##### 






As filed with the Securities and
Exchange Commission on May 13, 2004

Registration No. 333-112898




---

---

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Amendment No. 2 toFORM F-4

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933


Millar Western Forest Products Ltd.

(Exact name of Registrant as specified in its charter and
translation of Registrants name into English)


Alberta, Canada
(State or other jurisdiction of
incorporation or organization)
    
    0800
(Primary standard Industrial
Classification Code Number)
    
    Not Applicable
(I.R.S. Employer
Identification No.)


_____________

16640  111 Avenue
Edmonton, Alberta T5M 2S5
(780) 486-8200
(Address and telephone number of Registrants principal executive offices)

_____________

CT Corporation
111 Eighth Avenue
13th Floor
New York, New York 10011
(212) 894-8400
(Name, address and telephone number of agent for service)

_____________

with a copy to:

Joseph R. Concini, C.A.
Millar Western Forest Products Ltd.
16640  111 Avenue
Edmonton, Alberta T5M 2S5
(780) 486-8200
    
    Brice T. Voran, Esq.
Shearman & Sterling LLP
199 Bay Street, Suite 4405
Toronto, Ontario M5L 1E8
(416) 360-8484
    
    Robert J. Turner, Q.C.
Fraser Milner Casgrain LLP
10180  101 Street
Edmonton, Alberta T5J 3V5
(780) 423-7100


_____________

Approximate date of commencement of proposed sale to the public:As soon
as practicable after the effective date of this Registration Statement.

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. o









---



The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance withSection 8(a)of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section8(a), may
determine.





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##### 



|The information in this
prospectus is not complete and may be changed. We may not sell
these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities nor a solicitation of
an offer to buy these securities in any state where the offer or
sale is not permitted.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Subject to completion
dated May 13, 2004




PROSPECTUS

(MILLAR LOGO)

Millar Western Forest Products Ltd.

Offer to Exchange

7.75% Senior Notes due 2013





for

all outstanding 7.75% Senior Notes due 2013



As of the date of the prospectus, the new notes
will not be senior to any other indebtedness.



---

The
exchange offer will expire at 5:00 p.m., New York City
time,
on                               ,
2004, unless extended.

We
do not intend to list the new notes on any national securities
exchange, and no established trading market for the new notes is
anticipated.



---




See
the section entitled Risk Factors beginning on
page 9 for a discussion of factors that you should consider
before tendering your old notes in the exchange offer.




Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.



---

The date of this prospectus
is                               ,
2004.



---



##### 



TABLE OF CONTENTS




|                                                                                          |  |      |     | 
|----------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                          |  | Page
|                                                                                          |  |     
|MARKET AND INDUSTRY DATA AND FORECASTS                                                    |  |      | ii  | 
|PRESENTATION OF OUR FINANCIAL INFORMATION                                                 |  |      | iii | 
|EXCHANGE RATE DATA                                                                        |  |      | iii | 
|PROSPECTUS SUMMARY                                                                        |  |      | 2   | 
|RISK FACTORS                                                                              |  |      | 9   | 
|SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS                                         |  |      | 19  | 
|EXCHANGE OFFER                                                                            |  |      | 20  | 
|USE OF PROCEEDS                                                                           |  |      | 29  | 
|CAPITALIZATION                                                                            |  |      | 29  | 
|SELECTED HISTORICAL FINANCIAL AND OTHER DATA                                              |  |      | 30  | 
|MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  |      | 32  | 
|OUR INDUSTRY                                                                              |  |      | 44  | 
|OUR BUSINESS                                                                              |  |      | 50  | 
|MANAGEMENT                                                                                |  |      | 64  | 
|PRINCIPAL SHAREHOLDER                                                                     |  |      | 67  | 
|RELATED PARTY TRANSACTIONS                                                                |  |      | 68  | 
|DESCRIPTION OF OUR REVOLVING CREDIT FACILITY                                              |  |      | 70  | 
|DESCRIPTION OF NOTES                                                                      |  |      | 71  | 
|INCOME TAX CONSIDERATIONS                                                                 |  |      | 116 | 
|PLAN OF DISTRIBUTION                                                                      |  |      | 118 | 
|LEGAL MATTERS                                                                             |  |      | 118 | 
|EXPERTS                                                                                   |  |      | 119 | 
|GLOSSARY OF CERTAIN TERMS AND DEFINITIONS                                                 |  |      | 120 | 







You should rely only upon the information
provided in this prospectus. We have not authorized anyone to
provide you with different information.




i



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##### 



MARKET AND INDUSTRY DATA AND
FORECASTS

This prospectus includes market share and
industry data and forecasts that we obtained from industry
publications and surveys and internal company surveys. Unless
otherwise indicated:



| |   |                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Resource Information Systems Inc., or RISI, an
    independent paper and forest products industry research firm, is
    the source for third party pulp and lumber industry data and
    forecasts; and                                                         
|
| |  | NLK Consultants Inc., or NLK, a provider of
    consulting engineering services and market research to the
    forest products industry, is the source for third party industry
    data with respect to the cost positions of BCTMP producers in
    the world.




Industry publications and surveys and forecasts
generally state that the information contained therein has been
obtained from sources that we believe to be reliable. Some data
is also based on our good faith estimates, which are derived
from our review of internal surveys, as well as independent
sources.




ii



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##### 



PRESENTATION OF OUR FINANCIAL
INFORMATION

We present our financial statements in Canadian
dollars. In this prospectus, except where otherwise indicated,
all dollar amounts are expressed in Canadian dollars, references
to $ or dollars are to Canadian dollars
and references to US$ and
U.S. dollars are to United States dollars.

Our financial statements have been prepared in
accordance with generally accepted accounting principles in
Canada, or Canadian GAAP. To the extent applicable to our
financial statements, these principles conform in all material
respects with generally accepted accounting principles in the
United States, or U.S. GAAP, except as described in
note 21 to our audited financial statements included
elsewhere in this prospectus.

EXCHANGE RATE DATA

The following table sets forth, for each period
indicated, the average of such exchange rates on the last day of
each month during such period, based on the inverse of the noon
buying rate in the City of New York for cable transfers in
Canadian dollars as certified for customs purposes by the
Federal Reserve Bank of New York:

|        |  |                         |        |      |  |      |        |      |  |      |        |      |  |  |        |  |  |  |        |  |  |  |        | 
|------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|        |  |                        
|        |  | Year ended December 31,
|        |  |                        
|        |  | 1998                    |        | 1999 |  | 2000 |        | 2001 |  | 2002 |        | 2003
|        |  |                         |        |      |  |      |        |      |  |      |        |     
|Average |  |                         | 0.6714 |      |  |      | 0.6744 |      |  |      | 0.6732 |      |  |  | 0.6444 |  |  |  | 0.6369 |  |  |  | 0.7186 | 

The following table sets forth, for each of the
last six months, for Canadian dollars expressed in
U.S. dollars, the low and high exchange rates and the
exchange rate at the end of the month based on the inverse of
the noon buying rate as described above:




|     |  |                 |        |          |  |         |        |          |  |       |        |       |  |  |        |  |  |  |        |  |  |  |        | 
|---- |  | --------------- | ------ | -------- |  | ------- | ------ | -------- |  | ----- | ------ | ----- |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|     |  |                
|     |  | Last six months
|     |  |                
|     |  | November        |        | December |  | January |        | February |  | March |        | April
|     |  |                 |        |          |  |         |        |          |  |       |        |      
|Low  |  |                 | 0.7484 |          |  |         | 0.7460 |          |  |       | 0.7496 |       |  |  | 0.7439 |  |  |  | 0.7418 |  |  |  | 0.7293 | 
|High |  |                 | 0.7708 |          |  |         | 0.7738 |          |  |       | 0.7880 |       |  |  | 0.7629 |  |  |  | 0.7645 |  |  |  | 0.7637 | 







On May 12, 2004, the inverse of the noon
buying rate was US$0.7206 = $1.00.




iii



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##### 



PROSPECTUS SUMMARY The following summary is qualified in its
entirety by reference to, and must be read in conjunction with,
the more detailed information, including the financial
statements and the notes thereto, included elsewhere in this
prospectus. Unless otherwise indicated, references to
Millar Western, we, us, or
our refer to Millar Western Forest Products Ltd. We
have no subsidiaries. References to Industries refer
to our parent company Millar Western Industries Ltd. References
to ADMT and MADMT with respect to pulp
production, sales or capacity, mean air dried metric tonnes and
thousands of air dried metric tonnes, respectively; references
to MFBM and MMFBM with respect to lumber
production, sales or capacity refer to thousands of board feet
and millions of board feet, respectively. In this prospectus,
unless otherwise indicated, all dollar amounts are stated in
Canadian dollars. References to $ or
dollars are to Canadian dollars and references to
US$ or U.S. dollars are to United
States dollars. Certain terms used in this prospectus are
defined in Glossary of Certain Terms and
Definitions. The Company We are a leading, integrated forest products
company in Alberta that produces and markets hardwood and
softwood bleached chemi-thermo-mechanical pulp, or BCTMP, and
softwood lumber. We are a leading global marketer of BCTMP, the
lowest-cost producer of BCTMP in the world and among the
lowest-cost lumber producers in Canada. As a result of our
low-cost positions, modern assets, low ongoing capital
requirements and high degree of fiber self-sufficiency, we
believe we are well positioned to benefit from any improvements
in prices for market pulp and lumber. For the year ended
December 31, 2003, we had net revenue of
$258.6 million. We own and operate three production facilities in
Alberta: a BCTMP mill and a sawmill at an integrated complex in
Whitecourt and a sawmill in Boyle. We also receive management
fees and sales commissions for managing the operations of, and
marketing all pulp produced by, a BCTMP mill near Meadow Lake,
Saskatchewan, that is jointly owned by our parent, Millar
Western Industries Ltd., or Industries, and the Province of
Saskatchewan. We believe that this relationship results in many
benefits to us, including a larger marketing presence, cost
economies of scale and optimization of operating practices. The Whitecourt pulp mill is the lowest-cost
producer of BCTMP in the world. This pulp mill produces
hardwood, softwood and blended grades of pulp and has an annual
production capacity of 285,000 ADMT. The Meadow Lake pulp mill
has an annual production capacity of 325,000 ADMT of
hardwood BCTMP. The combined annual production capacity of
610,000 ADMT represents approximately 25% of the
worlds market BCTMP capacity and we accounted for over 25%
of the worlds BCTMP sales volume in 2002. Our BCTMP is
sold internationally for use in the production of a diverse
range of paper products, including coated and uncoated printing
and writing papers, paperboard, specialty papers, tissue and
toweling. Our sawmills produce kiln-dried, dimension lumber
from spruce, pine and fir, or SPF, for the residential and
commercial construction industries. Our Whitecourt and Boyle
sawmills have an annual capacity of 225 MMFBM and
100 MMFBM, respectively, and are among the lowest-cost
sawmills in Canada. Our lumber production is sold principally in
Canada and the United States, with certain higher-margin
specialty grades sold in Japan. We supply our fiber needs primarily through
timber resources held under long-term agreements with the
Government of Alberta, which provide a high degree of fiber
self-sufficiency, security of supply and scope for progressive,
sustainable forest management practices. Our head office is located at
16640 - 111 Avenue, Edmonton, Alberta, T5M 2S5.
Our telephone number is 780-486-8200 and our facsimile number is
780-486-8282.


2



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##### 



Exchange Offer 
 On November 25, 2003, we completed a
private offering of the old notes. We entered into a
registration rights agreement with Goldman, Sachs &
Co., CIBC World Markets Corp., Harris Nesbitt Corp. and HSBC
Securities (USA) Inc., the initial purchasers in the private
offering, in which we agreed to deliver to you this prospectus
as part of the exchange offer and agreed to use our reasonable
best efforts to complete the exchange offer within
45 business days after the date the registration statement
filed with the Securities and Exchange Commission was declared
effective. You are entitled to exchange in the exchange offer
new notes for your old notes. The terms of the new notes are
identical in all material respects to the terms of the old
notes, except that the new notes will have been registered under
the Securities Act and will be issued free from any covenant
requiring registration, including terms providing for an
increase in the interest rate on the old notes upon a failure to
file or have declared effective an exchange offer registration
statement or to consummate the exchange offer by certain
dates. 
  The Exchange Offer
    
    With this exchange offer, we are offering to
    exchange an aggregate principal amount of up to
    US$190.0 million of the new notes for a like principal
    amount of the old notes.Expiration Date
    
    The exchange offer will expire at 5:00 p.m.,
    New York City time
    on                     ,
    2004, unless we, in our sole discretion, extend it. See the
    section entitled Exchange Offer  Expiration of
    the Exchange Offer; Extensions; Amendments. In no event
    will the exchange offer remain in effect more than
    30 business days from the date the registration statement
    is declared effective.Exchange Date
    
    We will exchange the old notes on the first
    business day following the expiration date. See the section
    entitled Exchange Offer  Terms of the Exchange
    Offer.Procedures for Tendering Old Securities
    
    For information on procedures for tendering old
    notes and the actions required to make a formal offering of your
    old notes, see the section entitled Exchange
    Offer  Procedures for Tendering.Taxation
    
    The exchange of the old notes for the new notes
    in the exchange offer is not a taxable exchange. As a result, a
    U.S. Holder will not recognize any gain or loss for
    U.S. federal income tax purposes upon exchanging old notes
    for new notes in the exchange offer. See the section entitled
    Income Tax Considerations  U.S. Federal
    Income Tax Considerations.Resale
    
    Based upon the position of the staff of the SEC
    as described in previous no-action letters, we believe that a
    holder who exchanges the old notes for the new securities in the
    exchange offer and satisfies certain other conditions generally
    may offer for resale, sell and otherwise transfer the new notes
    without further registration under the Securities Act and
    without delivery of a prospectus that satisfies the requirements
    of section 10 of the Securities Act.Any holder of the old notes using the exchange
    offer to participate in a distribution of the new notes cannot
    rely on the no-action letters referred to above. See the section
    entitled Exchange Offer  Purpose and Effect of
    the Exchange Offer.


3



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##### 



Remaining Old Notes
    
    If you do not tender your old notes in the
    exchange offer or if we do not accept your old notes for
    exchange as described under the section entitled Exchange
    Offer  Terms of the Exchange Offer you will
    continue to hold these old notes, and they will continue to bear
    legends restricting their transfer.Exchange Agent
    
    The Bank of New York will act as exchange agent
    for the exchange offer. See the section entitled Exchange
    Offer  Exchange Agent for the exchange
    agents address and telephone number.Use of Proceeds
    
    We will receive no proceeds from the exchange
    offer. See the section entitled Use of Proceeds. The Exchange Notes Other than the obligation to conduct an
exchange offer, the new notes will have the same financial terms
and covenants as the old notes, which are summarized as
follows:  Issuer
    
    Millar Western Forest Products Ltd.Notes Offered
    
    US$190,000,000 aggregate principal amount of
    7.75% Senior Notes due November 15, 2013.Maturity
    
    November 15, 2013.Interest
    
    The notes will bear interest from the most recent
    date to which interest has been paid on the old notes or, if no
    interest has been paid on the old notes, from November 25,
    2003Interest Payment Dates
    
    May 15 and November 15 of each year,
    commencing May 15, 2004.Ranking
    
    The notes will be general unsecured obligations
    of Millar Western and will rank equally in right of payment with
    all of our existing and future senior unsecured indebtedness. As
    of March 31, 2004, we had no indebtedness other than the
    notes.Subsidiary Guarantees
    
    We have no subsidiaries. Each of our future
    material subsidiaries, if any, will guarantee the payment of
    principal, premium, if any, and interest on the notes.Optional Redemption
    
    Before November 15, 2006, we may redeem up
    to 35% of the notes with the net cash proceeds of specified
    sales of our common shares at 107.75% of the principal amount
    plus accrued and unpaid interest to the redemption date.After November 15, 2008, we may redeem all
    or a portion of the principal amount of the notes at the
    redemption prices listed in the section Description of
    Notes  Redemption  Optional
    Redemption plus accrued and unpaid interest to the
    applicable redemption date.Tax Redemption
    
    If we become obligated to pay withholding taxes
    related to payments on the notes as a result of changes
    affecting Canadian withholding taxes, we may redeem all, but not
    less than all, of the notes at 100% of their principal amount
    plus accrued and unpaid interest to the redemption date. See


4



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##### 



Description of Notes 
    Redemption  Redemption for Changes in Canadian
    Withholding Taxes.Additional Amounts
    
    All payments with respect to the notes will be
    made without withholding or deduction for Canadian taxes unless
    required by law or the interpretation or administration thereof,
    in which case we will pay such withholding or deduction as may
    be necessary so that the net amount received by the holders
    after such withholding or deduction will not be less than the
    amount that would have been received in the absence of such
    withholding or deduction. See Description of
    Notes  Additional Amounts.Mandatory Offer to Purchase
    
    Upon the occurrence of specified types of changes
    of control and specified types of asset sales, we must offer to
    purchase the notes at the prices listed in the sections
    Description of Notes  Offers to Repurchase by
    Millar Western  Change of Control and
     Asset Sales, plus in each case accrued
    and unpaid interest to the date of purchase.Basic Covenants of the Indenture
    
    The indenture under which the notes will be
    issued will, among other things, restrict our ability to: incur additional indebtedness; pay dividends and make distributions; repurchase stock; make certain investments; transfer or sell assets; create liens; enter into transactions with
    affiliates; issue or sell stock of subsidiaries; create dividend or other payment
    restrictions affecting restricted subsidiaries; and merge, consolidate, amalgamate or
    sell all or substantially all of our assets to another person.These covenants are subject to other important
    qualifications and limitations. For more details, see the
    section Description of Notes  Certain
    Covenants.Exchange and Registration Rights Agreement
    
    Pursuant to an exchange and registration rights
    agreement, we agreed to file a registration statement on an
    appropriate form with respect to an offer to exchange the old
    notes for a new issue of debt securities with terms
    substantially similar to the old notes and which will be
    registered under the Securities Act. The exchange offer is in
    satisfaction of that agreement.If the exchange offer is not completed within
    specified time periods, special interest will accrue and be
    payable. See Description of Notes  Registration
    Rights; Special Interest.


5



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##### 



Risk Factors You should carefully consider all of the
information in this prospectus. In particular, you should read
the specific risk factors under the section entitled Risk
Factors in this prospectus, prior to making a decision to
tender your old notes in the exchange offer.


6



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##### 



Summary Historical Financial and Other
Data 
 You should read the summary historical financial
and other data set forth below in conjunction with our financial
statements and the related notes and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus. The
summary historical financial data for the years ended and as at
December 31, 2001, 2002 and 2003 are derived from our
audited financial statements. The summary historical financial
data for the three months ended and as at March 31, 2003
and 2004 have been derived from our unaudited financial
statements included elsewhere in this prospectus that include,
in the opinion of our management, all adjustments, consisting
only of normal recurring adjustments, necessary to present
fairly this unaudited financial data. The results of operations
for any interim period are not necessarily indicative of the
results of operations for the entire fiscal year. We prepare our
financial statements in accordance with Canadian GAAP, which
differs in certain respects from U.S. GAAP. For a
discussion of the principal differences between Canadian GAAP
and U.S. GAAP as they pertain to us, see note 21 to
our audited financial statements included elsewhere in this
prospectus. 
 
 Three monthsYear ended December 31,
    
    ended March 31,2001(1)
    
    2002
    
    2003
    
    2003
    
    2004(in thousands, except ratios, shipments and averagenet revenue)Statements of earnings data:Canadian GAAPNet revenue(2)
    
    $
    210,878
    
    
    $
    233,965
    
    
    $
    258,522
    
    
    $
    60,838
    
    
    $
    66,779Cost of sales
    
    
    161,863
    
    
    
    177,354
    
    
    
    197,072
    
    
    
    47,213
    
    
    
    50,233Depreciation and amortization
    
    
    16,184
    
    
    
    16,731
    
    
    
    16,601
    
    
    
    4,174
    
    
    
    3,905General and administration
    
    
    15,424
    
    
    
    13,391
    
    
    
    12,978
    
    
    
    3,520
    
    
    
    3,157Severance costs
    
    
    
    
    
    
    2,298
    
    
    
    
    
    
    
    
    
    
    
    Employees profit sharing
    
    
    
    
    
    
    
    
    
    
    325
    
    
    
    
    
    
    
    587Operating earnings
    
    
    17,407
    
    
    
    24,191
    
    
    
    31,576
    
    
    
    5,931
    
    
    
    8,897Financing expenses(3)
    
    
    25,266
    
    
    
    26,153
    
    
    
    28,672
    
    
    
    7,847
    
    
    
    3,684Refinancing charges(4)
    
    
    
    
    
    
    
    
    
    
    14,965
    
    
    
    
    
    
    
    Unrealized exchange (gain) loss on debt
    
    
    15,521
    
    
    
    (2,208
    )
    
    
    (47,768
    )
    
    
    (17,264
    )
    
    
    4,294Other expense (income)(5)
    
    
    4,415
    
    
    
    (707
    )
    
    
    (1,490
    )
    
    
    (72
    )
    
    
    (22
    )Earnings (loss) before income taxes
    
    
    (27,795
    )
    
    
    953
    
    
    
    37,197
    
    
    
    15,420
    
    
    
    941Income taxes (recovery)
    
    
    (4,325
    )
    
    
    445
    
    
    
    1,635
    
    
    
    (134
    )
    
    
    1,095Net earnings (loss)
    
    $
    (23,470
    )
    
    $
    508
    
    
    $
    35,562
    
    
    $
    15,554
    
    
    $
    (154
    )U.S. GAAPNet earnings (loss)
    
    $
    (28,038
    )
    
    $
    2,087
    
    
    $
    39,992Other data:Canadian GAAPCash provided by operating activities
    
    $
    20,649
    
    
    $
    23,136
    
    
    $
    12,452
    
    
    $
    (17,242
    )
    
    $
    (7,137
    )Shipments:Pulp (MADMT)
    
    
    236
    
    
    
    272
    
    
    
    292
    
    
    
    72
    
    
    
    76Lumber (MMFBM)
    
    
    250
    
    
    
    283
    
    
    
    342
    
    
    
    78
    
    
    
    84Average net revenue:Pulp ($ per ADMT)
    
    
    503
    
    
    
    469
    
    
    
    517
    
    
    
    497
    
    
    
    488Lumber ($ per MFBM)
    
    
    330
    
    
    
    354
    
    
    
    297
    
    
    
    298
    
    
    
    334


7



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##### 



As at December 31,
    
    As atMarch 31,2001
    
    2002
    
    2003
    
    2004(in thousands)Balance sheets data:Canadian GAAPCash
    
    $
    15,872
    
    
    $
    35,005
    
    
    $
    72,301
    
    
    $
    63,789Total assets
    
    $
    316,678
    
    
    $
    321,640
    
    
    $
    345,697
    
    
    $
    359,034Short-term debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt, including current portion
    
    $
    254,800
    
    
    $
    252,592
    
    
    $
    244,511
    
    
    $
    248,805Shareholders equity
    
    $
    1,496
    
    
    $
    2,004
    
    
    $
    37,566
    
    
    $
    37,952U.S. GAAPTotal assets
    
    $
    317,257
    
    
    $
    322,172
    
    
    $
    349,831Shareholders equity
    
    $
    449
    
    
    $
    2,536
    
    
    $
    42,528 
 
  (1)
    Comparative statement of earnings and balance
    sheet data have been restated to reflect the change in
    accounting policy with respect to unrealized foreign exchange
    gains or losses on the translation of long-term debt. See
    note 2 to our audited financial statements included
    elsewhere in this prospectus.(2)
    Net revenue is gross revenue, net of
    transportation costs, commissions and discounts, the impact of
    foreign exchange forward contracts and lumber duties.(3)
    Financing expense consists of interest expense,
    amortization of deferred financing costs and foreign exchange
    gains or losses on U.S. dollar cash and working capital.
    See note 13 to our audited consolidated financial
    statements included elsewhere in this prospectus.(4)
    Refinancing charges relate to the repurchase and
    redemption of US$160 million aggregate principal amount of
    our 9 7/8% Senior Notes due 2008. See note 14 to our
    audited consolidated financial statements included elsewhere in
    this prospectus.(5)
    Other expense (income) includes the gain or loss
    on disposal of property, plant and equipment, the provision for
    severance costs related to the new sawmill project and
    unrealized gain or loss on contracts. See note 18 to our
    audited financial statements included elsewhere in this
    prospectus.


8



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RISK FACTORS

You should carefully consider the following risk
factors, as well as the other information contained in this
prospectus, before deciding whether to tender your old notes in
the exchange offer. Any of the following risks could materially
adversely affect our business, financial condition, results of
operations and cash flows. The risk factors set forth below
(other than Absence of Public Market for the New
Notes) are generally applicable to the old notes as well
as the new notes.

Risks Related to the Notes

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




We currently have and after this offering will
continue to have a significant amount of indebtedness, comprised
solely of the notes, and significant debt service obligations.
As of March 31, 2004, the notes were not senior to any
other indebtedness. The following table sets forth our total
indebtedness, total shareholders equity, total
capitalization and ratio of total indebtedness to total
capitalization as at March 31, 2004:







|                                                        |  |   |                | 
|------------------------------------------------------- |  | - | -------------- | 
|Total indebtedness                                      |  | $ | 248.8  million | 
|Total shareholders equity                              |  |   | 38.0 million   | 
|                                                        |  |   |                | 
|Total capitalization                                    |  | $ | 286.8  million | 
|                                                        |  |   |                | 
|Ratio of total indebtedness to total
    capitalization |  |   | 86.8%          | 




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



| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make it more difficult for us to satisfy our
    obligations with respect to the notes and other indebtedness;                                                                                                                                
|
| |  | increase our vulnerability to adverse economic
    and industry conditions;                                                                                                                                                                   
|
| |  | require us to dedicate a substantial portion of
    cash from operations to the payment of debt service, thereby
    reducing the availability of cash to fund working capital,
    capital expenditures and other general corporate purposes;
|
| |  | limit our ability to obtain financing for working
    capital, capital expenditures, general corporate purposes or
    acquisitions;                                                                                                          
|
| |  | place us at a disadvantage compared to our
    competitors that have a lower degree of leverage; and                                                                                                                                          
|
| |  | limit our flexibility in planning for, or
    reacting to, changes in our business and in the forest products
    industry.                                                                                                                   

We may not generate cash flow sufficient to
service all of our obligations, including our obligations
related to the notes.

Our ability to make payments on and to refinance
our indebtedness, including the notes, and to fund our
operations, working capital and capital expenditures, depends on
our ability to generate cash in the future. Our cash flow is
subject to general economic, industry, financial, competitive,
operating, regulatory and other factors that are beyond our
control. Our business may not generate cash flow in an amount
sufficient to enable us to repay our indebtedness, including the
notes, or to fund our other liquidity needs. We estimate that we
will need to generate approximately $28 million of cash to
fund our interest and maintenance capital expenditure
requirements for the next twelve months. We may need to
refinance all or a portion

9



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of our indebtedness, including the notes, on or
before maturity. Our ability to refinance our indebtedness or
obtain additional financing will depend on, among other things:




| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | our financial condition at the time;                                                                            
|
| |  | restrictions in the indenture governing the notes
    and the terms governing our revolving credit facility; and
|
| |  | other factors, including the condition of the
    financial markets or the forest products industry.            

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

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




Although the terms governing our revolving credit
facility and the indenture governing the notes will contain
restrictions on the incurrence of additional indebtedness,
additional indebtedness incurred in compliance with these
restrictions could be substantial. As at March 31, 2004,
our revolving credit facility would have permitted additional
borrowing of up to $49.0 million. In addition, the
indenture does not prevent us from incurring obligations, such
as trade payables and operating leases, that do not constitute
indebtedness. If we incur additional indebtedness or other
obligations, the related risks that we face could be magnified.




The notes will be unsecured and effectively
subordinated to our existing and future secured indebtedness and
holders of the notes may receive less from our assets, ratably,
than holders of our secured indebtedness.




The notes will be general unsecured obligations,
ranking effectively junior in right of payment to all our
existing and future secured debt, including obligations under
our revolving credit facility, to the extent of the collateral
securing such debt. As at March 31, 2004, we would have had
no secured debt outstanding and $49.0 million available for
future borrowings under our revolving credit facility. In
addition, the indenture governing the notes will permit the
incurrence of additional debt, some of which may be secured debt.







In the event that we are declared bankrupt,
become insolvent or are liquidated or reorganized, any secured
indebtedness will be entitled to be paid in full from our assets
securing such indebtedness before any payment may be made with
respect to the notes. Holders of the notes will participate
ratably in our remaining assets with all holders of our
unsecured indebtedness that is deemed to rank equally with the
notes, and potentially with all of the other general creditors
(including trade creditors), based upon the respective amounts
owed to each holder or creditor. In any of the preceding events,
there may be insufficient assets to pay amounts due on the
notes. As a result, holders of the notes may receive less from
our assets, ratably, than holders of our secured indebtedness.




10



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

The indenture governing the notes and the terms
governing our revolving credit facility contain covenants that,
among other things, limit our ability to:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | incur additional indebtedness;                                                                      
|
| |  | pay dividends and make distributions;                                                               
|
| |  | repurchase stock;                                                                                   
|
| |  | make certain investments;                                                                           
|
| |  | transfer or sell assets;                                                                            
|
| |  | create liens;                                                                                       
|
| |  | enter into transactions with affiliates;                                                            
|
| |  | issue or sell stock of subsidiaries;                                                                
|
| |  | create dividend or other payment restrictions
    affecting restricted subsidiaries; and            
|
| |  | merge, consolidate, amalgamate or sell all or
    substantially all of our assets to another person.

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

We may be unable to purchase notes in the
event of a change of control.

Upon the occurrence of a change of control, which
is defined in the indenture and includes, among other things,
the sale or transfer of all or substantially all of our assets,
the adoption of a plan relating to our liquidation or
dissolution or a person other than the beneficial owners of
Industries obtaining control of 30% or more of our common
shares, we will be required to make an offer to purchase notes
at a price equal to 101% of their principal amount, plus accrued
and unpaid interest, if any, to the date of purchase. Any such
change of control would constitute a default under our revolving
credit facility. In addition, the terms of our revolving credit
facility prevent us from purchasing the notes. We may not have
sufficient funds to repay our revolving credit facility and make
the required offer to purchase at the time of such event. Any
future debt that we incur may also contain restrictions on the
purchase of the notes.

Certain bankruptcy and insolvency laws may
impair the trustees ability to enforce remedies under the
notes.

We are incorporated under the laws of the
Province of Alberta and substantially all of our assets are
located in Canada. Under bankruptcy laws in the United States,
courts typically have jurisdiction over a debtors
property, wherever located, including property situated in other
countries. There can be no assurance, however, that courts
outside of the United States would recognize the
U.S. bankruptcy courts jurisdiction. Accordingly,
difficulties may arise in administering a U.S. bankruptcy
case involving a Canadian debtor like us with property located
outside of the United States, and any orders or judgments of a
bankruptcy court in the United States may not be enforceable in
Canada against us.

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The rights of the trustee to enforce remedies may
be significantly impaired by the restructuring provisions of
applicable Canadian federal bankruptcy, insolvency and other
restructuring legislation if the benefit of such legislation is
sought with respect to us. For example, both the Bankruptcy and
Insolvency Act (Canada) and the Companies Creditors
Arrangement Act (Canada) contain provisions enabling an
insolvent person to obtain a stay of proceeding
against its creditors and others and to prepare and file a
proposal for consideration by all or some of its creditors to be
voted on by the various classes of its creditors. Such a
restructuring proposal, if accepted by the requisite majorities
of creditors and approved by the court, may be binding on
persons, such as holders of the notes, who may not otherwise be
willing to accept it. Moreover, this provision of the
legislation permits, in certain circumstances, an insolvent
debtor to retain possession and administration of its property,
even though it may be in default under the applicable debt
instrument.

The powers of the court under the Bankruptcy and
Insolvency Act (Canada) and particularly under the
Companies Creditors Arrangement Act (Canada) have been
exercised broadly to protect a restructuring entity from actions
taken by creditors and other parties. Accordingly, if we were to
seek protection under such Canadian bankruptcy legislation
following commencement of or during such a proceeding, payments
under the notes may be discontinued, the trustee may be unable
to exercise its rights under the indenture and holders of the
notes may not be compensated for any delays in payments, if any,
of principal and interest.

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

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

Absence of Public Market for the New
Notes.

The new notes are being offered to the holders of
old notes. The old notes were issued on November 25, 2003
to qualified institutional buyers in compliance with
Rule 144A under the Securities Act. To the extent that old
notes are tendered and accepted in the exchange offer, the
trading market for the remaining untendered old notes could be
adversely affected. There is no existing trading market for the
new notes, and there can be no assurance regarding the future
development of a market for the new notes, the ability of a
holder of the new notes to sell their new notes or the price at
which such holders may be able to sell their new notes.

Although the initial purchasers of the old notes
have informed us that they currently intend to make a market of
the new notes they are not obligated to do so, and any such
market making may be discontinued at any time without notice.
Accordingly, there can be no assurance as to the development or
liquidity of any trading market for the new notes. We do not
intend to apply for listing or quotation of the new notes on any
securities exchange or stock market.

12



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The market for the old notes may be
significantly more limited after the exchange
offer.

Because we anticipate that most holders of old
notes will elect to exchange their old notes, we expect that the
liquidity of the market for any old notes remaining after the
completion of the exchange offer may be substantially limited.
Any old notes tendered and exchanged in the exchange offer will
reduce the aggregate principal amount of the old notes
outstanding. Accordingly, the liquidity of the market for any
old notes could be adversely affected and you may be unable to
sell them. The extent of the market for the old notes and the
availability of price quotations would depend on a number of
factors, including the number of holders of old notes remaining
outstanding and the interest of securities firms in maintaining
a market in the old notes. An issue of securities with a smaller
number of units available for trading may command a lower, and
more volatile, price than would a comparable issue of securities
with a larger number of units available for trading. Therefore,
the market price for the old notes that are not exchanged may be
lower and more volatile as a result of the reduction in the
aggregate principal amount of the old notes outstanding.

Risks Related to Our Business and the Forest
Products Industry

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

Our financial performance is principally
dependent on the selling prices of, and the demand for, the pulp
and lumber products we sell. Prices and demand for such products
have fluctuated significantly in the past and may fluctuate
significantly in the future. For example, from 1999 to 2003,
pulp and lumber prices have ranged from a high of US$594 per
ADMT and US$368 per MFBM, respectively, to a low of US$407 per
ADMT and US$239 per MFBM, respectively. The markets for pulp and
lumber are highly cyclical and affected by such factors as
global economic conditions, demand for pulp and paper,
residential and commercial construction in North America and
Asia, changes in industry production capacity and inventory
levels and other factors beyond our control. Market conditions,
demand and selling prices for our products may decline from
current levels. Any prolonged or severe weakness in the market
for any of our principal products would adversely affect our
business, financial condition, results of operations and cash
flows.

Prices for lumber products, including our
products, have been and are at cyclically low levels, primarily
due to oversupply and excess capacity in North America. Prices
for pulp products, including our products, are below historical
averages, primarily due to weak general economic conditions and
paper demand in our primary markets. We are unable to determine
the degree and timing of a recovery in the prices for our
products.

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

The softwood lumber agreement, finalized in early
1996, addressed long-standing disputes between United States and
Canadian manufacturers of softwood lumber products. Effective
for five years commencing April 1, 1996, the softwood
lumber agreement permitted the annual export from British
Columbia, Alberta, Ontario and Quebec of 14.7 BFBM of softwood
lumber to the United States without duty, with additional
volumes subject to payment of graduated duties. Each company
operating in British Columbia, Alberta, Ontario and Quebec and
exporting softwood lumber to the United States was allocated a
portion of the overall quota, based on historical shipments to
the United States. The agreement expired on March 31, 2001
and was not renewed.

Following the expiration of the softwood lumber
agreement and in response to complaints of a coalition of
U.S.-based lumber producers, timber owners and trade unions, the
United States

13



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Department of Commerce and the United States
International Trade Commission rendered preliminary
determinations contending that Canadian softwood lumber was sold
at less than fair value and subsidized. As a result of these
determinations, we were required to post bonds in respect of
potential antidumping and countervailing duties on our exports
of softwood lumber to the United States at rates of 12.6% and
19.31%, respectively. In May 2002, the United States
International Trade Commission issued its final determination,
which found that Canadian imports threatened to injure the
U.S. softwood lumber industry, and imposed antidumping and
countervailing duties on softwood lumber exports to the United
States. Our combined effective duty rate is 25.6%. As a result,
we are now required to remit cash deposits in an amount equal to
the duties on our softwood lumber exports to the United States.
Such duties are subject to appeal processes before both a
binational panel under the North American Free Trade Agreement
and the World Trade Organization. Discussions are ongoing
between representatives of the Canadian and the United States
governments with a view to resolving this trade dispute.
However, we do not know what the outcome of these appeals or
discussions will be.


The existence of the duties has had a negative
effect on our net revenue and profitability. Our sales of lumber
represented approximately 39% of our net revenue for the year
ended December 31, 2003, and approximately 47% of lumber
sales were made to customers in the United States in that
period. If the duty is not reduced or if it is increased, the
profitability of our lumber operations will continue to suffer
and our lumber operations could, under certain circumstances,
become unprofitable, which would adversely affect our business,
financial condition, results of operations and cash flows.

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

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

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




The production of lumber and pulp is capital
intensive. We expect capital expenditures to be approximately
$10.0 million in 2004 and plan to make capital expenditures
of approximately $8 million per year on average for the
foreseeable future to fund maintenance capital at our existing
facilities. However, our annual capital expenditures may vary
due to fluctuations in requirements for maintenance, unforeseen
events and changes to environmental or other regulations that
require capital for compliance. Although we maintain our
production equipment with regular periodic and scheduled
maintenance, key pieces of equipment in our various production
processes may need to be repaired or replaced before such repair
or replacement is scheduled. If we do not have sufficient funds
or such repairs or replacements are delayed, the




14



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costs of repairing or replacing such equipment
and the associated downtime of the affected production line
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.


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

Our operating results are sensitive to
fluctuations in the exchange rate of the Canadian dollar to the
U.S. dollar, as prices for our products are denominated in
U.S. dollars or linked to prices quoted in
U.S. dollars. In 2003, approximately 76% of our sales were
denominated in U.S. dollars, while most of our operating
costs were incurred in Canadian dollars. Therefore, an increase
in the value of the Canadian dollar relative to the
U.S. dollar reduces the amount of revenue in Canadian
dollar terms realized by us from sales made in
U.S. dollars, which reduces our operating margin and the
cash flow available to fund our operations. From January 1,
2003 to December 31, 2003, the value of the Canadian dollar
relative to the U.S. dollar has increased by approximately
US$0.14, or 22%. Based on sales revenue for the year ended
December 31, 2003, the effect of a US$0.01 change in the
value of the Canadian dollar over the course of the year would
impact operating earnings by approximately $2.9 million.

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

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

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

We obtain approximately 76% of our fiber
requirements, based on current production capacity, from the
Millar Western Forest Management Agreement, or Millar Western
FMA, Coniferous Timber Quotas and Deciduous Timber Allocations
issued by the Alberta Minister of Sustainable Resource
Development, each of which is issued for a period of
20 years. Some of our Coniferous Timber Quotas and
carry-over volume, representing approximately 22% of our fiber
requirements, expire in 2006, and one of our Deciduous Timber
Allocations, representing approximately 4% of our fiber
requirements, expires in 2007. There is no assurance that such
quotas and allocations will be renewed or extended on acceptable
terms, if at all. In addition, the Millar Western FMA and such
quotas and allocations contain terms or conditions that could,
under certain circumstances, result in a reduction of the amount
of fiber available to us.

We obtain approximately 15% of our fiber
requirements under multi-year agreements with other forest
products companies and purchase approximately 9% in the open
market. Accordingly, our operations could be affected by changes
in the supply and demand for, and the prices of, purchased fiber.

The Government of Alberta imposes stumpage fees
on all timber harvested on government-owned land. Amendments to
legislation or regulatory regimes of the Government of Alberta
may change stumpage fee structures payable in relation to the
harvesting of timber and may increase the costs through the
imposition of additional and more stringent reforestation and
silvicultural standards. A material increase to the stumpage
rates applicable to the Millar Western FMA, our

15



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Coniferous Timber Quotas or our Deciduous Timber
Allocations could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. The costs of our fiber, including any fees charged for
fiber, logging and transportation, and market prices for
purchased fiber have historically fluctuated and could increase
in the future. Any significant increase in the cost of fiber
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.


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




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




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

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

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




In connection with a variety of operations on our
properties, we are required to make regulatory filings with
governmental agencies. Any of these agencies could delay review
of or reject any of our filings. Any delay associated with a
filing could result in a delay or restriction in operating our
mills or logging operations, any of which could have an adverse
effect on our operating results. For example, our pulp and
lumber facilities at Whitecourt operate under approvals granted
by an agency of the Government of Alberta. These approvals
expire in November 2004 and February 2006, respectively. Our
ability to operate these facilities depends on maintaining these
approvals. If we are unable to extend or renew either approval
or any other material license or permit, or if there is a delay
in renewing such approvals, licenses or permits, our business,
financial condition, results of operations and cash flows could
be materially adversely affected.




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Our sole shareholder has the ability to
direct our operations and its interests may conflict with the
interests of the noteholders.

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

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

Our business is subject to the risks of operating
pulp mills and sawmills and logging, such as unforeseen
equipment breakdowns, power failures, fires, environmental
issues, severe weather or any other event, which could result in
a temporary or prolonged shutdown of any of our operations. A
shutdown at any of our operations could materially adversely
affect our business, financial condition, results of operations
and cash flows. Although we maintain insurance, including
business interruption insurance, we may incur losses beyond the
limits of, or outside the coverage of, such insurance. From time
to time, various types of insurance for companies in the pulp
and lumber industries have not been available on commercially
acceptable terms or, in some cases, have been unavailable. For
example, we do not insure and cannot get insurance against
losses of standing timber from any cause, including fire, and
insurance against certain environmental risks is not available
on commercially acceptable terms. In addition, premiums for our
existing coverage may increase substantially and we may be
unable to maintain our current insurance coverage.

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

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

The power purchase rights effectively reduce our
exposure to fluctuations in market electricity rates. In 2003,
we estimate that the power purchase rights provided us savings
of $17.6 million compared to what we would have paid at
market rates, and therefore comprised a meaningful component of
our operating performance. The agreements governing our power
purchase rights contain termination provisions which are
effective upon the occurrence of a force majeure event. If our
power purchase rights were terminated, we would be exposed to
fluctuations in market electricity rates, which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows. Although all parties to
the PPAs, including us, have provided financial commitments in
relation to the agreements, the other parties to the agreements
may fail to perform their obligations over the term of the
agreements, which could diminish the benefits we receive from
the arrangements. A failure by EPCOR Utilities Inc., in
particular, could adversely affect the savings we realize from
the power purchase rights.

17



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##### 



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

18



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##### 



SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

This prospectus contains forward-looking
statements. These forward-looking statements are not based on
historical facts but, rather, on our current expectations and
our projections about future events, including our current
expectations regarding:



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | the future demand for, and sales volumes of, our
    lumber and pulp products;                                       
|
| |  | future production volumes, efficiencies and
    operating costs;                                                     
|
| |  | increases or decreases in the prices of our
    products;                                                            
|
| |  | our future stability and growth prospects;                                                                           
|
| |  | our business strategies, the measures to
    implement those strategies and the benefits to be derived
    therefrom;
|
| |  | our future profitability and capital needs,
    including capital expenditures;                                      
|
| |  | the outlook for and other future developments in
    our affairs or in the industries in which we participate; and   
|
| |  | the effect on us of new accounting releases.                                                                         

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

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

19



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##### 



EXCHANGE OFFER

Purpose and Effect of the Exchange
Offer

The exchange offer will give holders of old notes
the opportunity to exchange the new notes that have been
registered under the Securities Act, for old notes, which were
issued and sold on November 25, 2003 to the initial
purchasers, Goldman, Sachs & Co., CIBC World Markets
Corp., Harris Nesbitt Corp. and HSBC Securities (USA) Inc., for
resale to qualified institutional buyers and non-U.S. persons.
The terms of the new notes will be identical in all material
respects to the terms of the old notes except that the new notes
will have been registered under the Securities Act and will be
issued free from any provision for an increase in the interest
rate on the old notes upon a failure to file or have declared
effective an exchange offer registration statement or to
consummate the exchange offer by certain dates and the new notes
will not bear legends restricting their transfer.

The exchange offer is not being made to, nor will
we accept tenders for exchange from, holders of old notes in any
jurisdiction in which the exchange offer or the acceptance of it
would not be in compliance with the securities or blue sky laws
of the jurisdiction.

Resale of New Notes

We believe that new notes issued in connection
with the exchange offer in exchange for old notes may be offered
for resale, resold and otherwise transferred by any holder of
new notes without further registration under the Securities Act
and without delivery of a prospectus that satisfies the
requirements of section 10 of the Securities Act if:



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | the holder is not a broker dealer or our
    affiliate within the meaning of Rule 405 under
    the Securities Act;
|
| |  | the new notes are acquired in the ordinary course
    of the holders business; and                                  
|
| |  | the holder does not intend to participate in a
    distribution of the new notes.                                    

Any holder who exchanges old notes in the
exchange offer with the intention of participating in any manner
in a distribution of the new notes must comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with secondary resale transactions.

This prospectus may be used for an offer to
resell, resale or other retransfer of new notes. With regard to
broker-dealers, only broker-dealers that acquired the old notes
as a result of market-making activities or other trading
activities may participate in the exchange offer. Each
broker-dealer that receives new notes for its own account in
exchange for old notes, where the old notes were acquired by the
broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of the new notes.
Please read the section entitled Plan of
Distribution for more details regarding the transfer of
new notes.

Terms of the Exchange Offer

Upon the terms and subject to the conditions set
forth in this prospectus and in the letter of transmittal, we
will accept for exchange any old notes properly tendered and not
withdrawn before expiration of the exchange offer. The date of
acceptance for exchange of the old notes and completion of the
exchange offer is the exchange date, which will be the first
business day following the expiration date unless we extend the
date as described in this prospectus. We will issue US$1,000
principal amount of new notes in exchange for each US$1,000
principal amount of old notes surrendered under the exchange
offer. Old notes may be tendered only in integral multiples of
US$1,000. The new notes will be delivered promptly following the
expiration date.

20



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##### 



The new notes will evidence the same debt as the
old notes. The new notes will be issued under and entitled to
the benefits of the same indenture that authorized the issuance
of the old notes. Consequently, the old notes and the new notes
will be treated as a single series of debt securities under the
indenture. For a description of the indenture, see the section
entitled Description of Notes.

The exchange offer is not conditioned upon any
minimum aggregate principal amount of old notes being tendered
for exchange.

As of the date of this prospectus, US$190,000,000
aggregate principal amount of the old notes are outstanding.
This prospectus and the letter of transmittal are being sent to
all registered holders of old notes. There will be no fixed
record date for determining registered holders of old notes
entitled to participate in the exchange offer.

We intend to conduct the exchange offer in
accordance with the applicable requirements of the Securities
Act, the Exchange Act and the rules and regulations of the SEC.
Old notes that are not exchanged in the exchange offer will
remain outstanding and continue to accrue interest and will be
entitled to the rights and benefits their holders have under the
indenture relating to the old notes and the new notes.

We will be deemed to have accepted for exchange
properly tendered old notes when we have given oral or written
notice of the acceptance to the exchange agent. The exchange
agent will act as agent for the holders of old notes who
surrender them in the exchange offer for the purposes of
receiving the new notes from us and delivering the new notes to
their holders. The exchange agent will make the exchange
promptly following the expiration date. This exchange date will
be the first business day following the expiration date unless
it is extended as described in this prospectus. We expressly
reserve the right to amend or terminate the exchange offer, and
not to accept for exchange any old notes not previously accepted
for exchange, upon the occurrence of any of the conditions
specified below under the subsection entitled
 Conditions.

Holders who tender old notes in the exchange
offer will not be required to pay brokerage commissions or fees
or, subject to the instructions in the letter of transmittal,
transfer taxes with respect to the exchange of old notes. We
will pay all charges and expenses, other than applicable taxes
described below, in connection with the exchange offer. It is
important that you read the subsection entitled
 Fees and Expenses for more details
regarding fees and expenses incurred in the exchange offer.

Expiration of the Exchange Offer; Extensions;
Amendments




The exchange offer will expire at 5:00 p.m.,
New York City time,
on                     ,
2004. The exchange offer can be extended by us in our sole
discretion, in which case the term expiration date
will mean the latest date and time to which the exchange offer
is extended. In no event will the exchange offer remain in
effect more than 30 business days from the date the
registration statement is declared effective.




In order to extend the exchange offer, we will
notify the exchange agent orally, confirmed in writing, or in
writing of any extension. We will notify the registered holders
of old notes by public announcement of the extension no later
than 9:00 a.m., New York City time, on the business
day after the previously scheduled expiration of the exchange
offer.

Without limiting the manner in which we may
choose to make public announcements of any delay in acceptance,
extension, termination or amendment of the exchange offer, we
will have no obligation to publish, advertise, or otherwise
communicate any public announcement, other than by making a
timely release to a financial news service.

21



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##### 



Conditions

We will not be obligated to accept for exchange
the old notes of any holder that has not made to us:



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the representations described under the
    subsections entitled  Purpose and Effect of the
    Exchange Offer,  Procedures for
    Tendering; and
|
| |  | any other representations that may be reasonably
    requested in order to comply with applicable laws.                                                 

We expressly reserve the right, at any time or at
various times, to extend the period of time during which the
exchange offer is open. Consequently, we may delay acceptance of
any old notes by giving oral or written notice of an extension
to the holders. During an extension, all old notes previously
tendered will remain subject to the exchange offer, and we may
accept them for exchange. We will return any old notes that we
do not accept for exchange for any reason without expense to
their tendering holder promptly after the expiration or
termination of the exchange offer.




We expressly reserve the right to amend the
exchange offer or terminate the exchange offer in the event that
a condition is not satisfied or waived and to reject for
exchange any old notes not previously accepted for exchange. By
public announcement, in compliance with Rule 14e-1(d), we
will give oral or written notice of any extension, amendment,
non-acceptance or termination to the holders of the old notes no
later than 9:00 a.m., New York City time, on the business
day after the previously scheduled expiration of the exchange
offer. If we amend the exchange offer in a manner that we
consider material, we will disclose the amendment by means of a
prospectus supplement.







These conditions are solely for our benefit and
we may assert them regardless of the circumstances that may give
rise to them in our sole discretion. If we fail at any time to
exercise any of the preceding rights, this failure will not
constitute a waiver of that right. All conditions to the
exchange offer, other than those dependent upon receipt of
governmental regulatory approval, must be satisfied or waived by
us prior to the expiration of the exchange offer.




We will not accept for exchange any old notes
tendered, and will not issue new notes in exchange for any old
notes, if at that time a stop order is threatened or in effect
with respect to the registration statement of which this
prospectus constitutes a part or the qualification of the
indenture governing the notes under the Trust Indenture Act.

If the Exchange Offer is being registered for the
purpose of secondary resales, any securityholder using the
Exchange Offer to participate in a distribution of the Exchange
Notes (1) could not rely on the staff position enunciated in
Exxon Capital or similar letters and (2) must comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction.

