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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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


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


FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002     COMMISSION FILE NUMBER 333-63825


                           SCOTIA PACIFIC COMPANY LLC
             (Exact name of Registrant as Specified in its Charter)



                   DELAWARE                                68-0414690
         (State or other jurisdiction                   (I.R.S. Employer
       of incorporation or organization)             Identification Number)

                P. O. BOX 712                                 95565
          125 MAIN STREET, 2ND FLOOR                       (Zip Code)
              SCOTIA, CALIFORNIA
   (Address of Principal Executive Offices)


       Registrant's telephone number, including area code: (707) 764-2330

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


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

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

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


      Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X|   No |_|

      Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES |_|   NO |X|

      The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, as of the last business day of the registrant's most recently
completed second fiscal quarter: -0-

      REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (I)(1)(A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.

              DOCUMENTS INCORPORATED BY REFERENCE: Not applicable.

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                               TABLE OF CONTENTS


                                     PART I

   Item 1.    Business

   Item 2.    Properties

   Item 3.    Legal Proceedings

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

                                     PART II

   Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters

   Item 6.    Selected Financial Data

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

   Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

   Item 8.    Financial Statements and Supplementary Data
                      Independent Auditors' Report
                      Report of Independent Public Accountants
                      Balance Sheet
                      Statement of Income (Loss)
                      Statement of Cash Flows
                      Notes to Financial Statements

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

                                    PART III

   Items
      10-13.  Not applicable.

   Item 14.   Controls and Procedures

   Item 15.   Not applicable.

                                     PART IV



   Item 16.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K

   Signatures

   Certifications

   Index of Exhibits



                                    PART I

ITEM 1.         BUSINESS

GENERAL

      Scotia Pacific Company LLC (the "COMPANY"), a special purpose Delaware
limited liability company wholly owned by The Pacific Lumber Company ("PACIFIC
LUMBER"), was organized by Pacific Lumber in May 1998 to facilitate the sale of
the Company's 6.55% Series B Class A-1 Timber Collateralized Notes due 2028,
(the "CLASS A-1 NOTES"), 7.11% Series B Class A-2 Timber Collateralized Notes
due 2028 (the "CLASS A-2 NOTES") and 7.71% Series B Class A-3 Timber
Collateralized Notes due 2028 (the "CLASS A-3 NOTES," together with the Class
A-1 Timber Notes and the Class A-2 Timber Notes, the "TIMBER NOTES"). The
Indenture governing the Timber Notes is referred to herein as the "INDENTURE."
Pacific Lumber is a wholly owned subsidiary of MAXXAM Group Inc. ("MGI"), and
Pacific Lumber also wholly owns Salmon Creek LLC ("SALMON CREEK"). MGI is an
indirect wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). As used herein, the
terms "MGI," "Pacific Lumber," or "MAXXAM" refer to the respective companies and
their subsidiaries, unless otherwise noted or the context indicates otherwise.

      Except as otherwise indicated, all references herein to "Notes" represent
the Notes to the Company's Financial Statements contained herein.

      This Annual Report on Form 10-K contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("PSLRA"). These statements appear in a number of
places (see Item 1. "Business--Harvesting Practices" and "--Regulatory and
Environmental Factors," Item 3. "Legal Proceedings" and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Background," "--Results of Operations" and "--Financial Condition
and Investing and Financing Activities"). Such statements can be identified by
the use of forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans" or "anticipates" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy. Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from the
forward-looking statements as a result of various factors. These factors include
the effectiveness of management's strategies and decisions, general economic and
business conditions, developments in technology, new or modified statutory or
regulatory requirements and changing prices and market conditions. This Report
identifies other factors which could cause differences between such
forward-looking statements and actual results. No assurance can be given that
these are all of the factors that could cause actual results to vary materially
from the forward-looking statements.

TIMBER AND TIMBERLANDS

      This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and
"Business--General" above for cautionary information with respect to such
forward-looking statements.

      The Company owns, and the obligations of the Company under the Timber
Notes are secured by, (i) approximately 205,000 acres of timberlands, (ii) the
timber and related harvesting rights (the "COMPANY TIMBER RIGHTS") with respect
to an additional approximately 12,200 acres of timberlands that are owned by
Pacific Lumber, Salmon Creek and an unaffiliated third party, (iii)
approximately 400 acres of timberlands with respect to which Pacific Lumber owns
the Timber Rights (the "PACIFIC LUMBER TIMBER RIGHTS"), (iv) certain computer
hardware and software, including a geographic information system ("GIS")
containing information on numerous aspects of the Company's timberlands (subject
to certain rights of concurrent use by Pacific Lumber) and (v) certain other
assets. Substantially all of the Company's assets serve as security for the
Timber Notes. The timberlands owned by the Company (including the timberlands
which are subject to the Pacific Lumber Timber Rights) and the timberlands
subject to the Company Timber Rights are hereinafter collectively referred to as
the "COMPANY TIMBERLANDS." The timber located on the Company Timberlands which
is not subject to the Pacific Lumber Timber Rights is hereinafter referred to as
the "COMPANY TIMBER."

      In March 1999, Pacific Lumber, the Company and Salmon Creek (collectively,
the "PALCO COMPANIES") consummated the Headwaters Agreement (the "HEADWATERS
AGREEMENT") with the United States and California. Pursuant to the agreement,
approximately 5,600 acres of timberlands owned by the Palco Companies (the
"HEADWATERS TIMBERLANDS") were transferred to the United States in exchange for
(i) an aggregate of $300.0 million, (ii) approximately 7,700 acres of
timberlands, and (iii) approval by the federal and state governments of habitat
conservation and sustained yield plans (the "ENVIRONMENTAL PLANS") in respect of
the Company Timberlands. California also agreed to offer to purchase a portion
of Pacific Lumber's Grizzly Creek grove and to purchase the Company's Owl Creek
grove (which purchases were subsequently consummated; see Note 2).

      Timber generally is categorized by species and the age of a tree when it
is harvested. "OLD GROWTH" trees are often defined as trees which have been
growing for approximately 200 years or longer, and "YOUNG GROWTH" trees are
those which have been growing for less than 200 years. The forest products
industry grades lumber into various classifications according to quality. The
two broad categories into which all grades fall based on the absence or presence
of knots are called "upper" and "common" grades, respectively. Old growth trees
have a higher percentage of upper grade lumber than young growth trees.

      The Company Timber is comprised of primarily young growth and old growth
redwood and Douglas-fir timber. In May 2002, the Company completed the first
timber cruise on the Company Timberlands since 1986. The results of the timber
cruise provided the Company with an estimate of the volume of merchantable
Company Timber. The new cruise data reflected a 0.1 million MBF decrease in
estimated overall timber volume as compared to the estimated volumes reported as
of December 31, 2001 using the 1986 cruise data (adjusted for harvest and
estimated growth). The new cruise data indicates that there is significantly
less old growth timber than estimated as of December 31, 2001, using the 1986
cruise data. There was also an estimated increase in young growth timber volume
almost equal to the estimated decrease in old growth timber volume. This shift
in timber volume between classifications decreased the overall timber volume
reported in Mbfe (see the following paragraph) by 0.2 to 2.9 million. These
timber volume numbers do not reflect substantial quantities of sub-merchantable
trees which exist but are not yet mature enough to be included within the
inventory of Company Timber. This change in mix could adversely affect the
Company's revenues. However, because there are many variables that affect
revenues and profitability, the Company cannot quantify the effect of the
revised estimate on current and future cash flows. The new timber volumes are
now being utilized in various aspects of the Company's operations, including
estimating volumes on timber harvesting plans ("THPS") and determining depletion
expense.

      Under the Mbfe concept, one thousand board feet, net Scribner scale, of
old growth redwood timber equals one Mbfe. One thousand board feet, net Scribner
scale, of each other species and category of timber included in the Company
Timber was assigned a value equal to a fraction of an Mbfe (in order to account
for their relative values). This fraction was generally determined by dividing
the June 1998 SBE Price applicable to such species and category by the June 1998
SBE Price applicable to old growth redwood. "SBE PRICE" is the applicable
stumpage price for each species of timber and category thereof pursuant to a
schedule published periodically by the California State Board of Equalization.
See "--Operation of Company Timberlands" and "--Harvesting Practices" below.

      See "--Regulatory and Environmental Factors," Item. 3 "Legal Proceedings,"
and Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for various legal, regulatory, environmental and other
challenges being faced by the Company in connection with timber harvesting and
other operations on the Company Timberlands.

      Redwood lumber is a premium, high value-added product which has different
supply and demand characteristics from the general lumber market. Redwood is
known for its natural beauty, superior ability to retain paints and finishes,
dimensional stability and its innate resistance to decay, insects and chemicals.
As a result, redwood lumber is generally not used for commodity applications
such as structural frames for construction, but is used instead for specialty
applications such as exterior siding, trim and fascia for both residential and
commercial construction, outdoor furniture, decks, planters and retaining walls.
Redwood also has a variety of industrial applications because of its resistance
to chemicals and because it does not impart any taste or odor to liquids or
solids. Redwood lumber has historically commanded a substantial price premium to
other softwood timber types. Redwood is grown commercially only in North America
in a region that extends for approximately 375 miles along the coast of the
Pacific Northwest. The combination of excellent soil conditions and climate
makes this region one of the most productive timber regions in North America.

      Douglas-fir is used primarily for new construction and some decorative
purposes and is widely recognized for its strength, hard surface and attractive
appearance. Douglas-fir is grown commercially along the west coast of North
America and in Chile and New Zealand.

      Pacific Lumber engages in extensive efforts to supplement the natural
regeneration of the Company Timber and increase the amount of timber on the
Company Timberlands. The Company is required to comply with California forestry
regulations regarding reforestation, which generally require that an area be
reforested to specified standards within an established period of time. Pursuant
to the Services Agreement described below (see "--Operation of Company
Timberlands"), Pacific Lumber conducts regeneration activities on the Company
Timberlands for the Company. Regeneration of redwood timber generally is
accomplished through redwood sprouts from harvested trees and the planting of
redwood seedlings at levels designed to optimize growth. Douglas-fir timber is
regenerated almost entirely by planting seedlings. During 2002, Pacific Lumber
planted an estimated 1,100,000 redwood and Douglas-fir seedlings on the Company
Timberlands.

      California law requires large timberland owners, including the Company, to
demonstrate that their operations will not decrease the sustainable productivity
of their timberlands. A timber company may comply with this requirement by
submitting a sustained yield plan to the California Department of Forestry and
Fire Protection ("CDF") for review and approval. A sustained yield plan contains
a timber growth and yield assessment, which evaluates and calculates the amount
of timber and long-term production outlook for a company's timberlands, a fish
and wildlife assessment, which addresses the condition and management of
fisheries and wildlife in the area, and a watershed assessment, which addresses
the protection of aquatic resources. The relevant regulations require
determination of a long-term sustained yield ("LTSY"), which is the average
annual growth sustainable by the timber inventory at the end of a 100-year
planning period. The LTSY is determined based upon timber inventory, projected
growth and harvesting methodologies, as well as soil, water, air, wildlife and
other relevant considerations. A sustained yield plan must demonstrate that the
average annual harvest over any rolling ten-year period within the planning
horizon does not exceed the LTSY.

      The Company is also subject to federal and state laws providing for the
protection and conservation of wildlife species which have been designated as
endangered or threatened, certain of which are found on the Company Timberlands.
These laws generally prohibit certain adverse impacts on such species (referred
to as a "TAKE"), except for incidental takes which do not jeopardize the
continued existence of the affected species and which are made in accordance
with an approved habitat conservation plan and related incidental take permit. A
habitat conservation plan analyzes the impact of the incidental take and
specifies measures to monitor, minimize and mitigate such impact. As part of the
Headwaters Agreement, the federal and state governments approved the
Environmental Plans, consisting of a sustained yield plan (the "SYP") and a
multi-species habitat conservation plan (the "HCP"), in respect of the Company
Timberlands. See "--Regulatory and Environmental Factors" below and Note 7.

OPERATION OF COMPANY TIMBERLANDS

      The Company's foresters, wildlife and fisheries biologists, geologists,
botanists and other personnel are responsible for providing a number of forest
stewardship techniques, including protecting the Company Timber from forest
fires, erosion, insects and other damage, overseeing reforestation activities
and monitoring environmental and regulatory compliance. The Company's personnel
are also responsible for preparing THPs and updating the GIS that contains
information on numerous aspects of the Company Timberlands. See "--Harvesting
Practices" below for a description of the Company's GIS updating process and the
THP preparation process.

      The Company is a party with Pacific Lumber to a master purchase agreement
(the "MASTER PURCHASE AGREEMENT") which governs the sale to Pacific Lumber of
logs harvested from the Company Timberlands. As Pacific Lumber purchases logs
from the Company pursuant to the Master Purchase Agreement, Pacific Lumber is
responsible, at its own expense, for harvesting and removing the standing
Company Timber covered by approved THPs, with the purchase price being based
upon "stumpage prices." Title to, and the obligation to pay for, harvested logs
passes to Pacific Lumber once the logs are measured. The Master Purchase
Agreement contemplates that all sales of logs by the Company to Pacific Lumber
will be at fair market value (based on stumpage prices) for each species and
category of timber. The Master Purchase Agreement provides that if the purchase
price equals or exceeds the SBE Price and a structuring price set forth in a
schedule to the Indenture, the purchase price is deemed to be at fair market
value. If the purchase price equals or exceeds the SBE Price, but is less than
the structuring price, then the Company is required to engage an independent
forestry consultant to confirm that the purchase price reflects fair market
value. SBE Price is the stumpage price for each species and category of timber
as set forth in the most recent "HARVEST VALUE SCHEDULE" (or any successor
publication) published by the California State Board of Equalization (or any
successor agency) applicable to the timber sold during the applicable period.
Harvest Value Schedules are published twice a year for purposes of computing a
yield tax imposed on timber harvested between January 1 through June 30 and July
1 through December 31. SBE Prices are not necessarily representative of actual
prices that would be realized from unrelated parties at subsequent dates. See
also Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--General--Master Purchase Agreement
Provisions" and "--Financial Condition and Investing and Financing Activities."

      After obtaining an approved THP, the Company offers for sale the logs to
be harvested pursuant to such THP. While the Company may sell logs to third
parties, it derives substantially all of its revenue from the sale of logs to
Pacific Lumber pursuant to the Master Purchase Agreement. Each sale of logs by
the Company to Pacific Lumber is made pursuant to a separate log purchase
agreement that relates to the Company Timber covered by an approved THP and
incorporates the provisions of the Master Purchase Agreement. Each such log
purchase agreement provides for the sale to Pacific Lumber of the logs harvested
from the Company Timber covered by such THP and generally constitutes an
exclusive agreement with respect to the timber covered thereby, subject to
certain limited exceptions. However, the timing and amount of log purchases by
Pacific Lumber is affected by factors outside the control of the Company,
including regulatory and environmental factors, the financial condition of
Pacific Lumber, and the supply and demand for lumber products (which, in turn,
will be influenced by demand in the housing, construction and remodeling
industries).

