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

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

                                    FORM 10-K
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended  December  31, 2002  Commission  File No.:  1-13573-01
                                                                      1-13573

                       U.S. TIMBERLANDS KLAMATH FALLS, LLC
                         U.S. TIMBERLANDS FINANCECORP.
             (Exact name of registrant as specified in its charter)


                 DELAWARE                               91-1217136
                 DELAWARE                               91-1851612
       (State or other jurisdiction                 (I.R.S. Employer
    of incorporation or organization)              Identification No.)

    625 Madison Avenue, Suite 10-B, New York, NY              10022
      (Address of principal executive offices)             (Zip code)

        Registrant's telephone number, including area code: 212-755-1100

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


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

           Securities registered pursuant to Section 12(g) of the Act:

      Title of Each Class:            Name of Each Exchange on Which Registered:
      9-5/8% Senior Notes                       New York Stock Exchange

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during then preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.

                                   Yes[X] No[__]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to be the best of  registrant's  knowledge,  in definitive  proxy or information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to the Form 10-K. [X]

            Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).

Yes [X]

No  [ ]

Documents incorporated by reference: See item 15. Exhibit Index


<page>

                          U.S. TIMBERLANDS COMPANY, LLC
                         U.S. TIMBERLANDS FINANCE CORP.



                                TABLE OF CONTENTS

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                                TABLE OF CONTENTS

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PART I

         Item 1.  Business......................................................................................1
         Item 2.  Properties................................................................................... 9
         Item 3.  Legal Proceedings............................................................................10
         Item 4.  Submission of Matters to a Vote of Security Holders..........................................11

PART II

         Item 5.  Market for Registrant's Common Units and Related Security Holder Matters.....................12
         Item 6.  Selected Financial Data......................................................................13
         Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations........14
         Item 7A.  Quantitative and Qualitative Disclosures About Market Risk..................................22
         Item 8.  Financial Statements.........................................................................22
         Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........22

PART III

         Item 10. Directors and Executive Officers of the Registrant...........................................23
         Item 11. Executive Compensation.......................................................................26
         Item 12. Security Ownership of Certain Beneficial Owners and Management...............................30
         Item 13. Certain Relationships and Related Transactions...............................................30
         Item 14. Controls and Procedures......................................................................32

PART IV

         Item 15. Exhibits, Financial Statements, and Reports on Form 8-K......................................33

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                                       ii

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                                     PART I

Item 1. Business.

General

            The business of U.S. Timberlands Company, LLC, a Delaware limited
liability company formed in 1996 (the "Company"), consists of the growing of
trees and the sale of logs and standing timber. The Company owns approximately
364,000 fee acres of timberland and cutting rights on approximately 13,000 acres
of timberland (collectively the "Timberlands") containing total merchantable
timber volume estimated as of January 1, 2003 to be approximately 0.9 billion
board feet ("BBF") in Oregon east of the Cascade Range (the "Timberlands"). Logs
harvested from the Timberlands are sold to unaffiliated domestic conversion
facilities. These logs are processed for sale as lumber, plywood and other wood
products, primarily for use in new residential home construction, home
remodeling and repair and general industrial applications. The Company also owns
and operates its own seed orchard and produces approximately four million
conifer seedlings annually from its nursery, approximately 75% of which are used
for its own internal reforestation programs, with the balance sold to other
forest products companies. Except as the context otherwise requires, references
herein to, or descriptions of, assets and operations of the Company include the
assets and operations of the U.S. Timberlands, LP (the "Master Partnership").

            The Timberlands' merchantable timber consists of Ponderosa Pine
(approximately 44%) and Douglas Fir (approximately 14%), species which have
historically commanded premium prices over other softwood species, with the
balance consisting of Lodgepole Pine, White Fir and other softwood species. The
Timberlands have stands of varying ages and are unique in the forests east of
the Cascade Range in Oregon in that approximately 121,000 acres are actively
managed tree farms (the "Plantations"). The Plantations were first established
by Weyerhaeuser Company ("Weyerhaeuser") in the early 1960s and acreage has been
planted each year since then. Currently, the Plantations contain age classes
ranging generally from one to 42 years old. Initial thinning or harvesting of
the Plantation stands is expected to begin within the next three years. The
balance of the Timberlands is composed of natural stands. For a more complete
description of the Company's properties, see "Properties."

            In August 1996, the Company and U.S. Timberlands Management Company,
LLC, formerly known as U.S. Timberlands Services Company, LLC ("Old Services"),
acquired approximately 604,000 fee acres of timberland (the "Klamath Falls
Timberlands"), containing an estimated merchantable timber volume of
approximately 1.9 BBF and related assets from Weyerhaeuser (the "Weyerhaeuser
Acquisition"). In July 1997, the Company, which is now the Master Partnership's
subsidiary operating company, acquired approximately 42,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland (the
"Ochoco Timberlands"), containing an estimated merchantable timber volume of
approximately 280 million board feet ("MMBF") from Ochoco Lumber Company
("Ochoco") (the "Ochoco Acquisition"). At the date of acquisition, over 40% of
the merchantable timber on the Ochoco Timberlands was at least 80 years old. As
of December 31, 2000, the Company had harvested substantially all of the Old
Growth timber on the Ochoco Timberlands. During the 4th quarter of 2002, the
Company sold the Ochoco property to an affiliate. During October 1999, the first
and second quarters of 2001, the third quarter of 2002 and the first quarter of
2003 the Company contributed primarily non-income producing, pre-merchantable
pine plantation timberlands in exchange for an investment in an affiliate (See
Item 13 Certain Relationships and Related Transactions and Notes 3 and 9 to the
Consolidated Financial Statements).

During the period from January 1, 1994 through the acquisition of the Klamath
Falls Timberlands by the Company, approximately 58% of the logs harvested from
the Klamath Falls Timberlands were delivered to a plywood mill owned by
Weyerhaeuser at Klamath Falls, Oregon. Similarly, prior to the Ochoco
Acquisition, substantially all of the timber harvested from the Ochoco
Timberlands was delivered to Ochoco's mills. The Company does not currently own
any conversion facilities nor does it presently intend to own any such
facilities on a long-term basis; consequently the Company's log sales are made
to unaffiliated third parties. Concurrent with the Company's acquisition of the
Klamath Falls Timberlands, the Company arranged for Collins Products LLC
("Collins"), a privately owned forest products company located within the
Klamath Falls Timberlands area, to purchase

                                        1

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Weyerhaeuser's Klamath Falls mill facilities. In September 1996, the Company
entered into a 10-year log supply agreement with Collins (the "Collins Supply
Agreement") providing for the purchase by the plywood mill and delivery by the
Company of a minimum of 34 million board feet ("MMBF") of logs each year at
market prices. During 2001, Collins suspended plywood production at the Klamath
Falls mill and it was mutually decided to cancel the remaining years on the
contract. In addition to its sales under the Collins Supply Agreement, the
Company sold and continues to sell logs to conversion facilities located in the
area surrounding the Timberlands. There are currently more than 20 primary
conversion facilities located within a 150-mile radius of the Company's
Timberlands.

Formation of the Company

            On November 19, 1997, the Master Partnership acquired substantially
all of the equity interests in the Company and the business and assets of Old
Services (the "Acquisition") and completed its initial public offering (the "MLP
Offering") of common units representing limited partner interests ("Common
Units"). Upon the closing of the Acquisition, Old Services contributed all of
its assets, including its timber operations, to U.S. Timberlands Services
Company, LLC, a newly formed Delaware limited liability company and the
Company's Manager (the "General Partner" or "New Services"), in exchange for
interests therein. Immediately thereafter, the Company assumed certain
indebtedness (the "Holdings Debt") of U.S. Timberlands Holdings, LLC, an
affiliate of the Company ("Holdings"), and the Manager contributed its timber
operations to the Company in exchange for a member interest in the Company. Then
the Manager contributed all but a 1% member interest in the Company to the
Master Partnership in exchange for a General Partner interest in the Master
Partnership, the right to receive Incentive Distributions (as defined herein)
and 1,387,963 subordinated units representing limited partner interests in the
Master Partnership ("Subordinated Units"), and Holdings contributed all of its
interest in the Company to the Master Partnership in exchange for 2,894,157
Subordinated Units. The Manager then distributed the Subordinated Units to Old
Services. Approximately 143,398 Subordinated Units were used by Old Services to
redeem interests in Old Services held by certain founding directors of the
Manager (the "Founding Directors"). As a result of such transactions, the
Company became the Operating Company and the Manager owns an aggregate 2%
interest in the Master Partnership and the Company on a combined basis, and the
right to receive Incentive Distributions; U.S. Timberlands Holdings Group, LLC,
a successor to Old Services and Holdings owns 3,140,162 Subordinated Units and
the Founding Directors own an aggregate of 143,398 Subordinated Units. The
3,283,560 Subordinated Units owned by U.S. Timberlands Holdings Group, LLC and
the Founding Directors represent an aggregate 25.5% interest in the Master
Partnership. The Common Units and the Subordinated Units are referred to herein
collectively as "Units" and the holders of Units are referred to herein as
"Unitholders."

