TimberWest announces 2008 fourth quarter results



    VANCOUVER, Feb. 12 /CNW/ - "By all accounts 2008 was the most difficult
year in our history," said Paul McElligott, President and CEO of TimberWest
Forest Corp. "As a result of the US housing downturn sales revenues were under
continuous pressure throughout the year. The Company had many challenging
restructuring decisions to make in the business and ended the year in the eye
of the financial storm needing to refinance under considerable duress. As we
had previously disclosed, we were going to breach a covenant under our credit
agreements at the end of the calendar year. Having explored a number of
alternatives to solve our liquidity issues, we were in the midst of executing
a refinancing solution when the credit markets collapsed. As such, we were
left with only one viable option to raise additional capital through a $150
million convertible debenture offering which closed on February 11, 2009 and
has allowed us to pay down senior debt and renegotiate our credit facilities."
    "We did not go to this solution easily as it was dilutive, but we believe
that we have acted in the best interests of the Company and are now on a
stable footing to weather this downturn and excel on the other side of it,"
said Mr. McElligott. "The fact that two wholly-owned subsidiaries of British
Columbia Investment Management Corporation (the "bcIMC Investors") have made
such a significant investment in our business is very positive. They are
significant British Columbia based investors who share our long term vision
for timberland and real estate on Vancouver Island. This is further
demonstrated by their nomination of the Honorable David Emerson to our Board."

    Financial Highlights

    In spite of low revenues, all of the cost reduction and business model
changes that we have undertaken over the years, including this year, have
meant that we are well-positioned for the future. While we did use our
operating line this year to pay distributions, the business generated enough
cash to cover its fixed costs and all the restructuring costs. As a largely
variable cost business today, we are better able to reduce sales activity
levels, let the trees grow, and entitle land while keeping the balance sheet
strong. To underscore this point, we have taken this business from a high cost
operating company with over 1,400 employees in the timber, logging and
sawmilling business to a low cost timber and land management company of 88
employees.
    TimberWest generated a distributable cash loss of $11.4 million or
($0.15) per unit for the fourth quarter of 2008 compared to $55.4 million of
distributable cash or $0.71 per unit for the same quarter in 2007. For the
year ended December 31, 2008 the Company generated a distributable cash loss
of $24.8 million or ($0.32) per unit compared to $90.3 million of
distributable cash or $1.16 per unit for the year ended December 31, 2007.
    Included in the distributable cash loss for the quarter are restructuring
costs of $4.4 million associated with the settlement of the United
Steelworkers agreement and the salaried workforce reduction. As well, the
quarterly results include $2.0 million of costs associated with modifying the
subordinated note component of the Stapled Units and refinancing the debt. The
distributable cash results for the fourth quarter of 2007 include the sale of
the Leech Creek lands to the Capital Regional District for $64.7 million.
    On a year-to-date basis in 2008, if all of the one-time restructuring and
refinancing costs are excluded, the distributable cash loss would have been
$7.7 million or ($0.10) per unit. Likewise, if the Leech Creek sale had been
excluded from the 2007 results, distributable cash would have been $25.6
million or $0.33 per unit.

    Operating Highlights

    Our timberland sales revenues have diminished from our five-year average
of $311.0 million to this year's low of $147.4 million. Our sales realizations
are down more than $21 per m(3) or 22% from our five-year average and our
annual sales volumes are down by almost 40% from our five-year average annual
sales volumes. Private land harvest volumes were only 1.6 million m(3), our
lowest private land harvest on record. We ended the year with average annual
sales realizations of $76 per m(3) and sales volumes of 1.9 million m(3).
Production costs averaged $67 per m(3) this year, which includes fixed costs
associated with the operations. We are pleased with our unit cost results in
light of the material reduction in volume the Company has experienced.
    On the real estate side of the business, the Company achieved sales of
$0.3 million for the fourth quarter and $11.8 million for the year. It is
worth noting that these gross as-is sales averaged $10,100 per acre for the
year representing a significant lift over timberland values. 2008 was largely
devoted to staffing up, establishing reporting systems, acquiring a better
understanding of our real estate portfolio, and finalizing plans for the
future. The transactions we completed in 2008 benefited communities and
provided job creation opportunities. Whether it was enabling a farm to grow in
size or providing additional land for First Nations' housing, we were able to
generate benefits for Vancouver Island residents.
    Some progress was realized on the entitlement front in 2008. 200 hectares
of land next to the Campbell River airport were successfully rezoned
industrial, significantly increasing its potential value. We also filed a
proposal for a small scale agricultural development of 166 hectares just south
of Courtenay in the Comox Valley. In addition, we participated in the town of
Ladysmith's "visioning" process during 2008, which was implemented to help
define the future growth and development of that community. All of these
initiatives have received very positive community feedback.

    Safety

    The Company's safety record was excellent in 2008 with a 35%
year-over-year improvement in our Medical Incident Rating (MIR). At year end
we achieved our SAFE certification goal with 100% of our timberlands
contractors SAFE certified. We are an industry leader in accomplishing this
and our timberlands staff have done a terrific job getting this level of
certification in place. We are heading into 2009 with further safety
improvements planned and an even tougher MIR goal. As a result of these safety
improvements, we have also reduced our WorkSafeBC costs with a 43% improvement
in our rate which translates into approximately $100,000 of annual savings.
All of TimberWest's employees and contractors are to be commended for their
continued focus on safety and for their impressive accomplishments in 2008.

    United Steelworkers Settlement

    Late in December, TimberWest concluded a new eight-year labour agreement
with the United Steelworkers Union (USW) Local 1-80 and Local 1-363, ending a
strike that had been in effect since the summer of 2007. Ratification of the
contract was completed in early January 2009.
    We are very pleased that TimberWest and the USW were able to agree on a
new contractor model that will allow for more mid-sized long term contractors,
which will place TimberWest on a more stable footing with its competitors in
this very difficult time in the industry.

    The final agreement contains several key features:

    
    -   The new contractor model allows the company to sub-divide operations
        and employ medium sized unionized contractors on its land base,

    -   The subdivided contracts will be for five year terms, with annual
        price reviews,

    -   A signing bonus for qualified contractor employees and qualified
        engineers and foresters,

    -   The agreement recognizes that TimberWest is no longer an operating
        company,

    -   All outstanding grievances, including the defamation law suit between
        TimberWest and the USW have been resolved, and

    -   The company will no longer have unionized employees once sub-division
        is fully implemented.
    

    TimberWest believes this agreement provides a more manageable,
cost-effective, and viable system for timber harvesting on its land base. At
the same time, it will continue to protect the rights of the United
Steelworkers for harvesting jobs, create the opportunity for more operators to
enter the marketplace, and maintain a high standard of environmental and
safety performance.

    Capital Structure

    On December 19, 2008, the Company held a Special meeting of its
unitholders to consider amendments to the Series A Subordinate Note component
of the Stapled Units. The Company received unitholder approval at the meeting
and lender approval on the same day to implement these modifications. The key
change was the replacement of the fixed interest rate of 12% with a 2 - 12%
variable interest rate on the notes. This modification allows the Company to
better match its distributions with its cash flows, particularly during this
downturn.

    Outlook

    We have started 2009 with no improvement in our end markets and do not
expect a major turnaround to get underway in 2009. Forecasters continue to
have a difficult time predicting exactly when housing demand will recover in
the US but most believe it will be sometime in 2010 at the earliest. As a
result of the global economic downturn, our Asian markets could also
experience reduced demand for logs in the coming year.
    In 2009 we expect to improve our real estate marketing and increase our
sales support on Vancouver Island. We also expect to progress our entitlement
discussions with several communities. We are committed to growing a
distinctive and focused real estate business able to build a strong client
base. To that end, we have decided to give the business unit a separate name
to reflect its differences from TimberWest's forestry operations but maintain
its deep roots and commitment to Vancouver Island. The name we have chosen is
Couverdon, derived from the city in the Netherlands from which the ancestors
of Captain George Vancouver originated. We launched this brand last week and
look forward to this division's increasing success.
    "Looking beyond the immediate market challenges, we expect to see demand
and pricing for log and lumber products in our region improve when housing
activity returns to more normal levels," said Mr. McElligott. "This view is
based upon our assessment of the positive demographics in the US for housing;
our expectations regarding continuing growth in demand for wood products in
Asia; the impact of the inevitable future supply shortages caused by the
mountain pine beetle infestation in western Canada; further harvest reductions
in eastern Canada and the expected escalating Russian log export taxes. When
margins improve, we will increase our harvest."
    We also continue to believe that our real estate strategy is the right
long term one for unitholders. Planning and zoning will enhance real estate
values significantly on our development lands and over time raise the value of
our entire portfolio. Our efforts in this area will help communities achieve
sustainable development that brings with it jobs, homes, new infrastructure
and recreational opportunities for generations to come.
    As previously disclosed, we have set the interest on the Series A
Subordinate Notes for 2009 at 2% or $0.18 per Stapled Unit. We are not paying
those distributions in cash, but rather are deferring them for 2009. We have
the ability to defer these distributions for 18 months and as we get
visibility on the recovery and see improvements in our business, the Company's
intention is to pay the deferred distributions and resume paying distributions
at a level that we believe can be supported by the level of distributable cash
being generated. The Board's view on distribution policy has not changed and
it is the Company's intention to continue to distribute all of its available
cash while maintaining a strong balance sheet.

    
    Management's Discussion and Analysis
    For the three and twelve months ended December 31, 2008 and 2007
    

    Management's Discussion and Analysis supplements, but does not form part
of, the unaudited interim consolidated financial statements of TimberWest
Forest Corp. ("TimberWest" or "the Company") and the notes thereto for the
fourth quarter of 2008. This discussion and analysis provides an overview of
significant developments that have affected TimberWest's performance during
the fourth quarter and year to date 2008 relative to the fourth quarter and
year to date of 2007, and that have affected the Company's financial position
as at December 31, 2008, relative to December 31, 2007. Factors that could
affect future operations are also discussed. These factors may be affected by
known and unknown risks and uncertainties that may cause the actual future
results of the Company to be materially different than those expressed or
implied in this discussion. These risks and uncertainties are described herein
and in the Management's Discussion and Analysis contained in the Company's
2007 Annual Report.
    TimberWest's unaudited interim consolidated financial statements and the
accompanying notes included within this interim report include the accounts of
TimberWest Forest Corp. and its subsidiaries. The unaudited interim
consolidated financial statements and the accompanying notes are prepared in
accordance with Canadian generally accepted accounting principles (GAAP) and
are expressed in Canadian dollars.
    This Management's Discussion and Analysis has been prepared based on
information available as at February 12, 2009.
    Additional information relating to TimberWest, including the Company's
most recent Annual Information Form and other statutory reports, can be found
on the System for Electronic Document Analysis and Retrieval (SEDAR) at
http://www.sedar.com.

    
    Distributable Cash
    -------------------------------------------------------------------------
    (in millions of dollars)         Three months ended   Twelve months ended
                                         December 31           December 31
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    Net earnings (loss) from
     continuing operations         $  312.3   $   14.8   $  240.7   $  (13.3)
    Interest on Series A
     Subordinate Notes
     owned by unitholders              17.8       21.0       80.8       83.7
    -------------------------------------------------------------------------
    Earnings from continuing
     operations available
     for distribution                 330.1       35.8      321.5       70.4
    Gain on modification of
     Series A Subordinate
     Notes                           (461.6)         -     (461.6)         -
    Future income tax expense
     (recovery)                       120.3      (18.7)     114.5      (22.1)
    -------------------------------------------------------------------------
    Earnings (loss) from continuing
     operations available for
     distribution before provision
     for future income taxes, and
     gain on modification of
     Series A Subordinate Notes       (11.2)      17.1      (25.6)      48.3
    Add (deduct):
      Depreciation, depletion and
       amortization                     1.1        1.1        4.8        6.3
      Proceeds from sale of property,
       plant and equipment              0.8       65.1       11.5       71.9
      Gain on sale of property,
       plant and equipment             (0.3)     (22.3)      (5.5)     (28.5)
      Additions to property, plant
       and equipment                   (0.4)      (1.2)      (2.1)      (3.4)
      Financing costs                  (2.0)         -       (2.0)         -
      Other non-cash items              0.6       (3.5)       1.8       (1.6)
    -------------------------------------------------------------------------
                                       (0.2)      39.2        8.5       44.7
    -------------------------------------------------------------------------
    Distributable cash from
     continuing operations(1)      $  (11.4)  $   56.3   $  (17.1)  $   93.0
    -------------------------------------------------------------------------
    Distributable cash from
     discontinued operations              -       (0.9)      (7.7)      (2.7)
    -------------------------------------------------------------------------
    Distributable cash             $  (11.4)  $   55.4   $  (24.8)  $   90.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) The Company permanently closed its Elk Falls sawmill operations on
        May 9, 2008. These operations have been classified as discontinued
        operations and prior period financial statements have been restated.