Procedures for Tendering

Only a holder of record of old notes may tender
old notes in the exchange offer. To tender in the exchange
offer, a holder must:



| |   |                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | complete, sign and date the letter of
    transmittal, or a facsimile of the letter of transmittal; have
    the signature on the letter of transmittal guaranteed if the
    letter of transmittal so requires; and deliver the letter of
    transmittal or facsimile to the exchange agent prior to the
    expiration date; or
|
| |  | comply with DTCs Automated Tender Offer
    Program procedures described below.                                                                                                                                                                                                                                                  

22



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In addition, either:



| |   |                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the exchange agent must receive old notes along
    with the letter of transmittal;                                                                                                                                                                                                                               
|
| |  | the exchange agent must receive, before
    expiration of the exchange offer, a properly transmitted
    agents message and a timely confirmation of book-entry
    transfer of old notes into the exchange agents account at
    DTC according to the procedure for book-entry transfer described
    below; or
|
| |  | the holder must comply with the guaranteed
    delivery procedures described below.                                                                                                                                                                                                                               

To be tendered effectively, the exchange agent
must receive any physical delivery of the letter of transmittal
and other required documents at the address set forth below
under the subsection entitled  Exchange
Agent before expiration of the exchange offer. To receive
confirmation of a valid tender of old notes, a holder should
contact the exchange agent at the telephone number listed under
the subsection entitled  Exchange Agent.

The tender by a holder that is not withdrawn
before expiration of the exchange offer will constitute an
agreement between that holder and us in accordance with the
terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal. If a holder tenders less than
all of the old notes held by the holder, that tendering holder
should fill in the applicable box of the letter of transmittal.
The amount of old notes delivered to the exchange agent will be
deemed to have been tendered unless otherwise indicated.

The method of delivery of old notes, the
letter of transmittal and all other required documents to the
exchange agent is at the holders election and risk. Rather
than mail these items, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should
allow sufficient time to assure delivery to the exchange agent
before expiration of the exchange offer. Holders should not send
the letter of transmittal or old notes to us. Holders may
request their respective brokers, dealers, commercial banks,
trust companies or other nominees to effect the above
transactions for them.

Any beneficial owner whose old notes are
registered in the name of a broker, dealer, commercial bank
trust company or other nominee and who wishes to tender should
contact the registered holder promptly and instruct it to tender
on the owners behalf. If the beneficial owner wishes to
tender on its own behalf, it must, prior to completing and
executing the letter of transmittal and delivering its old
notes, either:



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | make appropriate arrangements to register
    ownership of the old notes in the owners name; or
|
| |  | obtain a properly completed bond power from the
    registered holder of old notes.             

The transfer of registered ownership may take
considerable time and may not be completed prior to the
expiration date.

If the letter of transmittal is signed by the
record holder(s) of the old notes tendered, the signature must
correspond with the name(s) written on the face of the old note
without alteration, enlargement or any change whatsoever. If the
letter of transmittal is signed by a participant in DTC, the
signature must correspond with the name as it appears on the
security position listing as the holder of the old notes.

A signature on a letter of transmittal or a
notice of withdrawal must be guaranteed by an eligible guarantor
institution. Rule 17Ad-15 under the Exchange Act describes
eligible guarantor institutions as banks, brokers, dealers,
municipal securities dealers, municipal securities brokers,
government securities dealers, government securities brokers,
credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings
associations. The

23



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signature need not be guaranteed by an eligible
guarantor institution if the old notes are tendered:




| |   |                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | by a registered holder who has not completed the
    box entitled Special Registration Instructions or
    Special Delivery Instructions on the letter of
    transmittal; or
|
| |  | for the account of an eligible institution.                                                                                                                                      

If the letter of transmittal is signed by a
person other than the registered holder of any old notes, the
old notes must be endorsed or accompanied by a properly
completed bond power. The bond power must be signed by the
registered holder as the registered holders name appears
on the old notes and an eligible institution must guarantee the
signature on the bond power.

If the letter of transmittal or any old notes or
bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, these persons
should so indicate when signing. Unless we waive this
requirement, they should also submit evidence satisfactory to us
of their authority to deliver the letter of transmittal.

The exchange agent and DTC have confirmed that
any financial institution that is a participant in DTCs
system may use DTCs Automated Tender Offer Program to
tender. Participants in the program may, instead of physically
completing and signing the letter of transmittal and delivering
it to the exchange agent, transmit their acceptance of the
exchange offer electronically. They may do so by causing DTC to
transfer the old notes to the exchange agent in accordance with
its procedures for transfer. DTC will then send an agents
message to the exchange agent. The term agents
message means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry
confirmation, to the effect that:



| |   |                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | DTC has received an express acknowledgment from a
    participant in its Automated Tender Offer Program that is
    tendering old notes that are the subject of the book-entry
    confirmation;                                                                                                  
|
| |  | the participant has received and agrees to be
    bound by the terms of the letter of transmittal or, in the case
    of an agents message relating to guaranteed delivery, that
    the participant has received and agrees to be bound by the
    applicable notice of guaranteed delivery; and
|
| |  | the agreement may be enforced against the
    participant.                                                                                                                                                                                                                                        

We will determine in our sole discretion all
questions as to the validity, form, eligibility, including time
of receipt, acceptance and withdrawal of tendered old notes. Our
determination will be final and binding. We reserve the absolute
right to reject any old notes not properly tendered or any old
notes the acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular
old notes. Our interpretation of the terms and conditions of the
exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties.

Unless waived, any defects or irregularities in
connection with tenders of old notes must be cured within the
time that we determine. Although we intend to notify holders of
defects or irregularities with respect to tenders of old notes,
neither we, the exchange agent nor any other person will incur
any liability for failure to give notification. Tenders of old
notes will not be deemed made until those defects or
irregularities have been cured or waived. Any old notes received
by the exchange agent that are not properly tendered and as to
which the defects or irregularities have not been cured or
waived will be returned by the exchange agent without cost to
the tendering holder, unless otherwise provided in the letter of
transmittal, as soon as practicable following the expiration
date.

24



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In all cases, we will issue new notes for old
notes that we have accepted for exchange under the exchange
offer only after the exchange agent timely receives:



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | old notes or a timely book-entry confirmation
    that old notes have been transferred into the exchange
    agents account at DTC; and        
|
| |  | a properly completed and duly executed letter of
    transmittal and all other required documents or a properly
    transmitted agents message.

Holders should receive a copy of the letter of
transmittal with this prospectus. A holder may obtain additional
copies of the letter of transmittal from the exchange
agents offices listed under the subsection entitled
 Exchange Agent. By signing the letter of
transmittal, each tendering holder of old notes will represent
to us that, among other things:



| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | any new notes that the holder receives will be
    acquired in the ordinary course of its business;                                                                                                                                                                                                                                                                                      
|
| |  | the holder has no arrangement or understanding
    with any person or entity to participate in the distribution of
    the new notes;                                                                                                                                                                                                                                                    
|
| |  | if the holder is a broker-dealer that will
    receive new notes for its own account in exchange for old notes
    that were acquired as a result of market-making activities or
    other trading activities, that it will deliver a prospectus, as
    required by law, in connection with any resale of those new
    notes (see the section entitled Plan of
    Distribution); and
|
| |  | the holder is not an affiliate, as
    defined in Rule 405 of the Securities Act, of us.                                                                                                                                                                                                                                                                                               

Book-entry Transfer

The exchange agent will make a request to
establish an account with respect to the old notes at DTC for
purposes of the exchange offer promptly after the date of this
prospectus. Any financial institution participating in
DTCs system may make book-entry delivery of old notes by
causing DTC to transfer old notes into the exchange agents
account at DTC in accordance with DTCs procedures for
transfer. Holders of old notes who are unable to deliver
confirmation of the book-entry transfer of their old notes into
the exchange agents account at DTC or all other documents
required by the letter of transmittal to the exchange agent on
or prior to the expiration date must tender their old notes
according to the guaranteed delivery procedures described below.

Guaranteed Delivery Procedures

Holders wishing to tender their old notes but
whose old notes are not immediately available or who cannot
deliver their old notes, the letter of transmittal or any other
required documents to the exchange agent or cannot comply with
the applicable procedures under DTCs Automated Tender
Offer Program before expiration of the exchange offer may tender
if:



| |   |                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the tender is made through an eligible guarantor
    institution;                                                                                                                                                                                                                                                                           
|
| |  | before expiration of the exchange offer, the
    exchange agent receives from the eligible guarantor institution
    either a properly completed and duly executed notice of
    guaranteed delivery, by facsimile transmission, mail or hand
    delivery, or a properly transmitted agents message and
    notice of guaranteed delivery:



| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | setting forth the name and address of the holder
    and the registered number(s) and the principal amount of old
    notes tendered;                                                          
|
| |  | stating that the tender is being made by
    guaranteed delivery; and                                                                                                                          
|
| |  | guaranteeing that, within three New York Stock
    Exchange trading days after expiration of the exchange offer,
    the letter of transmittal, or facsimile thereof, together with
    the old

25



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##### 



| |  |                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | notes or a book-entry confirmation, and any other
    documents required by the letter of transmittal will be
    deposited by the eligible guarantor institution with the
    exchange agent; and



| |   |                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the exchange agent receives the properly
    completed and executed letter of transmittal or facsimile
    thereof, as well as all tendered old notes in proper form for
    transfer or a book-entry confirmation, and all other documents
    required by the letter of transmittal, within three New York
    Stock Exchange trading days after expiration of the exchange
    offer.

Upon request to the exchange agent, a notice of
guaranteed delivery will be sent to holders who wish to tender
their old notes according to the guaranteed delivery procedures
set forth above.

Withdrawal of Tenders

Except as otherwise provided in this prospectus,
holders of old notes may withdraw their tenders at any time
before expiration of the exchange offer.

For a withdrawal to be effective:



| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the exchange agent must receive a written notice
    of withdrawal, which may be by telegram, telex, facsimile
    transmission or letter, at one of the addresses set forth below
    under the subsection entitled  Exchange
    Agent; or
|
| |  | holders must comply with the appropriate
    procedures of DTCs Automated Tender Offer Program system.                                                                                                                                        

Any notice of withdrawal must:



| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | specify the name of the person who tendered the
    old notes to be withdrawn;                                                                                            
|
| |  | identify the old notes to be withdrawn, including
    the principal amount of the old notes to be withdrawn; and                                                          
|
| |  | where certificates for old notes have been
    transmitted, specify the name in which the old notes were
    registered, if different from that of the withdrawing holder.

If certificates for old notes have been delivered
or otherwise identified to the exchange agent, then, prior to
the release of those certificates, the withdrawing holder must
also submit:



| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the serial numbers of the particular certificates
    to be withdrawn; and                                                                            
|
| |  | a signed notice of withdrawal with signatures
    guaranteed by an eligible institution, unless the withdrawing
    holder is an eligible institution.

If old notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at
DTC to be credited with the withdrawn old notes and otherwise
comply with the applicable DTC procedures.




We will determine all questions as to the
validity, form and eligibility, including time of receipt, of
notices of withdrawal, and our determination will be final and
binding on all parties. We will deem any old notes so withdrawn
not to have been validly tendered for exchange for purposes of
the exchange offer. We will return any old notes that have been
tendered for exchange but that are not exchanged for any reason
to their holder without cost to the holder. In the case of old
notes tendered by book-entry transfer into the exchange
agents account at DTC according to the procedures
described above, those old notes will be credited to an account
maintained with DTC for old notes, as soon as practicable after
withdrawal, rejection of tender or termination of the exchange
offer. You may retender properly withdrawn old notes by
following one of the procedures described under the subsection
entitled  Procedures for Tendering above
at any time on or before expiration of the exchange offer.




26



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##### 



A holder may obtain a form of the notice of
withdrawal from the exchange agent at its offices listed under
the subsection entitled  Exchange Agent.

Exchange Agent

The Bank of New York has been appointed as
exchange agent for the exchange offer. You should direct
questions and requests for assistance, requests for additional
copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery or the notice of
withdrawal to the exchange agent addressed as follows:

By Mail, Hand Delivery or Overnight
Courier:

The Bank of New York


Corporate Trust Operations 
Reorganization Unit


101 Barclay Street  7 East


New York, New York 10286


Attention: Mr. William Buckley


By Facsimile Transmission:

212-298-1915


Attention: Mr. William Buckley


For Information or Confirmation by
Telephone:

212-815-5788


Delivery of the letter of transmittal to an
address other than as shown above or transmission via facsimile
other than as set forth above does not constitute a valid
delivery of the letter of transmittal.

Fees and Expenses

We will bear the expenses of soliciting tenders.
The principal solicitation is being made by mail; however, we
may make additional solicitations by telegraph, telephone or in
person by our officers and regular employees and those of our
affiliates.

We have not retained any dealer-manager in
connection with the exchange offer and will not make any
payments to broker-dealers or others soliciting acceptances of
the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it
for its related reasonable out-of-pocket expenses.

We will pay the expenses to be incurred in
connection with the exchange offer, including the following:



| |   |                                                         
| | - | --------------------------------------------------------
| |  | SEC registration fees;                                  
|
| |  | fees and expenses of the exchange agent and
    trustee;
|
| |  | accounting and legal fees; and                          
|
| |  | printing and mailing costs.                             

Transfer Taxes

We will pay all transfer taxes, if any,
applicable to the exchange of old notes under the exchange
offer. The tendering holder, however, will be required to pay
any transfer taxes, whether imposed on the registered holder or
any other person, if:



| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | certificates representing old notes for principal
    amounts not tendered or accepted for exchange are to be
    delivered to, or are to be issued in the name of, any person
    other than the registered holder of old notes tendered;

27



---



##### 





| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | new notes are to be delivered to, or issued in
    the name of, any person other than the registered holder of the
    old notes;
|
| |  | tendered old notes are registered in the name of
    any person other than the person signing the letter of
    transmittal; or  
|
| |  | a transfer tax is imposed for any reason other
    than the exchange of old notes under the exchange offer.                      

If satisfactory evidence of payment of transfer
taxes is not submitted with the letter of transmittal, the
amount of any transfer taxes will be billed to the tendering
holder.

Accounting Treatment

We will record the new notes in our accounting
records at the same carrying value as the old notes, which is
the aggregate principal amount, as reflected in our accounting
records on the date of exchange. Accordingly, we will not
recognize any gain or loss for accounting purposes in connection
with the exchange offer. We will record the expenses of the
exchange offer as deferred financing costs, which will be
amortized over the term of the new notes.

Other

Participation in the exchange offer is voluntary,
and you should carefully consider whether to accept. We urge you
to consult your financial and tax advisors in making your own
decision on what action to take.

We may in the future seek to acquire old notes in
open-market or privately negotiated transactions, through
subsequent exchange offers or otherwise. However, we have no
present plans to acquire any old notes that are not tendered in
the exchange offer or to file a registration statement to permit
resales of any untendered old notes.

28



---



##### 



USE OF PROCEEDS

On November 25, 2003, we issued the old
notes and received net proceeds of approximately
$243.5 million. We used approximately $221.0 million
of the net proceeds to purchase or redeem all of our 9 7/8%
Senior Notes due 2008, including related premiums and fees. The
remaining net proceeds from the offering of the old notes have
been or will be used for general corporate purposes. We will not
receive any cash proceeds from the issuance of the new notes in
the exchange offer. In consideration for issuing the new notes
as contemplated by this prospectus, we will receive the old
notes in like principal amount. The old notes surrendered in
exchange for the new notes will be retired and cancelled and
cannot be reissued. Accordingly, the issuance of the new notes
will not result in any increase in our indebtedness or capital
stock.

CAPITALIZATION

The following table sets forth our capitalization
as at December 31, 2003. This table should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Description of Our Revolving Credit Facility and the
financial statements and related notes appearing elsewhere in
this prospectus.




|                                  |            |                      |         |         |         | 
|--------------------------------- | ---------- | -------------------- | ------- | ------- | ------- | 
|                                  |            | As at               
|                                  |            | March 31, 2004      
|                                  |            |                     
|                                  |            | (in thousands)      
|Debt (including current portion): |            |                      |         |        
|Revolving credit facility(1)      |            | $                    |        |        
|7.75% Senior Notes due 2013       |            |                      | 248,805 |        
|                                  |            |                      |         |        
|                                  | Total debt |                      |         | 248,805 |        
|Shareholders equity              |            |                      | 37,952  |        
|                                  |            |                      |         |        
|                                  |            | Total capitalization |         | $       | 286,757 | 
|                                  |            |                      |         |        










|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our revolving credit facility has total
    commitments of $50 million. Borrowings under our revolving
    credit facility are subject to a borrowing base calculation
    based on our accounts receivables and inventories. As at
    March 31, 2004, we would have been permitted to borrow
    approximately $49.0 million, before taking into account
    $4.1 million reserved for outstanding letters of credit.
    Our revolving credit facility is collateralized by our accounts
    receivable and inventory.




29



---



##### 



SELECTED HISTORICAL FINANCIAL AND OTHER
DATA

You should read the selected historical financial
and other data set forth below in conjunction with our financial
statements and the related notes and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus. The
selected historical financial data for the years ended and as at
December 31, 1999, 2000, 2001, 2002 and 2003 are derived
from our audited financial statements.




The selected historical financial data for the
three months ended and as at March 31, 2003 and 2004 have
been derived from our unaudited financial statements included
elsewhere in this prospectus that include, in the opinion of our
management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly this unaudited
financial data. The results of operations for any interim period
are not necessarily indicative of the results of operations for
the entire fiscal year.




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




|                                        |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |      |         |        |   |   |         |         |   |   |         |         |   |   |        |        |  
|--------------------------------------- | -------------------- | -------------------------------------------------------------------------- | ------- | --------------- | - | ------- | ------- | ------- | - | ---- | ------- | ------- | - | ---- | ------- | ------ | - | - | ------- | ------- | - | - | ------- | ------- | - | - | ------ | ------ | -
|                                        |                      |                                                                            |         |                 |   |         |         |         |   |      |         |        
|                                        |                      |                                                                            |         | Three months   
|                                        |                      | Year ended December 31,                                                    |         | ended March 31,
|                                        |                      |                                                                            |         |                
|                                        |                      | 1999(1)                                                                    |         | 2000(1)         |   | 2001(1) |         | 2002    |   | 2003 |         | 2003    |   | 2004
|                                        |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |     
|                                        |                      |                                                                           
|                                        |                      | (in thousands, except per share amounts, ratios, shipments and average net
|                                        |                      | revenue)                                                                  
|Statements of earnings data:            |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |      |         |        |   |   |         |         |   |   |         |         |   |   |        |       
|Canadian GAAP                           |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |      |         |        |   |   |         |         |   |   |         |         |   |   |        |       
|Net revenue(2)                          |                      | $                                                                          | 238,231 |                 |   | $       | 297,571 |         |   | $    | 210,878 |         |   | $    | 233,965 |        |   | $ | 258,522 |         |   | $ | 60,838  |         |   | $ | 66,779 |       
|Cost of sales                           |                      |                                                                            | 175,045 |                 |   |         | 199,410 |         |   |      | 161,863 |         |   |      | 177,354 |        |   |   | 197,072 |         |   |   | 47,213  |         |   |   | 50,233 |       
|Depreciation and amortization           |                      |                                                                            | 17,363  |                 |   |         | 15,807  |         |   |      | 16,184  |         |   |      | 16,731  |        |   |   | 16,601  |         |   |   | 4,174   |         |   |   | 3,905  |       
|General and administration              |                      |                                                                            | 13,457  |                 |   |         | 12,498  |         |   |      | 15,424  |         |   |      | 13,391  |        |   |   | 12,978  |         |   |   | 3,520   |         |   |   | 3,157  |       
|Severance costs                         |                      |                                                                            |        |                 |   |         |        |         |   |      |        |         |   |      | 2,298   |        |   |   |        |         |   |   |        |         |   |   |       |       
|Employees profit sharing               |                      |                                                                            | 453     |                 |   |         | 4,358   |         |   |      |        |         |   |      |        |        |   |   | 325     |         |   |   |        |         |   |   | 587    |       
|                                        |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |      |         |        |   |   |         |         |   |   |         |         |   |   |        |       
|Operating earnings                      |                      |                                                                            | 31,913  |                 |   |         | 65,498  |         |   |      | 17,407  |         |   |      | 24,191  |        |   |   | 31,576  |         |   |   | 5,931   |         |   |   | 8,897  |       
|Financing expenses(3)                   |                      |                                                                            | 26,989  |                 |   |         | 25,596  |         |   |      | 25,266  |         |   |      | 26,153  |        |   |   | 28,672  |         |   |   | 7,847   |         |   |   | 3,684  |       
|Refinancing charges(4)                  |                      |                                                                            |        |                 |   |         |        |         |   |      |        |         |   |      |        |        |   |   | 14,965  |         |   |   |        |         |   |   |       |       
|Unrealized exchange (gain) loss on debt |                      |                                                                            | (15,393 | )               |   |         | 6,960   |         |   |      | 15,521  |         |   |      | (2,208  | )      |   |   | (47,768 | )       |   |   | (17,264 | )       |   |   | 4,294  |       
|Other expense (income)(5)               |                      |                                                                            | 10      |                 |   |         | 2,664   |         |   |      | 4,415   |         |   |      | (707    | )      |   |   | (1,490  | )       |   |   | (72     | )       |   |   | (22    | )     
|                                        |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |      |         |        |   |   |         |         |   |   |         |         |   |   |        |       
|Earnings (loss) before income taxes     |                      |                                                                            | 20,305  |                 |   |         | 30,278  |         |   |      | (27,795 | )       |   |      | 953     |        |   |   | 37,197  |         |   |   | 15,420  |         |   |   | 941    |       
|Income taxes (recovery)                 |                      |                                                                            | (2,893  | )               |   |         | 14,279  |         |   |      | (4,325  | )       |   |      | 445     |        |   |   | 1,635   |         |   |   | (134    | )       |   |   | 1,095  |       
|                                        |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |      |         |        |   |   |         |         |   |   |         |         |   |   |        |       
|Net earnings (loss)                     |                      | $                                                                          | 23,198  |                 |   | $       | 15,999  |         |   | $    | (23,470 | )       |   | $    | 508     |        |   |   | 35,562  |         |   | $ | 15,554  |         |   | $ | (154   | )     
|                                        |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |      |         |        |   |   |         |         |   |   |         |         |   |   |        |       
|U.S. GAAP                               |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |      |         |        |   |   |         |         |   |   |         |         |   |   |        |       
|Operating earnings                      |                      |                                                                            |         |                 |   | $       | 62,798  |         |   | $    | 17,407  |         |   | $    | 24,191  |        |   | $ | 31,576  |         |   |   |         |         |   |   |        |       
|Net earnings (loss)                     |                      |                                                                            |         |                 |   | $       | 18,206  |         |   | $    | (28,038 | )       |   | $    | 2,087   |        |   | $ | 39,992  |         |   |   |         |         |   |   |        |       
|Other data:                             |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |      |         |        |   |   |         |         |   |   |         |         |   |   |        |       
|Canadian GAAP                           |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |      |         |        |   |   |         |         |   |   |         |         |   |   |        |       
|Cash provided by (used in):             |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |      |         |        |   |   |         |         |   |   |         |         |   |   |        |       
|                                        | Operating activities |                                                                            | $       | 13,802          |   |         | $       | 50,794  |   |      | $       | 20,649  |   |      | $       | 23,136 |   |   | $       | 12,452  |   |   | $       | (17,242 | ) |   | $      | (7,137 | )
|                                        | Investing activities |                                                                            | $       | (4,389          | ) |         | $       | (51,741 | ) |      | $       | (22,699 | ) |      | $       | (3,071 | ) |   |         | (14,843 | ) |   | $       | (748    | ) |   | $      | (1,375 | )
|                                        | Financing activities |                                                                            | $       |                |   |         | $       |        |   |      | $       |        |   |      | $       | (932   | ) |   |         | 39,687  |   |   | $       |        |   |   | $      |       |  
|Ratio of earnings to fixed charges(6)   |                      |                                                                            | 1.8x    |                 |   |         | 2.2x    |         |   |      |        |         |   |      | 1.0x    |        |   |   | 2.4x    |         |   |   | 3.6x    |         |   |   | 1.2x   |       
|Shipments:                              |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |      |         |        |   |   |         |         |   |   |         |         |   |   |        |       
|                                        | Pulp (MADMT)         |                                                                            |         | 234             |   |         |         | 279     |   |      |         | 236     |   |      |         | 272    |   |   |         | 292     |   |   |         | 72      |   |   |        | 76     |  
|                                        | Lumber (MMFBM)       |                                                                            |         | 289             |   |         |         | 288     |   |      |         | 250     |   |      |         | 283    |   |   |         | 342     |   |   |         | 78      |   |   |        | 84     |  
|Average net revenue:                    |                      |                                                                            |         |                 |   |         |         |         |   |      |         |         |   |      |         |        |   |   |         |         |   |   |         |         |   |   |        |       
|                                        | Pulp ($ per ADMT)    |                                                                            |         | 462             |   |         |         | 672     |   |      |         | 503     |   |      |         | 469    |   |   |         | 517     |   |   |         | 497     |   |   |        | 488    |  
|                                        | Lumber ($ per MFBM)  |                                                                            |         | 416             |   |         |         | 334     |   |      |         | 330     |   |      |         | 354    |   |   |         | 297     |   |   |         | 298     |   |   |        | 334    |  




30



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##### 






|                                          |  |                    |         |           |  |      |         |      |  |      |         |      |  |   |         |  |  |   |         |  |  |   |         | 
|----------------------------------------- |  | ------------------ | ------- | --------- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                          |  |                    |         |          
|                                          |  | As at December 31, |         | As at    
|                                          |  |                    |         | March 31,
|                                          |  | 1999               |         | 2000      |  | 2001 |         | 2002 |  | 2003 |         | 2004
|                                          |  |                    |         |           |  |      |         |      |  |      |         |     
|                                          |  |                    |         |          
|                                          |  | (in thousands)     |         |          
|Balance sheets data:                      |  |                    |         |           |  |      |         |      |  |      |         |      |  |   |         |  |  |   |         |  |  |   |         | 
|Canadian GAAP                             |  |                    |         |           |  |      |         |      |  |      |         |      |  |   |         |  |  |   |         |  |  |   |         | 
|Cash                                      |  | $                  | 18,869  |           |  | $    | 17,922  |      |  | $    | 15,872  |      |  | $ | 35,005  |  |  | $ | 72,301  |  |  | $ | 63,789  | 
|Total assets                              |  | $                  | 280,035 |           |  | $    | 331,165 |      |  | $    | 316,678 |      |  | $ | 321,640 |  |  | $ | 345,697 |  |  | $ | 359,034 | 
|Short-term debt                           |  | $                  |        |           |  | $    |        |      |  | $    |        |      |  | $ |        |  |  | $ |        |  |  | $ |        | 
|Long-term debt, including current portion |  | $                  | 232,319 |           |  | $    | 239,279 |      |  | $    | 254,800 |      |  | $ | 252,592 |  |  | $ | 244,511 |  |  | $ | 248,805 | 
|Shareholders equity (deficit)            |  | $                  | 8,967   |           |  | $    | 24,966  |      |  | $    | 1,496   |      |  | $ | 2,004   |  |  | $ | 37,566  |  |  | $ | 37,952  | 
|U.S. GAAP                                 |  |                    |         |           |  |      |         |      |  |      |         |      |  |   |         |  |  |   |         |  |  |   |         | 
|Total assets                              |  |                    |         |           |  | $    | 330,922 |      |  | $    | 317,257 |      |  | $ | 321,352 |  |  | $ | 349,831 |  |  |   |         | 
|Shareholders equity                      |  |                    |         |           |  | $    | 28,487  |      |  | $    | 449     |      |  | $ | 2,536   |  |  | $ | 42,528  |  |  |   |         | 









|    |                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Comparative statement of earnings and balance
    sheet data have been restated to reflect the change in
    accounting policy with respect to unrealized foreign exchange
    gains or losses on the translation of long-term debt. See
    note 2 to our audited financial statements included
    elsewhere in this prospectus.                                      
|   
|(2) | Net revenue is gross revenue, net of
    transportation costs, commissions and discounts, the impact of
    foreign exchange forward contracts and lumber duties.                                                                                                                                                                                                       
|   
|(3) | Financing expense consists of interest expense,
    amortization of deferred financing costs and foreign exchange
    gains or losses on U.S. dollar cash and working capital.
    See note 13 to our audited consolidated financial
    statements included elsewhere in this prospectus.                                                                              
|   
|(4) | Refinancing charges relate to the repurchase and
    redemption of US$160 million aggregate principal amount of
    our 9 7/8% Senior Notes due 2008. See note 14 to our
    audited consolidated financial statements included elsewhere in
    this prospectus.                                                                                                       
|   
|(5) | Other expense (income) includes the gain or loss
    on disposal of property, plant and equipment, the provision for
    severance costs related to the new sawmill project and
    unrealized gain or loss on contracts. See note 18 to our
    audited financial statements included elsewhere in this
    prospectus.                                                
|   
|(6) | For purposes of calculating the ratio of earnings
    to fixed charges, earnings are defined as earnings (loss) before
    income taxes plus fixed charges. Fixed charges consist of
    interest expense and amortization of deferred financing costs.
    The deficiency of earnings to cover fixed charges in the year
    ended December 31, 2001 was $23.5 million.

31



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##### 



MANAGEMENTS DISCUSSION AND ANALYSIS
OF

FINANCIAL CONDITION AND RESULTS OF
OPERATIONS


The following discussion of our financial
condition and results of operations is based upon and should be
read in conjunction with our financial statements and the
accompanying notes included elsewhere in this prospectus. Our
financial statements have been prepared in accordance with
Canadian GAAP, which differ from financial statements prepared
in accordance with U.S. GAAP. The principal differences between
Canadian GAAP and U.S. GAAP with respect to our financial
statements relate to the recognition of unrealized gains on
forward exchange contracts in 2002 and 2003, the recognition of
an unrealized loss on forward exchange contracts in 2001 and the
recognition of an unrealized loss on an energy contract in 2001.
For a further discussion of these differences, see note 21
to our audited financial statements included elsewhere in this
prospectus.

Overview

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

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

Our operating results are largely affected by the
prevailing market prices for pulp and lumber. The markets for
pulp and lumber are highly cyclical and affected by such factors
as global economic conditions, demand for paper, residential and
commercial construction in North America and Asia, changes in
industry production capacity and inventory levels. In addition,
Canadian lumber markets and our results have been significantly
impacted by the softwood lumber dispute. We sell almost half of
our lumber in the United States. Since May 22, 2002, we
have recorded combined antidumping and countervailing duties at
an effective rate of 25.6% on all softwood lumber exports to the
United States as a selling expense in the lumber segment. In
response to these duties, many Canadian lumber producers have
increased their lumber output in order to reduce unit costs,
which has exacerbated the oversupply condition in North American
lumber markets. See note 10 to our audited financial
statements for a further discussion of the duties.

Our operating results are sensitive to
fluctuations in the exchange rate of the Canadian dollar to the
U.S. dollar, as prices for our products are denominated in
U.S. dollars or linked to prices quoted in
U.S. dollars and we have incurred substantially all of our
debt in U.S. dollars. In 2003, approximately 76% of our
revenue was denominated in U.S. dollars, while most of our
operating costs were incurred in Canadian dollars. In order to
mitigate the impact of foreign exchange volatility on our
operating results, we have entered into foreign exchange forward
contracts to partially hedge our exposure to fluctuations in
U.S. dollar revenue and we have incurred substantially all
of our debt in U.S. dollars. Effective January 1,
2002, we retroactively adopted a new accounting policy of the
Canadian Institute of Chartered Accountants with respect to the
recognition of unrealized foreign exchange gains or losses.
Under the new policy, exchange gains or losses that arise on
translation of long-term debt denominated in a foreign currency
are included in income in the current period. See note 2 to
our audited financial statements for a further discussion of the
change in accounting policy.

Pulp and lumber production volumes have a direct
impact on our operating results. Our Whitecourt pulp mills
production capacity has increased from a design capacity of
210,000 tonnes per year to the current capacity of 285,000
tonnes per year through operating improvements and capital
expenditures. Through the optimization of the new sawmill at

32



---



##### 



Whitecourt and the implementation of an extra
shift at Boyle, the production capacity of our lumber segment
has also increased in the past year.


The availability of an economical fiber supply is
one of the most important factors affecting the profitability of
forest products companies. Fiber supply self-sufficiency is a
key competitive element, because the direct control and
management of timber resources partially insulates an operator
from fluctuations in the market price of fiber. We supply our
manufacturing operations primarily from fiber resources held
under long-term agreements with the Government of Alberta, which
provides a secure supply of fiber and stable costs on a
sustainable basis. Approximately 91% of the fiber requirements
for our pulp mill and sawmill facilities are supplied by the
Millar Western FMA, our provincial quotas and allocations, and
multi-year fiber agreements with other forest products
companies. We purchase the balance of our fiber requirements in
the open market.

Electricity costs represent approximately 30% of
our manufacturing costs for pulp and less than 5% for lumber,
based on 2003 costs, and fluctuations in the price of
electricity affect our costs. In January 2001, we acquired
long-term power purchase rights to insulate our pulp and lumber
operations from volatility in the electricity market.

Our Results of Operations

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




|                          |                        |                                |       |           |   |      |       |              |   |      |       |       |   |   |      |      |   |   |      |      |  
|------------------------- | ---------------------- | ------------------------------ | ----- | --------- | - | ---- | ----- | ------------ | - | ---- | ----- | ----- | - | - | ---- | ---- | - | - | ---- | ---- | -
|                          |                        |                                |       |           |   |      |       |             
|                          |                        |                                |       |           |   |      |       | Three months
|                          |                        |                                |       | ended    
|                          |                        | Year ended December 31,        |       | March 31,
|                          |                        |                                |       |          
|                          |                        | 2001                           |       | 2002      |   | 2003 |       | 2003         |   | 2004
|                          |                        |                                |       |           |   |      |       |              |   |     
|                          |                        |                               
|                          |                        | (in millions, except as noted)
|Net revenue(1)            |                        |                                |       |           |   |      |       |              |   |      |       |       |   |   |      |      |   |   |      |     
|                          | Lumber                 |                                | $     | 82.6      |   |      | $     | 100.2        |   |      | $     | 101.5 |   |   | $    | 23.3 |   |   | $    | 28.0 |  
|                          | Pulp                   |                                |       | 119.0     |   |      |       | 127.7        |   |      |       | 150.9 |   |   |      | 35.8 |   |   |      | 37.1 |  
|                          | Corporate and other(2) |                                |       | 9.3       |   |      |       | 6.1          |   |      |       | 6.2   |   |   |      | 1.7  |   |   |      | 1.7  |  
|                          |                        |                                |       |           |   |      |       |              |   |      |       |       |   |   |      |      |   |   |      |     
|Total                     |                        | $                              | 210.9 |           |   | $    | 234.0 |              |   | $    | 258.6 |       |   | $ | 60.8 |      |   | $ | 66.8 |     
|                          |                        |                                |       |           |   |      |       |              |   |      |       |       |   |   |      |      |   |   |      |     
|Operating earnings (loss) |                        |                                |       |           |   |      |       |              |   |      |       |       |   |   |      |      |   |   |      |     
|                          | Lumber                 |                                | $     | (7.1      | ) |      | $     | 9.1          |   |      | $     | 4.9   |   |   | $    | 1.1  |   |   | $    | 2.4  |  
|                          | Pulp                   |                                |       | 30.9      |   |      |       | 22.9         |   |      |       | 34.2  |   |   |      | 6.7  |   |   |      | 8.7  |  
|                          | Corporate and other(2) |                                |       | (6.4      | ) |      |       | (7.8         | ) |      |       | (7.5  | ) |   |      | (1.9 | ) |   |      | (2.2 | )
|                          |                        |                                |       |           |   |      |       |              |   |      |       |       |   |   |      |      |   |   |      |     
|Total                     |                        | $                              | 17.4  |           |   | $    | 24.2  |              |   | $    | 31.6  |       |   | $ | 5.9  |      |   | $ | 8.9  |     
|                          |                        |                                |       |           |   |      |       |              |   |      |       |       |   |   |      |      |   |   |      |     
|Shipments                 |                        |                                |       |           |   |      |       |              |   |      |       |       |   |   |      |      |   |   |      |     
|                          | Lumber (MMFBM)         |                                |       | 250       |   |      |       | 283          |   |      |       | 342   |   |   |      | 78   |   |   |      | 84   |  
|                          | Pulp (MADMT)           |                                |       | 236       |   |      |       | 272          |   |      |       | 292   |   |   |      | 72   |   |   |      | 76   |  
|Average net revenue       |                        |                                |       |           |   |      |       |              |   |      |       |       |   |   |      |      |   |   |      |     
|                          | Lumber ($ per MFBM)    |                                |       | 330       |   |      |       | 354          |   |      |       | 297   |   |   |      | 298  |   |   |      | 334  |  
|                          | Pulp ($ per ADMT)      |                                |       | 503       |   |      |       | 469          |   |      |       | 517   |   |   |      | 497  |   |   |      | 488  |  









|    |                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net revenue is gross revenue, net of
    transportation costs, commissions and discounts, the impact of
    foreign exchange forward contracts and lumber duties.
|   
|(2) | Primarily represents revenue from management and
    marketing contracts, the related costs and unallocated corporate
    expenses.                              

33



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##### 



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

|              |  |                         |       |      |  |      |       |  |  |   |       | 
|------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|              |  |                        
|              |  | Year ended December 31,
|              |  |                        
|              |  | 2001                    |       | 2002 |  | 2003
|              |  |                         |       |      |  |     
|              |  |                        
|              |  | (in millions)          
|Canada        |  | $                       | 56.2  |      |  | $    | 61.5  |  |  | $ | 63.1  | 
|United States |  |                         | 50.2  |      |  |      | 56.9  |  |  |   | 59.7  | 
|Europe        |  |                         | 56.6  |      |  |      | 38.8  |  |  |   | 41.5  | 
|Asia          |  |                         | 46.2  |      |  |      | 76.1  |  |  |   | 93.3  | 
|Other         |  |                         | 1.6   |      |  |      | 0.7   |  |  |   | 1.0   | 
|              |  |                         |       |      |  |      |       |  |  |   |       | 
|              |  | $                       | 210.9 |      |  | $    | 234.0 |  |  | $ | 258.6 | 
|              |  |                         |       |      |  |      |       |  |  |   |       | 






| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Three months ended March 31, 2004
    compared to the three months ended March 31,
    2003







Overview







Net revenue for the quarter ended March 31,
2004, increased by $6.0 million, or 10%, to
$66.8 million, compared to $60.8 million for the same
period in 2003, primarily due to higher revenue from the lumber
segment. Lumber segment net revenue was up by 20% over last year
as a result of higher sales volumes and a sharp rise in selling
price. These factors more than offset the impact of a stronger
Canadian dollar, which appreciated relative to the
U.S. dollar by approximately 15% compared to the first
quarter of 2003. The effects of the strengthened Canadian dollar
were partly mitigated by our currency hedging program, which
covered approximately 70% of our U.S. dollar revenue for
the quarter ended March 31, 2004. The programs
benefits amounted to $2.0 million for the quarter, compared
to $1.9 million for the same period in 2003.







Operating earnings increased by $3 million,
or 51% to $8.9 million for the first quarter, compared to
$5.9 million for the same period in 2003, mainly due to
higher prices for pulp and lumber and lower operating and
freight costs for the pulp segment. Operating earnings for the
quarter included a charge of $0.6 million for
employees profit sharing; no accrual was recorded for
profit sharing for the first quarter of 2003.







General and administration expense in the quarter
decreased by $0.4 million compared to the first quarter of
2003, primarily as a result of lower consulting fees.







Lumber







Net revenue from the lumber segment increased by
$4.7 million, or 20.2%, to $28.0 million during the
first quarter of 2004, compared to $23.3 million for the
same period in 2003, as a result of higher average revenue per
unit and higher sales volumes. Average net revenue per unit
increased by $36 per thousand board feet, or 12.8%, in the
quarter compared to the same period in 2003, due to a sharp rise
in average selling prices. Sales volumes improved by six million
board feet, or 7%, in the first quarter of 2004 compared to the
same period in 2003, due to increased production at our sawmills
and continued strong demand reflecting the high number of
housing starts in the United States and Canada. Countervailing
and antidumping duties increased by $0.8 million, or 33%,
to $3.2 million for the first quarter of 2004 compared to
$2.4 million for the same period in 2003, largely as a
result of higher average selling prices.







Operating earnings from the lumber segment
increased by $1.3 million, or 118%, to $2.4 million
for the first quarter of 2004, compared to $1.1 million for
the same period in 2003. The increase in operating earnings was
predominantly the result of higher revenue, partially offset by
higher manufacturing costs. Manufacturing cost of sales
increased by $15 per thousand board feet, or 5.6%, compared
to the same period in 2003. This increase was primarily a result
of




34



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##### 






increased fiber costs related to higher
reforestation expense at our Boyle operations, which returned to
harvesting non fire-damaged timber, as well as higher timber
dues, which are assessed according to the benchmark price of
lumber. Lumber cost of sales reflected savings from our power
purchase rights, in terms of lower electricity rates compared to
market rates, of $0.1 million in the first quarter of 2004,
compared to $0.5 million in the same period of 2003.








Pulp







Net revenue from the pulp segment increased by
$1.3 million, or 3.5%, to $37.1 million in the first
quarter of 2004, compared to $35.8 million in the same
period of 2003. While sales volumes improved by
3,800 tonnes, or 5%, due to continued strong demand for
BCTMP in the world market, average net revenue per unit
decreased by $9 per tonne, or 1.8%, compared to the same period
in 2003. Although pulp prices improved in the quarter compared
to the same period in 2003, the significant appreciation in
value of the Canadian dollar in relation to the U.S. dollar
more than offset the price increase. The negative impact of
foreign exchange fluctuations was partly mitigated by our
currency hedging program, which resulted in benefits of
$1.5 million for the first quarter of 2004 and
$1.5 million in the same period in 2003.







Operating earnings from the pulp segment
increased by $2 million, or 30%, to $8.7 million in
the first quarter of 2004, compared to $6.7 million for the
same period in 2003. The increase in operating earnings was
largely the result of lower manufacturing and freight costs.
Pulp cost of sales was $14 per tonne lower in the quarter
compared to the same period in 2003, primarily due to lower
natural gas costs and to lower freight and other distribution
costs, which decreased by $21 per tonne in the quarter. Pulp
cost of sales also reflected savings from our power purchase
rights of $2.0 million for the first three months of 2004,
compared to $6.1 million for the same period of 2003.







Corporate
and Other







Revenue from corporate and other activities for
the first quarter of 2004 was relatively stable. Operating
earnings in this segment decreased by $0.4 million in the
quarter, compared to the same period in 2003. This decrease was
largely a result of an accrual for the employees profit
sharing plan, which was partially offset by lower consulting
fees.







Financing
Expenses







Financing expenses decreased by $4.2 million
for the first quarter of 2004 compared to the same period in
2003, primarily due to exchange rate fluctuations. The
U.S. dollar exchange rate at March 31, 2004, was
1.3095, compared to 1.2869 at December 31, 2003. The
depreciation in value of the Canadian dollar relative to the
U.S. dollar in the first quarter resulted in a foreign
exchange gain of $1.5 million on U.S. dollar cash and
working capital, compared to a loss of $1.9 million in the
same period in 2003. Interest expense was $0.7 million
lower for the first quarter of 2004, due to interest accruing on
long-term debt at a rate of 7 3/4%, compared to a rate of
9 7/8% in the same period of 2003. Interest expense was
also lower, due to the effect of the stronger Canadian dollar on
U.S. dollar interest expense.







Unrealized
Exchange Loss (Gain) on Debt







Unrealized foreign exchange loss on
U.S. dollar Senior Notes amounted to $4.3 million in
the first quarter of 2004, as a result of the decline in value
of the Canadian dollar relative to the U.S. dollar since
the end of the previous quarter. In the first quarter of 2003,
unrealized foreign exchange gains on debt amounted to
$17.3 million, due to the appreciation in the value of the
Canadian dollar in relation to the U.S. dollar since the
end of 2002. These gains and losses were unrealized and had no
impact on our cash flows and were excluded from the calculation
of the employees profit sharing plan.




35



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##### 






Income
Taxes







Operating results for the quarter ended
March 31, 2004, were subject to income and capital taxes at
an effective rate of 35%. The actual tax rate for the quarter
varied significantly from the effective rate, primarily as a
result of the non-deductible portion of unrealized exchange
losses on debt. Income tax expense for the quarter consisted of
large-corporations capital tax of $0.1 million and future
income tax expense of $1.0 million, compared to
large-corporations capital tax of $0.2 million and a future
income tax recovery of $0.3 million in 2003.






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



| |         
| | --------
| | Overview

Net revenue increased by $24.6 million, or
10.0%, to $258.6 million in 2003, compared to
$234.0 million in 2002, primarily due to higher sales from
the pulp segment. While sales volumes of pulp and lumber have
been strong in 2003, net revenue from the lumber segment
continues to be negatively impacted by higher duties on sales of
lumber to the United States. Duty expense for 2003 amounted to
$11.9 million, compared to $2.9 million in 2002.
Duties in the prior year did not commence until May 22 and
included a $2.3 million reduction as a result of a reversal
of duties that were previously accrued. A strengthening Canadian
dollar, which has appreciated by approximately 22% relative to
the U.S. dollar in 2003, has also had a negative impact on
revenue. However, the negative impact has been partly mitigated
by our currency hedging program, which hedged approximately 61%
of our U.S. dollar revenue in 2003. The programs
benefits amounted to $14.7 million in 2003.

Operating earnings increased by $7.4 million
to $31.6 million in 2003, compared to $24.2 million in
2002. The improvement in operating earnings in 2003 was largely
due to stronger operating results from the pulp segment. Both
segments, however, continued to generate positive cash flow as a
result of low manufacturing costs.

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

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

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

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

Lumber

Net revenue from the lumber segment increased by
$1.3 million, or 1.3%, to $101.5 million in 2003,
compared to $100.2 million in 2002. The slight increase was
due to higher sales volumes partially offset by lower average
net revenue per unit. Sales volumes improved by 59 MMFBM,
or 20.8%, in 2003 compared to 2002 due to higher production at
our sawmills and continued strong demand. While sales volumes
increased, average net revenue per unit decreased by $57 per
MFBM, or 19.2%, in 2003 compared to 2002, as a result of lower
average prices and higher duties on sales of softwood lumber in
the United States. Countervailing and antidumping duties for
2003 amounted to $11.9 million, compared to
$2.9 million in 2002. Duties in the prior year did not
commence until May 22 and included a $2.3 million
reduction as a result of a reversal of duties that were
previously accrued.

Operating earnings for the lumber segment
decreased by $4.2 million, or 46%, to $4.9 million in
2003, compared to $9.1 million in 2002. The decrease in
operating earnings in 2003 was largely the result of lower net
revenue. Higher net revenue in the second half of the year was
not

36



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##### 



enough to offset the weak first half of 2003,
which experienced lower pricing and higher duty expenses
compared to the first half of 2002. Manufacturing cost of sales
decreased by $33 per MFBM from 2002 as a result of higher
production at both sawmills, as well as lower fiber costs at
Boyle stemming from the utilization of fire-damaged timber.
Lumber cost of sales reflects savings from our power purchase
rights, in terms of lower electricity rates compared to market
rates, of $1.2 million in 2003.


Pulp

Net revenue from the pulp segment increased by
$23.2 million, or 18%, to $150.9 million in 2003,
compared to $127.7 million in 2002, as a result of higher
sales volumes and higher average net revenue per unit. As a
result of higher pulp prices in 2003, average net revenue per
unit improved by $49 per tonne, or 10.5%. In addition, sales
volumes increased by 20,000 tonnes, or 7.4%, compared to 2002.

Operating earnings from the pulp segment
increased by $11.3 million, or 49.5%, to $34.2 million
in 2003, compared to $22.9 million in 2002, which was
largely the result of higher revenues, partially offset by
higher repair and maintenance costs and higher natural gas
costs. Pulp cost of sales reflects savings from our power
purchase rights of $16.4 million in 2003.

Corporate
and Other

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

Financing
Expenses

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

Refinancing
Charges

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

Unrealized
Exchange (Gain) Loss on Debt

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

Income
Taxes

Operating results in 2003 were subject to income
and capital taxes at an effective rate of 35%. Variations from
the effective rate are detailed in note 15 of the audited
financial statements. In 2003, income tax expense consisted of a
large-corporations capital tax of $0.6 million and future
income taxes of $1.0 million, compared to
large-corporations capital tax of $0.5 million and a future
income tax recovery of $0.1 million in 2002. The actual tax
rate in 2003 varied

37



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##### 



significantly from the effective rate, primarily
because of the non-taxable portion of unrealized exchange gains
on debt and the recognition of previously unrecognized tax
benefits. In 2003, we recorded $3.6 million of previously
unrecognized tax benefits related to the translation of foreign
currency debt.


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

Overview

Our financial performance was stronger in 2002
despite the continued difficult market conditions for both
lumber and pulp and the negative effects of the ongoing softwood
lumber trade dispute. Increased sales volumes for both lumber
and pulp contributed to an 11% increase in net revenue, to
$234.0 million in 2002 compared to $210.9 million in
2001.

Cost of sales increased by $15.5 million, or
10%, to $177.4 million in 2002, compared to
$161.9 million in 2001, mainly due to higher sales volumes
of both lumber and pulp. Lumber manufacturing costs were lower
in 2002 due to significant productivity improvements in the new
sawmill in Whitecourt during the year. Pulp manufacturing costs
increased as a result of higher energy costs after a provincial
government energy rebate program expired at the end of 2001.

Depreciation and amortization expense was
$0.5 million higher in 2002, reflecting a full years
depreciation on the new sawmill in Whitecourt.

General and administration expense for the year
decreased by $2.0 million, or 13%, to $13.4 million in
2002, compared to $15.4 million in 2001, primarily as a
result of lower salary and travel costs.

We implemented a workforce reduction program in
January 2002 and recorded a provision for severance costs of
$2.3 million.

As a result of the increase in net revenue and
lower manufacturing and administration costs, operating earnings
increased by $6.7 million, or 39%, from $17.4 million
in 2001 to $24.1 million in 2002. We recorded earnings
before income taxes of $1.0 million in 2002. There was no
contribution to the employee profit sharing program in 2002
because there was a net loss before the unrealized exchange gain
on debt. No contribution was made to the employee profit sharing
program in 2001 because there was a net loss before income taxes
for the year of $27.8 million.

Lumber

Net revenue for the lumber segment increased by
$17.6 million, or 21%, to $100.2 million in 2002,
compared to $82.6 million in 2001, primarily as a result of
higher lumber shipments. Our new sawmill in Whitecourt achieved
better than expected levels of productivity, resulting in higher
production volumes and lower manufacturing costs for the year.
Average net revenue per unit improved from 2001 levels, in part
due to a $2.3 million reversal of the 2001 countervailing
and antidumping duties imposed by the United States Department
of Commerce and in part due to higher lumber prices in general.
In 2002, average net revenue per unit was $354 per MFBM, which
was $24 per MFBM greater than 2001. Lumber cost of sales
averaged $300 per MFBM, $37 per MFBM lower than 2001, primarily
due to the new sawmill in Whitecourt and $0.4 million of
savings realized from our long-term power purchase rights.
Overall, our lumber segment realized operating earnings of
$9.1 million in 2002 compared to an operating loss of
$7.1 million in 2001.

Pulp

Net revenue from the pulp segment increased by
$8.7 million, or 7%, from $119.0 million in 2001 to
$127.7 million in 2002 as a result of higher pulp
shipments, partially offset by lower market pulp prices. Strong
demand for BCTMP contributed to the higher sales volumes.