            Concurrent with the closing of the Initial Offering, the Company and
its wholly owned subsidiary, U.S. Timberlands Finance Corp. ("Finance Corp."),
consummated the public offering (the "Public Note Offering") of $225.0 million
aggregate principal amount of 9 5/8% unsecured senior notes due 2007 (the
"Notes). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."

            Finance  Corp.,  a  Delaware  corporation,  was formed on August 18,
1997, and is a wholly-owned  subsidiary of the Company.  Finance Corp. serves as
the  co-obligor  for the Notes.  It has nominal  assets and does not conduct any
operations.  Accordingly,  a discussion  of  operations,  liquidity  and capital
resources of Finance Corp. is not presented.

            On October 17, 2002, the Master Limited Partnership announced that
it had signed a definitive agreement to be acquired by an acquisition company
formed by a group led by senior management. The definitive agreement
contemplates a cash tender offer for 100% of the outstanding common limited
partnership units not already owned by the acquiring entity or its affiliates
for $3.00 per unit in cash, followed by a merger of the acquisition company with
and into the Company, pursuant to which each common limited partnership unit not
already owned by the acquiring entity or its affiliates would be converted into
the right to receive $3.00 per unit in cash. The tender offer commenced on
November 19, 2002 and was completed on March 6, 2003. Pursuant to the tender
offer, approximately 71% of the Company's common units were tendered. The
acquisition group therefore controls about 87% of the outstanding common units.
The remaining common units not purchased in the tender offer will be


                                       2
<PAGE>

acquired by the acquisition group in a merger that is expected to be completed
in the second quarter of 2003.

Company Structure and Management

            The operations of the Master Partnership are conducted through, and
the operating assets are owned by, the Company, as the Master Partnership's
operating subsidiary. The Master Partnership owns a 98.9899% member interest in
the Company and the Manager owns a 1% general partner interest in the Master
Partnership and a 1.0101% managing member interest in the Company. The Manager
therefore owns an aggregate 2% interest in the Master Partnership and the
Company on a combined basis.

            The Company's business is managed by the Manager. The Manager does
not receive any management fee or other compensation in connection with its
management of the Company, but is reimbursed for all direct and indirect
expenses incurred on behalf of the Company (including wages and salaries of
employees, officers and directors of the Manager) and all other necessary or
appropriate expenses allocable to the Company or otherwise reasonably incurred
by the Manager in connection with the operation of the Company's business.

            Conflicts of interest may arise between the Manager and its
affiliates, on the one hand, and the Master Partnership, the Company and the
Unitholders, on the other, including conflicts relating to the purchase and sale
of timber and/or timber deeds, compensation of the directors, officers and
employees of the Manager and the determination of fees and expenses that are
allocable to the Company. The Manager has a conflicts committee (the "Conflicts
Committee"), consisting of two independent members of its Board of Directors,
that is available at the Manager's discretion to review matters involving
conflicts of interest.

            The principal executive offices of the Company and the Manager are
located at 625 Madison Avenue, Suite 10-B, New York, New York 10022. The
telephone number at such offices is (212) 755-1100.

The Timberlands

Timber Growth

            Timber growth rates reflect timberland productivity and the rate of
return on a timber investment. Growth rate is an important factor in determining
when to harvest timber and the harvest potential of timberlands over the long
term. Merchantable timber is economically mature for harvesting when its current
growth rate falls below the desired rate of return on the investment in the
standing trees. The average growth rate from regeneration to economic maturity
measures the capacity of the land for timber production. The Company's older and
natural stands on the Timberlands that are expected to provide the near term
harvest have a current average growth rate of approximately 150 board feet per
acre per annum. The younger plantations, that presently have less merchantable
volume, are growing at a rate that is expected to average at least 315 board
feet per acre per annum to economic maturity in 50 to 60 years. This growth rate
is based on calculated volumes at the time of maturity. The Company has achieved
higher growth rates on the Plantations by planting high quality seedlings, by
eliminating competing non-timber growth from the Timberlands and by applying
modern forestry practices to assist the growth of the timber. Currently, nearly
all of the seedlings planted are grown from superior seed produced in the
Company's seed orchard. Management does take action to enhance the growth rate
in the natural stands as well. For example, selective harvesting in the slower
growing natural stands opens up the timber stand allowing for more vigorous
growth of the remaining trees. When it is no longer possible to maintain
acceptable growth rates in these stands they will be harvested entirely and
converted to faster growing plantations.

Harvest Plans

            The Company strives to manage all of its Timberlands, including the
Plantations, in an economically prudent and environmentally sensitive manner in
order to maximize their value over time. Integral to this management process are
the Company's long-term harvest plans. The Company prepares its harvest plans
annually based on analyses of the size, age, and class distribution of the
Timberlands and the economic maturity of each


                                       3
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harvest tract. The factors the Company considers in determining its long-term
harvest plans include, among other things, current and expected market
conditions, competition, customer requirements, the age, size and species
distribution of the Company's timber, assumptions about timber growth rates
(which are improving over time as a result of technological and biological
advances that improve forest management practices), expected acquisitions and
dispositions, access to the Timberlands, availability of contractors, sales
contracts and environmental and regulatory constraints. The Company's harvest
plans reflect the Company's expectations for each year's harvest, including the
sites to be harvested, the manner of harvesting such sites, the volume of each
species to be harvested, the prices expected to be received for the Company's
timber, the amount of stumpage sales, logging and other costs, thinning
operations and other relevant information. The Company has the flexibility to
update its harvest plans during the year to take into consideration changes in
these factors. The Company harvested or committed to harvest from log, stumpage
and timber deed sales 205 million board feet (MMBF) in 2002 and plans to
harvest, or commit to harvest, approximately 108 MMBF in 2003. The Company sold
3.5 MMBF through property sales in 2002. If current market conditions do not
improve, the Company will be required to harvest its current Timberlands
aggressively over approximately the next one to two years after which time the
harvest level is expected to decline to a level which the Company considers to
be more sustainable over the long term. Because harvest plans are based on
certain assumptions, many of which are beyond the Company's control, there can
be no assurance that the Company will be able to harvest the volumes projected
in its harvest plans. Although the Company's debt obligations place certain
limitations on the harvest plans which may limit the cash flow available for
unrestricted use in the future, the Company believes that it, generally has
sufficient flexibility to permit modifications in response to fluctuations in
the market for logs and lumber and the other factors described above. In 2002,
because of the accelerated harvesting, during the fourth quarter, of salvage
timber resulting from the Toolbox Fire, the operating company exceeded the
allowable four year harvest by 6.9 MMBF and, as required under the Indenture has
placed $662 thousand in a restricted account only to be used in ways prescribed
in the Indentures. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." If the Company's current harvest plans are
pursued unaltered for the next ten years, if it consummates the land sales
contemplated by its strategic plan and if its other strategic assumptions prove
to be accurate, the Company expects that its timber inventory will decline
through 2010 and Ponderosa Pine volume will increase as a percentage of its
total timber inventory by such date. The Company expects that its inventory
would remain relatively stable thereafter. Long-term harvest plans, growth rates
and forest inventory levels were reviewed during 2002. Such harvest plans, land
sales and other strategic assumptions do not take into account any acquisition
that the Company may consummate during such period.

 Access

            The Timberlands are accessible by a system of approximately 5,000
miles of established roadways or low-maintenance roads owned by the Company or
its Affiliates. The Company uses third party road crews to conduct construction
and maintenance on the Timberlands. The Company regularly enters into reciprocal
road use agreements with the United States Department of Agriculture - Forest
Service ("USFS") and the United States Department of Interior Bureau of Land
Management ("BLM") and cooperates with such agencies in numerous cost-sharing
arrangements regarding jointly used roads.