    -------------------------------------------------------------------------
                                     Three months ended   Twelve months ended
    Per Stapled Unit amounts:            December 31           December 31
    (in dollars)                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    Basic and diluted earnings
     (loss) from continuing
     operations available for
     distribution before provision
     for future income taxes and
     gain on modification of
     Series A Subordinate Notes
     per weighted average Stapled
     Unit                          $  (0.14)  $   0.22   $  (0.33)  $   0.62
    Basic and diluted distributable
     cash from continuing
     operations per weighted
     average Stapled Unit             (0.15)      0.72      (0.22)      1.20
    Basic and diluted distributable
     cash from discontinued
     operations per weighted
     average Stapled Unit                 -      (0.01)     (0.10)     (0.04)
    Basic and diluted distributable
     cash per weighted average
     Stapled Unit                  $  (0.15)  $   0.71   $  (0.32)  $   1.16
    Cash distributions paid per
     Stapled Unit                  $   0.27   $   0.27   $   1.08   $   1.08
    -------------------------------------------------------------------------

    The following table provides a reconciliation of cash flow from
    operations to distributable cash:

    -------------------------------------------------------------------------
                                     Three months ended   Twelve months ended
                                         December 31           December 31
    (in millions of dollars)           2008       2007       2008       2007
    -------------------------------------------------------------------------

    Cash used in continuing
     operations                    $  (30.4)  $  (22.1)  $  (94.4)  $  (68.7)
    Add (deduct):
      Change in non-cash working
       capital                         (0.2)      (6.1)     (13.7)       9.3
      Interest on Series A
       Subordinate Notes
       owned by unitholders            17.8       21.0       80.8       83.7
      Proceeds from sale of property,
       plant and equipment              0.8       65.1       11.5       71.9
      Additions to property,
       plant and equipment             (0.4)      (1.2)      (2.1)      (3.4)
      Financing costs                  (2.0)         -       (2.0)         -
      Other non-cash items              3.0       (0.4)       2.8        0.2
    -------------------------------------------------------------------------
                                       19.0       78.4       77.3      161.7
    -------------------------------------------------------------------------
    Distributable cash from
     continuing operations            (11.4)      56.3      (17.1)      93.0
    -------------------------------------------------------------------------
    Distributable cash from
     discontinued operations              -       (0.9)      (7.7)      (2.7)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Distributable cash             $  (11.4)  $   55.4   $  (24.8)  $   90.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Distributable cash includes consolidated net earnings (loss), plus
interest expensed on Series A Subordinate Notes owned by unitholders, plus
non-cash income taxes, plus depreciation, depletion and amortization, plus
proceeds from the sale of property, plant and equipment net of their gain
(loss) on sale, less additions to property, plant and equipment, less
financing fees and, from time to time, adjustments for other items deemed
appropriate by the Board of Directors. Earnings from continuing operations
available for distribution is comprised of consolidated net earnings (loss)
from continuing operations plus interest expensed on Series A Subordinate
Notes. The Series A Subordinate Notes are owned by the unitholders and
interest thereon is paid to the unitholders, therefore, earnings from
continuing operations available for distribution to unitholders reflects
earnings before this interest charge.
    Earnings from continuing operations available for distribution and
distributable cash are measures that do not have a standardized meaning
prescribed by GAAP and may not be comparable to similar measures presented by
other companies. Management believes that the presentation of these measures
will enhance an investor's understanding of the Company's operating
performance. Reconciliations of net earnings (loss) and cash flow from
continuing operations before changes in working capital, as determined in
accordance with GAAP, and earnings from continuing operations available for
distribution and distributable cash are provided in the preceding tables.

    The following tables present a quarterly comparison of distributable cash
generated, in total and on a per Stapled Unit basis:

    
    -------------------------------------------------------------------------
                                2008    2007    2006    2005    2004    2003
    -------------------------------------------------------------------------
    Distributable Cash
    (in millions of dollars)
    First quarter             $ (3.9) $ 26.9  $ 31.5  $ 23.9  $ 27.7  $ 25.7
    Second quarter              (3.2)   13.6    35.5    15.4    43.5     4.7
    Third quarter               (6.3)   (5.6)    9.3    (1.7)   35.9    12.0
    Fourth quarter             (11.4)   55.4    27.5    29.7    18.1     9.0
    -------------------------------------------------------------------------
                              $(24.8) $ 90.3  $103.8  $ 67.3  $125.2  $ 51.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Distributable Cash per
     Stapled Unit(2)
    (in dollars)
    First quarter             $(0.05) $ 0.35  $ 0.41  $ 0.31  $ 0.36  $ 0.34
    Second quarter             (0.04)   0.17    0.46    0.20    0.57    0.06
    Third quarter              (0.08)  (0.07)   0.12   (0.02)   0.47    0.15
    Fourth quarter             (0.15)   0.71    0.35    0.38    0.24    0.12
    -------------------------------------------------------------------------
                              $(0.32) $ 1.16  $ 1.34  $ 0.87  $ 1.64  $ 0.67
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (2) Per Stapled Unit amounts by quarter do not necessarily add to the
        total of the year and year-to-date due to changes in the weighted
        average number of Stapled Units outstanding during the year.


    Financial Highlights
    -------------------------------------------------------------------------
                                     Three months ended   Twelve months ended
                                         December 31           December 31
    (in millions of dollars)           2008       2007       2008       2007
    -------------------------------------------------------------------------

    Sales                          $   35.9   $   96.5   $  163.7   $  318.4

    Operating earnings (loss) from
     continuing operations             (8.6)      20.6      (14.9)      57.5

    Operating earnings (loss) from
     continuing operations
     - % of sales                     (24.0)%     21.3%      (9.1)%     18.1%

    Earnings (loss) before interest,
     taxes, depreciation and
     amortization(3) from
     continuing operations             (7.5)      21.7      (10.6)      69.4

    Earnings (loss) before interest,
     taxes, depreciation and
     amortization from continuing
     operations per basic and
     diluted weighted average
     Stapled Unit(3)                  (0.10)      0.28      (0.14)      0.89

    Earnings (loss) before interest,
     taxes, depreciation and
     amortization(3) from
     discontinued operations            2.3      (19.3)      (5.4)     (21.1)

    Earnings (loss) before interest,
     taxes, depreciation and
     amortization from discontinued
     operations per basic and
     diluted weighted average
     Stapled Unit(3)                   0.03      (0.25)     (0.07)     (0.27)

    Earnings (loss) before interest,
     taxes, depreciation and
     amortization(3)                   (5.2)       2.4      (16.0)      48.3

    Earnings (loss) before interest,
     taxes, depreciation and
     amortization per basic and
     diluted weighted average
     Stapled Unit(3)                  (0.07)      0.03      (0.21)      0.62

    Distributable cash             $  (11.4)  $   55.4   $  (24.8)  $   90.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (3) Earnings (loss) before interest, taxes, depreciation and amortization
        is a measure that does not have a standardized meaning prescribed by
        GAAP and may not be comparable to similar measures presented by other
        companies. Management believes that the presentation of this measure
        will enhance an investor's understanding of the Company's operating
        performance. A reconciliation of net earnings (loss) as determined in
        accordance with GAAP and earnings (loss) before interest, taxes,
        depreciation and amortization is provided in the supplemental
        information appended to this interim report.
    

    Sales revenues for the three months ended December 31, 2008 were down
compared to the fourth quarter of 2007. The decline in sales revenues year
over year is a result of significantly lower real estate sales in the fourth
quarter of 2008 compared to 2007, combined with lower log sales revenues
resulting from a steep reduction in average log sales realizations of $19 per
m(3). In the fourth quarter of 2007, the Leech Creek conservation land sale
accounted for 67% of sales in that quarter. Similarly, sales for year ended
December 31, 2008 compared to 2007 were lower for the same factors.

    Highlights and Significant Transactions

    Adoption of New Accounting Policies

    During the first quarter, the Company adopted new accounting policies and
disclosure requirements issued by the Canadian Institute of Chartered
Accountants ("CICA"). TimberWest changed its policy of accounting for
inventories and adopted enhanced disclosure requirements for inventories,
financial instruments, capital management and going concern assessment.
    Prior to January 1, 2008, TimberWest accounted for inventories other than
supplies at the lower of average cost and net realizable value on an aggregate
basis for each of logs and for lumber. Effective January 1, 2008, inventories
other than supplies are recorded at the lower of average cost and net
realizable value on an item-by-item basis defined as end-use-sorts for logs
and grade levels for lumber. TimberWest adopted the new accounting policy on a
prospective basis and prior years have not been restated. Accordingly, the
opening log inventory and opening retained earnings as at January 1, 2008 have
been written down by $2.0 million.
    The opening lumber inventory and opening retained earnings as at January
1, 2008 have been written down by $0.8 million as a result of the new
accounting policy to measure inventories at the lower of average cost and net
realizable value on an item-by-item basis.

    Refinancing

    Prior to year-end, TimberWest announced its intention to raise $150
million by way of a convertible debenture issue. TimberWest entered into an
agreement with two wholly-owned subsidiaries of British Columbia Investment
Management Corporation (the "bcIMC Investors") under which the bcIMC Investors
have agreed to purchase $100 million principal amount of convertible
debentures of the Company by way of a private placement. In addition, the
Company announced a rights offering in which the Company distributed rights
that entitled the existing holders of Stapled Units of the Company to purchase
up to $50 million aggregate principal amount of the convertible debentures.
The bcIMC Investors have committed to purchase an additional amount of the
debentures equal to the aggregate principal amount of the debentures not
subscribed for under the rights offering by providing a standby commitment.
    The Company also announced that the proposed amendments to the Company's
loan agreement had been approved by the Company's lenders, subject to the
execution of definitive documentation and the fulfillment of certain
conditions, including the completion of at least $100 million of a convertible
debenture offering and the application to the Company's existing credit
facilities of $75 million of the proceeds of the offering. The rights offering
and the private placement are intended to satisfy this condition.
    The convertible debentures will bear interest at an annual rate of 9%
payable quarterly in arrears with a maturity date of February 11, 2014. The
convertible debentures, including all accrued and unpaid interest thereon,
will be convertible subject to certain conditions outlined in the final
prospectus at $3.50 per Stapled Unit.
    Subsequent to year end, on February 11, 2009, the Company announced the
closing of the $150 million convertible debenture refinancing and amendments
to the Company's loan agreements. The bcIMC Investors total investment was
$100 million and the Company raised an additional $50 million through the
public rights offering. With the amendments to the bank loan agreement and the
issuance of the $150 million convertible debentures, the Company believes it
has sufficient flexibility to operate through the current market downturn. As
previously reported, the Company did not expect to remain in compliance with
its debt covenants under the loan agreement at the end of the 2008 calendar
year. However, the lenders agreed to waive the covenant tests until the
refinancing was complete. See note 16.

