                 
|                                         |                                            | thousands of                  
|                                         |                                            | Canadian dollars)             
|ASSETS                                   |                                            |                                |         |         |       |   |         |       
|Current                                  |                                            |                                |         |         |       |   |         |       
|                                         | Cash                                       |                                | $       | 4,958   |       |   | $       | 49,469 |       
|                                         | Receivables                                |                                |         |         |       |   |         |        |       
|                                         |                                            | Affiliated company (note 10)   |         |         | 5,793 |   |         |        | 12,114 | 
|                                         |                                            | Other                          |         |         | 380   |   |         |        | 918    | 
|                                         | Inventory (note 3)                         |                                |         | 6,891   |       |   |         | 8,820  |       
|                                         | Prepaid expenses                           |                                |         | 29      |       |   |         | 274    |       
|                                         |                                            |                                |         |         |       |   |         |       
|                                         |                                            |                                | 18,051  |         |       |   | 71,595  |       
|                                         |                                            |                                |         |         |       |   |         |       
|Property, plant and equipment (note 4)   |                                            |                                | 108,078 |         |       |   | 98,542  |       
|Other assets (note 5)                    |                                            |                                | 1,500   |         |       |   | 1,205   |       
|                                         |                                            |                                |         |         |       |   |         |       
|                                         |                                            | $                              | 127,629 |         |       | $ | 171,342 |       
|                                         |                                            |                                |         |         |       |   |         |       
|LIABILITIES AND SHAREHOLDERS
    EQUITY |                                            |                                |         |         |       |   |         |       
|Current                                  |                                            |                                |         |         |       |   |         |       
|                                         | Accounts payable and accrued liabilities   |                                |         |         |       |   |         |        |       
|                                         |                                            | Trade                          |         | $       | 2,008 |   |         | $      | 3,054  | 
|                                         |                                            | Affiliated companies (note 10) |         |         | 4,716 |   |         |        | 5,408  | 
|                                         | Income taxes payable                       |                                |         |        |       |   |         | 6,691  |       
|                                         | Current portion of long-term debt (note 6) |                                |         | 3,822   |       |   |         |       |       
|                                         |                                            |                                |         |         |       |   |         |       
|                                         |                                            |                                | 10,546  |         |       |   | 15,153  |       
|                                         |                                            |                                |         |         |       |   |         |       
|Other                                    |                                            |                                |         |         |       |   |         |       
|                                         | Future income taxes (note 9)               |                                |         | 13,802  |       |   |         | 16,016 |       
|                                         | Other long-term liabilities                |                                |         | 22      |       |   |         | 33     |       
|                                         |                                            |                                |         |         |       |   |         |       
|                                         |                                            |                                | 13,824  |         |       |   | 16,049  |       
|                                         |                                            |                                |         |         |       |   |         |       
|Preferred Class A shares (note 7)        |                                            |                                | 61,384  |         |       |   | 82,885  |       
|                                         |                                            |                                |         |         |       |   |         |       
|Shareholders equity                     |                                            |                                |         |         |       |   |         |       
|                                         | Common stock (note 8)                      |                                |         | 55,419  |       |   |         | 55,419 |       
|                                         | Retained earnings (deficit)                |                                |         | (13,544 | )     |   |         | 1,836  |       
|                                         |                                            |                                |         |         |       |   |         |       
|                                         |                                            |                                | 41,875  |         |       |   | 57,255  |       
|                                         |                                            |                                |         |         |       |   |         |       
|Contingencies (note 12)                  |                                            |                                |         |         |       |   |         |       
|Subsequent event (note 14)               |                                            |                                |         |         |       |   |         |       
|                                         |                                            | $                              | 127,629 |         |       | $ | 171,342 |       
|                                         |                                            |                                |         |         |       |   |         |       

See accompanying notes to financial
statements.

F-45



---



##### 



VOYAGEUR PANEL LIMITED

STATEMENTS OF EARNINGS

(Unaudited)


|                                                                                     |                               |                         |        |        |        |   |        |        |        | 
|------------------------------------------------------------------------------------ | ----------------------------- | ----------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                                     |                               |                        
|                                                                                     |                               | Three Months           
|                                                                                     |                               | Ended March 31         
|                                                                                     |                               |                        
|                                                                                     |                               | 2003                    |        | 2004  
|                                                                                     |                               |                         |        |       
|                                                                                     |                               |                        
|                                                                                     |                               | (expressed in          
|                                                                                     |                               | thousands of           
|                                                                                     |                               | Canadian dollars)      
|Revenues                                                                             |                               |                         |        |        |        |   |        |       
|                                                                                     | Sales                         |                         |        |        |        |   |        |        |       
|                                                                                     |                               | Trade                   |        | $      | 8,741  |   |        | $      | 2,705  | 
|                                                                                     |                               | Related party (note 10) |        |        | 17,584 |   |        |        | 45,137 | 
|                                                                                     |                               |                         |        |        |        |   |        |       
|                                                                                     |                               |                         | 26,325 |        |        |   | 47,842 |       
|                                                                                     |                               |                         |        |        |        |   |        |       
|Costs and expenses                                                                   |                               |                         |        |        |        |   |        |       
|                                                                                     | Operating expenses            |                         |        | 20,648 |        |   |        | 20,845 |       
|                                                                                     | Sales commissions (note 10)   |                         |        | 900    |        |   |        | 1,792  |       
|                                                                                     | Management fees (note 10)     |                         |        | 424    |        |   |        | 382    |       
|                                                                                     | Depreciation and amortization |                         |        | 3,133  |        |   |        | 2,950  |       
|                                                                                     |                               |                         |        |        |        |   |        |       
|                                                                                     |                               |                         | 25,105 |        |        |   | 25,969 |       
|                                                                                     |                               |                         |        |        |        |   |        |       
|Earnings from operations                                                             |                               |                         | 1,220  |        |        |   | 21,873 |       
|                                                                                     |                               |                         |        |        |        |   |        |       
|Interest income                                                                      |                               |                         | 19     |        |        |   | 66     |       
|Interest expense                                                                     |                               |                         | (79    | )      |        |   | (6     | )     
|Foreign exchange loss                                                                |                               |                         | (330   | )      |        |   | (373   | )     
|Unrealized (increase) decrease in the fair
    value of
    preferred Class A shares |                               |                         | 3,235  |        |        |   | (2,016 | )     
|                                                                                     |                               |                         |        |        |        |   |        |       
|                                                                                     |                               |                         | 2,845  |        |        |   | (2,329 | )     
|                                                                                     |                               |                         |        |        |        |   |        |       
|Earnings before income taxes                                                         |                               |                         | 4,065  |        |        |   | 19,544 |       
|Income taxes (note 9)                                                                |                               |                         |        |        |        |   |        |       
|                                                                                     | Current                       |                         |        | (69    | )      |   |        | (7,883 | )     
|                                                                                     | Future                        |                         |        | (264   | )      |   |        | 452    |       
|                                                                                     |                               |                         |        |        |        |   |        |       
|                                                                                     |                               |                         | (333   | )      |        |   | (7,431 | )     
|                                                                                     |                               |                         |        |        |        |   |        |       
|Net earnings                                                                         |                               | $                       | 3,732  |        |        | $ | 12,113 |       
|                                                                                     |                               |                         |        |        |        |   |        |       

See accompanying notes to financial
statements.

F-46



---



##### 



VOYAGEUR PANEL LIMITED

STATEMENTS OF SHAREHOLDERS
EQUITY

(Unaudited)


(expressed in thousands of Canadian
dollars)


|                             |                               |                                   |         |          |  |          |        |   |  |   |        |        | 
|---------------------------- | ----------------------------- | --------------------------------- | ------- | -------- |  | -------- | ------ | - |  | - | ------ | ------ | 
|                             |                               |                                  
|                             |                               | Three Months Ended March 31, 2004
|                             |                               |                                  
|                             |                               | December 31                       |         | Net      |  | March 31
|                             |                               | 2003                              |         | Earnings |  | 2004    
|                             |                               |                                   |         |          |  |         
|Common stock                 |                               |                                   |         |          |  |          |        |   |  |   |        |       
|                             | Boise Cascade Corporation     |                                   | $       | 38,314   |  |          | $      |  |  |   | $      | 38,314 | 
|                             | Rainy River OSB Holdings Inc. |                                   |         | 17,105   |  |          |        |  |  |   |        | 17,105 | 
|                             |                               |                                   |         |          |  |          |        |   |  |   |        |       
|                             |                               |                                   | 55,419  |          |  |          |       |   |  |   | 55,419 |       
|                             |                               |                                   |         |          |  |          |        |   |  |   |        |       
|Retained earnings (deficit)  |                               |                                   | (10,277 | )        |  |          | 12,113 |   |  |   | 1,836  |       
|                             |                               |                                   |         |          |  |          |        |   |  |   |        |       
|Balance at end of the period |                               | $                                 | 45,142  |          |  | $        | 12,113 |   |  | $ | 57,255 |       
|                             |                               |                                   |         |          |  |          |        |   |  |   |        |       

|                             |                               |                                   |         |          |  |          |       |   |  |   |         |        | 
|---------------------------- | ----------------------------- | --------------------------------- | ------- | -------- |  | -------- | ----- | - |  | - | ------- | ------ | 
|                             |                               |                                  
|                             |                               | Three Months Ended March 31, 2003
|                             |                               |                                  
|                             |                               | December 31                       |         | Net      |  | March 31
|                             |                               | 2002                              |         | Earnings |  | 2003    
|                             |                               |                                   |         |          |  |         
|Common stock                 |                               |                                   |         |          |  |          |       |   |  |   |         |       
|                             | Boise Cascade Corporation     |                                   | $       | 38,314   |  |          | $     |  |  |   | $       | 38,314 | 
|                             | Rainy River OSB Holdings Inc. |                                   |         | 17,105   |  |          |       |  |  |   |         | 17,105 | 
|                             |                               |                                   |         |          |  |          |       |   |  |   |         |       
|                             |                               |                                   | 55,419  |          |  |          |      |   |  |   | 55,419  |       
|                             |                               |                                   |         |          |  |          |       |   |  |   |         |       
|Deficit                      |                               |                                   | (17,276 | )        |  |          | 3,732 |   |  |   | (13,544 | )     
|                             |                               |                                   |         |          |  |          |       |   |  |   |         |       
|Balance at end of the period |                               | $                                 | 38,143  |          |  | $        | 3,732 |   |  | $ | 41,875  |       
|                             |                               |                                   |         |          |  |          |       |   |  |   |         |       

See accompanying notes to financial
statements.

F-47



---



##### 



VOYAGEUR PANEL LIMITED

STATEMENTS OF CASH FLOWS

(Unaudited)


|                                        |                                                      |                                                                              |        |        |        |   |        |        |       |  
|--------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ----- | -
|                                        |                                                      |                                                                             
|                                        |                                                      | Three Months                                                                
|                                        |                                                      | Ended March 31                                                              
|                                        |                                                      |                                                                             
|                                        |                                                      | 2003                                                                         |        | 2004  
|                                        |                                                      |                                                                              |        |       
|                                        |                                                      |                                                                             
|                                        |                                                      | (expressed in                                                               
|                                        |                                                      | thousands of                                                                
|                                        |                                                      | Canadian dollars)                                                           
|Cash provided by (used for) operations  |                                                      |                                                                              |        |        |        |   |        |       
|                                        | Net earnings                                         |                                                                              | $      | 3,732  |        |   | $      | 12,113 |      
|                                        | Items in net earnings not using
    (providing) cash |                                                                              |        |        |        |   |        |        |      
|                                        |                                                      | Depreciation                                                                 |        |        | 2,944  |   |        |        | 2,950 |  
|                                        |                                                      | Amortization of deferred financing costs                                     |        |        | 189    |   |        |        |      |  
|                                        |                                                      | Future income taxes                                                          |        |        | 264    |   |        |        | (452  | )
|                                        |                                                      | Unrealized foreign exchange gain                                             |        |        | (266   | ) |        |        |      |  
|                                        |                                                      | Unrealized increase (decrease) in fair value
    of preferred Class A shares |        |        | (3,235 | ) |        |        | 2,016 |  
|                                        | Receivables                                          |                                                                              |        | 149    |        |   |        | (5,022 | )    
|                                        | Inventory                                            |                                                                              |        | (1,725 | )      |   |        | (2,595 | )    
|                                        | Accounts payable and accrued liabilities             |                                                                              |        | 820    |        |   |        | 461    |      
|                                        | Income taxes payable                                 |                                                                              |        |       |        |   |        | (1,285 | )    
|                                        | Other                                                |                                                                              |        | 47     |        |   |        | (250   | )    
|                                        |                                                      |                                                                              |        |        |        |   |        |       
|Cash provided by operations             |                                                      |                                                                              | 2,919  |        |        |   | 7,936  |       
|                                        |                                                      |                                                                              |        |        |        |   |        |       
|Cash provided by (used for) investment  |                                                      |                                                                              |        |        |        |   |        |       
|                                        | Expenditures for property, plant and equipment       |                                                                              |        | (5     | )      |   |        | (1,456 | )    
|                                        |                                                      |                                                                              |        |        |        |   |        |       
|Cash used for investment                |                                                      |                                                                              | (5     | )      |        |   | (1,456 | )     
|                                        |                                                      |                                                                              |        |        |        |   |        |       
|Cash provided by (used for) financing   |                                                      |                                                                              |        |        |        |   |        |       
|                                        | Payments of long-term debt                           |                                                                              |        | (3,884 | )      |   |        |       |      
|                                        |                                                      |                                                                              |        |        |        |   |        |       
|Cash used for financing                 |                                                      |                                                                              | (3,884 | )      |        |   |       |       
|                                        |                                                      |                                                                              |        |        |        |   |        |       
|Effect of exchange rate changes on cash |                                                      |                                                                              | (204   | )      |        |   |       |       
|                                        |                                                      |                                                                              |        |        |        |   |        |       
|Increase (decrease) in cash             |                                                      |                                                                              | (1,174 | )      |        |   | 6,480  |       
|Cash, beginning of period               |                                                      |                                                                              | 6,132  |        |        |   | 42,989 |       
|                                        |                                                      |                                                                              |        |        |        |   |        |       
|Cash, end of period                     |                                                      | $                                                                            | 4,958  |        |        | $ | 49,469 |       
|                                        |                                                      |                                                                              |        |        |        |   |        |       
|Supplementary Information               |                                                      |                                                                              |        |        |        |   |        |       
|                                        | Income taxes paid, net                               |                                                                              | $      | (950   | )      |   | $      | 9,166  |      
|                                        | Interest paid                                        |                                                                              |        | 77     |        |   |        |       |      
|                                        |                                                      |                                                                              |        |        |        |   |        |       

See accompanying notes to financial
statements

F-48



---



##### 



VOYAGEUR PANEL LIMITED

NOTES TO FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2004 AND
2003

(Unaudited)


1. ORGANIZATION AND PURPOSE

Voyageur Panel Limited (the
Corporation), doing business in the province of
Ontario, Canada, was formed October 12, 1995, pursuant to
the Unanimous Shareholders Agreement
(Shareholders Agreement) between Boise Cascade
Corporation (Boise), Rainy River Forest Products
Inc. (Rainy), Rainy River OSB Holdings Inc.
(Rainy Sub), a wholly owned subsidiary of Rainy, the
Northwestern Mutual Life Insurance Company
(Northwestern), and Allstate Insurance Company
(Allstate). Boise and Rainy Sub hold common shares;
Northwestern and Allstate hold preferred shares
(Class A shares) (see note 7). In November
1995, Rainy amalgamated with Stone-Consolidated Corporation and
the new company, also named Stone-Consolidated Corporation
(Stone), succeeded to Rainys interest in Rainy
Sub and to Rainys contractual rights and obligations. On
May 30, 1997, Stone and Abitibi-Price Inc. amalgamated and
the new company, named Abitibi-Consolidated, Inc., succeeded to
Stones contractual rights and obligations. Effective
January 1, 2004, Rainy Sub was liquidated and its assets
and liabilities transferred to its parent, Abitibi-Consolidated
Company of Canada (Abitibi). The share certificates
in the name of Rainy Sub have been cancelled and a new
certificate for the same number of shares has been issued by
Voyageur to Abitibi. Each shareholder is entitled to vote the
total number of shares held by the shareholder on all matters
requiring shareholder approval as if the Class A shares and
common shares were one class.