Sales and Markets

            The Company sells its timber through log sales, stumpage sales and
deed sales. Under a log sale, the Company identifies a block of timberland that
is ready to be harvested and solicits offers from its customers for delivery of
logs. After a price and volume have been agreed among the parties, the Company
contracts a third party to harvest the acreage and deliver to a roadside site on
the Timberlands, where a contracted trucking company picks up the logs and
delivers them to the customer. A stumpage sale is similar to a log sale in that
the Company solicits offers from its customers for timber on a block of
timberland that is ready to be harvested. However, under a stumpage contract,
the Company sells the customer the right to harvest the timber, or stumpage, and
the customer arranges to harvest and deliver the logs. Under a stumpage
contract, revenue recognition occurs as the timber is harvested by the customer,
as the Company retains the risk of loss until the timber is harvested. A timber
deed sale


                                       4
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is similar to a stumpage sale, except revenue recognition occurs when the
contract is executed, as the Company passes the risk of loss to the customer
when the contract is executed.

            The Company currently sells its sawlogs or stumpage to unaffiliated
wood products manufacturers and sells its chips to unaffiliated pulp mills or
hardboard plants. The percentage of logs which are sold as sawlogs/stumpage or
pulp logs is dependent upon, among other things, the species mix and quality of
the inventory harvested and the market dynamics affecting the region. Most of
the timber on the Timberlands is softwood, which, due to its long fiber,
strength, flexibility and other characteristics, is generally preferred over
hardwood for construction lumber and plywood. Once processed, sawlogs are
suitable for use as structural grade lumber, appearance grade boards, plywood
and laminated veneer and can also be manufactured for such end uses as window
trim, molding and door jambs. During 2002, sawlogs, stumpage sales and timber
deed sales accounted for approximately 47%, 0% and 34%, respectively, of the
Company's revenue. Chips, which can be used to make hardboard or pulp, and
seedlings combined accounted for 3% of the Company's revenues in 2002. There
were property sales in 2002 of $5.8 million, compared to 2001 property sales of
$0.0 million.

            The Company's customers include numerous unaffiliated operators of
conversion facilities. Since its acquisition of the Klamath Falls Timberlands in
August 1996, the Company has sold logs and chips from such timberlands to over
25 different customers. Concurrent with the Weyerhaeuser Acquisition, the
Company arranged for Collins, a privately owned forest products company located
within the Klamath Falls Timberlands, to purchase Weyerhaeuser's Klamath Falls
mill facilities. At such time, the Company entered into the Collins Supply
Agreement, a 10-year log supply agreement with Collins providing for purchase by
the plywood mill and delivery by the Company of a minimum of 34 MMBF of logs
each year at market prices. In the fourth quarter of 2001, the Collins Supply
Agreement was cancelled by mutual agreement as a result of the closure of the
Collins Klamath Falls Plywood Mill in Klamath Falls. In 2002, sales to Boise
Cascade, Crown Pacific, Timber Products, and Scott Timber accounted for
approximately 55% of the Company's revenue. No other single non-affiliated
customer accounted for more than 6% of the Company's net revenues for 2002.
Although the loss of one or more of such customers or other significant
customers could have a material adverse effect on the Company's results of
operations, the Company believes that the capacity for processing wood fiber in
the Company's markets currently is in balance with the supply and that,
therefore, such customers could be replaced with some additional freight costs.
There are currently more than 20 primary conversion facilities located within a
150-mile radius of the Company's Timberlands.

Seasonality

            Log and stumpage sales volumes are generally at their lowest levels
in the first and second quarters of each year. Heavy snowfalls in higher
elevations prevent access to many areas of the Company's timberlands in the
first quarter. This limited access, along with spring break-up conditions in
March or April (when warming weather thaws and softens roadbeds), restricts
logging operations to lower elevations and areas with rockier soil types. The
result of these constraints is that log sales volumes are typically at their
lowest in the first quarter, improving in the second quarter and at their high
during the third and fourth quarters. Most customers in the region react to this
seasonality by carrying high log inventories at the end of the calendar year at
a level that provides sufficient inventory to carry them to the second quarter
of the following year.

            Contributing to this seasonality of log volumes is the market demand
for lumber and related products which is typically lower in the first or winter
quarter when activity in the construction industry is slow, but increasing
during the spring, summer and fall quarters. Log and stumpage prices generally
increase in the spring with this build up of construction activity matching the
timing of re-entry to all forested areas and increased logging activity.


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Competition

            Due to transportation costs, domestic conversion facilities in the
Pacific Northwest tend to purchase raw materials within relatively confined
geographic areas, generally within a 200-mile radius. It is generally recognized
that log suppliers such as the Company provide their market with a commodity
product. The Company and its competitors all benefit from the same competitive
advantages in the region--namely, close proximity to numerous mills, and
positive demographic trends of the Pacific Northwest and the West Coast.
Therefore, the Company and its competitors are currently able to sell all the
logs they are able to produce at a market clearing price although this price has
been adversely affected by international competition. Additional competitive
factors within a market area generally will include species and grade, quality,
ability to supply logs which consistently meet the customers' specifications and
ability to meet delivery requirements. The Company believes that it has a
reputation as a stable and consistent supplier of well merchandised,
high-quality logs. The Company has no conversion facilities and therefore does
not compete with its customers for logs. The Company believes that this gives it
an advantage over certain of its competitors that also own conversion
facilities.

            The Company competes with numerous private land and timber owners in
the northwestern United States and the state agencies of Oregon, as well as of
foreign imports, primarily from Canada, Chile, and New Zealand. In recent years,
the strength of the U.S. dollar combined with the much lower value of currencies
in Canada, the Pacific Rim and South America have made international competition
a larger factor in competitive pricing. In addition, the Company competes with
the USFS, the BLM and the Bureau of Indian Affairs. Certain of the Company's
competitors have significantly greater financial resources than the Company.

            The Company believes that it competes successfully in the timber
business for the following reasons: (i) the Company has substantial holdings of
timber properties which include approximately 0.9 BBF of merchantable, good
quality timber, approximately 121,000 acres of plantation timberland and a
full-scale seed orchard and nursery operation located in a region where
conversion facilities have been experiencing shortages in the supply of wood
fiber; (ii) the Company focuses on owning timberlands rather than operating
conversion facilities, which minimizes the Company's cost structure and capital
expenditures, allows the Company to seek the most favorable markets for its
timber rather than being committed to supply its own facilities, and ensures
that the Company will not compete with its customers; (iii) the Company's lean
operating structure allows it to efficiently manage its Timberlands, and should
enable it to acquire additional timberlands without commensurate increases in
overhead; and (iv) the Company's computerized geographic information system
("GIS") enables the Company to evaluate the optimal timing and patterns of the
harvest of its Timberlands and evaluate and integrate acquisitions of additional
timberlands.

Resource Management

Timber Resource Management

            All of the silvicultural activities on the Timberlands and the
harvesting and delivery of logs are conducted by independent contractors. The
Company's operations involve intensive timber management and harvesting
operations, which include road construction and reforestation, as well as
wildlife and watershed management, all of which are carefully monitored using
the Company's GIS. See "Geographic Information System." The Company employs a
number of traditional and recently developed harvesting techniques on its lands
based on site-specific characteristics and other resource considerations. The
topography of the Timberlands allows over 95% of the Timberlands to be harvested
using lower-cost mechanical methods as opposed to higher-cost cable systems.

            Harvesting on the Timberlands is conducted using both selective and
regeneration harvesting. In selective harvesting, a partial harvest provides
merchantable timber and opens up the stand for supplemental growth on the
remaining stand. Harvest entries are separated by approximately 1 to 15 years
and each entry is prescribed for volume to be removed, spacing to be provided,
and diameter limits to be harvested. In regeneration harvesting, which is used
to harvest approximately 60% of the Company's timber, all merchantable volume is
removed in a single harvest. After an area has been regeneration harvested, the
Company employs a reforestation contractor to plant two-year-old seedlings at an
optimal density of approximately 300 trees per acre. The Company also attempts


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to protect and maintain the ecosystem within the Timberlands while providing for
a reasonable harvest. For example, the Company typically leaves a mix of green
and dead trees at the harvest site, including some large trees, snags and downed
logs to provide habitats for a variety of wildlife species while enriching the
soil for successive generations of trees.