      The Company continues to rely on Pacific Lumber to provide operational,
management and related services not performed by its own employees with respect
to the Company Timberlands pursuant to a services agreement (the "SERVICES
AGREEMENT"). The services include the furnishing of all equipment, personnel and
expertise not within the Company's possession and reasonably necessary for the
operation and maintenance of the Company Timberlands and the Company Timber as
well as timber management techniques designed to supplement the natural
regeneration of, and increase the amount of, Company Timber. Pacific Lumber is
required to provide all services under the Services Agreement in a manner
consistent in all material respects with prudent business practices which are
consistent with then current applicable industry standards and are in compliance
in all material respects with all applicable timber laws. The Company pays
Pacific Lumber a services fee ("SERVICES FEE") which is adjusted annually based
on a specified government index relating to wood products and reimburses Pacific
Lumber for the cost of constructing, rehabilitating and maintaining roads, and
performing reforestation services, on the Company Timberlands. Certain of such
reimbursable expenses vary in relation to the amount of timber to be harvested
in any given period.

      The Company provides certain services to Pacific Lumber pursuant to an
additional services agreement (the "ADDITIONAL SERVICES AGREEMENT"). These
services include (i) assisting Pacific Lumber to operate, maintain and harvest
its own timber properties, (ii) updating and providing access to the GIS with
respect to information concerning Pacific Lumber's own timber properties and
(iii) assisting Pacific Lumber with its statutory and regulatory compliance.
Pacific Lumber pays the Company a fee for such services equal to the actual cost
of providing such services, as determined in accordance with generally accepted
accounting principles.

      The Company, Pacific Lumber and Salmon Creek are also parties to a
reciprocal rights agreement (the "RECIPROCAL RIGHTS AGREEMENT") whereby, among
other things, the parties have granted to each other certain reciprocal rights
of egress and ingress through their respective properties in connection with the
operation and maintenance of such properties and their respective businesses. In
addition, Pacific Lumber and the Company are parties to an environmental
indemnification agreement (the "ENVIRONMENTAL INDEMNIFICATION AGREEMENT"),
pursuant to which Pacific Lumber has agreed to indemnify the Company from and
against certain present and future liabilities arising with respect to hazardous
materials, hazardous materials contamination or disposal sites, or under
environmental laws with respect to the Company Timberlands. In particular,
Pacific Lumber is liable with respect to any contamination which occurred on the
Company Timberlands prior to the date of their transfer to the Company.

HARVESTING PRACTICES

      This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and
"Business--General" above for cautionary information with respect to such
forward-looking statements.

      The GIS contains information regarding numerous aspects of the Company
Timberlands, including timber type, tree class, wildlife and botanical data,
geological information, roads, rivers and streams. Subject to the terms of the
Services Agreement, Pacific Lumber, to the extent necessary, provides the
Company with personnel and technical assistance in updating, upgrading and
improving the GIS and the other computer systems owned by the Company. By
carefully monitoring and updating this data base and conducting field studies,
the Company's foresters, with the assistance (if required) of Pacific Lumber
pursuant to the Services Agreement, are better able to develop detailed THPs
addressing the various regulatory requirements. The Company also utilizes a
Global Positioning System ("GPS") which can provide precise location of
geographic features through satellite positioning. Use of the GPS greatly
enhances the quality and efficiency of the GIS data.

      The ability of the Company to harvest timber will depend in large part
upon its ability to obtain regulatory approval of THPs. Prior to harvesting
timber in California, companies are required to obtain the CDF's approval of a
detailed THP for the area to be harvested. A THP must be submitted by a
registered professional forester and must include information regarding the
method of proposed timber operations for a specified area, whether the
operations will have any adverse impact on the environment and, if so, the
mitigation measures to be used to reduce any such impact. The CDF's evaluation
of THPs incorporates review and analysis of such THPs by several California and
federal agencies and public comments received with respect to such THPs. The
number of the Company's approved THPs and the amount of timber covered by such
THPs varies significantly from time to time, depending upon the timing of agency
review and other factors. Timber covered by an approved THP is typically
harvested within a one year period from the date harvesting first begins. The
Indenture requires the Company to use its best efforts (consistent with prudent
business practices) to maintain a number of pending THPs which, together with
THPs previously approved, would cover rights to harvest a quantity of Company
Timber adequate to pay interest and principal amortization based on the Minimum
Principal Amortization schedule (as set forth in the Indenture) for the Timber
Notes for the next succeeding twelve month period. Despite its best efforts, the
Company has in the past experienced difficulties in the THP approval process;
however, the rate of approvals has improved during the last two years. See Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Background" and "--Results of Operations--Log Sales to Pacific
Lumber." While the Company's supply of approved THPs remains below its
expectations, the Company continues to believe that the Environmental Plans
should in the long-term expedite the preparation and facilitate approval of its
THPs.

      The Company employs a variety of well-accepted methods of selecting trees
for harvest designed to achieve optimal regeneration and to meet its
state-approved SYP. These methods, referred to as "silvicultural systems" in the
forestry profession, range from very light thinnings (aimed at enhancing the
growth rate of retained trees) to clear cutting which results in the harvest of
nearly all trees in an area (with the exception of sub-merchantable trees and
trees retained for wildlife protection). In between are a number of varying
levels of partial harvests which can be employed.

EMPLOYEES

      As of March 1, 2003, the Company employed 94 persons, 89 of whom were
registered professional foresters, geologists, wildlife and fisheries
biologists, botanists or otherwise involved in the management of the Company
Timberlands. None of the Company's employees are covered by a collective
bargaining agreement.

PRINCIPAL EXECUTIVE OFFICES

      The principal executive offices of the Company are located at 125 Main
Street, 2nd Floor, P.O. Box 712, Scotia, California 95565. The telephone number
of the Company is (707) 764-2330.

REGULATORY AND ENVIRONMENTAL FACTORS

      This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and
"Business--General" above for cautionary information with respect to such
forward-looking statements.

      General
      The Company's business is subject to the Environmental Plans and a variety
of California and federal laws and regulations dealing with timber harvesting,
threatened and endangered species and habitat for such species, and air and
water quality. Compliance with such laws and regulations also plays a
significant role in Pacific Lumber's business. The California Forest Practice
Act (the "FOREST PRACTICE ACT") and related regulations adopted by the
California Board of Forestry and Fire Protection (the "BOF") set forth detailed
requirements for the conduct of timber harvesting operations in California.
These requirements include the obligation of timber companies to obtain
regulatory approval of detailed THPs containing information with respect to
areas proposed to be harvested. See "--Harvesting Practices" above. California
law also requires large timberland owners, including the Company, to demonstrate
that their proposed timber operations will not decrease the sustainable
productivity of their timberlands. See "--Timber and Timberlands" above. The
federal Endangered Species Act (the "ESA") and California Endangered Species Act
(the "CESA") provide in general for the protection and conservation of
specifically listed wildlife and plants. These laws generally prohibit the take
of certain species, except for incidental takes pursuant to otherwise lawful
activities which do not jeopardize the continued existence of the affected
species and which are made in accordance with an approved habitat conservation
plan and related incidental take permits. A habitat conservation plan, among
other things, specifies measures to minimize and mitigate the potential impact
of the incidental take of species and to monitor the effects of the activities
covered by the plan. The operations of Pacific Lumber are also subject to the
California Environmental Quality Act (the "CEQA"), which provides for protection
of the state's air and water quality and wildlife, and the California Water
Quality Act and federal Clean Water Act (the "CWA"), which require that the
Company conduct its operations so as to reasonably protect the water quality of
nearby rivers and streams. Compliance with such laws, regulations and judicial
and administrative interpretations, together with other regulatory and
environmental matters, have resulted in restrictions on the scope and timing of
the Company's timber operations (such as recent actions of the regional water
board and its staff--see "--Water Quality" below), increased operational costs
and engendered litigation and other challenges to its operations.

      The Environmental Plans
      The Environmental Plans, consisting of the HCP and the SYP, were approved
by the federal and state governments upon the consummation of the Headwaters
Agreement. In connection with approval of the Environmental Plans, incidental
take permits ("PERMITS") were issued with respect to certain threatened,
endangered and other species found on the Company Timberlands. The Permits cover
the 50-year term of the HCP and allow incidental takes of 17 different species
covered by the HCP, including four species which are found on the Company
Timberlands that had previously been listed under the ESA and/or the CESA by the
applicable governmental entities. The agreements which implement the
Environmental Plans also provide for various remedies (including the issuance of
written stop orders and liquidated damages) in the event of a breach by the
Company of these agreements or the Environmental Plans.

      Under the Environmental Plans, harvesting activities are prohibited or
restricted on certain areas of the Company Timberlands. Some of these
restrictions continue for the entire 50-year period. For example, several areas
(consisting of substantial quantities of timber, including old growth redwood
and Douglas-fir timber) serve as habitat conservation areas for the marbled
murrelet, a coastal seabird, and certain other species. Harvesting in certain
other areas of the Company Timberlands is currently prohibited while these areas
are evaluated for the potential risk of landslide and the degree to which
harvesting activities will be prohibited or restricted in the future. Further,
additional areas alongside streams have been designated as buffers, in which
harvesting is prohibited or restricted, to protect aquatic and riparian habitat.
Restrictions on harvest in streamside buffers and potential landslide prone
acres may be adjusted up or down, subject to certain minimum and maximum
buffers, based upon the ongoing watershed analysis process described below. The
adaptive management process described below may also be used to modify most of
these restrictions.

      The first analysis by the Palco Companies of a watershed, Freshwater, was
released in June 2001. This analysis was used by the Palco Companies and the
government agencies to develop proposed harvesting prescriptions. The Freshwater
prescriptions resulted in a reduction in the size of the streamside buffers set
forth in the Environmental Plans and also provide for geologic reviews in order
to conduct any harvesting activities on potential landslide-prone areas.
Watershed analysis based prescriptions are currently being developed for other
portions of the Company Timberlands. At least one additional watershed analysis
study is expected to be completed in 2003. The HCP required the Palco Companies,
together with the government agencies, to establish a watershed analysis
schedule resulting in completion of the initial watershed analysis process for
all covered lands within five years. However, due largely to the number of
agencies involved and the depth and complexity of the analysis, the process has
thus far proven to require more time than originally anticipated. Accordingly,
the Palco Companies will be working with the government agencies to establish an
appropriate timeline and to streamline the process for implementation of
watershed analysis on the remaining portions of Company Timberlands to ensure
that such studies are time and cost efficient, and that such studies continue to
provide scientific results necessary to evaluate potential changes to the
harvesting restrictions on those lands.

      The HCP imposes certain restrictions on the use of roads on the
timberlands covered by the HCP during several months of the year and during
periods of wet weather. However, Pacific Lumber has conducted, and the Company
expects that Pacific Lumber will be able to continue to conduct, some harvesting
during these periods. A pending adaptive management change to the road
restrictions of the Environmental Plans would help ensure that road restrictions
are consistent with the operational needs of the Palco Companies. The HCP also
requires that 75 miles of roads be stormproofed on an annual basis and that
certain other roads must be built or repaired. The nature of this work requires
that it be performed in the dry periods of the year. To date, over 360 miles of
roads have been stormproofed.

      The HCP contains an adaptive management provision, which various
regulatory agencies have clarified will be implemented on a timely and efficient
basis, and in a manner which will be both biologically and economically sound.
This provision allows the Palco Companies to propose changes to many of the HCP
prescriptions based on, among other things, economic considerations. The
regulatory agencies have also clarified that in applying this adaptive
management provision, to the extent the changes proposed do not result in the
jeopardy of a particular species, the regulatory agencies will consider the
practicality of the suggested changes, including the cost and economic
feasibility and viability. The Palco Companies and the agencies have implemented
various adaptive management changes related to wildlife and rare plants, and
other changes relating to roads and streamside buffers are under consideration
by the government agencies. These adaptive management changes have increased the
ability to conduct harvesting operations and/or reduce operating costs while
still meeting the obligations of the Environmental Plans.

      Water Quality
      Under the Federal Clean Water Act, the Environmental Protection Agency
(the "EPA") is required to establish total maximum daily load limits ("TMDLS")
in water courses that have been declared to be "water quality impaired." The EPA
and the North Coast Regional Water Quality Control Board ("NORTH COAST WATER
BOARD") are in the process of establishing TMDLs for many northern California
rivers and certain of their tributaries, including nine water courses that flow
within the Company Timberlands. The Company expects this process to continue
into 2010. In December 1999, the EPA issued a report dealing with TMDLs on two
of the nine water courses. The agency indicated that the requirements under the
HCP would significantly address the sediment issues that resulted in TMDL
requirements for these water courses. The North Coast Water Board has begun the
process of establishing the TMDL requirements applicable to two other water
courses on the Company Timberlands, with a targeted completion of spring 2004 for
these two water courses. The final TMDL requirements applicable to the Company
Timberlands may require aquatic protection measures that are different from or
in addition to those in the HCP or that result from the prescriptions to be
developed pursuant to the watershed analysis process provided for in the HCP.

      Effective January 1, 2003, a California statute eliminates a waiver
previously granted to, among others, timber companies. This waiver had been in
effect for a number of years and waived the requirement under California water
quality regulations for timber companies to follow certain waste discharge
requirements in connection with their timber harvesting and related operations.
The new statute provides, however, that regional water boards such as the North
Coast Water Board are authorized to renew the waiver. The North Coast Water
Board has renewed the waiver for timber companies through December 31, 2003.
Should the North Coast Water Board decide not to extend this or another waiver
beyond December 31, 2003, it may thereafter notify a company that the Board will
require such company to follow certain waste discharge requirements in order to
conduct harvesting operations on a THP. The waste discharge requirements may
include aquatic protection measures that are different from or in addition to
those provided for in the THP approved by the CDF. Accordingly, harvesting
activities could be delayed and/or adversely affected as these waste discharge
requirements are developed and implemented.

      Beginning with the 2002-2003 winter operating period, the Palco Companies
have been required to submit "Reports of Waste Discharge" to the North Coast
Water Board in order to conduct winter harvesting activities in the Freshwater
Creek and Elk River watersheds. After consideration of these reports, the North
Coast Water Board imposed requirements on the Palco Companies to implement
additional mitigation and erosion control practices in these watersheds. These
additional requirements will somewhat increase operating costs. The North Coast
Water Board also issued a clean up and abatement order (the "ELK RIVER ORDER")
for the Elk River watershed and is contemplating similar actions for the
Freshwater, Bear, Jordan and Stitz Creeks watersheds. The Elk River Order is
aimed at addressing existing sediment production sites through clean up actions.
The order, as well as additional orders in the other watersheds (should they be
issued), could result in significant costs to the Company beginning in 2003 and
extending over a number of years. The Palco Companies have appealed the Elk
River Order to the State Water Resources Control Board (the "STATE WATER
BOARD"), but are holding the appeal in abeyance while they discuss this matter
with the North Coast Water Board and its staff.