The principal business of the Corporation is to
operate a 440 million square feet (MMSF) per
year oriented strand board (OSB) plant in Barwick,
Ontario, Canada. The Corporation is prohibited from engaging in
any other business activity by the terms of agreements among the
shareholders.

Under the terms of a Stock Purchase Agreement,
each shareholder contributed its equity contributions to the
Corporation at the times specified. Under the terms of the
Shareholders Agreement, additional capital, if needed, may
be called for, but no shareholder can be required to contribute.
No additional contributions have been called for.

The Shareholders Agreement provides that
neither Boise nor Abitibi are permitted to transfer their
shares, other than to an affiliate, prior to the fifth
anniversary of the closing date except with approval of
shareholders holding 85% of the outstanding shares. It also
provides that holders of the Class A shares may transfer
shares, other than to a competitor engaged in the manufacture of
wood products, at any time, without the consent of any party.
Additionally, it provides that holders of the Class A
shares may transfer shares to a competitor, at any time, with
the approval of shareholders holding 85% of the outstanding
shares. Any transfer by Abitibi or a holder of Class A
shares shall be subject to Boises right of first offer.
After the fifth anniversary of the closing date, and if certain
conditions are met, the holders of Class A shares may
exercise a Put Right that will initiate an appraisal process to
sell their shares to the Corporation at the then fair market
value. Boise may exercise a Call Right to purchase shares
available pursuant to the Put Right. The fifth anniversary date
was reached October 12, 2000. As at March 31, 2004,
these rights had not been exercised. Following the eighth
anniversary of the closing date, Boise may purchase all
Class A shares at fair market value. The eighth anniversary
date was reached October 12, 2003. As at March 31, 2004,
these rights had not been exercised. The Shareholders
Agreement also defines other liquidation rights of equity
holders, and other standard terms and conditions.

F-49



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

THREE MONTHS ENDED MARCH 31, 2004 AND
2003

(Unaudited)




1. ORGANIZATION AND PURPOSE 
(Continued)


Boise manages the business and affairs of the
Corporation pursuant to the Operating and Marketing Agreement,
subject to limitations imposed by the Shareholders
Agreement. Certain matters, as defined in the Shareholders
Agreement, require shareholder approval. Under the terms of the
Operating and Marketing Agreement, Boise will provide to the
Corporation all engineering, financial, accounting, legal, and
general management services necessary to operate the plant and
will market all products produced by the plant. Product sales
prices to both unaffiliated customers and to related parties
will be based on then prevailing market prices. The term of this
agreement is through December 31, 2020, subject to early
termination if Boise were to liquidate its interest in the
Corporation. The marketing services include provisions for a
sales force and offices, marketing and sales plans, sales entry
and billing, invoicing, collection, customer selection and
credit, customer service, and claims services.

Under the terms of a Wood Supply Service
Agreement, Abitibi will exercise the rights of the Corporation
under various wood procurement agreements and will acquire wood
from private lands. Abitibi will pay all costs incurred by it in
performing the agreement including all Crown charges, stumpage
payments to private landowners, logging and hauling costs, and
all other expenses incurred in delivering. Abitibi will be
compensated for its costs. The initial term of this agreement
ends December 31, 2005, and is renewable year to year
thereafter.

2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

BASIS OF PRESENTATION. These financial statements
are expressed in Canadian dollars and are prepared in accordance
with Canadian generally accepted accounting principles
(Canadian GAAP). These financial statements differ
in certain respects from those prepared in accordance with
United States generally accepted accounting principles
(U.S. GAAP) and are not intended to provide
certain disclosures which would be found in U.S. GAAP
financial statements. These measurement differences are
described in note 13 Differences between Canadian and
United States generally accepted accounting principles.

USE OF ESTIMATES. The preparation of financial
statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and
expenses for the reporting period. Actual results may vary from
those estimates.

FOREIGN CURRENCY TRANSLATION. Monetary assets and
liabilities that are denominated in U.S. dollars are
translated into Canadian dollars at the rate of exchange in
effect at the balance sheet date. Revenues and expenses that are
denominated in U.S. dollars are translated into Canadian
dollars at average monthly exchange rates prevailing during the
year. Resulting translation adjustments are included in the
Statements of Earnings under the caption Foreign exchange
loss.

FINANCIAL INSTRUMENTS. The estimated fair values
of financial instruments including cash, receivables, accounts
payable and accrued liabilities, income taxes payable, current
portion of long-term debt and other long-term liabilities are
approximately the same as their carrying values. The preferred
Class A shares are recorded at fair value as at the end of
the reporting

F-50



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

THREE MONTHS ENDED MARCH 31, 2004 AND
2003

(Unaudited)




2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  (Continued)


period. The change in the fair value of the
preferred Class A shares between reporting periods is
recorded in the Statements of Earnings.

REVENUE RECOGNITION. Revenue is recognized when
persuasive evidence of an arrangement exists, the sales price is
fixed and determinable, title transfers, and risk of loss has
passed to the customer.

INVENTORY. The Corporation values inventory at
the lower of cost or market with cost based on average costing.
Manufactured inventories include costs for materials, labor, and
factory overhead.

PROPERTY, PLANT AND EQUIPMENT. Property, plant
and equipment is recorded at cost. Cost includes expenditures
for major improvements and replacements and the net amount of
interest cost associated with significant capital additions. No
interest was capitalized in 2004 or 2003. Depreciation is
determined using the straight-line method. Gains and losses from
sales and retirements are included in income as they occur.
Estimated service lives of principal items of property, plant
and equipment are 40 years for buildings and range
from 3 to 20 years for machinery and equipment.

OTHER ASSETS. At March 31, 2004,other assets
consisted of deposits. At March 31, 2003, other assets
consisted of deposits and financing costs incurred by the
Corporation. Financing costs were amortized on a straight-line
basis over the term of the loan.

INCOME TAXES. The Corporation uses the asset and
liability method of accounting for income taxes. Under the asset
and liability method, future tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases.
Future tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on future tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the date of enactment or
substantive enactment. A valuation allowance is recorded against
any future income tax asset if it is more likely than not that
the asset will not be realized in its entirety.

3. INVENTORY

|                                   |  |                   |       |      |  |   |       | 
|---------------------------------- |  | ----------------- | ----- | ---- |  | - | ----- | 
|                                   |  |                  
|                                   |  | March 31         
|                                   |  |                  
|                                   |  | 2003              |       | 2004
|                                   |  |                   |       |     
|                                   |  |                  
|                                   |  | (expressed in    
|                                   |  | thousands of     
|                                   |  | Canadian dollars)
|Finished goods and work in process |  | $                 | 938   |      |  | $ | 1,394 | 
|Logs                               |  |                   | 3,329 |      |  |   | 4,312 | 
|Other raw materials and supplies   |  |                   | 2,624 |      |  |   | 3,114 | 
|                                   |  |                   |       |      |  |   |       | 
|                                   |  | $                 | 6,891 |      |  | $ | 8,820 | 
|                                   |  |                   |       |      |  |   |       | 

F-51



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

THREE MONTHS ENDED MARCH 31, 2004 AND
2003

(Unaudited)


4. PROPERTY, PLANT AND
EQUIPMENT

|                           |  |                            |         |              |  |     |        |  |  |   |        | 
|-------------------------- |  | -------------------------- | ------- | ------------ |  | --- | ------ |  |  | - | ------ | 
|                           |  |                           
|                           |  | March 31, 2004            
|                           |  |                           
|                           |  |                            |         | Accumulated  |  |    
|                           |  | Cost                       |         | Depreciation |  | Net
|                           |  |                            |         |              |  |    
|                           |  |                           
|                           |  | (expressed in thousands of
|                           |  | Canadian dollars)         
|Land                       |  | $                          | 587     |              |  | $   |       |  |  | $ | 587    | 
|Buildings and improvements |  |                            | 33,058  |              |  |     | 7,538  |  |  |   | 25,520 | 
|Machinery and equipment    |  |                            | 140,327 |              |  |     | 67,892 |  |  |   | 72,435 | 
|                           |  |                            |         |              |  |     |        |  |  |   |        | 
|                           |  | $                          | 173,972 |              |  | $   | 75,430 |  |  | $ | 98,542 | 
|                           |  |                            |         |              |  |     |        |  |  |   |        | 

|                           |  |                            |         |              |  |     |        |  |  |   |         | 
|-------------------------- |  | -------------------------- | ------- | ------------ |  | --- | ------ |  |  | - | ------- | 
|                           |  |                           
|                           |  | March 31, 2003            
|                           |  |                           
|                           |  |                            |         | Accumulated  |  |    
|                           |  | Cost                       |         | Depreciation |  | Net
|                           |  |                            |         |              |  |    
|                           |  |                           
|                           |  | (expressed in thousands of
|                           |  | Canadian dollars)         
|Land                       |  | $                          | 587     |              |  | $   |       |  |  | $ | 587     | 
|Buildings and improvements |  |                            | 32,801  |              |  |     | 6,292  |  |  |   | 26,509  | 
|Machinery and equipment    |  |                            | 138.361 |              |  |     | 57,379 |  |  |   | 80,982  | 
|                           |  |                            |         |              |  |     |        |  |  |   |         | 
|                           |  | $                          | 171,749 |              |  | $   | 63,671 |  |  | $ | 108,078 | 
|                           |  |                            |         |              |  |     |        |  |  |   |         | 

5. OTHER ASSETS

|                         |  |                   |        |      |  |   |       | 
|------------------------ |  | ----------------- | ------ | ---- |  | - | ----- | 
|                         |  |                  
|                         |  | March 31         
|                         |  |                  
|                         |  | 2003              |        | 2004
|                         |  |                   |        |     
|                         |  |                  
|                         |  | (expressed in    
|                         |  | thousands of     
|                         |  | Canadian dollars)
|Deferred financing costs |  | $                 | 3,396  |      |  | $ |      | 
|Accumulated amortization |  |                   | (3,208 | )    |  |   |      | 
|                         |  |                   |        |      |  |   |       | 
|                         |  |                   | 188    |      |  |   |      | 
|Deposits                 |  |                   | 1,312  |      |  |   | 1,205 | 
|                         |  |                   |        |      |  |   |       | 
|                         |  | $                 | 1,500  |      |  | $ | 1,205 | 
|                         |  |                   |        |      |  |   |       | 

6. LONG-TERM DEBT

In October 1995, the Corporation entered into a
variable rate lending commitment which included a nonrevolving
progress draw term credit facility (Credit B), up to
US$65,000,000, denominated in U.S. dollars. The Credit B
facility provided funds for construction. Interest rate options
available to the Corporation included rates based on the London
Interbank Offering Rate, or the U.S. Base Rate. At
March 31, 2003, $3,822,000 (US$2,600,000) of borrowings
were outstanding with a variable interest rate of 3.17%. Full
and final payment of the Credit B facility was made in May, 2003.

F-52



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

THREE MONTHS ENDED MARCH 31, 2004 AND
2003

(Unaudited)


7. PREFERRED CLASS A
SHARES

On October 12, 1995, the Corporation
authorized 19,000,000 preferred Class A shares, US$1.00 par
value. At March 31, 2004 and 2003, 10,000,000 Class A
shares to Northwestern, and 9,000,000 Class A shares to
Allstate were outstanding. After the fifth anniversary of the
closing date, and if certain conditions are met, the holders of
Class A shares may exercise a Put Right that will initiate
an appraisal process to sell their shares to the Corporation at
the then fair market value. The fair market value was
$82,885,000 and $61,384,000 at March 31, 2004 and 2003, and
was determined based on the Class A shareholders
portion of an estimated U.S. dollar purchase price
translated at the applicable current exchange rate. Boise may
exercise a Call Right to purchase shares available pursuant to
the Put Right. The fifth anniversary date was reached
October 12, 2000. As at March 31, 2004, these rights
had not been exercised. Following the eighth anniversary of the
closing date, Boise may purchase all Class A shares at fair
market value. The eighth anniversary date was reached
October 12, 2003. As at March 31, 2004, these rights
had not been exercised.

Dividends will be paid on a semiannual basis by
the Corporation, unless otherwise agreed. The Class A
shares will be entitled to a 12% per annum dividend, preference
over the common shares in dividend payments, and unpaid
Class A share dividends will compound semi-annually. No
dividends have been paid through March 31, 2004. At
March 31, 2004 and 2003, the cumulative Class A
dividend in arrears was $35,526,000 (US$27,096,000) and
$32,375,000 (US$22,025,000). Class A shares may participate
in additional dividend distributions if certain conditions are
met. The policy of the Corporation is to distribute all
available cash not required for other purposes.

8. COMMON STOCK

|           |                                                    |                   |   |        |  |  |   |        | 
|---------- | -------------------------------------------------- | ----------------- | - | ------ |  |  | - | ------ | 
|           |                                                    |                  
|           |                                                    | March 31         
|           |                                                    |                  
|           |                                                    | 2003              |   | 2004  
|           |                                                    |                   |   |       
|           |                                                    |                  
|           |                                                    | (expressed in    
|           |                                                    | thousands of     
|           |                                                    | Canadian dollars)
|Authorized |                                                    |                   |   |        |  |  |   |       
|           | 40,500,000 common voting shares, US$1.00 par value |                   |   |        |  |  |   |        | 
|Issued     |                                                    |                   |   |        |  |  |   |       
|           | 40,500,000 common voting shares                    |                   | $ | 55,419 |  |  | $ | 55,419 | 

Dividends will be paid on a semiannual basis by
the Corporation, unless otherwise agreed. The Class A
shares will be entitled to preference over the common shares in
dividend payments. No dividends have been paid through March 31,
2004.