            Particular forestry practices vary by geographic region and depend
upon factors such as soil productivity, weather, terrain, tree size, age and
stocking. The climate, site and soil conditions on the east side of the Cascade
Range, for example, permit management to harvest on an optimal rotation, or
harvest cycle, of 50 to 60 years. Forest stands are thinned periodically to
improve growth and stand quality until harvested. The Company actively utilizes
commercial thinning as a timber management practice. Pre-commercial thinning,
which occurs only in the Plantation stands, is utilized when the timber
harvested is not merchantable. The Company believes that such thinning improves
the overall productivity of the Timberlands by enhancing the growth of the
remaining trees. Occasionally, revenues are generated from pre-merchantable
thinning due to strong markets for wood chips.

            The Company's policy is to ensure that every acre harvested is
reforested in order to enhance the long-term value of its timberlands. Based on
the geographic and climatic conditions of a given harvest site, harvested areas
may be regenerated naturally, by leaving mature trees to reseed the area, or
replanted with seedlings. Natural regeneration methods are widely used on
approximately 40% of the Company's harvested land. Approximately 33% of the
Timberlands acreage currently consists of Plantations. The Company expects to
convert an average of 14,000 acres of natural stands per year over the next
three years to Plantations. The seed orchard produces seed from trees selected
because they were the best genotype in their respective environments. During
2002, the Company planted approximately 3.9 million seedlings and expects to
plant 4.3 million seedlings in 2003. The Company uses the seed collected from
its orchard (representing approximately 90% of seedlings planted) to grow trees
with desirable traits such as superior growth characteristics, good form and
disease resistance, resulting in greater wood volume over a rotation than that
generated by naturally regenerated seedlings. The seedlings are grown in the
Company's nursery, which uses seeds from the Company's seed orchard, which was
established by Weyerhaeuser in 1973.

Geographic Information System ("GIS")


            The GIS is a computer software program that the Company acquired
from Weyerhaeuser as part of the Klamath Falls Acquisition. The GIS data, which
has been compiled over a period of at least five years, includes detailed
topographical field maps for every stand within the Timberlands, setting forth
the characteristics, including age, species, size and other characteristics for
the timber growing on each stand. Using the data in the GIS, the Company can use
a computer model to "grow" the timber over time, enabling it to generate
long-term harvest plans and to update its inventory annually. To maintain the
integrity of the data in the GIS, the Company performs a detailed ground survey
of the remaining timber inventory on a tract after each harvest and updates the
data in the GIS for that tract. With the aid of the GIS, the Company is able to
actively manage the Timberlands, track its inventory and develop site-specific
harvest plans on multiple scales, adding additional layers of detail, such as
the location of roadways or wildlife nesting areas, as required. The GIS also
permits the Company to analyze the impact that new legislation may have on its
Timberlands by inputting the proposed constraints imposed by such legislation in
light of the particular field characteristics of its Timberlands. The Company
believes the GIS may be used to the Company's advantage to evaluate potential
acquisition opportunities.

Federal and State Regulation

Endangered Species

            The Federal Endangered Species Act and counterpart state legislation
protect species threatened with possible extinction. Protection of endangered
species may include restrictions on timber harvesting, road building and other
silvicultural activities in areas containing the affected species. A number of
species indigenous to the Pacific Northwest have been protected under the
Endangered Species Act, including the northern spotted owl, marbled murrelet,
Columbian white-tail deer, mountain caribou, grizzly bear, bald eagle and
various anadromous fish species. Currently, the Company has identified several
spotted owl and bald eagle nesting areas affecting the


                                       7
<PAGE>

Timberlands and the presence of bull trout in certain of its streams, which may
affect harvesting on approximately 27,000 acres.

            The United States Fish and Wildlife Service (the "USFWS") listed the
American Bald Eagle in 1976 and the Northern Spotted Owl in 1990 as threatened
species throughout its range in Washington, Oregon and California. The Oregon
Forest Practices Act and related regulations also protect endangered species and
has specific provisions governing habitat protection for the spotted owl, the
bald eagle and other threatened species.

            Based on the 2002 survey year, there were approximately 71 bald
eagle sites on the Klamath Falls Timberlands. The Company observes harvesting
restrictions around the eagle sites. Due in part to efforts of the Company and
its Predecessor, the bald eagle is expected to be removed from the endangered
species list in the near future.

            In addition, the Company conducts surveys to determine the presence
of northern spotted owls. The surveys have been conducted every year in order to
(i) meet the regulatory requirements for timber harvest and other management
activities, (ii) monitor existing sites and determine the current status of such
sites, (iii) determine if areas identified as containing suitable habitat are
supporting owls and (iv) investigate other spotted owl or other species
sightings. The most recent of such surveys was completed in August 2002, and
identified approximately 29 northern spotted owl sites affecting the Klamath
Falls Timberlands, three of which are located, totally, on the Klamath Falls
Timberlands.

            The Company believes that it is managing its harvesting operations
in the areas affected by protected species in substantial compliance with
applicable federal and state regulations. Based on certain consultants' reports,
and on management's knowledge of the Timberlands, the Company does not believe
that there are any species protected under the Endangered Species Act or similar
state laws that, under current regulations and Court interpretation, would have
a material adverse effect on the Company's ability to harvest the Timberlands in
accordance with current harvest plans. There can be no assurance, however, that
species within the Timberlands may not subsequently receive protected status
under the Endangered Species Act or that currently protected species may not be
discovered in significant numbers within the Timberlands. Additionally, there
can be no assurance that future legislative, administrative or judicial
activities related to protected species will not adversely affect the Company or
its ability to continue its activities and operations.

Timberlands

            The operation of the Timberlands is subject to specialized statutes
and regulations in the State of Oregon, which has enacted laws which regulate
forestry operations, including the Forest Practices Act, which addresses many
growing, harvesting and processing activities on forest lands. Among other
requirements, these laws restrict the size and spacing of regeneration harvest
units, and impose certain reforestation obligations on the owners of forest
lands. The State of Oregon requires a company to provide prior notification
before beginning harvesting activity. The Forest Practices Act and other state
laws and regulations control timber slash burning, operations during fire hazard
periods, logging activities which may affect water courses or in proximity to
certain ocean and inland shore lines, water protection and enhancement and
certain grading and road construction activities. The Company believes it is in
substantial compliance with these regulations.

Environmental Laws and Superfund

            The Company's operations are subject to federal, state and local
environmental laws and regulations relating to the protection of the
environment. Although the Company believes that it is in material compliance
with these requirements, there can be no assurance that significant costs, civil
and criminal penalties, and liabilities will not be incurred, including those
relating to claims for damages to property or natural resources resulting from
the Company's operations.

            Environmental laws and regulations have changed substantially and
rapidly over the last 20 years, and the Company anticipates there will be
continuing changes. The trend in environmental regulations is to place more


                                       8
<PAGE>

restrictions and limitations on activities that may affect the environment, such
as emissions of pollutants and the generation and disposal of wastes.
Increasingly strict environmental restrictions and limitations have resulted in
increased operating costs for the Company and it is possible that the costs of
compliance with environmental laws and regulations will continue to increase.

Access to Timberlands May be Limited by Federal Regulation

            A substantial portion of the Timberlands consists of sections of
land that are intermingled with or adjacent to sections of federal land managed
by the USFS and the BLM. Removal of trees from those portions of the Timberlands
requires transportation of the logs by truck across logging and general purpose
roads. The Company has entered into road use agreements with the USFS and the
BLM. The majority of the Company's timberland management activities to include
the transportation of timber products across federal land and roads fall under
such agreements, which describe the Company's exclusive rights to transport
timber products across federal lands and roads without USFWS consultation. In
many cases, access is only, or most economically, achieved through a road or
roads built across adjacent federal land pursuant to a reciprocal right-of-way
("RROW"). Removal of federal timber often requires similar access across the
Timberlands. Recent litigation (not involving the Company) before the United
States Court of Appeals for the Ninth Circuit held that the BLM was not required
to consult with the USFWS, which administers the Endangered Species Act, prior
to approving a private landowner's proposal to build an access road across
federal land pursuant to an existing RROW entered into prior to the enactment of
the Endangered Species Act. A reversal on appeal or a rehearing of that case, or
future federal law or regulation requiring the BLM to consult with the USFWS in
connection with an RROW, could materially adversely affect the Company's ability
to harvest the affected portion of the Timberlands. Certain of the Company's
RROW agreements contain provisions that require compliance with state and
federal environmental laws and regulations. To the extent that the Company
acquires new Timberlands that require access through federal lands, the Company
may enter into new RROW agreements with the BLM or other federal agencies which
would require consultation with the USFWS. In addition, the BLM has published
advance notice of its intent to revise regulations governing RROW agreements
entered into the future to, among other things, expand the BLM's consideration
of environmental and cultural factors in granting, issuing or renewing
rights-of-way, provide the BLM with regulatory authority to object to the
location of roads because of potential effects on threatened or endangered
species and allow for the abandonment of rights-of-way under certain
circumstances.