      Impact of Future Legislation
      Laws, regulations and related judicial decisions and administrative
interpretations dealing with the Company's business are subject to change and
new laws and regulations are frequently introduced concerning the California
timber industry. From time to time, bills are introduced in the California
legislature and the U.S. Congress which relate to the business of the Company,
including the protection and acquisition of old growth and other timberlands,
threatened and endangered species, environmental protection, air and water
quality and the restriction, regulation and administration of timber harvesting
practices.

      For instance, in January 2003, the Natural Resources Committee of the
California Senate issued a report that recommended consideration of legislation
on a number of issues that would affect the Company, including collection of
fees for THPs, providing a stronger role for regional water boards in the THP
process, limiting the use of clearcutting, and regulating the rate of harvest in
individual watersheds. On February 7, 2003, Senate Bill 217 was introduced
addressing a number of these issues and others. If this legislation is passed as
written, it will have a significant adverse impact on the Company. It is likely
that other legislation addressing these issues will be introduced as well.

      In addition to existing and possible new or modified statutory enactments,
regulatory requirements and administrative and legal actions, the California
timber industry remains subject to potential California or local ballot
initiatives and evolving federal and California case law which could affect
timber harvesting practices. It is not possible to assess the effect of such
future legislative, judicial and administrative events on the Company or its
business.

      Treesitters on Company Timberlands
      The Company has over the past several months had a number of persons
trespass on the Company Timberlands for the purpose of "treesitting" (i.e.
occupying trees for varying periods of time). To date, these activities have not
had a material impact on the Company; however, there can be no assurance that
this will continue to be the case.

      Timber Operators License
      In order to conduct logging operations, road building, stormproofing and
certain other activities, a company must obtain from the CDF a Timber Operator's
License. In December 2001, Pacific Lumber was granted a Timber Operator's
License for 2002 and 2003. At the end of the first quarter of 2002, Pacific
Lumber ended its company-staffed logging operations and now relies exclusively
on contract loggers.

ITEM 2.         PROPERTIES

      A description of the Company's properties is included under Item 1. above.

ITEM 3.         LEGAL PROCEEDINGS

      This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and
"Business--General" above for cautionary information with respect to such
forward-looking statements.

TIMBER HARVESTING LITIGATION

      Pending lawsuits could affect the Company's ability to implement the HCP
and/or the SYP, implement certain of the Company's approved THPs, or carry out
certain other operations, as discussed below. Two such lawsuits were resolved
during 2002. See Note 7. Certain of the remaining pending cases are described
below. The Services Agreement requires Pacific Lumber to prepare and file on
behalf of the Company all pleadings and motions, and otherwise diligently
pursue, appeals of any denial, and defense of any challenge to approval, of any
THP or the Environmental Plans or similar plan or permit and related matters.

      In March 1999, an action entitled Environmental Protection Information
Association, Sierra Club v. California Department of Forestry and Fire
Protection, California Department of Fish and Game, The Pacific Lumber Company,
Scotia Pacific Company LLC, Salmon Creek Corporation, et al. (the
"EPIC-SYP/PERMITS LAWSUIT") was filed and is now pending in Superior Court in
Humboldt County, California (No. CV-990445). This action alleges, among other
things, various violations of the CESA and the CEQA, and challenges, among other
things, the validity and legality of the SYP and the Permits issued by
California. The plaintiffs seek, among other things, injunctive relief to set
aside California's approval of the SYP and the Permits issued by California. In
March 1999, a similar action entitled United Steelworkers of America, AFL-CIO,
CLC, and Donald Kegley v. California Department of Forestry and Fire Protection,
The Pacific Lumber Company, Scotia Pacific Company LLC and Salmon Creek
Corporation (the "USWA LAWSUIT") was filed in Superior Court in Humboldt County
(No. CV-990452) challenging the validity and legality of the SYP. In connection
with the EPIC-SYP/Permits lawsuit, the trial judge has issued a stay of the
effectiveness of the Permits for approval of new THPs, but released from the
stay, and refused to enjoin, operations under THPs that were previously approved
consistent with the Permits. In addition, on November 26, 2002, the Court
exempted from the stay all in-process THPs submitted through mid-October.
Although the stay prevents the CDF from approving new THPs that rely upon the
Permits, the Company is obtaining review and approval of new THPs under a
procedure provided for in the forest practice rules that does not depend upon
the Permits. Because certain THPs will not qualify for this procedure, there
could be a reduction in 2003 harvest levels which could have an adverse impact
on the Company. These two cases have been consolidated for trial, which began on
March 24, 2003. The judge has indicated that he expects to rule no earlier than
July 2003. The Company believes that appropriate procedures were followed
throughout the public review and approval process concerning the Environmental
Plans and is working with the relevant government agencies to defend these
challenges. The Company does not believe the resolution of these matters should
result in a material adverse effect on its financial condition, results of
operations or the ability to harvest timber. However, in addition to the
potential short-term adverse impacts described above, these matters could have a
long-term negative impact if they are decided adversely to the Company.

      In July 2001, an action entitled Environmental Protection Information
Center v. The Pacific Lumber Company, Scotia Pacific Company LLC (No. CD1-2821)
was filed in the U.S. District Court for the Northern District of California
(the "BEAR CREEK LAWSUIT"). The lawsuit alleges that the Company's and Pacific
Lumber's harvesting and other activities under certain of its approved and
proposed THPs will result in discharges of pollutants in violation of the CWA.
The plaintiff asserts that the CWA requires the defendants to obtain a permit
from the North Coast Water Board before beginning timber harvesting and road
construction activities and is seeking to enjoin these activities until such
permit has been obtained. The plaintiff also seeks civil penalties of up to
$27,500 per day for the defendant's alleged continued violation of the CWA. The
Company believes that the requirements under the HCP are adequate to ensure that
sediment and pollutants from its harvesting activities will not reach levels
harmful to the environment. Furthermore, EPA regulations specifically provide
that such activities are not subject to CWA permitting requirements. The Company
believes that it has strong legal defenses in this matter; however, there can be
no assurance that this lawsuit will not have a material adverse impact on the
Company's financial condition, results of operations or liquidity.

      On November 20, 2002, an action entitled Humboldt Watershed Council, et
al. v. North Coast Regional Water Quality Control Board, et al. (No.
CPF02-502062) (the "HWC LAWSUIT"), naming Pacific Lumber as real party in
interest, was filed in the Superior Court for the County of San Francisco. The
suit seeks to enjoin timber operations in the Elk and Freshwater watersheds of
the Company Timberlands until and unless the regional and state water boards
impose on those operations waste discharge requirements that meet standards
demanded by the plaintiff. On February 24, 2003, the Court granted Pacific
Lumber's motion to change venue to Humboldt County and deferred consideration of
plaintiff's motion for a temporary restraining order. The Company believes that
Pacific Lumber and the regional and state boards have valid defenses to this
action. However, an adverse ruling could result in a delay of timber operations
that could have a material adverse impact on the Company's financial position,
results of operations or liquidity.

      On February 25, 2003, the recently elected District Attorney of Humboldt
County filed a civil suit entitled The People of the State of California v.
Pacific Lumber, Scotia Pacific Holding Company and Salmon Creek Corporation in
the Superior Court of Humboldt County (No. DR030070) (the "HUMBOLDT DA ACTION").
The suit was filed under California's unfair competition law and alleges that
the Palco Companies used certain unfair business practices in connection with
completion of the Headwaters Agreement, and that this resulted in the Palco
Companies being able to harvest significantly more trees under the Environmental
Plans than would have otherwise been the case. The suit seeks a variety of
remedies including a civil penalty of $2,500 for each additional tree that has
been or will be harvested due to this alleged increase in harvest, as well as
restitution and an injunction in respect of the additional timber harvesting
allegedly being conducted. The Company believes that this suit is without merit;
however, there can be no assurance that the Palco Companies will prevail or that
an adverse outcome would not be material to the Company's financial position,
results of operations or liquidity.

      On November 16, 2001, Pacific Lumber filed a case entitled The Pacific
Lumber Company, et al. v. California State Water Resources Control Board (No.
DR010860) in the Humboldt County Superior Court (the "THP NO. 520 LAWSUIT")
alleging that the State Water Board had no legal authority to impose mitigation
measures that were requested by the staff of the North Coast Water Board during
the THP review process and rejected by the CDF. When the staff of the North
Coast Water Board attempted to impose these mitigation measures in spite of the
CDF's decision, Pacific Lumber appealed to the State Water Board, which imposed
certain of the requested mitigation measures and rejected others. Pacific Lumber
filed the THP No. 520 lawsuit challenging the State Water Board's decision, and
on January 24, 2003, the Court granted Pacific Lumber's request for an order
invalidating the imposition of these additional measures. Other claims included
in this action have been dismissed by Pacific Lumber without prejudice to its
future rights. On March 25, 2003, the State Water Board appealed this decision.
While the Company believes the Court's decision will be sustained, a reversal
could result in increased demands by the regional and state water boards and
their staffs to impose controls and limitations on timber harvesting on the
Company Timberlands beyond those provided for by the Environmental Plans.

OTHER LITIGATION

      The Company is involved in other claims, lawsuits and proceedings. While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred or their effect on the Company, management believes that the resolution
of such uncertainties and the incurrence of such costs should not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.

ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      Not applicable.

                                    PART II

ITEM 5.         MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS

      Pacific Lumber holds a 100% member interest in the Company. Accordingly,
there is no established public trading market for the Company's equity
securities. The Company did not make any cash distributions in respect of such
interest during 2000. During 2001, $79.9 million in distributions were made to
Pacific Lumber, including a $73.1 million distribution in connection with the
sale of the Company's Owl Creek grove. In March 2002, a distribution of $29.4
million was made to Pacific Lumber. See Note 3.

ITEM 6.         SELECTED FINANCIAL DATA

      Not applicable.

ITEM 7.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS

      The following should be read in conjunction with the Company's Financial
Statements and the Notes thereto appearing in Item 8.

BACKGROUND

      This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and Item 1.
"Business--General" for cautionary information with respect to such
forward-looking statements.

      Regulatory and environmental matters play a significant role in the
Company's operations. See Note 7 and Item 1. "Business--Regulatory and
Environmental Factors" for a discussion of these matters.

      Since the consummation of the Headwaters Agreement in March 1999, there
has been a significant amount of work required in connection with the
implementation of the Environmental Plans, and this work is expected to continue
for several more years. In 1999 and 2000, this caused delays in obtaining
approvals of THPs. The rate of approvals of THPs during 2001 improved over that
for the prior year, and further improvements were experienced in 2002. As
discussed in Note 7, other factors may adversely impact the Company's ability to
meet its harvesting goals. The North Coast Water Board is requiring the Company
to apply certain waste discharge requirements to approved THPs covering winter
harvesting operations in the Freshwater and Elk River watersheds, and the North
Coast Water Board could require the Company to follow waste discharge
requirements before harvesting operations are conducted on THPs in other
watersheds. This requirement could cause delays in harvesting. A stay issued in
connection with the EPIC-SYP/Permits lawsuit requires the Company to follow an
alternative THP approval process for THPs submitted to the CDF after mid-
October, resulting in delays in obtaining approvals of THPs.

      Furthermore, there can be no assurance that certain other pending legal,
regulatory and environmental matters or future governmental regulations,
legislation or judicial or administrative decisions, adverse weather conditions,
or low log prices will not have a material adverse effect on the Company's
financial position, results of operations or liquidity. See Item 1.
"Business--Regulatory and Environmental Factors," Item 3. "Legal Proceedings"
and Note 7 for further information regarding regulatory and legal proceedings
affecting the Company's operations.

RESULTS OF OPERATIONS

      This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and Item 1.
"Business--General" for cautionary information with respect to such
forward-looking statements.

      General
      Mbfe Concept. The Mbfe concept was used in structuring the Timber Notes in
order to take account of the relative values of the species and categories of
timber included in the Company Timber. Under the Mbfe concept, one thousand
board feet, net Scribner scale, of old growth redwood timber equates to one
Mbfe. One thousand board feet, net Scribner scale, of each other species and
category of timber included in the Company Timber was assigned a value in Mbfe
equal to a fraction of an Mbfe. This fraction was generally determined by
dividing the SBE Price applicable to such species and category for the first
half of 1998 by the SBE Price applicable to old growth redwood for the first
half of 1998.

      Master Purchase Agreement Provisions. The Master Purchase Agreement
contemplates that all sales of logs by the Company to Pacific Lumber will be at
fair market value (based on stumpage prices) for each species and category of
timber. The Master Purchase Agreement provides that if the purchase price equals
or exceeds the SBE Price and a structuring price set forth in a schedule to the
Indenture, the purchase price is deemed to be at fair market value. If the
purchase price equals or exceeds the SBE Price, but is less than the structuring
price, then the Company is required to engage an independent forestry consultant
to confirm that the purchase price reflects fair market value. Harvest Value
Schedules setting forth the SBE Prices are published by the California State
Board of Equalization twice a year for the purpose of computing a yield tax
imposed on timber harvested between January 1 and June 30 and July 1 and
December 31. Harvest Value Schedules are based on twenty-four months of actual
log and timber sales that occur within nine specified timber value areas. These
sales are arms length transactions adjusted for time by indexing the prices
(using log and lumber price trends) to a specific date, which is approximately
sixty days prior to the effective date of the Harvest Value Schedules. SBE
Prices may not necessarily be representative of actual prices that would be
realized from unrelated parties at subsequent dates.

      Seasonality. Logging operations on the Company's timberlands are highly
seasonal and have historically been significantly higher in the months of April
through November than in the months of December through March. Management
expects that the Company's revenues and cash flows will continue to be markedly
seasonal because of the harvesting, road use, wet weather and other restrictions
imposed by the HCP. As a result, a substantial majority of the future harvesting
on the Company's timberlands can be expected to be concentrated during the
period from June through October of each year. Some of these restrictions may be
modified somewhat under the adaptive management provision contained in the HCP,
and as a result of the watershed analysis process currently being performed.