    Cash Distribution

    On December 19, 2008, the Company announced that proposed amendments to
the terms of the Series A Subordinate Notes forming part of the Company's
Stapled Units were approved by holders of the Stapled Units at a special
meeting held on the same day. The Company also announced that the note
amendments were approved by the lenders under its credit facilities and
accordingly became effective as of December 31, 2008.
    The note amendments:

    
    -   changed the rate of interest on the notes from a fixed rate of 12%
        per annum to a variable rate of between 2% and 12% per annum to be
        set from time to time based on the Company's distributable cash;

    -   reduced the period over which the Company can defer payments of
        interest on the notes from 27 months to 18 months, and provide that
        the Company may only exercise this deferral right in respect of
        interest payments for periods where the applicable interest rate on
        the notes is 2%; and

    -   replaced the Company's current right to elect to pay interest on the
        notes by delivering common shares or preferred shares of the Company
        with the right to elect to pay interest on the notes by delivering
        Stapled Units.
    

    The note amendments have been implemented to enable the Company to better
align its distributions with the underlying cash flows of its timberlands and
real estate businesses.
    The Company has set the interest rate on the notes at 2% per annum
(corresponding to annual cash distributions of $0.18 per Stapled Unit) for
2009. However, given the challenging business conditions it continues to face,
the Company will defer distributions for the foreseeable future, including the
distribution payable on January 15, 2009.
    The note amendments were approved 99% in favour by unitholders holding
approximately 67% of the aggregate principal amount of all the notes
represented in person or by proxy at the special meeting.

    Quarterly Conference Call

    TimberWest will hold a conference call at 9:00am (Pacific) on Friday,
February 13, 2009, to discuss results of the fourth quarter. To access the
conference call, listeners should dial 1-800-754-1336. For those unable to
participate in the live call, a recording of the call will be available until
February 27, 2009, and can be accessed at 1-800-558-5253 using code 21410937.
The conference call will also be broadcast live over the internet via
TimberWest's website home page at http://www.timberwest.com. The webcast will
be archived and available for an additional 90 days.

    Operating Highlights

    
                                     Three months ended   Twelve months ended
                                         December 31           December 31
    Timberland Operations:             2008       2007       2008       2007
    -------------------------------------------------------------------------

    Log Sales Revenue (in millions
     of dollars)
      Domestic                     $   14.8   $   17.2   $   68.5   $  122.1
      Export - Asia                    17.1       11.8       68.0       82.4
      Export - US                       3.0        1.4       10.9       41.9
    -------------------------------------------------------------------------
                                   $   34.9   $   30.4   $  147.4   $  246.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Log Sales Realizations ($/m(3))
      Domestic                           54         92         64         86
      Export - Asia                     118         96         99        112
      Export - US                        64        108         62         85
    -------------------------------------------------------------------------
                                         75         94         76         93
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Log Sales Volume (thousand m(3))
      Domestic                        272.9      187.5    1,077.4    1,417.8
      Export - Asia                   145.7      123.0      686.8      734.5
      Export - US                      46.6       12.5      175.9      488.9
    -------------------------------------------------------------------------
                                      465.2      323.0    1,940.1    2,641.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Log Sales Mix (thousand m(3))
      Fir                             284.0      151.8    1,253.3    1,697.7
      Hembal                          131.5       99.7      468.1      573.8
      Cedar                            18.4       44.8      103.8      204.9
      Other                            31.3       26.7      114.9      164.8
    -------------------------------------------------------------------------
                                      465.2      323.0    1,940.1    2,641.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Log Production Volume
     (thousand m(3))
      Public tenures                   35.1       75.9      265.4      452.4
      Private timberlands             414.3      212.4    1,569.1    2,226.6
    -------------------------------------------------------------------------
                                      449.4      288.3    1,834.5    2,679.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Log Production Costs ($/m(3))        71         97         67         73

    Timberland operating margin
     (% of log sales)                     1%        (3)%        3%        20%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Log sales revenues for the three months and year-to-date ended December
31, 2008, were down compared to log sales revenues for the same periods of
2007 due to significant declines in average log realizations as a result of
weak domestic and US log markets, the Company's deferred harvest strategy, and
a strong Canadian dollar for most of the year.
    During 2008, Japan was the bright spot in the log market. For the three
months ended December 31, 2008, log shipments increased 53% and average
realizations increased 24% compared to the fourth quarter of 2007. Overall,
log shipments into this market increased slightly during 2008 to 571,000 m(3)
compared to 521,000 m(3) in 2007 as the Company focused on supplying key
customers in that market to ensure their source of supply for premium species
Douglas fir logs.
    Unit production costs for the fourth quarter of 2008 decreased compared
to the fourth quarter of 2007 due to higher production volumes compared to the
fourth quarter of 2007 when the United Steelworkers strike curtailed
production during the quarter. Unit production costs on a year-to-date basis
were lower as a result of the use of lower cost and more competitive bid
contractors compared to 2007 when the Company experienced above market cost
increases with its large stump-to-dump contractors who, as a group, produced
55% of the Company's private land harvest compared to 25% in 2008.

    
                                     Three months ended   Twelve months ended
                                         December 31           December 31
    Real Estate:                       2008       2007       2008       2007
    -------------------------------------------------------------------------

    Real Estate Sales (in millions
     of dollars)                   $    0.3   $   65.3   $   11.8   $   67.1
    Leech Creek Net Proceeds (in
     millions of dollars)                 -       64.6          -       64.6
    Leech Creek Net Proceeds
     ($/acre)                             -      2,691          -      2,691
    Real Estate Net Proceeds,
     excluding Leech Creek (in
     millions of dollars)               0.3        0.4       10.9        1.9
    Real Estate Net Proceeds,
     excluding Leech Creek ($/acre)  15,908      4,160      9,409      3,636
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Real estate sales in the fourth quarter of 2008 comprised of a property
    sale from non-core real estate assets. Proceeds from the sale of real
    estate for the fourth quarter of 2007 were comprised of one significant
    conservation land sale (Leech Creek) to the Capital Regional District and
    several smaller transactions.

    Earnings (loss) Before
    Interest, Taxes, Depreciation    Three months ended   Twelve months ended
    and Amortization (EBITDA)(4):        December 31           December 31
    (in millions of dollars)           2008       2007       2008       2007
    -------------------------------------------------------------------------

    Net earnings (loss) from
     continuing operations         $  312.3   $   14.8   $  240.7   $  (13.3)
    Add (deduct):
      Interest on Series A
       Subordinate Notes
       paid to unitholders             17.8       21.0       80.8       83.7
      Interest on long-term debt        1.5        2.5        7.6        3.7
      Interest on short-term debt       1.1        1.0        2.6       11.2
      Income tax expense (recovery)   120.3      (18.7)     114.5      (22.2)
      Depreciation, depletion and
       amortization                     1.1        1.0        4.5        5.4
      Amortization of deferred
       financing costs                    -        0.1        0.3        0.9
      Gain on modification of
       Series A Subordinate
       Notes                         (461.6)         -     (461.6)         -
    -------------------------------------------------------------------------
    Earnings (loss) from continuing
     operations before Interest,
     Taxes, Depreciation and
     Amortization                      (7.5)      21.7      (10.6)      69.4
    -------------------------------------------------------------------------
    Earnings (loss) from discontinued
     operations before Interest,
     Taxes, Depreciation and
     Amortization                       2.3      (19.3)      (5.4)     (21.1)
    -------------------------------------------------------------------------
    Earnings (loss) before Interest,
     Taxes, Depreciation and
     Amortization                      (5.2)       2.4      (16.0)      48.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (4) EBITDA does not have a standardized meaning prescribed by Canadian
        generally accepted accounting principles and may not be comparable to
        similar measures presented by other companies. Management believes
        that the presentation of this measure will enhance an investor's
        understanding of the Company's operating performance.


    Discontinued Operations

                                     Three months ended   Twelve months ended
                                         December 31           December 31
    Elk Falls Sawmill:                 2008       2007       2008       2007
    ------------------------------------------------------------------------
    Sales Revenue by Product
    (in millions of dollars)
      Lumber                       $      -   $   20.1   $   34.6   $   76.0
      Wood chips and residuals            -        2.5        4.6       12.4
    ------------------------------------------------------------------------

    Sales Realizations
      Lumber ($/mfbm)                     -        582        622        606
      Wood chips ($/m3)                   -         46         43         46
    ------------------------------------------------------------------------

    Sales Volume
      Lumber (million fbm)                -       34.4       55.6      125.3
      Wood chips (thousand m3)            -       51.7      101.9      254.3
    ------------------------------------------------------------------------

    Lumber Production Volume
     (million fbm)                        -       23.4       43.3      122.7
    ------------------------------------------------------------------------

    The Elk Falls sawmill was permanently closed on May 9, 2008.


    Financial Position

    Summary of Financial Position
    from Continuing Operations:            As at                 As at
    (in millions of dollars)         December 31, 2008     December 31, 2007
    -------------------------------------------------------------------------
    Cash and cash equivalents                 $   30.8                 $ 1.2
    Current assets, including cash
     and cash equivalents                         71.0                  47.2
    Property, plant and equipment              1,222.0               1,230.0
    Other assets                                   7.1                   2.0
    Current liabilities                          132.2                  36.1
    Current liabilities (excluding
     short term debt)                             23.9                  36.1
    Long-term debt                               189.8                 187.5
    Long-term liabilities (excluding
     long term debt)                             292.6                 159.6
    Series A Subordinate Notes owned
     by unitholders                              240.4                 698.1
    Unitholder's equity                          443.7                 210.8
    -------------------------------------------------------------------------
    