F-53



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

THREE MONTHS ENDED MARCH 31, 2004 AND
2003

(Unaudited)


9. INCOME TAXES

The overall income tax provision differs from the
amount that would be obtained by applying the combined statutory
income tax rate to earnings as a result of manufacturing and
processing credit, large corporation taxes, and changes in tax
rates as follows:

|                                                                                                           |  |                   |        |      |  |   |        |  
|---------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | ---- |  | - | ------ | -
|                                                                                                           |  |                  
|                                                                                                           |  | Three Months     
|                                                                                                           |  | Ended March 31   
|                                                                                                           |  |                  
|                                                                                                           |  | 2003              |        | 2004
|                                                                                                           |  |                   |        |     
|                                                                                                           |  |                  
|                                                                                                           |  | (expressed in    
|                                                                                                           |  | thousands of     
|                                                                                                           |  | Canadian dollars)
|Earnings before income taxes                                                                               |  | $                 | 4,065  |      |  | $ | 19,544 |  
|Combined federal and provincial income tax rate                                                            |  |                   | 36.62  | %    |  |   | 36.12  | %
|                                                                                                           |  |                   |        |      |  |   |        |  
|Income tax expense based on statutory income tax
    rate                                                  |  |                   | (1,489 | )    |  |   | (7,059 | )
|Permanent difference from unrealized (increase)
    decrease in the fair value of preferred Class A shares |  |                   | 1,185  |      |  |   | (728   | )
|Manufacturing and processing credit                                                                        |  |                   | 29     |      |  |   | 431    |  
|Large corporation tax                                                                                      |  |                   | (69    | )    |  |   | (69    | )
|Change in tax rate                                                                                         |  |                   | 11     |      |  |   |       |  
|Other                                                                                                      |  |                   |       |      |  |   | (6     | )
|                                                                                                           |  |                   |        |      |  |   |        |  
|                                                                                                           |  | $                 | (333   | )    |  | $ | (7,431 | )
|                                                                                                           |  |                   |        |      |  |   |        |  

Future income taxes are provided for temporary
differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured for
tax purposes. The components of the net future income tax
liability in the Balance Sheets are as follows:

|                                                                                               |  |                   |        |      |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ----------------- | ------ | ---- |  | - | ------ | -
|                                                                                               |  |                  
|                                                                                               |  | Three Months     
|                                                                                               |  | Ended March 31   
|                                                                                               |  |                  
|                                                                                               |  | 2003              |        | 2004
|                                                                                               |  |                   |        |     
|                                                                                               |  |                  
|                                                                                               |  | (expressed in    
|                                                                                               |  | thousands of     
|                                                                                               |  | Canadian dollars)
|Non-capital loss carry forwards                                                                |  | $                 | (1,986 | )    |  | $ |       |  
|Capital loss carry forwards                                                                    |  |                   | (2,364 | )    |  |   | (4,462 | )
|Unrealized foreign exchange loss on long-term debt                                             |  |                   | (1,210 | )    |  |   |       |  
|Excess of carrying value of property, plant and
    equipment and other assets over tax values |  |                   | 17,548 |      |  |   | 18,555 |  
|Other temporary differences                                                                    |  |                   | (1,577 | )    |  |   | (1,797 | )
|Valuation allowance                                                                            |  |                   | 3,391  |      |  |   | 3,720  |  
|                                                                                               |  |                   |        |      |  |   |        |  
|                                                                                               |  | $                 | 13,802 |      |  | $ | 16,016 |  
|                                                                                               |  |                   |        |      |  |   |        |  

At March 31, 2004, the Corporation had
$1,751,000 of Ontario corporation minimum tax credits which
expire in 2006 through 2011.

F-54



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

THREE MONTHS ENDED MARCH 31, 2004 AND
2003

(Unaudited)


10. RELATED PARTY TRANSACTIONS

Pursuant to the Operating and Marketing
Agreement, Boise is entitled to reimbursement for certain
materials and services provided during construction and
operation of the facility and will receive an annual fee
escalating at 3% per year. Boise shall also receive a commission
equaling 4% of the net selling price on sales for which Boise
acts as agent. See the table below.

Under the terms of the Wood Supply Services
Agreement, the Corporation will pay to Abitibi all costs
incurred by it in performing the agreement plus a management fee
of $500,000 per year beginning at the start of operations. In
addition, if renewal charges for hardwood exceed the amount
covered by Crown charges, the Corporation will pay a
proportionate share of these charges. See the table below.

Boise and Abitibi have received reimbursement for
the following operating, development, and other costs:

|                                                                      |                   |                   |        |       |  |   |        |        | 
|--------------------------------------------------------------------- | ----------------- | ----------------- | ------ | ----- |  | - | ------ | ------ | 
|                                                                      |                   |                  
|                                                                      |                   | Three Months     
|                                                                      |                   | Ended March 31   
|                                                                      |                   |                  
|                                                                      |                   | 2003              |        | 2004 
|                                                                      |                   |                   |        |      
|                                                                      |                   |                  
|                                                                      |                   | (expressed in    
|                                                                      |                   | thousands of     
|                                                                      |                   | Canadian dollars)
|Paid to Boise:                                                        |                   |                   |        |       |  |   |        |       
|                                                                      | Management fees   |                   | $      | 424   |  |   | $      | 382    | 
|                                                                      | Sales Commissions |                   |        | 900   |  |   |        | 1,792  | 
|                                                                      | Freight           |                   |        | 3,709 |  |   |        | 3,075  | 
|                                                                      |                   |                   |        |       |  |   |        |       
|                                                                      |                   | $                 | 5,033  |       |  | $ | 5,249  |       
|                                                                      |                   |                   |        |       |  |   |        |       
|Paid to Abitibi:                                                      |                   |                   |        |       |  |   |        |       
|                                                                      | Management fees   |                   | $      | 149   |  |   | $      | 154    | 
|                                                                      | Wood purchases    |                   |        | 8,578 |  |   |        | 9,413  | 
|                                                                      |                   |                   |        |       |  |   |        |       
|                                                                      |                   | $                 | 8,727  |       |  | $ | 9,567  |       
|                                                                      |                   |                   |        |       |  |   |        |       
|Sales to Boise                                                        |                   |                   | 17,584 |       |  | $ | 45,137 |       
|                                                                      |                   |                   |        |       |  |   |        |       
|Receivables from affiliated company:                                  |                   |                   |        |       |  |   |        |       
|                                                                      | Boise             |                   | $      | 5,793 |  |   | $      | 12,114 | 
|                                                                      |                   |                   |        |       |  |   |        |       
|Accounts payable and accrued liabilities to
    affiliated companies: |                   |                   |        |       |  |   |        |       
|                                                                      | Abitibi           |                   | $      | 2,995 |  |   | $      | 3,540  | 
|                                                                      | Boise             |                   |        | 1,721 |  |   |        | 1,868  | 
|                                                                      |                   |                   |        |       |  |   |        |       
|                                                                      |                   | $                 | 4,716  |       |  | $ | 5,408  |       
|                                                                      |                   |                   |        |       |  |   |        |       

These transactions are in the normal course of
operations and are measured at the exchange amount which is the
amount of consideration established and agreed to by the related
parties.

F-55



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

THREE MONTHS ENDED MARCH 31, 2004 AND
2003

(Unaudited)


11. MAJOR CUSTOMERS

A substantial portion of the net sales of the
Corporation are made to a limited number of customers. During
the three months ended March 31, 2004 and 2003, two such
customers accounted for 94% and 67% of sales. Substantially all
of the Corporations sales to related parties and to
unaffiliated customers were into the United States.

12. CONTINGENCIES

The Corporation is involved in litigation and
administrative proceedings primarily arising in the normal
course of Corporation business. In the opinion of management,
the Corporations recovery, if any, or liability, if any,
under any pending litigation or administrative proceeding would
not materially affect the Corporations financial condition
or results of operations.

13. DIFFERENCES BETWEEN CANADIAN AND
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The Corporations financial statements have
been prepared in accordance with Canadian GAAP which, in the
case of the Corporation, are in conformity in all material
respects with U.S. GAAP, with the following exceptions:

Reconciliation
of Canadian and U.S. GAAP

Under U.S. GAAP, future income tax assets and
liabilities are revalued for enacted changes in tax rates. Under
Canadian GAAP, future income tax assets and liabilities are
revalued for all enacted or substantially enacted changes in tax
rates.

Under U.S. GAAP, changes in the fair value of
redeemable securities are treated in the same manner as a
dividend and are charged against retained earnings, or in the
absence of retained earnings, as charges against paid-in
capital. Under Canadian GAAP, changes in the fair value of
redeemable securities are charged to income.

The following information is presented in
accordance with U.S. GAAP, reflecting these adjustments.

|                                                                                     |  |                |        |      |  |   |        | 
|------------------------------------------------------------------------------------ |  | -------------- | ------ | ---- |  | - | ------ | 
|                                                                                     |  |               
|                                                                                     |  | Three Months  
|                                                                                     |  | Ended March 31
|                                                                                     |  |               
|Effect on net earnings:                                                              |  | 2003           |        | 2004
|                                                                                     |  |                |        |     
|Net earnings under Canadian GAAP                                                     |  | $              | 3,732  |      |  | $ | 12,113 | 
|Adjustments:                                                                         |  |                |        |      |  |   |        | 
|Unrealized increase (decrease) in the fair value
    of
    preferred Class A shares |  |                | (3,235 | )    |  |   | 2,016  | 
|Future income taxes                                                                  |  |                | (11    | )    |  |   |       | 
|                                                                                     |  |                |        |      |  |   |        | 
|Net earnings under U.S. GAAP                                                         |  | $              | 486    |      |  | $ | 14,129 | 
|                                                                                     |  |                |        |      |  |   |        | 

F-56



---



##### 



VOYAGEUR PANEL LIMITED


NOTES TO FINANCIAL STATEMENTS 
(Continued)

THREE MONTHS ENDED MARCH 31, 2004 AND
2003

(Unaudited)




13. DIFFERENCES BETWEEN CANADIAN AND
UNITED STATES GENERALLY ACCEPTED
ACCOUNTING       PRINCIPLES 
(Continued)


|                                                   |  |          |        |      |  |   |         | 
|-------------------------------------------------- |  | -------- | ------ | ---- |  | - | ------- | 
|                                                   |  |         
|                                                   |  | March 31
|                                                   |  |         
|Effect on balance sheets:                          |  | 2003     |        | 2004
|                                                   |  |          |        |     
|Total liabilities under Canadian GAAP              |  | $        | 85,754 |      |  | $ | 114,087 | 
|Adjustment:                                        |  |          |        |      |  |   |         | 
|Future income taxes                                |  |          | 1,113  |      |  |   |        | 
|                                                   |  |          |        |      |  |   |         | 
|Total liabilities under U.S. GAAP                  |  | $        | 86,867 |      |  | $ | 114,087 | 
|                                                   |  |          |        |      |  |   |         | 
|Total shareholders equity under Canadian
    GAAP |  | $        | 41,875 |      |  | $ | 57,255  | 
|Adjustment:                                        |  |          |        |      |  |   |         | 
|Total shareholders equity adjustments             |  |          | (1,113 | )    |  |   |        | 
|                                                   |  |          |        |      |  |   |         | 
|Total shareholders equity under U.S. GAAP         |  | $        | 40,762 |      |  | $ | 57,255  | 
|                                                   |  |          |        |      |  |   |         | 

14. SUBSEQUENT EVENT

On April 15, 2004, the Corporations
shareholders announced that they had reached an agreement with
Ainsworth Lumber Co. Ltd. for its purchase of the Corporation
for approximately US$193,000,000, plus as much as US$10,000,000
more based on OSB prices between closing the transaction and
December 31, 2004. The transaction is expected to close in
second quarter 2004.

F-57



---



##### 



Independent Auditors Report

The Board of Directors

Potlatch Corporation:


We have audited the balance sheets of the
Oriented Strand Board Manufacturing Facilities (the
Business) of Potlatch Corporation (the Parent)
as of December 31, 2003 and 2002, and the related
statements of operations, parents equity and cash flows
for each of the years in the three-year period ended
December 31, 2003. These financial statements are the
responsibility of the Parents management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of the Business as of December 31, 2003 and 2002
and the results of its operations and its cash flows for each of
the years in the three-year period then ended in accordance with
Canadian generally accepted accounting principles.

/s/ KPMG LLP

September 10, 2004


Portland, Oregon


F-58



---



##### 



THE BUSINESS

(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Balance Sheets

December 31, 2003 and 2002

(Expressed in US Dollars in
thousands)


|                                          |                                                                          |                      |         |        |        |   |         |        |        | 
|----------------------------------------- | ------------------------------------------------------------------------ | -------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                          |                                                                          | 2003                 |         | 2002  
|                                          |                                                                          |                      |         |       
|Assets                                    |                                                                          |                      |         |        |        |   |         |       
|Current assets:                           |                                                                          |                      |         |        |        |   |         |       
|                                          | Cash                                                                     |                      | $       | 1      |        |   | $       | 1      |       
|                                          | Receivables, net of allowance for doubtful
    accounts of $150 and $150 |                      |         | 14,295 |        |   |         | 9,412  |       
|                                          | Inventories (note 2)                                                     |                      |         | 19,327 |        |   |         | 16,880 |       
|                                          | Prepaid expenses                                                         |                      |         | 183    |        |   |         | 155    |       
|                                          |                                                                          |                      |         |        |        |   |         |       
|                                          |                                                                          | Total current assets |         |        | 33,806 |   |         |        | 26,448 | 
|Land                                      |                                                                          |                      | 981     |        |        |   | 981     |       
|Plant and equipment, net (note 3)         |                                                                          |                      | 139,378 |        |        |   | 151,688 |       
|Timber permit deposits and roads (note 4) |                                                                          |                      | 2,417   |        |        |   | 3,371   |       
|Pension assets (note 7)                   |                                                                          |                      | 20,708  |        |        |   | 17,474  |       
|Other assets                              |                                                                          |                      | 197     |        |        |   | 105     |       
|                                          |                                                                          |                      |         |        |        |   |         |       
|                                          |                                                                          | $                    | 197,487 |        |        | $ | 200,067 |       
|                                          |                                                                          |                      |         |        |        |   |         |       
|Liabilities and Parents Equity           |                                                                          |                      |         |        |        |   |         |       
|Current liabilities:                      |                                                                          |                      |         |        |        |   |         |       
|                                          | Accounts payable and accrued liabilities
    (note 6)                    |                      | $       | 13,608 |        |   | $       | 16,431 |       
|Future income taxes (note 5)              |                                                                          |                      | 27,383  |        |        |   | 24,274  |       
|Retiree medical liability (note 7)        |                                                                          |                      | 14,825  |        |        |   | 13,650  |       
|Parents equity                           |                                                                          |                      | 141,671 |        |        |   | 145,712 |       
|Commitments and contingencies (note 9)    |                                                                          |                      |         |        |        |   |         |       
|                                          |                                                                          |                      |         |        |        |   |         |       
|                                          |                                                                          | $                    | 197,487 |        |        | $ | 200,067 |       
|                                          |                                                                          |                      |         |        |        |   |         |       

See accompanying notes to financial
statements.