      Timber Cruise. In May 2002, the Company completed the first timber cruise
on its timberlands since 1986. The results of the timber cruise provided the
Company with an estimate of the volume of merchantable timber on the Company's
timberlands. The new cruise data reflected a 0.1 million MBF decrease in
estimated overall timber volume as compared to the estimated volumes reported as
of December 31, 2001, using the 1986 cruise data (adjusted for harvest and
estimated growth). This shift in timber volume between classifications decreased
the overall timber volume reported in Mbfe by 0.2 million to 2.9 million. The
new cruise data indicates that there is significantly less old growth timber
than estimated as of December 31, 2001, using the 1986 cruise data. There was
also an estimated increase in young growth timber volume almost equal to the
estimated decrease in old growth timber volume. This change in mix could
adversely affect the Company's revenues. However, because there are many
variables that affect revenues and profitability, the Company cannot quantify
the effect of the revised estimate on current and future cash flows. The new
timber volumes are now being utilized in various aspects of the Company's
operations, including estimating volumes on THPs and determining depletion
expense.

      Log Sales to Pacific Lumber
      The following table presents price, volume and revenue amounts for the
Company for the periods indicated (revenues in millions).


                                                      YEARS ENDED DECEMBER 31,
                  -------------------------------------------------------------------------------------------------
                                2002                             2001                            2000
                  -------------------------------- -------------------------------- -------------------------------
                               PRICE                             PRICE                           PRICE
                        MBFES  $/MBFE    REVENUES        MBFES  $/MBFE    REVENUES    MBFES     $/MBFE    REVENUES
                  ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- ----------

Redwood..........    98,700  $     555  $    54.8     94,700  $     926  $    87.7     89,200  $  1,275  $   113.7
Douglas-fir......    23,300        394        9.2     20,900        511       10.7     18,300       725       13.3
Other............     2,800        206        0.6      1,700        354        0.6      1,900       527        1.0
                  ----------            ---------- ----------            ---------- ----------           ----------
                    124,800        518  $    64.6    117,300        844  $    99.0    109,400     1,170  $   128.0
                  ==========            ========== ==========            ========== ==========           ==========

      The decrease in net sales for 2002 versus 2001 was due to a substantial
decrease in SBE Prices for redwood logs. SBE Prices published for small redwood
logs from January 1, 2001 through December 31, 2002, reflect declines from 40%
to 58%. Douglas-fir prices reflected decreases from 13% to 28% for the same
period. Accordingly, the Company experienced a 39% decrease in its overall
average realized price during 2002. The increase in log volume was predominantly
attributable to the increase in available-to-log THPs. As of December 31, 2002,
the Company's ending inventory of approved THPs was the highest since 1997.
However, seasonal harvesting restrictions have significantly increased under the
HCP. As such, the available-to-log inventory of THPs may be significantly
adversely affected at any given time.

      The decrease in net sales for 2001 versus 2000 was due to a substantial
decrease in SBE Prices for redwood logs, offset somewhat by an increase in log
delivery volumes. Published SBE Prices for small redwood logs increased 38% in
the second half of 2000; however, this was followed by a 40% decrease in the
second half of 2001. Overall, the Company's total average realized price
decreased 28% during 2001. The increase in log volumes was due largely to a rise
in the Company's available-to-log THPs.

      Operating Income and Net Income (Loss)
      Operating income was $30.2 million and $64.5 million for the years ended
December 31, 2002 and 2001, respectively. The decrease in operating income is
principally due to the decrease in log sales discussed above. Overall, general
and administrative expenses have remained relatively stable. The Company
experienced a $1.0 million decrease in yield taxes caused by the lower SBE
Prices as discussed above, as well as a reduction in the cost of preparing THPs
(predominantly in the areas of geology and botany) by utilizing internal
staffing and hiring fewer outside contractors. However, these gains have been
offset by increases in insurance costs and increased administrative staffing.
Depletion and depreciation increased as a result of increased harvest levels.

      Net income (loss) was $(23.1) million in 2002 as compared to $15.1 million
in 2001, again principally due to the decrease in net sales from logs discussed
above. In addition, interest and other income decreased $3.7 million for 2002,
principally due to lower investment earnings and lower amounts of funds
available for investment (see also Note 3).

      Operating income was $64.5 million and $93.1 million for the years ended
December 31, 2001 and 2000, respectively. The decrease in operating income is
principally due to the decrease in log sales discussed above. General and
administrative costs decreased slightly principally as a result of lower yield
taxes caused by the lower SBE Prices discussed above.

      In addition to the decrease in operating income discussed previously, net
income decreased in 2001 because 2000 results included two significant gains:
the $59.5 million gain on the sale of the Owl Creek grove in December 2000 as
well as an extraordinary gain of $6.0 million on the purchase of Timber Notes
held in the Scheduled Amortization Reserve Account (the "SAR ACCOUNT").

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

      This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and Item 1.
"Business--General" for cautionary information with respect to such
forward-looking statements.

      Note 5 contains additional information concerning the Company's
indebtedness and certain restrictive debt covenants.

      The December 2000 sale of the Owl Creek grove generated gross proceeds of
$67.0 million for the Company.

      During the year ended December 31, 2000, $52.5 million in funds from the
SAR Account were used to reacquire Timber Notes, representing $60.0 million in
principal, as permitted under the Indenture. As of December 31, 2002, the fair
value of cash, marketable securities and other investments held in the SAR
Account, including the reacquired Timber Notes, was $113.8 million. The Company
and its affiliates may from time to time purchase additional Timber Notes as
opportunities arise.

      The Indenture contains various covenants which, among other things, limit
the ability of the Company to incur additional indebtedness and liens, to engage
in transactions with affiliates, to pay dividends and to make investments. Under
the terms of the Indenture, the Company will generally have cash available for
distribution to Pacific Lumber when the Company's cash flows from operations
exceed the amounts required by the Indenture to be reserved for the payment of
current debt service (including interest, principal and premiums) on the Timber
Notes, repayment of the Line of Credit (described below), capital expenditures,
certain other operating expenses and replenishment of the SAR Account.

      On March 5, 2002, the Company notified the trustee for the Timber Notes
that it had met all of the requirements of the SAR Reduction Date, as defined in
the Timber Notes Indenture (i.e., certain harvest, THP inventory and Line of
Credit requirements). Accordingly, on March 20, 2002, the Company released $29.4
million from the SAR Account and distributed this amount to Pacific Lumber.

      The Company has an agreement with a group of banks which allows it to
borrow up to one year's interest on the Timber Notes (the "LINE OF CREDIT"). On
May 31, 2002, the Line of Credit was extended for an additional year to July 11,
2003. Annually, the Company will request that the Line of Credit be extended for
a period of not less than 364 days. If not extended, the Company may draw upon
the full amount available. The amount drawn would be repayable in 12 semiannual
installments on each note payment date (after the payment of certain other
items, including the Aggregate Minimum Principal Amortization Amount, as
defined, then due), commencing approximately two and one-half years following
the date of the draw. At December 31, 2002, the Company could have borrowed a
maximum of $59.8 million under the Line of Credit, and there were no borrowings
outstanding under the Line of Credit.

      On the note payment date in January 2002, the Company had $33.9 million
set aside in the note payment account to pay the $28.4 million of interest due
as well as $5.5 million of principal. The Company repaid an additional $6.1
million of principal on the Timber Notes using funds held in the SAR Account,
resulting in a total principal payment of $11.6 million, an amount equal to
Scheduled Amortization (as defined in the Indenture).

      On the note payment date in July 2002, the Company had $15.1 million set
aside in the note payment account and borrowed $13.0 million (net of $0.9
million borrowed in respect of Timber Notes held by the Company) from the Line
of Credit to pay the $28.1 million of interest due. The Company repaid $3.2
million of principal on the Timber Notes (an amount equal to Scheduled
Amortization) using funds held in the SAR Account.

      On the note payment date in January 2003, the Company had $5.6 million set
aside in the note payment account to pay the $27.9 million of interest due. The
Company used $22.3 million (net of $1.6 million borrowed in respect of Timber
Notes held by the Company) of the funds available under the Line of Credit to
pay the remaining amount of interest due. The Company repaid $12.1 million of
principal on the Timber Notes (an amount equal to Scheduled Amortization) using
funds held in the SAR Account.

      With respect to the note payment date in July 2003, the Company expects to
use $27.6 million (net of $1.9 million which will be borrowed in respect of
Timber Notes held by the Company) of the funds available under the Line of
Credit to pay the entire amount of interest due. The Company expects to repay
$4.6 million of principal on the Timber Notes (an amount equal to Scheduled
Amortization) using funds held in the SAR Account.

      The Company's cash flows from operations are significantly impacted by
harvest volumes and log prices. In June 2002, the State Board of Equalization
adopted the new Harvest Value Schedule for the second half of 2002. The SBE
Prices published in that schedule reflected an approximate 16% decline for small
redwood logs and no price change for small Douglas-fir logs from the prior
period. This decline in SBE Prices had an adverse impact on the Company's net
sales and liquidity during the second half of 2002. See "--Results of
Operations--Log Sales to Pacific Lumber." Accordingly, with respect to the note
payment in January 2003, the Company required funds from the Line of Credit to
pay a portion of the interest due, and all of the funds used to pay the
Scheduled Amortization were provided from the SAR Account.

      In January 2003, in accordance with the Master Purchase Agreement (see
"Results of Operations--Master Purchase Agreement Provisions" above), the
Company engaged an independent forestry consultant with respect to establishing
the purchase price of logs to be sold to Pacific Lumber in the first half of
2003. The consultant determined that with respect to certain categories of logs,
the fair market value was higher than the comparable SBE Price. The resulting
prices for redwood logs will on average be approximately 20% higher for the
first half of 2003 than those for the second half of 2002. There will be
relatively no price change for Douglas-fir.

      With respect to short-term liquidity, the Company believes that existing
cash available for principal payments from the SAR Account, and funds available
under the Line of Credit, together with cash flows from operations, should
provide sufficient funds to meet its working capital, capital expenditures and
required debt service obligations through 2003. With respect to long-term
liquidity, although the Company expects that cash flows from operations and
funds available under the SAR Account and the Line of Credit should be adequate
to meet its debt service, working capital and capital expenditure requirements,
unless log prices continue to improve, there can be no assurance that
this will be the case. In addition, cash flows from operations may continue to
be adversely affected if harvest levels decline as a result of the factors
discussed in "--Background" above and Note 7.

      Pacific Lumber's 2001 cash flows from operations were adversely affected
by operating inefficiencies, lower lumber prices, an inadequate supply of logs
and a related slowdown in lumber production. During 2001, comprehensive external
and internal reviews were conducted of Pacific Lumber's business operations.
These reviews were conducted in an effort to identify ways in which Pacific
Lumber could operate on a more efficient and cost effective basis. Based upon
the results of these reviews, Pacific Lumber, among other things, closed two of
its four sawmills, eliminated certain of its operations, including its soil
amendment and concrete block activities, began utilizing more efficient
harvesting methods and adopted certain other cost saving measures. Most of these
changes were implemented by Pacific Lumber in the last quarter of 2001, or the
first quarter of 2002. Pacific Lumber also ended its company-staffed logging
operations (which historically performed approximately half of its logging) as
of March 31, 2002, and now relies exclusively on contract loggers. Further
actions may be taken during the next year as a result of Pacific Lumber's
continuing evaluation process.

      The $29.4 million distribution from the Company to Pacific Lumber
discussed above improved Pacific Lumber's liquidity during 2002. However,
Pacific Lumber's cash flows from operations may be adversely affected by
diminished availability of logs from the Company, lower lumber prices, adverse
weather conditions, or pending legal, regulatory and environmental matters. See
"--Background" and "Results of Operations--General--Timber Cruise" above as well
as Note 7 for further discussion of the regulatory and environmental factors
affecting harvest levels and the results of the timber cruise completed in 2002.
Pacific Lumber may require funds available under its credit agreement and/or
additional prepayments by MGI of an intercompany loan in order to meet its
working capital and capital expenditure requirements for the next year.

CRITICAL ACCOUNTING POLICIES

      The discussion and analysis of the Company's financial condition and
results of operations is based upon the Company's financial statements, which
have been prepared in accordance with generally accepted accounting principles.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. Estimates are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. The
result of this process forms the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. The Company re-evaluates its estimates and judgments on a regular,
ongoing basis. Actual results may differ from these estimates due to changed
circumstances and conditions.

      The following accounting policies are considered critical in light of the
potentially material impact that the estimates, judgments and uncertainties
affecting the application of these policies might have on the Company's reported
financial information.

      Loss Contingencies
      The Company is involved in various claims, lawsuits and other proceedings
discussed in Note 7. Such litigation involves uncertainty as to possible losses
the Company may ultimately realize when one or more future events occur or fail
to occur. The Company accrues and charges to income estimated losses from
contingencies when it is probable (at the balance sheet date) that an asset has
been impaired or liability incurred and the amount of loss can be reasonably
estimated. Differences between estimates recorded and actual amounts determined
in subsequent periods are treated as changes in accounting estimates (i.e., they
are reflected in the financial statements in the period in which they are
determined to be losses, with no retroactive restatement).

      The Company estimates the probability of losses on legal contingencies
based on the advice of internal and external counsel, the outcomes from similar
litigation, the status of the lawsuits (including settlement initiatives),
legislative developments, and other factors. Risks and uncertainties are
inherent with respect to the ultimate outcome of litigation. Pacific Lumber
provides services to the Company with respect to the defense of certain legal
actions. The Services Agreement requires Pacific Lumber to prepare and file on
behalf of the Company all pleadings and motions, and otherwise diligently
pursue, appeals of any denial, and defense of any challenge to approval, of any
THP or the Environmental Plans or similar plan or permit and related matters.
See Note 7 for further discussion of the Company's material legal contingencies.

      Depletion
      Depletion of the Company's timber and timberlands is computed utilizing
the units-of-production method based upon estimates of timber quantities. The
depletion base is the total historical cost attributable to the Company's
timberlands. Depletion for the period is determined by multiplying the depletion
base by the ratio of harvested units for the period over the total expected
recoverable units. The Company's total for expected recoverable units is
reviewed on a periodic basis and revised, if necessary. Any adjustments are made
prospectively (i.e., the remaining undepleted cost is expensed over the
remaining recoverable units).

      In the second quarter of 2002, the Company completed its timber cruise
which resulted in new and updated timber volume information (see also Note 7).
Accordingly, the Company revised its estimated depletion rates beginning April
1, 2002. The impact of the updated timber volume information on depletion
expense for the year ended December 31, 2002, was not material.

NEW ACCOUNTING STANDARDS

      See Note 1 for a discussion of new accounting pronouncements and their
potential impact on the Company.

ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company is exposed to changes in interest rates under the Line of
Credit. This facility bears interest at either the prime interest rate or LIBOR
plus a specified percentage point spread. The Line of Credit was established in
conjunction with the offering of the Timber Notes. As of December 31, 2002,
there were no borrowings outstanding under the Line of Credit. Based on the
amount of borrowings outstanding under the Line of Credit during 2002, the
impact of a 1.0% change in interest rates effective from the beginning of the
year would not have been material to the Company's interest expense for 2002.

      All of the Company's other debt is fixed-rate, and therefore, does not
expose the Company to the risk of higher interest payments due to changes in
market interest rates. The Company does not utilize interest rate swaps or
similar hedging arrangements.


ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEPENDENT AUDITORS' REPORT

To the Managers and Member of
Scotia Pacific Company LLC:

      We have audited the accompanying balance sheet of Scotia Pacific Company
LLC (a Delaware limited liability company and a wholly owned subsidiary of The
Pacific Lumber Company) (the "Company") as of December 31, 2002, and the related
statements of income (loss) and of cash flows for the year 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 audit. The financial statements of the Company as of December 31, 2001, and
for the years ended December 31, 2001 and 2000 were audited by other auditors
who have ceased operations. Those auditors expressed an unqualified opinion on
those financial statements in their report dated March 6, 2002.

      We conducted our audit 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 audit provides 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 Scotia Pacific Company LLC
as of December 31, 2002, and the results of its operations and its cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.


DELOITTE & TOUCHE LLP


Portland, Oregon
March 14, 2003


      THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP IN CONNECTION WITH SCOTIA PACIFIC COMPANY LLC'S FILING ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K. THE BALANCE SHEET AS
OF DECEMBER 31, 2000, AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR
ENDED DECEMBER 31, 1999, REFERRED TO IN THE AUDIT REPORT HAVE NOT BEEN INCLUDED
IN THE ACCOMPANYING FINANCIAL STATEMENTS.



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Managers and Member of
Scotia Pacific Company LLC:

      We have audited the accompanying balance sheets of Scotia Pacific Company
LLC (a Delaware limited liability company and a wholly owned subsidiary of The
Pacific Lumber Company) as of December 31, 2001 and 2000, and the related
statements of income and cash flows for each of the three years in the period
ended December 31, 2001. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Scotia Pacific Company LLC
as of December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.


                                                          ARTHUR ANDERSEN LLP


San Francisco, California
March 6, 2002



                           SCOTIA PACIFIC COMPANY LLC

                                  BALANCE SHEET
                            (IN MILLIONS OF DOLLARS)



                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2002        2001
                                                                                            ----------  -----------
ASSETS
Current assets:
   Cash, cash equivalents, and restricted cash............................................  $    10.1   $     37.8
   Marketable securities, restricted......................................................       19.3         17.1
   Receivables from Pacific Lumber........................................................        2.6          3.8
   Prepaid timber harvesting costs........................................................        7.3          7.9
   Other current assets...................................................................        0.9          0.6
                                                                                            ----------  -----------
      Total current assets................................................................       40.2         67.2
Timber and timberlands, net of accumulated depletion of $272.5 and
   $261.6, respectively...................................................................      239.4        247.9
Property and equipment, net of accumulated depreciation of $15.0 and
    $13.0, respectively...................................................................       23.7         20.9
Deferred financing costs, net.............................................................       15.1         16.4
Restricted cash, marketable securities and other investments..............................       52.9         87.6
Other assets..............................................................................        5.6          6.5
                                                                                            ----------  -----------
                                                                                            $   376.9   $    446.5
                                                                                            ==========  ===========

LIABILITIES AND MEMBER DEFICIT
Current liabilities:
   Due to Pacific Lumber..................................................................  $     0.8   $      1.0
   Accrued interest.......................................................................       24.9         25.4
   Other accrued liabilities..............................................................        2.1          3.0
   Current maturities of long-term debt, excluding $2.6 and $2.3, respectively, of
      repurchased Timber Notes held in the SAR Account....................................       16.8         14.9
                                                                                            ----------  -----------
      Total current liabilities...........................................................       44.6         44.3
Long-term debt, less current maturities and excluding $52.8 and $55.4, respectively,
   of repurchased Timber Notes held in the SAR Account....................................      737.7        754.5
Other noncurrent liabilities..............................................................        0.1            -
                                                                                            ----------  -----------
      Total liabilities...................................................................      782.4        798.8
                                                                                            ----------  -----------

Contingencies (See Note 7)

Member deficit............................................................................     (405.5)      (352.3)
                                                                                            ----------  -----------
                                                                                            $   376.9   $    446.5
                                                                                            ==========  ===========

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




                           SCOTIA PACIFIC COMPANY LLC

                           STATEMENT OF INCOME (LOSS)
                            (IN MILLIONS OF DOLLARS)



                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2002        2001        2000
                                                                                ----------  ----------  -----------

Log sales to Pacific Lumber...................................................  $    64.6   $    99.0   $    128.0
                                                                                ----------  ----------  -----------

Operating expenses:
   General and administrative.................................................       20.6        22.0         22.5
   Depletion, depreciation and amortization...................................       13.8        12.5         12.4
                                                                                ----------  ----------  -----------
                                                                                     34.4        34.5         34.9
                                                                                ----------  ----------  -----------

Operating income..............................................................       30.2        64.5         93.1

Other income (expense):
   Gains on sales of timberlands..............................................          -         1.2         59.5
   Interest and other income..................................................        4.6         8.3          8.6
   Interest expense...........................................................      (57.9)      (58.9)       (62.6)
                                                                                ----------  ----------  -----------
Income (loss) before extraordinary items......................................      (23.1)       15.1         98.6
Extraordinary items:
   Gains on repurchases of debt...............................................          -           -          6.0
                                                                                ----------  ----------  -----------
Net income (loss).............................................................  $   (23.1)  $    15.1   $    104.6
                                                                                ==========  ==========  ===========


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



                           SCOTIA PACIFIC COMPANY LLC

                             STATEMENT OF CASH FLOWS
                            (IN MILLIONS OF DOLLARS)



                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2002        2001        2000
                                                                                ----------  ----------  -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss) .........................................................  $   (23.1)  $    15.1   $    104.6
   Adjustments to reconcile net income (loss) to net cash provided by
      (used for) operating activities:
      Extraordinary gains on repurchases of debt..............................          -           -         (6.0)
      Gain on sale of timberlands.............................................          -        (1.2)       (59.5)
      Depletion, depreciation and amortization................................       13.8        12.5         12.4
      Amortization of deferred financing costs................................        1.4         1.4          1.4
      Increase (decrease) in cash resulting from changes in:
        Receivables from Pacific Lumber.......................................        1.2         7.4         (6.7)
        Prepaid timber harvesting costs.......................................        0.6        (2.2)        (1.4)
        Due to Pacific Lumber.................................................       (0.2)        0.3         (0.2)
        Accrued interest......................................................       (0.4)       (0.9)        (1.8)
        Other accrued liabilities.............................................       (0.8)       (0.4)         0.7
        Other.................................................................       (0.3)          -         (0.2)
                                                                                ----------  ----------  -----------
        Net cash provided by (used for) operating activities..................       (7.8)       32.0         43.3
                                                                                ----------  ----------  -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures.......................................................       (7.2)       (6.2)        (8.2)
   Proceeds from sale of assets...............................................          -         1.3         67.0
   Restricted cash withdrawals used to acquire timberlands ...................          -           -          0.8
                                                                                ----------  ----------  -----------
        Net cash provided by (used for) investing activities..................       (7.2)       (4.9)        59.6
                                                                                ----------  ----------  -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Principal payments on Timber Notes and other timber related debt...........      (15.0)      (14.2)       (16.0)
   Other net changes in restricted cash.......................................       31.7         6.7          9.9
   Member distributions.......................................................      (29.4)      (79.9)           -
                                                                                ----------  ----------  -----------
        Net cash used for financing activities................................      (12.7)      (87.4)        (6.1)
                                                                                ----------  ----------  -----------

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH........      (27.7)      (60.3)        96.8
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD.............       37.8        98.1          1.3
                                                                                ----------  ----------  -----------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD...................  $    10.1   $    37.8   $     98.1
                                                                                ==========  ==========  ===========

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   Repurchases of debt using restricted cash..................................  $       -   $       -   $     52.5
   Contribution of assets by Pacific Lumber...................................          -           -          5.7
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid..............................................................  $    57.0   $    58.4   $     63.1



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



                           SCOTIA PACIFIC COMPANY LLC

                          NOTES TO FINANCIAL STATEMENTS


1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF PRESENTATION

      Scotia Pacific Company LLC (the "COMPANY") is a Delaware limited liability
company wholly owned by The Pacific Lumber Company ("PACIFIC LUMBER"), which is
a wholly owned subsidiary of MAXXAM Group Inc. ("MGI"). MGI is an indirect
wholly owned subsidiary of MAXXAM Inc. ("MAXXAM"). The Company is a special
purpose limited liability company organized in May 1998 to facilitate the
offering of the 6.55% Class A-1, the 7.11% Class A-2 and the 7.71% Class A-3
Timber Collateralized Notes due 2028 of the Company (the "TIMBER NOTES").
Concurrent with the closing in July 1998 (the "CLOSING") of the Timber Notes
offering, Scotia Pacific Holding Company ("SCOTIA PACIFIC") was merged into the
Company and Pacific Lumber and Salmon Creek LLC, a wholly owned subsidiary of
Pacific Lumber ("SALMON CREEK"), transferred to the Company approximately 13,500
acres of timberlands and the timber and related timber harvesting rights (but
not the underlying land) with respect to an additional approximately 19,700
acres of timberlands. The Company in turn transferred to Pacific Lumber the
timber and related timber harvesting rights (but not the underlying land) with
respect to approximately 1,400 acres of timberlands. The merger and the
transfers have been accounted for as a reorganization of entities under common
control which requires the Company to record the assets, liabilities and results
of operations of Scotia Pacific after giving effect to the transfers as well as
the assets, liabilities and results of operations acquired from Pacific Lumber
and Salmon Creek at their respective historical cost. Accordingly, the Company
is the successor entity to all of Scotia Pacific's historical operations
(exclusive of the assets transferred to Pacific Lumber) and to the historical
operations attributable to the timberlands and timber and related timber
harvesting rights acquired from Pacific Lumber and Salmon Creek.

      Consistent with the Company's purpose and pursuant to the terms of the
indenture governing the Timber Notes (the "INDENTURE"), the Company is obligated
to set aside each month a portion of the funds it receives from the sale of logs
to Pacific Lumber sufficient to make the specified payments of principal and
interest on the Timber Notes computed in accordance with the Indenture and to
have a sufficient amount to pay operating expenses and capital improvements.

   USE OF ESTIMATES AND ASSUMPTIONS

      The preparation of financial statements in accordance with accounting
principles generally accepted in the United State of America requires the use of
estimates and assumptions that affect (i) the reported amounts of assets and
liabilities, (ii) the disclosure of contingent assets and liabilities known to
exist as of the date the financial statements are published and (iii) the
reported amount of revenues and expenses recognized during each period
presented. The Company reviews all significant estimates affecting its financial
statements on a recurring basis and records the effect of any necessary
adjustments prior to filing the financial statements with the Securities and
Exchange Commission. Adjustments made using estimates often relate to improved
information not previously available. Uncertainties regarding such estimates and
assumptions are inherent in the preparation of the Company's financial
statements; accordingly, actual results could differ from estimates, and it is
possible that the subsequent resolution of any one of the contingent matters
described in Note 7 could differ materially from current estimates. The results
of an adverse resolution of such uncertainties could have a material effect on
the Company's financial position, results of operations or liquidity.

      LIQUIDITY AND CASH RESOURCES

      The Company's cash flows from operations are significantly impacted by
harvest volumes and log prices. In June 2002, the State Board of Equalization
adopted the new "HARVEST VALUE SCHEDULE" for the second half of 2002. The prices
published in that schedule (the "SBE PRICE") reflected an approximate 16%
decline for small redwood logs and no price change for small Douglas-fir logs
from the prior period. The decline in SBE Prices had an adverse impact on the
Company's net sales and liquidity during the second half of 2002. Accordingly,
with respect to the note payment in January 2003, the Company required funds
from its line of credit (the "LINE OF CREDIT;" see Note 5) to pay a portion of
the interest due. All of the funds used to pay principal were provided from the
Scheduled Amortization Reserve Account (the "SAR ACCOUNT;" see Note 5).

      The master purchase agreement entered into by the Company and Pacific
Lumber ("MASTER PURCHASE AGREEMENT"; see Note 6) contemplates that all sales of
logs by the Company to Pacific Lumber will be at fair market value (based on
stumpage prices) for each species and category of timber. The Master Purchase
Agreement provides that if the purchase price equals or exceeds the SBE Price
and a structuring price set forth in a schedule to the Indenture, the purchase
price is deemed to be at fair market value. If the purchase price equals or
exceeds the SBE Price, but is less than the structuring price, then the Company
is required to engage an independent forestry consultant to confirm that the
purchase price reflects fair market value. In January 2003, the Company so
engaged a consultant with respect to establishing the purchase prices of logs to
be sold to Pacific Lumber in the first half of 2003. The consultant determined
that with respect to certain categories of logs, the fair market value at that
time was higher than the comparable SBE Price. The resulting prices for redwood
logs will on average be approximately 20% higher for the first half of 2003 than
those for the second half of 2002. There will be relatively no price change for
Douglas-fir.

      With respect to short-term liquidity, the Company believes that existing
cash available for principal payments from the SAR Account, and funds available
under the Line of Credit, together with cash flows from operations, should
provide sufficient funds to meet its working capital, capital expenditures and
required debt service obligations through 2003. With respect to long-term
liquidity, although the Company expects that cash flows from operations and
funds available under the SAR Account and the Line of Credit should be adequate
to meet its debt service, working capital and capital expenditure requirements,
unless log prices continue to improve, there can be no assurance that
this will be the case. In addition, cash flows from operations may continue to
be adversely affected if harvest levels decline as a result of regulatory
compliance and the litigation discussed in Note 7.

   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Prepaid Timber Harvesting Costs and Other Long-Term Assets
      Direct costs associated with the preparation of timber harvesting plans
("THPS") are capitalized and reflected in prepaid timber harvesting costs on the
balance sheet. These costs are expensed as the timber covered by the related THP
is harvested. Costs associated with the preparation of the Company's sustained
yield plan and the Company's multi-species habitat conservation plan were
capitalized and are reflected in other long-term assets. These costs are being
amortized over 10 years.

      Timber and Timberlands
      Timber and timberlands were recorded at the historical cost of Scotia
Pacific, Pacific Lumber and Salmon Creek. Depletion is computed utilizing the
units-of-production method based upon estimates of timber quantities.
Periodically, the Company will review its depletion rates considering currently
estimated merchantable timber and will adjust the depletion rates prospectively.

      In the second quarter of 2002, the Company completed a timber cruise which
resulted in new and updated timber volume information (see also Note 7).
Accordingly, the Company revised its estimated depletion rates beginning April
1, 2002. The impact of the updated timber volume information on depletion
expense for the year ended December 31, 2002, was not material.

      Concentrations of Credit Risk
      Cash equivalents and marketable securities are invested primarily in short
to medium-term investment grade debt instruments as well as other types of
corporate and government debt obligations. The Company mitigates its
concentration of credit risk with respect to these investments by generally
purchasing investment grade products (ratings of A1/P1 short-term or at least
BBB/Baa3 long-term). No more than 5% is invested in the same issue.