    Cash and cash equivalents increased to $30.8 million at December 31,
2008, reflecting an increase in cash provided by financing activities. Trade
accounts receivable was $4.1 million at December 31, 2008, comparable to $4.9
million at the end of 2007. Inventory was $29.1 million at December 31, 2008,
down from $32.9 million at December 31, 2007. Prior to January 1, 2008,
TimberWest recorded inventories at a lower of average cost and net realizable
value on an aggregate basis for logs. On January 1, 2008 TimberWest changed
its policy of accounting for inventories to record inventories at the lower of
average cost and net realizable value on an item-by-item basis defined as
end-use sorts for logs (See Highlights and Significant Transactions - Adoption
of New Accounting Policies). This change in accounting policy for inventories
resulted in a $3.2 million decrease of log inventory values as at December 31,
2008 compared to the end of 2007. Prepaid expenses and other current assets
were $3.7 million at December 31, 2008, compared to $6.1 million at the end of
2007, reflecting a decrease in non-trade receivables. Future income tax assets
were $3.3 million as at December 31, 2008, an increase from $2.1 million at
the end of 2007. The year over year increase is due to an increase of $1.2
million in future tax assets for financial reporting accruals not deductible
for tax purposes.
    Property, plant and equipment were $1,222.0 million as at December 31,
2008, $8.0 million less than as at December 31, 2007. This decrease primarily
reflects the sale of higher and better use properties and other capital
assets, with a net book value of $5.6 million, as well as a provision for
depreciation of capital assets of $4.5 million recorded during the year. These
items were offset in part by capital additions of $2.1 million, comprised
primarily of logging roads and new information technology systems.
    Other assets of $7.1 million as at December 31, 2008, increased from the
balance of $2.0 million at the end of December 31, 2007. This increase is
primarily due to the non-cash financial assets of $4.7 million that were
recorded in 2008. These financial assets are the embedded derivatives that
arise from the Company's option to defer the Series A Subordinate Note
interest payments for up to 18 months while the distribution rate is set at 2%
and the option to extend the maturity date of the Series A Subordinate Notes
for a 10-year period from 2038 to 2048.
    Current liabilities as at December 31, 2008, include borrowings of $108.3
million on the Tranche B term unsecured term credit facility. Excluding the
term credit facility, current liabilities at December 31, 2008 were $23.9
million. This variance in current liabilities (excluding short-term debt) can
be attributed to the decrease in distribution payable, as the distribution in
respect of the fourth quarter of 2008 is classified as a long-term liability
to reflect the 27 month payment deferral. Accounts payable and accrued
liabilities increased $8.8 million to $23.9 million as at December 31, 2008,
reflecting increased trade payables and invoice accruals due to higher harvest
levels in the month of December 2008, and increased restructuring related
accruals associated with the labour settlement, severance, and refinancing
compared to balances as at December 31, 2007.
    As at December 31, 2008, the Company had combined borrowings of $298.1
million on its available credit facilities, including borrowings of $189.8
million on its Tranche A $216.7 million long-term unsecured revolving facility
due on September 24, 2012, and $108.3 million on its Tranche B $108.3 million
term facility due September 24, 2009. In addition, the Company had commitments
of $16.8 million relating to outstanding letters of credit issued under its
Tranche A facility. The Company also had cash on hand of $30.8 million.
    Other long-term liabilities as at December 31, 2008, included a
silviculture liability of $3.2 million, a $36.7 million liability relating to
employee future benefits, a $17.8 million distribution payable and a future
income tax liability of $234.9 million. The long-term silviculture liability
and the liability relating to employee future benefits are comparable to
balances as at December 31, 2007. The deferred distribution payable of $17.8
million ($21.0 million face value) is the fair value of the January 15, 2009
distribution that has been deferred for up to 27 months. The future income tax
liability increased to $234.9 million at the end of 2008. The increase in 2008
can be attributed to a $119.6 million expense on the $461.6 million gain on
modification of Series A Subordinate Notes. Also reflected is the effect of
the reduction in the British Columbia provincial corporate tax rate that was
substantively enacted in the first quarter of 2008.
    The Series A Subordinate Note component of the Company's Stapled Unit is
presented as a liability on the Company's consolidated balance sheets. As at
December 31, 2008 the fair value of the Series A Subordinate Note liability
was $240.4 million compared to $698.1 million as at December 31, 2007.
Amendments approved by unitholders on December 19, 2008 resulted in an
accounting revaluation of the Series A Subordinate Notes. The revaluation
resulted in a write-down in the book value of the Series A Subordinate Notes
with a corresponding non-cash accounting gain of $461.6 million, which will be
accreted back to the $698.2 million face value over the term of the notes. The
book value of the Series A Subordinate Notes has been increased by two
embedded derivatives of $4.7 million that arise from the Company's option to
defer distributions on the notes, and the option to extend the term of the
note for a period of 10-years. In addition, transaction costs of $0.9 million
for the Series A Subordinate Note modification have reduced the book value of
the notes.
    During the quarter ended December 31, 2008, 261,844 Stapled Unit options
were granted, no options to purchase Stapled Units were exercised, 26,000
options were cancelled and 107,938 options expired. During the 12 months ended
December 31, 2008, 261,844 Stapled Unit options were granted, options to
purchase 15,297 Stapled Units were exercised for proceeds of $0.1 million,
35,678 options were cancelled and 122,698 options expired. As at February 12,
2009, the Company had 1,240,326 granted and outstanding Stapled Unit option
awards and 77,765,440 issued and outstanding Stapled Units.
    Current assets from discontinued operations as at December 31, 2008,
included prepaid expenses of $0.1 million. Comparatively, current assets from
discontinued operations as at December 31, 2007, included accounts receivables
of $8.5 million, lumber inventories of $8.2 million and prepaid expenses and
other current assets of $0.5 million. Current liabilities from discontinued
operations are comprised of accounts payable and accrued liabilities and were
$1.5 million as at December 31, 2008, compared to $4.3 million at December 31,
2007. Current assets and liabilities from discontinued operations have
decreased due to the permanent closure of the Elk Falls sawmill on May 9,
2008.

    
    Cash Flow and Liquidity

                                     Three months ended   Twelve months ended
    Selected Cash Flow Items:            December 31           December 31
    (in millions of dollars)           2008       2007       2008       2007
    -------------------------------------------------------------------------

    Cash provided by (used in):

    Operating activities from
     continuing operations:
      Cash used in operations
       before changes in non-cash
       working capital             $  (30.6)  $  (28.2)  $ (108.1)  $ (59.4)
      Changes in non-cash working
       capital                          0.2        6.1       13.7      (9.3)
    -------------------------------------------------------------------------
                                      (30.4)     (22.1)     (94.4)    (68.7)
    -------------------------------------------------------------------------

    Financing activities:
      Issuance of Stapled Units
       on exercise of options             -        0.2         0.1      1.7
      Revolving credit facilities      62.8      154.5         2.3    187.5
      Term credit facilities              -          -       108.3        -
      Financing costs                  (2.0)         -        (2.0)       -
      Debentures                          -     (195.0)          -   (195.0)
    -------------------------------------------------------------------------
                                       60.8      (40.3)      108.7     (5.8)
    -------------------------------------------------------------------------

    Investing activities:
      Proceeds from sale of other
       assets                           0.8       65.1        11.5     71.9
      Additions to property,
       plant and equipment             (0.4)      (1.2)       (2.1)    (3.4)
      Other assets                     (0.1)      (0.1)          -     (0.6)
    -------------------------------------------------------------------------
                                        0.3       63.8         9.4     67.9
    -------------------------------------------------------------------------

    Cash provided by (used in)
     discontinued operations:          (0.8)      (1.2)        5.9     (1.5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Increase (decrease) in cash
     and cash equivalents          $   29.9   $    0.2   $    29.6   $ (8.1)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    During the three months ended December 31, 2008, the Company issued no
Stapled Units on the exercise of Stapled Unit options, compared to the
issuance of 11,910 Stapled Units on the exercise of Stapled Unit options for
net proceeds of $0.2 million in the comparative quarter in 2007. During the
fourth quarter of 2008, $62.8 million was borrowed on available credit
facilities, compared to $40.5 million that was applied to reduce amounts
borrowed on available credit facilities during the same period in 2007.
    For the twelve months ended December 31, 2008, the Company issued 15,297
Stapled Units for net proceeds of $0.1 million on the exercise of Stapled Unit
options, compared to the issuance of 114,889 Stapled Units for net proceeds of
$1.7 million on the exercise of Stapled Unit options in the comparative period
in 2007. In 2008, $110.6 million was borrowed on available credit facilities,
compared to a $7.5 million decrease in amounts borrowed on available credit
facilities during the same period in 2007. Cash and cash equivalents at the
end of 2008 were $30.8 million compared to $1.2 million in the prior year.
    Financing activities in fourth quarter of 2008 included financing fees of
$2.0 million related to the modification of the Series A Subordinate Notes and
the offering of rights to subscribe for 9% convertible debentures.
    In the fourth quarter of 2008, the Company received net proceeds of $0.8
million from the sale of other assets, including $0.3 million from the sale of
higher use properties and incurred $0.4 million for capital expenditures
primarily for the construction of logging roads and new information
technology. For the twelve months ended December 31, 2008, the Company
received net proceeds of $11.5 million from the sale of other assets,
primarily from the sale of higher use properties, and incurred $2.1 million
for capital expenditures primarily for the construction of logging roads and
new information technology.

    As at December 31, 2008, the principal amount of TimberWest's total
debt(5) outstanding was $298.1 million compared to total principal amount of
debt outstanding of $187.5 million as at December 31, 2007. The Company's
consolidated debt-to-total capitalization ratio(5) as at December 31, 2008 was
30:70, compared to 17:83 as at December 31, 2007.
    Cash used in discontinued operations in the fourth quarter of 2008, was
the result of a reduction in accounts payable and accrued liabilities.
    Total debt facilities available to the Company as at December 31, 2008,
were $325.0 million, comprised of $108.3 million available under Tranche B, a
term facility due September 24, 2009 and $216.7 million available under
Tranche A, a long-term revolving facility due September 24, 2012. As at
December 31, 2008 the Company had commitments of $16.8 million relating to
outstanding letters of credit issued to secure various obligations of the
Company issued under Tranche A, the $216.7 million long-term unsecured
facility.

    Internal Controls over Financial Reporting

    During the quarter ended December 31, 2008, the Company did not make any
changes to its internal controls over financial reporting that would have
materially affected, or would reasonably likely materially affect, such
controls.

    International Financial Reporting Standards ("IFRS")

    On February 13, 2008, the Canadian Accounting Standards Board ("AcSB")
confirmed the use of International Financial Reporting Standards ("IFRS") to
commence in 2011 for publicly accountable profit-oriented enterprises. IFRS
will replace Canada's Generally Accepted Accounting Principles ("GAAP") and
the official changeover date is for interim and annual financial statements
relating to fiscal years beginning on or after January 1, 2011.
    TimberWest will adopt IFRS according to requirements outlined by the
AcSB, and is in the process of preparing for the adoption of IFRS, on January
1, 2011.

    
    ------------------------------------
    (5) Total debt and the debt-to-total capitalization ratio are measures
        that do not have a standardized meaning prescribed by GAAP and may
        not be comparable to similar measures presented by other companies.
        As the Company's Series A Subordinate Notes trade only as part of the
        Company's equity instrument, the Stapled Unit, they are not included
        in the Company's definition of debt. Management believes that the
        presentation of these measures will enhance an investor's
        understanding of the Company's financial resources and capital
        structure.
    

    Forward Looking Statements

    The statements which are not historical facts contained in this report
are forward-looking statements that involve risks and uncertainties.
TimberWest's actual results could differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, general
economic conditions, variations in TimberWest's product prices and changes in
commodity prices generally, changes in market conditions, variations in
harvest levels, changes in log transportation costs, actions of competitors,
interest rate and foreign currency fluctuations, regulatory, harvesting fee
and trade policy changes and other actions by governmental authorities
including real estate zoning approvals, the ability to implement business
strategies and pursue business opportunities, labour relations, weather
conditions, forest fires, insect infestation, disease and other natural
phenomena and other risks and uncertainties described in TimberWest's public
filings with securities regulatory authorities.

    
                                   Notice

    The accompanying unaudited interim consolidated financial statements of
TimberWest Forest Corp. (the "Company") have not been reviewed by the
Company's auditors.


    Consolidated Statements of Operations and Comprehensive Income (Loss)

    (in millions of dollars)         Three months ended   Twelve months ended
    Unaudited                            December 31           December 31
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------

    Sales                          $   35.9   $   96.5   $  163.7   $  318.4

    Operating costs and expenses:
      Cost of sales                    40.2       71.3      161.6      239.4
      Selling, administrative and
       other                            3.2        3.6       12.5       16.1
      Depreciation, depletion and
       amortization                     1.1        1.0        4.5        5.4
    -------------------------------------------------------------------------
                                       44.5       75.9      178.6      260.9
    -------------------------------------------------------------------------
    Operating earnings (loss)
     from continuing operations        (8.6)      20.6      (14.9)      57.5
    Interest expense:
      Series A Subordinate Notes
       owned by unitholders            17.8       21.0       80.8       83.7
      Long-term debt                    1.5        2.5        7.6        3.7
      Short-term debt                   1.1        1.0        2.6       11.2
    -------------------------------------------------------------------------
                                       20.4       24.5       91.0       98.6
    Amortization of deferred
     financing costs                      -        0.1        0.3        0.9
    Other expense (income)                -       (0.1)       0.2       (6.5)
    Gain on modification of
     Series A Subordinate Notes      (461.6)         -     (461.6)         -
    -------------------------------------------------------------------------
                                     (441.2)      24.5     (370.1)      93.0
    -------------------------------------------------------------------------
    Earnings (loss) before income
     taxes from continuing
     operations                       432.6       (3.9)     355.2      (35.5)
    Income tax expense (recovery)
     (note 4)                         120.3      (18.7)     114.5      (22.2)
    -------------------------------------------------------------------------
    Net earnings (loss) and
     comprehensive income (loss)
     from continuing operations       312.3       14.8      240.7      (13.3)
    Net earnings (loss) and
     comprehensive income (loss)
     from discontinued operations       2.3      (14.9)      (5.4)     (18.5)
    -------------------------------------------------------------------------
    Net earnings (loss) and
     comprehensive income (loss)   $  314.6   $   (0.1)  $  235.3   $  (31.8)
    -------------------------------------------------------------------------
    Basic and diluted earnings
     (loss) from continuing
     operations per common share
     (note 5)                      $   4.02   $   0.19   $   3.10   $  (0.17)
    Basic and diluted earnings
     (loss) from discontinued
     operations per common share
     (note 5)                      $   0.03   $  (0.19)  $  (0.07)  $  (0.24)
    Basic and diluted earnings
     (loss) per common share
     (note 5)                      $   4.05   $  (0.00)  $   3.03   $  (0.41)
    -------------------------------------------------------------------------


    Consolidated Statements of Retained Earnings (Deficit)

    (in millions of dollars)         Three months ended   Twelve months ended
    Unaudited                            December 31           December 31
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    Retained earnings (deficit),
     beginning of period, as
     previously reported           $  (63.8)  $   18.4   $   18.3   $   50.1

    Adoption of new accounting
     policy for inventories
     (note 2(a))                          -          -       (2.8)         -
    -------------------------------------------------------------------------
    Retained earnings, beginning
     of period, as adjusted           (63.8)      18.4       15.5       50.1
    -------------------------------------------------------------------------
    Net earnings (loss) and
     comprehensive income (loss)
     for the period                   314.6       (0.1)     235.3      (31.8)
    -------------------------------------------------------------------------
    Retained earnings (deficit),
     end of period                 $  250.8   $   18.3   $  250.8   $   18.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to unaudited interim consolidated financial
statements.