F-59



---



##### 



THE BUSINESS

(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Statements of Operations

Years ended December 31, 2003, 2002, and
2001

(Expressed in US Dollars in
thousands)


|                                                     |                                                |                                        |         |         |        |      |         |         |         |   |         |         |         |  
|---------------------------------------------------- | ---------------------------------------------- | -------------------------------------- | ------- | ------- | ------ | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                     |                                                | 2003                                   |         | 2002    |        | 2001
|                                                     |                                                |                                        |         |         |        |     
|Net sales                                            |                                                | $                                      | 314,452 |         |        | $    | 187,460 |         |         | $ | 167,327 |        
|Costs and expenses:                                  |                                                |                                        |         |         |        |      |         |         |         |   |         |        
|                                                     | Depreciation and amortization                  |                                        |         | 15,872  |        |      |         | 17,464  |         |   |         | 16,744  |        
|                                                     | Materials, labor, and other operating expenses |                                        |         | 200,451 |        |      |         | 182,457 |         |   |         | 167,909 |        
|                                                     | Selling, general, and administrative expenses  |                                        |         | 4,882   |        |      |         | 3,878   |         |   |         | 3,522   |        
|                                                     |                                                |                                        |         |         |        |      |         |         |         |   |         |        
|                                                     |                                                |                                        | 221,205 |         |        |      | 203,799 |         |         |   | 188,175 |        
|                                                     |                                                |                                        |         |         |        |      |         |         |         |   |         |        
|                                                     |                                                | Earnings (loss) before taxes on income |         |         | 93,247 |      |         |         | (16,339 | ) |         |         | (20,848 | )
|Provision (benefit) for taxes on income
    (note 5) |                                                |                                        | 36,366  |         |        |      | (6,372  | )       |         |   | (8,131  | )      
|                                                     |                                                |                                        |         |         |        |      |         |         |         |   |         |        
|                                                     |                                                | Net earnings (loss)                    |         | $       | 56,881 |      |         | $       | (9,967  | ) |         | $       | (12,717 | )
|                                                     |                                                |                                        |         |         |        |      |         |         |         |   |         |        

See accompanying notes to financial
statements.

F-60



---



##### 



THE BUSINESS

(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Statements of Parents Equity

Years ended December 31, 2003, 2002, and
2001

(Expressed in US Dollars in
thousands)


|                              |  |   |         |  
|----------------------------- |  | - | ------- | -
|Balance, December 31, 2000    |  | $ | 156,539 |  
|Net loss                      |  |   | (12,717 | )
|Transfers from corporate, net |  |   | 14,247  |  
|                              |  |   |         |  
|Balance, December 31, 2001    |  |   | 158,069 |  
|Net loss                      |  |   | (9,967  | )
|Transfers to corporate, net   |  |   | (2,390  | )
|                              |  |   |         |  
|Balance, December 31, 2002    |  |   | 145,712 |  
|Net earnings                  |  |   | 56,881  |  
|Transfers to corporate, net   |  |   | (60,922 | )
|                              |  |   |         |  
|Balance, December 31, 2003    |  | $ | 141,671 |  
|                              |  |   |         |  

See accompanying notes to financial
statements.

F-61



---



##### 



THE BUSINESS

(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Statements of Cash Flows

Years ended December 31, 2003, 2002, and
2001

(Expressed in US Dollars in
thousands)


|                                      |                                                                                                          |                                                                     |                                                         |         |        |         |   |        |        |        |   |         |        |         |  
|------------------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------- | - | ------ | ------ | ------ | - | ------- | ------ | ------- | -
|                                      |                                                                                                          | 2003                                                                |                                                         | 2002    |        | 2001   
|                                      |                                                                                                          |                                                                     |                                                         |         |        |        
|Cash flows from operating activities: |                                                                                                          |                                                                     |                                                         |         |        |         |   |        |        |        |   |        
|                                      | Net earnings (loss)                                                                                      |                                                                     | $                                                       | 56,881  |        |         | $ | (9,967 | )      |        | $ | (12,717 | )     
|                                      | Adjustments to reconcile net earnings (loss) to
    net cash provided by (used in) operating activities: |                                                                     |                                                         |         |        |         |   |        |        |        |   |         |       
|                                      |                                                                                                          | Depreciation and amortization                                       |                                                         |         | 15,872 |         |   |        | 17,464 |        |   |         | 16,744 |        
|                                      |                                                                                                          | Employee benefit plans                                              |                                                         |         | (2,059 | )       |   |        | (2,360 | )      |   |         | (1,622 | )      
|                                      |                                                                                                          | Future income taxes                                                 |                                                         |         | 3,109  |         |   |        | 3,218  |        |   |         | 502    |        
|                                      |                                                                                                          | Decrease (increase) in receivables                                  |                                                         |         | (4,883 | )       |   |        | 126    |        |   |         | (1,611 | )      
|                                      |                                                                                                          | Increase in inventories                                             |                                                         |         | (2,447 | )       |   |        | (3,511 | )      |   |         | (1,841 | )      
|                                      |                                                                                                          | Decrease (increase) in prepaids                                     |                                                         |         | (28    | )       |   |        | 99     |        |   |         | (62    | )      
|                                      |                                                                                                          | Decrease (increase) in timber permit deposits                       |                                                         |         | 954    |         |   |        | 1,685  |        |   |         | (1,136 | )      
|                                      |                                                                                                          | Increase (decrease) in accounts payable and
    accrued liabilities |                                                         |         | (2,823 | )       |   |        | (92    | )      |   |         | 86     |        
|                                      |                                                                                                          |                                                                     |                                                         |         |        |         |   |        |        |        |   |        
|                                      |                                                                                                          |                                                                     | Net cash provided by (used in) operating
    activities |         |        | 64,576  |   |        |        | 6,662  |   |         |        | (1,657  | )
|                                      |                                                                                                          |                                                                     |                                                         |         |        |         |   |        |        |        |   |        
|Cash flows from investing activities: |                                                                                                          |                                                                     |                                                         |         |        |         |   |        |        |        |   |        
|                                      | Additions to plant and equipment                                                                         |                                                                     |                                                         | (3,665  | )      |         |   | (4,378 | )      |        |   | (13,882 | )     
|                                      | Other, net                                                                                               |                                                                     |                                                         | (92     | )      |         |   | 13     |        |        |   | (119    | )     
|                                      |                                                                                                          |                                                                     |                                                         |         |        |         |   |        |        |        |   |        
|                                      |                                                                                                          |                                                                     | Net cash used in investing activities                   |         |        | (3,757  | ) |        |        | (4,365 | ) |         |        | (14,001 | )
|                                      |                                                                                                          |                                                                     |                                                         |         |        |         |   |        |        |        |   |        
|Cash flows from financing activities: |                                                                                                          |                                                                     |                                                         |         |        |         |   |        |        |        |   |        
|                                      | Transfers (to) from corporate, net                                                                       |                                                                     |                                                         | (60,819 | )      |         |   | (2,297 | )      |        |   | 15,658  |       
|                                      |                                                                                                          |                                                                     |                                                         |         |        |         |   |        |        |        |   |        
|                                      |                                                                                                          |                                                                     | Net cash provided by (used in) financing
    activities |         |        | (60,819 | ) |        |        | (2,297 | ) |         |        | 15,658  |  
|                                      |                                                                                                          |                                                                     |                                                         |         |        |         |   |        |        |        |   |        
|Change in cash                        |                                                                                                          |                                                                     |                                                        |         |        |         |  |        |        |        |  |        
|Balance at beginning of period        |                                                                                                          |                                                                     | 1                                                       |         |        |         | 1 |        |        |        | 1 |        
|                                      |                                                                                                          |                                                                     |                                                         |         |        |         |   |        |        |        |   |        
|Balance at end of period              |                                                                                                          | $                                                                   | 1                                                       |         |        | $       | 1 |        |        | $      | 1 |        
|                                      |                                                                                                          |                                                                     |                                                         |         |        |         |   |        |        |        |   |        

See accompanying notes to financial
statements.

F-62



---



##### 



THE BUSINESS

(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements

(US Dollars)


December 31, 2003 and 2002


(1) Summary of Principal Accounting
Policies



|    |                                         
|--- | ----------------------------------------
|(a) | Background and Basis of
    Presentation

The accompanying financial statements have been
prepared in accordance with Canadian generally accepted
accounting principles for the purpose of presenting the Oriented
Strand Board (OSB) Manufacturing Facilities (the Business
or Minnesota OSB Facilities) of Potlatch Corporation (Potlatch
or the Parent) and the results of its operations, and its cash
flows. The Minnesota OSB facilities are part of a proposed sale
to Ainsworth Lumber Co. Ltd. (Ainsworth). The Minnesota OSB
Facilities of Potlatch are located at Bemidji, Cook and Grand
Rapids, Minnesota. These financial statements do not reflect any
effects of the sale of the Business. Material measurement
differences to accounting principles generally accepted in the
United States of America are set out in Note 11.

The proposed sale includes the capital assets,
inventory and accounts receivable of the Business (certain
assets), and the assumption of certain contracts directly
associated with the operations (certain liabilities). The
proposed sale does not include the transfer to the buyer of
pension assets or liabilities, and retiree medical and income
tax liabilities (though such assets and liabilities have been
reflected in the accompanying financial statements). The
Business has been managed as part of the Wood Products segment
of Potlatch.

Potlatch did not maintain the Business as a
separate business unit, nor did management analyze the Business
as a separate line of business, and external financial
statements historically have not been prepared. The accompanying
financial statements have been derived from the historical
accounting records of Potlatch and the Minnesota OSB Facilities
in order to present the balance sheets of the Business as of
December 31, 2003 and 2002 and the results of operations,
and cash flows for the years ended December 31, 2003, 2002,
and 2001 solely for the purpose of filing with securities
regulatory authorities. The historical operating results of the
Business may not be indicative of its results in the future or
what its results of operations, financial position and cash
flows would have been had it been a stand-alone company.

The statements of operations for the Business
include allocations for certain costs from the parent level
directly related to the operations of the Business: medical
costs for hourly and salaried active and retired employees,
hourly pension, workers compensation, general liability
and property insurance, salaried payroll costs (payroll taxes,
pension, and other payroll related costs), pro-rata share of
corporate administration expense for accounting, purchasing,
information systems, and research and development. In addition,
the balance sheets include an allocation of pension assets and
retiree medical liabilities. Such allocations were done based
primarily upon the percentage of the Business headcount
and payroll related matters as compared to overall headcount and
payroll related matters of Potlatch on a consolidated basis.
Management believes the methodologies applied for the allocation
of these costs and assets and liabilities are reasonable.
Interest expense incurred by the Parent has not been allocated
to the Business.

Significant changes could have occurred in the
funding and operations of the Business, were it to operate as an
independent stand-alone entity, including an increase in debt,
which would have a significant impact on its financial position
and results of operations.

F-63



---



##### 



THE BUSINESS


(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements 
(Continued)

(US Dollars)


December 31, 2003 and 2002




(1) Summary of Principal Accounting
Policies  (Continued)




|    |                
|--- | ---------------
|(b) | Parents Equity

Investments by and advances from Potlatch
represents Potlatchs interest in the recorded net assets
of the Business. Potlatch uses a centralized approach to cash
management and the financing of operations. As a result, none of
Potlatchs cash, cash equivalents, or direct indebtedness
have been allocated to the Business in the financial statements.
All transactions between the Business and Potlatch, including
the allocation of corporate expenses, flow through the
Parents equity account.



|    |            
|--- | -----------
|(c) | Inventories

Inventories are stated at the lower of current
average cost or net realizable value. The average cost method is
used to determine cost of all inventories.



|    |           
|--- | ----------
|(d) | Properties

Property, plant, and equipment are valued at cost
less accumulated depreciation. Depreciation of buildings,
equipment and other depreciable assets is determined using the
straight-line method. Estimated useful lives range from 30 to
40 years for buildings and structures and 2 to
25 years for equipment.

Timber permit deposits are for timber purchased
under contracts where the Business does not own the underlying
land. The cost of permit timber deposits is capitalized in
timber accounts, and as timber is harvested and finished goods
are sold, the costs are expensed.

Major improvements and replacements of property,
plant, and equipment are capitalized. Maintenance, repairs, and
minor improvements and replacements are expensed as incurred.
Upon retirement or other disposition, applicable cost and
accumulated depreciation or amortization are removed from the
accounts. Any gains or losses are included in earnings.



|    |                  
|--- | -----------------
|(e) | Long-Lived Assets

Long-lived assets are accounted for in accordance
with CICA 3063, Impairment of Long-Lived Assets and CICA
3475, Disposal of Long-Lived Assets and Discontinued
Operations. These statements require that long-lived assets
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets
may not be recoverable. Assets to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell.



|    |                                    
|--- | -----------------------------------
|(f) | Revenue and Revenue
    Recognition

The Business recognizes revenue from product
sales to customers when the product is shipped from the mills in
accordance with sales arrangements. To determine net sales,
discounts, returns, and allowances are deducted from gross
sales. The net sales figure presented herein in the statements
of operations includes sales to other segments of Potlatch.
These intersegment sales totaled $0.2 million for each year
presented.

F-64



---



##### 



THE BUSINESS


(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements 
(Continued)

(US Dollars)


December 31, 2003 and 2002




(1) Summary of Principal Accounting
Policies  (Continued)


Freight costs are classified as cost of goods
sold for all periods presented.



|    |             
|--- | ------------
|(g) | Income Taxes

The Business is a division of Potlatch and, for
the purposes of U.S. federal and state income taxes, is not
directly subject to income taxes but is included in
Potlatchs consolidated income tax returns. For purposes of
these financial statements, the Business provision
(benefit) for U.S. income taxes has been determined on a
separate return basis.

Income taxes are accounted for under the asset
and liability method. Income taxes payable are settled in the
current period through transfers to (from) corporate in the
parents equity account. Future income tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Future income tax assets and liabilities
are measured using substantively enacted or enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on future income tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the substantive enactment date.



|    |            
|--- | -----------
|(h) | Environment

As part of Potlatchs corporate policy,
there is an ongoing process to monitor, report on and comply
with environmental requirements. Based on this process, accruals
for environmental liabilities are established. Management
estimates environmental liabilities based on various assumptions
and judgments, the specific nature of which varies in light of
the particular facts and circumstances surrounding each
potential environmental liability. These estimates typically
reflect assumptions and judgments as to the probable nature,
magnitude and timing of required investigation, remediation, and
monitoring activities and the probable cost of these activities,
and in some cases reflect assumptions and judgments as to the
obligation or willingness and ability of third parties to bear a
proportionate or allocated share of the cost of these
activities. Due to the numerous uncertainties and variables
associated with these assumptions and judgments, and the effects
of changes in governmental regulation and environmental
technologies, both the precision and reliability of the
resulting estimates of the related liabilities are subject to
substantial uncertainties. Management regularly monitors
estimated exposure to environmental liabilities and, as
additional information becomes known, the estimates may change
significantly. The estimates of environmental liabilities do not
reflect potential future recoveries from insurance carriers
except to the extent that recovery may from time to time be
deemed probable as a result of a carriers agreement to
payment terms. In those instances in which the estimated
exposure reflects actual or anticipated cost-sharing
arrangements with third parties, management does not believe
that there will be exposure to additional material liability as
a result of nonperformance by such third parties. Currently,
management is not aware of any material environmental
liabilities and have accrued for only specific environmental
remediation costs that have been determined are probable and
reasonably estimable.