Safety and Health

            The operations of the Timberlands are subject to the requirements of
the Federal Occupational Safety and Health Act ("OSHA") and comparable state
statutes relating to the health and safety of employees. The Company believes
that it is in compliance with OSHA regulations, including general industry
standards, permissible exposure levels for toxic chemicals and record-keeping
requirements.

Employees

            As of March 15, 2003, the Company had 29 employees, including
employees of the Manager that manage the business of the Company. The employees
are not unionized, and the Company believes that its employee relations are
good. All of the silvicultural activities on the Timberlands and the harvesting
and delivery of logs are conducted by independent contractors who are not
employees of the Company.

Item 2. Properties

Timber Inventory

            The Company currently owns and manages approximately 364,000 fee
acres of timberland and cutting rights on approximately 13,000 acres of
timberland containing total merchantable timber volume estimated as of January
1, 2003 to be approximately 0.9 BBF in Oregon east of the Cascade Range. A
merchantable tree is a tree of sufficient size that will produce a sound log 16
feet in length and at least 4.6 inches in diameter, inside bark, at the small
end. The Company's merchantable timber inventory consists of a substantial
percentage of premium species


                                       9
<PAGE>

of softwood, consisting of Ponderosa Pine and Douglas Fir, species which have
historically commanded premium prices over other softwood species, as well as
Lodgepole Pine, White Fir and other species. The Company believes that the
Timberlands are suitable for current operations.

            The Timberlands have stands of varying sizes and ages and are unique
in the forests east of the Cascade Range in Oregon in that approximately 121,000
acres of the 364,000 acre total consist of actively managed Pine Plantations
with stands ranging in age from one to 42 years. The Plantations are stocked
with high quality Ponderosa Pine (approximately 78%) and Lodgepole Pine
(approximately 22%). Initial thinning of the Plantation stands, including the
thinning of commercial quantities of merchantable timber, is expected to begin
within the next three years. See "The Timberlands--Harvest Plans."

Merchantable Timber Inventory by Species

            The Company maintains data regarding the estimated merchantable
timber inventory by species within the Timberlands. All volume estimates are
based on information developed by Company personnel. As of January 1, 2003, the
total timber inventory amounted to 0.9 BBF. The Company's combined timber
inventory by MMBF and percentage is Ponderosa Pine (383 (44%)), Lodgepole Pine
(170 (20%)), White Fir (157 (18%)), Douglas Fir (124 (14%)) and other species
(35 (4%)). Other species include Cedar, Sugar Pine, Western Larch and Grand Fir.

Size and Species Distribution of Merchantable Timber

            The Company's Timberlands are diversified by species mix and, to a
lesser extent, by size distribution. Timber on the Timberlands generally reaches
merchantable size between 40 and 50 years in natural stands and between 25 and
35 years in the Plantations. The Company maintains data as to the estimated
volume distribution of merchantable timber on the Timberlands by species and by
diameter at breast-height ("DBH"). As of January 1, 2003, approximately 211
MMBF, or 24%, of the merchantable timber, had a DBH of 16 or more inches.

Acreage Distribution by Age Class on Plantations

            The Company also maintains data as to the acreage distribution of
timber on the Plantations by age class. As of January 1, 2003, the Plantations
totaled 121,000 acres. Of the total acreage, 64,000 acres range from 1 to 15
years of age, 27,000 acres range from 16 to 25 years of age, and 30,000 acres
are 26 years of age or older.

Item 3. Legal Proceedings

On April 25, 2002, the Company announced that several purported class action
lawsuits were filed in the Court of Chancery of the State of Delaware for the
County of New Castle against the Manager and the board of directors of the
General Partner alleging, among other things, breach of fiduciary duty and
self-dealing by the Manager and the board in connection with the going private
transaction. The lawsuits sought to enjoin the going private transaction, to
rescind the going private transaction if it is consummated, and to recover
damages and attorney's fees. The lawsuits also named the Company as a defendant.

On July 12, 2002, the Company was notified that all of the purported class
action lawsuits were consolidated into one class action lawsuit by the Court of
Chancery of the State of Delaware.

On October 17, 2002, the Company announced that it had reached a tentative
settlement of the purported class action lawsuits, subject to court approval and
other customary conditions. The settlement provided, among other things, for an
increase in the consideration provided in the offer to purchase the common units
to $3.00 per unit. On December 12, 2002 the parties executed a Stipulation of
Settlement which the Court of Chancellery approved as a settlement at a hearing
on January 30, 2003.

On June 21, 2002, the Company was notified that it was named in a lawsuit filed
in State Court in Oregon as a codefendant seeking medical expenses and up to
$12.0 million in damages for injuries sustained by the minor child of an
employee of the Manager while riding on equipment owned by the Manager. At the
time, liability insurance


                                       10
<PAGE>

was in place, however, the insurance underwriter has since gone bankrupt and
coverage is limited and is being administered by the Oregon Guarantee Insurance
Association.

Management and its counsel are still reviewing the facts of the injury claims
and it is too early to assess its effect on the Company.

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

There were no matters submitted to a vote of the Company's members or the Master
Partnership's Unitholders during the fourth quarter of 2002.


                                       11
<PAGE>

                                     PART II

Item 5. Market for Registrant's Common Units and Related Security Holder Matters


            In connection with the consummation of the Initial Public Offering
for the Master Partnership and the Public Note Offering for the Company
(hereafter the "Transactions"), a 98.9899% member interest in the Company was
issued to the Master Partnership and a 1.0101% member interest was issued to the
Manager. There is no public trading market for the Company's equity securities.
The Company distributes all of its Available Cash (as defined in the Company's
partnership agreement) on a quarterly basis.

            The Company made its first cash distribution to the Master
Partnership for distribution to holders of the Common Units and the Subordinated
Units on May 15, 1998, of $0.73, representing the sum of $0.50, the Minimum
Quarterly Distribution (as defined in the Master Partnership Agreement) for the
first quarter of 1998, plus $0.23, the pro rata portion of the Minimum Quarterly
Distribution for the period from November 19, 1997 through December 31, 1997.
The Company made the Minimum Quarterly Distributions of $0.50 per Unit for each
subsequent quarter on August 14, 1998, November 13, 1998, February 12, 1999, May
14, 1999, August 13, 1999, November 15, 1999, February 14, 2000, May 15, 2000,
August 14, 2000, November 14, 2000 and February 14, 2001, respectively. On May
10, 2001 due to declining log prices and deteriorating business conditions, the
Board of Directors indefinitely suspended further distributions.

Issuance of Unregistered Securities

            The Company did not conduct any unregistered offering of its
securities in 2002.


                                       12
<PAGE>

Item 6: Selected Financial Data

          The financial information set forth below for each of the indicated
years is derived from the Company's audited consolidated financial statements.
This information should be read in conjunction with the consolidated financial
statements and related notes included with this report and previously filed with
the Securities and Exchange Commission.