38



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##### 



However, average net revenue per unit in 2002 was
$34 per tonne lower than in 2001. At $341 per tonne, pulp cost
of sales were 4% higher than in 2001, primarily as a result of
power cost increases, partially offset by productivity gains.
The 2002 power costs included a $1.6 million provision
resulting from a reassessment of power rates for electricity
consumed in 2000. Our pulp segment realized savings from our
long-term power purchase rights of $5.5 million in 2002.
Given the lower average net revenue per unit and the power cost
reassessment, our pulp segment recorded operating earnings of
$22.9 million in 2002, compared to $30.9 million in
2001.


Corporate
and Other

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

Financing
Expenses

Financing expenses increased by $0.9 million
in 2002, compared to 2001, primarily due to a reduction in
foreign exchange gains realized on working capital balances
during the year, which was partially offset by a reduction in
short term interest expense.

Unrealized
Exchange (Gain) Loss on Debt

In 2002 we recorded an unrealized gain of
$2.2 million on the translation of long-term debt
denominated in U.S. dollars. The gain resulted from a
stronger Canadian dollar relative to the U.S. dollar at the
end of 2002 compared to the exchange rate at the end of 2001. In
2001, we recorded an unrealized loss of $15.5 million as a
result of a relatively weaker Canadian dollar in relation to the
U.S. dollar at the end of 2001, compared to the exchange
rate at the end of 2000.

Other
Expense (Income)

Included in other expense (income) in 2002 was a
recovery on an energy contract of $0.7 million before tax.
In 2001, we recorded a provision for loss on this contract of
$5.0 million before tax.

Income
Taxes

Operating results for the year ended
December 31, 2002 were subject to income and capital taxes
at an effective rate of 35%. Variations from the effective rate
are detailed in note 15 of the audited financial
statements. The provision for income taxes for 2002 consisted of
large corporation tax expense of $0.5 million and a future
income tax recovery of $0.1 million compared to an income
tax recovery in 2001, which consisted of large corporation tax
expense of $0.6 million and a future income tax recovery of
$4.9 million.

Liquidity and Capital Resources




For the quarter ended March 31, 2004, we required
cash of $7.1 million for operations, including changes in
working capital, compared to $17.2 million for the same
quarter of 2003. The decrease in cash required for operations in
the first quarter of 2004 primarily resulted from improved
operating earnings and reduced reforestation expenditures. Cash
required for working capital decreased by $0.6 million in
the first quarter of 2004 compared to the same period in 2003,
with the majority of the cash requirement reflecting our
seasonal build up of log inventories.







Net capital expenditures increased by
$0.5 million in the first quarter of 2004 compared to the
same period in 2003.




39



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##### 






At March 31, 2004, we had cash of
$63.8 million, compared to cash of $17.0 million at
March 31, 2003. An additional $49.0 million was
available under our revolving credit facility, of which
$4.1 million was committed for letters of credit.







Borrowings under our revolving credit facility
are subject to a borrowing base calculation based on our
accounts receivable and inventory. As at March 31, 2004,
the borrowing base was $49.0 million. The interest rate on
the revolving credit facility is floating and may, at our
option, be based upon the Bank Prime Rate, U.S. Base Rate,
Bankers Acceptance Rates, or LIBOR plus, in each case, a
borrowing margin. Collateral for the facility is a first charge
on all of our accounts receivable and inventory. See
Description of Our Revolving Credit Facility.




In 2003, we generated cash of $12.5 million
from operations, compared to $23.1 million in 2002. The
reduced cash flow from operations in 2003 was largely a result
of lower cash provided from changes in working capital. The
decrease in cash generated from working capital changes in 2003
compared to 2002 resulted from increased accounts receivable and
a reduction in deferred revenue in 2003 that more than offset
cash generated from reductions in inventories and prepaid
expenses and an increase in accounts payable and accrued
liabilities during the same period. The reduction in deferred
revenue of $6.5 million reflected the recognition in income
in 2003 of cash received in December 2002.

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

At December 31, 2003, we had cash of
$72.3 million, compared to a cash balance of
$35.0 million as at December 31, 2002. An additional
$37.9 million was available under our revolving credit
facility, of which $4.5 million was committed for letters
of credit. Borrowings under our revolving credit facility are
subject to a borrowing base calculation based on our accounts
receivable and inventory. As at December 31, 2003, the
borrowing base was $37.9 million. The interest rate on the
revolving credit facility is floating and may, at our option, be
based upon the Bank Prime Rate, U.S. Base Rate, Bankers
Acceptance Rates, or LIBOR plus, in each case, a borrowing
margin. Collateral for the facility is a first charge on all of
our accounts receivable and inventory. See Description of
Our Revolving Credit Facility.

For the year ended December 31, 2002, we
generated $23.1 million of cash from operations after
changes in working capital, compared to $20.6 million in
2001. The increased cash flow was primarily a result of improved
operating earnings and reduced reforestation expenditures. Cash
generated from working capital was $11.2 million in 2002,
compared to $15.0 million in 2001. Capital expenditures
decreased to $3.5 million in 2002, all of which was spent
on maintenance capital projects, compared to $24.2 million
in 2001. The reduction was primarily attributable to the
completion of the new sawmill in Whitecourt in 2001. Proceeds
from the sale of surplus equipment were $0.4 million in
2002, compared to $1.6 million in 2001.




Total capital expenditures for 2004 are expected
to be approximately $10.0 million and we expect to spend an
average of approximately $8.0 million per year for the
foreseeable future to maintain the productivity of our
facilities. Capital expenditures in 2001, 2002 and 2003 were
$24.2 million, $3.5 million and $8.8 million,
respectively. No environmental capital expenditures are
anticipated in the near future.




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

40



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##### 



The table below summarizes our contractual
obligations as of December 31, 2003.

|                               |  |                       |       |           |  |           |      |           |  |         |      |  |  |   |      |  |  |   |       | 
|------------------------------ |  | --------------------- | ----- | --------- |  | --------- | ---- | --------- |  | ------- | ---- |  |  | - | ---- |  |  | - | ----- | 
|                               |  |                      
|                               |  | Payment due by period
|                               |  |                      
|Contractual Obligations        |  |                       |       | Less than |  |           |      | More than
|(in $ millions)                |  | Total                 |       | 1 year    |  | 1-3 years |      | 3-5 years |  | 5 years
|                               |  |                       |       |           |  |           |      |           |  |        
|Long-term debt                 |  | $                     | 244.5 |           |  | $         |     |           |  | $       |     |  |  | $ |     |  |  | $ | 244.5 | 
|Power purchase rights(1)       |  |                       | 388.3 |           |  |           | 20.6 |           |  |         | 41.9 |  |  |   | 44.5 |  |  |   | 281.3 | 
|Natural gas purchase contracts |  |                       | 8.6   |           |  |           | 2.9  |           |  |         | 5.7  |  |  |   |     |  |  |   |      | 
|Reforestation                  |  |                       | 7.1   |           |  |           | 3.6  |           |  |         | 1.4  |  |  |   | 0.7  |  |  |   | 1.4   | 
|Other                          |  |                       | 5.0   |           |  |           | 1.8  |           |  |         | 3.1  |  |  |   | 0.1  |  |  |   |      | 
|                               |  |                       |       |           |  |           |      |           |  |         |      |  |  |   |      |  |  |   |       | 
|Total                          |  | $                     | 653.5 |           |  | $         | 28.9 |           |  | $       | 52.1 |  |  | $ | 45.3 |  |  | $ | 527.2 | 
|                               |  |                       |       |           |  |           |      |           |  |         |      |  |  |   |      |  |  |   |       | 






|    |                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on managements reasonable estimate of
    future maintenance and operating costs. See Our
    Business  Energy Supply.

Off-Balance Sheet Arrangements

We have no material off-balance sheet
arrangements.

Market Risks and Uncertainties

Commodity
Prices

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

|          |  |                   |            |                       |  |   |      | 
|--------- |  | ----------------- | ---------- | --------------------- |  | - | ---- | 
|          |  | Change in         |            | Estimated impact on  
|          |  | realized price(1) |            | operating earnings(2)
|          |  |                   |            |                      
|          |  |                  
|          |  | (in millions)    
|Pulp(3)   |  |                   | US$50/ADMT |                       |  | $ | 18.2 | 
|Lumber(4) |  |                   | US$50/MFBM |                       |  | $ | 13.7 | 






|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(1) | Assumed exchange rate of US$0.75 = $1.00.                                               
|   
|(2) | Before impact of profit sharing plan.                                                   
|   
|(3) | Based on annual shipments of 285,000 ADMT.                                              
|   
|(4) | Based on annual shipments of 325 MMFBM and
    combined softwood lumber duties of 25.6%.

Foreign
Exchange

We sell the majority of our products outside of
Canada in U.S. dollars (76% of 2003 revenue; 73% of 2002
revenue; and 73% of 2001 revenue). Consequently, the value of
the Canadian dollar versus the U.S. dollar has a major
impact on net revenue and profitability. The value of the
Canadian dollar was US$0.7738 as at December 31, 2003,
compared to US$0.6329 as at December 31, 2002.

The impact on earnings of fluctuations in
currency rates is somewhat offset by the corresponding
fluctuations in our debt service payments, substantially all of
which are denominated in U.S. dollars. To further reduce
the impact on earnings of fluctuations in currency rates, we
have a policy of hedging up to 75% of our anticipated
U.S. dollar cash receipts with

41



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##### 



foreign exchange forward contracts of up to
12 months in duration. Foreign currency derivative
financial instruments are not used for speculative purposes. In
2003, we utilized US$80 million of U.S. dollar foreign
exchange forward contracts under the hedging program, or
approximately 61% of our U.S. dollar revenue, and realized
a gain of $14.7 million. As at December 31, 2003, we
had US$77 million of foreign exchange forward contracts
which expire at various dates to December 2004. The average rate
of the contracts is US$0.7271 = $1.00. As at
December 31, 2003, these contracts had an unrecognized gain
of $6.8 million. Based on sales revenue for the year ended
December 31, 2003, the effect of a US$0.01 change in the
value of the Canadian dollar over the course of the year would
impact operating earnings by approximately $2.9 million.


Interest
Rate

The interest rate on our existing
US$190.0 million aggregate principal amount of 7.75% Senior
Notes due 2008 is fixed. We do not currently use any derivative
instruments to manage our exposure to changes in market interest
rates, nor do we use any instruments to manage our exposure to
changes in foreign currency rates with respect to our
U.S. dollar denominated debt, nor do we intend to with
respect to the notes.

Critical Accounting Estimates

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

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

Reforestation
Obligation

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

Valuation of
Inventory

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

42



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Adoption of New Accounting
Pronouncements

Effective January 1, 2003, we adopted SFAS
No. 143, Accounting for Asset Retirement
Obligations for U.S. GAAP. The impact of adopting the
new standard was to increase earnings for the year ended
December 31, 2003, by $0.8 million, as described in
note 21 to the audited financial statements included
elsewhere in this prospectus. In 2002, the Canadian Accounting
Standards Board issued a new Canadian accounting standard on
Asset Retirement Obligations. The new standard is effective for
fiscal years beginning on or after January 1, 2004. The
adoption of the new Canadian accounting standard will
substantially eliminate the GAAP difference.

In 2002, the Canadian Accounting Standards Board
issued amended accounting guideline 13, Hedging
Relationships. The guideline, which sets strict conditions
that must be met before a company can apply hedge accounting, is
effective for fiscal years beginning on or after July 1,
2003. We have adopted the guideline effective January 1,
2004 and have met the conditions so that there is no change to
our current accounting policy related to hedge accounting for
forward exchange contracts.

In April 2003, the Canadian Accounting Standards
Board issued new Canadian Standard 3063, Impairment of
Long-Lived Assets. The section establishes standards for
the recognition, measurement and disclosure of the impairment of
long-lived assets held for use. It applies to non-monetary
long-lived assets, including property, plant and equipment,
intangible assets with finite useful lives, deferred
pre-operating costs and long-term prepaid assets. The standard
is to be applied prospectively for years beginning on or after
April 1, 2003. We have considered the application of the
new standard and expect that adoption will not have a material
impact on our financial statements.

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

In January 2003, the Canadian Accounting
Standards Board issued Accounting Guideline 15,
Consolidation of Variable Interest Entities
(AcG-15), which is very similar to FIN 46. On
January 7, 2004, the Canadian Accounting Standards Board
noted the release of FIN 46-R and reaffirmed its intention
to harmonize the requirements of AcG-15 and FIN 46-R. The
Canadian Accounting Standards Board expects to approve an
exposure draft of proposed amendments to AcG-15 as soon as
possible, with the expectation that AcG-15, as amended, would be
effective for years beginning on or after November 1, 2004.
We expect to adopt AcG-15 effective January 1, 2005.

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

43



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OUR INDUSTRY

The Pulp Industry

Wood pulp is the main component used in the
manufacture of paper and paperboard products. Wood pulp types
depend on two primary variables: the wood type and the
manufacturing process used to produce the pulp. The two major
types of wood are hardwood and softwood. Manufacturing processes
range from purely chemical processes, in which wood is processed
into pulp using chemicals, to purely mechanical processes, in
which wood is mechanically ground into pulp. Within the chemical
pulp sector, the dominant process is the kraft process. Within
the mechanical pulp sector, there are a variety of processes
which utilize a combination of mechanical and chemical processes
and produce a wide range of pulps, including thermo-mechanical
pulp, or TMP, chemi-thermo-mechanical pulp, or CTMP, and
bleached chemi-thermo-mechanical pulp, or BCTMP. Each process
produces pulps with differing strength, brightness, bulk,
opacity and other characteristics which are suited to different
end-use products.

BCTMP is used in a variety of paper and
paperboard products, often as a direct replacement for kraft
pulps. Traditionally, softwood BCTMP has been used in tissue,
toweling, newsprint and paperboard products. The development of
high-quality hardwood BCTMP in the early 1990s opened the market
for the use of BCTMP in the production of coated and uncoated
papers, traditionally referred to as woodfree papers. Hardwood
BCTMP has become a desired fiber in the production of such paper
grades for its formation and opacity. In addition, both softwood
and hardwood BCTMP are in high demand by Asian paperboard
producers for their bulk and stiffness. According to RISI, the
production of paperboard in China will grow by 2.6 million
tonnes, or 66%, from 2003 to 2005.

Developments in papermaking technology have
resulted in a decreased need for high-strength chemical pulps in
the production of many paper grades, and hardwood fibers have
become sought after for their superior formation and printing
properties compared to softwood fibers. Demand for hardwood
BCTMP has grown due to these trends, as it provides a functional
advantage in many paper grades. In addition to its functional
advantages, BCTMPs higher bulk allows papermakers to use
less fiber to produce the same number of sheets of paper,
providing a financial advantage to the papermaker.

Furthermore, BCTMP producers have an economic
advantage compared to kraft pulp producers in terms of wood
costs, because the BCTMP process achieves a higher yield of pulp
from wood. The BCTMP process for producing pulp differs from the
kraft process most significantly in how wood chips are
processed. The kraft process uses chemicals to separate
cellulose fibers by dissolving lignin, whereas BCTMP uses a
combination of chemicals, steam and mechanical processes to
separate cellulose fibers, while retaining most of the lignin.
The BCTMP process typically converts approximately 85% to 90% of
the wood into pulp, whereas the kraft process typically achieves
a 45% to 55% yield.

In 2003, paper-grade pulps manufactured using the
chemical process represented approximately 75% of total world
wood pulp consumption. Mechanical wood pulps accounted for
approximately 21% of total world wood pulp consumption. Most of
the pulp consumed in 2003 was produced and used by paper or
paperboard manufacturing facilities that are integrated with
their own pulp mills. This is particularly true for mechanical
pulps, where approximately 92% of the production is integrated
with paper or paperboard manufacturing facilities. The balance,
known as market pulp, is sold in the open market.

44



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2003 World Paper-Grade Wood Pulp
Consumption

|                 |                                    |         |        |         |         |  |        |        |        | 
|---------------- | ---------------------------------- | ------- | ------ | ------- | ------- |  | ------ | ------ | ------ | 
|                 |                                    | Total   |        | Market 
|                 |                                    | Pulp    |        | Pulp   
|                 |                                    |         |        |        
|                 |                                    | (MADMT) |        | (MADMT)
|BSKP(1)          |                                    |         | 37,215 |         |         |  | 19,784 |       
|BHKP(2)          |                                    |         | 49,586 |         |         |  | 19,085 |       
|Sulphite         |                                    |         | 4,372  |         |         |  | 1,394  |       
|Unbleached Kraft |                                    |         | 33,607 |         |         |  | 2,257  |       
|                 |                                    |         |        |         |         |  |        |       
|                 | Total Chemical                     |         |        | 124,780 |         |  |        | 42,520 |       
|Semi-chemical    |                                    |         | 6,335  |         |         |  | 35     |       
|Mechanical(3)    |                                    |         | 35,682 |         |         |  | 3,272  |       
|                 |                                    |         |        |         |         |  |        |       
|                 | Total Semi-chemical and Mechanical |         |        | 42,017  |         |  |        | 3,307  |       
|                 |                                    |         |        |         |         |  |        |       
|                 |                                    | Total   |        |         | 166,797 |  |        |        | 45,827 | 
|                 |                                    |         |        |         |         |  |        |       




Source: RISI.



|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Bleached softwood kraft pulp.                                                                                                                                      
|   
|(2) | Bleached hardwood kraft pulp. Includes EUKP, or
    eucalyptus kraft pulp, among other types of BHKP.                                                              
|   
|(3) | Includes TMP, CTMP, BCTMP and pure mechanical
    pulps. According to RISI, market CTMP and BCTMP represent
    approximately 70% of total mechanical market pulps.

Total shipments of market pulp increased by
approximately 10% from 1999 to 2003, while total market pulp
capacity increased by 13.5%. The majority of this capacity was
added in 2000, with new BHKP mills completed in the southern
hemisphere. Shipments and capacity of mechanical market pulp
increased by 5.7% and 8.0%, respectively, from 1999 to 2003. The
growth in demand for mechanical market pulp has been primarily
in BCTMP as a result of increased use of BCTMP by paper
producers, growth in production of paper types that benefit from
its inclusion and its attractive pricing relative to kraft pulp.

Capacity expansions in the world market pulp
industry have been modest since 2000, allowing the
shipment-to-capacity ratio to rise. We believe that growth in
market BCTMP supply will be constrained in the next few years,
as we do not anticipate that any new BCTMP mills will commence
operations. Two new projects, which could commence operations as
early as 2006, are in the planning stages, but no final decision
on their construction has been announced. Strong demand due to
an improving economic outlook is projected to drive market pulp
prices upward through 2005. RISI is projecting increases in
paper demand of 4.9% in 2004 and 3.9% in 2005. RISI is also
forecasting that demand will be strongest in Western Europe and
China, where most new paper machines will be non-integrated with
pulp production. In addition, RISI is expecting that wood pulp
will continue to displace non-wood pulp in China. All of these
factors combine to create a favorable outlook for pulp.

45



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World Market Pulp Statistics

(MADMT, except percentages and
prices)


|                         |                        |                         |  |          |  |      |  |        |  |      |  |             |  |  |  |        |  |  |  |        |  |  |  |       | 
|------------------------ | ---------------------- | ----------------------- |  | -------- |  | ---- |  | ------ |  | ---- |  | ----------- |  |  |  | ------ |  |  |  | ------ |  |  |  | ----- | 
|                         |                        |                         |  |         
|                         |                        | Year ended December 31, |  |         
|                         |                        |                         |  | % change
|                         |                        | 1999                    |  | 2000     |  | 2001 |  | 2002   |  | 2003 |  | 1999 - 2003
|                         |                        |                         |  |          |  |      |  |        |  |      |  |            
|Total                    |                        |                         |  |          |  |      |  |        |  |      |  |             |  |  |  |        |  |  |  |        |  |  |  |      
|                         | Shipments              |                         |  | 41,656   |  |      |  | 42,396 |  |      |  | 42,440      |  |  |  | 44,140 |  |  |  | 45,827 |  |  |  | 10.0% | 
|                         | Capacity               |                         |  | 43,562   |  |      |  | 46,084 |  |      |  | 46,920      |  |  |  | 47,713 |  |  |  | 49,435 |  |  |  | 13.5% | 
|                         | Shipment/ Capacity (%) |                         |  | 95.6     |  |      |  | 92.0   |  |      |  | 90.5        |  |  |  | 92.5   |  |  |  | 92.7   |  |  |  |       | 
|Mechanical               |                        |                         |  |          |  |      |  |        |  |      |  |             |  |  |  |        |  |  |  |        |  |  |  |      
|                         | Shipments              |                         |  | 3,095    |  |      |  | 3,391  |  |      |  | 3,015       |  |  |  | 3,162  |  |  |  | 3,272  |  |  |  | 5.7%  | 
|                         | Capacity               |                         |  | 3,455    |  |      |  | 3,656  |  |      |  | 3,615       |  |  |  | 3,665  |  |  |  | 3,730  |  |  |  | 8.0%  | 
|                         | Shipment/ Capacity (%) |                         |  | 89.6     |  |      |  | 92.8   |  |      |  | 83.4        |  |  |  | 86.3   |  |  |  | 87.7   |  |  |  |       | 
|Average Price (US$/ADMT) |                        |                         |  |          |  |      |  |        |  |      |  |             |  |  |  |        |  |  |  |        |  |  |  |      
|                         | NBSKP                  |                         |  | 520      |  |      |  | 681    |  |      |  | 531         |  |  |  | 460    |  |  |  | 525    |  |  |  |       | 
|                         | EUKP                   |                         |  | 490      |  |      |  | 652    |  |      |  | 485         |  |  |  | 458    |  |  |  | 502    |  |  |  |       | 
|                         | BCTMP                  |                         |  | 435      |  |      |  | 594    |  |      |  | 424         |  |  |  | 407    |  |  |  | 473    |  |  |  |       | 




Source: RISI.

Historically, prices for all pulps, including
BCTMP, have been cyclical. General economic conditions and
changes in paper and paperboard demand and pulp industry
capacity are the primary factors affecting demand and supply in
the pulp market, and therefore the price of pulp. Historically,
BCTMP has sold at a discount to northern bleached softwood kraft
pulp, or NBSKP, largely reflecting the lower costs of producing
the pulp, with the relative discount narrowing during strong
pulp markets. From 1999 to 2003, BCTMP prices ranged from 80% of
the NBSKP price at the bottom of the cycle to 90% of the NBSKP
price at the peak. However, in recent years, BCTMP pricing has
been more directly referenced to EUKP pricing. Due to the strong
demand and small supply growth for BCTMP, the price differential
between BCTMP and EUKP has been reduced to less than $30/ADMT
from historical levels of $55 to $65/ADMT. We believe that the
expected strong global economic recovery in 2004, which will
increase pulp and paper demand, modest incremental capacity
growth over the next two years and a relatively weak
U.S. dollar will combine to drive an increase in pulp
prices, including BCTMP prices.

The Lumber Industry

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

The majority of Canadas softwood lumber is
sold in the United States with domestic consumption being the
second largest market. Japan is a small but important market for
producers in both Alberta and British Columbia because of its
relative proximity and potential for growth. Although it still
represents a small portion of total housing starts, North
American wood- frame construction continues to be increasingly
accepted in Japan, and this change in construction practice
represents an opportunity for market expansion.

The following table sets forth North American
softwood lumber shipments, capacity, Canadian exports and
average industry transaction prices for the periods indicated.
Total shipments from the United States and Canada amounted to
67.2 BFBM in 2003, up 1.7% from

46



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##### 



2002 as a result of economic growth in North
America. North American lumber capacity was 77.1 BFBM in 2003,
up 1.0% from 2002.


North American Softwood Lumber
Statistics

(BFBM, except percentages and prices)


|                           |               |                         |     |                       |  |      |     |      |  |      |     |             |  |  |     |      |  |  |     |      |  |  |       |      |   
|-------------------------- | ------------- | ----------------------- | --- | --------------------- |  | ---- | --- | ---- |  | ---- | --- | ----------- |  |  | --- | ---- |  |  | --- | ---- |  |  | ----- | ---- | --
|                           |               |                         |     |                      
|                           |               | Year ended December 31, |     |                      
|                           |               |                         |     | % increase (decrease)
|                           |               | 1999                    |     | 2000                  |  | 2001 |     | 2002 |  | 2003 |     | 1999 - 2003
|                           |               |                         |     |                       |  |      |     |      |  |      |     |            
|Shipments                  |               |                         |     |                       |  |      |     |      |  |      |     |             |  |  |     |      |  |  |     |      |  |  |       |     
|                           | United States |                         |     | 36.5                  |  |      |     | 35.7 |  |      |     | 34.6        |  |  |     | 35.8 |  |  |     | 36.2 |  |  |       | (0.8 | )%
|                           | Canada        |                         |     | 28.9                  |  |      |     | 28.7 |  |      |     | 29.1        |  |  |     | 30.3 |  |  |     | 31.0 |  |  |       | 7.2  | % 
|                           |               |                         |     |                       |  |      |     |      |  |      |     |             |  |  |     |      |  |  |     |      |  |  |       |     
|                           | Total         |                         |     | 65.4                  |  |      |     | 64.4 |  |      |     | 63.7        |  |  |     | 66.1 |  |  |     | 67.2 |  |  |       | 2.7  | % 
|                           |               |                         |     |                       |  |      |     |      |  |      |     |             |  |  |     |      |  |  |     |      |  |  |       |     
|Capacity                   |               |                         |     |                       |  |      |     |      |  |      |     |             |  |  |     |      |  |  |     |      |  |  |       |     
|                           | United States |                         |     | 39.8                  |  |      |     | 40.3 |  |      |     | 40.7        |  |  |     | 41.7 |  |  |     | 42.2 |  |  |       | 6.0  | % 
|                           | Canada        |                         |     | 32.2                  |  |      |     | 33.3 |  |      |     | 33.6        |  |  |     | 34.6 |  |  |     | 35.0 |  |  |       | 8.6  | % 
|                           |               |                         |     |                       |  |      |     |      |  |      |     |             |  |  |     |      |  |  |     |      |  |  |       |     
|                           | Total         |                         |     | 72.0                  |  |      |     | 73.3 |  |      |     | 74.3        |  |  |     | 76.3 |  |  |     | 77.1 |  |  |       | 7.2  | % 
|                           |               |                         |     |                       |  |      |     |      |  |      |     |             |  |  |     |      |  |  |     |      |  |  |       |     
|Shipments/ Capacity (%)    |               |                         |     |                       |  |      |     |      |  |      |     |             |  |  |     |      |  |  |     |      |  |  |       |     
|                           | United States |                         |     | 91.7                  |  |      |     | 88.6 |  |      |     | 85.0        |  |  |     | 85.8 |  |  |     | 85.8 |  |  |       | (6.4 | )%
|                           | Canada        |                         |     | 98.8                  |  |      |     | 87.0 |  |      |     | 86.6        |  |  |     | 87.7 |  |  |     | 88.5 |  |  |       | (1.3 | )%
|                           | Average       |                         |     | 90.8                  |  |      |     | 87.9 |  |      |     | 85.7        |  |  |     | 86.6 |  |  |     | 87.2 |  |  |       | (4.0 | )%
|Canadian Exports To:       |               |                         |     |                       |  |      |     |      |  |      |     |             |  |  |     |      |  |  |     |      |  |  |       |     
|                           | United States |                         |     | 18.2                  |  |      |     | 18.3 |  |      |     | 18.7        |  |  |     | 19.0 |  |  |     | 19.2 |  |  |       | 5.4  | % 
|                           | Offshore      |                         |     | 2.4                   |  |      |     | 2.6  |  |      |     | 2.1         |  |  |     | 2.2  |  |  |     | 2.4  |  |  |       | 0.8  | % 
|Average Price(US$/MFBM)(1) |               |                         | 368 |                       |  |      | 282 |      |  |      | 275 |             |  |  | 262 |      |  |  | 239 |      |  |  | (35.1 | )%  




Source: RISI.



|    |                                                            
|--- | -----------------------------------------------------------
|(1) | Western SPF 2 x 4 random length,
    standard and better.

Lumber consumption in North America has been
strong over the last few years. New housing construction
continuing at high levels, partly due to low interest rates and
favorable demographics, has resulted in strong demand for
lumber. Despite the strong demand over the past few years,
lumber prices have remained at low levels due to an oversupply
in the North American market.

In the third quarter of 2003, a short-term
reduction in industry supply due to forest fires in British
Columbia and an increase in demand due to inventory restocking
resulted in a strong upturn in lumber prices. However, prices
have since moderated in response to a resumption of production
in British Columbia and seasonal reduction in demand. While the
anticipated economic recovery in the United States is expected
to stimulate demand growth, the lumber industry will continue to
face oversupply and softwood lumber trade issues, resulting in
relatively low lumber prices for the next few years.



| |                                        
| | ---------------------------------------
| | U.S.Canada Softwood Lumber
    Dispute

The softwood lumber agreement, finalized in early
1996, addressed long-standing disputes between United States and
Canadian manufacturers of softwood lumber products. Effective
for five years commencing April 1, 1996, the softwood
lumber agreement permitted the annual export from British
Columbia, Alberta, Ontario and Quebec of 14.7 BFBM of softwood
lumber to the United States without duty, with additional
volumes subject to payment of graduated duties. Each company
operating in British Columbia, Alberta, Ontario and Quebec and
exporting softwood lumber to the United States was allocated a
portion of the overall quota, based on

47



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historical shipments to the United States. The
agreement expired on March 31, 2001 and was not renewed.


Following the expiration of the softwood lumber
agreement, and in response to complaints of a coalition of
U.S.-based lumber producers, timber owners and trade unions, the
United States Department of Commerce and the United States
International Trade Commission rendered preliminary
determinations contending that Canadian softwood lumber was sold
at less than fair value and subsidized. As a result of these
determinations, Canadian softwood lumber producers, including
us, were required to post bonds in respect of potential
antidumping and countervailing duties on exports of softwood
lumber to the United States at rates of 12.6% and 19.3%,
respectively. The bonding requirements were cancelled in May
2002 and all existing bonds were returned. In May 2002, the
United States International Trade Commission issued its final
determination, which found that Canadian softwood lumber imports
threatened to injure the U.S. softwood lumber industry and
imposed specified antidumping and countervailing duties on
softwood lumber exports to the United States. Our combined
effective duty rate is 25.6%. As a result, we are now required
to remit cash deposits in an amount equal to the duties on our
softwood lumber exports to the United States.

Such duty rates are subject to appeal processes
before both a binational panel pursuant to the North American
Free Trade Agreement, or NAFTA, and the World Trade
Organization. NAFTA Review Panels have issued three rulings on
the issue in recent months. The first two rulings stated that
affirmative antidumping and countervailing duty determinations
were supported by substantial evidence on the
record. However, the panel found that the Department of
Commerce erred in its calculation of the duty levels. In the
antidumping ruling, the panel cited general,
company-specific, and scope errors. In
the countervailing ruling, the NAFTA panel said that the
Department of Commerce should not have used cross-border
comparisons of timber prices. The panel asked the Department of
Commerce to recalculate the duty levels. Beyond the NAFTA
rulings, the Canadian industry is allowed to request, and has
requested, that the U.S. Department of Commerce conduct an
administrative review every 12 months. As a result, duties
may be reduced both retroactively and prospectively through a
series of recalculations and reviews.

The softwood lumber dispute remains unresolved.
As a result, the profitability of our lumber segment has been
negatively affected. Sales of lumber represented approximately
39% of our net revenue for the year ended December 31,
2003, and approximately 47% of our lumber sales were made in the
United States in that period. If these duties are not reduced,
the profitability of our lumber operations will continue to
suffer and the duties could, under certain circumstances, make
our lumber operations unprofitable. Discussions are ongoing
between representatives of the Canadian and the United States
governments with a view to arriving at a negotiated resolution
to this trade dispute. However, we do not know what the outcome
of these discussions or the appeals described above will be.

Fiber Supply and Forest Management in the
Province of Alberta

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

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Development before any operations can commence. A
detailed forest management plan describes the resources of a
forest management area and the forest management and
silvicultural practices to be used by the holder to achieve and
maintain a perpetual sustained yield of timber from the area. A
detailed forest management plan is updated every 10 years
and includes a harvest schedule for a full timber rotation of 80
to 100 years.


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

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OUR BUSINESS

We are a leading, integrated forest products
company in Alberta that produces and markets hardwood and
softwood bleached chemi-thermo-mechanical pulp, or BCTMP, and
softwood lumber. We are a leading global marketer of BCTMP, the
lowest-cost producer of BCTMP in the world and among the
lowest-cost lumber producers in Canada. As a result of our
low-cost positions, modern assets, low ongoing capital
requirements and high degree of fiber self-sufficiency, we
believe we are well positioned to benefit from any improvements
in prices for market pulp and lumber. For the year ended
December 31, 2003, we had net revenue of
$258.6 million.

We were incorporated under the Business
Corporations Act (Alberta) on September 8, 1997, and
had no operations or cash flows from September 8, 1997 to
May 12, 1998. On May 13, 1998, we acquired all of the
forest products operations of Industries and issued
US$160 million of 9 7/8 Senior Notes due 2008. The
predecessor of Industries was first incorporated in 1919 and
began lumber operations in Whitecourt in 1923. Industries
completed construction of the Whitecourt pulp mill in 1988 and
the Meadow Lake pulp mill in 1992 and acquired the Boyle sawmill
in 1993. We completed construction of the new Whitecourt sawmill
in 2001. We have no subsidiaries.

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

The Whitecourt pulp mill is the lowest-cost
producer of BCTMP in the world. This pulp mill produces
hardwood, softwood and blended grades of pulp and has an annual
production capacity of 285,000 ADMT. The Meadow Lake pulp mill
has an annual production capacity of 325,000 ADMT of hardwood
BCTMP. The combined annual production capacity of 610,000 ADMT
represents approximately 25% of the worlds market BCTMP
capacity and we accounted for over 25% of the worlds BCTMP
sales volume in 2003. Our BCTMP is sold internationally for use
in the production of a diverse range of paper products,
including coated and uncoated printing and writing papers,
paperboard, specialty papers, tissue and toweling.

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

From 1998 to 2002, world consumption of
mechanical market pulps, which include BCTMP, grew at an average
rate of 2.9% per year. From 2003 to 2007, RISI projects
mechanical market pulp consumption growth at 2.6% per year. The
historical and projected growth in mechanical market pulp demand
has occurred and is expected to occur mainly in BCTMP, as a
result of the increased acceptance of BCTMP by paper producers,
growth in production of paper types that benefit from its
inclusion, and its attractive pricing relative to kraft pulp. We
believe growth in market BCTMP supply will be limited in the
next few years. RISI projects that market pulp prices, including
BCTMP prices, will improve in 2004.

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Our sawmills produce kiln-dried, dimension lumber
from spruce, pine and fir, or SPF, for the residential and
commercial construction industries. Our Whitecourt and Boyle
sawmills have an annual capacity of 225 MMFBM and 100 MMFBM,
respectively, and are among the lowest-cost sawmills in Canada.
Our lumber production is sold principally in Canada and the
United States, with certain higher-margin specialty grades sold
in Japan. The Whitecourt sawmill also produces higher-margin
machine stress rated, or MSR, lumber for load bearing
applications. In June 2001, we completed construction of our
new, state-of-the-art Whitecourt sawmill for a total cost of
$42.6 million, which we funded from operating cash flow. We
believe that the new Whitecourt sawmill is among the
lowest-cost, most efficient and most technologically advanced
sawmills in North America. The new mill has provided us with
significant benefits, including a 24% increase in lumber
recovery rates, a 21% reduction in unit manufacturing costs and
a 20% reduction in the mills workforce.

We supply our fiber needs primarily through
timber resources held under long-term agreements with the
Government of Alberta, which provide a high degree of fiber
self-sufficiency, security of supply and scope for progressive,
sustainable forest management practices. These forest resources,
together with multi-year fiber agreements with other forest
products companies, constitute approximately 91% of our fiber
requirements at existing production capacity levels and provide
a low-cost, sustainable supply of fiber to our facilities. We
purchase the balance of our fiber requirements in the open
market. See  Fiber Supply and Forest
Management.

Competitive Strengths

We believe the following strengths give us a
competitive advantage within the forest products industry and
position us well to benefit from any improvement in prices for
market pulp and lumber, including RISIs projected
improvement in market pulp prices, including BCTMP prices, in
2004.

Leading Global Marketer of BCTMP.We are a leading global marketer
of BCTMP and were responsible for over 25% of the worlds
BCTMP sales volume in 2002. We believe we have become a leader
in BCTMP by providing consistently high-quality products and
excellent technical support to our customers. We have also been
a leader in product development; for example, we introduced 100%
aspen BCTMP to the marketplace as a suitable component in coated
and uncoated printing and writing papers.

Low-Cost Producer of BCTMP and Lumber.We are the lowest-cost producer of
BCTMP in the world and are among the lowest-cost producers of
lumber in Canada. Our low-cost position is a result of our
modern facilities, advanced production technologies, low-cost
fiber and electricity, and our non-unionized, highly-motivated
workforce, all of which have been key contributors to the
efficiency and productivity of our operations. We have worked
consistently to improve our competitive position by implementing
a wide range of cost-cutting initiatives and investing prudently
in our facilities to improve their efficiency and increase their
production capacity.

High-Quality, Modern Facilities with Low
Ongoing Capital Requirements.Our
mills are modern and were built to sustain high levels of
performance. At Whitecourt, our technologically advanced pulp
mill commenced operations in 1988 and our new, state-of-the-art
sawmill commenced operations in 2001. We are committed to
maintaining our facilities operating efficiency through
prudent capital expenditures and high standards of maintenance
that improve or maintain our competitiveness and profitability.
As a result of our modern and well-maintained facilities, we
expect that maintenance capital expenditures will average
approximately $8 million per year for the foreseeable
future.

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Secure, Low-Cost Fiber Supply.We harvest timber under long-term
agreements with the Government of Alberta and have a secure
supply of additional fiber through multi-year fiber agreements
with other forest products companies in our region. These
agreements are valuable assets that provide a cost-competitive
and sustainable supply of fiber for approximately 91% of our
current needs. To further enhance our supply of fiber, we employ
progressive forest management strategies designed to foster the
growth of healthy, productive forests. In addition, we benefit
from our location in Alberta, which affords a low-cost, abundant
fiber supply. Our fiber costs have been, and are expected to
remain, relatively stable.

Diversified Products and Markets.Our production of pulp and lumber
provides a diverse revenue and earnings base. From 1999 to 2003,
pulp averaged approximately 60% of our total net revenue, while
lumber averaged approximately 40% of our total net revenue. This
balance of pulp and lumber production helps us maintain our
financial performance during periodic cyclical downturns in
either of the two markets. In addition, the geographic and
product-line diversity of our customers lessens the impact of a
downturn in demand in any one region or product category. In
2003, we derived 36% of our net revenue from Asia, 24% from
Canada, 23% from the United States and 17% from Europe. Pulp
shipments from Whitecourt and Meadow Lake by end-product in 2003
were as follows: 43% for coated paper, 26% for paperboard, 12%
for specialty and other paper, 10% for uncoated paper and 9% for
tissue and toweling.

Record of Continuous Operating Improvement.By employing an operating
philosophy focused on continuous improvement, we have
demonstrated the ability to consistently increase production
capacity and reduce costs at our facilities. For example, since
its completion in 1988, we have increased the Whitecourt pulp
mills production capacity by 36% and improved its cost
position. Additionally, our new Whitecourt sawmill, completed in
June 2001, currently operates at 17% above its original
production capacity. This facility has increased lumber recovery
rates by 24%, reduced unit manufacturing costs by 21% and
allowed us to reduce our workforce at the mill by 20%. Our
technologically advanced facilities, our focus on predictive
maintenance and employee input and involvement in
decision-making have contributed to maintaining the high quality
of our facilities and to achieving high utilization rates, low
maintenance costs and strong environmental and safety
performance with limited ongoing maintenance capital
expenditures.

Prudent Operating Philosophy.We have a prudent operating
philosophy and have successfully mitigated the impact of several
significant external factors that could affect our financial
performance. For example, effective January 1, 2001, we
acquired long-term power purchase rights that significantly
reduce our exposure to fluctuations in market electricity rates.
Throughout the remaining 17-year term of these rights, our
electricity costs are expected to remain relatively stable.
Since acquiring these rights, our electricity costs have
generally been below market rates in Alberta. Further, we
continually review our operations in an effort to maximize
efficiency. Such reviews have resulted in company-wide workforce
reductions of 18% since 1998. In addition, we have hedged a
significant portion of our exposure to fluctuations in exchange
rates. It is in large part due to prudent practices such as
these that we have maintained sufficient liquidity throughout a
period of low commodity prices.

Environmental Leadership.We maintain high environmental
standards in our pulp and lumber facilities and have
consistently demonstrated leadership in the development of
progressive forest management practices aimed at ensuring a
sustainable yield of timber while maintaining healthy forest
ecosystems. In 1996, our Whitecourt pulp mill became the first
manufacturing facility in North America and the second pulp mill
in the world to achieve ISO 14001 certification of its
environmental management systems. In 1998, the Meadow Lake pulp
mill also earned ISO 14001 certification. In addition, our
Whitecourt pulp mill, sawmill and forest management operations
in 1995 became the first in Alberta to be certified under the
provincial industrys environmental certification program,
FORESTCARE. Our Boyle sawmill and woodlands operations
were certified under FORESTCARE in 1996.

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Strong Management Team.Our senior management group has an
average of approximately 27 years of experience in the
forest products industry. This group is responsible for the
development of our low-cost, modern facilities and our leading
position in the BCTMP market. Under the leadership of our senior
managers, we believe we have developed a strong internal culture
that encourages employee participation in decision-making and,
through initiatives such as our comprehensive employee
profit-participation plan, promotes efficiency and productivity.

Operating Strategy

Our strategic objective is to enhance our
profitability and competitive position as a low-cost,
diversified producer of pulp and lumber products. Our strategy
for realizing this goal is to manage our fiber resources to
maximize timber yield on a sustainable basis and to convert this
fiber into the highest-margin end products at the lowest cost.
We intend to utilize our position as a leading global marketer
of BCTMP to increase demand for BCTMP through the continued
development of new and higher-margin applications and products,
as well as by continuing to provide comprehensive technical
support to our customers. We plan to continue to optimize the
production of dimension lumber on a low-cost basis and expand
into higher-margin products. We believe that, on the basis of
this strategy, we are well positioned to benefit from growth in
demand and any increase in prices for our products. We
continually evaluate potential acquisition opportunities that
could enhance our business.

Production Facilities

We own and operate three production facilities in
Alberta: a BCTMP mill and a sawmill at an integrated complex in
Whitecourt and a sawmill in Boyle. We also manage the operations
of, and market all pulp produced by, the Meadow Lake pulp mill.



| |     
| | ----
| | Pulp

Our BCTMP mill located at Whitecourt, Alberta,
commenced commercial production in July 1988. The pulp mill was
constructed at a cost of approximately $205 million and was
designed to produce 210,000 ADMT per year. Since start up, our
focus on mill optimization and continuous improvement has
increased the production capacity of the plant to 285,000 ADMT
per year, a 36% increase.

Whitecourt BCTMP Mill Operating
History

|                      |  |                         |         |      |  |         |         |      |  |      |         |  |  |  |         |  |  |  |         | 
|--------------------- |  | ----------------------- | ------- | ---- |  | ------- | ------- | ---- |  | ---- | ------- |  |  |  | ------- |  |  |  | ------- | 
|                      |  |                        
|                      |  | Year ended December 31,
|                      |  |                        
|                      |  | 1999                    |         | 2000 |  | 2001(1) |         | 2002 |  | 2003
|                      |  |                         |         |      |  |         |         |      |  |     
|Production (ADMT)     |  |                         | 246,359 |      |  |         | 274,075 |      |  |      | 238,362 |  |  |  | 278,427 |  |  |  | 283,130 | 
|Operating days        |  |                         | 359     |      |  |         | 361     |      |  |      | 342     |  |  |  | 363     |  |  |  | 355     | 
|Tonnes/ available day |  |                         | 686     |      |  |         | 759     |      |  |      | 696     |  |  |  | 767     |  |  |  | 798     | 
|Man hours/ tonne      |  |                         | 1.35    |      |  |         | 1.16    |      |  |      | 1.27    |  |  |  | 0.95    |  |  |  | 0.93    | 






|    |                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In 2001, due to cyclically low pulp prices and
    abnormally high market electricity rates, we curtailed pulp
    production and sold the electricity related to our long-term
    power purchase rights.

Our Whitecourt pulp mill is a two-line mill that
offers flexibility in meeting customer and production demands.
The Whitecourt pulp mill uses a technologically and
environmentally advanced process to produce chlorine-free
hardwood (aspen), softwood (SPF), and blended pulps for use in
the production of coated and uncoated printing and writing
papers, paperboard, specialty paper, tissue and toweling.
Process features include an alkaline peroxide bleaching system,
which is much more environmentally friendly than the
chlorine-bleaching systems used

53



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by kraft pulp mills, a biological effluent
treatment system, and a sophisticated, automated mill-wide
process control system. The pulp mill is certified to the
ISO 9002 quality management standard and was the first
manufacturing facility in North America and the second pulp mill
in the world to achieve the ISO 14001 environmental
management certification.


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

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

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

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Our technologically-advanced Whitecourt pulp
mill, low-cost fiber and electricity, efficient use of energy,
advanced bleaching process and highly flexible and productive
work force combine to give us a competitive cost advantage over
other BCTMP producers. An analysis completed in October 2003 by
NLK ranks the Whitecourt pulp mill as the lowest-cost producer
of both softwood and hardwood BCTMP in the world, as indicated
in the charts below. That study also ranked the Meadow Lake pulp
mill, which we operate and market the pulp from, as the third
lowest-cost producer of hardwood BCTMP in the world as indicated
in the following charts.

World Market BCTMP Delivered Cost
Curve  2003(1)

(BAR GRAPHS)




Source: NLK, October 2003



|    |                                                  
|--- | -------------------------------------------------
|(1) | Depreciation, interest and taxes are not included



| |       
| | ------
| | Lumber

We own and operate two sawmills located at
Whitecourt and Boyle, Alberta. The Whitecourt and Boyle sawmills
have a combined annual capacity of 325 MMFBM and are among the
lowest-cost sawmills in Canada.

Lumber Operating History

|                    |            |                         |     |      |  |      |     |      |  |      |     |     |     |  |     |     |  |  |     |     | 
|------------------- | ---------- | ----------------------- | --- | ---- |  | ---- | --- | ---- |  | ---- | --- | --- | --- |  | --- | --- |  |  | --- | --- | 
|                    |            |                        
|                    |            | Year ended December 31,
|                    |            |                        
|                    |            | 1999                    |     | 2000 |  | 2001 |     | 2002 |  | 2003
|                    |            |                         |     |      |  |      |     |      |  |     
|Production (MMFBM): |            |                         |     |      |  |      |     |      |  |      |     |     |     |  |     |     |  |  |     |    
|                    | Whitecourt |                         |     | 198  |  |      |     | 183  |  |      |     | 156 | (1) |  |     | 194 |  |  |     | 213 | 
|                    | Boyle      |                         |     | 90   |  |      |     | 103  |  |      |     | 97  |     |  |     | 100 |  |  |     | 129 | 
|                    |            |                         |     |      |  |      |     |      |  |      |     |     |     |  |     |     |  |  |     |    
|Total               |            |                         | 288 |      |  |      | 286 |      |  |      | 253 |     |     |  | 294 |     |  |  | 342 |    
|                    |            |                         |     |      |  |      |     |      |  |      |     |     |     |  |     |     |  |  |     |    






|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 2001 volume declined due to start-up of the new
    Whitecourt sawmill and the transfer of substantially all
    production from the old Whitecourt sawmill.

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

In June 2001, we completed construction of our
new, state-of-the-art Whitecourt sawmill at a total cost of
$42.6 million, which was funded from operating cash flow.
This project significantly improved the efficiency of the
Whitecourt lumber operation, increased the quality of its
products and reduced its manufacturing costs. Based on operating
results of the new mill for the year ended December 31,
2003 compared to operating results of the old mill for the year
ended December 31, 2000, the benefits resulting from the
project include a 21% increase in lumber recovery rates, a 19%
reduction in unit manufacturing costs and a 19% reduction in the
mills workforce. The new sawmill, which operates on a
24-hour-per-day, seven-day-per-week schedule, is a single-line
mill designed to handle logs with diameters from 3 to 22 inches.
The sawmill comprises a portal crane used to unload trucks and
to forward logs to a computerized log merchandising system, and
two optimized short-log feed systems. The log preparation area
utilizes three 22-inch debarkers and two high-speed cut-off
saws. Cut logs are laser-scanned to determine the highest-value
cutting pattern, and sent to four log-sorting bins or to a whole
log chipping system. The primary machine center consists of a
double length in-feed canter quad band, and an in-line thin-kerf
vertical gang edger. A board edger/ optimizer, a trimmer
optimizer, and a J-Bar bin sorter complete the rough lumber
process. The finishing process includes four natural-gas-fired
dry kilns, a high-speed planer mill, and a J-Bar sorting system.
The facility also utilizes the latest in scanning technology to
maximize wood recovery and an advanced, automated process
control system.

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

The Boyle mill is a two-line operation. The two
primary machine centers are a scragg saw and a headrig. Other
major equipment includes a gang-edger, an edger-optimizer, a
trimmer-optimizer, a J-bar bin sorter, two dry kilns and a
planer mill that uses computerized scanning technology to
enhance the performance of its equipment.

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Through our significant capital investment in new
technology and a focus on continuous improvement, we have
reduced unit manufacturing costs in our lumber operations by 23%
since 1999, as indicated in the chart below.

Our Historical Lumber Manufacturing
Costs(1)

(BAR GRAPH)






|    |                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------
|(1) | Depreciation, interest and taxes not included.                                                          
|   
|(2) | The new Whitecourt sawmill was completed in June
    2001 and 2002 was its first full year of operation.

Our lumber operations are among the lowest cost
in Canada, as indicated in the chart below.

Average Lumber Manufacturing
Costs(1)

(BAR GRAPH)




Source: RISI Wood Products Annual Survey of
Manufacturing Costs, 2002



|    |                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------
|(1) | Depreciation, interest and taxes not included.                                                          
|   
|(2) | The new Whitecourt sawmill was completed in June
    2001 and 2002 was its first full year of operation.

Capital
Expenditures

Our capital expenditures can be categorized into
two types: maintenance capital and discretionary expenditures.
We consider capital expenditures that are required to maintain
the production capacity of our facilities at current levels, or
expenditures that address safety or environmental matters, to be
maintenance capital expenditures. Capital expenditures that
enhance the productivity or profitability of our operations are
considered to be discretionary. From 1999 to 2003, maintenance
capital expenditures averaged $5.1 million per year. In
that same period, an additional $46.3 million of
discretionary expenditures were made, of which 92% was related
to the new sawmill in Whitecourt. We estimate that maintenance
capital expenditures will average approximately
$8.0 million per year for the foreseeable future.

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Sales and Marketing

Pulp

We are a leading global marketer of BCTMP. The
following table shows the approximate distribution of sales by
end-use of pulp marketed by us from our Whitecourt pulp mill and
the Meadow Lake pulp mill.

Pulp Distribution of Sales by End Product
(2003 Shipments)

|                     |  |  |     | 
|-------------------- |  |  | --- | 
|Coated papers        |  |  | 43% | 
|Paperboard           |  |  | 26% | 
|Specialty and others |  |  | 12% | 
|Uncoated papers      |  |  | 10% | 
|Tissue and towel     |  |  | 9%  | 

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

Our corporate marketing staff, supported by an
international network of independent sales agents, markets pulp
from the Whitecourt and Meadow Lake pulp mills to all major pulp
consuming regions, including Europe, Asia, and North America. In
2003, our top five pulp customers represented approximately 37%
of all pulp marketed by us, with our largest single customer
representing approximately 14% of all pulp marketed by us.