      Revenue Recognition
      Revenues from the sale of logs are recorded when the legal ownership and
the risk of loss passes to the buyer, which is at the time each log is measured.

      Deferred Financing Costs
      Costs incurred to obtain debt financing are deferred and amortized on a
straight-line basis over the estimated term of the related borrowing. The
amortization of deferred financing costs is included in interest expense on the
Statement of Income (Loss).

      Legal Contingencies
      The Company is currently involved in various claims and proceedings which
are reviewed for potential financial exposure on a regular basis. If the
potential loss from any claim or legal proceeding is considered probable and is
reasonably estimable as of the balance sheet date, a liability is accrued. The
Company estimates the probability of losses on legal contingencies based on the
advice of internal and external counsel, the outcomes from similar litigation,
the status of the lawsuits (including settlement initiatives), legislative
developments, and other factors. See Note 7 for a description of the Company's
material legal proceedings.

      Income Taxes
      The Company, a single member limited liability company, has not made an
election to be treated as an association and, therefore, is disregarded as a
separate taxable entity solely for income tax purposes. The Company is treated
as a division of Pacific Lumber for tax purposes. All income taxes with respect
to the Company are shown on Pacific Lumber's financial statements, and all
deferred income tax assets and deferred income tax liabilities with respect to
the Company at December 31, 2002 and 2001, are reflected in Pacific Lumber's
financial statements.

      New Accounting Standards
      In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS NO. 143") which addresses accounting and
reporting standards for obligations associated with the retirement of tangible
long-lived assets and the related asset retirement costs. The Company is
required to adopt SFAS No. 143 beginning on January 1, 2003. In general, SFAS
No. 143 requires the recognition of a liability resulting from anticipated asset
retirement obligations, offset by an increase in the value of the associated
productive asset for such anticipated costs. Over the life of the asset,
depreciation expense is to include the ratable expensing of the retirement cost
included with the asset value. The statement applies to all legal obligations
associated with the retirement of a tangible long-lived asset that result from
the acquisition, construction, or development and/or the normal operation of a
long-lived asset, except for certain lease obligations. Excluded from this
statement are obligations arising solely from a plan to dispose of a long-lived
asset and obligations that result from the improper operation of an asset (i.e.
certain types of environmental obligations). The Company does not expect the
adoption of SFAS No. 143 to have a material impact on its future financial
statements.

      In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS NO. 145") which, among other things, rescinds the previous
guidance for debt extinguishments. SFAS No. 145 eliminates the requirement that
gains and losses from extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. However,
transactions would not be prohibited from extraordinary item classification if
they meet the criteria in Accounting Principles Board Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions ("APB OPINION 30")." Applying the provisions of APB Opinion 30 will
distinguish transactions that are part of an entity's recurring operations from
those that are unusual or infrequent or that meet the criteria for
classification as an extraordinary item. This statement is effective for the
Company's fiscal year beginning January 1, 2003. The adoption of SFAS No. 145
will result in the reflection of the gains on repurchases of debt in investment,
interest and other income rather than as an extraordinary item in the financial
statements.

2.    SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

      In December 2000, the Company sold the Owl Creek grove for $67.0 million,
resulting in a pre-tax gain of $59.5 million.

3.    CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS

      Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less. As of December 31, 2002 and 2001,
carrying amounts of the Company's cash equivalents approximated fair value.

      The Company segregates its investments in marketable securities into
"held-to-maturity" (debt securities only) and "available-for-sale" securities in
accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS NO. 115").

      Management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.

      Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses reported in other comprehensive income, a
separate component of member deficit.

      The cost of securities sold is determined using the first-in, first-out
method. The fair value of substantially all securities is determined by quoted
market prices. The following is a summary of held-to-maturity and
available-for-sale securities (in millions):

                                                                                                DECEMBER 31,
                                                                                          ------------------------
                                                                                             2002         2001
                                                                                          -----------  -----------
Held-to-maturity securities:
   Cost.................................................................................  $     15.4   $     11.9
   Estimated fair value.................................................................        15.7         11.9

Available-for-sale securities:
   Cost.................................................................................        39.9         71.5
   Estimated fair value.................................................................        40.5         72.4

      Investment, interest and other income (expense), net, includes gross
realized gains and losses on sales of available-for-sale securities for each of
the three years in the period ended December 31, 2002, as follows (in millions):


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2002        2001        2000
                                                                                ----------  ----------  -----------

Gross realized gains..........................................................  $     2.4   $     1.2   $      0.1
Gross realized losses.........................................................       (0.1)       (0.2)        (0.1)

      The net adjustment to unrealized holding gains (losses) on
available-for-sale securities included as a separate component of member deficit
totaled $(0.7) million, $0.5 million, and $1.1 million in 2002, 2001, and 2000,
respectively.

      Available-for-sale securities generally consist of U.S. corporate debt
securities, U.S. Treasury obligations, and other debt securities with
contractual maturities ranging from one year to five years. Held-to-maturity
securities consist of U.S. government agency obligations with contractual
maturities ranging from one year to five years.

      RESTRICTED CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS
      Cash, marketable securities and other investments include the following
amounts which are restricted under the terms of the Company's debt agreements
(in millions):

                                                                                               DECEMBER 31,
                                                                                        ---------------------------
                                                                                            2002          2001
                                                                                        ------------- -------------
Current assets:
   Cash and cash equivalents, restricted............................................... $        5.2  $       35.3
   Marketable securities, restricted:
      Amounts held in SAR Account......................................................         19.3          17.1
                                                                                        ------------- -------------
                                                                                                24.5          52.4
Long-term restricted cash, marketable securities and other investments:
   Amounts held in SAR Account.........................................................        101.6         137.8
   Other amounts restricted under the Indenture........................................          2.6           2.8
   Less:  Amounts attributable to repurchased Timber Notes held in
      SAR Account......................................................................        (51.3)        (53.0)
                                                                                        ------------- -------------
                                                                                                52.9          87.6
                                                                                        ------------- -------------
Total restricted cash, marketable securities and other investments..................... $       77.4  $      140.0
                                                                                        ============= =============

      Amounts in the SAR Account are being held by the trustee under the
Indenture to support principal payments on the Timber Notes. See Note 5 for
further discussion of the SAR Account.

      On March 5, 2002, the Company notified the trustee for the Timber Notes
that it had met all of the requirements of the SAR Reduction Date, as defined in
the Indenture (e.g., certain harvest, THP inventory and Line of Credit
requirements). Accordingly, on March 20, 2002, the Company released $29.4
million from the SAR Account and distributed this amount to Pacific Lumber.

      OTHER INVESTMENTS
      Funds held in the SAR Account include interests in several limited
partnerships which invest in diversified portfolios of common stocks and equity
securities, in addition to exchange traded options, futures, forward foreign
currency contracts, and other arbitrage opportunities. These investments are not
consolidated, but are accounted for under the equity method. The Company's
ownership percentages in these partnerships were less than 5.0% at December 31,
2002 and 2001. As of December 31, 2002 and 2001, these investments amounted to
$13.3 million and $15.7 million, respectively.

      Interest and other income includes equity in earnings from the Company's
investment in these partnerships for each of the three years in the period ended
December 31, 2002, as follows (in millions):


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2002        2001        2000
                                                                                ----------  ----------  -----------

Equity in earnings from investments in partnerships...........................  $     0.6   $     0.7   $      0.1
                                                                                ==========  ==========  ===========

4.    PROPERTY AND EQUIPMENT

      Property and equipment are recorded at historical cost. Subsequent
acquisitions of property and equipment are recorded at cost. Depreciation is
computed principally utilizing the straight-line method at rates based upon the
estimated useful lives of the various classes of assets. The carrying value of
property and equipment is assessed when events and circumstances indicate that
an impairment might exist. The existence of an impairment is determined by
comparing the net carrying value of the asset to its estimated undiscounted
future cash flows. A probability-weighted approach is used for situations in
which alternative courses of action to recover the carrying amount of long-lived
assets are under consideration or a range is estimated for the amount of
possible future cash flows. If an impairment is present, assets are written down
to fair value and a loss is recognized. The major classes of property and
equipment are as follows (dollar amounts in millions):


                                                                                                   DECEMBER 31,
                                                                                    ESTIMATED   -------------------
                                                                                   USEFUL LIVES   2002      2001
                                                                                   -----------  --------- ---------

Logging roads  ...................................................................   15 years   $   36.8  $   32.3
Other............................................................................. 5 - 15 years      1.9       1.6
                                                                                                --------- ---------
                                                                                                    38.7      33.9
Less:  accumulated depreciation...................................................                 (15.0)    (13.0)
                                                                                                --------- ---------
                                                                                                $   23.7  $   20.9
                                                                                                ========= =========

      Depreciation expense for the years ended December 31, 2002, 2001 and 2000
was $2.0 million, $1.8 million and $1.9 million, respectively.

5.    DEBT

      In July 1998, the Company issued $867.2 million aggregate principal amount
of Timber Notes, which are due at various times through July 20, 2028. The
Timber Notes are senior secured obligations of the Company and do not constitute
obligations of, and are not guaranteed by, Pacific Lumber or any other person.
The Timber Notes were issued in three classes: Class A-1 Timber Notes
aggregating $160.7 million, Class A-2 Timber Notes aggregating $243.2 million
and Class A-3 Timber Notes aggregating $463.3 million. Pursuant to the terms of
the Indenture, the Company is permitted to incur up to $75.0 million at any one
time of non-recourse indebtedness secured by purchase money mortgages to acquire
additional timberlands, an unspecified amount of Additional Timber Notes (as
defined in the Indenture) provided certain conditions are met, and certain other
debt on a limited basis. The Company is not permitted to incur any other
indebtedness for borrowed money. The Timber Notes and the Line of Credit are
secured by a lien on (i) the Company's timber, timberlands and timber rights
(subject to Pacific Lumber's ownership of the timber and related timber
harvesting rights on approximately 400 acres of such timberlands), (ii) certain
contract rights and other assets, (iii) the proceeds of the foregoing and (iv)
funds held in various accounts by the Trustee for the Timber Notes. Amounts
payable on the Timber Notes are paid semi-annually, generally on January 20 and
July 20 of each year (each, a "NOTE PAYMENT DATE").

      The Timber Notes were structured to link, to the extent of cash available,
the deemed depletion of the Company's timber (through the harvest and sale of
logs) to the required amortization of the Timber Notes. The required amount of
amortization on any Note Payment Date is determined by various mathematical
formulas set forth in the Indenture. "SCHEDULED AMORTIZATION" of the Timber
Notes represents the amount of principal which the Company must pay through each
Note Payment Date in order to avoid payment of prepayment or deficiency
premiums, as described below. The Scheduled Maturity Dates for the Class A-1 and
Class A-2 Timber Notes, which are January 20, 2007 and January 20, 2014,
respectively, represent the Note Payment Dates on which the Company will pay the
final installment of principal if all payments of principal are made in
accordance with Scheduled Amortization. The Scheduled Maturity Date for the
Class A-3 Timber Notes is also January 20, 2014. The Scheduled Amortization for
the Class A-3 Timber Notes does not include any principal amortization prior to
their Scheduled Maturity Date. If the Class A-3 Timber Notes are not paid in
full on or before their Scheduled Maturity Date, a Cash Retention Event (as
defined in the Indenture) will occur as a result of which 75% of all Excess
Funds (as defined in the Indenture) will be deposited in the note payment
account ("PAYMENT ACCOUNT") until all classes of Timber Notes are paid in full,
generally in sequential order.

      Minimum Principal Amortization of the Timber Notes represents the minimum
amount of principal which the Company must pay (on a cumulative basis and
subject to available cash) on such Class, to the extent of available funds
on deposit in the Payment Account, through any Note Payment Date. If the Timber
Notes were amortized in accordance with Minimum Principal Amortization, the
final installments of principal would be paid on January 20, 2010, July 20, 2017
and July 20, 2028 for the Class A-1, Class A-2 and Class A-3 Timber Notes,
respectively.

      In November 1999, $169.0 million of funds from the sale of the Headwaters
Timberlands were contributed to the Company and set aside in the SAR Account.
Amounts in the SAR Account are part of the collateral securing the Timber Notes
and will be used to make principal payments to the extent that other available
amounts are insufficient to pay Scheduled Amortization on the Class A-1 and
Class A-2 Timber Notes. In addition, during the six years beginning January 20,
2014, any amounts in the SAR Account will be used to amortize the Class A-3
Timber Notes as set forth in the Indenture, as amended. Funds may from time to
time be released to the Company from the SAR Account if the amount in the
account at that time exceeds the Required Scheduled Amortization Reserve Balance
(as defined and set forth in the Indenture). If the balance in the SAR Account
falls below the Required Scheduled Amortization Reserve Balance, up to 50% of
any Remaining Funds (funds that could otherwise be released to the Company free
of the lien securing the Timber Notes) is required to be used on each monthly
deposit date to replenish the SAR Account. The amount attributable to Timber
Notes held in the SAR Account of $51.3 million reflected in Note 3 represents
$55.4 million principal amount of reacquired Timber Notes. Repurchases made
during the year ended December 31, 2000, resulted in an extraordinary gain of
$6.0 million.

      The Company has the right to cause additional prepayments of principal to
be made on any Note Payment Date. If the principal of the Timber Notes is paid
in advance of Scheduled Amortization, the Company will pay a prepayment premium
on such accelerated payment. The prepayment premium on any Note Payment Date is
equal to the excess, if any, of (a) the sum of (i) the present value of the
prepayment amount (discounted from the date(s) that the prepayment amount would
otherwise have been paid under the Scheduled Amortization to the Note Payment
Date) plus (ii) the sum of the present values of the amounts of interest that
would have accrued thereafter with respect to the prepayment amount over (b) the
amount of the prepayment. The present value is computed using a "Reinvestment
Yield" (as defined in the Indenture) which is comparable to the yield of like
term U.S. Treasury securities plus 0.50% per annum.

      If the principal of the Timber Notes is paid later than as provided for
under Scheduled Amortization, the Company will pay a deficiency premium on such
deficient amount. The deficiency premium payable on any Note Payment Date equals
an amount of interest on the amount of the deficient principal amount from the
previous Note Payment Date to the current Note Payment Date at 1.50% per annum.