F-65



---



##### 



THE BUSINESS


(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements 
(Continued)

(US Dollars)


December 31, 2003 and 2002




(1) Summary of Principal Accounting
Policies  (Continued)




|    |                                     
|--- | ------------------------------------
|(i) | Recent Accounting
    Pronouncements

CICA 3110, Asset Retirement
Obligations, was adopted effective January 1, 2003. The
Statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which
it is incurred, with the associated asset retirement costs
capitalized as part of the carrying amount of the long-lived
asset. Adoption of this Statement did not have a material effect
on the financial condition of the Business or results of
operations of the Business.

(2) Inventories

|                       |  |               |        |      |  |   |        | 
|---------------------- |  | ------------- | ------ | ---- |  | - | ------ | 
|                       |  | 2003          |        | 2002
|                       |  |               |        |     
|                       |  |              
|                       |  | (US Dollars  
|                       |  | in thousands)
|Logs                   |  | $             | 8,584  |      |  | $ | 8,055  | 
|Finished goods         |  |               | 3,778  |      |  |   | 2,304  | 
|Materials and supplies |  |               | 6,965  |      |  |   | 6,521  | 
|                       |  |               |        |      |  |   |        | 
|                       |  | $             | 19,327 |      |  | $ | 16,880 | 
|                       |  |               |        |      |  |   |        | 

(3) Plant and Equipment

|                                                |                          |               |          |         |  |   |          |         | 
|----------------------------------------------- | ------------------------ | ------------- | -------- | ------- |  | - | -------- | ------- | 
|                                                |                          | 2003          |          | 2002   
|                                                |                          |               |          |        
|                                                |                          |              
|                                                |                          | (US Dollars  
|                                                |                          | in thousands)
|Land improvements                               |                          | $             | 11,076   |         |  | $ | 10,776   |        
|Buildings and structures                        |                          |               | 60,559   |         |  |   | 60,740   |        
|Machinery and equipment                         |                          |               | 264,275  |         |  |   | 266,272  |        
|Construction in progress                        |                          |               | 2,142    |         |  |   | 751      |        
|                                                |                          |               |          |         |  |   |          |        
|                                                | Subtotal                 |               |          | 338,052 |  |   |          | 338,539 | 
|Less: accumulated depreciation and amortization |                          |               | (198,674 | )       |  |   | (186,851 | )      
|                                                |                          |               |          |         |  |   |          |        
|                                                | Plant and equipment, net |               | $        | 139,378 |  |   | $        | 151,688 | 
|                                                |                          |               |          |         |  |   |          |        

(4) Timber Permit Deposits and
Roads

|                       |       |               |       |       |  |   |       |       | 
|---------------------- | ----- | ------------- | ----- | ----- |  | - | ----- | ----- | 
|                       |       | 2003          |       | 2002 
|                       |       |               |       |      
|                       |       |              
|                       |       | (US Dollars  
|                       |       | in thousands)
|Timber permit deposits |       | $             | 2,359 |       |  | $ | 3,294 |      
|Permit roads           |       |               | 58    |       |  |   | 77    |      
|                       |       |               |       |       |  |   |       |      
|                       | Total |               | $     | 2,417 |  |   | $     | 3,371 | 
|                       |       |               |       |       |  |   |       |      

F-66



---



##### 



THE BUSINESS


(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements 
(Continued)

(US Dollars)


December 31, 2003 and 2002


(5) Taxes on Income

The provision (benefit) for taxes on income
is comprised of the following:

|        |                                         |                           |        |        |  |      |        |        |   |   |        |        |  
|------- | --------------------------------------- | ------------------------- | ------ | ------ |  | ---- | ------ | ------ | - | - | ------ | ------ | -
|        |                                         | 2003                      |        | 2002   |  | 2001
|        |                                         |                           |        |        |  |     
|        |                                         |                          
|        |                                         | (US Dollars in thousands)
|Current |                                         | $                         | 33,257 |        |  | $    | (9,590 | )      |   | $ | (8,633 | )     
|Future  |                                         |                           | 3,109  |        |  |      | 3,218  |        |   |   | 502    |       
|        |                                         |                           |        |        |  |      |        |        |   |   |        |       
|        | Provision (benefit) for taxes on income |                           | $      | 36,366 |  |      | $      | (6,372 | ) |   | $      | (8,131 | )
|        |                                         |                           |        |        |  |      |        |        |   |   |        |       

The provision (benefit) for taxes on income
differs from the amount computed by applying the statutory
federal income tax rate of 35% to earnings before taxes on
income due to the following:

|                                                              |                                         |                           |        |        |  |      |        |        |   |   |        |        |  
|------------------------------------------------------------- | --------------------------------------- | ------------------------- | ------ | ------ |  | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                                              |                                         | 2003                      |        | 2002   |  | 2001
|                                                              |                                         |                           |        |        |  |     
|                                                              |                                         |                          
|                                                              |                                         | (US Dollars in thousands)
|Computed expected tax provision
    (benefit)               |                                         | $                         | 32,636 |        |  | $    | (5,718 | )      |   | $ | (7,297 | )     
|State and local taxes, net of federal income tax
    benefits |                                         |                           | 3,730  |        |  |      | (654   | )      |   |   | (834   | )     
|                                                              |                                         |                           |        |        |  |      |        |        |   |   |        |       
|                                                              | Provision (benefit) for taxes on income |                           | $      | 36,366 |  |      | $      | (6,372 | ) |   | $      | (8,131 | )
|                                                              |                                         |                           |        |        |  |      |        |        |   |   |        |       
|Effective tax rate                                            |                                         |                           | 39.0   | %      |  |      | 39.0   | %      |   |   | 39.0   | %     

The tax effects of significant temporary
differences creating future income tax assets and liabilities at
December 31 were:

|                                |  |                |        |      |  |   |        |  
|------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                |  | 2003           |        | 2002
|                                |  |                |        |     
|                                |  |               
|                                |  | (US Dollars in
|                                |  | thousands)    
|Plant and equipment             |  | $              | 25,089 |      |  | $ | 22,783 |  
|Pensions                        |  |                | 8,076  |      |  |   | 6,815  |  
|Retiree medical                 |  |                | (5,782 | )    |  |   | (5,324 | )
|                                |  |                |        |      |  |   |        |  
|Net future income tax liability |  | $              | 27,383 |      |  | $ | 24,274 |  
|                                |  |                |        |      |  |   |        |  

F-67



---



##### 



THE BUSINESS


(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements 
(Continued)

(US Dollars)


December 31, 2003 and 2002


(6) Accounts Payable and Accrued
Liabilities

|                                       |  |                |        |      |  |   |        | 
|-------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                       |  | 2003           |        | 2002
|                                       |  |                |        |     
|                                       |  |               
|                                       |  | (US Dollars in
|                                       |  | thousands)    
|Trade accounts payable                 |  | $              | 3,782  |      |  | $ | 5,006  | 
|Accrued stumpage                       |  |                | 1,692  |      |  |   | 1,863  | 
|Accrued wages and employee benefits    |  |                | 5,628  |      |  |   | 6,396  | 
|Accrued taxes, other than income taxes |  |                | 804    |      |  |   | 876    | 
|Accrued freight                        |  |                | 787    |      |  |   | 1,420  | 
|Accrued utilities                      |  |                | 745    |      |  |   | 692    | 
|Other                                  |  |                | 170    |      |  |   | 178    | 
|                                       |  |                |        |      |  |   |        | 
|                                       |  | $              | 13,608 |      |  | $ | 16,431 | 
|                                       |  |                |        |      |  |   |        | 

(7) Employee Benefit Plans

Potlatch maintains defined benefit pension plans
for its salaried and hourly employees. The benefits provided
under the pension plans are funded by a master trust Potlatch
has established for that purpose. Potlatch also provides
benefits under a defined benefit retiree health care and life
insurance plan to eligible salaried employees. Benefits provided
under the health care and life insurance plan are currently
funded by the general assets of Potlatch. The amounts presented
in these financial statements under the balance sheet captions
Pension assets and Retiree medical
liability represent the estimated portions of
Potlatchs pension and retiree medical plans assets
and liabilities that correspond to the employees of the
Minnesota OSB Facilities being sold. The allocation of these
amounts has been primarily based upon the percentage of the
Business payroll costs as compared to the overall payroll
costs of Potlatch on a consolidated basis. As stated previously
in these footnotes, no transfer of pension assets or liabilities
and no transfer of retiree medical liabilities will be made as a
result of the proposed sale. Inclusion of pension assets and the
retiree medical liability has been made for the purpose of
presenting financial statements for the Minnesota OSB
Facilities. The management of Potlatch determined that it was
not practical to prepare detailed employee benefit plan footnote
disclosures for the stand alone financial statements of the
Business in a manner that would be consistent with the level of
detail provided in the Parents consolidated financial
statements.

The Business had income of $669, $1,343 and
$1,492 related to its employee benefit plans for the years ended
December 31, 2003, 2002 and 2001, respectively.

(8) Disclosures about Fair Value of
Financial Instruments and Concentration of Credit Risk

The fair value of financial instruments, such as
receivables, does not differ from the carrying value.

The Business eight largest customers
accounted for approximately 58%, 49% and 46% of combined net
sales for 2003, 2002 and 2001, respectively.

F-68



---



##### 



THE BUSINESS


(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements 
(Continued)

(US Dollars)


December 31, 2003 and 2002


(9) Commitments and
Contingencies

The Business has operating leases for a sales
office and certain equipment in the mills and administration
offices expiring at various dates through 2008.

The following table includes a schedule of future
minimum lease payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one
year as of December 31, 2003. It also summarizes the
contractual obligations of the Business as of December 31, 2003.
Portions of the amounts shown are reflected in accounts payable:

|                     |       |       |        |                           |  |       |       |       |  |        |       |       |  |   |       |       |  |   |    |    | 
|-------------------- | ----- | ----- | ------ | ------------------------- |  | ----- | ----- | ----- |  | ------ | ----- | ----- |  | - | ----- | ----- |  | - | -- | -- | 
|                     |       |       |        |                          
|                     |       |       |        | Payments due by period   
|                     |       |       |        |                          
|                     |       |       |        | 1                         |  | 2-3   |       | 4-5   |  | Over 5
|                     |       | Total |        | Year                      |  | Years |       | Years |  | Years 
|                     |       |       |        |                           |  |       |       |       |  |       
|                     |       |       |        |                           |  |      
|                     |       |       |        | (US Dollars in thousands) |  |      
|Operating leases     |       | $     | 2,014  |                           |  | $     | 859   |       |  | $      | 1,149 |       |  | $ | 6     |       |  | $ |   |   
|Purchase obligations |       |       | 21,363 |                           |  |       | 8,640 |       |  |        | 8,740 |       |  |   | 3,888 |       |  |   | 95 |   
|                     |       |       |        |                           |  |       |       |       |  |        |       |       |  |   |       |       |  |   |    |   
|                     | Total |       | $      | 23,377                    |  |       | $     | 9,499 |  |        | $     | 9,889 |  |   | $     | 3,894 |  |   | $  | 95 | 
|                     |       |       |        |                           |  |       |       |       |  |        |       |       |  |   |       |       |  |   |    |   

Total rent and lease expense was
$0.3 million. $0.1 million and $0.1 million for
the years ended December 31, 2003, 2002 and 2001,
respectively.

In late January 2004, Potlatch voluntarily
reported to the Minnesota Pollution Control Agency (MPCA) a
potential air permit violation at the oriented strand board
facility in Bemidji, Minnesota, relating to the nonoperation of
equipment used to control nitrous oxide emissions from a
wood-fired boiler for a period of approximately 29 months.
Corrective action has been taken, and Potlatch is cooperating
with the MPCA in its investigation. As the investigation is
ongoing, Potlatch has not been advised as to what action the
MPCA may take. Because Potlatch discovered the violation,
corrected the situation and voluntarily reported it to the MPCA
management does not believe any potential fine will be
significant based on previous experience with the MPCA. The MPCA
has not indicated any potential range for a possible fine. No
amount has been accrued in these financial statements.

The site environmental manager reported to
management on August 6, 2004, that soil contamination
appears to remain at the oriented strand board facility in Cook,
Minnesota. This contamination appears to be in the area of the
former primary slasher at the site, from an original discovery
in 2000. Management is in the process of determining the
remediation necessary for the situation and the related costs;
accordingly, no amounts have been accrued.

The hourly employees at the Grand Rapids OSB
facility are covered under a collective bargaining agreement
with the Paper, Allied-Industrial, Chemical and Energy Workers
International Union. The current bargaining agreement is
scheduled to expire on October 14, 2004.

F-69



---



##### 



THE BUSINESS


(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements 
(Continued)

(US Dollars)


December 31, 2003 and 2002


(10) Related Party Transactions

Purchases
and Sales

Until mid-2002 the Business purchased logs from
Potlatchs Resource segment. Since that time, the
procurement function of the Resource segment has been part of
the Business and, as such, intersegment purchases declined
significantly as a result. For 2003, 2002 and 2001 intersegment
purchases amounted to $0.2 million, $63.5 million and
$87.6 million, respectively. Sales to other Potlatch
segments for each of the years presented were $0.2 million.
The purchases and sales are recorded as costs and revenues of
the Business with a corresponding amount recorded in
parents equity as transfers (to) from corporate, net,
at their exchange amount which is the amount set by the related
parties to the transactions.

(11) Reconciliation to U.S.
GAAP

These financial statements were prepared in
conformity with accounting principles generally accepted in
Canada. To conform the balance sheets to accounting principles
generally accepted in the United States of America
(U.S. GAAP), the following adjustments relating to minimum
pension liabilities were made in US dollars in thousands:

|                      |                     |          |   |            |  |           |   |        |   |  |   |         | 
|--------------------- | ------------------- | -------- | - | ---------- |  | --------- | - | ------ | - |  | - | ------- | 
|                      |                     | Canadian |   |            |  |          
|                      |                     | GAAP     |   | Adjustment |  | U.S. GAAP
|                      |                     |          |   |            |  |          
|At December 31, 2003: |                     |          |   |            |  |           |   |        |   |  |   |        
|                      | Pension assets      |          | $ | 20,708     |  |           | $ | (2,626 | ) |  | $ | 18,082  | 
|                      | Pension liabilities |          |   |           |  |           |   | 3,387  |   |  |   | 3,387   | 
|                      | Future income taxes |          |   | 27,383     |  |           |   | (2,345 | ) |  |   | 25,038  | 
|                      | Parents equity     |          |   | 141,671    |  |           |   | (3,668 | ) |  |   | 138,003 | 
|At December 31, 2002: |                     |          |   |            |  |           |   |        |   |  |   |        
|                      | Pension assets      |          | $ | 17,474     |  |           | $ | (1,762 | ) |  | $ | 15,712  | 
|                      | Pension liabilities |          |   |           |  |           |   | 4,471  |   |  |   | 4,471   | 
|                      | Future income taxes |          |   | 24,274     |  |           |   | (2,431 | ) |  |   | 21,843  | 
|                      | Parents equity     |          |   | 145,712    |  |           |   | (3,802 | ) |  |   | 141,910 | 

Under U.S. GAAP, the Business would
recognize the difference between the unfunded accumulated
pension benefit obligation and the accrued benefit asset as an
additional minimum pension liability, and an equal amount as an
intangible asset. If the additional liability exceeded
unrecognized past service cost, the excess would be recognized
as other comprehensive loss, net of any resulting tax benefits.