    Consolidated Balance Sheets
    (in millions of dollars)               As at                 As at
                                     December 31, 2008     December 31, 2007
                                         Unaudited
    -------------------------------------------------------------------------

    Assets
      Current assets:
        Cash                                  $   30.8              $    1.2
        Accounts receivable                        4.1                   4.9
        Inventories (note 2(a) and 6)             29.1                  32.9
        Prepaid expenses and other
         current assets                            3.7                   6.1
        Future income taxes                        3.3                   2.1
        Discontinued operations                    0.1                  17.2
    -------------------------------------------------------------------------
                                                  71.1                  64.4
      Property, plant and equipment,
       net (note 7)                            1,222.0               1,230.0
      Other assets (note 8)                        7.1                   2.0
    -------------------------------------------------------------------------
                                              $1,300.2              $1,296.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Unitholders' Equity
      Current liabilities:
        Term credit facilities                $  108.3              $      -
        Accounts payable and accrued
         liabilities                              23.9                  15.1
        Distribution payable                         -                  21.0
        Discontinued operations                    1.5                   4.3
    -------------------------------------------------------------------------
                                                 133.7                  40.4
        Revolving credit facilities              189.8                 187.5
        Long-term silviculture liability           3.2                   3.2
        Employee future benefits (note 10)        36.7                  37.2
        Deferred distribution payable
         (note 11)                                17.8                     -
        Future income taxes                      234.9                 119.2
    -------------------------------------------------------------------------
                                                 616.1                 387.5
        Series A Subordinate Notes
         owned by unitholders (note 12)          240.4                 698.1
    -------------------------------------------------------------------------
                                                 856.5               1,085.6
    -------------------------------------------------------------------------

        Unitholders' equity:
          Share capital, consisting of
           common and preferred shares
           (note 12)                             191.0                 191.0
          Contributed surplus                      1.9                   1.5
          Retained earnings                      250.8                  18.3
    -------------------------------------------------------------------------
                                                 443.7                 210.8
    -------------------------------------------------------------------------
                                              $1,300.2              $1,296.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to unaudited interim consolidated financial
statements.


    Consolidated Statements of Cash Flows

    (in millions of dollars)         Three months ended   Twelve months ended
    Unaudited                            December 31           December 31
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating activities:
      Net earnings (loss) from
       continuing operations       $  312.3   $   14.8   $  240.7   $  (13.3)
      Items not involving cash:
        Depreciation, depletion
         and amortization               1.1        1.1        4.8        6.3
        Gain on sale of property,
         plant and equipment           (0.3)     (22.3)      (5.5)     (28.5)
        Future income tax expense
         (recovery)                   120.3      (18.7)     114.5      (22.1)
        Gain on modification of
         Series A Subordinate Note   (461.6)         -     (461.6)         -
        Other non-cash items           (2.4)      (3.1)      (1.0)      (1.8)
    -------------------------------------------------------------------------
                                      (30.6)     (28.2)    (108.1)     (59.4)
      Changes in non-cash working
       capital:
        Accounts receivable            (0.5)       3.8        0.8        1.8
        Inventories                    (5.2)       3.7        1.8        7.4
        Prepaid expenses and other
         working capital                1.5        4.4        2.4       (1.0)
        Accounts payable and
         accrued liabilities            4.4       (5.8)       8.7      (17.5)
    -------------------------------------------------------------------------
                                        0.2        6.1       13.7       (9.3)
    -------------------------------------------------------------------------
                                      (30.4)     (22.1)     (94.4)     (68.7)
    -------------------------------------------------------------------------
    Financing activities:
      Issuance of Stapled Units
       on exercise of options:
        Series A Subordinate Notes        -        0.1        0.1        1.1
        Share capital                     -        0.1          -        0.6
    -------------------------------------------------------------------------
                                          -        0.2        0.1        1.7
      Revolving credit facilities      62.8      154.5        2.3      187.5
      Term credit facilities              -          -      108.3          -
      Financing costs                  (2.0)         -       (2.0)         -
      Debentures                          -     (195.0)         -     (195.0)
    -------------------------------------------------------------------------
                                       60.8      (40.3)     108.7       (5.8)
    -------------------------------------------------------------------------
    Investing activities:
      Proceeds from sale of
       property, plant and
       equipment                        0.8       65.1       11.5       71.9
      Additions to property, plant
       and equipment                   (0.4)      (1.2)      (2.1)      (3.4)
        Other assets                   (0.1)      (0.1)         -       (0.6)
    -------------------------------------------------------------------------
                                        0.3       63.8        9.4       67.9
    -------------------------------------------------------------------------
    Cash provided by (used in)
     continuing operations             30.7        1.4       23.7       (6.6)
    Cash provided by (used in)
     discontinued operations           (0.8)      (1.2)       5.9       (1.5)
    Increase (decrease) in cash
     and cash equivalents              29.9        0.2       29.6       (8.1)
    Cash and cash equivalents,
     beginning of period                0.9        1.0        1.2        9.3
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period                 $   30.8   $    1.2   $   30.8   $    1.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Supplemental information:
      Interest on Series A
       Subordinate Notes paid
       to unitholders              $   21.0   $   20.9   $   84.0   $   83.6
      Other interest paid          $    2.2   $   10.7   $    9.0   $   18.8

    See accompanying notes to unaudited interim consolidated financial
statements.



    Notes to Unaudited Interim Consolidated Financial Statements

    For the three and twelve months ended December 31, 2008 and 2007

    Financial figures presented in the tables that follow are in millions of
    dollars, except per common share amounts.


    1.  Significant Accounting Policies

        The accompanying unaudited interim consolidated financial statements
        include the accounts of TimberWest Forest Corp. and its subsidiaries
        ("the Company"), have been prepared in accordance with Canadian
        generally accepted accounting principles and are expressed in
        Canadian dollars. Not all disclosures required by Canadian generally
        accepted accounting principles ("GAAP") for annual financial
        statements are presented and, accordingly, these interim consolidated
        financial statements should be read in conjunction with the Company's
        most recent annual consolidated financial statements. These interim
        consolidated financial statements follow the same accounting policies
        and methods of application used in the Company's audited annual
        consolidated financial statements of December 31, 2007, except for
        the adoption of new accounting policies as described in note 2.

    2.  Adoption of New Accounting Policies

        (a) Inventories, Section 3031

            In June 2007, the CICA issued Section 3031, Inventories, that
            supersedes Section 3030 and applies to interim and annual periods
            beginning on or after January 1, 2008. This section establishes
            increased guidance on the measurement of inventory and enhances
            disclosure requirements. The changes in measurement requirements
            include measuring inventories at the lower of cost and net
            realizable value, increased guidelines on the grouping of
            inventories including requirement for the Company to use a
            consistent cost formula for inventory of a similar nature and
            use, the allocation of overhead based on normal capacity, the use
            of specific cost method for inventories that are not ordinarily
            interchangeable or goods and services produced for specific
            purposes, and the reversal of previous write-downs to net
            realizable value when the value of inventories increase
            subsequent to the write-downs.

            Prior to January 1, 2008, TimberWest accounted for log and lumber
            inventories other than supplies at the lower of average cost and
            net realizable value on an aggregate basis for each of logs and
            for lumber. Supplies were recorded at the lower of cost and
            replacement value.

            TimberWest adopted Section 3031 on January 1, 2008 on a
            prospective basis and prior periods are not restated.
            Accordingly, inventories other than supplies are recorded at the
            lower of average cost and net realizable value on an item-by-item
            basis defined as end-use-sorts for logs and grade levels for
            lumber. The opening log inventory and opening retained earnings
            as at January 1, 2008 have been written down by $2.0 million.

            The opening lumber inventory and opening retained earnings as at
            January 1, 2008 have been written down by $0.8 million.

            Supplies are recorded at the lower of cost and replacement value
            which approximates net realizable value.

        (b) Financial Instruments - Disclosures and Presentation, Sections
            3862 and 3863

            The CICA issued Section 3862 on disclosures, and Section 3863 on
            presentation. The two new Sections replace Section 3861, and set
            out additional financial instruments disclosure requirements
            while carrying forward unchanged its presentation requirements.
            These sections are applicable to interim and annual financial
            statements relating to fiscal years beginning on or after October
            1, 2007.

            TimberWest adopted Section 3862 and 3863 effective January 1,
            2008 and provides qualitative and quantitative disclosures
            related to the nature and extent of risks arising from financial
            instruments (see note 14).

        (c) Capital Disclosures, Section 1535

            The Company adopted Section 1535, Capital Disclosures, effective
            January 1, 2008. This section requires additional disclosures
            relating to capital management strategies to enable users of its
            financial statements to evaluate the Company's objectives,
            policies and processes for managing capital.

        (d) Assessing Going Concern, Section 1400

            In June 2007, Section 1400 was amended to include requirements
            for management to assess and disclose an entity's ability to
            continue as a going concern. This section applies to interim and
            annual periods beginning on or after January 1, 2008.

            The current economic environment for the North American forest
            products industry is challenging with substantially lower than
            average prices, a strong Canadian dollar relative to the US
            dollar and high input costs due to low production. TimberWest
            responded to these conditions by reducing logging production,
            permanently closing its last sawmill operation, reducing overhead
            costs, and restructuring labour and contractor agreements. The
            Company has a working capital deficit of $62.6 million primarily
            due to the current portion of term credit facilities of
            $108.3 million.

            The Company has forecasted its financial results and cash flows
            for 2009 using its best estimates of market and operating
            conditions. These forecasts consider the modification of the
            interest rate on the Series A Subordinate Notes, with interest
            deferred for a period of time (note 12), and the refinancing
            package (note 16) which includes credit amendments to the bank
            facilities, a $100 million private placement with British
            Columbia Investment Management Corporation of 9% convertible
            debentures, and a $50 million 9% convertible debenture rights
            offering that was completed on February 11, 2009. Based on these
            forecasts the Company believes there is sufficient financial
            flexibility to continue as a going concern in a protracted
            downturn. The Company expects to meet its future cash
            requirements through a combination of cash generated from its
            logging operations and real estate sales, existing cash balances
            and credit facilities, and the refinancing arrangements
            completed. However, any significant strengthening of the Canadian
            dollar, decline in U.S. housing or other markets driving reduced
            demand or other unexpected adverse developments could adversely
            impact the Company's liquidity in the short term.

            The accompanying consolidated financial statements have been
            prepared assuming the Company will continue as a going concern,
            which contemplates the realization of assets and the satisfaction
            of liabilities in the normal course of business. The consolidated
            financial statements do not include any adjustments relating to
            the recoverability and classification of recorded asset amounts
            and the amount and classification of liabilities that might be
            necessary should the Company be unable to continue as a going
            concern.