Lumber

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

We market our lumber in North America mainly
through wholesale distributors that resell it to a large number
of other customers. Our top five lumber customers in 2003, all
of which were wholesale distributors, accounted for
approximately 45% of lumber segment sales, with our largest
customer accounting for approximately 12% of lumber sales.

Transportation

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

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Fiber Supply and Forest Management

We supply our manufacturing operations primarily
from timber resources held under long-term agreements with the
Government of Alberta, providing security of supply and scope
for progressive, sustainable forest management practices. These
forest resources, together with a multi-year fiber exchange
agreement and supply contracts with other forest products
companies, provide a cost-competitive and sustainable supply of
fiber to our production facilities and represent approximately
91% of our annual fiber requirements. We purchase the balance of
our fiber requirements in the open market.

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

Our coniferous annual allowable cut, or AAC, from
the Millar Western FMA and Coniferous Timber Quotas is
796,400 cubic meters. The deciduous AAC from the Millar
Western FMA and Deciduous Timber Allocations is 394,300 cubic
meters. In previous years, we did not harvest our full AAC under
the Millar Western FMA, our Coniferous Timber Quotas or our
Deciduous Timber Allocations. This volume of fiber is carried
over and available to us to harvest in future years. Through a
log-for-wood-chip exchange agreement and supply contracts with
other forest product companies, we receive up to 190,000 cubic
meters of coniferous timber and up to 90,000 cubic meters
of deciduous timber annually. The following table sets out our
AAC under our current long-term provincial tenure and fiber
available annually under our other fiber agreements:

|                                           |  |                |           |           |  |  |         | 
|------------------------------------------ |  | -------------- | --------- | --------- |  |  | ------- | 
|                                           |  | Coniferous     |           | Deciduous
|                                           |  |                |           |          
|                                           |  |               
|                                           |  | (cubic meters)
|Forest Management Agreement(1)             |  |                | 289,400   |           |  |  | 249.700 | 
|Coniferous Timber Quotas(2)                |  |                | 507,000   |           |  |  |        | 
|Deciduous Timber Allocations(3)            |  |                |          |           |  |  | 144,600 | 
|Carry-over volume(4)                       |  |                | 122,000   |           |  |  | 72,000  | 
|Exchange agreement and supply contracts(5) |  |                | 190,000   |           |  |  | 90,000  | 
|                                           |  |                |           |           |  |  |         | 
|Total annual fiber supply:                 |  |                | 1,108,400 |           |  |  | 556,300 | 
|                                           |  |                |           |           |  |  |         | 






|    |                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net of third party allocations. Expires 2017 and
    is renewable for additional terms of 20 years.                                                                                                                       
|   
|(2) | Expire 2006 to 2021 and are renewable for
    additional terms of 20 years.                                                                                                                                               
|   
|(3) | Expire 2007 and 2023 and are renewable for
    additional terms of 20 years.                                                                                                                                              
|   
|(4) | Carry-over volume for coniferous is the average
    volume of fiber available for harvest annually to 2006.
    Carry-over volume for deciduous is the average volume of fiber
    available for harvest annually to 2011.
|   
|(5) | The exchange agreement is evergreen, with two
    years notice required for termination. There are two
    supply contracts, one that expires in 2010 and one that has been
    renewed on an annual basis since 1994.   

We have taken a leadership role in the
development of progressive forest management practices and
technology aimed at enhancing timber yields while protecting
diverse forest values and maintaining healthy forest ecosystems.
In 1995, our Whitecourt forest, sawmill and pulp mill

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operations became the first in Alberta to achieve
certification under FORESTCARE, the Alberta forest
industrys comprehensive code of practices governing
industry activities in areas such as land use, harvesting and
reforestation, environmental protection, employee and public
safety, and sustainable development. Our Boyle operations
achieved FORESTCAREcertification in 1996. The
FORESTCARE program was modified in 2001, and the
Whitecourt operations achieved recertification in 2003. We
expect the Boyle operation will receive its recertification by
the end of 2003.


Provincial
Stumpage Fees

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

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

Energy Supply

We use both electricity and natural gas as
sources of energy in our pulp and lumber operations. Electricity
is used primarily in the pulp operation and, based on 2002
costs, represents approximately 25% of the total manufacturing
cost of pulp and 2% of the total manufacturing cost of lumber.
Natural gas is used for heating and in the drying process for
both pulp and lumber and, based on 2002 costs, represents
approximately 5% of the total manufacturing cost of pulp and 2%
of the total manufacturing cost of lumber.

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

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

Through our participation in the syndicate, we
have indirect control over electrical generating capacity of
approximately 584,000 megawatt hours annually over the first
13 years of our power purchase rights and 472,000 megawatt
hours annually for the balance of the 20-year period. This
represents approximately 87% of our electricity requirements at
existing levels of production capacity for the first
13 years and 70% of our requirements for the remaining
period. To this

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extent, our electricity costs are the costs
specified in the schedules to the PPAs plus transmission costs,
which mitigates our exposure to the fluctuations in market
electricity rates.


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

Other Commodities

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

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

Employees

As at December 31, 2003, we employed 618
full-time employees, all of whom are non-unionized.

|                            |  |              |     | 
|--------------------------- |  | ------------ | --- | 
|Location                    |  | Employees(1)
|                            |  |             
|Corporate office (Edmonton) |  |              | 67  | 
|Whitecourt pulp mill        |  |              | 108 | 
|Whitecourt sawmill(2)       |  |              | 249 | 
|Whitecourt woodlands        |  |              | 34  | 
|Boyle sawmill and woodlands |  |              | 160 | 
|                            |  |              |     | 
|Total                       |  |              | 618 | 
|                            |  |              |     | 






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

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

We believe we have excellent relations with our
employees, demonstrated by exceptionally low absenteeism and
turnover rates. Further, we have never experienced a labor
disruption. Our compensation initiatives have been successful in
enhancing employee commitment to our operating strategy, while
employee training in technical, leadership and business skills
has resulted in ongoing improvements in productivity. Employee
safety is a priority at all our operations, which is reflected
in our low safety incident rates. For 2002, our Whitecourt pulp
mill and sawmill received awards as the safest mills in Alberta
in their respective size categories, while our Boyle sawmill and
Whitecourt pulp mill both received the continuing excellence in
health and safety awards in their category for their performance
over a five-year period. Our highly-motivated employees are key
contributors to the efficiency, productivity and safety that
characterize our operations.

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Environmental Matters

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

Both the pulp and lumber operations at Whitecourt
have been issued renewable 10-year environmental approvals under
AEPEA. The pulp mills approval expires on
November 30, 2004, and the lumber operations approval
expires in February 2006.

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

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

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

All forest areas we harvest are reforested to the
standards required under the Timber Management Regulations
(Alberta). Since 1998, we have spent $39.3 million on
reforestation and as at December 31, 2003, have an accrued
liability of $7.1 million for future reforestation.

Meadow Lake

We market all of the pulp produced by, and manage
the operations of, the Meadow Lake pulp mill. The Meadow Lake
pulp mill is a BCTMP pulp mill with an annual capacity of
325,000 ADMT of hardwood BCTMP and is the third lowest cost
producer of hardwood BCTMP in the world. The Meadow Lake pulp
mill is owned by the Meadow Lake Pulp Limited Partnership, which
we refer to as the Partnership, which is itself owned 50% by our
parent, Industries, and its affiliate and 50% by the Government
of Saskatchewan. The management and administrative services
provided under contract to the Meadow Lake pulp mill include
executive management, transportation, finance and accounting,
human resources and information systems. The cost of providing
these services, including a portion of overhead, is allocated to
the Meadow Lake pulp mill and reimbursed monthly to us on a cost
plus basis, effectively reducing the administrative costs of our
operations. This arrangement also works to the benefit of both
the Meadow Lake pulp mill and our Whitecourt pulp mill in terms
of the sharing of technological advances and improvements and in
increasing our purchasing power for raw materials used in the
pulping process.

The marketing agreement appoints us as the
exclusive marketing and sales agent for all of the pulp produced
at the Meadow Lake pulp mill. We are paid a commission based on
net sales revenue for the sale of pulp produced by the Meadow
Lake pulp mill. The combined production capacity of 610,000 ADMT
of BCTMP per year from the Whitecourt and Meadow Lake pulp mills
is all sold under the Millar Western name. See Related
Party Transactions.

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Legal Proceedings

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

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MANAGEMENT

Directors and Officers

The following table sets forth certain
information with respect to our directors and executive officers.

|                               |  |     |    |            |  |          |    |  |  |                                                    
|------------------------------ |  | --- | -- | ---------- |  | -------- | -- |  |  | ---------------------------------------------------
|                               |  |     |    | Years of   |  |         
|                               |  |     |    | Industry   |  |         
|Name                           |  | Age |    | Experience |  | Position
|                               |  |     |    |            |  |         
|James B. Millar                |  |     | 63 |            |  |          | 40 |  |  | Chairman and Director                              
|H. MacKenzie Millar(2)         |  |     | 57 |            |  |          | 33 |  |  | President, Chief Executive Officer and Director    
|J. Craig Armstrong             |  |     | 51 |            |  |          | 29 |  |  | Executive Vice-President                           
|Joseph R. Concini, C.A.        |  |     | 42 |            |  |          | 12 |  |  | Chief Financial Officer                            
|Carol Cotton, C.A.             |  |     | 46 |            |  |          | 15 |  |  | Senior Vice-President, Corporate                   
|Joseph Costantino              |  |     | 54 |            |  |          | 31 |  |  | Senior Vice-President, Operations                  
|Ronald J. Reis                 |  |     | 50 |            |  |          | 28 |  |  | Senior Vice-President, Engineering &
    Technology
|Robert J. Turner, Q.C.(2)      |  |     | 56 |            |  |          |    |  |  | Secretary, General Counsel and Director            
|W. Kenneth Davidson            |  |     | 53 |            |  |          |    |  |  | Director                                           
|William D. Grace, F.C.A.(1)(2) |  |     | 68 |            |  |          |    |  |  | Director                                           
|Donald R. Ching(1)             |  |     | 62 |            |  |          |    |  |  | Director                                           
|Douglas G. Hall (1)            |  |     | 54 |            |  |          |    |  |  | Director                                           






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

James B.
Millarhas served as our Chairman
of the Board and a Director since September 1997.
Mr. Millar has also served as President of Industries since
1987. Mr. Millar joined the family business on a full-time
basis in 1963, working in the construction and forest products
divisions of our parent, Industries. Mr. Millar is a past
president of the Alberta Roadbuilders Association and served on
the board of trustees of the University of Alberta Hospitals
Foundation. Mr. Millar has a B.Sc. in Civil Engineering
from the University of Alberta. Mr. Millar is the brother
of H. MacKenzie Millar.

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

J. Craig
Armstronghas served as Executive
Vice-President since July 1998. Prior to this,
Mr. Armstrong had served as our Senior Vice-President,
Marketing, since September 1997. Mr. Armstrong joined
Industries in 1987 as Director of Sales and Marketing and was
appointed

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Senior Vice-President, Marketing, in 1994. Prior
to 1987, Mr. Armstrong spent eight years with St. Anne Pulp
Sales and five years as head of sales for Prince Albert Pulp Co.
Mr. Armstrong has a Bachelor of Commerce from the
University of Saskatchewan.


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

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

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

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

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

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

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

Donald R.
Chingwas appointed a Director in
September 1997. Mr. Ching is President of SaskTel, a
communications company.

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

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

Compensation

Executive officers are appointed annually and
serve at the discretion of the Board of Directors. The aggregate
amount of compensation paid by us in 2003 to all directors and
officers as a group for services in all capacities was
$2.2 million.

Our policy provides that each non-employee
director is entitled to receive an annual fee of $13,000 and a
fee of $950 for each board or committee meeting attended. The
chair of each committee of the Board of Directors is entitled to
an additional $2,500 per annum. The total compensation paid to
non-employee directors for the year ended December 31, 2003
was $0.1 million.

We do not have a stock incentive plan and have
never granted stock appreciation rights to any of our directors,
officers or employees. We maintain a defined contribution
pension plan for all of our employees. The aggregate amount
which we contributed to the pension plan on behalf of the
employees in 2003 was $1.3 million, of which
$0.2 million represented contributions on behalf of our
officers. All of our employees are entitled to participate on a
voluntary basis in a retirement savings plan, or a RSP, under
which we match each employees RSP contribution. The
aggregate amount of matching RSP contributions which were paid
by us in 2003 was $0.7 million, of which less than $10,000
represented matching contributions on behalf of our officers.

On January 1, 2000, we established a
supplementary defined benefit pension plan for our executives
and certain key employees. Under this plan, participants will be
entitled to a target level of retirement benefits in combination
with the Canada Pension Plan and our other Registered Pension
Plans. The aggregate amount which we contributed to the
supplementary pension plan on behalf of the participants was
$0.3 million in 2003.

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

Employee Profit Sharing Plan

All full-time employees participate in a profit
sharing plan which distributes to employees on an annual basis a
percentage of earnings before income taxes and unusual items,
such as unrealized exchange gains or losses on debt. The
percentage of such earnings set aside for distribution under the
employee profit sharing plan is reviewed annually. For the years
ended December 31, 2001, 2002 and 2003, the amount of such
earnings set aside for distribution was nil, nil and
$0.3 million, respectively.

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PRINCIPAL SHAREHOLDER


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

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

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

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RELATED PARTY TRANSACTIONS

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



| |                          
| | -------------------------
| | Non-Competition Agreement

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



| |                              
| | -----------------------------
| | Trademark Licensing Agreement

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



| |                             
| | ----------------------------
| | Corporate Services Agreement

We entered into a corporate services agreement,
which we refer to as the Corporate Services Agreement, with
Industries in 1998, regarding office, managerial and aircraft
services. Pursuant to the Corporate Services Agreement,
Industries has granted us a non-exclusive license to use and
occupy an office building owned by Industries for market rent.
We have agreed to supply to Industries, on a non-exclusive
basis, management, finance and accounting, information systems,
purchasing and human resource services as the needs of
Industries dictate. Industries pays us 5% in excess of the costs
we incur in providing such services. All of the persons employed
by Industries in forest products operations remained employees
of Industries until December 31, 1998, at which time they
became our employees. Industries agreed to make such employees
available to us, continued to pay such employees and did not
terminate or alter any terms of employment. We reimbursed
Industries for all costs incurred by Industries related to those
employees. Industries makes its aircraft available to us on a
standby basis and we pay a standby fee equal to 100% of the
fixed costs of the aircraft and a proportionate amount of the
variable costs equal to the portion of our use of the aircraft
in relation to the total use of the aircraft. The Corporate
Services Agreement may be terminated by either party upon six
months notice.

68



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##### 



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



| |                       
| | ----------------------
| | Meadow Lake Agreements

Pursuant to a marketing agreement with the Meadow
Lake Pulp Limited Partnership, or the Partnership, we must use
our best efforts to arrange for sales of the pulp produced by
the Meadow Lake pulp mill on terms approved by the Partnership.
We are required to distribute sales fairly between the Meadow
Lake pulp mill and the Whitecourt pulp mill. We receive between
1% and 3% of the net sales of pulp produced by the Meadow Lake
pulp mill as a commission. The marketing agreement may be
terminated by us upon two months notice if Industries and
its affiliate no longer own any equity interest in the
Partnership. Industries and its affiliate and the Government of
Saskatchewan hold a joint interest in the Partnership, which
owns the Meadow Lake pulp mill. The Partnership can terminate
the agreement with two months notice upon the affirmative
vote of holders of more than 50% of the equity interest in the
Partnership.

Pursuant to an administrative services agreement
with the Partnership, we must make our executive officers,
administrative personnel and facilities available to the
Partnership on a non-exclusive basis to the extent reasonably
required by the Partnership. The Partnership is required to pay
the expenses (including a proportional allocation of overhead
expenses) we incur in providing such personnel and facilities.
The administrative services agreement may be terminated by us
upon two months notice if Industries and its affiliate no
longer own any equity interest in the Partnership. The
Partnership can terminate the agreement with two months
notice upon the affirmative vote of holders of more than 50% of
the equity interest in the Partnership.



| |                                    
| | -----------------------------------
| | Magnesium Sulphate Supply Agreement

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

Services Provided by Directors

Robert J. Turner, Secretary, General Counsel and
a Director of Millar Western, is a partner at the law firm of
Fraser Milner Casgrain LLP, which received fees of $256,724,
$449,140 and $318,821 for general corporate legal advice
provided to us in 2001, 2002 and 2003, respectively. Such
compensation did not exceed 5% of the revenues of Fraser Milner
Casgrain LLP during 2001, 2002 or 2003. In connection with the
offering of the notes, we are represented by Fraser Milner
Casgrain LLP with respect to matters of Canadian law.

Indebtedness of Directors and
Officers




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




69



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DESCRIPTION OF OUR REVOLVING CREDIT
FACILITY

We have a revolving credit facility dated as at
June 27, 2001 (as amended on May 27, 2002 and
June 9, 2003) with the Canadian Imperial Bank of Commerce,
HSBC Bank Canada and Bank of Montreal, each of which is an
affiliate of one of the Initial Purchasers. Our revolving credit
facility consists of a $50 million revolving credit
facility and expires on June 27, 2004. Concurrently with
the closing of the offering of the old notes, we amended our
revolving credit facility to, among other things, extend the
maturity to November 30, 2004, with an option for us to
extend the maturity for an additional 364 days.




Borrowings under our revolving credit facility
are subject to a borrowing base calculation based on our
accounts receivable and inventory. As at March 31, 2004,
the borrowing base was $49.0 million. As at March 31, 2004,
no amounts were drawn on the revolving credit facility and
$4.1 million was committed for letters of credit. The
interest rate on the revolving credit facility is floating and
may, at our option, be based upon the Bank Prime Rate,
U.S. Base Rate, Bankers Acceptance Rates, or LIBOR plus, in
each case, a borrowing margin. Collateral for the facility is a
first charge on all of our accounts receivable and inventory.




The revolving credit facility contains various
covenants restricting, among other things, our ability to incur
indebtedness, make investments or acquisitions, create liens,
make capital expenditures, sell assets, merge or consolidate
with a third party and pay dividends or make other
distributions. In addition, the revolving credit facility
contains financial covenants requiring us to maintain a minimum
fixed charge coverage ratio and a minimum working capital ratio.
The revolving credit facility has no scheduled amortization,
scheduled commitment reductions or mandatory prepayment
provisions.

Events of default under the revolving credit
facility are customary for facilities of this type including,
among other things, the failure to pay interest, principal and
other fees, the failure to observe or perform any material
covenant contained in the revolving credit facility, a change of
control of Millar Western and the institution of any bankruptcy
or insolvency proceedings.

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##### 



DESCRIPTION OF NOTES

You can find the definitions of certain terms
used in this description under the subheading Certain
Definitions.

The old notes and the new notes are referred to
collectively herein as the notes. The old notes were
and the new notes will be issued under an indenture dated
November 25, 2003 by and between us and The Bank of New
York as trustee. The terms of the notes include those stated in
the indenture and those made part of the indenture by reference
to the Trust Indenture Act, as in effect on the date of the
Indenture. The notes are subject to all such terms, and holders
of the notes are referred to the Indenture and the Trust
Indenture Act for a statement of them.




The following description is a summary of the
material terms and provisions of the indenture and the
registration rights agreement. It does not restate these
agreements in their entirety. We urge you to read the indenture
and the registration rights agreement because they, and not this
description, define your rights as holders of the notes. A copy
of the form of indenture may be obtained from us by any holder
or prospective investor upon request.




The registered Holder of a note will be treated
as the owner of it for all purposes. Only registered Holders
will have rights under the indenture.

Brief Description of the Notes

The notes:



| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | are our general unsecured obligations;                                                                                                             
|
|
|
| |  | rank equally in right of payment with any of our
    future senior unsecured Indebtedness; and                                                     
|
|
|
| |  | are effectively subordinated to any of our
    existing and future secured Indebtedness to the extent of the
    assets securing that Indebtedness.
|

Principal, Maturity and Interest




The old notes were initially issued in a total
principal amount of US$190.0 million. We may issue
additional notes from time to time after this offering. Any
issuance of additional notes will be subject to all of the
covenants of the indenture. The notes and any additional notes
subsequently issued under the indenture will rank equally and
will be treated as a single class for all purposes under the
indenture, including, without limitation, waivers, amendments,
redemptions and offers to purchase. We will issue notes in
denominations of US$1,000 and integral multiples of US$1,000.
The notes will mature on November 15, 2013.







Interest on the notes accrues at the rate of
7.75% per annum and is payable semi-annually in arrears on
May 15 and November 15, commencing on May 15,
2004. We will make each interest payment to the Holders of
record on the immediately preceding May 1 and
November 1.




Interest on the notes accrues from the date of
original issuance or, if interest has already been paid, from
the date it was most recently paid. Interest is computed on the
basis of a 360-day year comprised of twelve 30-day months.




Methods of Receiving Payments on the
Notes







If a Holder has given wire transfer instructions
to us, we will pay all principal, interest and premium and
Special Interest (as defined in  Registration
Rights; Special Interest), if any, on that Holders
notes in accordance with those instructions. All other payments
on notes will be made at the office or agency of the paying
agent and registrar within the City and State of New York unless
we elect to make interest payments by check mailed to the
Holders at their addresses set forth in the register of Holders.




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##### 



Registrar and Paying Agent for the
Notes




The trustee will initially act as paying agent
and registrar for the notes. We may change the paying agent or
registrar without prior notice to the Holders of the notes, and
we or any of our Restricted Subsidiaries may act as paying agent
or registrar.




Transfer and Exchange




A Holder may transfer or exchange notes in
accordance with the indenture. The registrar and the trustee may
require a Holder to furnish appropriate endorsements and
transfer documents in connection with a transfer of notes.
Holders will be required to pay all taxes due on transfer. We
are not required to transfer or exchange any note selected for
redemption. Also, we are not required to transfer or exchange
any note for a period of 15 days before a selection of
notes to be redeemed.




Guarantees




Under the circumstances described under
 Certain Covenants  Limitation on
Subsidiaries, the notes may in the future be fully and
unconditionally guaranteed by our Restricted Subsidiaries, as
Guarantors. As of the Issue Date, we have no Subsidiaries.







The Guarantors will guarantee all of our
obligations under the indenture, including our obligation to pay
principal, interest, premium and Special Interest, if any, with
respect to the notes. The obligations of each Guarantor will be
limited to the maximum amount as will, after giving effect to
all other contingent and fixed liabilities of such Guarantor and
after giving effect to any collections from or payments made by
or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or
pursuant to its contribution obligations under the indenture,
result in the obligations of such Guarantor under the Guarantee
not constituting a fraudulent conveyance or fraudulent transfer
under applicable law. Each Guarantor that makes a payment or
distribution under a Guarantee will be entitled to a
contribution from each other Guarantor in a proportional amount
based on the net assets of each Guarantor, determined in
accordance with GAAP.







A Guarantor will be released from all of its
obligations under its Guarantee if all of its assets or Capital
Stock is sold, in each case in a transaction in compliance with
 Offers to Repurchase by Millar
Western  Asset Sales below, or the Guarantor
merges with or into or consolidates with, or transfers all or
substantially all of its assets in compliance with
 Merger, Consolidation or Sale of Assets
above, or the Guarantor is designated an Unrestricted Subsidiary
in compliance with the other terms of the indenture, and such
Guarantor has delivered to the trustee an officers
certificate and an opinion of counsel, each stating that all
conditions precedent herein provided for relating to such
transaction have been complied with.




Additional Amounts




All payments made by us under or with respect to
the notes, or by any Guarantor pursuant to the Guarantees, will
be made free and clear of and without withholding or deduction
for or on account of any present or future tax, duty, levy,
impost, assessment or other governmental charge, including
related penalties, interest and other liabilities, imposed or
levied by or on behalf of the Government of Canada or of any
province or territory of Canada or by any authority or agency of
Canada having power to tax (hereinafter, the Taxes),
unless we or such Guarantor, as the case may be, is required to
withhold or deduct Taxes by law or by the interpretation or
administration of the law. If we or any Guarantor is required to
withhold or deduct any amount for or on account of Taxes from
any payment made under or with respect to the notes, we or such
Guarantor will pay such additional amounts (the Additional
Amounts) as may be necessary so that the net amount
received by each Holder of notes, including Additional Amounts,
after such withholding or deduction will not be less than the
amount such Holder would




72



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##### 






have received if such Taxes had not been withheld
or deducted; provided, however, that no Additional Amounts will
be payable with respect to a payment made to a Holder (an
Excluded Holder):







| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | with which we or such Guarantor does not deal at
    arms length (within the meaning of the Income Tax Act
    (Canada)) at the time of making such payment,                                                                                                                                                                                                                                                                                                                                                                                  
|
|
|
| | (2) | which is subject to such Taxes by reason of its
    being connected with Canada or any province or territory thereof
    otherwise than solely by reason of the Holders activity in
    connection with purchasing the notes, by the mere holding of
    notes or by reason of the receipt of payments thereunder,                                                                                                                                                                                                                            
|
|
|
| | (3) | which failed to duly and timely comply with our
    timely request to provide information, documents, certification
    or other evidence concerning such Holders nationality,
    residence, entitlement to treaty benefits, identity or
    connection with Canada, if and to the extent that due and timely
    compliance with such request would have resulted in the
    reduction or elimination of any Taxes as to which Additional
    Amounts would have otherwise been payable to such Holder of
    notes but for this clause (3),
|
|
|
| | (4) | which is a fiduciary, a partnership or not the
    beneficial owner of any payment on a note, if and to the extent
    that any beneficiary or settlor of such fiduciary, any partner
    in such partnership or the beneficial owner of such payment (as
    the case may be) would not have been entitled to receive
    Additional Amounts with respect to such payment if such
    beneficiary, settlor, partner or beneficial owner had been the
    Holder of such note or                                                               
|
|
|
| | (5) | any combination of the preceding numbered
    clauses (1) through (4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|




We or such Guarantor will also (a) make such
withholding or deduction and (b) remit the full amount
deducted or withheld to the relevant authority in accordance
with applicable law.







We or the Guarantor will furnish the Holders of
the notes, within 30 days after the date the payment of any
Taxes is due pursuant to applicable law, certified copies of tax
receipts evidencing such payment by us or such Guarantor. We or
any Guarantor will, upon written request of a Holder (other than
an Excluded Holder), reimburse each such Holder for the amount
of:






| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | any Taxes so levied or imposed and paid by such
    Holder as a result of payments made under or with respect to the
    notes, and                                                                                                                                                                                                                                                                                                            
|
|
|
| | (2) | any Taxes so levied or imposed with respect to
    any reimbursement under the preceding clause (1) but
    excluding any such Taxes on such Holders net income so
    that the net amount received by such Holder (net of payments
    made under or with respect to the notes) after such
    reimbursement will not be less than the net amount the Holder
    would have received if Taxes on such reimbursement had not been
    imposed.
|




At least 30 days prior to each date on which
any payment under or with respect to the notes is due and
payable, if we or any Guarantor will be obligated to pay
Additional Amounts with respect to such payment, we or such
Guarantor will deliver to the trustee an officers
certificate stating the fact that such Additional Amounts will
be payable and the amounts so payable and will set forth such
other information necessary to enable the trustee to pay such
Additional Amounts to Holders on the payment date. Whenever in
the indenture or in this Description of Notes there
is mentioned, in any context, the payment of principal, premium,
if any, Redemption Price, Change of Control Payment, Asset Sale
Payment, interest or any other amount payable under or with
respect to any note, such mention will be deemed to include
mention of the payment of Additional Amounts to the extent that,
in such context, Additional Amounts are, were or would be
payable in respect thereof.




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Redemption

Optional
Redemption




At any time prior to November 15, 2006, we
may on any one or more occasions redeem up to 35% of the
aggregate principal amount of notes issued under the indenture,
calculated after giving effect to the issuance of additional
notes, if any, at a redemption price of 107.75% of the principal
amount, plus accrued and unpaid interest and Special Interest,
if any, to the redemption date, with the net cash proceeds of
one or more issuances of Common Stock; provided that:






| |     |                                                                                                                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | at least 65% of the aggregate principal amount of
    notes issued under the indenture, calculated after giving effect
    to the issuance of additional notes, if any, remains outstanding
    immediately after the occurrence of such redemption (excluding
    notes held by us and our Affiliates); and
|
|
| | (2) | the redemption occurs within 90 days of the
    date of the closing of such sale of Common Stock.                                                                                                                                                                                                           




Except pursuant to the preceding paragraph and as
described below under  Redemption for Changes
in Canadian Withholding Taxes, the notes will not be
redeemable at our option before November 15, 2008.







After November 15, 2008, we may redeem all
or a part of the notes upon not less than 30 nor more than
60 days prior notice, at the redemption prices
(expressed as percentages of principal amount) set forth below
plus accrued and unpaid interest and Special Interest, if any,
on the notes redeemed, to the applicable redemption date, if
redeemed during the twelve-month period beginning on
November 15 of the years indicated below:




|                    |  |            |         |  
|------------------- |  | ---------- | ------- | -
|Year                |  | Percentage
|                    |  |           
|2008                |  |            | 103.875 | %
|2009                |  |            | 102.583 | %
|2010                |  |            | 101.292 | %
|2011 and thereafter |  |            | 100.000 | %



| |                                                         
| | --------------------------------------------------------
| | Redemption for Changes in Canadian
    Withholding Taxes




We may redeem all, but not less than all, of the
notes at any time at 100% of the aggregate principal amount of
the notes, plus accrued and unpaid interest and Special
Interest, if any, on the notes redeemed to the applicable
redemption date, if we have become or would become obligated to
pay, on the next date on which any amount would be payable with
respect to the notes, any Additional Amounts as a result of a
change in the laws (including any regulations promulgated
thereunder) of Canada (or any political subdivision or taxing
authority of Canada), or any change in any official position
regarding the application or interpretation of such laws or
regulations, which change is announced or becomes effective on
or after the date of this prospectus.




Mandatory
Redemption




We are not required to make mandatory redemption
or sinking fund payments with respect to the notes.




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##### 



Selection and
Notice

If less than all of the notes are to be redeemed
at any time, the trustee will select notes for redemption as
follows:



| |     |                                                                                                                                                                                             
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | if the notes are listed on any national
    securities exchange, in compliance with the requirements of the
    principal national securities exchange on which the notes are
    listed; or
|
| | (2) | if the notes are not listed on any national
    securities exchange, on a pro rata basis, by lot or by such
    method as the trustee deems fair and appropriate.                           

No notes of US$1,000 or less can be redeemed in
part. Notices of redemption will be mailed by first class mail
at least 30 but not more than 60 days before the redemption
date to each Holder of notes to be redeemed at its registered
address, except that redemption notices may be mailed more than
60 days prior to a redemption date if the notice is issued
in connection with a defeasance of the notes or a satisfaction
and discharge of the indenture. Notices of redemption may not be
conditional.

If any note is to be redeemed in part only, the
notice of redemption that relates to that note will state the
portion of the principal amount of that note that is to be
redeemed. A new note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the
Holder of notes upon cancellation of the original note. Notes
called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.




Offers to Repurchase by Millar
Western




Change of
Control




If a Change of Control occurs, we will make an
offer to repurchase all outstanding notes pursuant to a Change
of Control Offer on the terms set forth in the indenture. In the
Change of Control Offer, we will offer a Change of Control
Payment in cash equal to 101% of the aggregate principal amount
of notes repurchased plus accrued and unpaid interest and
Special Interest, if any, on the notes repurchased, to the date
of repurchase. Within 30 days following any Change of
Control, we will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of
Control and offering to repurchase notes on the Change of
Control Payment Date specified in the notice, which date will be
no earlier than 30 days and no later than 60 days from
the date the notice is mailed, pursuant to the procedures
required by the indenture and described in the notice. We will
comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations
thereunder to the extent those laws and regulations are
applicable in connection with the repurchase of the notes as a
result of a Change of Control. To the extent that the provisions
of any securities laws or regulations conflict with the Change
of Control provisions of the indenture, we will comply with the
applicable securities laws and regulations and will not be
deemed to have breached its obligations under the Change of
Control provisions of the indenture by virtue of such conflict.







On the Change of Control Payment Date, we will,
to the extent lawful:






| |     |                                                                                                                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | accept for payment all notes or portions of notes
    properly tendered pursuant to the Change of Control Offer;                                                                                                          
|
| | (2) | deposit with the paying agent an amount equal to
    the Change of Control Payment in respect of all notes or
    portions of notes properly tendered; and                                                                
|
|
| | (3) | deliver or cause to be delivered to the trustee
    the notes properly accepted together with an officers
    certificate stating the aggregate principal amount of notes or
    portions of notes being purchased by us.
|

75



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##### 



The paying agent will promptly provide to each
Holder of notes properly tendered the Change of Control Payment
for such notes, and the trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a
new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided that each new note will
be in a principal amount of US$1,000 or an integral multiple of
US$1,000.




We will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.







The provisions described above that require us to
make a Change of Control Offer following a Change of Control
will be applicable whether or not any other provisions of the
indenture are applicable. Except as described above with respect
to a Change of Control, the indenture does not contain
provisions that permit the Holders of the notes to require that
we repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.







We will not be required to make a Change of
Control Offer upon a Change of Control if a third party makes
the Change of Control Offer in the manner, at the times and
otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by us and
purchases all notes properly tendered and not withdrawn under
the Change of Control Offer.







The definition of Change of Control includes a
phrase relating to the direct or indirect sale, lease, transfer,
conveyance or other disposition of all or substantially
all of our properties or assets, including those of our
Subsidiaries, taken as a whole. Although there is a limited body
of case law interpreting the phrase substantially
all, there is no precise established definition of the
phrase under applicable law. Accordingly, the ability of a
Holder of notes to require us to repurchase its notes as a
result of a sale, lease, transfer, conveyance or other
disposition of less than all of our assets, taken as a whole, to
another Person or group may be uncertain.






| |            
| | -----------
| | Asset Sales




We will not, and will not permit any of our
Restricted Subsidiaries to, consummate an Asset Sale in any
single transaction or series of related transactions unless:






| |     |                                                                                                                                                                                                                                                                                                                                             
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | We (or our Restricted Subsidiary, as the case may
    be) receives consideration at the time of the Asset Sale at
    least equal to the Fair Market Value of the assets or Capital
    Stock issued or sold or otherwise disposed of;                                                                                                      
|
|
|
| | (2) | the Fair Market Value is determined by our Board
    of Directors and evidenced by a resolution of the Board of
    Directors set forth in an officers certificate delivered
    to the trustee; and                                                                                                                                       
|
|
|
| | (3) | at least 75% of the consideration received in the
    Asset Sale by us or such Restricted Subsidiary is in the form of
    cash or Cash Equivalents or Replacement Assets, in each case
    received at the time of such sale of other disposition. For
    purposes of this provision, each of the following will be deemed
    to be cash:
|



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (a) | any liabilities, as shown on our or such
    Restricted Subsidiarys most recent balance sheet, of us or
    any Restricted Subsidiary (other than contingent liabilities and
    liabilities that are by their terms subordinated to the notes or
    any Guarantee) that are assumed by the transferee of any such
    assets pursuant to a customary novation agreement that releases
    us or such Restricted Subsidiary from further liability; and
|
|
|
| | (b) | any securities, notes or other obligations
    received by us or any such Restricted Subsidiary from such
    transferee that are contemporaneously, subject to ordinary
    settlement periods, converted by us or such Restricted
    Subsidiary into cash, to the extent of the cash or Cash
    Equivalents received in that conversion.                                                                                                             
|

76



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##### 






Within 365 days after the receipt of any Net
Proceeds from an Asset Sale, we or such Restricted Subsidiary
may apply those Net Proceeds at its option:






| |     |                                                                                                                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | to repay term or revolving credit Indebtedness
    under a Credit Facility (other than any such Indebtedness that
    is subordinate in right of payment to the notes) and, if the
    Indebtedness repaid is revolving credit Indebtedness, to
    correspondingly reduce commitments with respect thereto;
|
| | (2) | if the Asset Sale is by a Restricted Subsidiary
    that is not a Guarantor, to repay, redeem or repurchase any
    Indebtedness of that Restricted Subsidiary; or                                                                                                                                          
|
| | (3) | to purchase Replacement Assets or make a capital
    expenditure.                                                                                                                                                                                                                                           




Pending the final application of any Net
Proceeds, we or such Restricted Subsidiary may temporarily
reduce revolving credit borrowings or otherwise invest the Net
Proceeds in any manner that is not prohibited by the indenture.







Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the preceding paragraph will
constitute Excess Proceeds. When the aggregate
amount of Excess Proceeds exceeds US$10.0 million, we will
make an Asset Sale Offer to all Holders of notes and all holders
of other Indebtedness that is of equal rank as the notes
containing provisions similar to those set forth in the
indenture with respect to offers to purchase or redeem such
indebtedness with the proceeds of sales of assets, to purchase
the maximum principal amount of notes and such other pari passu
Indebtedness that may be purchased out of the Excess Proceeds.







In the Asset Sale Offer, we will offer an Asset
Sale Payment in cash equal to 100% of the principal amount plus
accrued and unpaid interest and Special Interest, if any, to the
date of purchase. If any Excess Proceeds remain after
consummation of an Asset Sale Offer, we or such Restricted
Subsidiary may use those Excess Proceeds for any purpose not
otherwise prohibited by the indenture. If the aggregate
principal amount of notes and other Indebtedness of equal rank
tendered into such Asset Sale Offer exceeds the amount of Excess
Proceeds, the trustee will select the notes and such other
Indebtedness of equal rank to be purchased on a pro rata basis.
Upon completion of each Asset Sale Offer, the amount of Excess
Proceeds will be reset at zero.







We will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent those laws and
regulations are applicable in connection with each repurchase of
notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with
the Asset Sale provisions of the indenture, we will comply with
the applicable securities laws and regulations and will not be
deemed to have breached its obligations under the Asset Sale
provisions of the indenture by virtue of such conflict.




Material Covenants






| |         
| | --------
| | Overview







In the indenture under which the notes will be
issued, we have agreed to covenants that limit our ability,
among other things, to:






| |   |                                      
| | - | -------------------------------------
|
| |  | incur additional indebtedness;       
|
|
|
| |  | pay dividends and make distributions;
|
|
|
| |  | repurchase stock;                    
|
|
|
| |  | make certain investments;            
|
|
|
| |  | transfer or sell assets;             
|

77



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##### 





| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
|
| |  | create liens;                                                                                       
|
|
|
| |  | enter into transactions with affiliates;                                                            
|
|
|
| |  | issue or sell stock of subsidiaries;                                                                
|
|
|
| |  | create dividend or other payment restrictions
    affecting                                         
|
|
|
| |  | restricted subsidiaries; and                                                                        
|
|
|
| |  | merge, consolidate, amalgamate or sell all or
    substantially all of our assets to another person.
|




In addition, if a Change of Control occurs, each
holder of exchange notes will have the right to require us to
repurchase all or a part of the holders exchange notes at
a price equal to 101% of their principal amount, plus any
accrued and unpaid interest to the date of repurchase.







These covenants are subject to important
qualifications and limitations. Please see the full description
of the covenants set out below.






| |                                          
| | -----------------------------------------
| | Limitation on Additional
    Indebtedness






| |              
| | -------------
| | Brief Summary







We will not be able to incur additional
indebtedness unless the Consolidated Fixed Charge Coverage Ratio
is 2.0:1 or greater. However, this restriction is subject to
several important exceptions which will allow us to incur
additional indebtedness even though the Consolidated Fixed
Charge Coverage Ratio may be less than 2.0:1. For specific
information regarding this covenant see the detailed description
below.









| |                     
| | --------------------
| | Detailed Description







We will not, and will not cause or permit any of
our Restricted Subsidiaries to, directly or indirectly, incur
(as defined) any Indebtedness (including, without limitation,
any Acquired Indebtedness); provided that if no Default or Event
of Default will have occurred and be continuing at the time or
as a consequence of the incurrence of such Indebtedness, we or
any Restricted Subsidiary may incur Indebtedness (including any
Acquired Indebtedness) if our Consolidated Fixed Charge Coverage
Ratio is greater than 2.0 to 1.







Notwithstanding the preceding, the following
items of Indebtedness may be incurred (collectively,
Permitted Indebtedness):









| |     |                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | our and any Restricted Subsidiarys
    Indebtedness arising under or in connection with Credit
    Facilities in an aggregate principal amount at any time
    outstanding not to exceed the greater of:






| |     |                                                                                                                                        
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------
|
| | (A) | $50.0 million, less any prepayments actually
    made thereunder that permanently reduce the commitment under a
    Credit Facility and
|
|
|
| | (B) | the sum of:                                                                                                                            
|



| |     |                                                                                                
| | --- | -----------------------------------------------------------------------------------------------
|
| | (a) | 85.0% of the net book value of our and our
    Restricted Subsidiaries accounts receivable and
|
|
|
| | (b) | 60.0% of the net book value of our and our
    Restricted Subsidiaries inventory;             
|



| |     |                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Indebtedness under the notes and any Guarantees
    to be issued on the Issue Date, and the Exchange Notes and any
    Guarantees to be issued pursuant to the registration rights
    agreement;

78



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##### 





| |     |                                                                                                                                                                                                                                                                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) | Indebtedness not covered by any other clause of
    this definition which is outstanding on the Issue Date;                                                                                                                                                                                                                                                                   
|
|
| | (4) | our Indebtedness owed to and held by any
    Wholly-Owned Restricted Subsidiary which is unsecured and
    subordinated in right of payment to the payment and performance
    of our obligations under the indenture and the notes and
    Indebtedness of any Restricted Subsidiary owed to and held by us
    or another Wholly-Owned Restricted Subsidiary; provided that:
|



| |     |                                                                                                                                                                                                                                                                              
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (a) | any sale or other disposition of any Indebtedness
    of us or any Restricted Subsidiary referred to in this
    clause (4) to a Person (other than us or a Wholly-Owned
    Restricted Subsidiary);                                                                         
|
|
|
| | (b) | any sale or other disposition of Capital Stock of
    any Wholly-Owned Restricted Subsidiary which holds our or any
    Restricted Subsidiarys Indebtedness such that such
    Wholly-Owned Restricted Subsidiary ceases to be a Wholly-Owned
    Restricted Subsidiary; and
|
|
|
| | (c) | the Designation of a Restricted Subsidiary that
    holds our or any Restricted Subsidiarys Indebtedness as an
    Unrestricted Subsidiary;                                                                                                                                 
|






| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | will be deemed to be an incurrence of
    Indebtedness not constituting Permitted Indebtedness by the
    issuer of such Indebtedness;






| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (5) | Purchase Money Indebtedness and Capitalized Lease
    Obligations incurred to acquire, construct or improve property
    in the ordinary course of business in an aggregate principal
    amount outstanding not to exceed, together with all other
    Indebtedness outstanding under this clause (5), at the time
    of any such incurrence and after giving pro forma effect
    thereto, 5.0% of our consolidated tangible assets as of the end
    of the most recent fiscal quarter for which consolidated
    financial statements are available ending on or prior to the
    date of determination;
|
|
|
| | (6) | Interest Rate Agreements relating to our or any
    Restricted Subsidiarys Indebtedness which indebtedness:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|



| |     |                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------
| | (a) | bears interest at fluctuating interest rates and                                                                  
|
|
| | (b) | is otherwise permitted to be incurred under
     Certain Covenants  Limitation on
    Additional Indebtedness;
|



| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | provided that the notional principal amount of
    such Interest Rate Agreements, at the time of the incurrence
    thereof, does not exceed the principal amount of the
    Indebtedness to which such Interest Rate Agreements relate;



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (7) | Indebtedness under Currency Agreements or
    Commodity Agreements; provided that in the case of Currency
    Agreements which relate to Indebtedness, such Currency
    Agreements do not increase the principal amount of our and our
    Restricted Subsidiaries Indebtedness outstanding other
    than as a result of fluctuations in foreign currency exchange
    rates or by reason of fees, indemnities or compensation payable
    thereunder;
|
|
|
| | (8) | our or any Restricted Subsidiarys
    Indebtedness in respect of reimbursement obligations relating to
    undrawn standby letters of credit issued for our or any
    Restricted Subsidiarys account, as the case may be, in the
    ordinary course of business;                                                                                                                                                                                     
|
|
|
| | (9) | our or any Restricted Subsidiarys
    Indebtedness in respect of bid, performance, surety and appeal
    bonds, statutory obligations or other obligations of a like
    nature provided in the ordinary course of business;                                                                                                                                                                                                                            
|

79



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##### 





| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (10) | additional Indebtedness not to exceed
    $25.0 million in aggregate principal amount at any one time
    outstanding;                                                                                                                                                                                                                                                                                                                                                            
|
|
| | (11) | Refinancing Indebtedness;                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
|
| | (12) | the guarantee by us or any of the Guarantors of
    our or a Guarantors Indebtedness that was permitted to be
    incurred by another provision of this covenant;                                                                                                                                                                                                                                                                                                                
|
|
|
| | (13) | the accrual of interest, the accretion or
    amortization of original issue discount, the payment of interest
    on any Indebtedness in the form of additional Indebtedness with
    the same terms, and the payment of dividends on Disqualified
    Capital Stock in the form of additional shares of the same class
    of Disqualified Capital Stock; provided, in each such case, that
    the amount thereof is included in our Consolidated Fixed Charges
    as accrued;
|
|
|
| | (14) | our or any Restricted Subsidiarys
    Indebtedness consisting of guarantees, indemnities or
    obligations in respect of purchase price adjustments in
    connection with the acquisition or disposition of assets,
    including, without limitation, Capital Stock; and                                                                                                                                                                                                      
|
|
|
| | (15) | the incurrence of Indebtedness by us or any
    Restricted Subsidiary arising from the honoring by a bank or
    other financial institution of a check, draft or similar
    instrument inadvertently (except in the case of daylight
    overdrafts) drawn against insufficient funds in the ordinary
    course of business; provided that such Indebtedness is
    extinguished within 30 days of incurrence.                                                                 
|




For purposes of determining compliance with this
Limitation on Additional Indebtedness covenant, in
the event that an item of proposed Indebtedness meets the
criteria of more than one of the categories of Permitted
Indebtedness described in clauses (1) through
(15) above, or is entitled to be incurred pursuant to the
first paragraph of this covenant, we will be permitted to
classify or reclassify such item of Indebtedness in any manner
that complies with this covenant.






| |                                      
| | -------------------------------------
| | Limitation on Restricted
    Payments






| |              
| | -------------
| | Brief Summary







We will not be permitted to make Restricted
Payments unless we meet several conditions, including being able
to incur additional indebtedness pursuant to the Consolidated
Fixed Charge Coverage Ratio test in the first paragraph of the
detailed description of the Limitation on Additional
Indebtedness covenant. In addition, the amount of
Restricted Payments permitted by the Limitation on
Restricted Payments covenant is limited.







In general, Restricted Payments include
dividends, redemptions of our stock or stock of a Restricted
Subsidiary, prepayments of subordinated indebtedness, and some
kinds of investments. However, this restriction is subject to
several important exceptions which will allow us to make
Restricted Payments from time to time. For specific information
regarding this covenant see the detailed description below.









| |                     
| | --------------------
| | Detailed Description







We will not, and will not cause or permit any of
our Restricted Subsidiaries to, directly or indirectly:









| |     |                                                                                                                                                                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (A) | declare or pay any dividend or any other
    distribution or payment on Capital Stock of us or any Restricted
    Subsidiary or any payment made to the direct or indirect holders
    (in their capacities as such) of Capital Stock of us or any
    Restricted Subsidiary, other than:









| |     |                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------
| | (1) | dividends or distributions payable solely in our
    Capital Stock (other than Disqualified Capital Stock), and




80



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##### 








| |     |                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------
| | (2) | in the case of our Restricted Subsidiaries,
    dividends or distributions payable to us or to a Restricted
    Subsidiary;






| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (B) | purchase, redeem or otherwise acquire or retire
    for value any of our or a Restricted Subsidiarys Capital
    Stock (other than Capital Stock owned by us or a Restricted
    Subsidiary) or any Capital Stock of any of our direct or
    indirect parents;                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
|
|
| | (C) | make any principal payment on, or purchase,
    defease, repurchase, redeem or otherwise acquire or retire for
    value, prior to any scheduled maturity, scheduled repayment or
    scheduled sinking fund payment, any Indebtedness of us or any
    Guarantor which is subordinated in right of payment to the notes
    or such Guarantors Guarantee, as the case may be (other
    than any subordinated Indebtedness held by us or any
    Wholly-Owned Restricted Subsidiary or any such Indebtedness
    acquired in anticipation of satisfying a scheduled sinking fund
    obligation, principal installment or final maturity in each case
    due within one year of the date of acquisition);
|
|
| | (D) | make any Investment other than a Permitted
    Investment;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
|
| | (E) | designate any Subsidiary as an Unrestricted
    Subsidiary (a Designation); provided that the
    Designation of a Subsidiary as an Unrestricted Subsidiary will
    be deemed to include the Designation of all of the Subsidiaries
    of such Subsidiary; or                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
|
|
| | (F) | forgive any Indebtedness of an Affiliate owed to
    us or a Restricted Subsidiary                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|



| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (all such payments and other actions set forth
    in clauses (A) through (F) above being collectively
    referred to as Restricted Payments) unless, at the
    time of and after giving effect to such Restricted Payment:



| |     |                                                                                                                                                                                                                                                    
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | no Default or Event of Default will have occurred
    and be continuing at the time of or immediately after giving
    effect to such Restricted Payment;                                                                                          
|
|
|
| | (2) | immediately after giving pro forma effect to such
    Restricted Payment, we could incur US$1.00 of additional
    Indebtedness (other than Permitted Indebtedness) under the
     Limitation on Additional Indebtedness
    covenant above; and
|
|
| | (3) | immediately after giving effect to such
    Restricted Payment, the aggregate amount of all Restricted
    Payments declared or made after the Issue Date does not exceed
    the sum (without duplication) of:                                    



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (a) | 50% of our cumulative Consolidated Net Income (or
    if cumulative Consolidated Net Income will be a loss, minus 100%
    of such loss) for the period beginning on the first day of our
    fiscal quarter commencing after the Issue Date and ending on the
    last day of the fiscal quarter immediately preceding the date of
    such proposed Restricted Payment (treating such period as a
    single accounting period);                                                                                                                                                                                                                                                                                                                                                  
|
|
|
| | (b) | 100% of the aggregate net cash proceeds received
    by us from the issuance or sale after the Issue Date (other than
    to a Restricted Subsidiary) of (A) our Capital Stock (other
    than Disqualified Capital Stock) or (B) any Indebtedness or
    other securities of Millar Western that are convertible into or
    exercisable or exchangeable for our Capital Stock (other than
    Disqualified Capital Stock) which have been so converted,
    exercised or exchanged, as the case may be, excluding, in the
    case of clause (3)(b), any net cash proceeds from the
    issuance of Common Stock to the extent such net cash proceeds
    are used to redeem the notes in accordance with the first
    paragraph of Redemption  Optional Redemption
    above;
|
|
| | (c) | without duplication of any amounts included in
    clause (3)(a) above, so long as the Designation thereof was
    treated as a Restricted Payment made after the Issue Date, with
    respect to any Unrestricted Subsidiary that has been
    redesignated as a Restricted Subsidiary after the Issue Date in
    accordance with the definition of                                                                                                                                                                                                                                                                                                                                                                                                                               

81



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##### 



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     | Restricted Subsidiary, our
    proportionate interest in an amount equal to the Fair Market
    Value of our interest in such Subsidiary; provided that such
    amount will not in any case exceed the Designation Amount with
    respect to such Restricted Subsidiary at the time of its
    Designation;                                                                                                                                         
|
|
| | (d) | in the case of the disposition or repayment of
    any Investment, or the release of a Guarantee, constituting a
    Restricted Payment made after the Issue Date, an amount equal to
    the lesser of the return of capital with respect to such
    Investment and the initial amount of such Investment which was
    treated as a Restricted Payment, in either case, less the cost
    of the disposition of such Investment and net of taxes; and
|
| | (e) | $10.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                          




In determining the amount of any Restricted
Payment, cash distributed or invested will be valued at the face
amount thereof and Property other than cash will be valued at
its Fair Market Value, except that, in determining the amount of
any Restricted Payment made under clause (E) above, the
amount of such Restricted Payment (the Designation
Amount) will be equal to the greater of (A) the book
value or (B) the Fair Market Value of our proportionate
interest in such Subsidiary on such date.