F-70



---



##### 



THE BUSINESS


(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements 
(Continued)

(US Dollars)


December 31, 2003 and 2002




(11) Reconciliation to U.S.
GAAP  (Continued)


Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive
Income, issued under U.S. GAAP, requires the reporting
and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive
income, which incorporates net income, includes all changes in
equity during a period except those resulting from investments
by and distributions to owners. There is currently no
requirement to disclose comprehensive income under Canadian
GAAP. To conform the statements of operations to U.S. GAAP,
amounts would have been recorded for other comprehensive income
(loss) totaling $134 and $(3,802), net of tax, for the years
ended December 31, 2003 and 2002, respectively.

F-71



---



##### 



THE BUSINESS

(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Balance Sheets

June 30, 2004 and 2003

(US Dollars in thousands)


Unaudited


|                                                                                        |                                                                          |                      |         |        |        |   |         |        |        | 
|--------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | -------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                        |                                                                          | 2004                 |         | 2003  
|                                                                                        |                                                                          |                      |         |       
|Assets                                                                                  |                                                                          |                      |         |        |        |   |         |       
|Current assets:                                                                         |                                                                          |                      |         |        |        |   |         |       
|                                                                                        | Cash                                                                     |                      | $       | 1      |        |   | $       | 1      |       
|                                                                                        | Receivables, net of allowance for doubtful
    accounts of $150 and $150 |                      |         | 18,902 |        |   |         | 11,232 |       
|                                                                                        | Inventories (note 2)                                                     |                      |         | 24,834 |        |   |         | 17,412 |       
|                                                                                        | Prepaid expenses                                                         |                      |         | 552    |        |   |         | 739    |       
|                                                                                        |                                                                          |                      |         |        |        |   |         |       
|                                                                                        |                                                                          | Total current assets |         |        | 44,289 |   |         |        | 29,384 | 
|Land                                                                                    |                                                                          |                      | 981     |        |        |   | 981     |       
|Plant and equipment, at cost less accumulated
    depreciation of $206,123 and $194,166 |                                                                          |                      | 134,175 |        |        |   | 145,469 |       
|Timber permit deposits and roads                                                        |                                                                          |                      | 1,928   |        |        |   | 1,781   |       
|Pension assets (note 5)                                                                 |                                                                          |                      | 22,098  |        |        |   | 19,054  |       
|Other assets                                                                            |                                                                          |                      | 214     |        |        |   | 120     |       
|                                                                                        |                                                                          |                      |         |        |        |   |         |       
|                                                                                        |                                                                          | $                    | 203,685 |        |        | $ | 196,789 |       
|                                                                                        |                                                                          |                      |         |        |        |   |         |       
|Liabilities and Parents Equity                                                         |                                                                          |                      |         |        |        |   |         |       
|Current liabilities:                                                                    |                                                                          |                      |         |        |        |   |         |       
|                                                                                        | Accounts payable and accrued liabilities
    (note 4)                    |                      | $       | 14,376 |        |   | $       | 15,623 |       
|Future income taxes                                                                     |                                                                          |                      | 27,607  |        |        |   | 24,781  |       
|Retiree medical liability (note 5)                                                      |                                                                          |                      | 15,640  |        |        |   | 13,931  |       
|Parents equity                                                                         |                                                                          |                      | 146,062 |        |        |   | 142,454 |       
|Commitments and contingencies (note 6)                                                  |                                                                          |                      |         |        |        |   |         |       
|                                                                                        |                                                                          |                      |         |        |        |   |         |       
|                                                                                        |                                                                          | $                    | 203,685 |        |        | $ | 196,789 |       
|                                                                                        |                                                                          |                      |         |        |        |   |         |       

See accompanying notes to financial
statements.

F-72



---



##### 



THE BUSINESS

(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Statements of Operations

Six months ended June 30, 2004 and
2003

(US Dollars in thousands)


Unaudited


|                                       |                                                |                                 |         |         |         |   |         |        |       | 
|-------------------------------------- | ---------------------------------------------- | ------------------------------- | ------- | ------- | ------- | - | ------- | ------ | ----- | 
|                                       |                                                | 2004                            |         | 2003   
|                                       |                                                |                                 |         |        
|Net sales                              |                                                | $                               | 233,458 |         |         | $ | 114,734 |       
|Costs and expenses:                    |                                                |                                 |         |         |         |   |         |       
|                                       | Depreciation and amortization                  |                                 |         | 7,793   |         |   |         | 7,963  |      
|                                       | Materials, labor, and other operating expenses |                                 |         | 106,965 |         |   |         | 99,516 |      
|                                       | Selling, general, and administrative expenses  |                                 |         | 2,833   |         |   |         | 2,266  |      
|                                       |                                                |                                 |         |         |         |   |         |       
|                                       |                                                |                                 | 117,591 |         |         |   | 109,745 |       
|                                       |                                                |                                 |         |         |         |   |         |       
|                                       |                                                | Earnings before taxes on income |         |         | 115,867 |   |         |        | 4,989 | 
|Provision for taxes on income (note 3) |                                                |                                 | 45,767  |         |         |   | 1,946   |       
|                                       |                                                |                                 |         |         |         |   |         |       
|                                       |                                                | Net earnings                    |         | $       | 70,100  |   |         | $      | 3,043 | 
|                                       |                                                |                                 |         |         |         |   |         |       

See accompanying notes to financial
statements.

F-73



---



##### 



THE BUSINESS

(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Statements of Cash Flows

Six months ended June 30, 2004 and
2003

(US Dollars in thousands)


Unaudited


|                                      |                                                                                         |                                                                     |                                           |         |        |         |   |        |        |        |  
|------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ----------------------------------------- | ------- | ------ | ------- | - | ------ | ------ | ------ | -
|                                      |                                                                                         | 2004                                                                |                                           | 2003   
|                                      |                                                                                         |                                                                     |                                           |        
|Cash flows from operating activities: |                                                                                         |                                                                     |                                           |         |        |         |   |       
|                                      | Net earnings                                                                            |                                                                     | $                                         | 70,100  |        |         | $ | 3,043  |       
|                                      | Adjustments to reconcile net earnings to net cash
    provided by operating activities: |                                                                     |                                           |         |        |         |   |        |       
|                                      |                                                                                         | Depreciation and amortization                                       |                                           |         | 7,793  |         |   |        | 7,963  |       
|                                      |                                                                                         | Employee benefit plans                                              |                                           |         | (575   | )       |   |        | (1,299 | )     
|                                      |                                                                                         | Future income taxes                                                 |                                           |         | 224    |         |   |        | 507    |       
|                                      |                                                                                         | Increase in receivables                                             |                                           |         | (4,607 | )       |   |        | (1,820 | )     
|                                      |                                                                                         | Increase in inventories                                             |                                           |         | (5,507 | )       |   |        | (532   | )     
|                                      |                                                                                         | Increase in prepaid expenses                                        |                                           |         | (369   | )       |   |        | (584   | )     
|                                      |                                                                                         | Decrease in timber permit deposits                                  |                                           |         | 489    |         |   |        | 1,590  |       
|                                      |                                                                                         | Increase (decrease) in accounts payable and
    accrued liabilities |                                           |         | 768    |         |   |        | (808   | )     
|                                      |                                                                                         |                                                                     |                                           |         |        |         |   |       
|                                      |                                                                                         |                                                                     | Net cash provided by operating activities |         |        | 68,316  |   |        |        | 8,060  |  
|                                      |                                                                                         |                                                                     |                                           |         |        |         |   |       
|Cash flows from investing activities: |                                                                                         |                                                                     |                                           |         |        |         |   |       
|                                      | Additions to plant and equipment                                                        |                                                                     |                                           | (2,581  | )      |         |   | (1,713 | )     
|                                      | Other, net                                                                              |                                                                     |                                           | (16     | )      |         |   | (15    | )     
|                                      |                                                                                         |                                                                     |                                           |         |        |         |   |       
|                                      |                                                                                         |                                                                     | Net cash used in investing activities     |         |        | (2,597  | ) |        |        | (1,728 | )
|                                      |                                                                                         |                                                                     |                                           |         |        |         |   |       
|Cash flows from financing activities: |                                                                                         |                                                                     |                                           |         |        |         |   |       
|                                      | Transfers to corporate, net                                                             |                                                                     |                                           | (65,719 | )      |         |   | (6,332 | )     
|                                      |                                                                                         |                                                                     |                                           |         |        |         |   |       
|                                      |                                                                                         |                                                                     | Net cash used in financing activities     |         |        | (65,719 | ) |        |        | (6,332 | )
|                                      |                                                                                         |                                                                     |                                           |         |        |         |   |       
|                                      |                                                                                         |                                                                     | Change in cash                            |         |        |        |   |        |        |       |  
|Balance at beginning of period        |                                                                                         |                                                                     | 1                                         |         |        |         | 1 |       
|                                      |                                                                                         |                                                                     |                                           |         |        |         |   |       
|Balance at end of period              |                                                                                         | $                                                                   | 1                                         |         |        | $       | 1 |       
|                                      |                                                                                         |                                                                     |                                           |         |        |         |   |       

See accompanying notes to financial
statements.

F-74



---



##### 



THE BUSINESS

(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements

(US Dollars)


June 30, 2004 and 2003


Unaudited


(1) Summary of Principal Accounting
Policies

(a) Background
and Basis of Presentation

The accompanying financial statements have been
prepared in accordance with Canadian generally accepted
accounting principles for the purpose of presenting the Oriented
Strand Board Manufacturing Facilities (the Business or Minnesota
OSB Facilities) of Potlatch Corporation (Potlatch or the Parent)
and the results of its operations, and its cash flows. The
Minnesota OSB facilities are part of a proposed sale to
Ainsworth Lumber Co. Ltd. (Ainsworth). The Minnesota OSB
Facilities of Potlatch are located at Bemidji, Cook and Grand
Rapids, Minnesota. These financial statements do not reflect any
effects of the sale of the Business.

The proposed sale includes the capital assets,
inventory and accounts receivable of the Business (certain
assets), and the assumption of certain contracts directly
associated with the operations (certain liabilities). The
proposed sale does not include the transfer to the buyer of
pension assets or liabilities, and retiree medical and income
tax liabilities (though such assets and liabilities have been
reflected in the accompanying financial statements). The
Business has been managed as part of the Wood Products segment
of Potlatch.

Potlatch did not maintain the Business as a
separate business unit, nor did management analyze the Business
as a separate line of business, and external financial
statements historically have not been prepared. The accompanying
financial statements have been derived from the historical
accounting records of Potlatch and the Minnesota OSB Facilities
in order to present the balance sheets of the Business as of
June 30, 2004 and 2003 and the results of operations, and
cash flows for the periods then ended solely for the purpose of
filing with securities regulatory authorities. The historical
operating results of the Business may not be indicative of its
results in the future or what its results of operations,
financial position and cash flows would have been had it been a
stand-alone company.

The statements of operations for the Business
include allocations for certain costs from the parent level
directly related to the operations of the Business: medical
costs for hourly and salaried active and retired employees,
hourly pension, workers compensation, general liability
and property insurance, salaried payroll costs (payroll taxes,
pension, and other payroll related costs), pro-rata share of
corporate administration expense for accounting, purchasing,
information systems, and research and development. In addition,
the balance sheets include an allocation of pension assets and
retiree medical liabilities. Management believes the
methodologies applied for the allocation of these costs and
assets and liabilities are reasonable. Interest expense incurred
by the Parent has not been allocated to the Business.

Significant changes could have occurred in the
funding and operations of the Business were it to operate as an
independent stand-along entity, including an increase in debt,
which would have a significant impact on its financial position
and results of operations.

These interim unaudited financial statements do
not include all disclosures required by generally accepted
accounting principles for complete financial statements.
Accordingly, the accompanying financial statements should be
read in connection with the Business audited financial
statements as of December 31, 2003 and 2002 and for each of
the years in the three-

F-75



---



##### 



THE BUSINESS


(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements 
(Continued)

(US Dollars)


June 30, 2004 and 2003


Unaudited




(1) Summary of Principal Accounting
Policies  (Continued)


year period then ended. The Business
accounting policies are in accordance with accounting principles
generally accepted in Canada. In managements opinion,
these unaudited interim financial statements include all
adjustments necessary to present fairly such information. The
results of operations for the interim period are not necessarily
indicative of the results to be expected in future periods.

(b) Parents
Equity

Investments by and advances from Potlatch
represent Potlatchs interest in the recorded net assets of
the Business. Potlatch uses a centralized approach to cash
management and the financing of operations. As a result, none of
Potlatchs cash, cash equivalents, or direct indebtedness
has been allocated to the Business in the financial statements.
All transactions between the Business and Potlatch, including
the allocation of corporate expenses, flow through the
Parents equity account.

(2) Inventories

|                       |  |                |        |          |  |   |        | 
|---------------------- |  | -------------- | ------ | -------- |  | - | ------ | 
|                       |  | June 30,       |        | June 30,
|                       |  | 2004           |        | 2003    
|                       |  |                |        |         
|                       |  |               
|                       |  | (US Dollars in
|                       |  | thousands)    
|Logs                   |  | $              | 13,452 |          |  | $ | 7,262  | 
|Finished goods         |  |                | 4,071  |          |  |   | 3,183  | 
|Materials and supplies |  |                | 7,311  |          |  |   | 6,967  | 
|                       |  |                |        |          |  |   |        | 
|                       |  | $              | 24,834 |          |  | $ | 17,412 | 
|                       |  |                |        |          |  |   |        | 

(3) Taxes on Income

Current and future income taxes were $45,543 and
$224, respectively, for the six-month period ended June 30,
2004, and $1,439 and $507, respectively, for the six-month
period ended June 30, 2003.

The provision for taxes on income is computed by
applying an estimated annual effective tax rate. This rate was
39.5% for the six months ended June 30, 2004, and 39% for
the six months ended June 30, 2003.