      The following table presents the amortization of the Timber Notes,
excluding $55.4 million face value of repurchased Timber Notes held in the SAR
Account, based on Minimum Principal Amortization and Scheduled Amortization (in
millions):


                                                                                          MINIMUM
                                                                                         PRINCIPAL      SCHEDULED
                                                                                       AMORTIZATION   AMORTIZATION
                                                                                       ------------- --------------
Years Ending December 31:
   2003..............................................................................  $          -  $        16.7
   2004..............................................................................           2.0           19.2
   2005..............................................................................          14.7           21.7
   2006..............................................................................          17.9           25.3
   2007..............................................................................          21.3           28.3
   Thereafter........................................................................         698.4          643.1
                                                                                       ------------- --------------
                                                                                       $      754.3  $       754.3
                                                                                       ============= ==============

      As of December 31, 2002 and 2001, the estimated fair value of debt,
including current maturities, was $539.9 million and $640.6 million,
respectively. The estimated fair value of debt is determined based on the quoted
market price for the Timber Notes. The Timber Notes are thinly traded financial
instruments; accordingly, their market price at any balance sheet date may not
be representative of the price which would be derived from a more active market.

      Pursuant to certain liquidity requirements under the Indenture, the
Company has entered into the Line of Credit with a group of banks pursuant to
which the Company may borrow to pay interest on the Timber Notes. The maximum
amount the Company may borrow is equal to one year's interest on the aggregate
outstanding principal balance of the Timber Notes (the "REQUIRED LIQUIDITY
AMOUNT"). At December 31, 2002, the Required Liquidity Amount was $59.8 million.
On May 31, 2002, the Line of Credit was extended for an additional year to July
11, 2003. Annually, the Company will request that the Line of Credit be extended
for a period of not less than 364 days. If not extended, the Company may draw
upon the full amount available. The amount drawn would be repayable in 12
semiannual installments on each note payment date (after the payment of certain
other items, including the Aggregate Minimum Principal Amortization Amount, as
defined, then due), commencing approximately two and one-half years following
the date of the draw. At December 31, 2002, there were no borrowings outstanding
under the Line of Credit.

      On the note payment date in January 2002, the Company had $33.9 million
set aside in the Payment Account to pay the $28.4 million of interest due
as well as $5.5 million of principal. The Company repaid an additional $6.1
million of principal on the Timber Notes using funds held in the SAR Account,
resulting in a total principal payment of $11.6 million, an amount equal to
Scheduled Amortization.

      On the note payment date in July 2002, the Company had $15.1 million set
aside in the Payment Account and borrowed $13.0 million (net of $0.9
million borrowed in respect of Timber Notes held by the Company) from the Line
of Credit to pay the $28.1 million of interest due. The Company repaid $3.2
million of principal on the Timber Notes (an amount equal to Scheduled
Amortization) using funds held in the SAR Account.

      On the note payment date in January 2003, the Company had $5.6 million set
aside in the Payment Account to pay the $27.9 million of interest due. The
Company used $22.3 million (net of $1.6 million borrowed in respect of Timber
Notes held by the Company) of the funds available under the Line of Credit to
pay the remaining amount of interest due. The Company repaid $12.1 million of
principal on the Timber Notes, an amount equal to Scheduled Amortization, using
funds held in the SAR Account.

6.    RELATED PARTY TRANSACTIONS

      At the time of Closing, the Company and Pacific Lumber entered into the
Master Purchase Agreement which governs all log sales by the Company to Pacific
Lumber. Substantially all of the Company's revenues have been and are expected
to continue to be derived from the sale of logs to Pacific Lumber. The harvested
logs are purchased by Pacific Lumber (i.e., title passes and the obligation to
make payment therefor is incurred) at the time each log is measured. The Master
Purchase Agreement contemplates that all sales of logs by the Company to Pacific
Lumber will be at fair market value (based on stumpage prices) for each species
and category of timber. See "Liquidity and Capital Resources" in Note 1 for
further information.

      The Company and Pacific Lumber also entered into a services agreement at
the time of Closing (the "SERVICES AGREEMENT"), pursuant to which Pacific Lumber
provides a variety of operational, management and related services in respect of
the Company's timber properties not provided by the Company employees, including
reforestation, fire protection and road maintenance, rehabilitation and
construction. In addition, Pacific Lumber provides services to the Company with
respect to the defense of any legal challenges. The Company pays a Services Fee
(as defined) in an initial amount of $107,000 per month adjusted annually based
on the producer price index and reimburses Pacific Lumber for the cost of
constructing, rehabilitating and maintaining roads and performing reforestation
services. For the years ended December 31, 2002, 2001, and 2000, $10.4 million,
$9.7 million, and $11.6 million was recorded under the Services Agreement,
respectively.

7.    CONTINGENCIES

      Regulatory and environmental matters play a significant role in the
Company's forest products business, which is subject to a variety of California
and federal laws and regulations, as well as a habitat conservation plan ("HCP")
and a sustained yield plan ("SYP" and together with the HCP, the "ENVIRONMENTAL
PLANS"), dealing with timber harvesting practices, threatened and endangered
species and habitat for such species, and air and water quality.

      The SYP complies with regulations of the California Board of Forestry and
Fire Protection requiring timber companies to project timber growth and harvest
on their timberlands over a 100-year planning period and to demonstrate that
their projected average annual harvest for any decade within a 100-year planning
period will not exceed the average annual growth level during the last decade of
the 100-year planning period. The SYP is effective for 10 years (subject to
review after five years) and may be amended by Pacific Lumber, subject to
approval by the California Department of Forestry and Fire Protection ("CDF").
Revised SYPs will be prepared every decade that address the harvest level based
upon assessment of changes in the resource base and other factors. The HCP and
the incidental take permits related to the HCP (the "PERMITS") allow incidental
"take" of certain species located on the Company's timberlands which species
have been listed by government entities under the federal Endangered Species Act
("ESA") and/or the California Endangered Species Act (the "CESA") so long as
there is no "jeopardy" to the continued existence of such species. The HCP
identifies the measures to be instituted in order to minimize and mitigate the
anticipated level of take to the greatest extent practicable. The SYP is also
subject to certain of these provisions. The HCP and related Permits have a term
of 50 years.

      Since the consummation of the Headwaters Agreement in March 1999, there
has been a significant amount of work required in connection with the
implementation of the Environmental Plans, and this work could continue for
several more years. Nevertheless, the rate of approvals of THPs during 2001
improved over that for the prior year, and further improvements were experienced
in 2002. Despite the improvements in the THP approval process, other factors
such as actions by the North Coast Regional Water Quality Control Board (the
"NORTH COAST WATER BOARD") and pending litigation discussed below may adversely
impact the Company's ability to meet its harvesting goals.

      In May 2002, the Company completed the first timber cruise on its
timberlands since 1986. The results of the timber cruise provided the Company
with an estimate of the volume of merchantable timber on the Company's
timberlands. The new cruise data reflected a 0.1 million MBF decrease in
estimated overall timber volume as compared to the estimated volumes reported as
of December 31, 2001 using the 1986 cruise data (adjusted for harvest and
estimated growth). This shift in timber volume between classifications decreased
the overall timber volume reported in Mbfe by 0.2 million to 2.9 million. The
new cruise data indicates that there is significantly less old growth timber
than estimated as of December 31, 2001, using the 1986 cruise data. There was
also an estimated increase in young growth timber volume almost equal to the
estimated decrease in old growth timber volume. This change in mix could
adversely affect the Company's revenues. However, because there are many
variables that affect revenues and profitability, the Company cannot quantify
the effect of the revised estimate on current and future cash flows. The new
timber volumes are now being utilized in various aspects of the Company's
operations, including estimating volumes on THPs and determining depletion
expense.

      Under the federal Clean Water Act ("CWA"), the Environmental Protection
Agency ("EPA") is required to establish the total maximum daily load limits
("TMDLS") in water courses that have been declared to be "water quality
impaired." The EPA and the North Coast Water Board are in the process of
establishing TMDLs for many northern California rivers and certain of their
tributaries, including nine water courses that flow within the Company's
timberlands. The Company expects this process to continue into 2010. In December
1999, the EPA issued a report dealing with TMDLs on two of the nine water
courses. The agency indicated that the requirements under the HCP would
significantly address the sediment issues that resulted in TMDL requirements for
these two water courses. The North Coast Water Board has begun the process of
establishing the TMDL requirements applicable to two other water courses on the
Company's timberlands, with a targeted completion of spring 2004 for these two
water courses. The final TMDL requirements applicable to the Company's
timberlands may require aquatic protection measures that are different from or
in addition to those in the HCP or that result from the prescriptions to be
developed pursuant to the watershed analysis process provided for in the HCP.

       Effective January 1, 2003, a California statute eliminates a waiver
previously granted to, among others, timber companies. This waiver had been in
effect for a number of years and waived the requirement under California water
quality regulations for timber companies to follow certain waste discharge
requirements in connection with their timber harvesting and related operations.
The new statute provides, however, that regional water boards such as the North
Coast Water Board are authorized to renew the waiver. The North Coast Water
Board has renewed the waiver for timber companies through December 31, 2003.
Should the North Coast Water Board decide not to extend this or another waiver
beyond December 31, 2003, it may thereafter notify a company that the North
Coast Water Board will require such company to follow certain waste discharge
requirements in order to conduct harvesting operations on a THP. The waste
discharge requirements may include aquatic protection measures that are
different from or in addition to those provided for in the THP approved by the
CDF. Accordingly, harvesting activities could be delayed and/or adversely
affected, as these waste discharge requirements are developed and implemented.

      Beginning with the 2002-2003 winter operating period, Pacific Lumber has
been required to submit "Reports of Waste Discharge" to the North Coast Water
Board in order to conduct winter harvesting activities in the Freshwater Creek
and Elk River watersheds. After consideration of these reports, the North Coast
Water Board imposed requirements on Pacific Lumber to implement additional
mitigation and erosion control practices in these watersheds. These additional
requirements will somewhat increase operating costs. The North Coast Water Board
issued a clean up and abatement order ("ELK RIVER ORDER") for the Elk River
watershed and is contemplating similar actions for the Freshwater, Bear, Jordan
and Stitz Creeks watersheds. The Elk River Order is aimed at addressing existing
sediment production sites through clean up actions. The order, as well as
additional orders in the other watersheds (should they be issued), could result
in significant costs to Pacific Lumber beginning in 2003 and extending over a
number of years. Pacific Lumber has appealed the Elk River Order to the State
Water Resources Control Board ("STATE WATER BOARD"), but are holding the appeal
in abeyance while Pacific Lumber discusses this matter with the North Coast
Water Board and its staff.

      Lawsuits are pending and threatened which seek to prevent the Company from
implementing the HCP and/or the SYP, implementing certain of the Company's
approved THPs, or carrying out certain other operations. The Services Agreement
requires Pacific Lumber to prepare and file on behalf of the Company all
pleadings and motions, and otherwise diligently pursue, appeals of any denial,
and defense of any challenge to approval, of any THP or the Environmental Plans
or similar plan or permit and related matters.

      In December 1997, an action entitled Kristi Wrigley, et al v. Charles
Hurwitz, John Campbell, Pacific Lumber, MAXXAM Inc., Scotia Pacific Company LLC,
et al. (the "WRIGLEY LAWSUIT ") was filed. This action alleges, among other
things, that the defendants' logging practices have contributed to an increase
in flooding and damage to domestic water systems in a portion of the Elk River
watershed. On September 20, 2002, an agreement was reached to settle this
litigation, and the parties are proceeding to implement that agreement.

      In March 1999, an action entitled Environmental Protection Information
Association, Sierra Club v. California Department of Forestry and Fire
Protection, California Department of Fish and Game, The Pacific Lumber Company,
Scotia Pacific Company LLC, Salmon Creek Corporation, et al. (the
"EPIC-SYP/PERMITS LAWSUIT") was filed. This action alleges, among other things,
various violations of the CESA and the CEQA, and challenges, among other things,
the validity and legality of the SYP and the Permits issued by California. The
plaintiffs seek, among other things, injunctive relief to set aside California's
approval of the SYP and the Permits issued by California. In March 1999, a
similar action entitled United Steelworkers of America, AFL-CIO, CLC, and Donald
Kegley v. California Department of Forestry and Fire Protection, The Pacific
Lumber Company, Scotia Pacific Company LLC and Salmon Creek Corporation (the
"USWA LAWSUIT") was filed challenging the validity and legality of the SYP. In
connection with the EPIC-SYP/Permits lawsuit, the trial judge has issued a stay
of the effectiveness of the Permits for approval of new THPs, but released from
the stay, and refused to enjoin, operations under THPs that were previously
approved consistent with the Permits. In addition, on November 26, 2002, the
Court exempted from the stay all in-process THPs submitted through mid-October.
Although the stay prevents the CDF from approving new THPs that rely upon the
Permits, the Company is obtaining review and approval of new THPs under a
procedure provided for in the forest practice rules that does not depend upon
the Permits. Because certain THPs will not qualify for this procedure there
could be a reduction in 2003 harvest levels which could have an adverse impact
on the Company. These two cases have been consolidated for trial, which began
March 24, 2003. The judge has indicated that he expects to rule no earlier than
July 2003. The Company believes that appropriate procedures were followed
throughout the public review and approval process concerning the Environmental
Plans and is working with the relevant government agencies to defend these
challenges. The Company does not believe the resolution of these matters should
result in a material adverse effect on its financial condition, results of
operations or the ability to harvest timber. However, in addition to the
potential short-term adverse impacts described above, these matters could have a
long-term negative impact if they are decided adversely to the Company.

      In July 2001, an action entitled Environmental Protection Information
Center v. The Pacific Lumber Company, Scotia Pacific Company LLC (the "BEAR
CREEK LAWSUIT") was filed. The lawsuit alleges that the Company's and Pacific
Lumber's harvesting and other activities under certain of its approved and
proposed THPs will result in discharges of pollutants in violation of the CWA.
The plaintiff asserts that the CWA requires the defendants to obtain a permit
from the North Coast Water Board before beginning timber harvesting and road
construction activities, and is seeking to enjoin these activities until such
permit has been obtained. The plaintiff also seeks civil penalties of up to
$27,500 per day for the defendant's alleged continued violation of the CWA. The
Company believes that the requirements under the HCP are adequate to ensure that
sediment and pollutants from its harvesting activities will not reach levels
harmful to the environment. Furthermore, EPA regulations specifically provide
that such activities are not subject to CWA permitting requirements. The Company
believes that it has strong legal defenses in this matter; however, there can be
no assurance that this lawsuit will not have a material adverse impact on the
Company's financial condition, results of operations or liquidity.

      On November 20, 2002, an action entitled Humboldt Watershed Council, et
al. v. North Coast Regional Water Quality Control Board, et al. (the "HWC
LAWSUIT"), naming Pacific Lumber as real party in interest, was filed. The suit
seeks to enjoin timber operations in the Elk and Freshwater watersheds of the
Company's timberlands until and unless the regional and state water boards
impose on those operations waste discharge requirements that meet standards
demanded by the plaintiff. The Company believes that Pacific Lumber and the
regional and state boards have valid defenses to this action. However, an
adverse ruling could result in a delay of timber operations that could have a
material adverse impact on the Company's financial position, results of
operations or liquidity.