The provisions of this covenant will not prevent:






| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | the payment of any dividend or distribution
    within 60 days after the date of declaration thereof, if at
    such date of declaration such payment would comply with the
    provisions of the indenture;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
|
| | (2) | the repurchase, redemption or other acquisition
    or retirement of any shares of our Capital Stock or Indebtedness
    or any Guarantors Capital Stock or Indebtedness
    subordinated to the notes or such Guarantors Guarantee, as
    the case may be, by conversion into, or by or in exchange for,
    shares of our Capital Stock (other than Disqualified Capital
    Stock), or out of the net cash proceeds of the substantially
    concurrent sale (other than to a Restricted Subsidiary) of other
    shares of our Capital Stock (other than Disqualified Capital
    Stock); provided that any such net cash proceeds are excluded
    from clause (3)(b) of the immediately preceding paragraph
    for the purposes of this calculation (and were not included
    therein at any time) and are not used to redeem the notes
    pursuant to Redemption  Optional
    Redemption above;                                                                                                                                                
|
|
|
| | (3) | the redemption, repayment or retirement of our or
    any Guarantors Indebtedness subordinated to the notes or
    such Guarantors Guarantee, as the case may be, in exchange
    for, by conversion into, or out of the net cash proceeds of,
    (x) a substantially concurrent sale or incurrence of
    Indebtedness by us or such Guarantor, as the case may be (other
    than any Indebtedness owed to a Restricted Subsidiary), that is
    contractually subordinated in right of payment to the notes or
    such Guarantors Guarantee, as the case may be, to at least
    the same extent as the Indebtedness being redeemed, repaid or
    retired or (y) a substantially concurrent sale (other than
    to a Restricted Subsidiary) of shares of our Capital Stock;
    provided that any such net cash proceeds are excluded from
    clause (3)(b) of the immediately preceding paragraph (and
    were not included therein at any time) and are not used to
    redeem the notes pursuant to Redemption 
    Optional Redemption above;
|
|
|
| | (4) | the retirement of any shares of our Disqualified
    Capital Stock by conversion into, or by exchange for, other
    shares of our Disqualified Capital Stock, or out of the net cash
    proceeds of the substantially concurrent sale (other than to a
    Restricted Subsidiary) of other shares of our Disqualified
    Capital Stock; provided that any such net cash proceeds are
    excluded from clause (3)(b) of the immediately preceding
    paragraph (and were not                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | included therein at any time) and are not used to
    redeem the notes pursuant to Redemption 
    Optional Redemption above;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
|
| | (5) | (x) the purchase, redemption or other
    acquisition for value of shares of our Capital Stock (other than
    Disqualified Capital Stock) held by our employees or directors
    (or their estates or beneficiaries under their estates) upon the
    death, retirement or termination of employment or directorship
    of such employees or directors pursuant to the terms of an
    employee benefit plan or other agreement approved by our Board
    of Directors and (y) the purchase, redemption, acquisition
    or other retirement for nominal value of any rights issued in
    accordance with the indenture and granted pursuant to any
    shareholder rights plan approved by our Board of Directors;
    provided that the aggregate cash consideration paid, or
    distributions made, pursuant to this clause (5) do not
    exceed $2.0 million in the aggregate subsequent to the
    Issue Date;
|
|
| | (6) | the payment of any dividend by a Restricted
    Subsidiary that is not a Wholly-Owned Restricted Subsidiary to
    the holders of its Capital Stock on a pro rata basis;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (7) | repurchases of Capital Stock deemed to occur upon
    the exercise of stock options;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (8) | payments of (a) dividends on, and
    (b) the repurchase, redemption, retirement or acquisition
    at the scheduled maturity, scheduled repayment or scheduled
    sinking fund date of, Disqualified Capital Stock the incurrence
    of which was permitted by the indenture; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
|
| | (9) | Investments acquired as a capital contribution
    to, or in exchange for, or out of the net cash proceeds of a
    substantially concurrent offering of, our Capital Stock (other
    than Disqualified Capital Stock); provided that the amount of
    any such net cash proceeds that are utilized for any such
    acquisition or exchange will be excluded from clause (3)(b)
    of the immediately preceding paragraph.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|




In calculating the aggregate amount of Restricted
Payments made subsequent to the Issue Date for purposes of
clause (3) of the immediately preceding paragraph, amounts
expended pursuant to clauses (1) (but only if the
declaration thereof has not been counted in a prior period), (5)
and (8)(a) of this paragraph will be included in such
calculation and clauses (2), (3), (4), (6), (7), (8)(b) and
(9) of this paragraph will not be included in such
calculation.







Not later than the date of making any Restricted
Payment other than a Restricted Payment under clause (2),
(3), (4), (5), (6), (7) or (9), which together with any
Restricted Payments not previously reported pursuant to this
sentence, exceeds $3.0 million, we will deliver to the
trustee an officers certificate stating that such
Restricted Payment is permitted and setting forth the basis upon
which the calculations required by the covenant described above
were computed, which calculations may be based upon our latest
available financial statements, and that no Default or Event of
Default has occurred and is continuing and no Default or Event
of Default will occur immediately after giving effect to any
such Restricted Payment.






| |                    
| | -------------------
| | Limitation on Liens






| |              
| | -------------
| | Brief Summary







We will not be permitted to create any Liens
unless we also secure the notes. However, we are allowed to
create liens without securing the notes as described in the
definition of Permitted Liens.









| |                     
| | --------------------
| | Detailed Description







We will not, and will not cause or permit any of
our Restricted Subsidiaries, directly or indirectly, to, create,
incur or otherwise cause or suffer to exist or become effective
any Liens of




83



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any kind (other than Permitted Liens) upon or
with respect to any property or assets of us or any of our
Restricted Subsidiaries, unless:







| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | if such Lien secures Indebtedness which is ranked
    equally and ratably with the notes or any Guarantee, then the
    notes or such Guarantee, as the case may be, are secured on an
    equal and ratable basis with the obligations so secured until
    such time as such obligations are no longer secured by a Lien or                                                                                                                                      
|
|
|
| | (2) | if such Lien secures Indebtedness which is
    subordinated to the notes or any Guarantee, then the notes or
    such Guarantee, as the case may be, are secured and the Lien
    securing such other Indebtedness will be subordinated to the
    Lien granted to the holders of the notes or such Guarantee, as
    the case may be, at least to the same extent as such
    Indebtedness is subordinated to the notes or such Guarantee, as
    the case may be.
|



| |                                               
| | ----------------------------------------------
| | Limitation on Transactions with
    Affiliates




Brief
Summary







We will only be permitted to enter into
transactions with Affiliates if the transactions are fair to us
and have terms at least as favorable as comparable arms
length transactions and after compliance with other conditions.
However, there are transactions with affiliates that do not
require us to comply with the conditions. For specific
information regarding this covenant and these exceptions see the
detailed description below.









Detailed
Description







We will not, and will not cause or permit any of
our Restricted Subsidiaries to, directly or indirectly, enter
into or suffer to exist any transaction or series of related
transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with any
Affiliate (each an Affiliate Transaction) or extend,
renew, waive or otherwise modify the terms of any Affiliate
Transaction entered into prior to the Issue Date unless:






| |     |                                                                                                                                                                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | such Affiliate Transaction is between or among us
    and our Restricted Subsidiaries or between or among Restricted
    Subsidiaries; or                                                                                                                                                                                                        
|
|
|
| | (2) | the terms of such Affiliate Transaction are fair
    to us or such Restricted Subsidiary, as the case may be, and are
    at least as favorable as the terms which could be obtained by us
    or such Restricted Subsidiary, as the case may be, in a
    comparable transaction made on an arms-length basis
    between unaffiliated parties.
|




In any Affiliate Transaction (or any series of
related Affiliate Transactions) involving an amount or having a
Fair Market Value in excess of $2.0 million which is not
permitted under clause (1) of the immediately preceding
sentence, we must obtain a resolution of the disinterested
members of our Board of Directors certifying that they have
approved such Affiliate Transaction and determined that such
Affiliate Transaction complies with clause (2) of the
immediately preceding sentence. In addition, in any Affiliate
Transaction (or any series of related Affiliate Transactions)
involving an amount or having a Fair Market Value in excess of
$20.0 million which is not permitted under clause (1)
of the second preceding sentence, we must obtain a written
opinion from an Independent Financial Advisor that such
transaction or transactions are fair to us or such Restricted
Subsidiary, as the case may be, from a financial point of view;
provided that the provisions of this sentence will not apply to
the sale of inventory in the ordinary course of business.







The preceding provisions will not apply to:






| |     |                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | any Permitted Investment or Restricted Payment
    made in compliance with the provisions described under
     Limitation on Restricted Payments above;

84



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| |     |                                                                                                                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) | reasonable fees and compensation paid to and
    indemnity provided on behalf of officers, directors or employees
    of us or any Restricted Subsidiary as determined in good faith
    by our Board of Directors or senior management;                                                                
|
|
|
| | (3) | the existence of, or performance or payment by
    any of our or our Restricted Subsidiaries of our or their
    obligations pursuant to and in accordance with the terms of, the
    Meadow Lake Services Agreement, the Corporate Services
    Agreements and the Magnesium Sulphate Supply Agreement;
|
|
|
| | (4) | sales of Capital Stock of us (other than
    Disqualified Capital Stock) to our Affiliates;                                                                                                                                                                                                             
|
|
| | (5) | the pledge of Capital Stock of Unrestricted
    Subsidiaries to support the Indebtedness thereof;                                                                                                                                                                                                       
|
|
| | (6) | customary shareholders and registration rights
    agreements among us and our shareholder; and                                                                                                                                                                                                         
|
|
|
| | (7) | transactions with a Person (other than an
    Unrestricted Subsidiary) that is our Affiliate solely because we
    own, directly or through a Restricted Subsidiary, Capital Stock
    in, or controls, such Person.                                                                                    
|

Limitation on
Issuance of Preferred Stock of Restricted
Subsidiaries






| |              
| | -------------
| | Brief Summary







Our Restricted Subsidiaries may not issue
preferred stock to persons other than us or our Restricted
Subsidiaries unless we are able to incur additional indebtedness
pursuant to the Consolidated Fixed Charge Coverage Ratio test of
the first paragraph of the detailed description of the
Limitation on Additional Indebtedness covenant. For
specific information regarding this covenant see the detailed
description below.









| |                     
| | --------------------
| | Detailed Description







We will not permit any Restricted Subsidiary to
issue any Preferred Stock (except Preferred Stock to us or a
Wholly-Owned Restricted Subsidiary) or permit any Person (other
than us or a Wholly-Owned Restricted Subsidiary) to hold any
such Preferred Stock unless we or such Restricted Subsidiary
would be entitled to incur or assume Indebtedness under the
first paragraph of the covenant described under Limitation
on Additional Indebtedness in an aggregate principal
amount equal to the aggregate stated value of the Preferred
Stock to be issued.




Limitation on
Capital Stock of Restricted Subsidiaries






| |              
| | -------------
| | Brief Summary







We will not be permitted to sell stock of our
Restricted Subsidiaries and our Restricted Subsidiaries may not
issue or sell their own stock or that of another Restricted
Subsidiary unless it is a sale to us or our wholly owned
Restricted Subsidiary, a sale of all of Capital Stock of the
Restricted Subsidiary or a sale of Preferred Stock in compliance
with the preceding covenant.









| |                     
| | --------------------
| | Detailed Description







We will not:






| |     |                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | sell, pledge, hypothecate or otherwise convey or
    dispose of any Capital Stock of a Restricted Subsidiary or                                                                            
|
|
|
| | (2) | permit any of its Restricted Subsidiaries to
    issue any Capital Stock, other than to us or a Wholly-Owned
    Restricted Subsidiary. The preceding restrictions will not apply
    to an
|

85



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##### 






| |  |                                                                                                                                                                                                                                                                                                                                                                                 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Asset Sale consisting of all of the Capital Stock
    of a Restricted Subsidiary owned by us made in compliance with
    the provisions of  Offers to Repurchase by
    Millar Western  Asset Sales above or the
    issuance of Preferred Stock in compliance with the covenant
    described under  Limitation on Preferred Stock
    of Restricted Subsidiaries above.




Limitation on
Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries






| |              
| | -------------
| | Brief Summary







Our Restricted Subsidiaries will not be permitted
to restrict their ability to, among other things, make
(1) dividend payments, (2) debt repayments,
(3) transfers of assets or (4) loans, to us or another
Restricted Subsidiary. However, this restriction is subject to
several important exceptions. For specific information regarding
this covenant see the detailed description below.









| |                     
| | --------------------
| | Detailed Description







We will not, and will not cause or permit any of
its Restricted Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to:






| |     |                                                                                                                                                                                                                  
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | pay dividends or make any other distributions to
    us or any Restricted Subsidiary (A) on its Capital Stock or
    (B) with respect to any other interest or participation in,
    or measured by, its profits;
|
|
|
| | (2) | repay any Indebtedness or any other obligation
    owed to us or any Restricted Subsidiary;                                                                                                                      
|
|
|
| | (3) | make loans or advances or capital contributions
    to us or any of our Restricted Subsidiaries; or                                                                                                              
|
|
|
| | (4) | transfer any of its properties or assets to us or
    any of our Restricted Subsidiaries;                                                                                                                        
|

except for such encumbrances or restrictions
existing under or by reason of:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | encumbrances or restrictions existing on the
    Issue Date to the extent and in the manner such encumbrances and
    restrictions are in effect on the Issue Date;                                                                                                                                                                                                                                                                                                                                                   
|
|
| | (2) | the indenture, the notes and any Guarantees, or
    any other instrument governing our debt securities incurred in
    compliance with the covenant entitled
     Limitation on Additional Indebtedness
    that are no more restrictive, taken as a whole, than those
    contained in the indenture, the notes and the Guarantees;                                                                                                                                                                               
|
|
| | (3) | applicable law;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
|
| | (4) | any instrument governing Acquired Indebtedness or
    Capital Stock of a Person acquired by us or our Restricted
    Subsidiaries as in effect at the time of such acquisition, which
    encumbrance or restriction is not applicable to any Person, or
    the properties or assets of any Person, other than the Person
    (including any Subsidiary of the Person), the property or assets
    of the Person (including any Subsidiary of the Person) or the
    properties or assets, in each case, so acquired;
|
|
| | (5) | customary non-assignment provisions in leases or
    other agreements entered in the ordinary course of business and
    consistent with past practices;                                                                                                                                                                                                                                                                                                                                                              
|
| | (6) | encumbrances or restrictions under Credit
    Facilities;                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (7) | Refinancing Indebtedness; provided that such
    restrictions are no more restrictive than those contained in the
    agreements governing the Indebtedness being extended,
    refinanced, renewed, replaced, defeased or refunded;                                                                                                                                                                                                                                                                                  

86



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| |     |                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (8) | customary restrictions in security agreements or
    mortgages securing Indebtedness of Millar Western or a
    Restricted Subsidiary only to the extent such restrictions
    restrict the transfer of the property subject to such security
    agreements and mortgages;                                                                                                                                
|
| | (9) | customary restrictions with respect to a
    Restricted Subsidiary pursuant to an agreement that has been
    entered into for the sale or disposition of all or substantially
    all of the Capital Stock or assets of such Restricted Subsidiary
    to be consummated in accordance with the terms of the indenture
    solely in respect of the Capital Stock or assets to be sold or
    disposed of;



| |      |                                                                                                                                                                                                                                                         
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (10) | provisions with respect to the disposition or
    distribution of assets or property in joint venture agreements,
    assets sale agreements, stock sale agreements and other similar
    agreements entered into in the ordinary course of business; or
|
| | (11) | restrictions on cash or other deposits or net
    worth imposed by customers under contracts entered into in the
    ordinary course of business.                                                                                                       

Limitation on
Subsidiaries






| |              
| | -------------
| | Brief Summary







We are not permitted to transfer assets to a
Restricted Subsidiary, which after such transfer would have
assets greater than $100,000, unless such Restricted Subsidiary
is a Guarantor or becomes a Guarantor. For specific information
regarding this covenant see the detailed description below.









| |                     
| | --------------------
| | Detailed Description







If we or any of its Restricted Subsidiaries
transfers or causes to be transferred any Property to, or
organizes, acquires, invests in or otherwise holds an Investment
in, any Restricted Subsidiary that is not a Guarantor having
total consolidated assets with a book value in excess of
$100,000, then such transferee or acquired or other Restricted
Subsidiary will (a) execute and deliver to the trustee a
supplemental indenture in form reasonably satisfactory to the
trustee pursuant to which such Restricted Subsidiary will
unconditionally guarantee all of Millar Westerns
obligations under the notes and the indenture on the terms set
forth in the indenture and (b) deliver to the trustee an
opinion of counsel that such supplemental indenture has been
duly authorized, executed and delivered by such Restricted
Subsidiary and constitutes a legal, valid, binding and
enforceable obligation of such Restricted Subsidiary.
Thereafter, such Restricted Subsidiary will be a Guarantor for
all purposes of the indenture. As of the date of this
prospectus, we have no Subsidiaries.




Payments for
Consent






| |              
| | -------------
| | Brief Summary







We may not pay any fee or other consideration to
a holder of the notes to induce that holder to agree to amend
the indenture unless we offer to pay the same fee to all holders
of the notes. See the detailed description below.









| |                     
| | --------------------
| | Detailed Description







We will not, and will not permit any of our
Subsidiaries to, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise,
to any holder of any notes for or as an inducement to any
consent, waiver or amendment of any of the terms or provisions
of the indenture or the notes unless such consideration is
offered to be paid or agreed to be paid to all holders of the
notes which so consent, waive or agree to amend in the time
frame set forth in solicitation documents relating to such
consent, waiver or agreement.




87



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##### 



Merger, Consolidation or Sale of
Assets




We will not, and will not cause or permit any
Guarantor to, consolidate with, amalgamate with, merge with or
into, or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its assets (as an
entirety or substantially as an entirety in one transaction or a
series of related transactions), to any Person unless:






| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | (x) we or such Guarantor, as the case may be,
    will be the continuing Person, or (y) the Person (if other
    than us or such Guarantor) formed by such consolidation or
    amalgamation or into which we or such Guarantor, as the case may
    be, is merged or to which the properties and assets of Millar
    Western or such Guarantor, as the case may be, are sold,
    assigned, transferred, leased, conveyed or otherwise disposed of
    (in any case, the Successor Company) will be a
    corporation organized and existing under the laws of the United
    States or any State thereof or the District of Columbia or the
    laws of Canada or any province or territory thereof and the
    Successor Company will expressly assume, by a supplemental
    indenture, executed and delivered to the trustee, in form
    satisfactory to the trustee, all of the obligations of us or
    such Guarantor, as the case may be, under the indenture, the
    notes and the Guarantees, as the case may be, and the
    obligations thereunder will remain in full force and effect;
|
|
|
| | (2) | immediately before and immediately after giving
    effect to such transaction (including, without limitation,
    giving effect to any Indebtedness and Acquired Indebtedness
    incurred or anticipated to be incurred and any Lien granted in
    connection with or in respect of the transaction), no Default or
    Event of Default will have occurred and be continuing; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
|
|
| | (3) | immediately after giving effect to such
    transaction, on a pro forma basis, we or such Successor Company
    could incur at least US$1.00 of additional Indebtedness (other
    than Permitted Indebtedness) under  Certain
    Covenants  Limitation on Additional
    Indebtedness above; provided that a Person that is
    a Guarantor may merge into us or another Person that is a
    Guarantor without complying with this clause (3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|




In connection with any consolidation, merger or
transfer of assets contemplated by this provision, we will
deliver, or cause to be delivered, to the trustee in form and
substance reasonably satisfactory to the trustee, an
officers certificate and an opinion of counsel, each
stating that such consolidation, merger or transfer and the
supplemental indenture in respect thereto comply with this
provision and that all conditions precedent herein provided for
relating to such transaction or transactions have been complied
with.







For purposes of the preceding, the transfer (by
lease, assignment, sale or otherwise, in a single transaction or
series of transactions) of all or substantially all of the
properties or assets of one or more of our Restricted
Subsidiaries, the Capital Stock of which constitutes all or
substantially all of our properties and assets, will be deemed
to be the transfer of all or substantially all of our properties
and assets.




Events of Default

The following events are defined in the indenture
as Events of Default:



| |     |                                                                                                                                                                                                                                                                                 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | default in payment of any principal of, or
    premium, if any, on the notes when due (whether at maturity,
    upon redemption or otherwise);                                                                                                                                  
|
| | (2) | default in the payment of any interest on, or
    Special Interest with respect to, any Note when due, which
    default continues for 30 days or more;                                                                                                                         
|
|
| | (3) | default by us or any Restricted Subsidiary in the
    observance or performance of any other covenant in the notes or
    the indenture for 30 days after written notice from the
    trustee or the holders of not less than 25% in aggregate
    principal amount of the notes
|

88



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##### 



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     | then outstanding (except in the case of a default
    with respect to the provisions described under
     Offers to Repurchase by Millar
    Western  Change of Control,
     Offers to Repurchase by Millar
    Western  Asset Sales, or Merger,
    Consolidation or Sale of Assets, which will constitute an
    Event of Default with such notice requirement but without such
    passage of time requirement);                       
|
|
|
| | (4) | default under any mortgage, indenture or
    instrument under which there may be issued or by which there may
    be secured or evidenced any Indebtedness for money borrowed by
    us or any of its Restricted Subsidiaries (or the payment of
    which is guaranteed by us or any of its Restricted
    Subsidiaries), whether such Indebtedness or guarantee now
    exists, or is created after the date of the indenture, if that
    default:
|



| |     |                                                                                                                                                                                                                                             
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | is caused by a failure to pay principal of, or
    interest or premium, if any, on such Indebtedness prior to the
    expiration of the grace period provided in such Indebtedness on
    the date of such default (a Payment Default); or
|
| | (b) | results in the acceleration of such Indebtedness
    prior to its expressed maturity,                                                                                                                                                       



| |                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | and, in each case, the principal amount of any
    such Indebtedness, together with the principal amount of any
    other such Indebtedness under which there has been a Payment
    Default or the maturity of which has been so accelerated,
    aggregates $7.0 million or more;



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (5) | any final judgment or judgments which can no
    longer be appealed for the payment of money in excess of
    $7.0 million (in excess of amounts covered by insurance and
    as to which the insurer has acknowledged coverage) will be
    rendered against us or any Restricted Subsidiary thereof, and
    will not be discharged for any period of 60 consecutive days
    during which a stay of enforcement will not be in effect;                  
|
|
|
| | (6) | certain events involving bankruptcy, insolvency
    or reorganization of us or any Restricted Subsidiary thereof; and                                                                                                                                                                                                                                                                                                                                      
|
|
| | (7) | any of the Guarantees of a Material Subsidiary
    ceases to be in full force and effect or any of the Guarantees
    of a Material Subsidiary is declared to be null and void and
    unenforceable or any of the Guarantees of a Material Subsidiary
    is found to be invalid or any of the Guarantors denies its
    liability under its Guarantee (other than by reason of release
    of a Guarantor in accordance with the terms of the indenture).




We will deliver to the trustee, as soon as
practicable and in any event within 10 days after our
knowledge thereof, written notice in the form of an
officers certificate of any Default under the indenture,
its status and what action we propose to take with respect
thereto.







In the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to us
or any Restricted Subsidiary, all outstanding notes will become
due and payable immediately without further action or notice. If
any other Event of Default occurs and is continuing, the trustee
or the Holders of at least 25% in principal amount of the then
outstanding notes may declare all the notes to be due and
payable immediately.




Holders of the notes may not enforce the
indenture or the notes except as provided in the indenture.
Subject to certain limitations, Holders of a majority in
principal amount of the then outstanding notes may direct the
trustee in its exercise of any trust or power. The trustee may
withhold from Holders of the notes notice of any continuing
Default or Event of Default if it determines that withholding
notice is in their interest, except a Default or Event of
Default relating to the payment of principal or interest or
Special Interest.

The Holders of a majority in aggregate principal
amount of the notes then outstanding by notice to the trustee
may on behalf of the Holders of all of the notes waive any
existing Default

89



---



##### 



or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in
the payment of interest or Special Interest on, or the principal
of, the notes.





In the case of any Event of Default occurring by
reason of any willful action or inaction taken or not taken by
or on our behalf with the intention of avoiding payment of the
premium that we would have had to pay if we then had elected to
redeem the notes pursuant to the optional redemption provisions
of the indenture, an equivalent premium will also become and be
immediately due and payable to the extent permitted by law upon
the acceleration of the notes.




Legal Defeasance and Covenant
Defeasance




We may, at our option and at any time, elect to
have all of our obligations discharged with respect to the
outstanding notes and all obligations of the Guarantors
discharged with respect to their Guarantees (Legal
Defeasance) except for:






| |     |                                                                                                                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | the rights of Holders of outstanding notes to
    receive payments in respect of the principal of, or interest or
    premium and Special Interest, if any, on such notes when such
    payments are due from the trust referred to below;                           
|
|
| | (2) | Our obligations with respect to the notes
    concerning issuing temporary notes, registration of notes,
    mutilated, destroyed, lost or stolen notes and the maintenance
    of an office or agency for payment and money for security
    payments held in trust;
|
|
|
| | (3) | the rights, powers, trusts, duties and immunities
    of the trustee, and our and the Guarantors obligations in
    connection therewith; and                                                                                                                       
|
|
| | (4) | the Legal Defeasance provisions of the indenture.                                                                                                                                                                                                                    




In addition, we may, at our option and at any
time, elect to have the obligations of us and the Guarantors
released with respect to certain covenants that are described in
the indenture (Covenant Defeasance) and thereafter
any omission to comply with those covenants will not constitute
a Default or Event of Default with respect to the notes. In the
event Covenant Defeasance occurs, certain events (not including
non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under  Events of
Default and Remedies will no longer constitute an Event of
Default with respect to the notes.




In order to exercise either Legal Defeasance or
Covenant Defeasance:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | We must irrevocably deposit with the trustee, in
    trust, for the benefit of the Holders of the notes, cash in
    U.S. dollars, non-callable Government Securities, or a
    combination of cash in U.S. dollars and non-callable
    Government Securities, in such amounts as will be sufficient, in
    the opinion of a nationally recognized firm of independent
    public accountants, to pay the principal of, or interest and
    premium and Special Interest, if any, on the outstanding notes
    on the stated maturity or on the applicable redemption date, as
    the case may be, and we must specify whether the notes are being
    defeased to maturity or to a particular redemption date;                                                                                                                                       
|
|
|
| | (2) | in the case of Legal Defeasance, we must deliver
    to the trustee an opinion of counsel reasonably acceptable to
    the trustee confirming that (a) we have received from, or
    there has been published by, the Internal Revenue Service a
    ruling or (b) since the date of the indenture, there has
    been a change in the applicable U.S. federal income tax
    law, in either case to the effect that, and based thereon such
    opinion of counsel will confirm that, the Holders of the
    outstanding notes will not recognize income, gain or loss for
    U.S. federal income tax purposes as a result of such Legal
    Defeasance and will be subject to U.S. federal income tax
    on the same amounts, in the same manner and at the same times as
    would have been the case if such Legal Defeasance had not
    occurred;
|

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (3) | in the case of Covenant Defeasance, we must
    deliver to the trustee an opinion of counsel reasonably
    acceptable to the trustee confirming that the Holders of the
    outstanding notes will not recognize income, gain or loss for
    U.S. federal income tax purposes as a result of such
    Covenant Defeasance and will be subject to U.S. federal
    income tax on the same amounts, in the same manner and at the
    same times as would have been the case if such Covenant
    Defeasance had not occurred;                                                                                                                                                                                                        
|
|
|
| | (4) | in the case of Legal Defeasance or Covenant
    Defeasance, we must deliver to the trustee an opinion of counsel
    in Canada to the effect that Holders of the outstanding notes
    will not recognize income, gain or loss for Canadian federal or
    provincial income tax or other tax purposes as a result of such
    Legal Defeasance or Covenant Defeasance, as applicable, and will
    be subject to Canadian federal or provincial income tax and
    other tax on the same amounts, in the same manner and at the
    same times as would have been the case if such Legal Defeasance
    or Covenant Defeasance, as applicable, had not occurred (which
    condition may not be waived by any Holder or the trustee);
|
|
| | (5) | no Default or Event of Default may have occurred
    and be continuing on the date of such deposit (other than a
    Default or Event of Default resulting from the borrowing of
    funds to be applied to such deposit);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
|
| | (6) | such Legal Defeasance or Covenant Defeasance will
    not result in a breach or violation of, or constitute a default
    under any material agreement or instrument (other than the
    indenture) to which we or any of our Subsidiaries is a party or
    by which we or any of our Subsidiaries is bound;                                                                                                                                                                                                                                                                                                                                                                                                                         
|
|
|
| | (7) | We must deliver to the trustee an officers
    certificate stating that the deposit was not made by us with the
    intent of preferring the Holders of notes over our other
    creditors with the intent of defeating, hindering, delaying or
    defrauding our creditors or others; and                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
|
|
| | (8) | We must deliver to the trustee an officers
    certificate and an opinion of counsel, each stating that all
    conditions precedent relating to the Legal Defeasance or the
    Covenant Defeasance have been complied with.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|

Satisfaction and Discharge

The indenture will be discharged and will cease
to be of further effect as to all notes issued thereunder, when:



| |     |        
| | --- | -------
| | (1) | either:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (a) | all notes that have been authenticated, except
    lost, stolen or destroyed notes that have been replaced or paid
    and notes for whose payment money has been deposited in trust
    and thereafter repaid to us, have been delivered to the trustee
    for cancellation; or                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
|
|
| | (b) | all notes that have not been delivered to the
    trustee for cancellation have become due and payable by reason
    of the mailing of a notice of redemption or otherwise or will
    become due and payable within one year and we or any Guarantor
    has irrevocably deposited or caused to be deposited with the
    trustee as trust funds in trust solely for the benefit of the
    Holders, cash in U.S. dollars, non-callable Government
    Securities, or a combination of cash in U.S. dollars and
    non-callable Government Securities, in amounts as will be
    sufficient without consideration of any reinvestment of
    interest, to pay and discharge the entire indebtedness on the
    notes not delivered to the trustee for cancellation for
    principal, premium and Special Interest, if any, and accrued
    interest to the date of maturity or redemption;
|

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| |     |                                                                                                                                                                                                                                                                                                                                                                     
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) | no Default or Event of Default has occurred and
    is continuing on the date of the deposit or will occur as a
    result of the deposit and the deposit will not result in a
    breach or violation of, or constitute a default under, any other
    instrument to which Millar Western or any Guarantor is a party
    or by which we or any Guarantor is bound;
|
|
|
| | (3) | We or any Guarantor has paid or caused to be paid
    all sums payable by it under the indenture; and                                                                                                                                                                                                                                                               
|
|
|
| | (4) | We have delivered irrevocable instructions to the
    trustee under the indenture to apply the deposited money toward
    the payment of the notes at maturity or the redemption date, as
    the case may be.                                                                                                                                                      
|




In addition, we must deliver an officers
certificate and an opinion of counsel to the trustee stating
that all conditions precedent to satisfaction and discharge have
been satisfied.




Amendment, Supplement and Waiver

Except as provided in the next two succeeding
paragraphs, the indenture or the notes may be amended or
supplemented with the consent of the Holders of at least a
majority in principal amount of the notes then outstanding
(including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for,
notes), and any existing default or compliance with any
provision of the indenture or the notes may be waived with the
consent of the Holders of a majority in principal amount of the
then outstanding notes (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or
exchange offer for, notes).

Without the consent of each Holder affected, an
amendment or waiver may not (with respect to any notes held by a
non-consenting Holder):



| |     |                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | reduce the principal amount of notes whose
    Holders must consent to an amendment, supplement or waiver;                                                                                                                                                                                                                                                             
|
| | (2) | reduce the principal of or change the fixed
    maturity of any note or change the date on which any notes may
    be subject to redemption or repurchase or reduce the redemption
    or repurchase price therefor;                                                                                                                                                   
|
| | (3) | reduce the rate of or change the time for payment
    of interest on any note, including Additional Amounts;                                                                                                                                                                                                                                                           
|
| | (4) | waive a Default or Event of Default in the
    payment of principal of, or interest or premium, or Special
    Interest, if any, on the notes (except a rescission of
    acceleration of the notes by the Holders of at least a majority
    in aggregate principal amount of the notes and a waiver of the
    payment default that resulted from such acceleration);
|
| | (5) | make any note payable in money other than that
    stated in the notes;                                                                                                                                                                                                                                                                                                
|
| | (6) | make any change in the provisions of the
    indenture relating to waivers of past Defaults or the rights of
    Holders of notes to receive payments of principal of, or
    interest or premium or Special Interest, if any, on the notes;                                                                                                                           
|
| | (7) | waive a redemption payment with respect to any
    note (other than a payment required by one of the covenants
    described above under the caption  Offers to
    Repurchase by Millar Western);                                                                                                                                                                  
|
| | (8) | release any Guarantor from any of its obligations
    under its Guarantee or the indenture, except in accordance with
    the terms of the indenture; or                                                                                                                                                                                                               
|
| | (9) | make any change in the preceding amendment and
    waiver provisions.                                                                                                                                                                                                                                                                                                  

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Notwithstanding the preceding, without the
consent of any Holder of notes, we, the Guarantors and the
trustee may amend or supplement the indenture or the notes:






| |     |                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | to cure any ambiguity, defect or inconsistency;                                                                                                                                                                                                                                                                                                                                      
|
| | (2) | to provide for uncertificated notes in addition
    to or in place of certificated notes;                                                                                                                                                                                                                                                                                            
|
|
| | (3) | to provide for the assumption of our obligations
    to Holders of notes in the case of a merger or consolidation or
    sale of all or substantially all of our assets;                                                                                                                                                                                                             
|
|
|
| | (4) | to make any change that would provide any
    additional rights or benefits to the Holders of notes or that in
    the good faith opinion of our Board of Directors (evidenced by a
    resolution of the Board of Directors set forth in an
    Officers Certificate delivered to the trustee) does not
    adversely affect the rights under the indenture of any such
    Holder;
|
|
| | (5) | to add a Guarantor;                                                                                                                                                                                                                                                                                                                                                                  
|
| | (6) | to comply with requirements of the Commission in
    order to effect or maintain the qualification of the indenture
    under the Trust Indenture Act; or                                                                                                                                                                                                                            
|
| | (7) | to issue additional notes in compliance with the
    covenant described under the caption
     Limitation on Additional Indebtedness.                                                                                                                                                                                                                                             

Reports to Holders




Whether or not required by the Commission, so
long as any notes are outstanding, we will furnish to the
Holders of notes, within the time periods specified in the
Commissions rules and regulations all quarterly and annual
financial information that Millar Western would have been
required to file with the Commission (a) on Forms 10-Q
or 10-K if we were required to file on such Forms, or
(b) on Forms 6-K, 20-F or 40-F, including in each case
a Managements Discussion and Analysis of Financial
Condition and Results of Operations and, with respect to
the annual information only, a report on the annual financial
statements by our certified independent accountants.







If, at any time after consummation of the
exchange offer contemplated by the registration rights
agreement, we are no longer subject to the periodic reporting
requirements of the Exchange Act for any reason, we will
nevertheless continue filing the reports specified in the
preceding paragraph with the Commission within the time periods
specified above unless the Commission will not accept such a
filing. We agree that we will not take any action for the
purpose of causing the Commission not to accept any such
filings. If, notwithstanding the preceding, the Commission will
not accept our filings for any reason, we will post the reports
referred to in the preceding paragraph on our website within the
time periods that would apply if we were required to file those
reports with the Commission. In addition, we and the Guarantors
have agreed that, for so long as any notes remain outstanding,
they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under
the Securities Act and including any information that would be
required by clause (b) of the preceding paragraph.




Concerning the Trustee




If the trustee becomes a creditor of us or any
Guarantor, the indenture limits its right to obtain payment of
claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise.
The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the
Commission for permission to continue or resign.




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The Holders of a majority in principal amount of
the then outstanding notes will have the right to direct the
time, method and place of conducting any proceeding for
exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event
of Default occurs and is continuing, the trustee will be
required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the
request of any Holder of notes, unless such Holder has offered
to the trustee security and indemnity satisfactory to it against
any loss, liability or expense.

Additional Information

Anyone who receives this prospectus may obtain a
copy of the indenture and registration rights agreement without
charge by writing to Millar Western Forest Products Ltd.
16640-111 Avenue, Edmonton, Alberta, Canada T2M 2S5,
Attention: Chief Financial Officer.

Governing Law

The indenture provides that the indenture and the
notes are governed by and construed in accordance with the laws
of the State of New York.

Enforceability of Judgments




Since substantially all of our assets are outside
the United States, any judgment obtained in the United States
against us, including judgments with respect to the payment of
principal, premium, if any, and interest on the notes, may not
be collectible within the United States.







We have has been informed by our Canadian
counsel, Fraser Milner Casgrain LLP, that the laws of the
Province of Alberta permit an action to be brought in a court of
competent jurisdiction in the Province of Alberta (a
Canadian Court) on any final and conclusive judgment
in personam of any federal or state court located in the Borough
of Manhattan in The City of New York (New York
Court) that is not impeachable as void or voidable under
the internal laws of the State of New York for a sum certain,
with certain exceptions, and provided, among other things, that
if:






| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | the court rendering such judgment had
    jurisdiction over the judgment debtor, as recognized by a
    Canadian Court (and submission by us in the indenture to the
    jurisdiction of the New York Court will be sufficient for the
    purpose);                                                                                                                                                                              
|
|
|
| | (2) | such judgment was not obtained by fraud or in a
    manner contrary to natural justice and the enforcement thereof
    would not be inconsistent with public policy, as such term is
    understood under the laws of the Province of Alberta;                                                                                                                                                                                    
|
|
|
| | (3) | the enforcement of such judgment does not
    constitute, directly or indirectly, the enforcement of foreign
    revenue, expropriatory or penal laws; and                                                                                                                                                                                                                                                                        
|
|
|
| | (4) | the action to enforce such judgment is commenced
    within six years of the date of such judgment. In the opinion of
    such counsel, a Canadian Court would not avoid enforcement of
    judgments of a New York Court respecting the indenture or the
    notes on the basis of public policy, as that term is understood
    under the laws of the Province of Alberta and the federal laws
    of Canada applicable therein.
|

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Book-Entry, Delivery and Form

Rule 144A
and Regulation S Notes

The old notes were offered and sold to qualified
institutional buyers in reliance on Rule 144A
(Rule 144A Notes) and sold in offshore
transactions in reliance on Regulation S
(Regulation S Notes).

Rule 144A Notes are initially represented by
one or more notes in registered, global form without interest
coupons (collectively, the Restricted Global Notes)
and were deposited with the trustee as custodian for The
Depository Trust Company (DTC), in New York, New
York, and registered in the name of DTC or its nominee. The
Restricted Global Notes (and any notes issued in exchange
therefor), including beneficial interests in the Restricted
Global Notes, will be subject to certain restrictions on
transfer set forth therein and in the indenture and will bear
the legend regarding such restrictions set forth under
Notice to Investors.

Regulation S Notes are initially represented
by global notes in fully registered form without interest
coupons (collectively the Regulation S Global
Notes and, together with the Restricted Global Notes, the
Global Notes or each individually, a Global
Note) registered in the name of a nominee of DTC and
deposited with the trustee, for the accounts of the Euroclear
System (Euroclear) and Clearstream Banking,
société anonyme (formerly known as Cedelbank)
(Clearstream).

Except as set forth below, the Global Notes may
be transferred, in whole and not in part, only to another
nominee of DTC or to a successor of DTC or its nominee.
Beneficial interests in the Global Notes may not be exchanged
for notes in certificated form except in the limited
circumstances described below. See  Exchange of
Book-Entry Notes for Certificated Notes. In addition,
beneficial interests in Restricted Global Notes may not be
exchanged for beneficial interests in the Regulation S
Global Note or vice versa except in accordance with the transfer
and certification requirements described below under
 Exchanges Between the Restricted Global Notes
and the Regulation S Global Notes.

Except as set forth below, notes will be issued
in registered, global form in minimum denominations of US$1,000
and integral multiples of US$1,000 in excess of US$1,000. Notes
will be issued at the closing of this offering only against
payment in immediately available funds.

Exchanges
Between the Restricted Global Notes and the Regulation S
Global Notes

Beneficial interests in the Restricted Global
Notes may be exchanged for beneficial interests in the
Regulation S Global Notes and vice versa only in connection
with a transfer of such interest. Such transfers are subject to
compliance with the certification requirements described below.

A beneficial interest in a Regulation S
Global Note may be transferred to a person who takes delivery in
the form of an interest in the Restricted Global Notes without
any certification.

Beneficial interests in the Restricted Global
Note may be transferred to a person who takes delivery in the
form of an interest in a Regulation S Global Note only upon
receipt by the trustee of a written certification from the
transferor (in the form provided in the indenture) to the effect
that such transfer is being made in accordance with
Rule 903 or 904 of Regulation S, or, if available,
Rule 144 (a Regulation S Global Note
Certificate).

Any beneficial interest in one of the Global
Notes that is transferred to a person who takes delivery in the
form of an interest in another Global Note will, upon transfer,
cease to be an interest in such Global Note and will become an
interest in another Global Note and, accordingly, will
thereafter be subject to all transfer restrictions and other
procedures applicable to beneficial interests in such other
Global Note for as long as it remains such an interest.

95



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Any exchange of a beneficial interest in a
Regulation S Global Note for a beneficial interest in the
Restricted Global Note will be effected in DTC by means of an
instruction originated by the trustee through the DTC
Deposit/Withdraw at Custodian (DWAC) system.
Accordingly, in connection with any such exchange, appropriate
adjustments will be made in the records of the Security Register
to reflect an increase in the principal amount of such
Restricted Global Note or vice versa, as applicable.

Exchanges of
Book-Entry Notes for Certificated Notes




A beneficial interest in a Global Note may not be
exchanged for a Note in certificated form unless (i) DTC
(x) notifies Millar Western that it is unwilling or unable
to continue as Depository for such Global Note or (y) has
ceased to be a clearing agency registered under the Exchange
Act, (ii) in the case of a Global Note held for an account
of Euroclear or Clearstream, Euroclear or Clearstream, as the
case may be, (A) is closed for business for a continuous
period of 14 days (other than by reason of statutory or
other holidays) or (B) announces an intention permanently
to cease business or does in fact do so, (iii) there will
have occurred and be continuing an Event of Default with respect
to the notes or (iv) a request for certificates has been
made upon 60 days prior written notice given to the
trustee in accordance with DTCs customary procedures and a
copy of such notice has been received by Millar Western from the
trustee. In all cases, certificated notes delivered in exchange
for any Global Note or beneficial interests therein will be
registered in the names, and issued in approved denominations,
requested by or on behalf of DTC (in accordance with its
customary procedures). Any certificated notes issued in exchange
for an interest in a Global Note will bear the legend
restricting transfers that is borne by such Global Note. Any
such exchange will be effected only through the DWAC System and
an appropriate adjustment will be made in the records of the
Security Register to reflect a decrease in the principal amount
of the relevant Global Note.




Exchanges of
Certificated Notes for Book-Entry Notes

Other notes, which will be issued in certificated
form, may not be exchanged for beneficial interests in any
Global Note unless such exchange complies with Rule 144A,
in the case of an exchange for an interest in the Restricted
Global Note, or Regulation S or (if available)
Rule 144, in the case of an exchange for an interest in the
Regulation S Global Note. In addition, in connection with
any such exchange and transfer, the trustee must have received
on behalf of the transferor a Regulation S Global Note
Certificate, as applicable. Any such exchange will be effected
through the DWAC System and an appropriate adjustment will be
made in the records of the Security Register to reflect an
increase in the principal amount of the relevant Global Note.

Global
Notes




The following description of the operations
and procedures of DTC, Euroclear and Clearstream is provided
solely as a matter of convenience. These operations and
procedures are solely within the control of the respective
settlement systems and are subject to changes by them from time
to time. We take no responsibility for these operations and
procedures and urge investors to contact the system or their
participants directly to discuss these matters.




Upon the issuance of the Regulation S Global
Notes and the Restricted Global Notes, DTC credited, on its
internal system, the respective principal amount of the
individual beneficial interests represented by such Global Notes
to the accounts with DTC (participants) or persons
who hold interests through participants. Ownership or beneficial
interests in the Global Notes is shown on, and the transfer of
that ownership will be effected only through, records maintained
by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to
interest of persons other than participants).

96



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As long as DTC, or its nominee, is the registered
Holder of a Global Note, DTC or such nominee, as the case may
be, will be considered the sole owner and Holder of the notes
represented by such Global Note for all purposes under the
indenture and the notes. Except in the limited circumstances
described above under  Exchanges of Book-Entry
Notes for Certificated Notes, owners of beneficial
interests in a Global Note will not be entitled to have portions
of such Global Note registered in their names, will not receive
or be entitled to receive physical delivery of notes in
definitive form and will not be considered the owners or Holders
of the Global Note (or any notes represented thereby) under the
indenture or the notes. In addition, no beneficial owner of an
interest in a Global Note will be able to transfer that interest
except in accordance with DTCs applicable procedures (in
addition to those under the indenture referred to herein and, if
applicable, those of Euroclear and Clearstream). In the event
that owners of beneficial interests in a Global Note become
entitled to receive notes in definitive form, such notes will be
issued only in registered form in denominations of US$1.000 and
integral multiples thereof.

Investors may hold their interests in the
Regulation S Global Notes through Clearstream or Euroclear,
if they are participants in such systems, or indirectly through
organizations which are participants in such systems or through
organizations other than Clearstream and Euroclear that are
participants in the DTC system. Clearstream and Euroclear will
hold interests in the Regulation S Global Notes on behalf
of their participants through customers securities
accounts in their respective accounts in their respective names
on the books of their respective depositaries, which, in turn,
will hold such interests in the Regulation S Global Notes
in customers securities accounts in the depositaries
names on the books of DTC. Investors may hold their interests in
the Restricted Global Notes directly through DTC, if they are
participants in such system, or indirectly through organizations
(including Euroclear and Clearstream) which are participants in
such system. All interests in a Global Note, including those
held through Euroclear or Clearstream, may be subject to the
procedures and requirements of DTC. Those interests held through
Euroclear and Clearstream may also be subject to the procedures
and requirements of such system.

The laws of some states of the United States
require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the
ability to transfer beneficial interests in a Global Note to
such persons may be limited to that extent. Because DTC can act
only on behalf of participants, which in turn act on behalf of
indirect participants and certain banks, the ability of a person
having beneficial interests in a Global Note to pledge such
interests to persons or entities that do not participate in the
DTC system, or otherwise take action in respect of such
interests, may be affected by the lack of a physical certificate
evidencing such interests.




Payments of the principal of and interest on
Global Notes will be made to DTC or its nominee as the
registered owner thereof. Neither we, the trustee nor any of our
or their respective agents will have any responsibility or
liability for any aspect of the records relating to or payments
made on account of beneficial ownership interests in the Global
Notes or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.







Except for trades involving only Euroclear or
Clearstream, beneficial interests in the Global Notes will trade
in DTCs Same-Day Funds Settlement System, and secondary
market trading activity in such interests will therefore settle
in immediately available funds. We expect that DTC or its
nominee, upon receipt of any payment of principal or interest in
respect of a Global Note representing any notes held by it or
its nominee, will immediately credit participants accounts
with payment in amounts proportionate to their respective
beneficial interests in the principal amount of such notes as
shown on the records of DTC or its nominee. We also expect that
payments by participants to owners of beneficial interests in
such Global Notes held through such participants will be
governed by standing instructions and customary practices, as is
now




97



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##### 



the case with securities held for the accounts of
customers registered in street name. Such payments
will be the responsibility of such participants.


Transfers between participants in DTC will be
effected in accordance with DTCs procedures, and will be
settled in same-day funds. Transfers between participants in
Euroclear and Clearstream will be effected in the ordinary way
in accordance with their respective rules and operating
procedures.

Subject to compliance with the transfer
restrictions applicable to the notes described above,
cross-market transfers between DTC participants, on the one
hand, and Euroclear or Clearstream participants on the other
hand, will be effected by DTC in accordance with DTC rules on
behalf of Euroclear or Clearstream, as the case may be, by its
respective depositary; however, such cross-market transactions
will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such
system in accordance with the rules and procedures and within
the established deadlines (Brussels time) of such system.
Euroclear or Clearstream, as the case may be, will if the
transaction meets its settlement requirements, deliver
instructions to its respective depositary to take action to
effect final settlement on its behalf by delivering or receiving
interests in the relevant Global Note in DTC, and making or
receiving payment in accordance with normal procedures for same
day funds settlement applicable to DTC. Euroclear participants
and Clearstream participants may not deliver instructions
directly to the depositaries for Euroclear or Clearstream.

Because of time zone differences, the securities
account of a Euroclear or Clearstream participant purchasing an
interest in a Global Note from a DTC participant will be
credited, and any such crediting will be reported to the
relevant Euroclear or Clearstream participant, during the
securities settlement processing day (which must be a business
day for Euroclear and Clearstream) immediately following the DTC
settlement date. Cash received on Euroclear or Clearstream as a
result of sales of interests in a Global Note by or through a
Euroclear or Clearstream participants to a DTC participant will
be received with value on the DTC settlement date but will be
available in the relevant Euroclear or Clearstream cash account
only as of the business day for Euroclear or Clearstream
following the DTC settlement date.




DTC has advised us that it will take any action
permitted to be taken by a Holder of notes (including the
presentation of notes for exchange as described below) only at
the direction of one or more participants to whose account with
DTC interests in the Global Notes are credited and only in
respect of such portion of the aggregate principal amount of the
notes as to which such participant or participants has or have
given such direction. However, if there is an Event of Default
(as defined below) under the notes, DTC reserves the right to
exchange the Global Notes for legended notes in certificated
form, and to distribute such notes to its participants.







DTC has advised us as follows: DTC is a limited
purpose trust company organized under the laws of the State of
New York, a member of the Federal Reserve System, a
clearing corporation within the meaning of the
Uniform Commercial Code, as amended, and a Clearing
Agency registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and
settlement of securities transactions between participants
through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical transfer
and delivery of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations.
Indirect access to the DTC system is available to other entities
such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a participant,
either directly or indirectly (indirect
participants).







Although DTC, Euroclear and Clearstream have
agreed to the preceding procedures in order to facilitate
transfers of beneficial ownership interests in the Global Notes
among participants of DTC, Euroclear and Clearstream, they are
under no obligation to perform or continue to perform




98



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##### 






such procedures, and such procedures may be
discontinued at any time. Neither we, the trustee nor any of our
or their respective agents will have any responsibility for the
performance by DTC, Euroclear and Clearstream, their
participants or indirect participants of their respective
obligations under the rules and procedures governing their
operations, including maintaining, supervising or reviewing the
records relating to, or payments made on account of, beneficial
ownership interests in Global Notes.