F-76



---



##### 



THE BUSINESS


(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements 
(Continued)

(US Dollars)


June 30, 2004 and 2003


Unaudited


(4) Accounts Payable and Accrued
Liabilities

|                                       |  |                |        |          |  |   |        | 
|-------------------------------------- |  | -------------- | ------ | -------- |  | - | ------ | 
|                                       |  | June 30,       |        | June 30,
|                                       |  | 2004           |        | 2003    
|                                       |  |                |        |         
|                                       |  |               
|                                       |  | (US Dollars in
|                                       |  | thousands)    
|Trade accounts payable                 |  | $              | 5,109  |          |  | $ | 5,550  | 
|Accrued stumpage                       |  |                | 947    |          |  |   | 917    | 
|Accrued wages and employee benefits    |  |                | 5,849  |          |  |   | 5,812  | 
|Accrued taxes, other than income taxes |  |                | 842    |          |  |   | 974    | 
|Accrued freight                        |  |                | 782    |          |  |   | 1,467  | 
|Accrued utilities                      |  |                | 784    |          |  |   | 677    | 
|Other                                  |  |                | 63     |          |  |   | 226    | 
|                                       |  |                |        |          |  |   |        | 
|                                       |  | $              | 14,376 |          |  | $ | 15,623 | 
|                                       |  |                |        |          |  |   |        | 

(5) Employee Benefit Plans

Potlatch maintains defined benefit pension plans
for its salaried and hourly employees. The benefits provided
under the pension plans are funded by a master trust Potlatch
has established for that purpose. Potlatch also provides
benefits under a defined benefit retiree health care and life
insurance plan to eligible salaried employees. Benefits provided
under the health care and life insurance plan are currently
funded by the general assets of Potlatch. The amounts presented
in these financial statements under the balance sheet captions
Pension assets and Retiree medical
liability represent the estimated portions of
Potlatchs pension and retiree medical plans assets
and liabilities that correspond to the employees of the OSB
manufacturing facilities being sold. The allocation of these
amounts has been primarily based upon the percentage of the
Business payroll costs as compared to the overall payroll
costs of Potlatch on a consolidated basis. As stated previously
in these footnotes, no transfer of pension assets or liabilities
and no transfer of retiree medical liabilities will be made as a
result of the proposed sale. Inclusion of pension assets and the
retiree medical liability has been made for the purpose of
presenting financial statements for the Minnesota OSB
Facilities. The management of Potlatch determined that it was
not practical to prepare detailed employee benefit plan footnote
disclosures for the stand alone financial statements of the
Business in a manner that would be consistent with the level of
detail provided in the Parents consolidated financial
statements.

The Business had income (expense) of $(110) and
$624, relating to employee benefit plans for the six-month
periods ended June 30, 2004 and 2003, respectively.

(6) Commitments and
Contingencies

The Business has operating leases for a sales
office and certain equipment in the mills and administration
offices expiring at various dates through 2008.

The following table includes a schedule of future
minimum lease payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one
year

F-77



---



##### 



THE BUSINESS


(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements 
(Continued)

(US Dollars)


June 30, 2004 and 2003


Unaudited




(6) Commitments and
Contingencies  (Continued)


as of December 31, 2003. It also summarizes
the contractual obligations of the Business as of December 31,
2003. Portions of the amounts shown are reflected in accounts
payable:

|                     |       |       |        |                           |  |       |       |       |  |        |       |       |  |   |       |       |  |   |    |    | 
|-------------------- | ----- | ----- | ------ | ------------------------- |  | ----- | ----- | ----- |  | ------ | ----- | ----- |  | - | ----- | ----- |  | - | -- | -- | 
|                     |       |       |        |                          
|                     |       |       |        | Payments due by period   
|                     |       |       |        |                          
|                     |       |       |        | 1                         |  | 2-3   |       | 4-5   |  | Over 5
|                     |       | Total |        | Year                      |  | Years |       | Years |  | Years 
|                     |       |       |        |                           |  |       |       |       |  |       
|                     |       |       |        |                           |  |      
|                     |       |       |        | (US Dollars in thousands) |  |      
|Operating leases     |       | $     | 2,014  |                           |  | $     | 859   |       |  | $      | 1,149 |       |  | $ | 6     |       |  | $ |   |   
|Purchase obligations |       |       | 21,363 |                           |  |       | 8,640 |       |  |        | 8,740 |       |  |   | 3,888 |       |  |   | 95 |   
|                     |       |       |        |                           |  |       |       |       |  |        |       |       |  |   |       |       |  |   |    |   
|                     | Total |       | $      | 23,377                    |  |       | $     | 9,499 |  |        | $     | 9,889 |  |   | $     | 3,894 |  |   | $  | 95 | 
|                     |       |       |        |                           |  |       |       |       |  |        |       |       |  |   |       |       |  |   |    |   

Total rent and lease expense was
$0.4 million and $0.1 million for the six month
periods ended June 30, 2004 and 2003, respectively.

In late January 2004, Potlatch voluntarily
reported to the Minnesota Pollution Control Agency (MPCA) a
potential air permit violation at the oriented strand board
facility in Bemidji, Minnesota, relating to the nonoperation of
equipment used to control nitrous oxide emissions from a
wood-fired boiler for a period of approximately 29 months.
Corrective action has been taken, and Potlatch is cooperating
with the MPCA in its investigation. As the investigation is
ongoing, Potlatch has not been advised as to what action the
MPCA may take. Because Potlatch discovered the violation,
corrected the situation and voluntarily reported it to the MPCA
management does not believe any potential fine will be
significant based on previous experience with the MPCA. The MPCA
has not indicated any potential range for a possible fine. No
amount has been accrued in these financial statements.

The site environmental manager reported to
management on August 6, 2004, that soil contamination
appears to remain at the oriented strand board facility in Cook,
Minnesota. This contamination appears to be in the area of the
former primary slasher at the site, from an original discovery
in 2000. Management is in the process of determining the
remediation necessary for the situation and the related costs;
accordingly, no amounts have been accrued.

The hourly employees at the Grand Rapids OSB
facility are covered under a collective bargaining agreement
with the Paper, Allied-Industrial, Chemical and Energy Workers
International Union. The current bargaining agreement is
scheduled to expire on October 14, 2004.

(7) Reconciliation to United States
Generally Accepted Accounting Principles

These financial statements were prepared in
conformity with accounting principles generally accepted in
Canada. To conform the balance sheets to accounting principles
generally accepted in the United States of America
(U.S. GAAP), the following adjustments relating to minimum
pension liabilities and major maintenance accruals were made in
U.S. dollars in thousands:

F-78



---



##### 



THE BUSINESS


(Oriented Strand Board Manufacturing


Facilities of Potlatch Corporation)


Notes to Financial Statements 
(Continued)

(US Dollars)


June 30, 2004 and 2003


Unaudited




(7) Reconciliation to United States
Generally Accepted Accounting Principles 
(Continued)


|                  |                     |          |   |            |  |      |   |        |   |  |   |         | 
|----------------- | ------------------- | -------- | - | ---------- |  | ---- | - | ------ | - |  | - | ------- | 
|                  |                     | Canadian |   |            |  | U.S.
|                  |                     | GAAP     |   | Adjustment |  | GAAP
|                  |                     |          |   |            |  |     
|At June 30, 2004: |                     |          |   |            |  |      |   |        |   |  |   |        
|                  | Prepaid expenses    |          | $ | 552        |  |      | $ | 460    |   |  | $ | 1,012   | 
|                  | Pension assets      |          |   | 22,098     |  |      |   | (3,084 | ) |  |   | 19,014  | 
|                  | Pension liabilities |          |   |           |  |      |   | 3,185  |   |  |   | 3,185   | 
|                  | Future income taxes |          |   | 27,607     |  |      |   | (2,445 | ) |  |   | 25,162  | 
|                  | Parents equity     |          |   | 146,062    |  |      |   | (3,364 | ) |  |   | 142,698 | 
|At June 30, 2003: |                     |          |   |            |  |      |   |        |   |  |   |        
|                  | Prepaid expenses    |          | $ | 739        |  |      | $ | 45     |   |  | $ | 784     | 
|                  | Pension assets      |          |   | 19,054     |  |      |   | (2,148 | ) |  |   | 16,906  | 
|                  | Pension liabilities |          |   |           |  |      |   | 3,929  |   |  |   | 3,929   | 
|                  | Future income taxes |          |   | 24,781     |  |      |   | (2,370 | ) |  |   | 22,411  | 
|                  | Parents equity     |          |   | 142,454    |  |      |   | (3,662 | ) |  |   | 138,792 | 

Under U.S. GAAP, the Business would
recognize the difference between the unfunded accumulated
pension benefit obligation and the accrued benefit asset as an
additional minimum pension liability, and an equal amount as an
intangible asset. If the additional liability exceeded
unrecognized past service cost, the excess would be recognized
as other comprehensive loss, net of any resulting tax benefits.

Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive
Income, issued under U.S. GAAP, requires the reporting
and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive
income, which incorporates net income, includes all changes in
equity during a period except those resulting from investments
by and distributions to owners. There is currently no
requirement to disclose comprehensive income under Canadian
GAAP. To conform the statements of operations to Canadian GAAP,
expenses for major maintenance totaling $460 and $45 for the six
months ended June 30, 2004 and 2003, respectively, have
been recognized while amounts recorded for other comprehensive
income (loss) under U.S. GAAP totaling $(155) and $95, net
of tax, for the six months ended June 30, 2004 and 2003,
respectively, have been omitted.

F-79



---



##### 



AINSWORTH LUMBER CO. LTD.

Pro Forma Consolidated Statement of
Operations

Year ended December 31, 2004


(Unaudited, in thousands of dollars except
share and per share data)


|                                                                      |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   |   |           |         |  |  |    |    |  |  |       |        |   |   |           |         | 
|--------------------------------------------------------------------- | ------------------------------ | ------------ | ------- | ------------- |  | --------------- | ------- | ----------- |  | ------------ | ------- | ------------ |  | ------------- | ----- | ----------- |  | ------------ | ------- | ----------- |  | ------------ | --------- | ------- |  | - | ------ | ------------ |  | - | ------ | ----- | - |  | -------- | --------- |  |  | ------ | ------ | - | - | --------- | ------- |  |  | -- | -- |  |  | ----- | ------ | - | - | --------- | ------- | 
|                                                                      |                                |              |         |               |  | Minnesota OSB   |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |             
|                                                                      |                                |              |         |               |  | Facilities      |         |             |  |              |         |              |  |               |       | Voyageur    |  |              |         |             |  |              |           |         |  |   |        |             
|                                                                      |                                |              |         | Minnesota OSB |  | Pro Forma       |         |             |  |              |         |              |  |               |       | Pro Forma   |  |              |         |             |  | Pro Forma    |           |         |  |   |        | Pro Forma   
|                                                                      |                                | Ainsworth    |         | Facilities    |  | Period from     |         |             |  |              |         | Pro Forma    |  | Voyageur      |       | Period from |  |              |         |             |  | Consolidated |           |         |  |   |        | Consolidated
|                                                                      |                                | Year         |         | Six Months    |  | July 1, 2004 to |         |             |  | Consolidated |         | Three Months |  | April 1, 2004 |       |             |  | Year         |         |             |  | Year        
|                                                                      |                                | Ended        |         | Ended         |  | September 22,   |         | Pro Forma   |  | Year Ended   |         | Ended        |  | to May 19,    |       | Pro Forma   |  | Ended        |         | Pro Forma   |  | Ended       
|                                                                      |                                | December 31, |         | June 30, 2004 |  | 2004            |         | Adjustments |  | December 31, |         | March 31,    |  | 2004          |       | Adjustments |  | December 31, |         | Adjustments |  | December 31,
|                                                                      |                                | 2004         |         | (Note 2)      |  | (Note 2)        |         | (Note 3)    |  | 2004         |         | 2004         |  | (Note 1c))    |       | (Note 4)    |  | 2004         |         | (Note 5)    |  | 2004        
|                                                                      |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |             
|                                                                      |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |             
|SALES                                                                 |                                | $            | 909,922 |               |  | $               | 312,512 |             |  | $            | 123,881 |              |  |               |       |             |  |              |         |             |  | $            | 1,346,315 |         |  | $ | 47,842 |              |  | $ | 21,996 |       |   |  |          |           |  |  |        |        |   | $ | 1,416,153 |         |  |  |    |    |  |  |       |        |   | $ | 1,416,153 |        
|                                                                      |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   |   |           |         |  |  |    |    |  |  |       |        |   |   |           |        
|COSTS AND EXPENSES                                                    |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   |   |           |         |  |  |    |    |  |  |       |        |   |   |           |        
|                                                                      | Costs of products sold         |              |         | 498,246       |  |                 |         | 143,186     |  |              |         | 68,329       |  |               |       |             |  |              |         |             |  |              |           | 709,761 |  |   |        | 20,845       |  |   |        | 7,155 |   |  |          | b)(vi)    |  |  |        | (234   | ) |   |           | 737,527 |  |  |    |    |  |  |       |        |   |   |           | 737,527 | 
|                                                                      | Selling and administration     |              |         | 31,014        |  |                 |         | 3,792       |  |              |         | 1,134        |  |               |       |             |  |              |         |             |  |              |           | 35,940  |  |   |        | 2,174        |  |   |        | 1,208 |   |  |          | b)(v)(vi) |  |  |        | (3,327 | ) |   |           | 35,995  |  |  |    |    |  |  |       |        |   |   |           | 35,995  | 
|                                                                      | Amortization of capital assets |              |         | 53,852        |  |                 |         | 10,432      |  |              |         | 3,459        |  |               |       | b)(i)(ii)   |  |              |         | 11,505      |  |              |           | 79,248  |  |   |        | 2,950        |  |   |        | 1,558 |   |  |          | b)(i)(ii) |  |  |        | 2,425  |   |   |           | 86,181  |  |  |    |    |  |  |       |        |   |   |           | 86,181  | 
|                                                                      | Write-down of capital assets   |              |         | 793           |  |                 |         |            |  |              |         |             |  |               |       |             |  |              |         |             |  |              |           | 793     |  |   |        |             |  |   |        |      |   |  |          |           |  |  |        |        |   |   |           | 793     |  |  |    |    |  |  |       |        |   |   |           | 793     | 
|                                                                      |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   |   |           |         |  |  |    |    |  |  |       |        |   |   |           |        
|                                                                      |                                |              | 583,905 |               |  |                 | 157,410 |             |  |              | 72,922  |              |  |               |       |             |  |              |         |             |  |              | 825,742   |         |  |   | 25,969 |              |  |   | 9,921  |       |   |  |          |           |  |  |        |        |   |   | 860,496   |         |  |  |    |    |  |  |       |        |   |   | 860,496   |        
|                                                                      |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   |   |           |         |  |  |    |    |  |  |       |        |   |   |           |        
|OPERATING EARNINGS                                                    |                                |              | 326,017 |               |  |                 | 155,102 |             |  |              | 50,959  |              |  |               |       |             |  |              |         |             |  |              | 520,573   |         |  |   | 21,873 |              |  |   | 12,075 |       |   |  |          |           |  |  |        |        |   |   | 555,657   |         |  |  |    |    |  |  |       |        |   |   | 555,657   |        
|FINANCE EXPENSE                                                       |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   |   |           |         |  |  |    |    |  |  |       |        |   |   |           |        
|                                                                      | Interest charges               |              |         | 40,723        |  |                 |         |            |  |              |         |             |  |               |       | b)(iii)     |  |              |         | 29,167      |  |              |           | 69,890  |  |   |        | 6            |  |   |        | (16   | ) |  |          | b)(iii)   |  |  |        | 2,433  |   |   |           | 72,313  |  |  |    | a) |  |  |       | (2,912 | ) |   |           | 69,401  | 
|                                                                      | Amortization charges           |              |         | 3,234         |  |                 |         |            |  |              |         |             |  |               |       | b)(iv)      |  |              |         | 1,788       |  |              |           | 5,022   |  |   |        |             |  |   |        |      |   |  |          | b)(iv)    |  |  |        | 440    |   |   |           | 5,462   |  |  |    |    |  |  |       |        |   |   |           | 5,462   | 
|                                                                      | Loss on repurchase of debt     |              |         | 106,198       |  |                 |         |            |  |              |         |             |  |               |       |             |  |              |         |             |  |              |           | 106,198 |  |   |        |             |  |   |        |      |   |  |          |           |  |  |        |        |   |   |           | 106,198 |  |  |    |    |  |  |       |        |   |   |           | 106,198 | 
|                                                                      |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   |   |           |         |  |  |    |    |  |  |       |        |   |   |           |        
|                                                                      |                                |              | 150,155 |               |  |                 | 155,102 |             |  |              |        |              |  |               |       |             |  |              |         |             |  |              | 181,110   |         |  |   | 6      |              |  |   | (16    | )     |   |  |          |           |  |  |        |        |   |   | 183,973   |         |  |  |    |    |  |  |       |        |   |   | 181,061   |        
|OTHER (INCOME) EXPENSE                                                |                                |              | 3,351   |               |  |                 |        |             |  |              |        |              |  |               |       |             |  |              |         |             |  |              | 3,351     |         |  |   | 307    |              |  |   | (466   | )     |   |  |          |           |  |  |        |        |   |   | 3,192     |         |  |  |    |    |  |  |       |        |   |   | 3,192     |        
|UNREALIZED INCREASE IN THE FAIR VALUE OF
    PREFERRED CLASS A SHARES |                                |              |        |               |  |                 |        |             |  |              |        |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   | 2,016  |              |  |   | 1,036  |       |   |  | b)(vii)  |           |  |  | (3,052 | )      |   |   |          |         |  |  |    |    |  |  |       |        |   |   |          |        
|FOREIGN EXCHANGE GAIN ON LONG-TERM DEBT                               |                                |              | (73,815 | )             |  |                 |        |             |  |              |        |              |  |               |       |             |  |              |         |             |  |              | (73,815   | )       |  |   |       |              |  |   |       |       |   |  |          |           |  |  |        |        |   |   | (73,815   | )       |  |  |    |    |  |  |       |        |   |   | (73,815   | )      
|                                                                      |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   |   |           |         |  |  |    |    |  |  |       |        |   |   |           |        
|(LOSS) INCOME BEFORE INCOME TAXES                                     |                                |              | 246,326 |               |  |                 | 155,102 |             |  |              | 50,959  |              |  |               |       |             |  |              |         |             |  |              | 409,927   |         |  |   | 19,544 |              |  |   | 11,521 |       |   |  |          |           |  |  |        |        |   |   | 442,307   |         |  |  |    |    |  |  |       |        |   |   | 445,219   |        
|INCOME TAX (RECOVERY) EXPENSE                                         |                                |              | 71,244  |               |  |                 | 61,265  |             |  |              | 20,130  |              |  |               | b)(v) |             |  |              | (15,777 | )           |  |              | 136,862   |         |  |   | 7,431  |              |  |   | 3,192  |       |   |  | b)(viii) |           |  |  | (611   | )      |   |   | 146,874   |         |  |  | a) |    |  |  | 1,025 |        |   |   | 147,899   |        
|                                                                      |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   |   |           |         |  |  |    |    |  |  |       |        |   |   |           |        
|NET (LOSS) INCOME                                                     |                                | $            | 175,082 |               |  | $               | 93,838  |             |  | $            | 30,829  |              |  |               |       |             |  |              |         |             |  | $            | 273,065   |         |  | $ | 12,113 |              |  | $ | 8,329  |       |   |  |          |           |  |  |        |        |   | $ | 295,433   |         |  |  |    |    |  |  |       |        |   | $ | 297,320   |        
|                                                                      |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   |   |           |         |  |  |    |    |  |  |       |        |   |   |           |        
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
    (000s)             |                                |              | 14,613  |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   |   | 14,613    |         |  |  |    |    |  |  |       |        |   |   | 14,613    |        
|                                                                      |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   |   |           |         |  |  |    |    |  |  |       |        |   |   |           |        
|BASIC AND DILUTED EARNINGS (LOSS) PER SHARE                           |                                | $            | 11.98   |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   | $ | 20.22     |         |  |  |    |    |  |  |       |        |   | $ | 20.34     |        
|                                                                      |                                |              |         |               |  |                 |         |             |  |              |         |              |  |               |       |             |  |              |         |             |  |              |           |         |  |   |        |              |  |   |        |       |   |  |          |           |  |  |        |        |   |   |           |         |  |  |    |    |  |  |       |        |   |   |           |        