      On February 25, 2003, the recently elected District Attorney of Humboldt
County filed a civil suit entitled The People of the State of California v.
Pacific Lumber, Scotia Pacific Holding Company and Salmon Creek Corporation (the
"HUMBOLDT DA ACTION"). The suit was filed under the California unfair
competition law and alleges that the Company, Pacific Lumber and Salmon Creek
used certain unfair business practices in connection with completion of the
Headwaters Agreement, and that this resulted in the ability to harvest
significantly more trees under the Environmental Plans than would have otherwise
been the case. The suit seeks a variety of remedies including a civil penalty of
$2,500 for each additional tree that has been or will be harvested due to this
alleged increase in harvest, as well as restitution and an injunction in respect
of the additional timber harvesting allegedly being conducted. The Company
believes that this suit is without merit; however, there can be no assurance
that the Company will prevail or that an adverse outcome would not be material
to the Company's financial position, results of operations or liquidity.

      On November 16, 2001, Pacific Lumber filed a case entitled The Pacific
Lumber Company, et al. v. California State Water Resources Control Board (the
"THP NO. 520 LAWSUIT") alleging that the State Water Board had no legal
authority to impose mitigation measures that were requested by the staff of the
North Coast Water Board during the THP review process and rejected by the CDF.
When the staff of the North Coast Water Board attempted to impose these
mitigation measures in spite of the CDF's decision, Pacific Lumber appealed to
the State Water Board, which imposed certain of the requested mitigation
measures. Pacific Lumber filed the THP No. 520 lawsuit challenging the State
Water Board's decision and on January 24, 2003, the Court granted Pacific
Lumber's request for an order invalidating the imposition of these additional
measures and rejected others. Other claims included in this action have been
dismissed by Pacific Lumber without prejudice to its future rights. On March 25,
2003, the State Water Board appealed this decision. While the Company believes
the Court's decision will be sustained, a reversal could result in increased
demands by the regional and state water boards and their staffs to impose
controls and limitations on timber harvesting on the Company's timberlands
beyond those provided for by the Environmental Plans.

      While the Company expects environmentally focused objections and lawsuits
to continue, it believes that the HCP, the SYP and the Permits should enhance
its position in connection with these continuing challenges and, over time,
reduce or minimize such challenges.

8.    COMPREHENSIVE INCOME (LOSS) AND MEMBER DEFICIT

      Comprehensive income (loss) includes the following (in millions):


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                ---------------------------------------
                                                                                    2002          2001          2000
                                                                                ------------   ----------    ----------

Net income (loss)...........................................................    $     (23.1)   $    15.1     $   104.6
Other comprehensive income (loss):
   Change in value of available-for-sale investments........................           (0.7)         0.5           1.1
                                                                                ------------   ----------    ----------
Total comprehensive income (loss)...........................................    $     (23.8)   $    15.6     $   105.7
                                                                                ============   ==========    ==========


      A reconciliation of the activity in member deficit is as follows (in
millions):


                                                                                    YEARS ENDED DECEMBER 31,
                                                                              -------------------------------------
                                                                                  2002         2001        2000
                                                                              ------------  ----------  -----------

Balance at beginning of period..............................................  $    (352.3)  $  (288.0)  $   (399.4)
Comprehensive income (loss).................................................        (23.8)       15.6        105.7
Contribution of assets by Pacific Lumber....................................            -           -          5.7
Distributions...............................................................        (29.4)      (79.9)           -
                                                                              ------------  ----------  -----------

Balance at end of period....................................................  $    (405.5)  $  (352.3)  $   (288.0)
                                                                              ============  ==========  ===========

9.    QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

      Summary quarterly financial information for the years ended December 31,
2002 and 2001 is as follows (in millions):


                                                                            THREE MONTHS ENDED
                                                        -----------------------------------------------------------
                                                           MARCH 31        JUNE 30     SEPTEMBER 30    DECEMBER 31
                                                        -------------- -------------- -------------- --------------
2002:
   Log sales to Pacific Lumber......................... $        15.9  $        14.1  $        19.7  $        14.9
   Operating income....................................           8.0            7.4            9.6            5.2
   Net loss............................................          (5.1)          (5.6)          (3.8)          (8.6)

2001:
   Log sales to Pacific Lumber......................... $        13.1  $        32.7  $        30.4  $        22.8
   Operating income....................................           7.8           24.9           19.6           12.2
   Net income (loss)...................................          (4.6)          12.2            6.6            0.9


ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE

      None.


                                    PART III


ITEM 14.        CONTROLS AND PROCEDURES

      The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

      Within 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.

      There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.


                                     PART IV

ITEM 16.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A)   INDEX TO FINANCIAL STATEMENTS

      1.   FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):

           Independent Auditors' Report
           Report of Independent Public Accountants
           Balance Sheet at December 31, 2002 and 2001
           Statement of Income (Loss) for the Years Ended December 31, 2002, 2001 and 2000
           Statement of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
           Notes to Financial Statements

      2.   FINANCIAL STATEMENT SCHEDULES:

           Schedules are inapplicable or the required information is included in
           the financial statements or the notes thereto.

(B)   REPORTS ON FORM 8-K

      On October 4, 2002, the Company filed a current report on Form 8-K (under
Item 9), related to the EPIC- SYP/Permits lawsuit.

      On October 21, 2002, the Company filed a current report on Form 8-K (under
Item 9), related to the filing of a certificate in respect of the Company's Timber Notes.

      On November 13, 2002, the Company filed a current report on Form 8-K dated
August 13, 2002, related to the Certification of the Chief Executive and Chief
Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

      On November 20, 2002, the Company filed a current report on Form 8-K
(under Item 9), related to the filing of a certificate in respect of the
Company's Timber Notes.

      On December 20, 2002, the Company filed a current report on Form 8-K
(under Item 9), related to the filing of a certificate in respect of the
Company's Timber Notes.

      On January 21, 2003, the Company filed a current report on Form 8-K (under
Item 9), related to the filing of two certificates in respect of the Company's
Timber Notes.

      On February 20, 2003, the Company filed a current report on Form 8-K
(under Item 9), related to the filing of a certificate in respect of the
Company's Timber Notes.

      On February 25, 2003, the Company filed a current report on Form 8-K
(under Item 5), related to the Humboldt DA action.

      On March 20, 2003, the Company filed a current report on Form 8-K (under
Item 9), related to the filing of a certificate in respect of the Company's
Timber Notes.

(C)   EXHIBITS

      Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 39, which index is incorporated herein by
reference).

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                                                       SCOTIA PACIFIC COMPANY LLC

Date:   March 28, 2003                           By:                        ROBERT E. MANNE
                                                     --------------------------------------------------------------
                                                                            Robert E. Manne
                                                                 President and Chief Executive Officer
                                                                     (Principal Executive Officer)

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


Date:   March 28, 2003                           By:                        J. KENT FRIEDMAN
                                                     --------------------------------------------------------------
                                                                            J. Kent Friedman
                                                                                Manager

Date:   March 28, 2003                           By:                         EZRA G. LEVIN
                                                     --------------------------------------------------------------
                                                                             Ezra G. Levin
                                                                                Manager

Date:   March 28, 2003                           By:                        ROBERT E. MANNE
                                                     --------------------------------------------------------------
                                                                            Robert E. Manne
                                                                                Manager

Date:   March 28, 2003                           By:                        PAUL N. SCHWARTZ
                                                     --------------------------------------------------------------
                                                                            Paul N. Schwartz
                                                                                Manager

Date:   March 28, 2003                           By:                          JACK M. WEBB
                                                     --------------------------------------------------------------
                                                                              Jack M. Webb
                                                                          Independent Manager

Date:   March 28, 2003                           By:                          SID C. WEISS
                                                     --------------------------------------------------------------
                                                                              Sid C. Weiss
                                                                          Independent Manager

Date:   March 28, 2003                           By:                         GARY L. CLARK
                                                     --------------------------------------------------------------
                                                                             Gary L. Clark
                                                              Vice President - Finance and Administration
                                                              (Principal Financial and Accounting Officer)



                                 CERTIFICATIONS



     I, Robert E. Manne, certify that:

     1.  I have reviewed this annual report on Form 10-K of Scotia Pacific
         Company LLC;

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

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

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

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

         b)   evaluated the effectiveness of the registrant's disclosure
              controls and procedures as of a date within 90 days prior to the
              filing date of this annual report (the "Evaluation Date"); and

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

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

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

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

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


Date:    March 28, 2003                   By:           /S/ ROBERT E. MANNE
                                              --------------------------------------
                                                         Robert E. Manne
                                              President and Chief Executive Officer
                                                    (Principal Executive Officer)




I, Gary L. Clark, certify that:

     1.  I have reviewed this annual report on Form 10-K of Scotia Pacific
         Company LLC;

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

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

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

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

         b)   evaluated the effectiveness of the registrant's disclosure
              controls and procedures as of a date within 90 days prior to the
              filing date of this annual report (the "Evaluation Date"); and

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

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

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

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

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


Date:    March 28, 2003                   By:                /S/ GARY L. CLARK
                                               -----------------------------------------------------
                                                               Gary L. Clark
                                               Vice President-Finance and Administration
                                               (Principal Financial and Accounting Officer)





                                INDEX OF EXHIBITS


EXHIBIT
NUMBER                                  DESCRIPTION
------                                  -----------

3.1     Certificate of Formation of Scotia Pacific Company LLC (the "Company")
        (incorporated herein by reference to Exhibit 3.1 to the Company's
        Registration Statement on Form S-4 dated September 21, 1998;
        Registration No. 333-63825; the "Company's Form S-4")

3.2     Agreement of Limited Liability Company of the Company, effective as of
        July 20, 1998 (incorporated herein by reference to Exhibit 3.2 to the
        Company's Form S-4)

4.2     Indenture, dated as of July 20, 1998, between the Company and State
        Street Bank and Trust Company ("STATE STREET") regarding the Company's
        Class A-1, Class A-2 and Class A-3 Timber Collateralized Notes (the
        "Indenture") (incorporated herein by reference to Exhibit 4.2 to the
        Quarterly Report on Form 10-Q/A of MAXXAM Inc. ("MAXXAM") for the
        quarter ended June 30, 1998; File No. 1-3924; the "MAXXAM June 1998 Form
        10-Q")

4.3     First Supplemental Indenture, dated as of July 16, 1999, to the
        Indenture (incorporated herein by reference to Exhibit 4.1 to the
        Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
        1999; the "Company June 1999 Form 10-Q")

4.4     Second Supplemental Indenture, dated as of November 18, 1999, to the
        Indenture (incorporated herein by reference to Exhibit 99.3 to the
        Company's Report on Form 8-K dated November 19, 1999)

4.5     Credit Agreement, dated as of July 20, 1998, among the Company, the
        financial institutions party thereto and Bank of America National Trust
        and Savings Association, as agent (the "Bank of America Credit
        Agreement") (incorporated herein by reference to Exhibit 4.3 to the
        MAXXAM June 1998 Form 10-Q)

4.6     First Amendment, dated as of July 16, 1999, to the Bank of America
        Credit Agreement (incorporated herein by reference to the Company June
        1999 Form 10-Q)

4.7     Second Amendment, dated as of June 15, 2001, to the Bank of America
        Credit Agreement (incorporated herein by reference to the Company's
        Quarterly Report on Form 10-Q for the quarter ended June 30, 2001)

4.8     Deed of Trust, Security Agreement, Financing Statement, Fixture Filing
        and Assignment of Proceeds, dated as of July 20, 1998, among the
        Company, Fidelity National Title Insurance Company, as trustee, and
        State Street, as collateral agent (incorporated herein by reference to
        Exhibit 4.2 to the MAXXAM June 1998 Form 10-Q)

10.1    New Master Purchase Agreement, dated as of July 20, 1998, between the
        Company and The Pacific Lumber Company ("PACIFIC LUMBER") (incorporated
        herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
        of MAXXAM Group Holdings Inc. for the quarter ended June 30, 1998; File
        No. 333-18723; the "MGHI June 1998 Form 10-Q")

10.2    New Services Agreement, dated as of July 20, 1998, between Pacific
        Lumber and the Company (incorporated herein by reference to Exhibit 10.2
        to the MGHI June 1998 Form 10-Q)

10.3    New Additional Services Agreement, dated as of July 20, 1998, between
        the Company and Pacific Lumber (incorporated herein by reference to
        Exhibit 10.3 to the MGHI June 1998 Form 10-Q)

10.4    New Reciprocal Rights Agreement, dated as of July 20, 1998, among
        Pacific Lumber, the Company and Salmon Creek Corporation ("SALMON
        CREEK") (incorporated herein by reference to Exhibit 10.4 to the MGHI
        June 1998 Form 10-Q)

10.5    New Environmental Indemnification Agreement, dated as of July 20, 1998,
        between Pacific Lumber and the Company (incorporated herein by reference
        to Exhibit 10.5 to the MGHI June 1998 Form 10-Q)

10.6    Implementation Agreement with Regard to Habitat Conservation Plan for
        the Properties of Pacific Lumber, the Company and Salmon Creek dated as
        of February 1999 by and among the United States Department of the
        Interior Fish and Wildlife Service ("USFWS"), the National Marine
        Fisheries Service, the California Department of Fish and Game ("CDF&G"),
        the California Department of Forestry and Fire Protection (the "CDF")
        and Pacific Lumber, Salmon Creek and the Company (incorporated herein by
        reference to Exhibit 99.3 to the Company's Form 8-K dated March 19,
        1999; the "Company March 19, 1999 Form 8-K")

10.7    Agreement Relating to Enforcement of AB 1986 dated as of February 25,
        1999 by and among The California Resources Agency, CDF&G, the CDF, The
        California Wildlife Conservation Board, Pacific Lumber, Salmon Creek and
        the Company (incorporated herein by reference to Exhibit 99.4 to the
        Company March 19, 1999 Form 8-K)

10.8    Habitat Conservation Plan dated as of February 1999 for the Properties
        of Pacific Lumber, Scotia Pacific Holding Company and Salmon Creek
        (incorporated herein by reference to Exhibit 99.5 to the Company March
        19, 1999 Form 8-K)

10.9    Letter dated as of February 25, 1999 from the CDF to Pacific Lumber
        (incorporated herein by reference to Exhibit 99.8 to the Company March
        19, 1999 Form 8-K)

10.10   Letter dated as of March 1, 1999 from the CDF to Pacific Lumber
        (incorporated herein by reference to Exhibit 99.9 to the Company March
        19, 1999 Form 8-K)

10.11   Letter dated as of March 1, 1999 from the USFWS and the U.S. Department
        of Commerce National Oceanic and Atmospheric Administration to Pacific
        Lumber, Salmon Creek and the Company (incorporated herein by reference
        to Exhibit 99.10 to the Company March 19, 1999 Form 8-K)`