Same Day Settlement and Payment




We will make payments in respect of the notes
represented by the Global Notes (including principal, premium,
if any, interest and Special Interest, if any) by wire transfer
of immediately available funds to the accounts specified by the
Global Note Holder. We will make all payments of principal,
interest and premium and Special Interest, if any, with respect
to Certificated Notes by wire transfer of immediately available
funds to the accounts specified by the Holders of the
Certificated Notes or, if no such account is specified, by
mailing a check to each such Holders registered address.
The notes represented by the Global Notes are expected to be
eligible to trade in the PORTAL market and to trade in
DTCs Same-Day Funds Settlement System, and any permitted
secondary market trading activity in such notes will, therefore,
be required by DTC to be settled in immediately available funds.
We expect that secondary trading in any Certificated Notes will
also be settled in immediately available funds.




Registration Rights; Special
Interest

The following description is a summary of the
material provisions of the registration rights agreement with
respect to the old notes. It does not restate that agreement in
its entirety. We urge you to read the proposed form of
registration rights agreement in its entirety because it, and
not this description, defines your registration rights as
Holders of the old notes. See  Additional
Information.




We and the initial purchasers entered into the
registration rights agreement pursuant to which, we agreed for
the benefit of the holders of the old notes to file with the
Commission the Exchange Offer Registration Statement on the
appropriate form under the Securities Act with respect to the
new notes. Upon the effectiveness of the Exchange Offer
Registration Statement, we will offer to the Holders of old
notes pursuant to the Exchange Offer who are able to make
certain representations the opportunity to exchange their old
notes for new notes. The new notes will be issued as evidence of
the same continuing indebtedness of us and the Guarantors and
will not constitute the creation of new indebtedness.




If:



| |     |                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | we are not permitted to consummate the Exchange
    Offer because the Exchange Offer is not permitted by applicable
    law or Commission policy; or
|
|
|
| | (2) | any Holder of old notes notifies us prior to the
    20th day following consummation of the Exchange Offer that:                                    
|



| |     |                                                                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | it is prohibited by law or Commission policy from
    participating in the Exchange Offer; or                                                                                                                                                                         
|
| | (b) | that it may not resell the new notes acquired by
    it in the Exchange Offer to the public without delivering a
    prospectus and the prospectus contained in the Exchange Offer
    Registration Statement is not appropriate or available for such
    resales; or
|
|
| | (c) | that it is a broker-dealer and owns old notes
    acquired directly from us or an affiliate of us,                                                                                                                                                                    
|

99



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##### 






We will file with the Commission a Shelf
Registration Statement to cover resales of old notes by the
Holders of Transfer Restricted Securities who satisfy certain
conditions relating to the provision of information in
connection with the Shelf Registration Statement.




For purposes of the preceding, old
notes means each note until:



| |     |                                                                                                                                                                                                                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | the date on which such old note has been
    exchanged by a Person other than a broker-dealer for a new note
    in the Exchange Offer;                                                                                                                                                                                              
|
| | (2) | following the exchange by a broker-dealer in the
    Exchange Offer of a note for an Exchange Note, the date on which
    such new note is sold to a purchaser who receives from such
    broker-dealer on or prior to the date of such sale a copy of the
    prospectus contained in the Exchange Offer Registration
    Statement;
|
| | (3) | the date on which such note has been effectively
    registered under the Securities Act and disposed of in
    accordance with the Shelf Registration Statement;                                                                                                                                                                    
|
|
| | (4) | the date on which such old note is distributed to
    the public pursuant to Rule 144 under circumstances in
    which any legend borne by such old note relating to the
    restrictions on transferability thereof, under the Securities
    Act or otherwise, is removed by us or pursuant to the indenture;
    or               
|
|
|
| | (5) | such note will cease to be outstanding.                                                                                                                                                                                                                                                                                              
|

The registration rights agreement provides that:



| |     |                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | we will file an Exchange Offer Registration
    Statement with the Commission on or prior to 90 days after
    the original issuance of the old notes;                                                          
|
|
|
| | (2) | we will use our reasonable best efforts to have
    the Exchange Offer Registration Statement declared effective by
    the Commission on or prior to 180 days after the original
    issuance of the old notes;
|
|
|
| | (3) | unless the Exchange Offer would not be permitted
    by applicable law or Commission policy, we will:                                                                                                           
|



| |     |                                                                                                                                                                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | commence the Exchange Offer; and                                                                                                                                                                                                                                                                                                                      
|
|
| | (b) | use our reasonable best efforts to issue on or
    prior to 45 business days, or longer, if required by the federal
    securities laws, after the date on which the Exchange Offer
    Registration Statement was declared effective by the Commission,
    new notes in exchange for all old notes tendered prior thereto
    in the Exchange Offer.
|






| |     |                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (4) | if obligated to file the Shelf Registration
    Statement, we will file the Shelf Registration Statement with
    the Commission on or prior to 60 days after such filing
    obligation arises and will use our reasonable best efforts to
    cause the Shelf Registration to be declared effective by the
    Commission on or prior to 150 days after such obligation
    arises.




If:



| |     |                                                                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | we fail to file any of the registration
    statements required by the registration rights agreement on or
    before the date specified for such filing; or                                                                                     
|
|
| | (2) | any of such registration statements is not
    declared effective by the Commission on or prior to the date
    specified for such effectiveness (the Effectiveness Target
    Date); or                                                       
|
|
| | (3) | we fail to consummate the Exchange Offer within
    45 business days after the initial effective date of the
    Exchange Offer Registration Statement relating to the Exchange
    Offer (if the Exchange Offer is then required to be made); or
|
|
| | (4) | the Shelf Registration Statement or the Exchange
    Offer Registration Statement is declared effective but
    thereafter ceases to be effective or usable in connection with                                                                   

100



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##### 



| |  |                                                                                                                                                                                                                  
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | resales of Transfer Restricted Securities during
    the periods specified in the registration rights agreement (each
    such event referred to in clauses (1) through
    (4) above, a Registration Default);




then we will pay additional interest
(Special Interest) to each Holder of Transfer
Restricted Securities, with respect to the first 90-day period
immediately following the occurrence of the first Registration
Default, in an amount equal to US$.05 per week per US$1,000
principal amount of old notes held by such Holder.




The amount of the Special Interest will increase
by an additional US$.05 per week per US$1,000 principal amount
of notes with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of
Special Interest for all Registration Defaults of US$.50 per
week per US$1,000 principal amount of old notes.




All accrued Special Interest will be paid by us
on each Interest Payment Date to the Global Note Holder by wire
transfer of immediately available funds or by federal funds
check and to Holders of Certificated Notes by wire transfer to
the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified.




Following the cure of all Registration Defaults,
the accrual of Special Interest will cease.




Holders of old notes are required to make certain
representations to us (as described under Exchange
Offer  Procedures for Tendering above) in order
to participate in the Exchange Offer and will be required to
deliver certain information to be used in connection with the
Shelf Registration Statement and to provide comments on the
Shelf Registration Statement within the time periods set forth
in the registration rights agreement in order to have their old
notes included in the Shelf Registration Statement and benefit
from the provisions regarding Special Interest set forth above.
By acquiring old notes, a Holder will be deemed to have agreed
to indemnify us against certain losses arising out of
information furnished by such Holder in writing for inclusion in
any Shelf Registration Statement. Holders of old notes will also
be required to suspend their use of the prospectus included in
the Shelf Registration Statement under certain circumstances
upon receipt of written notice to that effect from us.




Consent to Jurisdiction and Service




The indenture and the registration rights
agreement provide that we and any Guarantors appoint CT
Corporation System as our and their respective agent for service
of process in any suit, action or proceeding with respect to the
indenture or the notes and for actions brought under
U.S. federal or state securities laws brought in any
U.S. federal or state court located in the Borough of
Manhattan in The City of New York and will submit to the
jurisdiction of such courts.




Certain Definitions

Set forth below is a summary of certain of the
defined terms used in the indenture. Reference is made to the
indenture for the full definition of all such terms as well as
any other capitalized terms used herein for which no definition
is provided.




Acquired Indebtedness means
Indebtedness of a Person (including an Unrestricted Subsidiary)
or any of its Subsidiaries existing at the time such Person
becomes a Restricted Subsidiary or is merged into or
consolidated with us or a Restricted Subsidiary or which is
assumed in connection with the acquisition of assets from such
Person and, in each case, not incurred by such Person in
connection with, or in anticipation or contemplation of, such
Person becoming a Restricted Subsidiary or such merger,
consolidation or acquisition.




101



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##### 






Affiliate means, with respect
to any specific Person, any other Person (including, without
limitation, such Persons issue, siblings and spouse) that
directly or indirectly through one or more intermediaries
controls, or is controlled by, or is under common control with,
such specified Person. For the purposes of this definition,
control (including, with correlative meanings, the
terms controlling, controlled by, and
under common control with), as used with respect to
any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting
securities, by agreement or otherwise; provided that, for
purposes of the covenant described under
 Certain Covenants  Limitation on
Transactions with Affiliates, beneficial ownership of at
least 10% of the voting securities of a Person, either directly
or indirectly, will be deemed to be control.







Asset Acquisition means
(a) an Investment by us or any Restricted Subsidiary in any
other Person pursuant to which such Person becomes a Restricted
Subsidiary, or will be merged with or into us or any Restricted
Subsidiary or (b) the acquisition by us or any Restricted
Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the
assets of such Person or comprise any division or line of
business of such Person or any other properties or assets of
such Person other than in the ordinary course of business.







Asset Sale means any direct or
indirect sale, issuance, conveyance, assignment, transfer, lease
(other than operating leases entered into in the ordinary course
of business) or other disposition (including pursuant to any
Sale and Lease-Back Transaction), other than to us or any of our
Wholly-Owned Restricted Subsidiaries, in any single transaction
or series of related transactions of:






| |     |                                                                                                                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | any Capital Stock of any Restricted Subsidiary; or                                                                                                                                                                                                            
|
|
| | (2) | any other property or assets (including any
    interest therein, but excluding the Capital Stock of, or other
    Investment in, Unrestricted Subsidiaries) of us or of any
    Restricted Subsidiary thereof outside of the ordinary course of
    business;
|




provided that Asset Sales will not include:






| |     |                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | a transaction or series of related transactions
    for which we or our Restricted Subsidiaries receive aggregate
    consideration of less than $1.0 million (provided that we
    or such Restricted Subsidiary received consideration equal to
    the Fair Market Value of any such property or assets so sold,
    conveyed, assigned, transferred, leased or otherwise disposed
    of);
|
|
|
| | (2) | the sale, lease, conveyance, disposition or other
    transfer of all or substantially all of our assets as permitted
    under  Merger, Consolidation or Sale of
    Assets;                                                                                                                                                                                                              
|
|
|
| | (3) | sales of property or equipment that has become
    worn out, obsolete or damaged or otherwise unsuitable for use in
    connection with the business of us or any Restricted Subsidiary,
    as the case may be;                                                                                                                                                                              
|
|
| | (4) | the sale of inventory in the ordinary course of
    business;                                                                                                                                                                                                                                                                                                                                 
|
| | (5) | any Permitted Investment or Restricted Payment
    made in compliance with the  Certain
    Covenants  Limitation on Restricted Payments
    covenant;                                                                                                                                                                                                                                    
|
| | (6) | the sale or other disposition of cash or Cash
    Equivalents, or the sale of accounts receivable in the ordinary
    course of business or in connection with the compromise,
    settlement or collection thereof; and                                                                                                                                                                      
|
| | (7) | any sale or other disposition deemed to occur
    with creating or granting a Lien not otherwise prohibited by the
    indenture.                                                                                                                                                                                                                                                             

102



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##### 



Attributable Indebtedness in
respect of a Sale and Lease-Back Transaction means, as at the
time of determination, the greater of (i) the Fair Market
Value of the property subject to such arrangement and
(ii) the present value (discounted according to GAAP at the
cost of indebtedness implied in the Sale and Lease-Back
Transaction) of the total obligations of the lessee for rental
payments during the remaining term of the lease included in such
Sale and Lease-Back transaction (including any period for which
such lease has been extended).

Board of Directors means, as
to any Person, the board of directors of such Person and any
duly authorized committee thereof.




Capital Stock means, with
respect to any Person, any and all shares, interests,
participations or other equivalents (however designated and
whether or not voting) of corporate stock, partnership interests
or any other participation, right or other interest in the
nature of an equity interest in such Person including, without
limitation, Common Stock and Preferred Stock of such Person, or
any option, warrant or other security convertible into any of
the preceding.







Capitalized Lease Obligations
means with respect to any Person, Indebtedness represented by
obligations under a lease that is required to be capitalized for
financial reporting purposes in accordance with GAAP, and the
amount of such Indebtedness will be the capitalized amount of
such obligations determined in accordance with GAAP.




Cash Equivalents means:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | marketable direct obligations issued by, or
    unconditionally guaranteed by, the United States or Canadian
    Government or issued by any agency thereof and backed by the
    full faith and credit of the United States or Canada, in each
    case maturing within one year from the date of acquisition
    thereof;                                                                                                                                                                                                                                                                                                                                                                                            
|
|
| | (2) | marketable direct obligations issued by any state
    of the United States of America or any province of Canada or any
    political subdivision of any such state or province, as the case
    may be, or any public instrumentality thereof maturing within
    one year from the date of acquisition thereof and, at the time
    of acquisition, having one of the two highest ratings obtainable
    from either Standard & Poors Ratings Group
    (S&P) or Moodys Investors Service, Inc.
    (Moodys); provided that, in the event that any
    such obligation is not rated by S&P or Moodys, such
    obligation will have the highest rating from Dominion Bond
    Rating Service Limited (DBRS);
|
|
| | (3) | commercial paper maturing no more than one year
    from the date of creation thereof and, at the time of
    acquisition, having a rating of at least R-1 (low) from DBRS or
    A-2 from S&P or at least P-2 from Moodys;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (4) | certificates of deposit or bankers
    acceptances maturing within one year from the date of
    acquisition thereof issued by any bank organized under the laws
    of the United States of America or Canada or any state or
    province, as the case may be, thereof or the District of
    Columbia or any U.S. or Canadian branch of a foreign bank
    having at the date of acquisition thereof combined capital and
    surplus of not less than US$250,000,000;                                                                                                                                                                                                                                             
|
| | (5) | repurchase obligations with a term of not more
    than seven days for underlying securities of the types described
    in clause (1) above entered into with any bank meeting the
    qualifications specified in clause (4) above; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (6) | investments in money market funds which invest
    substantially all their assets in securities of the types
    described in clauses (1) through (5) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

A Change of Control means the
occurrence of any of the following:






| |     |                                                                                                                                                                                                                                                                              
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | the direct or indirect sale, lease, transfer,
    conveyance or other disposition (other than by way of merger,
    amalgamation or consolidation), in one or a series of related
    transactions, of all or substantially all of the properties or
    assets of us and our




103



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##### 



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | Restricted Subsidiaries taken as a whole to any
    person (as that term is used in
    Section 13(d)(3) of the Exchange Act) other than the
    Permitted Holders;                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
|
| | (2) | the adoption of a plan relating to our
    liquidation or dissolution;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
|
|
| | (3) | any Person or group of related Persons for
    purposes of Section 13(d) of the Exchange Act
    (Group), other than Permitted Holders, becomes the
    beneficial owner (as defined under Rule 13d-3 or any
    successor rule or regulation promulgated under the Exchange
    Act), directly or indirectly, of 50% or more of the total voting
    power of our Common Stock;                                                                                                                                                                                                                                                 
|
|
|
| | (4) | any Person or Group, other than Permitted
    Holders, becomes the beneficial owner, directly or indirectly,
    of more than 30% of the total voting power of our Common Stock,
    and the Permitted Holders beneficially own, directly or
    indirectly in the aggregate, a lesser percentage of the total
    voting power of our Common Stock than such Person or Group and
    do not have the right or ability by voting power, contract or
    otherwise to elect or designate for election a majority of the
    Board of Directors of Millar Western;                                                                   
|
|
|
| | (5) | there will be consummated any amalgamation,
    consolidation or merger of us in which we are not the continuing
    or surviving corporation or pursuant to which our Common Stock
    would be converted into cash, securities or other property,
    other than an amalgamation, consolidation or merger of us in
    which the holders of our Common Stock outstanding immediately
    prior to the consolidation or merger hold, directly or
    indirectly, at least a majority of the Common Stock of the
    surviving corporation immediately after such amalgamation,
    consolidation or merger; or                    
|
|
|
| | (6) | during any period of two consecutive years
    commencing after our initial public offering of Common Stock,
    individuals who at the beginning of such period constituted our
    Board of Directors (together with any new directors whose
    election by such Board of Directors or whose nomination for
    election by our shareholders has been approved by 66 2/3%
    of the directors then still in office who either were directors
    at the beginning of such period or whose election or
    recommendation for election was previously so approved) cease to
    constitute a majority of our Board of Directors.
|

Commission means the
U.S. Securities and Exchange Commission.

Commodity Agreement means, in
respect of a Person, any forward contract, commodity swap
agreement, commodity option agreement or other similar agreement
or arrangement designed to protect such Person against
fluctuations in commodity prices and not for speculative
purposes.

Common Stock of any Person
means all Capital Stock of such Person that is generally
entitled to (i) vote in the election of directors of such
Person or (ii) if such Person is not a corporation, vote or
otherwise participate in the selection of the governing body,
partners, managers or others that will control the management
and policies of such Person.




Consolidated Fixed Charge Coverage
Ratio means, with respect to any Person, the ratio of
EBITDA of such Person for the four most recent consecutive
fiscal quarters (the Four Quarter Period) ending on
or prior to the date of determination to Consolidated Fixed
Charges of such Person for such Four Quarter Period. In addition
to and without limitation of the preceding, for purposes of this
definition, EBITDA and Consolidated Fixed
Charges will be calculated after giving effect on a pro
forma basis to:






| |     |                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | the incurrence or repayment of any Indebtedness
    of such Person or any of its Restricted Subsidiaries (and the
    application of the proceeds thereof) giving rise to the need to
    make such calculation, as if such incurrence or repayment, as
    the case may be (and the application of the proceeds thereof),
    occurred on the first day of such Four Quarter Period;

104



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##### 





| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | any incurrence or repayment of other Indebtedness
    (and the application of the proceeds thereof), occurring on or
    after the first day of the Four Quarter Period and on or prior
    to the date of determination, as if such incurrence or
    repayment, as the case may be (and the application of the
    proceeds thereof), occurred on the first day of such Four
    Quarter Period; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (3) | any Asset Sales or Asset Acquisitions (including,
    without limitation, any Asset Acquisition giving rise to the
    need to make such calculation as a result of Millar Western or
    one of its Restricted Subsidiaries (including any Person who
    becomes a Restricted Subsidiary as a result of the Asset
    Acquisition) incurring, assuming or otherwise being liable for
    Acquired Indebtedness and also including any EBITDA attributable
    to the assets which are the subject of the Asset Sale or Asset
    Acquisition during the Four Quarter Period) occurring on or
    after the first day of the Four Quarter Period and on or prior
    to the date of determination, as if such Asset Sale or Asset
    Acquisition (including the incurrence, assumption or liability
    for any such Acquired Indebtedness) occurred on the first day of
    such Four Quarter Period.

Consolidated Fixed Charges
means, with respect to any Person, for any period, the sum,
without duplication, of:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Consolidated Interest Expense; plus                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (2) | the product of (x) the amount of all
    dividend payments (to any Person other than Millar Western or a
    Restricted Subsidiary) on any series of Disqualified Capital
    Stock of such Person (other than dividends paid in Capital Stock
    (other than Disqualified Capital Stock)) paid, accrued or
    scheduled to be paid or accrued during such period times
    (y) a fraction, the numerator of which is one and the
    denominator of which is one minus the then current effective
    consolidated federal, state, provincial and local tax rate of
    such Person, expressed as a decimal.

Consolidated Interest Expense
means, with respect to any Person, for any period, the sum,
without duplication, of:



| |     |                                                                                                                                                                                                                                                                                                                                                                  
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | the aggregate amount of interest charges
    (excluding fees and expenses incurred in connection with the
    Offering), whether expensed or capitalized, incurred or accrued
    by such Person and its Restricted Subsidiaries, determined on a
    consolidated basis in accordance with GAAP for such period
    (including non-cash interest payments); plus
|
| | (2) | to the extent not included in clause (1)
    above, an amount equal to the sum of:                                                                                                                                                                                                                                                                               



| |     |                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | imputed interest included in Capitalized Lease
    Obligations;                                                                                                       
|
| | (b) | all commissions, discounts and other fees and
    charges owed with respect to letters of credit and bankers
    acceptance financing;                               
|
| | (c) | the net costs associated with Interest Rate
    Agreements, Currency Agreements, Commodity Agreements and other
    hedging obligations;                              
|
| | (d) | amortization of deferred financing costs and
    expenses;                                                                                                            
|
| | (e) | the interest portion of any deferred payment
    obligations;                                                                                                         
|
| | (f) | amortization of discount or premium on
    Indebtedness, if any;                                                                                                      
|
| | (g) | all capitalized interest and all accrued interest;                                                                                                                    
|
| | (h) | all other non-cash interest expense;                                                                                                                                  
|
| | (i) | all interest incurred or paid under any guarantee
    of Indebtedness (including a guarantee of principal, interest or
    any combination thereof) of any Person; and

105



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##### 





| |     |                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (j) | the amount of all payments charged to
    shareholders equity on any compound financial
    instrument (as described under GAAP) paid, accrued or
    scheduled to be paid or accrued during such period.

For purposes of calculating Consolidated Interest
Expense on a pro forma basis:



| |     |                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | interest on Indebtedness bearing a floating rate
    of interest will be calculated using the interest rate in effect
    at the time of determination, taking into account on a pro forma
    basis any Interest Rate Agreement applicable to such
    Indebtedness if such Interest Rate Agreement has a remaining
    term at the date of determination of at least 12 months; and
|
|
|
| | (2) | if Indebtedness was incurred under a revolving
    credit facility, the interest expense on such Indebtedness will
    be calculated based upon the average daily balance of such
    Indebtedness during the applicable period.                                                                                                                                                     
|

Consolidated Net Income means,
with respect to any Person, for any period, the aggregate of the
Net Income of such Person and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance
with GAAP; provided that:



| |     |                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | the Net Income of any Person, other than the
    referent Person or a Restricted Subsidiary of the referent
    Person, will be excluded, except to the extent of the amount of
    cash dividends or distributions actually received by the
    referent Person or a Restricted Subsidiary of the referent
    Person;                                                                   
|
|
|
| | (2) | the Net Income (but not loss) of any Restricted
    Subsidiary of the Person in question that is subject to any
    restriction or limitation on the payment of dividends or the
    making of other distributions (other than pursuant to the notes
    or the indenture) will be excluded to the extent of such
    restriction or limitation;                                          
|
|
|
| | (3) | (a) the Net Income of any Person acquired in a
    pooling of interests transaction for any period
    prior to the date of such acquisition will be excluded and
    (b) any net after-tax gain (but not loss) resulting from an
    Asset Sale by the Person in question or any of its Restricted
    Subsidiaries other than in the ordinary course of business will
    be excluded;
|
|
|
| | (4) | after-tax items classified as extraordinary or
    unusual gains or losses and any foreign exchange gains and
    losses will be excluded;                                                                                                                                                                                                                                                
|
|
|
| | (5) | income or loss attributable to discontinued
    operations (including, without limitation, operations disposed
    of during such period whether or not such operations were
    classified as discontinued) will be excluded;                                                                                                                                                            
|
|
|
| | (6) | the cumulative effect of a change in accounting
    principles after the Issue Date will be excluded;                                                                                                                                                                                                                                                                                     
|
|
|
| | (7) | any restoration to income or any contingency
    reserve of an extraordinary, non-recurring or unusual nature
    will be excluded, except to the extent that provision for such
    reserve was made out of Consolidated Net Income accrued at any
    time subsequent to the Issue Date; and                                                                                            
|
|
|
| | (8) | in the case of a successor to the referent Person
    by consolidation or merger or as a transferee of the referent
    Persons assets, any earnings of the successor corporation
    prior to such consolidation, merger or transfer of assets will
    be excluded.                                                                                                                    
|




Corporate Services Agreements
means (i) the Corporate Services Agreement, dated as of
May 13, 1998, between us and Industries, as in effect on
the Issue Date, and (ii) the Trademark Licensing Agreement,
dated as of May 13, 1998, between us and Industries, as in
effect on the Issue Date, and, in the case of each of
clause (i) and (ii), any amendment thereto so long as any
such amendment does not materially alter the character or extent
of the financial and economic risks and obligations of us from
those existing on the Issue Date.




106



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##### 



Credit Facilities means, one
or more debt facilities or commercial paper facilities, in each
case with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or
refinanced in whole or in part from time to time.




Currency Agreement means any
foreign exchange contract, currency swap agreement or other
similar agreement or arrangement designed to protect us or any
Restricted Subsidiary against fluctuations in currency values.







Designation will have the
meaning set forth in the definition of Restricted
Payment.







Designation Amount will have
the meaning set forth in the definition of Restricted
Payment.




Disqualified Capital Stock
means any Capital Stock of a Person or a Restricted Subsidiary
thereof which, by its terms (or by the terms of any security
into which it is convertible or for which it is exchangeable at
the option of the holder), or upon the happening of any event,
matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the
holder thereof (except, in each case, in accordance with a
change of control provision, which provision has substantially
the same effect as the provisions of the indenture described
under  Offers to Repurchase by Millar
Western  Change of Control), in whole or in
part, or is exchangeable into Indebtedness on or prior to the
final maturity date of the notes.

EBITDA means, with respect to
any Person and its Restricted Subsidiaries, for any period, an
amount equal to:



| |     |                                  
| | --- | ---------------------------------
| | (1) | the sum, without duplication; of:



| |     |                                                                                                                                                                                                                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Consolidated Net Income for such period; plus                                                                                                                                                                                                                                                                            
|
| | (b) | the provision for taxes for such period based on
    income or profits to the extent such income or profits were
    included in computing Consolidated Net Income (minus any
    provision for taxes utilized in computing net loss under
    clause (a) hereof to the extent such provision reduced net
    loss); plus
|
| | (c) | Consolidated Interest Expense for such period;
    plus                                                                                                                                                                                                                                                                  
|
| | (d) | depreciation for such period on a consolidated
    basis, to the extent reducing Consolidated Net Income; plus                                                                                                                                                                                                           
|
| | (e) | amortization of intangibles for such period on a
    consolidated basis, to the extent reducing Consolidated Net
    Income; plus                                                                                                                                                                                        
|
| | (f) | any other non-cash items reducing Consolidated
    Net Income for such period; minus                                                                                                                                                                                                                                     



| |     |                                                                                                                                                                                                                                                 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | all non-cash items increasing Consolidated Net
    Income for such period; minus                                                                                                                                                                
|
| | (3) | all cash payments during such period relating to
    non-cash charges that were added back in determining EBITDA in
    any prior period, determined on a consolidated basis with
    respect to Millar Western and its Restricted Subsidiaries.

Exchange Act means the
U.S. Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Commission promulgated thereunder.




Fair Market Value means, with
respect to any asset or property, the price which could be
negotiated in an arms-length, free market transaction, for
cash, between a willing seller and a willing and able buyer,
neither of whom is under undue pressure or compulsion to
complete the transaction. Fair Market Value will be determined
by the Board of Directors of Millar Western




107



---



##### 






acting reasonably and in good faith and, in the
case of determination involving assets or property in excess of
$1.0 million will be evidenced by a resolution of the Board
of Directors of Millar Western delivered to the trustee.





GAAP means generally accepted
accounting principles consistently applied as in effect in
Canada from time to time.

Guarantee means a guarantee of
the notes or Exchange Notes by a Guarantor issued pursuant to
the terms of the indenture.

Guarantors means each
Restricted Subsidiary that hereafter becomes a Guarantor
pursuant to the indenture.




incur means, with respect to
any Indebtedness or other obligation of any Person, to create,
issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such
indebtedness or other obligation or the recording, as required
pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such Person (and
incurrence, incurred,
incurrable, and incurring will have
meanings correlative to the preceding); provided that a change
in GAAP that results in an obligation of such Person that exists
at such time becoming Indebtedness will not be deemed an
incurrence of such Indebtedness.







Indebtedness means (without
duplication), with respect to any Person, any indebtedness at
any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the
recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof), or evidenced by bonds,
notes, debentures or similar instruments or representing the
balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that
constitute accounts payable or trade payables, and other accrued
liabilities arising in the ordinary course of business) if and
to the extent any of the preceding indebtedness would appear as
a liability upon a balance sheet of such Person prepared in
accordance with GAAP, and will also include, to the extent not
otherwise included:






| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | any Capitalized Lease Obligations of such Person;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
|
| | (2) | obligations secured by a Lien to which any
    property or assets owned or held by such Person are subject,
    whether or not the obligation or obligations secured thereby
    will have been assumed, provided that, for the purposes of
    determining the amount of Indebtedness described in this clause,
    if recourse with respect to such Indebtedness is limited to such
    property or assets, the amount of such Indebtedness will be
    deemed to be the lesser of (A) the Fair Market Value of
    such property or assets and (B) the amount of such
    Indebtedness;                                                                                                                                                          
|
|
| | (3) | guarantees of items of other Persons which would
    be included within this definition for such other Persons
    (whether or not such items would appear upon the balance sheet
    of the guarantor);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (4) | all obligations for the reimbursement of any
    obligor on any letter of credit, bankers acceptance or
    similar credit transaction;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
|
| | (5) | all Disqualified Capital Stock issued by such
    Person with the amount of Indebtedness represented by such
    Disqualified Capital Stock being equal to the greater of its
    voluntary or involuntary liquidation preference and its maximum
    fixed repurchase price (for the purposes hereof, maximum
    fixed repurchase price of any Disqualified Capital Stock
    which does not have a fixed repurchase price will be calculated
    in accordance with the terms of such Disqualified Capital Stock
    as if such Disqualified Capital Stock were repurchased on any
    date on which Indebtedness will be required to be determined
    pursuant to the indenture and if such price is based upon, or
    measured by, the fair
|

108



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##### 



| |     |                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     | market value of such Disqualified Capital Stock,
    such price will be the Fair Market Value of such Disqualified
    Capital Stock);                                                                                                                                                                                                                                                   
|
|
|
| | (6) | obligations of any such Person under any Currency
    Agreement or any Interest Rate Agreement applicable to any of
    the preceding or Commodity Agreement (if and to the extent such
    Currency Agreement, Interest Rate Agreement or Commodity
    Agreement obligations would appear as a liability upon a balance
    sheet of such Person prepared in accordance with GAAP); and
|
|
| | (7) | Attributable Indebtedness of such Person.                                                                                                                                                                                                                                                                                                                                                




The amount of Indebtedness of any Person at any
date will be the outstanding balance at such date of all
unconditional obligations as described above and, with respect
to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation;
provided that:






| |     |                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | the amount outstanding at any time of any
    Indebtedness issued with original issue discount is the accreted
    value of such Indebtedness at such time as determined in
    conformity with GAAP; and
|
|
| | (2) | Indebtedness will not include any liability for
    federal, provincial, state, local or other taxes.                                                                                                    
|




Notwithstanding any other provision of the
preceding definition, any trade payable arising from the
purchase of goods or materials or for services obtained in the
ordinary course of business will not be deemed to be
Indebtedness of Millar Western or any of its Restricted
Subsidiaries for purposes of this definition. Furthermore,
guarantees of (or obligations with respect to letters of credit
supporting) Indebtedness otherwise included in the determination
of such amount will also not be included.







Independent Financial Advisor
means an investment banking firm of national reputation in the
United States or Canada (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a
direct or indirect financial interest in us or any of our
Affiliates and (ii) which, in the judgment of our Board of
Directors, is otherwise  independent and qualified to
perform the task for which it is to be engaged.




Industries means Millar
Western Industries Ltd.

Interest Rate Agreement means,
with respect to any Person, any interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement or
other similar agreement designed to protect the party indicated
therein against fluctuations in interest rates.




Investments means, with
respect to any Person, directly or indirectly, any advance (or
other extension of credit), account receivable (other than an
account receivable arising in the ordinary course of business of
such Person), loan or capital contribution to (by means of
transfers of cash or other Property to others, payments for
Property or services for the account or use of others or
otherwise), any guarantee of any obligations or Indebtedness of
any other Person, the purchase of any Capital Stock, bonds,
notes, debentures, partnership or joint venture interests or
other securities of, the acquisition, by purchase or otherwise,
of all or substantially all of the business or assets or stock
or other evidence of beneficial ownership of, or interest in any
Person or the making of any investment in any Person.
Investments will exclude (i) extensions of trade credit on
commercially reasonable terms in accordance with normal trade
practices of such Person and (ii) the repurchase by a
Person of securities of its own issue. For the purposes of the
Limitation on Restricted Payments covenant, the
amount of any Investment will be the original cost of such
Investment plus the cost of all additional Investments by Millar
Western or any of its Restricted Subsidiaries, without any
adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment,
reduced by the payment of dividends or distributions in
connection with such Investment or any other amounts received in




109



---



##### 






respect of such Investment; provided that no such
payment of dividends or distributions or receipt of any such
other amounts will reduce the amount of any Investment if such
payment of dividends or distributions or receipt of any such
amounts would be included in Consolidated Net Income. In
determining the amount of any Investment involving the transfer
of any property or assets other than cash, such property or
assets will be valued at its or their Fair Market Value at the
time of such transfer, as determined in good faith by the Board
of Directors of the Person making such transfer.








Issue Date means the date the
notes are first issued by us and authenticated by the trustee
under the indenture.







Lien means, with respect to
any property or assets of any Person, any mortgage or deed of
trust, pledge, hypothecation, assignment, deposit arrangement,
security interest, lien, charge, easement, encumbrance,
preference, priority, or other security agreement or
preferential arrangement of any kind or nature whatsoever on or
with respect to such property or assets (including without
limitation, any Capitalized Lease Obligation, conditional sales,
or other title retention agreement having substantially the same
economic effect as any of the preceding).







Magnesium Sulphate Supply
Agreement means the Magnesium Sulphate Supply
Agreement, dated August 15, 1988, between Millar Western
Industries Ltd. and Millar Western Pulp Ltd. (a predecessor of
Industries), as in effect on the Issue Date, and any amendment
thereto so long as any such amendment does not materially alter
the character or extent of the financial and economic risks and
obligations of us from those existing on the Issue Date.




Material Subsidiary means, at
any date of determination:



| |     |                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------
| | (1) | any Restricted Subsidiary that, together with its
    Subsidiaries that constitute Restricted Subsidiaries:



| |     |                                                                                                                                                                                                              
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (a) | for our most recent fiscal year, accounted for
    more than 5.0% of our consolidated revenues; or                                                                                                           
|
|
|
| | (b) | as of the end of such fiscal year, owned more
    than 5.0% of our consolidated assets, all as set forth on our
    consolidated financial statements for such year prepared in
    conformity with GAAP; and
|



| |     |                                                                                                                                                                                                                                                                                                                                                        
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | any Restricted Subsidiary which, when aggregated
    with all other Restricted Subsidiaries that are not otherwise
    Material Restricted Subsidiaries and as to which any event
    described in clause (7) of Events of Default
    above has occurred, would constitute a Material Restricted
    Subsidiary under clause (1) of this definition.




Meadow Lake Services Agreement
means each of (i) the Administrative Services Agreement,
dated as of October 31, 1990, among Millar Western
Management Ltd., Millar Western Pulp (Meadow Lake) Ltd. and
Meadow Lake Pulp Limited Partnership, as in effect on the Issue
Date, and (ii) the Marketing Agreement, dated as of
November 1, 1990, between Millar Western Management Ltd.
and Meadow Lake Pulp Limited Partnership, as in effect on the
Issue Date, and, in the case of each of clause (i) and
(ii), any amendment thereto so long as any such amendment does
not materially alter the character or extent of the financial
and economic risks and obligations of us from those existing on
the Issue Date.




Net Income means, with respect
to any Person, for any period, the net income (loss) of such
Person determined in accordance with GAAP.

Net Proceeds means, with
respect to any Asset Sale:






| |     |                                                                                  
| | --- | ---------------------------------------------------------------------------------
| | (1) | cash received by us or any Restricted Subsidiary
    from such Asset Sale, after:






| |     |                                                                                           
| | --- | ------------------------------------------------------------------------------------------
| | (a) | provision for all income or other taxes measured
    by or resulting from such Asset Sale;

110



---



##### 





| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | payment of all brokerage commissions,
    underwriting and other fees and expenses, including without
    limitation, legal, accounting and appraisal fees, related to
    such Asset Sale;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | (c) | provision for minority interest holders in any
    Restricted Subsidiary as a result of such Asset Sale;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
|
| | (d) | deduction of appropriate amounts to be provided
    by us or a Restricted Subsidiary as a reserve, in accordance
    with GAAP, against any liabilities associated with the assets
    sold or disposed of in such Asset Sale and retained by us or a
    Restricted Subsidiary after such Asset Sale, including, without
    limitation, pension and other post-employment benefit
    liabilities and liabilities related to environmental matters or
    against any indemnification obligations associated with the
    assets sold or disposed of in such Asset Sale; provided,
    however, that at such time as such amounts are no longer
    reserved or such reserve is no longer necessary, any remaining
    amounts will become Net Proceeds to be allocated in accordance
    with  Offers to Repurchase by Millar
    Western  Asset Sales; and
|
|
| | (e) | deduction of amounts required to be applied to
    the repayment of Indebtedness secured by a Lien on the asset or
    assets that were subject to such Asset Sale; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           






| |     |                                                                                                                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | promissory notes and other non-cash consideration
    received by us or any Restricted Subsidiary from such Asset Sale
    or other disposition upon the liquidation or conversion of such
    notes or non-cash consideration into cash.




Permitted Holders means:



| |     |                                                                                                                                                                                    
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | James B. Millar and H. MacKenzie Millar;                                                                                                                                           
|
| | (2) | the spouses, children and other lineal
    descendants of either of the persons referred to in
    clause (1) above;                                                               
|
| | (3) | the undistributed estate of any of the persons
    referred to in clauses (1) and (2) above;                                                                                       
|
| | (4) | any trust so long as one or more of the persons
    referred to in clause (2) above retains all of the
    beneficial interest thereunder; and                                     
|
| | (5) | any Person at least 80% of the voting power of
    the outstanding Capital Stock of which is owned by any of the
    persons referred to in clauses (1), (2), (3) or
    (4) above.

Permitted Investments means
Investments made on or after the Issue Date consisting of:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | Investments by us, or by a Restricted Subsidiary
    thereof, in us or a Restricted Subsidiary;                                                                                                                                                                                                                                                                                                        
|
|
|
| | (2) | Investments by us, or by a Restricted Subsidiary
    thereof, in a Person, if as a result of such Investment
    (a) such Person becomes a Restricted Subsidiary or
    (b) such Person is merged, consolidated or amalgamated with
    or into, or transfers or conveys substantially all of its assets
    to, or is liquidated into, us or a Restricted Subsidiary thereof;                         
|
|
| | (3) | Investments in Cash Equivalents;                                                                                                                                                                                                                                                                                                                                                                       
|
| | (4) | reasonable and customary loans and advances made
    to employees in connection with their relocation not to exceed
    $1.0 million in the aggregate at any one time outstanding;                                                                                                                                                                                                                     
|
|
| | (5) | an Investment that is made by us or a Restricted
    Subsidiary thereof in the form of any Capital Stock, bonds,
    notes, debentures or other securities that are issued by a third
    party to us or such Restricted Subsidiary solely as partial
    consideration for the consummation of an Asset Sale that is
    permitted under  Offers to Repurchase by Millar
    Western  Asset Sales;
|

111



---



##### 





| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (6) | other Investments in an amount not to exceed,
    together with the amount of all other Investments outstanding
    under this clause (6), at the time of such Investment and
    after giving pro forma effect thereto, 5.0% of our consolidated
    tangible assets as of the end of the most recent fiscal quarter
    for which consolidated financial statements are available ending
    on or prior to the date of determination (with the amount of
    each Investment being measured at the time made and without
    giving effect to subsequent changes in value);
|
|
|
| | (7) | any Investments by us or a Restricted Subsidiary
    received in compromise of claims, settlement of debts or
    disputes or satisfaction of judgments relating to obligations
    payable to us or such Restricted Subsidiary, as the case may be,
    in its capacity as trade creditor or from customers, which
    obligations were incurred in the ordinary course of business,
    including pursuant to any plan of reorganization or similar
    arrangement upon the bankruptcy or insolvency of any trade
    creditor or customer; and                            
|
|
| | (8) | Currency Agreements, Interest Rate Agreements and
    Commodity Agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Permitted Liens means:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) | Liens on Property or assets of, or any Capital
    Stock of, any corporation existing at the time such Property,
    assets or Capital Stock are acquired by us or any of our
    Restricted Subsidiaries, whether by merger, amalgamation,
    consolidation, purchase of assets or otherwise; provided
    (x) that such liens are not created, incurred or assumed in
    connection with, or in contemplation of, such assets being
    acquired by us or our Restricted Subsidiaries and (y) that
    any such Lien does not extend to or cover any Property, Capital
    Stock or Indebtedness other than the Property, Capital Stock or
    Indebtedness of such corporation;                                                                                                       
|
|
| | (2) | Liens securing Refinancing Indebtedness; provided
    that any such Lien does not extend to or cover any Property,
    Capital Stock or Indebtedness other than the Property, Capital
    Stock or Indebtedness securing the Indebtedness so refunded,
    refinanced or extended;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
|
| | (3) | Liens in favor of us or any Guarantor;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
|
| | (4) | Liens to secure Purchase Money Indebtedness that
    is otherwise permitted to be incurred under the indenture;
    provided that (a) any such Lien is created solely for the
    purpose of securing Indebtedness representing, or incurred to
    finance, refinance or refund, the cost (including sales and
    excise taxes, installation and delivery charges and other direct
    costs of, and other direct expenses paid or charged in
    connection with, such purchase or construction) of such
    Property, (b) the principal amount of the Indebtedness
    secured by such Lien does not exceed 100% of such costs and
    expenses, and (c) such Lien does not extend to or cover any
    Property other than such item of Property and any improvements
    on such item;
|
|
| | (5) | statutory liens or landlords,
    carriers, warehousemens, unemployment insurance,
    surety or appeal bonds, mechanics, suppliers,
    materialmens, repairmens or other like Liens imposed
    by law arising in the ordinary course of business and with
    respect to amounts not yet delinquent or being contested in good
    faith by appropriate proceedings, if a reserve or other
    appropriate provision, if any, as will be required in conformity
    with GAAP will have been made therefor;                                                                                                                                                                                                                                                                      
|
|
| | (6) | Liens existing on the Issue Date;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (7) | Liens securing only the notes or the Guarantees;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (8) | easements, reservation of rights of way,
    restrictions (including, but not limited to, zoning and building
    restrictions) and other similar easements, licenses,
    restrictions on                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

112



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| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |      | the use of Properties, or minor imperfections of
    title that in the aggregate are not material in amount and do
    not in any case materially detract from the Properties subject
    thereto or interfere with the ordinary conduct of the business
    of us and our Restricted Subsidiaries;                                                                                                                                                                                                                                                                                                                                                                                                       
|
|
|
| | (9)  | Liens for taxes, assessments or governmental
    charges that are being contested in good faith by appropriate
    proceedings; provided that any reserve or other appropriate
    provision as will be required in conformity with GAAP will have
    been made therefor;                                                                                                                                                                                                                                                                                                                                                                                                                                
|
|
| | (10) | Liens securing Capitalized Lease Obligations
    permitted to be incurred under clause (5) of the second
    paragraph of the covenant described under 
    Limitation on Additional Indebtedness above; provided that
    such Lien does not extend to any Property other than that
    subject to the underlying lease;                                                                                                                                                                                                                                                                                                                                                                              
|
| | (11) | Liens on inventory and receivables securing
    Indebtedness under a Credit Facility;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (12) | Liens securing obligations under Interest Rate
    Agreements, Currency Agreements and Commodity Agreements, in
    each case permitted to be incurred under the indenture;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (13) | Liens created or deposits made to secure the
    performance of tenders, bids, leases, statutory obligations,
    government contracts, performance bonds and other obligations of
    a like nature incurred in the ordinary course of business;                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | (14) | Liens in favor of customs and revenue authorities
    arising as a matter of law to secure payment of customs duties
    in connection with the importation of goods;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (15) | other Liens securing obligations incurred in the
    ordinary course of business, which obligations do not exceed
    $1.0 million in the aggregate at any one time outstanding;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (16) | Liens arising pursuant to Sale and Lease-Back
    transactions entered into in compliance with the indenture;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
|
| | (17) | Liens securing Indebtedness permitted to be
    incurred under clause (10) of the second paragraph of the
     Limitation on Additional Indebtedness
    covenant; provided that such Liens, together with all other
    Liens existing under this clause (17), will not, at the
    time of such incurrence and after giving pro forma effect
    thereto, extend to Property of us and our Restricted
    Subsidiaries with a Fair Market Value in excess of
    $50.0 million; provided, further, that, in the case of
    Property with a Fair Market Value of in excess of approximately
    $25.0 million, such Fair Market Value will be determined by
    an Independent Financial Advisor; and
|
|
|
| | (18) | any extension, renewal or replacement, in whole
    or in part, of any Lien described in the preceding
    clauses (1) through (17); provided that any such extension,
    renewal or replacement will be no more restrictive in any
    material respect than the Lien so extended, renewed or replaced
    and will not extend to any other Property of us or our
    Subsidiaries other than such item of Property originally covered
    by such Lien or by improvement thereon or additions or
    accessions thereto.                                                                                                                                                                               
|

Person means any individual,
corporation, partnership, limited liability company, joint
venture, association, joint-stock company, trust, unincorporated
organization or government (including any agency or political
subdivision thereof).

Preferred Stock means any
Capital Stock of a Person, however designated, which entitles
the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the
holders of other Capital Stock issued by such Person.

Property of any Person means
all types of real, personal, tangible, intangible or mixed
property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person and its
Subsidiaries under GAAP.

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Purchase Money Indebtedness
means any Indebtedness incurred by a Person to finance the cost
(including the cost of construction, installation or
improvement) of an item of property, the principal amount of
which Indebtedness does not exceed the sum of (i) the
lesser of (A) the Fair Market Value of such property or
(B) 100% of such cost and (ii) reasonable fees and
expenses of such Person incurred in connection therewith.




Refinancing Indebtedness means
Indebtedness that replaces, refunds, renews, refinances or
extends any Indebtedness of us or a Restricted Subsidiary
permitted to be incurred by us or its Restricted Subsidiaries
pursuant to the covenant described under  Certain
Covenants  Limitation on Additional Indebtedness
(other than pursuant to clauses (1), (4), (5), (6), (7),
(8), (9), (10), (12), (13), (14) and (15) of the definition
of Permitted Indebtedness), but only to the extent that:






| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | the Refinancing Indebtedness is subordinated to
    the notes to at least the same extent as the Indebtedness being
    replaced, refunded, renewed, refinanced or extended, if at all;                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (2) | the Refinancing Indebtedness is scheduled to
    mature either (a) no earlier than the Indebtedness being
    replaced, refunded, renewed, refinanced or extended, or
    (b) after the maturity date of the notes;                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | (3) | the portion, if any, of the Refinancing
    Indebtedness that is scheduled to mature on or prior to the
    maturity date of the notes has a weighted average life to
    maturity at the time such Refinancing Indebtedness is incurred
    that is equal to or greater than the weighted average life to
    maturity of the portion of the Indebtedness being replaced,
    refunded, renewed, refinanced or extended that is scheduled to
    mature on or prior to the maturity date of the notes;                                                                                                                          
|
| | (4) | such Refinancing Indebtedness is in an aggregate
    principal amount that is equal to or less than the sum of
    (a) the aggregate principal amount then outstanding under
    the Indebtedness being replaced, refunded, renewed, refinanced
    or extended, (b) the amount of accrued and unpaid interest,
    if any, and premiums owed, if any, not in excess of preexisting
    prepayment provisions on such Indebtedness being replaced,
    refunded, renewed, refinanced or extended and (c) the
    amount of customary fees, expenses and costs related to the
    incurrence of such Refinancing Indebtedness; and
|
|
| | (5) | such Refinancing Indebtedness is incurred by the
    same Person that initially incurred the Indebtedness being
    replaced, refunded, renewed, refinanced or extended, except that
    we may incur Refinancing Indebtedness to refund, refinance or
    extend Indebtedness of any Wholly-Owned Restricted Subsidiary.                                                                                                                                                                                                                                                                                                        
|




Replacement Assets means
(i) properties or assets (other than cash or Cash
Equivalents or any Capital Stock or other security) that will be
used or useful in our business as conducted on the Issue Date,
or in businesses similar to or ancillary to our business as
conducted on the Issue Date or (ii) Capital Stock of any
Person that will become on the date of acquisition thereof a
Guarantor as a result of such acquisition.







Restricted Subsidiary means
our Subsidiary other than an Unrestricted Subsidiary. Our Board
of Directors may designate any Unrestricted Subsidiary or any
Person that is to become a Subsidiary as a Restricted Subsidiary
if immediately after giving effect to such action (and treating
any Acquired Indebtedness as having been incurred at the time of
such action), (i) we could have incurred at least US$1.00
of additional Indebtedness (other than Permitted Indebtedness)
pursuant to  Certain Covenants 
Limitation on Additional Indebtedness above and
(ii) no Default or Event of Default will have occurred and
be continuing.







Sale and Lease-Back
Transaction means any arrangement with any Person
providing for the leasing by us or any Restricted Subsidiary of
any real or tangible personal property, which




114



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##### 






property has been or is to be sold or transferred
by us or such Restricted Subsidiary to such Person in
contemplation of such leasing.





Securities Act means the
U.S. Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder.

Subsidiary of any specified
Person means any corporation, partnership, joint venture,
limited liability company, association or other business entity,
whether now existing or hereafter organized or acquired,
(i) in the case of a corporation, of which more than 50% of
the total voting power of the Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the
election of directors, officers or trustees thereof is held by
such first-named Person or any of its Subsidiaries; or
(ii) in the case of a partnership, joint venture, limited
liability company, association or other business entity, with
respect to which such first-named Person or any of its
Subsidiaries has the power to direct or cause the direction of
the management and policies of such entity by contract or
otherwise or if in accordance with GAAP such entity is
consolidated with the first-named Person for financial statement
purposes.




Unrestricted Subsidiary means
(a) any Subsidiary of an Unrestricted Subsidiary and
(b) any Subsidiary of us which is classified after the
Issue Date as an Unrestricted Subsidiary by a resolution adopted
by our Board of Directors; provided that a Subsidiary may be so
classified as an Unrestricted Subsidiary only if such
classification is in compliance with  Certain
Covenants  Limitation on Restricted Payments
above. The trustee will be given prompt notice by Millar Western
of each resolution adopted by our Board of Directors under this
provision, together with a copy of each such resolution adopted.




Wholly-Owned Restricted
Subsidiary means any Restricted Subsidiary, all of the
outstanding voting securities (other than directors
qualifying shares or similar requirements of law) of which are
owned, directly or indirectly, by Millar Western or another
Wholly-Owned Restricted Subsidiary.