See accompanying Notes to the Pro Forma
Consolidated Financial Statements

F-80



---



##### 



AINSWORTH LUMBER CO. LTD.

Notes to the Pro Forma Consolidated Statement
of Operations

(Unaudited)


1) Basis of Presentation

On August 25, 2004, Ainsworth Lumber Co.
Ltd., (the Company) entered into a definitive
agreement with Potlatch Corporation (Potlatch) to
acquire the assets associated with three OSB
manufacturing facilities located in northern Minnesota (the
Minnesota OSB facilities) and related OSB
business at a purchase price of approximately
US$461.3 million ($592.7 million) (Note 3).

On April 14, 2004, the Company entered into
a Share Purchase Agreement to acquire all of the outstanding
common and Class A preferred shares of Voyageur Panel
Limited (Voyageur) for a purchase price of
US$206.7 million. The acquisition closed on May 19,
2004 (Note 4).

On March 3, 2004, the Company completed an
offering of US$210 million principal of 6.750% Senior Notes
due March 15, 2014 for the purpose of refinancing
substantially all of its 13.875% Senior Secured Notes due
July 15, 2007 and its 12 1/2% Senior Secured Notes due
July 15, 2007. Prior to this refinancing, the
Companys annual debt servicing obligation was
approximately US$35 million.

The accompanying pro forma consolidated financial
statements have been prepared by management for inclusion in a
Registration Statement of the Company relating to the issuance
of US$275 million aggregate principal amount of
7.25% Senior Notes due October 1, 2012 and
US$175 million aggregate principal amount of Senior
Floating Rate Notes with a rate of LIBOR plus 3.75% due
October 1, 2010.

The pro forma consolidated financial statements
include:

a) A pro forma consolidated statement of
operations for the year ended December 31, 2004 derived
from the consolidated statement of operations of the Company for
the year ended December 31, 2004, the unaudited statement
of operations of the Minnesota OSB facilities for the six
months ended June 30, 2004, the pro forma results of
operations of the Minnesota OSB facilities for the period
from July 1, 2004 to September 22, 2004, the unaudited
statement of operations of Voyageur for the three months ended
March 31, 2004, and the pro forma results of operations of
Voyageur for the period from April 1, 2004 to May 19,
2004, adjusted for the assumptions made giving effect to the
acquisitions as described in Notes 3 and 4, and the
reduction of interest expense arising from the
US$210 million refinancing of Senior Notes as described in
Note 5.

The pro forma consolidated statements of
operations for the year ended December 31, 2004 assume that
the purchase of the Minnesota OSB facilities and Voyageur
referred to above and the issues of debt to finance the
acquisitions occurred on January 1, 2004 (Notes 3
and 4).

The pro forma consolidated financial statements
are not necessarily indicative of the actual results that would
have occurred if the transactions had been in effect on the
dates indicated and are not necessarily indicative of what the
actual results will be in the future had the Company, the
Minnesota OSB facilities and Voyageur operated as a single
entity.

F-81



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Pro Forma Consolidated Statement
of Operations  (Continued)

(Unaudited)


2) Summary of Significant Accounting
Policies

The pro forma consolidated financial statements
have been compiled using the significant accounting policies as
set out in the audited consolidated financial statements of the
Company for the year ended December 31, 2004. The
accounting policies of the Minnesota OSB facilities and Voyageur
conform, in all material respects, to those of the Company with
the exception of the following:

Amortization expense

The Company amortizes its oriented strand board
facilities on a units of production basis whereas the Minnesota
OSB facilities and Voyageur amortize on a straight-line basis.
The Company has adjusted amortization expense to harmonize this
accounting policy.

Foreign Currency Translation

The US$ statement of operations for the Minnesota
OSB facilities for the six months ended June 30, 2004 and
the period from July 1, 2004 to September 22, 2004
have been translated into CDN$ at the average exchange rate for
the period of US$0.7470 = $1.00.

3) Pro Forma Assumptions Related to
Acquisition and Financing of the Minnesota
OSB Facilities

a) Acquisition

The acquisition of the Minnesota OSB facilities
has been accounted for in the accompanying pro forma
consolidated statement of operations using the purchase method
as set out below. The amounts allocated to specific assets and
liabilities at December 31, 2004 are as follows:

|                                  |                   |                   |       |       | 
|--------------------------------- | ----------------- | ----------------- | ----- | ----- | 
|                                  |                   | December 31, 2004
|                                  |                   |                  
|                                  |                   | (millions)       
|Net assets acquired at fair value |                   |                   |       |      
|                                  | Total assets      |                   | $     | 584.8 | 
|                                  | Total liabilities |                   |       |      | 
|                                  |                   |                   |       |      
|Total purchase price (i)          |                   | $                 | 584.8 |      
|                                  |                   |                   |       |      






|    |                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------
|(i) | Includes acquisition costs of $4 million and
    excludes financing costs of $15.1 million on the issuance
    of notes.

b) Assumptions for pro forma consolidated
statement of operations for the period from January 1, 2004
to September 22, 2004.



| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Amortization expense has been decreased
    by $1.2 million to reflect the harmonization of accounting
    policies described in Note 2.                                                     
|
| | (ii) Amortization expense has been increased
    by $12.7 million to reflect the impact of revised carrying
    values of capital assets resulting from the allocation of the
    purchase price.
|
| | (iii) Additional interest expense of
    $29.2 million has been recorded to reflect the
    U.S.$450 million Senior Notes financing, as if it occurred
    on January 1, 2004.                   
|
| | (iv) Amortization of deferred financing
    costs of $1.8 million has been charged to Finance expense.                                                                                           

F-82



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Pro Forma Consolidated Statement
of Operations  (Continued)

(Unaudited)




3) Pro Forma Assumptions Related to
Acquisition and Financing of the Minnesota
OSB Facilities (Continued)




| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | (v) A decrease in income tax expense of
    $15.8 million has been recorded to reflect the tax effect
    of items (i) thorough (iv) above.

4) Pro Forma Assumptions Related to
Acquisition and Financing of Voyageur

a) Acquisition

On May 19, 2004, the Company completed the
acquisition of 100% of the voting shares of Voyageur Panel
Limited (Voyageur) for a purchase price of
US$206.7 million (CDN$284.5 million). The acquisition
of Voyageur has been accounted for in the Companys
unaudited consolidated financial statements and the accompanying
pro forma consolidated financial statements using the purchase
method as set out below, and the operating results are included
in the Companys consolidated statement of operations from
the date of acquisition. The amounts allocated to specific
identifiable tangible and intangible assets and liabilities at
May 19, 2004 are as follows:

|                                  |                   |              |       |       | 
|--------------------------------- | ----------------- | ------------ | ----- | ----- | 
|                                  |                   | May 19, 2004
|                                  |                   |             
|                                  |                   | (millions)  
|Net assets acquired at fair value |                   |              |       |      
|                                  | Total assets      |              | $     | 244.2 | 
|                                  | Total liabilities |              |       | 51.4  | 
|                                  |                   |              |       |      
|Net assets acquired               |                   | $            | 192.8 |      
|Goodwill                          |                   |              | 103.5 |      
|                                  |                   |              |       |      
|Total purchase price              |                   | $            | 296.3 |      
|                                  |                   |              |       |      

b) Assumptions for pro forma consolidated
statement of operations for the period from January 1 to
May 19, 2004.



| |                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Amortization expense has been decreased
    by $0.03 million to reflect the harmonization of accounting
    policies described in Note 2.                                                                                                                                                                                              
|
| | (ii) Amortization expense has been increased
    by $2.5 million to reflect the impact of revised carrying
    values of capital assets resulting from the allocation of the
    purchase price.                                                                                                                                           
|
| | (iii) Additional interest expense of
    $2.4 million has been recorded to reflect the
    U.S. $110 million Senior Notes financing, as if it had
    occurred on January 1, 2004.                                                                                                                                                         
|
| | (iv) Amortization of deferred financing
    costs and debt discount of $0.4 million has been charged to
    Finance expense.                                                                                                                                                                                                               
|
| | (v) Selling and administration has been
    decreased by $2.8 million to reflect sales commissions paid
    by Voyageur for sales made via brokerage services that will no
    longer be paid by the Company, as it does not sell through
    brokers.                                                                                     
|
| | (vi) Management fees of $0.7 million
    ($0.2 million in cost of products sold and
    $0.5 million in selling and administration) for services
    previously provided by significant shareholders under
    contractual terms have been removed. These services will be
    provided within the Companys existing management structure.

F-83



---



##### 



AINSWORTH LUMBER CO. LTD.


Notes to the Pro Forma Consolidated Statement
of Operations  (Continued)

(Unaudited)




4) Pro Forma Assumptions Related to
Acquisition and Financing of Voyageur (Continued)




| |                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (vii) The unrealized increase in the fair
    value of preferred Class A shares of $3.1 million has
    been removed for the purposes of preparing the pro forma
    consolidated statement of operations as this charge would not be
    included in the consolidated statement of operations subsequent
    to the completion of the acquisition.
|
| | (viii) A decrease in income tax expense of
    $0.6 million has been recorded to reflect the tax effect of
    items (i) thorough (vii) above.                                                                                                                                                                                                     

5) Pro Forma Assumptions Related to
Refinancing of Senior Notes Completed on March 3,
2004

On March 3, 2004, the Company completed an
offering of US$210 million principal amount of 6.750%
Senior Notes due March 15, 2014 for the purpose of
refinancing substantially all of its 13.875% Senior Secured
Notes due July 15, 2007 and its 12 1/2% Senior Secured
Notes due July 15, 2007.

The pro forma consolidated statements of
operations reflect the reduced interest expense assuming that
US$210 million of the total outstanding indebtedness was
refinanced on January 1, 2004. No other pro forma
adjustments have been made in respect of this refinancing. The
impact of the refinancing on the statement of operations is as
follows:

For the year ended December 31, 2004,
interest expense has been decreased by $2.9 million and
income tax expense has been increased by $1.0 million.

6) U.S. GAAP Reconciliation

The pro forma consolidated financial statements
have been prepared in accordance with Canadian GAAP, which,
in the case of the Company, conforms in all material respects
with U.S. GAAP, except as set forth below:

Adjustments to earnings

|                                                                                          |  |              |         | 
|----------------------------------------------------------------------------------------- |  | ------------ | ------- | 
|                                                                                          |  | Year Ended  
|                                                                                          |  | December 31,
|                                                                                          |  | 2004        
|                                                                                          |  |             
|Pro forma net income in accordance with Canadian
    GAAP                                 |  | $            | 297,320 | 
|Reversal of amortization of capitalized start-up
    costs, net of future income taxes(1) |  |              | 1,033   | 
|                                                                                          |  |              |         | 
|Pro forma net income in accordance with
    U.S. GAAP                                     |  | $            | 298,353 | 
|                                                                                          |  |              |         | 
|Pro forma basic and diluted earnings per share in
    accordance with U.S. GAAP           |  | $            | 20.42   | 
|                                                                                          |  |              |         | 






|    |                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Under U.S. GAAP, the direct operating losses
    arising during the start-up phase of the oriented strand board
    facilities, which were capitalized under Canadian GAAP, are
    charged against earnings.

F-84