<TABLE>
<CAPTION>
                                                           U.S. Timberlands

                                           2002       2001       2000       1999       1998
                                           ----       ----       ----       ----       ----
<S>                                        <C>     <C>        <C>        <C>        <C>
CASH FLOWS AND OTHER DATA
    (IN MILLIONS):
Modified EBITDDA (2)                     $ 12.8    $  23.2    $  49.3    $  50.6    $  44.2
Additions to timber and timberlands         3.1        5.6        2.3        1.0        0.6
Cash flow from operating activities         3.2        9.2       28.9       25.5       18.5
Cash flow (used in) investing
    activities                             (3.3)      (4.7)      (2.3)      (1.3)      (0.6)
Cash flow from (used in) financing
    activities                               --       (6.6)     (26.2)     (26.2)     (23.7)

OPERATING STATEMENT DATA
    (IN MILLIONS EXCEPT PER
    UNIT AMOUNTS):
Revenues (1)                               49.5       54.6       75.6       77.0       71.3
Depreciation, depletion and road
    amortization (1)                       27.5       37.3       28.8       23.3       21.9
Fire loss                                   0.6         --         --         --         --
Cost of timber and property sales (1)       7.3         --        2.6         --        5.9
Operating income (loss) (1)               (21.9)     (14.1)      17.9       27.2       16.3
Income (loss) before extraordinary
    items                                 (44.1)     (36.6)      (4.1)       6.4       (6.4)
Net income (loss)                         (44.1)     (36.6)      (4.1)       6.4       (6.4)

BALANCE SHEET DATA (AT
    PERIOD END, IN MILLIONS):
Working capital                            (1.6)      (1.7)       2.0        2.4        1.4
Total assets                              211.0      254.4      300.9      327.7      350.7
Long-term debt (3)                        225.0      225.0      225.0      225.0      225.0
Equity (deficiency)                       (19.4)      24.4       67.1       97.2      116.9

OPERATING DATA (UNAUDITED):
Log, stumpage and timber deed sales
    volumes (MMBF) (1)                    204.8      250.7      243.7      187.3      144.5
Property sales volumes (MMBF) (1)           3.5         --       13.6         --       26.6
</TABLE>

(1)         Revenues in 2002 consist of $42.3 million of log, stumpage and deed
            sales, $5.8 million of timber and property sales and $1.5 million of
            by-products and other sales. Revenues in 2001 consist of $54.1
            million of log, stumpage and deed sales, $0.0 million of timber and
            property sales and $0.4 million of by-products and other sales.
            Revenues in 2000 consist of $72.3 million of log, stumpage and deed
            sales, $2.8 million of timber and property sales and $0.6 million of
            by-products and other sales. Revenues in 1999 consist of $76.6
            million of log and stumpage sales and $0.4 million of by-products
            and other sales. Revenues in 1998 consist of $63.6 million of log
            and stumpage sales, $6.3 million of timber and property sales and
            $1.4 million of by-products and other sales.


                                       13
<PAGE>

(2)         Modified EBITDDA is defined as operating income plus depreciation,
            depletion, and road amortization and cost of timber and property
            sales. Modified EBITDDA should not be considered as an alternative
            to net income, operating income, cash flows from operating
            activities or any other measure of financial performance presented
            in accordance with generally accepted accounting principles.
            Modified EBITDDA is not intended to represent cash flow and does not
            represent the measure of cash available for distribution, but
            provides additional information for evaluating the Company's ability
            to make the Minimum Quarterly Distribution. In addition, Modified
            EBITDDA does not necessarily represent funds available for
            management's discretionary use as it is calculated prior to debt
            service obligations and capital expenditures. See "Management's
            Discussion and Analysis of Financial Condition and Results of
            Operations."

(3)         See discussion of long-term debt at Note 7 of the Notes to
            Consolidated Financial Statements.

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


Forward-Looking Statements

            Certain information contained in this report may constitute
forward-looking statements within the meaning of the federal securities laws.
Although the Company believes that expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Forward-looking information is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected. Such risks, trends and
uncertainties include the highly cyclical nature of the forest products
industry, general economic conditions, competition, price conditions or trends
for the Company's products, the possibility that timber supply could be affected
if governmental, environmental or endangered species policies change, and
limitations on the Company's ability to harvest its timber due to adverse
natural conditions or increased governmental restrictions. The results of the
Company's operations and its ability to pay quarterly distributions to its
Unitholders depend upon a number of factors, many of which are beyond its
control. These factors include general economic and industry conditions,
domestic and export prices, supply and demand for logs, seasonality, government
regulations affecting the manner in which timber may be harvested, and
competition from other supplying regions and substitute products. These and
other risks are described in the Company's other reports and registration
statements, which are available from the United States Securities and Exchange
Commission.

General

            The Company's primary business is the growing and harvesting of
timber (see Item 1. Business).

            The Company's results of operations are affected by various factors,
many of which are beyond its control, including general industry conditions,
domestic and international prices and supply and demand for logs, lumber and
other wood products, seasonality and competition from other domestic and
international supplying regions and substitute products.

Supply and Demand Factors

Supply

            The supply of logs available for purchase has been most affected in
recent years by significant reductions in timber harvested from public
timberlands, principally as a result of efforts to preserve the habitat of
certain endangered species, as well as a change in the emphasis of government
policy toward habitat preservation, conservation and recreation and away from
timber management. Since the early 1970s, environmental and other similar
concerns and governmental policies have substantially reduced the volume of
timber under contract to be harvested from public lands. The pace of regulatory
activity accelerated in the late 1980s. The resulting supply decrease caused
prices for logs to increase significantly, reaching peak levels during 1993.
Prior to 1998, the low supply of timber from public lands, which is expected to
continue for the foreseeable future, benefited private timber holders such as
the Company through higher stumpage and log prices. Since 1998, the strength of
the U.S. dollar has decreased exports and increased imports and has equalized
the supply and demand equation and


                                       14
<PAGE>

contributed to the general downward trend of prices. Certain market conditions
for finished products have also negatively impacted stumpage and log prices in
2002.

            Industry participants do not expect environmental restrictions to
ease materially within any reasonable planning horizon. Consequently, many
producers of lumber and wood products are attempting to adapt to the new supply
environment by increasing their emphasis on raw material yields, entering into
long-term timber supply arrangements and value added manufacturing, and
accessing previously untapped supplies (such as private wood lot owners, timber
with difficult access, alternative species and imports). These factors have
tended to maintain supply of domestic produced logs and have kept prices from
increasing.

            In response to an increase in domestic timber prices in the early
1990s, imports of logs and lumber from abroad (from countries such as Canada and
New Zealand) increased. These imports, however, only partially offset the lost
volume of timber from public timberlands and did not replace the mature,
high-quality timber found in greater quantities on public timberlands. Imports
are likely to continue to increase over the next few years and could
significantly affect the raw material supplies in the domestic lumber and wood
products industry.

Demand

            Changes in general economic and demographic factors, including the
strength of the economy, unemployment rates and interest rates for home
mortgages and construction loans, have historically caused fluctuations in
housing starts and, in turn, demand and prices for lumber and commodity wood
products. United States housing starts for 2002 were up slightly from 2001
levels, however, lumber prices were generally depressed by an increase in
imported lumber. Because of the growth of the home center distribution business,
the repair and remodeling markets have become a significant factor in terms of
the demand for lumber and commodity wood products and have dampened the wide
fluctuations that occurred when new housing starts were the primary factor.
Prices for Pine species, primarily Ponderosa Pine, reached a peak in the spring
of 1993 and as a result attracted imports of Radiata Pine from New Zealand and
Chile. Given the strong, growing economy of the past several years, domestic
markets have been able to absorb the increasing quantities of imported Radiata
Pine lumber. With the slowing of our domestic economy, decreasing demand for
repair and remodeling markets and over supply of finished products in the
industry, the level of imports has had a negative impact on pricing for Pine
lumber. The demand for logs in the United States is also affected by the level
of lumber imports. In response to increasing lumber imports from Canada, the
United States and Canada signed an agreement in 1996 which restricted the
availability of Canadian softwood lumber in the United States. The Company
believes that this agreement, which expired on March 31, 2001, has not had a
material impact on the price or demand for logs in the United States. The United
States and Canada are presently negotiating a new softwood lumber agreement even
though a 30% tariff has been imposed on Canadian softwood lumber. The long term
effect of not having an agreement or having a new agreement is uncertain.

            Due to transportation costs, domestic conversion facilities in the
Pacific Northwest tend to purchase raw materials within relatively confined
geographic areas, generally within a 200-mile radius. The conversion facilities
in the vicinity of the Timberlands need more wood supply to run at capacity than
can be produced by nearby timberlands. As a result, the demand from this region
is relatively steady, although prices have generally declined with market
conditions.

Application of Critical Accounting Policies

          The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Certain accounting policies have a significant impact on amounts
reported in the financial statements. A summary of those significant accounting
policies can be found in Note 1 to the Company's financial statements included
herein.

Company has not adopted any new accounting policies during the year ended
December 31, 2002 that significantly impact its financial statements.


                                       15
<PAGE>

Among the significant judgments made by management in the preparation of the
Company's financial statements are the determination of the allowance for
doubtful accounts and the rates of depletion applicable to the Company's
merchantable timber. These determinations are made periodically in the ordinary
course of accounting.