            The Company's continuation as a going concern is ultimately
            dependent upon its future financial performance, which will be
            affected by general economic, competitive and other factors, many
            of which are beyond the Company's control.

    3.  Discontinued Operations

        On May 9, 2008, the Elk Falls sawmill in Campbell River, B.C. was
        permanently closed. This sawmill closure included the associated
        shipping operations at Stuart Channel Wharves located in Crofton,
        B.C. Subsequent to the closure, TimberWest is disposing of
        substantially all of the assets of the sawmill and dismantling the
        sawmill and planer mill. Ongoing costs such as property taxes
        continue to be expensed as incurred. The Company is assessing
        alternatives for the former sawmill site.

    -------------------------------------------------------------------------
                              Three months ended         Twelve months ended
                                 December 31                 December 31
                              2008          2007          2008          2007
    -------------------------------------------------------------------------
    Sales             $          -  $       23.1  $       42.4  $       90.6
    Earnings (loss)
     before income
     taxes            $        2.3  $      (19.9) $       (5.4) $      (23.5)
    Net earnings
     (loss)           $        2.3  $      (14.9) $       (5.4) $      (18.5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

        Sales from the logging operations to the sawmill operations have been
        recorded at fair value in accordance with the Company's internal
        policies. Inter-divisional sales for the three and twelve months
        ended December 31, 2008 were nil and $13.0 million (2007 -
        $7.3 million and $43.1 million). Sales revenues for 2008 include
        proceeds from the disposal of the operating assets of the sawmill.
        The earnings recorded in the fourth quarter related solely to a non
        cash actuarial gain resulting from the partial termination of pension
        plans related to former Elk Falls employees.

    -------------------------------------------------------------------------
                              Three months ended         Twelve months ended
                                 December 31                 December 31
                              2008          2007          2008          2007
    -------------------------------------------------------------------------
    Cash flow from
     operating
     activities       $       (0.8) $       (1.2) $        5.4  $       (1.5)
    Cash flow from
     financing activities        -             -             -             -
    Cash flow from
     investing activities        -             -           0.5             -
    -------------------------------------------------------------------------
    Cash provided
     by operations    $       (0.8) $       (1.2) $        5.9  $       (1.5)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    4.  Income Taxes

    -------------------------------------------------------------------------
                              Three months ended         Twelve months ended
                                 December 31                 December 31
                              2008          2007          2008          2007
    -------------------------------------------------------------------------
    Current income
     tax              $          -  $          -  $          -  $       (0.1)
    Future income tax
     expense (recovery)      120.3         (18.7)        114.5         (22.1)
    -------------------------------------------------------------------------
                      $      120.3  $      (18.7) $      114.5  $      (22.2)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

        The Company's future income tax liability increased for the fourth
        quarter of 2008, as a result of the gain on modification of the
        Series A Subordinate Notes which resulted in a future income tax
        expense of $119.6 million.

        In the first quarter of 2008, British Columbia provincial tax
        legislation was substantively enacted, resulting in the reduction of
        the provincial corporate tax rate to 11% as of July 1, 2008. This tax
        rate change resulted in a future income tax recovery of $4.3 million
        and is included in the future income tax expense for the 12 months
        ended December 31, 2008.

        The $22.2 million income tax recovery from continuing operations and
        the $5.0 million recovery from discontinued operations for 2007
        included a $16.9 million recovery to reflect the effect of changes in
        Canadian federal income tax rates that were substantively enacted
        during 2007.

    5.  Earnings (loss) per Share

    -------------------------------------------------------------------------
                              Three months ended         Twelve months ended
                                 December 31                 December 31
                              2008          2007          2008          2007
    -------------------------------------------------------------------------
    Net earnings (loss)
     from continuing
     operations       $      312.3  $       14.8  $      240.7  $      (13.3)
    -------------------------------------------------------------------------
    Net earnings (loss)      314.6          (0.1)        235.3         (31.8)
    -------------------------------------------------------------------------

    Basic weighted
     average number of
     common shares      77,765,440    77,744,554    77,759,137    77,720,298
    Incremental common
     shares from
     potential exercise
     of options              2,993        79,755        23,142       127,585
    -------------------------------------------------------------------------
    Diluted weighted
     average number of
     common shares      77,768,433    77,824,309    77,782,279    77,847,883
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted
     net earnings (loss)
     from continuing
     operations per
     common share     $       4.02  $       0.19  $       3.10  $      (0.17)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic and diluted
     net earnings
     (loss) from
     discontinued
     operations per
     common share     $       0.03  $      (0.19) $      (0.07) $      (0.24)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic and diluted
     net earnings (loss)
     per common share $       4.05  $      (0.00) $       3.03  $      (0.41)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    6.  Inventories

    -------------------------------------------------------------------------
                                           As at                       As at
                                     December 31,                December 31,
                                            2008                        2007
    -------------------------------------------------------------------------
    Logs                            $       29.1                $       32.9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

        For the three months ended December 31, 2008, no write down of log
        inventory was expensed to cost of sales for the period. For the
        twelve months ended December 31, 2008, log inventories have been
        written down by $1.2 million, which has been expensed to cost of
        sales for the period.

    7.  Property, Plant and Equipment

        The Company reviews long-lived assets for impairment when events or
        changes in circumstances indicate that the carrying value of these
        assets may not be recoverable. The Company tests for impairment using
        a two-step methodology:

        (i)   Determine whether the projected undiscounted future cash flows
              from operations exceed the net carrying amount of the assets as
              of the assessment date, and

        (ii)  If assets are determined to be impaired in step (i), then such
              impaired assets are written down to their fair value,
              determined principally by using discounted future cash flows
              expected from their use and eventual disposition.

        At year end, as a result of the continued decline in forest product
        prices and the negative outlook for forest products in the short
        term, the Company conducted step (i) impairment tests on its long
        lived assets. Estimates of future cash flows used to test the
        recoverability of long-lived assets included key assumptions related
        to forecast prices, growth and yield expectations, production levels,
        production costs, market supply and demand, currency fluctuations and
        capital spending. The assumptions are derived from information
        generated internally and other external published reports and
        forecasts prepared by various industry experts. Product sales prices
        were based on management's best estimates incorporating independent
        market information as well as analysis of historical data, trends and
        cycles. The Company is estimating an improvement in pricing in the
        future from the current depressed prices.

        Based on these assumptions, the Company's projected undiscounted cash
        flows from operations exceed the net book value of the Company's long
        lived assets by a considerable margin. As a result, the Company's is
        not required to perform the second step of comparing the net book
        value of the long lived assets to fair value.

        Estimates of future cash flows and fair value require judgments,
        assumptions and estimates and may change over time. Due to the
        variables associated with judgments and assumptions used in these
        tests, the precision and accuracy of estimates of impairment charges
        are subject to significant uncertainties and may change significantly
        as additional information becomes known. Long-lived assets
        represented approximately 94% of total assets as at December 31,
        2008. If future developments were to differ adversely from
        management's best estimate of key assumptions and associated cash
        flows, the Company could potentially experience future material
        impairment charges.

        Property, plant and equipment at December 31, 2008, includes private
        timberlands with a carrying value of $1,170.9 million. This amount
        includes a valuation increase adjustment of $375.9 million recorded
        resulting from the adoption of Section 3465 - Income Taxes of the
        CICA Handbook, which was mandatory for fiscal years ending on or
        after January 1, 2000.

    8.  Other Assets

        ---------------------------------------------------------------------
                                                         As at         As at
                                                   December 31,  December 31,
                                                          2008          2007
        ---------------------------------------------------------------------
        Deferred financing costs                  $        1.4  $        0.5
        Receivable on sale of property, plant and
         equipment                                           -           0.5
        Financial instruments                              4.7             -
        Other                                              1.0           1.0
        ---------------------------------------------------------------------
                                                  $        7.1  $        2.0
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Company has the option to defer the distributions payable to its
        unitholders for a period of up to 18 months in length while the
        distribution rate is set at 2% (note 12). This option constitutes an
        embedded derivative and is measured at its fair value. As the Company
        has elected to defer distributions for the immediate future, the
        value to the Company of this option has increased to $4.1 million.

        The embedded derivative arising from the option to extend the
        maturity of the Series A Subordinate Notes for a further 10-year
        period from 2038 to 2048 is measured at its fair value of
        $0.6 million.

    9.  Credit Facilities

        As at December 31, 2008, the Company's credit facilities were
        comprised of:

        (a) $216.7 million Tranche A unsecured long-term revolving facility:

            The Company has an unsecured long-term revolving facility of
            $216.7 million. Under this facility, funds are available to the
            Company in both Canadian and US dollars by way of adjusted prime
            rate-based loans, bankers' acceptances, LIBOR plus 0.9% loans and
            letters of credit or guarantee. This facility has been
            underwritten by a syndicate of banks and is due on September 24,
            2012. As at December 31, 2008, the Company had borrowings of
            $189.8 million (2007 - $187.5 million) on this facility. In
            addition, the Company had issued letters of credit or guarantee
            in the amount of $16.8 million (2007 - $1.4 million, with an
            additional $16.1 million issued by a Canadian Chartered bank
            cancelled in April 2008). The average effective interest rate on
            this facility for the period it was outstanding during 2008 was
            4.46% (2007 - 5.56%).

        (b) $108.3 million Tranche B unsecured term facility:

            The Company has an unsecured term facility of $108.3 million.
            Under this facility, funds are available to the Company in
            Canadian dollars by way of an adjusted prime rate-based term
            loan. This facility has been underwritten by a syndicate of banks
            and is due on September 24, 2009. As at December 31, 2008, the
            Company had borrowings of $108.3 million (2007 - nil) on this
            facility. The average effective interest rate on this facility
            for the period it was outstanding during 2008 was 4.21% (2007 -
            5.69%).

            Subsequent to year end, on February 11, 2009, the Company
            completed arrangements of a refinancing package that will give
            the Company considerable flexibility in weathering the current
            market downturn. See note 16.

    10. Employee Benefits

        ---------------------------------------------------------------------
                                                         As at         As at
                                                   December 31,  December 31,
                                                          2008          2007
        ---------------------------------------------------------------------
        Pension benefits                          $        9.4  $        8.8
        Non-pension benefits                              27.3          28.4
        ---------------------------------------------------------------------
                                                  $       36.7  $       37.2
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Company, through its subsidiaries, maintains pension plans that
        include defined benefit and defined contribution segments available
        to all salaried employees and a small number of hourly retirees not
        covered by union pension plans. For the three months ended December
        31, 2008, the Company recorded an expense of $0.8 million for pension
        benefit costs (2007 - $0.7 million) and made cash payments of
        $0.3 million to fund current service costs (2007 - $0.4 million). For
        the twelve months ended December 31, 2008, the Company recorded an
        expense of $2.3 million for pension benefit costs (2007 -
        $2.2 million) and made cash payments of $1.6 million to fund current
        service costs (2007 - $1.8 million).

        The Company also provides non-pension benefits consisting of group
        life insurance and medical benefits to eligible retired employees,
        which the Company funds on an as-incurred basis. For the three months
        ended December 31, 2008, the Company recorded a net gain of
        $1.6 million for non-pension benefit costs (2007 - $3.4 million gain)
        and made cash payments of $0.5 million to fund current benefit costs
        (2007 - $0.5 million). The Company recorded a non cash gain of $2.3
        related to the Elk Falls sawmill and an expense of $3.2 related to
        the rest of the Company. For the twelve months ended December 31,
        2008, the Company recorded an expense of $0.9 million for non-pension
        benefit costs (2007 - $0.3 million net gain) and made cash payments
        of $2.0 million to fund current benefit costs (2007 - $2.1 million).