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INCOME TAX CONSIDERATIONS

U.S. Federal Income Tax
Considerations


The following is a general discussion of certain
U.S. federal income tax consequences of the acquisition,
ownership and disposition of notes by a U.S. Holder (as
defined below). It applies only to notes held as capital assets,
within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended (the Code), by investors
who purchase the notes in the offering at the offering price.
This summary is intended for general information only, and does
not discuss all of the tax consequences that may be relevant to
a U.S. Holder and does not discuss the tax consequences
applicable to particular classes of U.S. Holders that may
be subject to special tax rules, such as dealers in securities
or currencies, traders in securities that elect mark to market,
banks, tax-exempt organizations, S corporations, life
insurance companies, persons that hold notes as part of a hedge,
or as part of a straddle or conversion transaction, taxpayers
subject to the alternative minimum tax or whose functional
currency is not the U.S. dollar. This summary also does not
address the tax consequences to shareholders or beneficiaries in
any entity that holds notes. In addition, this summary does not
describe any foreign, state or local tax considerations. We
recommend that investors who purchase the notes at a price other
than the offering price consult their tax advisors as to the
possible applicability to them of the amortizable bond premium
or market discount rules. This summary is based on the Code, its
legislative history, existing and proposed Treasury regulations
thereunder, published rulings by the Internal Revenue Service
(IRS) and court decisions, all as currently in
effect and all subject to change at any time, possibly with
retroactive effect.

We recommend that prospective purchasers of
notes consult their own tax advisors concerning the
consequences, in their particular circumstances, under the Code
and the laws of any other taxing jurisdiction, of the
acquisition, ownership and disposition of notes.

For the purposes of this summary, a
U.S. Holder is a beneficial owner that is:



| |   |                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an individual citizen or resident of the United
    States for U.S. federal income tax purposes;                                                                                                                                                                                                                                                      
|
| |  | a corporation, or other entity taxable as a
    corporation, created or organized in or under the laws of the
    United States or of any political subdivision of the United
    States;                                                                                                                                                             
|
| |  | an estate that is subject to U.S. federal
    income tax without regard to the source of its income; or                                                                                                                                                                                                                                               
|
| |  | a trust if (i) a United States court is able
    to exercise primary supervision over administration of the trust
    and one or more United States persons have authority to control
    all substantial decisions of the trust, or (ii) the trust
    has elected to be treated as a United States person under
    applicable Treasury regulations.

If a partnership holds notes, the
U.S. federal income tax treatment of a partner generally
will depend on the status of the partner and the activities of
the partnership. A U.S. Holder that is a partner of a
partnership should consult its tax advisors concerning the
consequences, under the Code and the laws of any other taxing
jurisdiction, of the ownership of the notes by such partnership.

The exchange of an old note for a new note in the
exchange offer is not a taxable exchange. As a result, a
U.S. Holder will not recognize any gain or loss upon
exchanging an old note for a new note. The holding period of a
new note will include the holding period of the old note
exchanged, and the adjusted tax basis of the new note received
will be the same as the adjusted tax basis of the old note
exchanged immediately before the exchange.

For U.S. federal income tax purposes,
interest on a note generally will be taxable to a
U.S. Holder as ordinary income at the time received or
accrued, in accordance with such U.S. Holders method
of accounting for such purposes. Such interest will generally
constitute

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foreign source income, and, with certain
exceptions, will be passive or financial
services income for purposes of the U.S. foreign tax
credit.


Upon the sale or exchange of a note (other than
the exchange of an old note for a new note, as described above),
a U.S. Holder will recognize gain or loss, if any, for
U.S. federal income tax purposes equal to the difference
between the amount realized on such sale or exchange (other than
amounts received that are attributable to accrued but unpaid
interest and taxed as interest) and such U.S. Holders
adjusted tax basis in the note. Such gain or loss generally will
constitute U.S. source capital gain or loss, and will be
long-term capital gain or loss if the note was held by such
U.S. Holder for more than one year. A
U.S. Holders ability to deduct capital losses against
ordinary income is subject to limitations.

Information reporting of payments of principal
and interest within the United States to non-corporate
U.S. Holders generally will be made on IRS Form 1099,
including payments made by wire transfer from outside the United
States to an account in the United States and the payment of
proceeds from the sale of a note effected at a U.S. office
of a broker.

A U.S. Holder may be subject to backup
withholding tax with respect to interest paid on the notes and
to proceeds from the sale, exchange, redemption or retirement of
the note, unless the holder (a) is a corporation or comes
within certain other exempt categories and, when required,
demonstrates that fact or (b) provides a correct taxpayer
identification number, certifies that it has not lost its
exemption from backup withholding or has not been notified by
the IRS that it has failed to report any interest or dividends,
and otherwise complies with applicable requirements of the
backup withholding rules. A holder of a note who does not
provide us with the holders correct taxpayer
identification number may be subject to penalties imposed by the
IRS.

Backup withholding is not an additional tax. Any
amount paid as backup withholding will be creditable against the
holders U.S. federal income tax liability.

Canadian Federal Income Tax
Considerations

The following is a general discussion of the
principal Canadian federal income tax considerations generally
applicable to a person who acquires new notes in exchange for
old notes and who, for the purposes of the Income Tax Act
(Canada) (the Canadian Tax Act) and at all relevant
times, is not resident in Canada, deals at arms length
with us, holds the old notes as capital property, will hold the
new notes as capital property, does not use or hold and is not
deemed or considered to use or hold the old notes in carrying on
business in Canada, will not use or hold and will not be deemed
or considered to use or hold the new notes in carrying on
business in Canada (an Unconnected Holder). For the
purposes of the Canadian Tax Act, related persons (as therein
defined) are deemed not to deal at arms length. Special
rules which are not discussed below may apply to an Unconnected
Holder that is an insurer that carries on an insurance business
in Canada and elsewhere.

This discussion is based on the current
provisions of the Canadian Tax Act and the regulations
thereunder (the Regulations) in force on the date
hereof, all specific proposals to amend the Canadian Tax Act and
the Regulations publicly announced by the Minister of Finance
(Canada) prior to the date hereof and our understanding of the
published administrative practices of the Canada Customs and
Revenue Agency. This summary does not take into account or
anticipate any other changes in law or administrative practice,
whether by legislative, government or judicial decision or
action and does not take into account provincial, territorial or
foreign income tax legislation or considerations.

This discussion is of a general nature only, and
is not intended to be, nor should it be interpreted as, legal or
tax advice to any particular Unconnected Holder and no
representation is made with respect to the Canadian income tax
consequences to any particular person

117



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exchanging old notes for new notes. We
recommend that unconnected Holders consult their own tax
advisors with respect to their particular circumstances.


The exchange by an unconnected Holder of old
notes for new notes will not be subject to Canadian income tax.

Under the Canadian Tax Act, payments by us to an
Unconnected Holder of principal and interest on the new notes
will be exempt from Canadian withholding tax.

No other Canadian taxes on income, including
taxable capital gains, will be payable by an Unconnected Holder
under the Canadian Tax Act solely as a consequence of the
ownership, acquisition or disposition of new notes.

PLAN OF DISTRIBUTION

Each broker-dealer that receives new notes for
its own account in the exchange offer must acknowledge that it
will deliver a prospectus in connection with any resale of the
new notes. This prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for old notes
where the old notes were acquired as a result of market-making
activities or other trading activities. We have agreed that to
the extent any broker-dealer participates in the exchange offer,
we will use our reasonable best efforts to maintain the
effectiveness of the registration statement filed in connection
with the exchange offer for a period of 180 days following
the completion of the exchange offer.

We will not receive any proceeds from any sales
of the new notes by broker-dealers. The new notes received by
broker-dealers for their own account pursuant to the exchange
offer may be sold from time to time in one or more transactions
in the over-the-counter market, in negotiated transactions,
through the writing of options on the new notes or a combination
of methods of resale, at market prices prevailing at the time of
resale, at prices related to those prevailing market prices or
at negotiated prices. Any resale may be made directly to the
purchaser or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from the
broker-dealer and/or the purchasers of the new notes. Any
broker-dealer that resells the new notes that were received by
it for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of the new
notes may be deemed to be an underwriter within the
meaning of the Securities Act and any profit on any resale of
new notes and any commissions or concessions received by any of
those persons may be deemed to be underwriting compensation
under the Securities Act. The letter of transmittal states that,
by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it
is an underwriter within the meaning of the
Securities Act.

We have agreed to pay the expenses incident to
the exchange offer, except commissions or concessions of any
brokers or dealers and the fees of any counsel or other advisors
or experts retained by the holders of old notes, and will
indemnify the holders of the new notes (including any
broker-dealers) against related liabilities, including
liabilities under the Securities Act.

The new notes have not been and will not be
qualified for sale under the securities laws of Canada or any
province or territory of Canada.

LEGAL MATTERS

Certain legal matters in connection with the
exchange offer and the validity of the notes will be passed upon
for us by Shearman & Sterling LLP, Toronto, Ontario, with
respect to matters of United States law, and by Fraser Milner
Casgrain LLP, Edmonton, Alberta, with respect to matters of
Canadian law.

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EXPERTS

The audited financial statements as at
December 31, 2003 and 2002 and for each of the years in the
three-year period ended December 31, 2003 included in this
prospectus have been audited by PricewaterhouseCoopers LLP,
independent auditors, as stated in their report appearing in
this prospectus.

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GLOSSARY OF CERTAIN TERMS AND
DEFINITIONS

The following terms have the following meanings
in this Prospectus:

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

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

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

BHKP means bleached hardwood
kraft pulp;

BSKP means bleached softwood
kraft pulp;

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

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

CTMP means
chemi-thermo-mechanical pulp;

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

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

dimension lumber means
standard commodity lumber, ranging, in the case of Millar
Western, from 1 × 3s to
2 × 10s in varying lengths, usually
8 to 16;

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

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

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

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

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

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

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

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

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

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

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

NBHKP means northern bleached
hardwood kraft pulp;

NBSKP means northern bleached
softwood kraft pulp;

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

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

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

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

TMP means thermo-mechanical
pulp; and

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

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INDEX TO FINANCIAL STATEMENTS




|                                                                                                         |  |     
|-------------------------------------------------------------------------------------------------------- |  | ----
|Auditors Report                                                                                         |  | F-2 
|                                                                                                        
|Balance Sheets as at December 31, 2003 and
    2002                                                      |  | F-3 
|                                                                                                        
|Statements of Earnings for the years ended
    December 31, 2003, 2002 and 2001                          |  | F-4 
|                                                                                                        
|Statements of Retained Earnings for the years
    ended December 31, 2003, 2002 and 2001                 |  | F-4 
|                                                                                                        
|Statements of Cash Flows for the years ended
    December 31, 2003, 2002 and 2001                        |  | F-5 
|                                                                                                        
|Notes to Financial Statements for the years ended
    December 31, 2003, 2002 and 2001                   |  | F-6 
|                                                                                                        
|Balance Sheets as at March 31, 2004
    (unaudited) and December 31, 2003                                |  | F-26
|                                                                                                        
|Statement of Earnings for the three months ended
    March 31, 2004 and 2003 (unaudited)                 |  | F-27
|                                                                                                        
|Statement of Retained Earnings for the three
    months ended March 31, 2004 and 2003 (unaudited)        |  | F-27
|                                                                                                        
|Statement of Cash Flows for the three months
    ended March 31, 2004 and 2003 (unaudited)               |  | F-28
|                                                                                                        
|Segmented Information for the three months ended
    March 31, 2004 and 2003 (unaudited)                 |  | F-29
|                                                                                                        
|Notes to Interim Financial Statements for the
    three months ended March 31, 2004 and 2003 (unaudited) |  | F-30




F-1



---



##### 



AUDITORS REPORT

To the Shareholder of


Millar Western Forest Products Ltd.


We have audited the balance sheets of Millar
Western Forest Products Ltd. as at December 31, 2003, and
2002, and the statements of earnings, retained earnings and cash
flows for each of the years in the three-year period ended
December 31, 2003. These financial statements are the
responsibility of the companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, these financial statements
present fairly, in all material respects, the financial position
of Millar Western Forest Products Ltd. as at December 31,
2003 and 2002 and the results of its operations and its cash
flows for each of the years in the three-year period ended
December 31, 2003 in accordance with generally accepted
accounting principles in Canada.

(PRICEWATERHOUSECOOPERS LLP)

Chartered Accountants


Edmonton, Canada

February 20, 2004


F-2



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

BALANCE SHEETS

|                                         |                                          |              |         |        |  |   |         |        | 
|---------------------------------------- | ---------------------------------------- | ------------ | ------- | ------ |  | - | ------- | ------ | 
|                                         |                                          |             
|                                         |                                          | December 31,
|                                         |                                          |             
|                                         |                                          | 2003         |         | 2002  
|(in thousands of Canadian dollars)       |                                          |              |         |       
|Assets                                   |                                          |              |         |        |  |   |         |       
|Current assets                           |                                          |              |         |        |  |   |         |       
|                                         | Cash                                     |              | $       | 72,301 |  |   | $       | 35,005 | 
|                                         | Accounts receivable                      |              |         | 34,605 |  |   |         | 33,931 | 
|                                         | Inventories (note 3)                     |              |         | 54,258 |  |   |         | 61,236 | 
|                                         | Prepaid expenses                         |              |         | 1,608  |  |   |         | 3,849  | 
|                                         | Future income taxes (note 15)            |              |         | 3,526  |  |   |         | 1,599  | 
|                                         |                                          |              |         |        |  |   |         |       
|                                         |                                          |              | 166,298 |        |  |   | 135,620 |       
|Property, plant and equipment (note 4)   |                                          |              | 152,446 |        |  |   | 159,407 |       
|Other assets (note 5)                    |                                          |              | 26,953  |        |  |   | 26,613  |       
|                                         |                                          |              |         |        |  |   |         |       
|                                         |                                          | $            | 345,697 |        |  | $ | 321,640 |       
|                                         |                                          |              |         |        |  |   |         |       
|Liabilities and Shareholders
    Equity |                                          |              |         |        |  |   |         |       
|Current liabilities                      |                                          |              |         |        |  |   |         |       
|                                         | Accounts payable and accrued liabilities |              | $       | 47,593 |  |   | $       | 46,984 | 
|                                         | Deferred revenue                         |              |         |       |  |   |         | 6,518  | 
|                                         |                                          |              |         |        |  |   |         |       
|                                         |                                          |              | 47,593  |        |  |   | 53,502  |       
|Long-term debt (note 7)                  |                                          |              | 244,511 |        |  |   | 252,592 |       
|Other obligations (note 8)               |                                          |              | 6,224   |        |  |   | 6,712   |       
|Future income taxes (note 15)            |                                          |              | 9,803   |        |  |   | 6,830   |       
|                                         |                                          |              |         |        |  |   |         |       
|                                         |                                          |              | 308,131 |        |  |   | 319,636 |       
|Shareholders equity                     |                                          |              |         |        |  |   |         |       
|                                         | Share capital (note 9)                   |              |         |       |  |   |         |       | 
|                                         | Retained earnings                        |              |         | 37,566 |  |   |         | 2,004  | 
|                                         |                                          |              |         |        |  |   |         |       
|                                         |                                          | $            | 345,697 |        |  | $ | 321,640 |       
|                                         |                                          |              |         |        |  |   |         |       
|Contingent liability (note 10)           |                                          |              |         |        |  |   |         |       

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

F-3



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

STATEMENTS OF EARNINGS

|                                    |  |                         |         |      |  |             |         |   |  |   |         |  
|----------------------------------- |  | ----------------------- | ------- | ---- |  | ----------- | ------- | - |  | - | ------- | -
|                                    |  |                        
|                                    |  | Year Ended December 31,
|                                    |  |                        
|                                    |  | 2003                    |         | 2002 |  | 2001       
|(in thousands of Canadian dollars)  |  |                         |         |      |  |            
|                                    |  |                         |         |      |  | (restated -
|                                    |  |                         |         |      |  | note 2)    
|Gross revenue                       |  | $                       | 317,297 |      |  | $           | 277,830 |   |  | $ | 248,825 |  
|Selling expenses                    |  |                         | 58,745  |      |  |             | 43,865  |   |  |   | 37,947  |  
|                                    |  |                         |         |      |  |             |         |   |  |   |         |  
|Net revenue                         |  |                         | 258,552 |      |  |             | 233,965 |   |  |   | 210,878 |  
|Cost of sales (note 11)             |  |                         | 197,072 |      |  |             | 177,354 |   |  |   | 161,863 |  
|Depreciation and amortization       |  |                         | 16,601  |      |  |             | 16,731  |   |  |   | 16,184  |  
|General and administration          |  |                         | 12,978  |      |  |             | 13,391  |   |  |   | 15,424  |  
|Severance costs (note 12)           |  |                         |        |      |  |             | 2,298   |   |  |   |        |  
|Employees profit sharing           |  |                         | 325     |      |  |             |        |   |  |   |        |  
|                                    |  |                         |         |      |  |             |         |   |  |   |         |  
|Operating earnings                  |  |                         | 31,576  |      |  |             | 24,191  |   |  |   | 17,407  |  
|Financing expenses (note 13)        |  |                         | 28,672  |      |  |             | 26,153  |   |  |   | 25,266  |  
|Refinancing charges (note 14)       |  |                         | 14,965  |      |  |             |        |   |  |   |        |  
|Exchange (gain) loss on debt        |  |                         | (47,768 | )    |  |             | (2,208  | ) |  |   | 15,521  |  
|Other expense (income) (note 18)    |  |                         | (1,490  | )    |  |             | (707    | ) |  |   | 4,415   |  
|                                    |  |                         |         |      |  |             |         |   |  |   |         |  
|Earnings (loss) before income taxes |  |                         | 37,197  |      |  |             | 953     |   |  |   | (27,795 | )
|Income taxes (recovery) (note 15)   |  |                         | 1,635   |      |  |             | 445     |   |  |   | (4,325  | )
|                                    |  |                         |         |      |  |             |         |   |  |   |         |  
|Net earnings (loss)                 |  | $                       | 35,562  |      |  | $           | 508     |   |  | $ | (23,470 | )
|                                    |  |                         |         |      |  |             |         |   |  |   |         |  

STATEMENTS OF RETAINED EARNINGS

|                                                 |  |                         |        |      |  |      |         |   |  |   |         |  
|------------------------------------------------ |  | ----------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                 |  |                        
|                                                 |  | Year Ended December 31,
|                                                 |  |                        
|                                                 |  | 2003                    |        | 2002 |  | 2001
|(in thousands of Canadian Dollars)               |  |                         |        |      |  |     
|Retained earnings, beginning of year             |  | $                       | 2,004  |      |  | $    | 21,878  |   |  | $ | 31,852  |  
|Change in accounting policy (note 2)             |  |                         |       |      |  |      | (20,382 | ) |  |   | (6,886  | )
|                                                 |  |                         |        |      |  |      |         |   |  |   |         |  
|Retained earnings, beginning of year as restated |  |                         | 2,004  |      |  |      | 1,496   |   |  |   | 24,966  |  
|Net earnings (loss)                              |  |                         | 35,562 |      |  |      | 508     |   |  |   | (23,470 | )
|                                                 |  |                         |        |      |  |      |         |   |  |   |         |  
|Retained earnings, end of year                   |  | $                       | 37,566 |      |  | $    | 2,004   |   |  | $ | 1,496   |  
|                                                 |  |                         |        |      |  |      |         |   |  |   |         |  

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

F-4



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

STATEMENTS OF CASH FLOWS

|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |         |  
|------------------------------------------------- | --------------------------------------------------------- | ---------------------- | ------- | -------- | - | ----------- | ------ | ------ | - | - | ------- | ------- | -
|                                                  |                                                           |                       
|                                                  |                                                           | Year ended December 31
|                                                  |                                                           |                       
|(in thousands of Canadian dollars)                |                                                           | 2003                   |         | 2002     |   | 2001       
|                                                  |                                                           |                        |         |          |   |            
|                                                  |                                                           |                        |         |          |   | (restated -
|                                                  |                                                           |                        |         |          |   | note 2)    
|Cash provided from (used in)                      |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|Operating activities                              |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|                                                  | Net earnings (loss)                                       |                        | $       | 35,562   |   |             | $      | 508    |   |   | $       | (23,470 | )
|                                                  | Items not affecting cash:                                 |                        |         |          |   |             |        |        |   |   |         |         |  
|                                                  | Depreciation and amortization                             |                        |         | 16,601   |   |             |        | 16,731 |   |   |         | 16,184  |  
|                                                  | Future income taxes (recovery)                            |                        |         | 1,046    |   |             |        | (130   | ) |   |         | (4,925  | )
|                                                  | Amortization of deferred financing costs                  |                        |         | 5,034    |   |             |        | 919    |   |   |         | 1,057   |  
|                                                  | Exchange (gain) loss on long-term debt                    |                        |         | (47,768  | ) |             |        | (2,208 | ) |   |         | 15,521  |  
|                                                  | Reforestation expense                                     |                        |         | 3,736    |   |             |        | 4,659  |   |   |         | 7,024   |  
|                                                  | Provision for duties (note 10)                            |                        |         |         |   |             |        | (2,268 | ) |   |         | 2,268   |  
|                                                  | Other                                                     |                        |         | (1,404   | ) |             |        | (1,249 | ) |   |         | 3,403   |  
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|                                                  |                                                           |                        | 12,807  |          |   |             | 16,962 |        |   |   | 17,062  |        
|                                                  | Reforestation expenditures                                |                        |         | (4,909   | ) |             |        | (4,982 | ) |   |         | (11,455 | )
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|                                                  |                                                           |                        | 7,898   |          |   |             | 11,980 |        |   |   | 5,607   |        
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|Changes in non-cash components of working capital |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|                                                  | Accounts receivable                                       |                        |         | (674     | ) |             |        | (488   | ) |   |         | 9,275   |  
|                                                  | Inventories                                               |                        |         | 7,882    |   |             |        | 791    |   |   |         | 10,272  |  
|                                                  | Prepaid expenses                                          |                        |         | 2,241    |   |             |        | (1,422 | ) |   |         | 366     |  
|                                                  | Accounts payable and accrued liabilities                  |                        |         | 1,623    |   |             |        | 5,757  |   |   |         | (4,871  | )
|                                                  | Deferred revenue                                          |                        |         | (6,518   | ) |             |        | 6,518  |   |   |         |        |  
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|                                                  |                                                           |                        | 4,554   |          |   |             | 11,156 |        |   |   | 15,042  |        
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|                                                  |                                                           |                        | 12,452  |          |   |             | 23,136 |        |   |   | 20,649  |        
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|Investing activities                              |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|                                                  | Additions to property, plant and equipment                |                        |         | (8,795   | ) |             |        | (3,480 | ) |   |         | (24,208 | )
|                                                  | Proceeds on disposal of property, plant and
    equipment |                        |         | 368      |   |             |        | 439    |   |   |         | 1,581   |  
|                                                  | Increase in other assets                                  |                        |         | (6,416   | ) |             |        | (30    | ) |   |         | (72     | )
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|                                                  |                                                           |                        | (14,843 | )        |   |             | (3,071 | )      |   |   | (22,699 | )      
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|Financing activities                              |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|                                                  | Increase in long-term debt                                |                        |         | 249,888  |   |             |        |       |   |   |         |        |  
|                                                  | Repayments of long-term debt                              |                        |         | (210,201 | ) |             |        |       |   |   |         |        |  
|                                                  | Repayment of other obligations                            |                        |         |         |   |             |        | (932   | ) |   |         |        |  
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|                                                  |                                                           |                        | 39,687  |          |   |             | (932   | )      |   |   |        |        
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|Increase (decrease) in cash                       |                                                           |                        | 37,296  |          |   |             | 19,133 |        |   |   | (2,050  | )      
|Cash, beginning of year                           |                                                           |                        | 35,005  |          |   |             | 15,872 |        |   |   | 17,922  |        
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|Cash, end of year                                 |                                                           | $                      | 72,301  |          |   | $           | 35,005 |        |   | $ | 15,872  |        
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|Supplemental cash flow information                |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|Interest paid                                     |                                                           | $                      | 22,200  |          |   | $           | 25,341 |        |   | $ | 25,693  |        
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        
|Income taxes paid                                 |                                                           | $                      | 588     |          |   | $           | 590    |        |   | $ | 704     |        
|                                                  |                                                           |                        |         |          |   |             |        |        |   |   |         |        

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

F-5



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.

NOTES TO FINANCIAL STATEMENTS

For the Years Ended December 31, 2003,
2002 and 2001


1.  SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES



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



| |     |     
| | --- | ----
| | (a) | Cash



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



| |     |            
| | --- | -----------
| | (b) | Inventories



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



| |     |                              
| | --- | -----------------------------
| | (c) | Property, plant and equipment



| |                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Property, plant and equipment for lumber mills
    is recorded at cost and is depreciated on a declining balance
    basis to amortize the cost of these assets, less salvage value,
    over their estimated useful lives, at the following annual rates:

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



| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Property, plant and equipment for the pulp mill
    is recorded at cost and is depreciated on a straight-line basis
    to amortize the cost of these assets, less salvage value, over
    their estimated useful lives, as follows:

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



| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Timber rights are recorded at cost and are
    amortized on the basis of the volume of timber harvested.                                                                                                       
|
| | The recoverability of property, plant and
    equipment is assessed annually or when changes in circumstances
    indicate that the carrying value may not be recoverable from
    estimated future cash flows.

F-6



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001


1.  SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)



| |     |                         
| | --- | ------------------------
| | (d) | Deferred financing costs



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



| |     |                      
| | --- | ---------------------
| | (e) | Power purchase rights



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



| |     |            
| | --- | -----------
| | (f) | Investments



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company recorded its investment in surplus
    energy contracts at cost. Any impairment in the value of these
    contracts was recorded when there was a decline in value that
    was other than temporary.



| |     |                         
| | --- | ------------------------
| | (g) | Reforestation obligation



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



| |     |                    
| | --- | -------------------
| | (h) | Revenue recognition



| |                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Revenue is recognized when goods are shipped and
    title has passed to the customer. Revenue received in advance of
    shipment is deferred and recognized when goods are shipped and
    title has passed to the customer. Transportation costs are
    included in selling expenses.



| |     |                        
| | --- | -----------------------
| | (i) | Interest capitalization



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest on the construction of property, plant
    and equipment is capitalized on specific borrowings required to
    finance the construction.



| |     |             
| | --- | ------------
| | (j) | Income taxes



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



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



| |                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has no operations outside of Canada,
    however, the Company does have a significant exposure to foreign
    currency exchange rate movements as a result of its long-term
    debt and export sales denominated in U.S. dollars.
|
| | Monetary assets and liabilities denominated in
    U.S. dollars are translated into Canadian dollars at the
    year-end exchange rate. Revenues and expenses denominated in
    U.S. dollars                                                 

F-7



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




1.  SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)




(k) Foreign
currency translation and related financial instruments
(Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | are translated at the average exchange rate of
    the month during which transactions take place. Gains and losses
    from translation are included in earnings.                                                                                                                                                                                                                             
|
| | The Company enters into forward exchange
    contracts to hedge a portion of its expected foreign currency
    denominated revenue over periods of up to twelve months into the
    future. The Company accounts for these contracts as a hedge,
    with resulting gains or losses included in net revenue in the
    same period as the foreign currency denominated revenue is
    recorded.



| |     |                       
| | --- | ----------------------
| | (l) | Employee benefit plans



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

2.  CHANGE IN ACCOUNTING
POLICY



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 1, 2002, the Company
    adopted a new standard issued by the Canadian Institute of
    Chartered Accountants with respect to the recognition of
    unrealized foreign exchange gains or losses. Under the new
    standard, exchange gains or losses that arise on translation of
    long-term debt denominated in a foreign currency are included in
    the determination of earnings for the current period. The
    Company has adopted the new recommendations retroactively and
    restated prior years financial statements. Prior to this
    change, gains or losses arising from translation of foreign
    currency denominated long-term debt were deferred and amortized
    over the remaining term of the debt. The unamortized balance of
    the deferred exchange loss was netted against long-term debt in
    the Companys financial statements. The following table
    outlines the increases (decreases) in the prior financial
    statements related to specific items in the financial statements
    as a result of the change in policy:

F-8



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




2.  CHANGE IN ACCOUNTING POLICY
(Continued)


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

3.  INVENTORIES

|                                   |  |      |        |      |  |   |        | 
|---------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                   |  | 2003 |        | 2002
|                                   |  |      |        |     
|Logs                               |  | $    | 21,921 |      |  | $ | 25,764 | 
|Pulp                               |  |      | 14,041 |      |  |   | 17,487 | 
|Lumber                             |  |      | 9,405  |      |  |   | 9,824  | 
|Operating and maintenance supplies |  |      | 8,891  |      |  |   | 8,161  | 
|                                   |  |      |        |      |  |   |        | 
|                                   |  | $    | 54,258 |      |  | $ | 61,236 | 
|                                   |  |      |        |      |  |   |        | 

4.  PROPERTY, PLANT AND
EQUIPMENT

|                             |                                |      |         |              |  |          |         |         |  |   |         |        | 
|---------------------------- | ------------------------------ | ---- | ------- | ------------ |  | -------- | ------- | ------- |  | - | ------- | ------ | 
|                             |                                |     
|                             |                                | 2003
|                             |                                |     
|                             |                                |      |         | Accumulated  |  | Net Book
|                             |                                | Cost |         | Depreciation |  | Value   
|                             |                                |      |         |              |  |         
|Lumber mills                 |                                |      |         |              |  |          |         |         |  |   |         |       
|                             | Buildings                      |      | $       | 27,614       |  |          | $       | 8,762   |  |   | $       | 18,852 | 
|                             | Process equipment              |      |         | 92,667       |  |          |         | 50,288  |  |   |         | 42,379 | 
|                             | Mobile equipment               |      |         | 8,080        |  |          |         | 5,957   |  |   |         | 2,123  | 
|                             | Furniture and office equipment |      |         | 7,223        |  |          |         | 5,117   |  |   |         | 2,106  | 
|Pulp mill                    |                                |      |         |              |  |          |         |         |  |   |         |       
|                             | Buildings                      |      |         | 21,834       |  |          |         | 10,129  |  |   |         | 11,705 | 
|                             | Process equipment              |      |         | 181,855      |  |          |         | 120,109 |  |   |         | 61,746 | 
|Land                         |                                |      | 2,086   |              |  |          |        |         |  |   | 2,086   |       
|Capital projects in progress |                                |      | 3,210   |              |  |          |        |         |  |   | 3,210   |       
|                             |                                |      |         |              |  |          |         |         |  |   |         |       
|                             |                                |      | 344,569 |              |  |          | 200,362 |         |  |   | 144,207 |       
|Timber rights                |                                |      | 16,284  |              |  |          | 8,045   |         |  |   | 8,239   |       
|                             |                                |      |         |              |  |          |         |         |  |   |         |       
|                             |                                | $    | 360,853 |              |  | $        | 208,407 |         |  | $ | 152,446 |       
|                             |                                |      |         |              |  |          |         |         |  |   |         |       

F-9



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




4.  PROPERTY, PLANT AND EQUIPMENT
(Continued)


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

5.  OTHER ASSETS

|                                   |  |      |        |      |  |   |        |  
|---------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                   |  | 2003 |        | 2002
|                                   |  |      |        |     
|Power purchase rights  at cost    |  | $    | 20,837 |      |  | $ | 20,837 |  
|Less: accumulated amortization     |  |      | (3,126 | )    |  |   | (2,084 | )
|                                   |  |      |        |      |  |   |        |  
|                                   |  |      | 17,711 |      |  |   | 18,753 |  
|                                   |  |      |        |      |  |   |        |  
|Deferred financing costs  at cost |  |      | 6,519  |      |  |   | 10,193 |  
|Less: accumulated amortization     |  |      | (54    | )    |  |   | (5,213 | )
|                                   |  |      |        |      |  |   |        |  
|                                   |  |      | 6,465  |      |  |   | 4,980  |  
|                                   |  |      |        |      |  |   |        |  
|Notes receivable (note 17(a))      |  |      | 2,465  |      |  |   | 2,431  |  
|Other                              |  |      | 312    |      |  |   | 449    |  
|                                   |  |      |        |      |  |   |        |  
|                                   |  | $    | 26,953 |      |  | $ | 26,613 |  
|                                   |  |      |        |      |  |   |        |  



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Amortization of power purchase rights for the
    year was $1,042,000 (2002  $1,042,000;
    2001  $1,042,000)

Power purchase rights



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company invested $20.8 million in 2000
    to acquire the rights to a portion of the electricity to be
    generated from two power plants in Alberta commencing
    January 1, 2001. These rights represent the Companys
    entitlement and obligation to purchase approximately 80
    megawatts of electrical power, which represents the
    Companys estimated electrical power requirements at
    existing capacity for a period of thirteen years and
    approximately 80% of its requirements for a further seven years
    at largely predetermined prices. The Company also has the right
    to resell any electricity not consumed under this arrangement,
    at prevailing

F-10



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




5.  OTHER ASSETS
(Continued)




Power
purchase rights (Continued)




| |                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | market prices. The Company has agreed that if the
    present value of the projected cash flows associated with the
    Power Purchase Rights fall below a certain level, the Company
    will provide a letter of credit to make up such shortfall. At
    December 31, 2003 a letter of credit was not required under
    this arrangement.

Deferred financing costs



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

6.  REVOLVING CREDIT
FACILITY



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has a $50 million revolving
    credit facility that expires on November 30, 2004 with an
    option for the Company to extend the maturity for an additional
    364 days. The credit facility was undrawn at
    December 31, 2003, and December 31, 2002. The facility
    is subject to a borrowing formula based upon the levels of
    inventory and accounts receivable. The amount available at
    December 31, 2003 under the facility was $37.9 million
    (2002  $43.4 million) of which $4.5 million
    (2002  $2.3 million) was committed for letters
    of credit. The interest rate on this facility is floating and
    may, at the Companys option, be based upon the Bank Prime
    Rate, U.S. Base Rate, Bankers Acceptance rates, or LIBOR.
    Collateral for the facility is a first charge on all accounts
    receivable and inventory of the Company.

7.  LONG-TERM DEBT

|                                       |  |      |         |      |  |   |         | 
|-------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                       |  | 2003 |         | 2002
|                                       |  |      |         |     
|Unsecured Senior Notes  U.S. $190,000 |  | $    | 244,511 |      |  |   |        | 
|Unsecured Senior Notes  U.S. $160,000 |  |      |        |      |  | $ | 252,592 | 
|                                       |  |      |         |      |  |   |         | 
|                                       |  | $    | 244,511 |      |  | $ | 252,592 | 
|                                       |  |      |         |      |  |   |         | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the fourth quarter of 2003, the Company repaid
    $210 million (U.S. $160 million) of Unsecured Senior Notes
    bearing interest at a rate of 9 7/8%. The Company also paid
    a call premium of $10.8 million (U.S. $8.2 million)
    that is included in refinancing charges (see note 14).                                                                                                                                                              
|
| | On November 25, 2003, the Company issued
    $250 million (U.S. $190 million) of Unsecured Senior
    Notes due November 15, 2013 that bear interest at a rate of
    7.75%, payable semi-annually on May 15 and November 15
    of each year. The first interest payment is due on May 15,
    2004. The notes are unsecured obligations of the Company and
    rank equally and ratably with all existing and future unsecured
    indebtedness of the Company.

F-11



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




7.  LONG-TERM DEBT
(Continued)




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

8.  OTHER OBLIGATIONS

|                                                           |  |      |        |      |  |   |        |  
|---------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                           |  | 2003 |        | 2002
|                                                           |  |      |        |     
|Reforestation obligations                                  |  |      |        |      |  |   |        |  
|Balance, beginning of year                                 |  | $    | 7,943  |      |  | $ | 6,800  |  
|Accrual for the year                                       |  |      | 4,043  |      |  |   | 6,125  |  
|Expenditures during the year                               |  |      | (4,909 | )    |  |   | (4,982 | )
|                                                           |  |      |        |      |  |   |        |  
|Balance, end of year                                       |  |      | 7,077  |      |  |   | 7,943  |  
|Less: current portion, included in accrued
    liabilities |  |      | (3,539 | )    |  |   | (4,554 | )
|                                                           |  |      |        |      |  |   |        |  
|                                                           |  |      | 3,538  |      |  |   | 3,389  |  
|Other                                                      |  |      | 4,002  |      |  |   | 3,323  |  
|Less: current portion, included in accrued
    liabilities |  |      | (1,316 | )    |  |   |       |  
|                                                           |  |      |        |      |  |   |        |  
|                                                           |  |      | 2,686  |      |  |   | 3,323  |  
|                                                           |  |      |        |      |  |   |        |  
|                                                           |  | $    | 6,224  |      |  | $ | 6,712  |  
|                                                           |  |      |        |      |  |   |        |  

9.  SHARE CAPITAL

Authorized

Unlimited number of common shares.

Issued and fully paid

|                                                 |  |      |   |      |  |   |   | 
|------------------------------------------------ |  | ---- | - | ---- |  | - | - | 
|                                                 |  | 2003 |   | 2002
|                                                 |  |      |   |     
|15,000,001 common shares (2002 
    15,000,001) |  | $    |  |      |  | $ |  | 
|                                                 |  |      |   |      |  |   |   | 

10. CONTINGENT LIABILITY

Countervailing
and antidumping duties



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In response to the expiration of the Softwood
    Lumber Agreement in 2001, a number of industry groups in the
    United States filed petitions with the U.S. Department of
    Commerce (USDOC) and the U.S. International Trade
    Commission (USITC) alleging unfair trade practices
    by the Canadian softwood lumber industry. These petitions
    proposed that certain softwood lumber exports from Canada to the
    United States be charged with countervailing and antidumping
    duties.
|
| | The final amount of countervailing and
    antidumping duties that may be assessed on Canadian softwood
    lumber exports to the U.S. cannot be determined at this time and
    will depend on determinations yet to be made by any reviewing
    courts, The North American Free                                                                                                                                                                                                                           

F-12



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




10. CONTINGENT LIABILITY
(Continued)




Countervailing
and antidumping duties (Continued)




| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Trade Agreement (NAFTA) or World
    Trade Organization (WTO) panels to which those
    determinations are being appealed.                                   
|
| | The expense or reversal for countervailing and
    antidumping duties is recorded as an adjustment to selling
    expenses in the Companys financial statements.

Countervailing
duty



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On August 9, 2001, the USDOC made a
    preliminary countervailing duty determination, imposing a
    bonding requirement at the rate of 19.31% on Canadian softwood
    lumber shipped to the U.S. During 2001, the Company accrued
    $1.4 million for the period from August 17, 2001 to
    December 15, 2001 when preliminary countervailing duties
    effectively expired. The Company posted bonds to cover the
    liability.                                                                                                                                  
|
| | On March 22, 2002, the USDOC announced its
    final determination in the countervailing duty investigation,
    adjusting the rate from 19.31% to 19.34% and subsequently,
    corrected for ministerial errors, to 18.79%. The USDOC also
    determined that no critical circumstances existed and,
    accordingly, the countervailing duty would not apply
    retroactively to May 19, 2001.                                                                                                                                                                       
|
| | On May 16, 2002, the USITC announced it had
    found no current injury, but a threat of injury to the U.S.
    lumber industry, effectively removing the requirement to remit
    the accrued countervailing duty for lumber shipped to the U.S.
    prior to December 15, 2001. As a result, in 2002 the
    Company reversed $1.7 million it had accrued from
    August 17, 2001 to March 31, 2002. The bonds posted to
    cover the liability were also cancelled.                                                                                                 
|
| | The finding of threat of injury by the USITC
    resulted in the USDOC issuing an order to collect cash deposits
    of estimated countervailing duties on a going forward basis.
    Effective May 22, 2002, the Company became subject to a
    countervailing duty of 18.79%. A charge of $3.6 million was
    incurred during 2002 relating to lumber shipments to the U.S.
    between May 22, 2002 and December 31, 2002. A charge
    of $8.2 million was incurred relating to lumber shipments
    to the U.S. between January 1, 2003 and December 31,
    2003.

Antidumping
duty



| |                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 31, 2001, the USDOC made a
    preliminary antidumping determination, imposing a bonding
    requirement at the rate of 12.6% on the Companys shipments
    of Canadian softwood lumber to the U.S. During 2001, the Company
    accrued $0.9 million relating to shipments to the U.S. from
    November 6, 2001 to December 31, 2001. The Company
    posted bonds to cover the liability.
|
| | On March 22, 2002, the USDOC announced its
    final determination in the antidumping investigation, adjusting
    the Companys rate from 12.6% to 9.67%, and subsequently
    corrected to 8.43% for ministerial errors.                                                                                                                                                                              

F-13



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




10. CONTINGENT LIABILITY
(Continued)




Antidumping
duty (Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On May 16, 2002, the USITC announced it had
    found no current injury, but a threat of injury, to the U.S.
    lumber industry, effectively removing the requirement to remit
    the accrued antidumping duty for lumber shipped to the U.S.
    prior to May 16, 2002. As a result, in 2002 the Company
    reversed $0.6 million it had accrued from November 6,
    2001 to March 31, 2002. The bonds posted to cover the
    liability were also cancelled.                                                                                         
|
| | The finding of threat of injury by the USITC
    resulted in the USDOC issuing an order to collect cash deposits
    of estimated antidumping duties on a going forward basis.
    Effective May 22, 2002, the Company became subject to an
    antidumping duty of 8.43%. A charge of $1.6 million was
    incurred during 2002 relating to lumber shipments to the U.S.
    between May 22, 2002 and December 2002. A charge of
    $3.7 million was incurred relating to lumber shipments to
    the U.S. between January 1, 2003 and December 31, 2003.

11. COST OF SALES



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Costs of sales in 2002 and 2001 include
    electricity related items of a significant and non-recurring
    nature. In 2002, the Company recorded $1.6 million in
    electricity costs related to final rate adjustments for
    electricity consumed in the 2000 year. In 2001, the Company
    also recorded $4.2 million in electricity costs related to
    preliminary rate adjustments for electricity consumed in the
    2000 year. At December 31, 2002, accounts payable
    included $4.3 million related to the costs accrued. This
    amount was fully repaid in 2003. The Company continues to appeal
    the final regulatory ruling on the year 2000 power rates and has
    disputed approximately $1.9 million of the costs accrued.
|
| | In 2001, the Company received consumption based
    electricity rebates that reduced its cost of sales in that year
    by $19.6 million. This rebate program ended
    December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

12. SEVERANCE COSTS



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

13. FINANCING EXPENSES

|                                                                          |                |      |        |        |  |      |        |        |  |   |        |        | 
|------------------------------------------------------------------------- | -------------- | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                          |                | 2003 |        | 2002   |  | 2001
|                                                                          |                |      |        |        |  |     
|Interest expense                                                          |                |      |        |        |  |      |        |        |  |   |        |       
|                                                                          | Long-term debt |      | $      | 20,617 |  |      | $      | 24,765 |  |   | $      | 25,031 | 
|                                                                          | Other          |      |        | 360    |  |      |        | 545    |  |   |        | 857    | 
|Amortization of deferred financing costs                                  |                |      | 897    |        |  |      | 919    |        |  |   | 1,057  |       
|Foreign exchange loss (gains) on U.S. dollar
    cash and working capital |                |      | 6,798  |        |  |      | (76    | )      |  |   | (1,679 | )     
|                                                                          |                |      |        |        |  |      |        |        |  |   |        |       
|                                                                          |                | $    | 28,672 |        |  | $    | 26,153 |        |  | $ | 25,266 |       
|                                                                          |                |      |        |        |  |      |        |        |  |   |        |       

F-14



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001


14. REFINANCING CHARGES



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

|                                         |  |   |        | 
|---------------------------------------- |  | - | ------ | 
|Premium on redemption of long-term debt  |  | $ | 10,828 | 
|Amortization of deferred financing costs |  |   | 4,137  | 
|                                         |  |   |        | 
|                                         |  | $ | 14,965 | 
|                                         |  |   |        | 

15. INCOME TAXES



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following analysis describes the difference
    between the effective tax rate reflected in the provision for
    income taxes and the statutory rates applicable to the Company.

|                                                                                                                                |                                                                |      |         |        |   |      |      |      |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ---- | ------- | ------ | - | ---- | ---- | ---- | - | - | ------- | ----- | -
|                                                                                                                                |                                                                | 2003 |         | 2002   |   | 2001
|                                                                                                                                |                                                                |      |         |        |   |     
|Earnings (loss) before income taxes                                                                                             |                                                                | $    | 37,197  |        |   | $    | 953  |      |   | $ | (27,795 | )    
|                                                                                                                                |                                                                |      |         |        |   |      |      |      |   |   |         |      
|Income taxes (recovery) based on combined
    Federal and Provincial income tax rates of 41.7%
    (2002  42.2%, 2001  43.1%) |                                                                | $    | 15,511  |        |   | $    | 402  |      |   | $ | (11,980 | )    
|Increase (decrease) resulting from:                                                                                             |                                                                |      |         |        |   |      |      |      |   |   |         |      
|                                                                                                                                | Manufacturing and processing deduction                         |      |         | (2,604 | ) |      |      | (67  | ) |   |         | 2,082 |  
|                                                                                                                                | Large corporations tax                                         |      |         | 589    |   |      |      | 575  |   |   |         | 600   |  
|                                                                                                                                | Non-deductible (taxable) unrealized
    (gain) loss on debt    |      |         | (4,417 | ) |      |      | (389 | ) |   |         | 2,404 |  
|                                                                                                                                | Non-taxable realized gain on debt                              |      |         | (3,459 | ) |      |      |     |   |   |         |      |  
|                                                                                                                                | Non-deductible (taxable) expenses
    (income) and other items |      |         | (452   | ) |      |      |     |   |   |         | 448   |  
|                                                                                                                                | Effect of reduction in income tax rate                         |      |         | 46     |   |      |      | (25  | ) |   |         | (249  | )
|                                                                                                                                | Change in valuation allowance                                  |      |         | (3,579 | ) |      |      | (51  | ) |   |         | 2,370 |  
|                                                                                                                                |                                                                |      |         |        |   |      |      |      |   |   |         |      
|                                                                                                                                |                                                                |      | (13,876 | )      |   |      | 43   |      |   |   | 7,655   |      
|                                                                                                                                |                                                                |      |         |        |   |      |      |      |   |   |         |      
|Income taxes                                                                                                                    |                                                                | $    | 1,635   |        |   | $    | 445  |      |   | $ | (4,325  | )    
|                                                                                                                                |                                                                |      |         |        |   |      |      |      |   |   |         |      
|Income taxes  current                                                                                                          |                                                                | $    | 589     |        |   | $    | 575  |      |   | $ | 600     |      
|Future income taxes (recovery)                                                                                                  |                                                                |      | 1,046   |        |   |      | (130 | )    |   |   | (4,925  | )    
|                                                                                                                                |                                                                |      |         |        |   |      |      |      |   |   |         |      
|Income taxes (recovery)                                                                                                         |                                                                | $    | 1,635   |        |   | $    | 445  |      |   | $ | (4,325  | )    
|                                                                                                                                |                                                                |      |         |        |   |      |      |      |   |   |         |      

F-15



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




15. INCOME TAXES (Continued)




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

|                                  |                                  |      |         |         |   |   |        |        |  
|--------------------------------- | -------------------------------- | ---- | ------- | ------- | - | - | ------ | ------ | -
|                                  |                                  | 2003 |         | 2002   
|                                  |                                  |      |         |        
|Future income tax assets          |                                  |      |         |         |   |   |        |       
|                                  | Reforestation costs              |      | $       | 2,482   |   |   | $      | 2,790  |  
|                                  | Premium on redemption of debt    |      |         | 2,590   |   |   |        |       |  
|                                  | Accrued softwood lumber duties   |      |         | 67      |   |   |        | 52     |  
|                                  | Accrued severance payments       |      |         | 40      |   |   |        | 250    |  
|                                  | Unrealized foreign exchange loss |      |         |        |   |   |        | 3,943  |  
|                                  | Valuation allowance              |      |         |        |   |   |        | (3,579 | )
|                                  | Other                            |      |         | 132     |   |   |        |       |  
|                                  |                                  |      |         |         |   |   |        |       
|                                  |                                  |      | 5,311   |         |   |   | 3,456  |       
|                                  |                                  |      |         |         |   |   |        |       
|Future income tax liabilities     |                                  |      |         |         |   |   |        |       
|                                  | Property, plant and equipment    |      |         | (10,645 | ) |   |        | (7,867 | )
|                                  | Unrealized foreign exchange gain |      |         | (943    | ) |   |        |       |  
|                                  | Other                            |      |         |        |   |   |        | (820   | )
|                                  |                                  |      |         |         |   |   |        |       
|                                  |                                  |      | (11,588 | )       |   |   | (8,687 | )     
|                                  |                                  |      |         |         |   |   |        |       
|Net future income tax liability   |                                  | $    | (6,277  | )       |   | $ | (5,231 | )     
|                                  |                                  |      |         |         |   |   |        |       
|As reported on the balance sheet: |                                  |      |         |         |   |   |        |       
|                                  | Future income tax assets         |      | $       | 3,526   |   |   | $      | 1,599  |  
|                                  | Future income tax liabilities    |      |         | (9,803  | ) |   |        | (6,830 | )
|                                  |                                  |      |         |         |   |   |        |       
|                                  | Net future income tax liability  |      | $       | (6,277  | ) |   | $      | (5,231 | )
|                                  |                                  |      |         |         |   |   |        |       

16. EMPLOYEE BENEFIT PLANS

Defined
contribution plans



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | The total expense for the Companys defined
    contribution plans is as follows:

|                                 |  |      |       |      |  |      |       |  |  |   |       | 
|-------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                 |  | 2003 |       | 2002 |  | 2001
|                                 |  |      |       |      |  |     
|Plans providing pension benefits |  | $    | 2,003 |      |  | $    | 1,772 |  |  | $ | 1,840 | 
|                                 |  |      |       |      |  |      |       |  |  |   |       | 

Defined
benefit plan



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | On January 1, 2000 the Company established
    a supplementary defined benefit pension plan for certain key
    employees.

F-16



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




16. EMPLOYEE BENEFIT PLANS
(Continued)




Defined
benefit plan (Continued)




| |                                               
| | ----------------------------------------------
| | Information regarding this plan is as follows:

|                                             |                                    |      |   |       |   |  |   |       |  
|-------------------------------------------- | ---------------------------------- | ---- | - | ----- | - |  | - | ----- | -
|                                             |                                    | 2003 |   | 2002 
|                                             |                                    |      |   |      
|Change in benefit obligation:                |                                    |      |   |       |   |  |   |      
|                                             | Obligation at beginning of year    |      | $ | 1,617 |   |  | $ | 1,322 |  
|                                             | Actuarial loss                     |      |   | (33   | ) |  |   | 105   |  
|                                             | Current service cost               |      |   | 83    |   |  |   | 97    |  
|                                             | Interest cost                      |      |   | 105   |   |  |   | 93    |  
|                                             |                                    |      |   |       |   |  |   |      
|                                             | Obligation at end of year          |      | $ | 1,772 |   |  | $ | 1,617 |  
|                                             |                                    |      |   |       |   |  |   |      
|Change in plan assets, at fair market value: |                                    |      |   |       |   |  |   |      
|                                             | Plan assets at beginning of year   |      | $ | 738   |   |  | $ | 490   |  
|                                             | Employer contributions             |      |   | 271   |   |  |   | 264   |  
|                                             | Actual return on plan assets       |      |   | 37    |   |  |   | (16   | )
|                                             |                                    |      |   |       |   |  |   |      
|                                             | Plan assets at end of year         |      | $ | 1,046 |   |  | $ | 738   |  
|                                             |                                    |      |   |       |   |  |   |      
|Reconciliation of funded status:             |                                    |      |   |       |   |  |   |      
|                                             | Plan deficit                       |      | $ | (726  | ) |  | $ | (879  | )
|                                             | Unamortized past service costs     |      |   | 719   |   |  |   | 785   |  
|                                             | Unamortized actuarial loss         |      |   | 115   |   |  |   | 154   |  
|                                             |                                    |      |   |       |   |  |   |      
|                                             | Net pension asset                  |      | $ | 108   |   |  | $ | 60    |  
|                                             |                                    |      |   |       |   |  |   |      
|Components of pension expense:               |                                    |      |   |       |   |  |   |      
|                                             | Current service costs              |      | $ | 83    |   |  | $ | 97    |  
|                                             | Interest costs                     |      |   | 105   |   |  |   | 93    |  
|                                             | Amortization of past service costs |      |   | 66    |   |  |   | 66    |  
|                                             | Expected return on plan assets     |      |   | (31   | ) |  |   | (22   | )
|                                             |                                    |      |   |       |   |  |   |      
|                                             | Net expense                        |      | $ | 223   |   |  | $ | 234   |  
|                                             |                                    |      |   |       |   |  |   |      



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

|                                                 |  |      |     |      |  |  |     |  
|------------------------------------------------ |  | ---- | --- | ---- |  |  | --- | -
|                                                 |  | 2003 |     | 2002
|                                                 |  |      |     |     
|Discount rate                                    |  |      | 6   | %    |  |  | 6.5 | %
|Rate of compensation increase                    |  |      | 4   | %    |  |  | 4   | %
|Expected long-term rate of return on plan assets |  |      | 3.5 | %    |  |  | 3.5 | %

F-17



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001


17. RELATED PARTY TRANSACTIONS



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



| |     |                                                                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Millar Western Industries Ltd.
    (Industries), the parent of the Company, has
    significant influence over Meadow Lake Pulp Limited Partnership
    (Meadow). The Company earned revenue from Meadow and
    has related accounts receivable as follows:

|                                                                  |  |      |       |      |  |      |       |  |  |   |       | 
|----------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                  |  | 2003 |       | 2002 |  | 2001
|                                                                  |  |      |       |      |  |     
|Commissions                                                       |  | $    | 3,789 |      |  | $    | 3,754 |  |  | $ | 3,111 | 
|Administration fees                                               |  | $    | 1,719 |      |  | $    | 1,726 |  |  | $ | 2,029 | 
|Included in accounts receivable related to these
    transactions |  | $    | 1,833 |      |  | $    | 2,511 |  |  | $ | 1,961 | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other assets at December 31, 2003 includes a
    $2,100,000 (2002  $2,100,000) note receivable from Meadow.
    This note bears interest at prime plus 1% (5.5% at
    December 31, 2003; 5.5% at December 31, 2002; 5.0% at
    December 31, 2001) and is collateralized by a third charge
    on the assets of Meadow. Repayment of the loan is dependent upon
    the future cash flows of Meadow. No interest income has been
    accrued in 2003, 2002 or 2001.