    11. Deferred distribution payable

        At December 31, 2008 the Company had an unpaid distribution
        obligation payable to its unitholders of $17.8 million. The Company
        can elect to defer payment of this obligation for up to 27 months. As
        a result of this deferral, the deferred distribution payable is
        accounted for at its fair value $17.8 million ($21.0 million face
        value). The obligation will be revalued at each reporting date.

    12. Stapled Units

    -------------------------------------------------------------------------
                                            Stapled Unit Components
                                    -----------------------------------------
                                                   Share Capital
                                                  (consisting of
                                      Series A      common and
                                     Subordinate    preferred
                           Number       Notes         shares)       Total
    -------------------------------------------------------------------------
    Twelve months ended
     December 31, 2007:

    Balance, December
     31, 2006           77,635,254        $697.0         190.4         887.4

    Issuance of Stapled
     Units on exercise
     of options            114,889           1.1           0.6           1.7
    -------------------------------------------------------------------------
    Balance, December
     31, 2007           77,750,143         698.1         191.0         889.1
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Twelve months ended
     December 31, 2008:

    Balance, December
     31, 2007           77,750,143         698.1         191.0         889.1

    Issuance of Stapled
     Units on exercise
     of options             15,297           0.1             -           0.1
    Modification of
     Series A
     Subordinate Notes           -        (461.6)            -        (461.6)
    Transaction costs            -          (0.9)            -          (0.9)
    Change in fair
     value of option
     to defer interest
     payment                     -           4.1             -           4.1
    Change in fair value
     of option to extend
     maturity                    -           0.6             -           0.6
    -------------------------------------------------------------------------
    Balance, December
     31, 2008           77,765,440         240.4         191.0         431.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

        The Company issues equity by way of Stapled Units, each Stapled Unit
        consisting of approximately $8.98 face amount of Series A Subordinate
        Notes, 100 preferred shares and one common share. The securities
        comprising a Stapled Unit trade together as Stapled Units and cannot
        be transferred except with each other as part of a Stapled Unit until
        the date of maturity of the Series A Subordinate Notes or the payment
        of the principal amount of the Series A Subordinate Notes following
        an event of default and expiration of a remedies blockage period.

        On December 19, 2008 the holders of the Stapled Units approved a
        series of note amendments that came into effect on December 31, 2008.
        The note amendments are as follows: (i) the rate of interest on the
        Series A Subordinate Notes payable was changed from a fixed 12% per
        annum to a variable rate between 2% and 12% per annum to be set from
        time to time based on the Company's distributable cash; (ii) the
        period over which the Company can defer payments of interest on the
        notes was reduced from 27 months to 18 months, and the Company may
        only exercise this deferral right in respect of interest payments for
        periods where the applicable interest rate on the subordinate notes
        is 2%; and (iii) replaces the Company's right to elect to pay
        interest on the subordinate notes by delivering common shares or
        preferred shares of the Company with the right to elect to pay
        interest on the notes by delivering Stapled Units.

        Each Series A Subordinate Note has been issued with a face amount of
        $8.978806569, entitling the holder to an interest payment per unit of
        between $0.179576131 and $1.077456788 per annum (2-12%). The Series A
        Subordinate Notes are unsecured and subordinate to all credit
        facilities (see note 9) and debentures. The principal amount of the
        Series A Subordinate Notes plus accrued and unpaid interest thereon
        are due on August 31, 2038, unless such date is extended by the
        Company at the time of the issuance of additional subordinate notes
        to a date not later than the earlier of: (i) the date of maturity of
        such additional subordinate notes; and (ii) August 31, 2048, and will
        be payable by cash or, at the option of the Company, by delivery of
        common shares to the Subordinate Note Trustee for the benefit of the
        holders of the subordinate notes.

        In accordance with Canadian GAAP, the note amendments have the effect
        of extinguishing the previous debt associated with the Series A
        Subordinate Notes and triggered a revaluation of debt on the
        extinguishment date (December 31, 2008). As a result of this
        revaluation the Company has recorded a 'Gain on modification of
        Series A Subordinate Notes' of $461.6 million on the Consolidated
        Statement of Operation and Comprehensive Income (loss) with a
        corresponding write-down to the Series A Subordinate Notes. The
        write-down has no tax consequence to the holders of the notes.

        The revalued Series A Subordinate Notes have been classified by the
        Company under Canadian GAAP as "held-to-maturity" under CICA Section
        3855 'Financial Instruments.' As such, the balance of the Series A
        Subordinate Notes will be accreted using the effective interest rate
        method to face value of $698.2 million to maturity. No accretion was
        recognized in 2008.

        Transaction costs of $0.9 million have been deferred and netted
        against the Series A Subordinate Notes and will be amortized using
        the effective rate method over the life of the Series A Subordinate
        Notes until they reach maturity.

        The option to defer interest distributions to the holders of the
        Stapled Units for up to 18 months is an embedded derivative under
        GAAP and is revalued at each reporting date. As at December 31, 2008
        the fair value of this option is $4.1 million.

        The option to extend the maturity date on the Series A Subordinate
        Notes from August 31, 2038 to August 31, 2048 is an embedded
        derivative under GAAP and is revalued at each reporting date. As at
        December 31, 2008 the fair value of this option is $0.6 million.

    13. Stock-based Compensation Plans

        Under the Company's Stapled Unit Option Plan, the Company may grant
        options for the purchase of Stapled Units to directors, officers or
        employees who are in active service or employment of the Company or
        of any of its subsidiaries. During the quarter ended December 31,
        2008, there were 261,844 Stapled Unit options granted at an average
        exercise price of $5.45 (2007 - 300 Stapled Unit options were granted
        at an average exercise price of $14.71). For the twelve months ended
        December 31, 2008, 261,844 Stapled Unit options were granted at an
        average exercise price of $5.45 (2007 - 339,670 Stapled Unit options
        were granted at an average exercise price of $16.46).

        The Company has applied the fair value method of accounting for
        Stapled Unit option grants awarded on or after January 1, 2003. The
        fair value of each option granted was estimated on the date of grant
        using the Black-Scholes option pricing model using the following
        weighted average assumptions:

        ---------------------------------------------------------------------
                                                          2008          2007
        ---------------------------------------------------------------------
        Risk-free interest rate                           2.7%          4.1%
        Expected life (years)                              5.0           5.0
        Expected volatility                              29.2%         21.6%
        Dividend yield                                    3.7%          6.5%
        Number of options granted                      261,844       339,670
        Weighted average fair value of options granted   $0.81         $1.85
        ---------------------------------------------------------------------

        The compensation cost for the 261,844 Stapled Unit options granted
        between January 1, 2008 and December 31, 2008 is $212,000 (2007 -
        339,670 Stapled Unit options were granted with a compensation cost of
        $628,000). The compensation cost of Stapled Unit option awards is
        amortized against earnings over the three-year vesting period of the
        underlying options and an expense of $148,000 and $302,000 has been
        recognized in net earnings for the three and twelve months ended
        December 31, 2008 (2007 - $92,000 and $551,000, respectively) with a
        corresponding credit to contributed surplus.

        Under the Company's Distribution Equivalent Plan, the Company awards
        Stapled Unit option holders an amount equal to actual distributions
        paid on the Company's Stapled Units. Awards granted under the
        Distribution Equivalent Plan vest under the same terms that apply to
        the corresponding options and can only be exercised at the time of
        exercise of the corresponding options. The Company applies the
        principles of the fair value-based method of accounting for stock-
        based compensation to awards granted under this plan.

        Awards are accrued on a basis equal to actual distributions paid on
        the Company's issued and outstanding Stapled Units and are charged to
        earnings as the underlying Stapled Unit options vest. For the three
        months ended December 31, 2008, $0.3 million has been accrued for
        awards granted under this plan (2007 - $0.3 million) and $0.3 million
        has been amortized against earnings for the quarter (2007 -
        $0.3 million). For the twelve months ended December 31, 2008,
        $1.1 million has been accrued for awards granted under the plan (2007
        - $1.1 million) and $1.2 million has been amortized against earnings
        for this period (2007 - $1.2 million).

        During the three months ended December 31, 2008, no Stapled Unit
        options were exercised, 26,000 Stapled Unit options with an average
        exercise price of $10.91 were cancelled and 107,938 Stapled Unit
        options with an average exercise price of $11.90 expired (2007 -
        11,910 Stapled Unit options with an average exercise price of $12.04
        were exercised and no Stapled Unit options were cancelled or
        expired). For the twelve months ended December 31, 2008, a total of
        15,297 Stapled Unit options with an average exercise price of $12.15
        were exercised, 35,678 Stapled Unit options with an average exercise
        price of $12.28 were cancelled and 122,698 Stapled Unit options with
        an average exercise price of $12.30 expired (2007 - 114,889 Stapled
        Unit options with an average exercise price of $13.55 were exercised
        and 8,160 Stapled Unit options with an average exercise price of
        $15.41 were cancelled).

    14. Financial Instruments

        (a) Accounting for financial instruments

            TimberWest has classified its cash and cash equivalents as held-
            for-trading and recorded them at fair value. Accounts receivable,
            and receivables on the sale of property, plant and equipment, are
            classified as loans and receivables and measured at amortized
            cost. The Company's drawings on available credit facilities,
            accounts payable and accrued liabilities, distribution payable,
            including interest payable, are classified as other liabilities,
            all of which are measured at amortized cost.

            The carrying values of accounts receivable, accounts payable and
            accrued liabilities and distribution payable approximate their
            fair values due to the short term to maturity of these
            instruments.

            The carrying values of receivables on the sale of property, plant
            and equipment are estimated to approximate their fair values due
            to their short term to maturity.

            The carrying values of drawings on available credit facilities
            approximate their fair values, as they bear floating interest
            rates that approximate market rates and have a short term to
            maturity.

            The carrying value of accrued liabilities for future silviculture
            costs approximate their fair value as determined based on the
            present value of future cash flows associated with these
            liabilities.

            The distribution payable of $21 million accrued at the end of
            2008 can be deferred for 27 months and as such has been fair
            valued at $17.8 million based on the present value of the future
            disbursement.

            On December 19, 2008 the holders of the Stapled Units approved a
            series of note amendments that came into effect on December 31,
            2008. These note amendments are further discussed in Note 12
            "Stapled Units." In accordance with GAAP, the note amendments
            have the effect of extinguishing the previous debt associated
            with the Series A Subordinate Notes and triggered a revaluation
            of debt on the extinguishment date (December 31, 2008). As a
            result of this revaluation the Company's Series A Subordinate
            Notes at December 31, 2008 had a carrying value of $240.4 million
            (2007 - $698.1 million).

            The revalued Series A Subordinate Notes have been classified by
            the Company under GAAP as "held-to-maturity" under CICA Section
            3855 'Financial Instruments.' As such, the balance of the Series
            A Subordinate Notes will be accreted using the effective interest
            method.

            The Series A Subordinate Notes are a component of the Company's
            Stapled Units, which include one common share, 100 preferred
            shares and approximately $8.98 face amount of the Series A
            Subordinate Notes. The Stapled Units are listed on the Toronto
            Stock Exchange. The embedded derivative arising from the option
            to extend the Series A Subordinate Notes for a further 10 year
            period from 2038 to 2048 is measured at fair value. The fair
            value of this option is determined by an independent financial
            firm. The embedded derivative arising from the option to defer
            the payment of distributions to unitholders for up to 18 months
            is measured at fair value.

        (b) Nature and extent of risks arising from financial instruments

            TimberWest is exposed to the following risks as a result of
            holding financial instruments: credit risk, market risk, and
            liquidity risk. The following is a description of the risks and
            how the Company manages its exposure to them.

            (i)   Credit risk:

                  Credit risk refers to the risk that a counterparty will
                  default on its contractual obligations resulting in
                  financial loss to the Company. The Company is exposed to
                  credit risk on accounts receivable from customers. To
                  mitigate and manage its credit risk, the Company regularly
                  reviews customer credit limits, monitors the financial
                  status of customers, and assesses the collectability of
                  accounts receivable. In certain offshore markets, the
                  Company requires bank letters of credit or letters of
                  assignment. The maximum exposure to credit risk as at
                  December 31, 2008 is the carrying value of the Company's
                  accounts receivable. As at December 31, 2008, substantially
                  all accounts receivable are current or outstanding for less
                  than 30 days.

            (ii)  Market risk:

                  Market risk refers to the risk of loss that may arise from
                  changes in market factors such as interest rates, and
                  foreign exchange rates.

                  Interest rate risk refers to the risk that the fair value
                  or future cash flows of a financial instrument will
                  fluctuate due to changes in market interest rates.

                  TimberWest has two credit facilities as at December 31,
                  2008: the first facility, Tranche A, is long-term financing
                  in the amount of $216.7 million, due on September 24, 2012;
                  the second facility, Tranche B, is short-term financing in
                  the amount of $108.3 million, due on September 24, 2009.
                  Under the Tranche A facility, funds are available to the
                  Company in both Canadian and US dollars by way of adjusted
                  prime rate-based loans, bankers' acceptances, loans and
                  letters of credit or guarantee. Under the Tranche B
                  facility, funds are available to the Company in Canadian
                  dollars by way of an adjusted prime rate-based term loan
                  due September 24, 2009. Subsequent to year end on February
                  11, 2009, the Company completed arrangements of a
                  refinancing package that will give the Company considerable
                  flexibility in weathering the current market downturn. See
                  note 16.

                  The Company normally enters into Bankers' Acceptance for
                  less than 30-day periods for the Tranche A credit facility
                  and could therefore be exposed to fluctuations in interest
                  rates at the Bankers' Acceptance expiration.

                  For the three months ended December 31, 2008, with other
                  variables unchanged, an interest rate change of 1% per
                  annum related to both of the credit facilities would affect
                  net earnings by approximately $0.7 million.

                  Foreign exchange risk refers to the risk that the fair
                  value or future cash flow of a financial instrument will
                  fluctuate because of changes in foreign exchange rate.

                  TimberWest sells a substantial volume of product outside of
                  Canada (49% of sales for the twelve months ended 2008), all
                  in US dollars. As such, the relative strength of the
                  Canadian dollar versus its US counterpart has an effect on
                  sales and earnings. Results can be adversely affected by a
                  strengthening Canadian dollar. The relative strength of the
                  Japanese yen, European euro, and the Russian ruble also
                  affect the Company's competitiveness in the markets where
                  it sells its products. TimberWest does not hedge its
                  foreign exchange risk.

                  Cash, accounts receivable, and accounts payable are
                  denominated in US and Canadian dollars. As at December 31,
                  2008, with other variables unchanged, the effect of a
                  $0.01 US change per Canadian dollar on cash, accounts
                  receivable, and accounts payable would be less than
                  $0.1 million.

            (iii) Liquidity risk:

                  Liquidity risk refers to the risk that TimberWest may be
                  unable to generate or obtain sufficient cash or cash
                  equivalents in a timely and cost-effective manner to meet
                  its commitments as they come due.

                  The Company manages liquidity risk by continuously
                  monitoring and reviewing both actual and forecasted cash
                  flows to maintain adequate cash and cash equivalent
                  balances.

                  The following table provides a summary of the contractual
                  undiscounted cash flow requirements for financial
                  liabilities as at December 31, 2008. This table details
                  payments due in each of the next five years and thereafter
                  for the Company's revolving credit facilities and
                  outstanding letters of credit:

    -------------------------------------------------------------------------
    (in millions
     of dollars)        2009    2010    2011    2012    2013   2014+   Total
    Reflected on the
     consolidated
     balance sheets:
      Credit
       facilities     $108.3  $    -  $    -  $189.8  $    -  $    -  $298.1
    -------------------------------------------------------------------------
    Not reflected on
     the consolidated
     balance sheets:
      Outstanding
       letters of
       credit           16.8       -       -       -       -       -    16.8
    -------------------------------------------------------------------------

                      $125.1  $    -  $    -  $189.8  $    -  $    -  $314.9
    -------------------------------------------------------------------------

                  Letters of credit are committed in perpetuity, renew
                  annually and the liability will diminish over time.

                  The Company has a working capital deficit of $62.6 million
                  due to the current portion of the term credit facility of
                  $108.3 million included in the table above.

    15. Capital Management

        TimberWest's objectives for managing capital are to safeguard its
        ability to continue as a going concern, to provide a sufficient
        return to its unitholders, and to meet external capital requirements
        on its debt and credit facilities.

        The Company manages its capital by monitoring its consolidated debt-
        to- total capitalization ratio. Debt is the total amount of
        borrowings on its revolving and term credit facilities on the balance
        sheet. Total capitalization is calculated as the sum of Series A
        Subordinate Notes, plus unitholders' equity which includes share
        capital, contributed surplus, and retained earnings. As the Company's
        Series A Subordinate Notes trade only as part of the Company's equity
        instrument, the Stapled Unit, they are not included in the Company's
        definition of debt.

        TimberWest's consolidated debt-total capitalization ratio as at
        December 31, 2008 was 30:70 as compared to 17:83 as at December 31,
        2007.

    16. Subsequent event

        Subsequent to year-end, on February 11, 2009, the Company announced
        the completion of a refinancing package that will give the Company
        considerable flexibility in weathering this downturn. TimberWest has
        raised $150 million by way of a 9% five-year convertible debenture
        issue and finalized a $250 million, three-year revolving loan
        agreement with a syndicate of banks. As previously reported, the
        Company did not expect to remain in compliance with its debt
        covenants under the loan agreement at the end of the 2008 calendar
        year. However, the lenders agreed to waive the covenant tests until
        this refinancing was complete.

        The $150 million of convertible debentures was raised through a $100
        million private placement with two wholly-owned subsidiaries of
        British Columbia Investment Management Corporation (the "bcIMC
        Investors") and through a $50 million rights offering to unitholders.
        These are five year debentures and are convertible into Stapled Units
        at $3.50. Upon conversion, the bcIMC Investors would own 23.7% of the
        currently issued and outstanding Stapled Units. The convertible
        debentures pay interest quarterly at 9% with the first interest
        payment due on April 15, 2009.

        The net proceeds of the rights offering and private placement are
        being used by the Company to permanently repay $75 million of
        indebtedness under its existing bank credit facilities, with the
        remainder being used to reduce indebtedness under the Company's
        revolving credit facilities. The new $250 million three-year
        revolving credit agreement has been filed on SEDAR and the key terms
        are summarized below:

           - Pricing is 600 bps over BA rates, or approximately 7% all in,

           - The facility is secured,

           - The financial covenants include a minimum EBITDA test, which is
             negative for 2009 to give the Company flexibility in what we see
             as a challenging year, and

           - The other financial covenants include a tangible net worth test
             and a loan to book and market value test.

        The 2008 costs related to this refinancing were $1.1 million and were
        deducted from distributable cash. Had this refinancing taken place in
        2008, the Company's senior debt would have approximated $117 million
        under the $250 million revolving credit facility.

    17. Comparative figures

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


    Supplemental Information  Three months ended         Twelve months ended
    Unaudited                    December 31                 December 31
                              2008          2007          2008          2007
    -------------------------------------------------------------------------
    Sales Revenue
     by Product
    (in millions of
     dollars)

      Log sales
        Domestic      $       14.8  $       17.2  $       68.5  $      122.1
        Export - Asia         17.1          11.8          68.0          82.4
        Export - US            3.0           1.4          10.9          41.9
    -------------------------------------------------------------------------
        Total log sales       34.9          30.4         147.4         246.4
      Real estate              0.3          65.3          11.8          67.1
      Other                    0.7           0.8           4.5           4.9
    -------------------------------------------------------------------------
                      $       35.9  $       96.5  $      163.7  $      318.4
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Sales Volume
      Logs
       (thousand m(3))
        Domestic             272.9         187.5       1,077.4       1,417.8
        Export - Asia        145.7         123.0         686.8         734.5
        Export - US           46.6          12.5         175.9         488.9
    -------------------------------------------------------------------------
                             465.2         323.0       1,940.1       2,641.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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

    Log Sales Mix
     (thousand m(3))
      Fir                    284.0         151.8       1,253.3       1,697.7
      Hembal                 131.5          99.7         468.1         573.8
      Cedar                   18.4          44.8         103.8         204.9
      Other                   31.3          26.7         114.9         164.8
    -------------------------------------------------------------------------
                             465.2         323.0       1,940.1       2,641.2
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Production Volume
      Logs
       (thousand m(3))
        Public tenures        35.1          75.9         265.4         452.4
        Private
         timberlands         414.3         212.4       1,569.1       2,226.6
    -------------------------------------------------------------------------
                             449.4         288.3       1,834.5       2,679.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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



    Discontinued Operations   Three months ended         Twelve months ended
    Unaudited                    December 31                 December 31
                              2008          2007          2008          2007
    -------------------------------------------------------------------------
    Sales Revenue by
     Product
    (in millions of
     dollars)
      Lumber, wood
       chips and
       other          $          -  $       23.1  $       42.4  $       90.6
    Sales Volume
      Lumber
       (million fbm)             -          34.4          55.6         125.3
    Production Volume
      Lumber
       (million fbm)             -          23.4          43.3         122.7
    -------------------------------------------------------------------------


    Earnings (Loss) Before
    Interest, Taxes,
    Depreciation and          Three months ended         Twelve months ended
    Amortization (EBITDA)(*):    December 31                 December 31
    (in millions of dollars)  2008          2007          2008          2007
    -------------------------------------------------------------------------

    Net earnings (loss)
     from continuing
     operations       $      312.3  $       14.8  $      240.7  $      (13.3)
    Add (deduct):
      Interest on
       Series A
       Subordinate
       Notes paid to
       unitholders            17.8          21.0          80.8          83.7
      Interest on
       long-term debt          1.5           2.5           7.6           3.7
      Interest on
       short-term debt         1.1           1.0           2.6          11.2
      Income tax
       recovery              120.3         (18.7)        114.5         (22.2)
      Depreciation,
       depletion and
       amortization            1.1           1.0           4.5           5.4
      Amortization of
       deferred
       financing costs           -           0.1           0.3           0.9

    Gain on modification
     of Series A
     Subordinate Notes      (461.6)            -        (461.6)            -
    -------------------------------------------------------------------------
    Earnings (loss) from
     continuing
     operations before
     Interest, Taxes,
     Depreciation and
     Amortization             (7.5)         21.7         (10.6)         69.4
    -------------------------------------------------------------------------
    Earnings (loss) from
     discontinued
     operations before
     Interest, Taxes,
     Depreciation and
     Amortization              2.3         (19.3)         (5.4)        (21.1)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Earnings (Loss)
     before Interest,
     Taxes, Depreciation
     and Amortization         (5.2)          2.4         (16.0)         48.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (*) EBITDA does not have a standardized meaning prescribed by Canadian
        generally accepted accounting principles and may not be comparable to
        similar measures presented by other companies. Management believes
        that the presentation of this measure will enhance an investor's
        understanding of the Company's operating performance.


    About TimberWest

    TimberWest Forest Corp. is uniquely positioned as western Canada's largest
private timber and land management company. The Company owns in fee simple
approximately 322,000 hectares or 796,000 acres of private land and is in the
business of selling timber products and real estate.

    Stapled Units of TimberWest Forest Corp. are traded on the Toronto Stock
Exchange under the symbol: TWF.UN

    Visit us at our web site: www.timberwest.com
    

    %SEDAR: 00009326E




For further information:

For further information: TimberWest Forest Corp., Suite 2300, 1055 West
Georgia Street, PO Box 11101, Vancouver, BC, V6E 3P3, Telephone: (604)
654-4600, Facsimile: (604) 654-4571; Investor Relations Contact: Bev Park,
Executive Vice President and Chief Financial Officer, Telephone: (604)
654-4600, Facsimile: (604) 654-4662, Email: invest@timberwest.com

Organization Profile

TIMBERWEST FOREST CORP.

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