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

|                                                                   |  |      |     |      |  |      |     |  |  |   |     | 
|------------------------------------------------------------------ |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                                                   |  | 2003 |     | 2002 |  | 2001
|                                                                   |  |      |     |      |  |     
|Administration fees                                                |  | $    | 663 |      |  | $    | 590 |  |  | $ | 893 | 
|                                                                   |  |      |     |      |  |      |     |  |  |   |     | 
|Included in accounts receivable relating to these
    transactions |  | $    | 47  |      |  | $    | 254 |  |  | $ | 253 | 
|                                                                   |  |      |     |      |  |      |     |  |  |   |     | 



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

|                                                                |  |      |       |      |  |      |       |  |  |   |       | 
|--------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                |  | 2003 |       | 2002 |  | 2001
|                                                                |  |      |       |      |  |     
|Chemical purchases and other services                           |  | $    | 2,803 |      |  | $    | 2,674 |  |  | $ | 3,475 | 
|                                                                |  |      |       |      |  |      |       |  |  |   |       | 
|Included in accounts payable relating to these
    transactions |  | $    | 451   |      |  | $    | 438   |  |  | $ | 957   | 
|                                                                |  |      |       |      |  |      |       |  |  |   |       | 

18. FINANCIAL INSTRUMENTS



| |     |                      
| | --- | ---------------------
| | (a) | Foreign currency risk



| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company realized approximately 76% of its
    2003 revenue (2002  73%; 2001  73%) in
    U.S. dollars and at December 31, 2003 the Company had
    $12,168,000 (2002  $10,991,000) in U.S. dollar
    denominated accounts receivable.

F-18



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




18. FINANCIAL INSTRUMENTS
(Continued)




(a) Foreign
currency risk (Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In order to reduce foreign currency risk, the
    Company borrows primarily in U.S. dollars. The Company also
    enters into forward exchange contracts to manage its foreign
    currency risk. The Company does not hold or issue foreign
    currency financial instruments for trading purposes. At December
    31, 2003, the Company held contracts to deliver US$77,000,000
    (2002  US$66,000,000) at an average rate of 1.3754
    (2002  1.5911) expiring at various dates to
    December 31, 2004. The market rate at December 31,
    2003, was 1.2869 (2002  1.5787). As at
    December 31, 2003, the amount of unrecognized gain on
    forward exchange contracts was $6,815,000 (2002 
    $820,000).



| |     |            
| | --- | -----------
| | (b) | Credit risk



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



| |     |                          
| | --- | -------------------------
| | (c) | Commodity and other risks



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company operates in the forest products
    sector which is highly competitive and cyclical in nature. The
    markets for the Companys commodities of pulp and lumber
    are affected by the global supply and demand for these products.
    The Company is exposed to market pricing for its commodities.
    During the years 2003, 2002 and 2001, the Company did not enter
    into any material financial instruments to mitigate its exposure
    to changes in the price of pulp or lumber.
|
| | In 2000, the Company entered into an energy
    contract for the purchase of power from January 1, 2002
    until December 31, 2002 that was surplus to the
    Companys electricity requirements. In 2001, the Company
    accrued an unrealized loss on these contracts of
    $5.0 million based on their fair value at year-end. In
    2002, the actual realized loss on these contracts was
    $4.3 million. The impact of these contracts on earnings is
    included in other expenses (income).



| |     |           
| | --- | ----------
| | (d) | Fair value



| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fair value of the Companys cash,
    accounts receivable, accounts payable and accrued liabilities is
    estimated to approximate carrying value due to the immediate or
    short-term maturity of these financial instruments.
|
| | The fair value of the Companys notes
    receivable has not been estimated as the notes are not
    marketable and are not subject to terms and conditions that
    would otherwise be available from arms length parties.           
|
| | The fair value of the Companys long-term
    debt at December 31, 2003, is estimated to be $253,680,000
    (2002  $243,751,000) based upon the price at which
    the debt was trading.                                            

F-19



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001


19. SEGMENTED INFORMATION



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys operations are located in
    Canada. The Companys reportable segments are strategic
    business units that manufacture and sell different products.
    They are managed separately as each business requires different
    technology and marketing strategies. The Company has two
    reportable segments: lumber and pulp. The lumber segment
    manufactures dimension lumber for sale primarily in Canada, the
    United States and Asia. The pulp segment manufactures bleached
    chemi-thermo-mechanical pulp for sale to paper makers worldwide.
    Included in corporate and other are the combined results from
    the Companys management and marketing services,
    unallocated corporate and other expenses.
|
| | The accounting policies of the segments are the
    same as those described in Note 1. The Company evaluates
    the performance of each segment based upon operating earnings.
    The Company does not allocate financing expenses, other income
    or expense, and income taxes to its business segments. The
    Company accounts for inter-segment revenue and transfers as if
    the transfers were to third parties at current market prices.                                                                                                                                                                                                                                                                                             

|                                 |  |        |         |      |  |      |         |  |  |   |        |  
|-------------------------------- |  | ------ | ------- | ---- |  | ---- | ------- |  |  | - | ------ | -
|                                 |  |       
|                                 |  | Lumber
|                                 |  |       
|                                 |  | 2003   |         | 2002 |  | 2001
|Product Segment                  |  |        |         |      |  |     
|Net revenue                      |  | $      | 101,526 |      |  | $    | 100,202 |  |  | $ | 82,562 |  
|Cost of sales and administration |  |        | 91,247  |      |  |      | 84,668  |  |  |   | 84,318 |  
|Depreciation and amortization    |  |        | 5,379   |      |  |      | 5,709   |  |  |   | 5,298  |  
|Severance costs                  |  |        |        |      |  |      | 681     |  |  |   |       |  
|                                 |  |        |         |      |  |      |         |  |  |   |        |  
|Operating earnings (loss)        |  | $      | 4,900   |      |  | $    | 9,144   |  |  | $ | (7,054 | )
|                                 |  |        |         |      |  |      |         |  |  |   |        |  

|                                 |  |      |         |      |  |      |         |  |  |   |         | 
|-------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                 |  |     
|                                 |  | Pulp
|                                 |  |     
|                                 |  | 2003 |         | 2002 |  | 2001
|                                 |  |      |         |      |  |     
|Net revenue                      |  | $    | 150,854 |      |  | $    | 127,643 |  |  | $ | 118,993 | 
|Cost of sales and administration |  |      | 105,825 |      |  |      | 92,686  |  |  |   | 77,539  | 
|Depreciation and amortization    |  |      | 10,787  |      |  |      | 10,708  |  |  |   | 10,580  | 
|Severance costs                  |  |      |        |      |  |      | 1,340   |  |  |   |        | 
|                                 |  |      |         |      |  |      |         |  |  |   |         | 
|Operating earnings               |  | $    | 34,242  |      |  | $    | 22,909  |  |  | $ | 30,874  | 
|                                 |  |      |         |      |  |      |         |  |  |   |         | 

|                                 |  |                     |        |      |  |      |        |   |  |   |        |  
|-------------------------------- |  | ------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                 |  |                    
|                                 |  | Corporate and Other
|                                 |  |                    
|                                 |  | 2003                |        | 2002 |  | 2001
|                                 |  |                     |        |      |  |     
|Net revenue                      |  | $                   | 6,172  |      |  | $    | 6,120  |   |  | $ | 9,323  |  
|Cost of sales and administration |  |                     | 12,978 |      |  |      | 13,391 |   |  |   | 15,430 |  
|Depreciation and amortization    |  |                     | 435    |      |  |      | 314    |   |  |   | 306    |  
|Severance costs                  |  |                     |       |      |  |      | 277    |   |  |   |       |  
|Employees profit sharing        |  |                     | 325    |      |  |      |       |   |  |   |       |  
|                                 |  |                     |        |      |  |      |        |   |  |   |        |  
|Operating loss                   |  | $                   | (7,566 | )    |  | $    | (7,862 | ) |  | $ | (6,413 | )
|                                 |  |                     |        |      |  |      |        |   |  |   |        |  

F-20



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




19. SEGMENTED INFORMATION
(Continued)


|                                 |  |       |         |      |  |      |         |  |  |   |         | 
|-------------------------------- |  | ----- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                 |  |      
|                                 |  | Total
|                                 |  |      
|                                 |  | 2003  |         | 2002 |  | 2001
|                                 |  |       |         |      |  |     
|Net revenue                      |  | $     | 258,552 |      |  | $    | 233,965 |  |  | $ | 210,878 | 
|Cost of sales and administration |  |       | 210,050 |      |  |      | 190,745 |  |  |   | 177,287 | 
|Depreciation and amortization    |  |       | 16,601  |      |  |      | 16,731  |  |  |   | 16,184  | 
|Severance costs                  |  |       |        |      |  |      | 2,298   |  |  |   |        | 
|Employees profit sharing        |  |       | 325     |      |  |      |        |  |  |   |        | 
|                                 |  |       |         |      |  |      |         |  |  |   |         | 
|Operating earnings               |  | $     | 31,576  |      |  | $    | 24,191  |  |  | $ | 17,407  | 
|                                 |  |       |         |      |  |      |         |  |  |   |         | 



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of sales for the lumber segment are net of
    chip transfers to the pulp segment of $3,868,000
    (2002  $4,926,000; 2001  $4,076,000).

|                                              |                     |                         |       |       |  |      |       |       |  |   |        |        | 
|--------------------------------------------- | ------------------- | ----------------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ------ | ------ | 
|                                              |                     |                        
|                                              |                     | Year Ended December 31,
|                                              |                     |                        
|                                              |                     | 2003                    |       | 2002  |  | 2001
|                                              |                     |                         |       |       |  |     
|Expenditures on property, plant and equipment |                     |                         |       |       |  |      |       |       |  |   |        |       
|                                              | Lumber              |                         | $     | 5,802 |  |      | $     | 2,110 |  |   | $      | 23,079 | 
|                                              | Pulp                |                         |       | 1,628 |  |      |       | 893   |  |   |        | 526    | 
|                                              | Corporate and other |                         |       | 1,365 |  |      |       | 477   |  |   |        | 603    | 
|                                              |                     |                         |       |       |  |      |       |       |  |   |        |       
|                                              |                     | $                       | 8,795 |       |  | $    | 3,480 |       |  | $ | 24,208 |       
|                                              |                     |                         |       |       |  |      |       |       |  |   |        |       

|                    |                     |              |         |         |  |   |         |         |  |  |  |  | 
|------------------- | ------------------- | ------------ | ------- | ------- |  | - | ------- | ------- |  |  |  |  | 
|                    |                     |              |         |        
|                    |                     | December 31, |         |        
|                    |                     |              |         |        
|                    |                     | 2003         |         | 2002    |  |  
|                    |                     |              |         |         |  |  
|Identifiable assets |                     |              |         |         |  |   |         |         |  |  |  | 
|                    | Lumber              |              | $       | 112,791 |  |   | $       | 117,624 |  |  |  |  | 
|                    | Pulp                |              |         | 130,970 |  |   |         | 143,664 |  |  |  |  | 
|                    | Corporate and other |              |         | 101,936 |  |   |         | 60,352  |  |  |  |  | 
|                    |                     |              |         |         |  |   |         |         |  |  |  | 
|                    |                     | $            | 345,697 |         |  | $ | 321,640 |         |  |  |  | 
|                    |                     |              |         |         |  |   |         |         |  |  |  | 



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys assets are all located in
    Canada. Net revenue is attributed to geographic locations based
    on shipping destination as follows:

|                 |               |                         |         |        |  |      |         |        |  |   |         |        | 
|---------------- | ------------- | ----------------------- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | 
|                 |               |                        
|                 |               | Year ended December 31,
|                 |               |                        
|                 |               | 2003                    |         | 2002   |  | 2001
|                 |               |                         |         |        |  |     
|Geographic Sales |               |                         |         |        |  |      |         |        |  |   |         |       
|Net revenue      |               |                         |         |        |  |      |         |        |  |   |         |       
|                 | Canada        |                         | $       | 63,050 |  |      | $       | 61,502 |  |   | $       | 56,207 | 
|                 | United States |                         |         | 59,676 |  |      |         | 56,929 |  |   |         | 50,249 | 
|                 | Europe        |                         |         | 41,502 |  |      |         | 38,794 |  |   |         | 56,619 | 
|                 | Asia          |                         |         | 93,330 |  |      |         | 76,115 |  |   |         | 46,198 | 
|                 | Other         |                         |         | 994    |  |      |         | 625    |  |   |         | 1,605  | 
|                 |               |                         |         |        |  |      |         |        |  |   |         |       
|                 |               | $                       | 258,552 |        |  | $    | 233,965 |        |  | $ | 210,878 |       
|                 |               |                         |         |        |  |      |         |        |  |   |         |       

F-21



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




|    |            
|--- | -----------
|20. | COMMITMENTS



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

|     |  |        |       | 
|---- |  | ------ | ----- | 
|Year |  | Amount
|     |  |       
|2004 |  | $      | 2,931 | 
|2005 |  | $      | 2,851 | 
|2006 |  | $      | 2,785 | 



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The financial statements of the Company have
    been prepared in accordance with Canadian generally accepted
    accounting principles (Canadian GAAP). The following adjustments
    and/or additional disclosures would be required in order to
    present the financial statements in accordance with U.S. GAAP
    and with practices prescribed by the United States Securities
    and Exchange Commission for the three years ended
    December 31, 2003, 2002, and 2001.

Net earnings and shareholders
equity



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

|                                                            |                                                              |      |        |        |   |              |       |       |   |   |         |        |  
|----------------------------------------------------------- | ------------------------------------------------------------ | ---- | ------ | ------ | - | ------------ | ----- | ----- | - | - | ------- | ------ | -
|                                                            |                                                              | 2003 |        | 2002   |   | 2001        
|                                                            |                                                              |      |        |        |   |             
|                                                            |                                                              |      |        |        |   | (re-stated -
|                                                            |                                                              |      |        |        |   | note 2)     
|Net earnings (loss) for the year under
    Canadian GAAP    |                                                              | $    | 35,562 |        |   | $            | 508   |       |   | $ | (23,470 | )     
|U.S. GAAP adjustments                                       |                                                              |      |        |        |   |              |       |       |   |   |         |       
|                                                            | Unrealized gain (loss) on forward
    exchange contracts (b) |      |        | 5,995  |   |              |       | 2,446 |   |   |         | (2,287 | )
|                                                            | Unrealized gain (loss) on energy
    contract (c)            |      |        |       |   |              |       |      |   |   |         | (4,895 | )
|                                                            | Cumulative effect of change in accounting
    principle (d)  |      |        | 650    |   |              |       |      |   |   |         |       |  
|                                                            | Accretion and change in asset retirement
    obligation (d)  |      |        | 179    |   |              |       |      |   |   |         |       |  
|                                                            | Effect on income taxes (e)                                   |      |        | (2,394 | ) |              |       | (867  | ) |   |         | 2,614  |  
|                                                            |                                                              |      |        |        |   |              |       |       |   |   |         |       
|Net earnings (loss) for the year under
    U.S. GAAP        |                                                              |      | 39,992 |        |   |              | 2,087 |       |   |   | (28,038 | )     
|Shareholders equity under U.S. GAAP,
    beginning of year |                                                              |      | 2,536  |        |   |              | 449   |       |   |   | 28,487  |       
|                                                            |                                                              |      |        |        |   |              |       |       |   |   |         |       
|Shareholders equity under U.S. GAAP, end of
    year       |                                                              | $    | 42,528 |        |   | $            | 2,536 |       |   | $ | 449     |       
|                                                            |                                                              |      |        |        |   |              |       |       |   |   |         |       



| |     |                                                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | Under U.S. GAAP, the unrealized gains or losses
    on forward exchange contracts at year-end must be recorded in
    earnings because the requirements for hedge accounting

F-22



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




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



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | under U.S. GAAP are not met. After the
    adjustment, accounts receivable under U.S. GAAP would be
    $41,420,000 (2002  $34,751,000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (c) | Under U.S. GAAP, the unrealized gains or losses
    on energy contracts (see note 18(c)) at year-end are recorded in
    earnings. The unrealized gain of $4,895,000 recorded for
    U.S. GAAP in 2000 had fully reversed by December 31,
    2001. At December 31, 2001 the Company accrued an
    unrealized loss of $4,984,000 for both Canadian and
    U.S. GAAP purposes.                                                                                                                                                                                                                                             
|
| | (d) | Effective January 1, 2003, for
    U.S. GAAP purposes, the Company adopted the provisions of
    SFAS No. 143, Accounting for Asset Retirement Obligations
    (SFAS No. 143). Under the provisions of SFAS
    No. 143, entities are required to record the estimated fair
    value of an asset retirement obligation in the period in which
    it is incurred. This change in accounting policy has been
    accounted for in accordance with APB20. After the adjustments,
    accounts payable and accrued liabilities would be $47,424,000
    and other obligations would be $5,564,000 for U.S. GAAP
    purposes.
|
| | (e) | Under U.S. GAAP, after the adjustments noted
    above, the future current tax asset would be $845,000
    (2002  future current tax asset of $1,311,000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (f) | Under U.S. GAAP, transportation costs of
    $33,869,000 (2002 -$31,258,000; 2001  $26,798,000)
    would not be netted against gross revenue, but would be recorded
    as an operating expense.                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (g) | Included in general and administrative expenses
    are bad debt expenses of $Nil in 2003 (2002  $Nil;
    2001  $Nil).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Balance Sheet

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

|                                            |  |      |        |      |  |   |        | 
|------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                            |  | 2003 |        | 2002
|                                            |  |      |        |     
|Trade accounts payable                      |  | $    | 36,739 |      |  | $ | 35,489 | 
|Interest payable                            |  | $    | 1,895  |      |  | $ | 3,118  | 
|Salary and benefits payable                 |  | $    | 2,699  |      |  | $ | 2,411  | 
|Current portion of reforestation obligation |  | $    | 3,539  |      |  | $ | 4,554  | 
|GST payable                                 |  | $    | 1,174  |      |  | $ | 1,223  | 
|Severance costs payable                     |  | $    | 214    |      |  | $ | 189    | 
|Other                                       |  | $    | 1,333  |      |  |   |       | 
|                                            |  |      |        |      |  |   |        | 
|                                            |  | $    | 47,593 |      |  | $ | 46,984 | 
|                                            |  |      |        |      |  |   |        | 
|Trade accounts receivable                   |  | $    | 20,453 |      |  | $ | 23,121 | 
|Inter-company account receivable            |  | $    | 1,935  |      |  | $ | 2,825  | 
|GST recoverable                             |  | $    | 2,891  |      |  | $ | 2,498  | 
|Other                                       |  | $    | 9,326  |      |  | $ | 5,487  | 
|                                            |  |      |        |      |  |   |        | 
|                                            |  | $    | 34,605 |      |  | $ | 33,931 | 
|                                            |  |      |        |      |  |   |        | 

F-23



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




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

Recent accounting pronouncements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 1, 2003, the Company
    adopted SFAS No. 143, Accounting for Asset Retirement
    Obligations for U.S. GAAP. The impact of adopting the
    new standard was to increase earnings for the year ended
    December 31, 2003, by $829,000, as described in
    note 21(a) above. In 2002, the Canadian Accounting
    Standards Board (AcSB) issued a new Canadian
    accounting standard on Asset Retirement Obligations. The new
    standard is effective for fiscal years beginning on or after
    January 1, 2004. The adoption of the new Canadian
    accounting standard will substantially eliminate the GAAP
    difference in 2004.                                                                                                                                                                                         
|
| | In 2002, the AcSB issued amended Accounting
    Guideline 13, Hedging Relationships. The guideline,
    which sets strict conditions that must be met before a company
    can apply hedge accounting, is effective for financial years
    beginning on or after July 1, 2003. The Company will adopt
    the guideline effective January 1, 2004. As a result of
    adopting the guideline, the Company does not expect there will
    be a change to its current accounting policy relating to hedge
    accounting. The adoption of the new Canadian accounting standard
    will eliminate the GAAP difference in 2004.                                                                                                                                                                                                                               
|
| | In April 2003, the AcSB issued new Canadian
    Standard 3063, Impairment of Long-Lived Assets. The
    section establishes standards for the recognition, measurement
    and disclosure of the impairment of long-lived assets held for
    use. It applies to non-monetary long-lived assets, including
    property, plant and equipment, intangible assets with finite
    useful lives, deferred pre-operating costs and long-term prepaid
    assets. The standard is to be applied prospectively for years
    beginning on or after April 1, 2003. The Company has
    considered the application of the new standard and expects that
    adoption will not have a material impact on the Companys
    financial statements.                                                                                                                     
|
| | In early 2003, the Financial Accounting Standards
    Board (FASB) issued FIN 46, Consolidation of
    Variable Interest Entities (VIEs). FASB
    subsequently issued FIN 46-R, a revised interpretation that
    supplements FIN 46. For the purpose of determining the effective
    dates of FIN 46 and FIN 46-R, the Company is considered a
    Non-public Entity. For all VIEs created before
    January 31, 2003, the Company is not required to adopt FIN
    46 or Fin 46-R but is required to adopt FIN 46-R by
    January 1, 2005. For VIEs created after January 31,
    2003, the Company must apply the provisions of FIN 46 or FIN
    46-R as of the date the Company first became involved with the
    VIE. This did not result in the consolidation of any VIEs.
    The Company will adopt FIN 46-R effective January 1, 2005.
|
| | In January 2003, the AcSB issued Accounting
    Guideline 15, Consolidation of Variable Interest
    Entities (AcG-15), which is very similar to
    FIN 46. On January 7, 2004, the AcSB noted the release of
    FIN 46-R and reaffirmed its intention to harmonize the
    requirements of AcG-15 and FIN 46-R.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | The AcSB expects to approve an exposure draft of
    proposed amendments to AcG-15 as soon as possible, with the
    expectation that AcG-15, as amended, would be effective for
    years beginning on or after November 1, 2004. The Company
    expects to adopt AcG-15 effective January 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-24



---



##### 



MILLAR WESTERN FOREST PRODUCTS LTD.


NOTES TO FINANCIAL STATEMENTS
(Continued)

For the Years Ended December 31, 2003,
2002 and 2001




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



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

F-25



---



##### 






MILLAR WESTERN FOREST PRODUCTS LTD.







BALANCE SHEETS







|                                                       |                                          |             |         |              |  |   |         |        | 
|------------------------------------------------------ | ---------------------------------------- | ----------- | ------- | ------------ |  | - | ------- | ------ | 
|                                                       |                                          | March 31,   |         | December 31,
|                                                       |                                          | 2004        |         | 2003        
|                                                       |                                          |             |         |             
|(in thousands of Canadian dollars)                     |                                          | (unaudited) |         | (audited)   
|Assets                                                 |                                          |             |         |              |  |   |         |       
|Current assets                                         |                                          |             |         |              |  |   |         |       
|                                                       | Cash                                     |             | $       | 63,789       |  |   | $       | 72,301 | 
|                                                       | Accounts receivable                      |             |         | 34,120       |  |   |         | 34,605 | 
|                                                       | Inventories (note 3)                     |             |         | 80,212       |  |   |         | 54,258 | 
|                                                       | Prepaid expenses                         |             |         | 977          |  |   |         | 1,608  | 
|                                                       | Future income taxes                      |             |         | 3,210        |  |   |         | 3,526  | 
|                                                       |                                          |             |         |              |  |   |         |       
|                                                       |                                          |             | 182,308 |              |  |   | 166,298 |       
|Property, plant and equipment                          |                                          |             | 150,159 |              |  |   | 152,446 |       
|Other assets                                           |                                          |             | 26,567  |              |  |   | 26,953  |       
|                                                       |                                          |             |         |              |  |   |         |       
|                                                       |                                          | $           | 359,034 |              |  | $ | 345,697 |       
|                                                       |                                          |             |         |              |  |   |         |       
|Liabilities and Shareholders
    Equity               |                                          |             |         |              |  |   |         |       
|Current liabilities                                    |                                          |             |         |              |  |   |         |       
|                                                       | Accounts payable and accrued liabilities |             | $       | 55,996       |  |   | $       | 47,593 | 
|Long-term debt (U.S.$190,000;
    2003  U.S.$190,000) |                                          |             | 248,805 |              |  |   | 244,511 |       
|Other obligations                                      |                                          |             | 5,529   |              |  |   | 6,224   |       
|Future income taxes                                    |                                          |             | 10,752  |              |  |   | 9,803   |       
|                                                       |                                          |             |         |              |  |   |         |       
|                                                       |                                          |             | 321,082 |              |  |   | 308,131 |       
|Shareholders equity                                   |                                          |             |         |              |  |   |         |       
|                                                       | Share capital                            |             |         |             |  |   |         |       | 
|                                                       | Retained earnings                        |             |         | 37,952       |  |   |         | 37,566 | 
|                                                       |                                          |             |         |              |  |   |         |       
|                                                       |                                          | $           | 359,034 |              |  | $ | 345,697 |       
|                                                       |                                          |             |         |              |  |   |         |       




F-26



---



##### 






MILLAR WESTERN FOREST PRODUCTS LTD.







STATEMENTS OF EARNINGS (LOSS)







For the Three Months Ended March 31








(unaudited)








|                                                    |  |      |        |      |  |   |        |  
|--------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                    |  | 2004 |        | 2003
|(in thousands of Canadian dollars)                  |  |      |        |     
|Revenue (note 1)                                    |  | $    | 80,886 |      |  | $ | 74,924 |  
|Cost of products sold                               |  |      | 50,233 |      |  |   | 47,213 |  
|Freight and other distribution costs                |  |      | 10,955 |      |  |   | 11,703 |  
|Depreciation and amortization                       |  |      | 3,905  |      |  |   | 4,174  |  
|General and administration                          |  |      | 3,157  |      |  |   | 3,520  |  
|Countervailing and anti-dumping duties
    (note 5) |  |      | 3,152  |      |  |   | 2,383  |  
|Employees profit sharing                           |  |      | 587    |      |  |   |       |  
|                                                    |  |      |        |      |  |   |        |  
|Operating earnings                                  |  |      | 8,897  |      |  |   | 5,931  |  
|Financing expenses (note 4)                         |  |      | (3,684 | )    |  |   | (7,847 | )
|Unrealized exchange gain (loss) on debt             |  |      | (4,294 | )    |  |   | 17,264 |  
|Other income (expenses)                             |  |      | 22     |      |  |   | 72     |  
|                                                    |  |      |        |      |  |   |        |  
|Earnings (loss) before income taxes                 |  |      | 941    |      |  |   | 15,420 |  
|Income tax recovery (expense)                       |  |      | (1,095 | )    |  |   | 134    |  
|                                                    |  |      |        |      |  |   |        |  
|Net earnings (loss)                                 |  | $    | (154   | )    |  | $ | 15,554 |  
|                                                    |  |      |        |      |  |   |        |  







STATEMENTS OF RETAINED EARNINGS







For the Three Months Ended March 31








(unaudited)








|                                                   |  |      |        |      |  |   |        | 
|-------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                                   |  | 2004 |        | 2003
|(in thousands of Canadian dollars)                 |  |      |        |     
|Retained earnings  beginning of period            |  | $    | 37,566 |      |  | $ | 2,004  | 
|Change in accounting policy (note 2)               |  |      | 540    |      |  |   | 540    | 
|                                                   |  |      |        |      |  |   |        | 
|Retained earnings, beginning of period as restated |  | $    | 38,106 |      |  | $ | 2,544  | 
|Net earnings (loss)                                |  |      | (154   | )    |  |   | 15,554 | 
|                                                   |  |      |        |      |  |   |        | 
|Retained earnings  end of period                  |  | $    | 37,952 |      |  | $ | 18,098 | 
|                                                   |  |      |        |      |  |   |        | 




F-27



---



##### 






MILLAR WESTERN FOREST PRODUCTS LTD.







STATEMENTS OF CASH FLOWS







For the Three Months Ended March 31










(unaudited)








|                                   |                                                   |                                                               |         |        |         |   |         |         |         |  
|---------------------------------- | ------------------------------------------------- | ------------------------------------------------------------- | ------- | ------ | ------- | - | ------- | ------- | ------- | -
|                                   |                                                   | 2004                                                          |         | 2003  
|(in thousands of Canadian dollars) |                                                   |                                                               |         |       
|Cash provided from (used in)       |                                                   |                                                               |         |        |         |   |         |        
|Operating activities               |                                                   |                                                               |         |        |         |   |         |        
|                                   | Net earnings (loss)                               |                                                               | $       | (154   | )       |   | $       | 15,554  |        
|                                   | Items not affecting cash:                         |                                                               |         |        |         |   |         |         |        
|                                   |                                                   | Future income tax expense (recovery)                          |         |        | 975     |   |         |         | (284    | )
|                                   |                                                   | Reforestation expense                                         |         |        | 4,135   |   |         |         | 2,817   |  
|                                   |                                                   | Depreciation and amortization                                 |         |        | 3,905   |   |         |         | 4,174   |  
|                                   |                                                   | Amortization of deferred financing charges                    |         |        | 164     |   |         |         | 230     |  
|                                   |                                                   | Unrealized foreign exchange loss (gain) on
    long-term debt |         |        | 4,294   |   |         |         | (17,264 | )
|                                   |                                                   | Other                                                         |         |        | 114     |   |         |         | (518    | )
|                                   |                                                   |                                                               |         |        |         |   |         |        
|                                   |                                                   |                                                               | 13,433  |        |         |   | 4,709   |        
|                                   | Reforestation expenditures                        |                                                               |         | (514   | )       |   |         | (1,269  | )      
|                                   |                                                   |                                                               |         |        |         |   |         |        
|                                   |                                                   |                                                               | 12,919  |        |         |   | 3,440   |        
|                                   |                                                   |                                                               |         |        |         |   |         |        
|                                   | Changes in non-cash components of working capital |                                                               |         |        |         |   |         |         |        
|                                   |                                                   | Accounts receivable                                           |         |        | 485     |   |         |         | (7,375  | )
|                                   |                                                   | Inventories                                                   |         |        | (27,727 | ) |         |         | (16,819 | )
|                                   |                                                   | Prepaid expenses                                              |         |        | 631     |   |         |         | 269     |  
|                                   |                                                   | Accounts payable and accrued liabilities                      |         |        | 6,555   |   |         |         | 9,163   |  
|                                   |                                                   | Deferred revenue                                              |         |        |        |   |         |         | (5,920  | )
|                                   |                                                   |                                                               |         |        |         |   |         |        
|                                   |                                                   |                                                               | (20,056 | )      |         |   | (20,682 | )      
|                                   |                                                   |                                                               |         |        |         |   |         |        
|                                   |                                                   |                                                               | (7,137  | )      |         |   | (17,242 | )      
|                                   |                                                   |                                                               |         |        |         |   |         |        
|Investing activities               |                                                   |                                                               |         |        |         |   |         |        
|                                   |                                                   | Additions to property, plant and equipment                    |         |        | (1,387  | ) |         |         | (856    | )
|                                   |                                                   | Proceeds on disposal of property, plant and
    equipment     |         |        | 50      |   |         |         | 107     |  
|                                   |                                                   | (Increase) decrease in other assets                           |         |        | (38     | ) |         |         | 1       |  
|                                   |                                                   |                                                               |         |        |         |   |         |        
|                                   |                                                   |                                                               | (1,375  | )      |         |   | (748    | )      
|                                   |                                                   |                                                               |         |        |         |   |         |        
|                                   | Decrease in cash                                  |                                                               |         | (8,512 | )       |   |         | (17,990 | )      
|                                   | Cash  beginning of period                        |                                                               |         | 72,301 |         |   |         | 35,005  |        
|                                   |                                                   |                                                               |         |        |         |   |         |        
|                                   | Cash  end of period                              |                                                               | $       | 63,789 |         |   | $       | 17,015  |        
|                                   |                                                   |                                                               |         |        |         |   |         |        




F-28



---



##### 






MILLAR WESTERN FOREST PRODUCTS LTD.







SEGMENTED INFORMATION







For the Three Months Ended
March 31








(unaudited)








|                                   |                                          |      |      |        |   |  |      |        |  
|---------------------------------- | ---------------------------------------- | ---- | ---- | ------ | - |  | ---- | ------ | -
|                                   |                                          | 2004 |      | 2003  
|(in thousands of Canadian dollars) |                                          |      |      |       
|Product segment                    |                                          |      |      |        |   |  |      |       
|Lumber                             |                                          |      |      |        |   |  |      |       
|                                   | Revenue                                  |      | $    | 34,167 |   |  | $    | 28,325 |  
|                                   | Cost of products sold                    |      |      | 23,537 |   |  |      | 20,814 |  
|                                   | Freight and other distribution costs     |      |      | 2,990  |   |  |      | 2,675  |  
|                                   | Depreciation and amortization            |      |      | 2,106  |   |  |      | 1,373  |  
|                                   | Countervailing and anti-dumping duties   |      |      | 3,152  |   |  |      | 2,383  |  
|                                   |                                          |      |      |        |   |  |      |       
|                                   | Operating earnings                       |      | $    | 2,382  |   |  | $    | 1,080  |  
|                                   |                                          |      |      |        |   |  |      |       
|Pulp                               |                                          |      |      |        |   |  |      |       
|                                   | Revenue                                  |      | $    | 45,055 |   |  | $    | 44,828 |  
|                                   | Cost of products sold                    |      |      | 26,696 |   |  |      | 26,399 |  
|                                   | Freight and other distribution costs     |      |      | 7,965  |   |  |      | 9,028  |  
|                                   | Depreciation and amortization            |      |      | 1,669  |   |  |      | 2,692  |  
|                                   |                                          |      |      |        |   |  |      |       
|                                   | Operating earnings                       |      | $    | 8,725  |   |  | $    | 6,709  |  
|                                   |                                          |      |      |        |   |  |      |       
|Corporate and other                |                                          |      |      |        |   |  |      |       
|                                   | Revenue                                  |      | $    | 1,664  |   |  | $    | 1,771  |  
|                                   | General and administration               |      |      | 3,157  |   |  |      | 3,520  |  
|                                   | Depreciation and amortization            |      |      | 130    |   |  |      | 109    |  
|                                   | Employees profit sharing                |      |      | 587    |   |  |      |       |  
|                                   |                                          |      |      |        |   |  |      |       
|                                   | Operating loss                           |      | $    | (2,210 | ) |  | $    | (1,858 | )
|                                   |                                          |      |      |        |   |  |      |       
|Total                              |                                          |      |      |        |   |  |      |       
|                                   | Revenue                                  |      | $    | 80,886 |   |  | $    | 74,924 |  
|                                   | Cost of products sold and administration |      |      | 53,390 |   |  |      | 50,733 |  
|                                   | Freight and other distribution costs     |      |      | 10,955 |   |  |      | 11,703 |  
|                                   | Depreciation and amortization            |      |      | 3,905  |   |  |      | 4,174  |  
|                                   | Countervailing and anti-dumping duties   |      |      | 3,152  |   |  |      | 2,383  |  
|                                   | Employees profit sharing                |      |      | 587    |   |  |      |       |  
|                                   |                                          |      |      |        |   |  |      |       
|                                   | Operating earnings                       |      | $    | 8,897  |   |  | $    | 5,931  |  
|                                   |                                          |      |      |        |   |  |      |       
|Shipments by business segment      |                                          |      |      |        |   |  |      |       
|Lumber (millions of board feet)    |                                          |      | 83.8 |        |   |  | 78.2 |       
|                                   |                                          |      |      |        |   |  |      |       
|Pulp (thousands of tonnes)         |                                          |      | 75.7 |        |   |  | 71.9 |       
|                                   |                                          |      |      |        |   |  |      |       







|                    |                     |           |         |              |  |   |         |         | 
|------------------- | ------------------- | --------- | ------- | ------------ |  | - | ------- | ------- | 
|                    |                     | March 31, |         | December 31,
|                    |                     | 2004      |         | 2003        
|                    |                     |           |         |             
|Identifiable assets |                     |           |         |              |  |   |         |        
|                    | Lumber              |           | $       | 129,902      |  |   | $       | 112,791 | 
|                    | Pulp                |           |         | 102,630      |  |   |         | 130,970 | 
|                    | Corporate and other |           |         | 126,502      |  |   |         | 101,936 | 
|                    |                     |           |         |              |  |   |         |        
|                    |                     | $         | 359,034 |              |  | $ | 345,697 |        
|                    |                     |           |         |              |  |   |         |        




F-29



---



##### 






MILLAR WESTERN FOREST PRODUCTS LTD.







NOTES TO INTERIM FINANCIAL
STATEMENTS







For the Three Months Ended March 31,
2004








(unaudited)










|   |                      
|-- | ---------------------
|1. | BASIS OF PRESENTATION






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | The accompanying unaudited interim financial
    statements have been prepared by the Company, following the same
    accounting policies and methods as those disclosed in the
    audited financial statements for the year ended
    December 31, 2003, except as described in note 2. Certain
    information and note disclosures normally included in financial
    statements prepared in accordance with generally accepted
    accounting principles in Canada have been omitted. These interim
    financial statements should be read in conjunction with the
    December 31, 2003 audited financial statements and the
    notes thereto included in the Companys Annual Report on
    Form 20-F. In the opinion of management, all adjustments,
    which are of a normal and recurring nature, necessary for a fair
    presentation of the balance sheet, results of operations, and
    cash flows of these interim periods have been included.
|
|
|
| | Prior to January 1, 2004, the Company, along
    with other companies in the forest products industry, presented
    freight and other distribution costs and countervailing and
    anti-dumping duties as selling expenses that were deducted from
    gross revenue in the statement of earnings. Effective
    January 1, 2004, the Canadian Institute of Chartered
    Accountants (CICA) introduced new standards for the
    application of generally accepted accounting principals
    (GAAP) which provide guidance on alternate sources to
    consult with when an issue is not specifically addressed by
    Canadian GAAP. As a result of applying the new standards, the
    Company has presented freight and other distribution costs and
    countervailing and anti-dumping duties as operating costs in the
    statement of earnings and reclassified the prior period
    presentation accordingly.                                        
|




2.  CHANGE IN ACCOUNTING
POLICY









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







3.  INVENTORIES







|                                   |  |           |        |              |  |   |        | 
|---------------------------------- |  | --------- | ------ | ------------ |  | - | ------ | 
|                                   |  | March 31, |        | December 31,
|                                   |  | 2004      |        | 2003        
|                                   |  |           |        |             
|Logs                               |  | $         | 45,595 |              |  | $ | 21,921 | 
|Pulp                               |  |           | 13,163 |              |  |   | 14,041 | 
|Lumber                             |  |           | 12,443 |              |  |   | 9,405  | 
|Operating and maintenance supplies |  |           | 9,011  |              |  |   | 8,891  | 
|                                   |  |           |        |              |  |   |        | 
|                                   |  | $         | 80,212 |              |  | $ | 54,258 | 
|                                   |  |           |        |              |  |   |        | 




F-30



---



##### 






MILLAR WESTERN FOREST PRODUCTS LTD.








NOTES TO INTERIM FINANCIAL STATEMENTS
(Continued)







For the Three Months Ended March 31,
2004










3.  INVENTORIES
(Continued)










| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys working capital requirements
    are highest in the first quarter due to a seasonal log inventory
    build-up that will be reduced in the second and third quarters
    of its fiscal year.







4.  FINANCING EXPENSES







|                                                                         |                |      |        |       |  |   |       |       | 
|------------------------------------------------------------------------ | -------------- | ---- | ------ | ----- |  | - | ----- | ----- | 
|                                                                         |                | 2004 |        | 2003 
|                                                                         |                |      |        |      
|Interest expense                                                         |                |      |        |       |  |   |       |      
|                                                                         | Long-term debt |      | $      | 4,854 |  |   | $     | 5,597 | 
|                                                                         | Other          |      |        | 120   |  |   |       | 105   | 
|Amortization of deferred financing costs                                 |                |      | 164    |       |  |   | 230   |      
|Foreign exchange (gain) loss on U.S. dollar
    cash and working capital |                |      | (1,454 | )     |  |   | 1,915 |      
|                                                                         |                |      |        |       |  |   |       |      
|                                                                         |                | $    | 3,684  |       |  | $ | 7,847 |      
|                                                                         |                |      |        |       |  |   |       |      







5.  COUNTERVAILING AND ANTI-DUMPING
DUTIES






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | On April 25, 2002, the U.S. Department of
    Commerce (USDOC) issued its final determination in
    the countervailing and anti-dumping investigations. The
    USDOCs final determination in the countervailing
    investigation resulted in a duty rate of 18.79% and an
    anti-dumping rate of 8.43%, both to be posted by cash deposits.                                                                                                        
|
|
|
| | On May 16, 2002, the United States
    International Trade Commission (USITC) published its
    final written determination on injury and stated that Canadian
    softwood lumber threatens material injury to the
    U.S. industry. As a result, cash deposits have been
    required for shipments at the rates determined by the USDOC
    effective from May 22, 2002. All bonds posted prior to
    May 22, 2002 have been returned and cancelled.
|
|
|
| | The Company has recorded $3.2 million for
    the period from January 1, 2004 to March 31, 2004
    representing the combined countervailing and anti-dumping duties
    of 27.22%. For the comparative period in 2003, the Company
    recorded combined duties of $2.4 million.                                                                                                                                                                          
|
|
|
| | The final amount of countervailing and
    anti-dumping duties that may be assessed on Canadian softwood
    lumber exports to the U.S. cannot be determined at this time and
    will depend on determinations yet to be made by any reviewing
    courts, The North American Free Trade Agreement
    (NAFTA) or World Trade Organization
    (WTO) panels to which those determinations are being
    appealed.                                     
|

F-31



---



##### 









US$190,000,000

Millar Western Forest

Products Ltd.

Offer to Exchange

7.75% Senior Notes due 2013





for

all outstanding 7.75% Senior Notes due 2013





---

(MILLAR LOGO)



---

,
2004

Exchange Agent:

The Bank of New York

Corporate Trust Options 
Reorganization Unit


101 Barclay Street  7 East


New York, New York 10286


Telephone: 212-815-5788


Fax: 212-298-1915


Through
and
including                     ,
2004, all dealers that effect transactions in these securities,
whether or not participating in this Exchange Offer, may be
required to deliver a prospectus. This is in addition to the
dealers obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.



---






---



##### 



PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20. Indemnification of Directors and Officers

Under the Business Corporations Act (Alberta), Millar Western Forest
Products Ltd. (the registrant) may indemnify a present or former director or
officer or a person who acts or acted at the registrants request as a director
or officer of another corporation of which the registrant is or was a
shareholder or creditor, and his or her heirs and legal representatives,
against all costs, charges and expenses, including an amount paid to settle an
action or satisfy a judgment, reasonably incurred by him or her in respect of
any civil, criminal or administrative action or proceeding to which he or she
is made a party by reason of his or her being or having been a director or
officer of the registrant or such other corporation if the director or officer
acted honestly and in good faith with a view to the best interests of the
registrant and, in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, had reasonable grounds for
believing that his or her conduct was lawful. Such indemnification may be made
in connection with an action by or on behalf of the registrant or such other
corporation only with court approval. A director is entitled to indemnification
from the registrant as a matter of right if he or she was substantially
successful on the merits of his or her defence, fulfilled the conditions set
forth above and is fairly and reasonably entitled to indemnity.

In accordance with provisions of the Business Corporations Act (Alberta)
described above, the by-laws of the registrant provide that the registrant
shall indemnify a director or officer, a former director or officer, or a
person who acts or acted at the registrants request as a director or officer
of a corporation of which the registrant is or was a shareholder or creditor,
and his or her heirs and legal representatives, against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a judgment,
reasonably incurred by him or her in respect of any civil, criminal or
administrative action or proceeding to which he or she was made a party by
reason of being or having been a director or officer of the registrant or such
other corporation if he or she acted honestly and in good faith with a view to
the best interests of the registrant and, in the case of a criminal or
administrative action or proceeding that is enforced by monetary penalty, he or
she had reasonable grounds in believing that his or her conduct was lawful.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the U.S. Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.

Item 21. Exhibits

See the index to exhibits that appears immediately following the signature
pages to this registration statement.

Item 22. Undertakings














| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | (1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:









| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the Calculation of
Registration Fee table in the effective registration statement;
|
| | (iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration
statement;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           









| |                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fideoffering thereof;









| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) to remove from registration by means of a post-effective amendment any
of
the securities being registered which remain unsold at the termination of the
offering; and









| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (4) If
the registrant is a foreign private issuer, to file a post-effective amendment to the registration statement to
include any financial statements required by Item 8.A. of Form 20-F at the
start of any delayed offering or throughout a continuous offering.
Financial statements and information otherwise required by Section
10(a)(3) of the Act need not be furnished, provided, that the
registrant includes in the prospectus, by means of a post-effective
amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of
those financial statements. Notwithstanding the foregoing, with
respect to registration statements on Form F-3, a post-effective
amendment need not be filed to include financial statements and
information required by Section 10(a)(3) of the Act or Rule 3-19 of
this chapter if such financial statements and information are
contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by
reference in the Form F-3.












II-1



---



##### 



















II-2



---



##### 



SIGNATURES




Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Edmonton, Province of Alberta, on the
13th day of
May, 2004.




MILLAR WESTERN FOREST PRODUCTS LTD.By:   /s/ Joseph R. ConciniName: Joseph R.
Concini, C.A.Title: Chief
Financial Officer


Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:

Signature
    
    Title
    
    Date*James B. Millar
    
    Chairman and Director
    
May 13, 2004/s/ H. MacKenzie MillarH. MacKenzie Millar
    
    President, Chief Executive Officer and Director (Principal Executive
Officer)
    
May 13, 2004/s/ Joseph R. ConciniJoseph R. Concini, C.A.
    
    Chief Financial Officer (Principal Financial Officer and Principal
Accounting Officer)
    
May 13, 2004*Robert J. Turner, Q.C.
    
    Secretary, General Counsel and
Director
    
May 13, 2004W. Kenneth Davidson
    
    Director*William D. Grace
    
    Director
    
May 13, 2004Donald R. Ching
    
    DirectorDouglas G. Hall
    
    Director


*By:
    
    /s/ Joseph R. ConciniAttorney-in-fact


II-3



---



##### 



AUTHORIZED U.S. REPRESENTATIVE




Pursuant to the requirements of Section 6(a) of the Securities Act of
1933, the undersigned has signed this registration statement, solely in the
capacity of the duly authorized representative of Millar Western Forest
Products Ltd. in the United States, in the City of Newark, State of Delaware,
on this 13th day of
May, 2004.




PUGLISI & ASSOCIATES
(Authorized U.S. Representative)By:
    
    /s/ Donald J. PuglisiName: Donald J. PuglisiTitle: Managing Director


II-4



---



##### 



EXHIBIT INDEX




Exhibit Number
    
    Description of Exhibits3.1*
    
    Certificate, Articles of Incorporation and Articles of Amendment3.2*
    
    By-laws4.1
    
    Indenture dated as of November 25, 2003 between the Company and The Bank of New York4.2
    
    Registration Rights Agreement between the Company and Goldman,
Sachs & Co. dated November 25, 20034.3
    
    Form of old note (included in Exhibit 4.1)4.4
    
    Form of new note (included in Exhibit 4.1)4.5
    
    Purchase Agreement between the Company and Goldman, Sachs & Co.
dated November 20, 2003.5.1
    
    Opinion of Fraser Milner Casgrain LLP as to the legality of the
securities being registered.5.2
    
    Opinion of Shearman & Sterling LLP as to the legality of the
securities being registered.10.1*
    
    Forest Management Agreement dated May 14, 1997 between the
Minister of Environmental Protection of Alberta and Millar
Western Industries Ltd.10.2*
    
    Corporate Services Agreement dated May 13, 1998 between the
Registrant and Millar Western Industries Ltd.10.3*
    
    Form of 1994 Performance Bonus Plan of the Registrant10.4*
    
    Non-Competition Agreement dated as of May 13, 1998 among the
Registrant, Millar Western Industries Ltd., James B. Millar and
H. MacKenzie Millar10.5*
    
    Marketing Agreement dated as of November 1, 1990 among Millar
Western Management Ltd. and Meadow Lake Pulp Limited10.6*
    
    Administrative Services Agreement dated October 31, 1990 among
Millar Western Management Ltd., Millar Western Pulp (Meadow
Lake) Ltd. and Meadow Lake Pulp Limited Partnership10.7*
    
    Trademark Licensing Agreement dated May 13, 1998 between the
Registrant and Industries10.8
    
    Credit Agreement dated as of June 27, 2001, as amended, between
the Registrant and Canadian Imperial Bank of Commerce10.9**
    
    PPA Auction Agreement dated July 14, 2000





II-5



---



##### 



Exhibit Number
    
    Description of Exhibits10.10***
    
    Power Syndicate Agreement (Battle River) dated January 1, 200110.11***
    
    Power Syndicate Agreement (Sundance C) dated January 1, 200112.1x
    
    Computation of ratio of earnings to fixed charges23.1
    
    Consent of Fraser Milner Casgrain LLP (included in Exhibit 5.1)23.2
    
    Consent of Shearman & Sterling LLP (included in Exhibit 5.2)23.3x
    
    Consent of PricewaterhouseCoopers LLP23.4
    
    Consent of NLK Consultants Inc.23.5
    
    Consent of Resource Information Systems Inc.24.1
    
    Powers of Attorney (included on the signature pages to the
Registration Statement)25.1
    
    Statement of Eligibility of The Bank of New York on Form T-1
with respect to the Indenture (separately bound)99.1
    
    Form of Letter of Transmittal99.2
    
    Form of Notice of Guaranteed Delivery99.3
    
    Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees99.4
    
    Form of Letter to Clients




---




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




II-6