Current Market Conditions

            Log prices in the first quarter of 2002 were down 3% from the fourth
quarter of 2001. During the second quarter prices improved by 2% and remained at
these levels during the third and fourth quarters.

            The average log price in 2002 was down by 8% from 2001 to $321/MBF
from $349/MBF. This downward trend has continued for three years with average
prices decreasing from $393/MBF to $321/MBF. In 2002, realizations from Timber
Deeds decreased to $152/MBF from $160/MBF in 2001.

Results of Operations

            The following table sets forth sales volume for each of 2002, 2001
and 2000 from the sale of logs, stumpage and timber deeds by thousand board feet
("MBF") and price per thousand board feet and the sales of property

<TABLE>
<CAPTION>
                             Sales Volume (MBF)                   Price Realization (MBF)
                             ------------------                   -----------------------

                                                       Timber                                    Timber     Timberland
    Period                  Logs           Stumpage    Deeds         Logs            Stumpage    Deeds      Sales ($000)
    ------                  ----           --------    -----         ----            --------    -----      ------------
<S>                        <C>             <C>        <C>           <C>           <C>           <C>           <C>
   2002
Year ended 12/31           74,612            --       130,161       $   330            --       $   135       $ 5,763
4th Quarter                31,015            --        19,159       $   324            --       $   174       $ 4,700
3rd Quarter                23,998            --        20,189       $   329            --       $   186       $ 1,063
2nd Quarter                14,575            --        88,480       $   341            --       $   114            --
1st Quarter                 5,024            --         2,333       $   349            --       $   169            --

   2001
Year ended 12/31           74,640            --       176,105       $   349            --       $   160
4th Quarter                15,827            --        48,838       $   361            --       $   158
3rd Quarter                27,984            --        83,899       $   347            --       $   173
2nd Quarter                 9,890            --        28,624       $   313            --       $   138
1st Quarter                20,939            --        14,744       $   357            --       $   133

   2000
Year ended 12/31           96,112           503       147,083       $   393       $   379       $   246       $ 2,773
4th Quarter                38,922            --        57,844       $   382            --       $   174       $ 2,773
3rd Quarter                22,718            --        29,501       $   372            --       $   189            --
2nd Quarter                13,908            --        51,037       $   432            --       $   346            --
1st Quarter                20,564           503         8,701       $   425       $   379       $   325            --
</TABLE>


                                       16
<PAGE>

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

            Revenues. Revenues decreased $5.1 million, or 9%, from $54.6 million
in 2001 to $49.5 million in 2002. The decrease is primarily attributable to a
decrease in log sales of $1.4 million and a $10.5 million decrease in stumpage
sales and deed sales. These decreases were offset by property sales in 2002 of
$5.8 million, compared to $0.0 million in 2001. Chip and by-product revenues
were also higher by $1.0 million in 2002 compared to 2001. To meet its working
capital requirements, the Company harvested and sold logs and timber deeds in
2002 at rates in excess of the estimated current annual board footage growth on
the Timberlands.

            Log sales for 2002 were $24.7 million on volumes of 74,612 MBF,
compared to log sales of $26.0 million on volumes of 74,640 in 2001. The average
log sales price for 2002 was $330 compared to an average log sales price of $349
in 2001, a 5% decrease, reflecting weaker markets for the Company's log sales.

            Timber deed sales for 2002 were $17.6 million on volumes of 130,162
MBF, compared to timber deed revenue of $28.1 million on volumes of 176,105 MBF
in 2001. The average timber deed sales price per MBF for 2002 was $135 compared
to an average timber deed sales price of $160 in 2001, a 16% decrease. The
significant decrease in timber deed sales realization is due to overall declines
in market conditions, as well as a change in the timber mix being sold in timber
sales.

            There were no stumpage sales for 2002 and 2001. The reduction in
stumpage volumes is a result of the Company's strategic decision to utilize log
sales and timber deed sales as its primary source of revenue.

            The Company had revenue from two property sales in 2002 of $5.8
million, compared to $0.0 million in revenue from timber and property sales
during 2001.

            Gross Profit. Gross profit decreased along with revenues by $3.9
million from $0.6 million in 2001 to -$3.3 million in 2002 and gross margin
decreased from 1% in 2001 to -6% in 2002. The decrease in gross margin was
primarily from four factors. First, contracted log and haul costs on a per MBF
basis were higher during 2002 as compared to 2001 due to longer hauls for
delivered logs. Second, the Company's timber deed sales were composed of a
different value grade mix as compared to 2001. Third, in 2002 the Company
incurred a fire loss of $0.6 million. Finally, continued declines in the timber
markets have resulted in lower realizations on delivered log and stumpage
values. Depletion, depreciation and road amortization decreased from $37.3
million in 2001 to $27.5 million in 2002 due primarily to decreased volume of
timber sales.

            Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $7.5 million in 2002, compared to selling, general
and administrative expenses of $8.3 million in 2001. Within selling, general and
administrative, most categories of expenses were down. Salaries, wages and
benefits were down $0.3 million due to positions that were vacant for a portion
of the year and professional services were down $0.2 million compared to 2001.
Those decreases were partly offset by increases in insurance expense of $0.1
million.

            Equity in Net Income (Loss) of Affiliate. The equity in net loss of
affiliate was $11.0 million during 2002 as compared to equity in net loss of
affiliate of $6.4 million in 2001. The losses in 2002 and 2001 reflect the
Company's share of losses absorbed from its common and preferred investment in
U.S. Timberlands Yakima, LLC. See "Investment in Affiliate" included in Note 9
of the Financial Statements for an explanation of the preferred and common
investments in U.S. Timberlands Yakima, LLC.

            Interest Expense. Interest expense was $21.7 million in 2002 and
$22.0 million in 2001 consisting primarily of interest expense on the Company's
$225.0 million of Senior Notes.

            Other Income (Expense), net. Other income, net, was $0.2 million for
2002, compared to $0.1 million for 2001, representing an increase in income of
$0.1 million.

            Cash Flow From Operations. During 2002, cash flow from operations
decreased $5.9 million or 65% compared to 2001, primarily because of a $7.6
million increase in net loss.


                                       17
<PAGE>

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

            Revenues. Revenues decreased $21.0 million, or 28%, from $75.6
million in 2000 to $54.6 million in 2001. The decrease is primarily attributable
to a decrease in log sales of $11.8 million and a $6.4 million decrease in
stumpage sales and deed sales, and the fact that the Company had a $2.8 million
dollar timber and property sale in 2000. To meet its working capital
requirements, the Company harvested and sold logs and timber deeds in 2001 at
rates in excess of the estimated current annual board footage growth on the
Timberlands.

            Log sales for 2001 were $26.0 million on volumes of 74,640 MBF,
compared to log sales of $37.8 million on volumes of 96,112 in 2000. The average
log sales price for 2001 was $349 compared to an average log sales price of $393
in 2000, an 11% decrease, reflecting weaker markets for the Company's log sales.

            Timber deed sales for 2001 were $28.1 million on volumes of 176,105
MBF, compared to timber deed revenue of $34.3 million on volumes of 147,083 MBF
in 2000. The average timber deed sales price per MBF for 2001 was $160 compared
to an average timber deed sales price of $246 in 2000, a 35% decrease. The
significant decrease in timber deed sales realization is due to overall declines
in market conditions, as well as a change in the timber mix being sold in timber
sales.

            There were no stumpage sales for 2001, compared with stumpage sales
of $0.2 million on volumes of 503 MBF in 2000. The reduction in stumpage volumes
is a result of the Company's strategic decision to utilize log sales and timber
deed sales as its primary source of revenue.

            The Company had no revenue from timber and property sales in 2001
compared to $2.8 million in revenue from timber and property sales during 2000.

            Gross Profit. Gross profit decreased along with revenues by $23.7
million from $24.3 million in 2000 to $0.6 million in 2001 and gross margin
decreased from 32% in 2000 to 1% in 2001. The decrease in gross margin was
primarily from three factors. First, contracted log and haul costs on a per MBF
basis were higher during 2001 as compared to 2000 due to longer hauls for
delivered logs. Second, the Company's timber deed sales were composed of a
different value grade mix as compared to 2000. Finally, continued declines in
the timber markets have resulted in lower realizations on delivered log and
stumpage values. Depletion, depreciation and road amortization increased from
$28.8 million in 2000 to $37.3 million in 2001 due to increased volume of timber
sales, increases in depletion rates effective January 1, 2001 and increased
volume of timber sold from a separate pool with a higher depletion rate.

            Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $8.3 million in 2001, consistent with selling,
general and administrative expenses of $8.4 million in 2000. Within selling,
general and administrative, most categories of expenses were down. Salaries and
wages were down $1.0 million due to the elimination of the annual bonuses of
$0.6 million, management positions that were vacant for a portion of the year of
$0.2 million, and a settlement with previous employee of $0.2 million in 2000.
Those decreases were offset by increases in professional services of $1.2
million over 2000, relating to the cost of advisors retained by the independent
committee formed to evaluate the going private transaction.

            Equity in Net Income (Loss) of Affiliate. The equity in net loss of
affiliate was $6.4 million during 2001 as compared to equity in net income of
affiliate of $2.0 million in 2000. The loss in 2001 reflects the Company's share
of losses absorbed from its common and preferred investment in U.S. Timberlands
Yakima, LLC and the income in 2000 reflects the recapture of $0.6 million in
losses previously absorbed by its preferred investment in U.S. Timberlands
Yakima, LLC and the Company's accrued return of $1.4 million on its preferred
investment See "Investment in Affiliate" included in Note 9 of the Financial
Statements for an explanation of the preferred and common investments in U.S.
Timberlands Yakima, LLC.


                                       18
<PAGE>

            Interest Expense. Interest expense was $22.0 million in 2001 and
$21.9 million in 2000 consisting primarily of interest expense on the Company's
$225.0 million of Senior Notes.

            Other Income (Expense), net. Other income, net, was $0.1 million for
2001, compared to $0.2 million for 2000, representing a decrease in income of
$0.1 million.

            Cash Flow From Operations. During 2001, cash flow from operations
decreased $19.7 million or 68% compared to 2000, primarily because of a $32.1
million decrease in net income.

Liquidity and Capital Resources

            The Company's primary sources of liquidity have been cash provided
by operating activities as well as debt and equity financings. As of December
31, 2002, the Company had a cash balance of $1.0 million and had $1.6 million
working capital deficit.

            Operating Activities. Cash flows provided by operating activities in
2002 were $3.2 million, compared to cash flows provided by operating activities
of $9.2 million in 2001. The $5.9 million decrease in cash flows provided by
operating activities was primarily attributable to a $7.6 million increase in
net loss.

            Investing Activities. Cash flows used in investing activities were
$3.3 million in 2002, as compared to cash flows used in investing activities of
$4.7 million during 2001 principally for reforestation, timber acquisitions and
road additions in each year.

            Financing Activities. Cash flows used in financing activities were
$0.0 and $6.6 million in 2002 and 2001. During 2002 and 2001, the Company paid
$0.0 and $6.6 million in distributions to Unitholders, Manager and minority
interest. Beginning in the second quarter of 2001, the Company ceased making
distributions to its Unitholders.

Notes

            On November 14, 1997, the Company issued $225.0 million aggregate
principal amount of Notes (the "Notes") representing unsecured general
obligations of the Company which bear interest at 9 5/8% per annum, payable
semiannually in arrears on May 15 and November 15. The Notes mature on November
15, 2007 unless previously redeemed. The Notes do not require any mandatory
redemption or sinking fund payments prior to maturity and are redeemable at the
option of the Company in whole or in part, on or after November 15, 2002, at
predetermined redemption prices plus accrued interest to the redemption date.
Upon the occurrence of certain events constituting a "change of control" (as
defined in the Indenture), the Company must offer to purchase the Notes, at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of purchase. There can be no assurance that the
Company will have access to sufficient funds to repurchase the Notes in the
event of a change in control.

            The indenture governing the Notes (the "Indenture") contains various
affirmative and restrictive covenants applicable to the Company and its
subsidiaries, including limitations on the ability of the Company and its
subsidiaries to, among other things, (i) incur additional indebtedness (other
than certain permitted indebtedness) unless the Company's Consolidated Fixed
Charge Coverage Ratio (as defined in the Indenture) is greater than 2.25 to
1.00, and (ii) make distributions to the Master Partnership, make investments
(other than permitted investments) in any person, create liens, engage in
transactions with affiliates, suffer to exist any restrictions on the ability of
a subsidiary to make distributions or repay indebtedness to the Master
Partnership, engage in sale and leaseback transactions, enter into a merger,
consolidation or sale of all or substantially all of its assets, sell assets or
harvest timber in excess of certain limitations or engage in a different line of
business. Under the Indenture, the Company will be permitted to make cash
distributions to the Master Partnership so long as no default or event of
default exists or would exist upon making such distribution (a) if the Company's
Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is
greater than 1.75 to 1.00, in an amount, in any quarter, equal to Available Cash
(as defined in the Indenture) for the immediately preceding fiscal quarter or
(b) if the Company's Consolidated Fixed


                                       19
<PAGE>

Charge Coverage Ratio is equal to or less than 1.75 to 1.00, in an aggregate
amount not to exceed (i) $7.5 million less the aggregate of all restricted
payments made under this clause (b)(i) during the immediately preceding 16
fiscal quarters (or shorter period, if applicable, beginning on the issue date
of the Notes), plus (ii) the net proceeds of certain capital contributions
(including the sale of Units) received by the Master Partnership. The Operating
Company did not meet the fixed charge coverage tests at December 31, 2002 and is
therefore not permitted to make any cash distributions to the Company.
Accordingly, the Company is not able to make distributions to its Unitholders.

            The Indenture also contains restrictions on the amount of timber
that may be harvested based on a limit of 150%, 140%, 130% and 120% of 125 MMBF,
adjusted for various acquisitions, dispositions and adjustments, averaged over a
one, two, three and four year period, respectively. In 2002, because of the
accelerated harvesting during the fourth quarter 2002 of salvage timber
resulting from the Toolbox Fire, the Company exceeded the allowable four year
harvest by 6.9 MMBF and, as required under the Indenture has placed $662
thousand in a restricted account only to be used in ways prescribed in the
Indentures.

Affiliate Credit Facility

            The Company had a credit facility with an affiliate of the Manager
(the "Affiliate Credit Facility") consisting of a revolving line of credit of up
to $12.0 million. Borrowings under the Affiliate Credit Facility bore interest
at the prime lending rate as published in the Wall Street Journal plus
applicable margin, which was based on the Company's leverage ratio. The
Affiliate Credit Facility expired, by its terms, at the end of April 2002. The
Company is seeking to replace the Affiliate Credit Facility with a working
capital facility from an unaffiliated third party. However, there can be no
assurance that the Company will be able to obtain a working capital credit
facility in amounts sufficient to fund its working capital needs from a
traditional commercial lender. The Company and the affiliated lender have also
initiated discussions with respect to a further extension of the credit facility
on terms comparable to those that would be obtained from an unaffiliated
financing source. While the Company continues to seek a credit facility from an
unaffiliated source, affiliated lenders have made short term advances to the
Company, payable on demand to the affiliates, at an annual interest rate of 10%.
The affiliate has made no commitment to continue lending funds to the Company,
and each request is reviewed on a case by case basis.

Capital Expenditures/Cash Distributions

            Capital expenditures in 2002 totaled $3.3 million. The Company
purchased timber cutting rights from its affiliate for approximately 12.0 MMBF
of timber for $1.3 million. The remaining $2.0 million in capital expenditures
were mainly in the nature of land management/silviculture costs. Capital
expenditures were financed through cash flow generated by operations. As the
Company does not currently own and does not plan to own manufacturing
facilities, and all logging is subcontracted to third parties, it is anticipated
that capital expenditures in the future will not be significant and will consist
mainly of land management/silviculture expenditures. It is currently anticipated
that the Company will not maintain significant log inventories, although small
log inventories may be maintained for a short period of time, or incur material
capital expenditures for machinery and equipment. The Company anticipates that
capital expenditures will be approximately $1.4 million in 2003 consisting
primarily of capitalized silviculture costs and miscellaneous equipment
purchases.

            Cash required to meet the Company's debt service will be
significant. To meet its working capital requirements, the Company has been
selling logs and making timber sales at a rate in excess of the Manager's
estimate of the current annual board footage growth on the Company's
timberlands. The debt service and, prior to the first quarter of 2001, quarterly
cash distributions have been funded from operations and borrowings. Given
projected volumes for sales of logs and timber, estimated current board footage
growth on the timberlands and the harvest restrictions in the Notes, unless
prices improve, costs are reduced, new markets are developed or the Company
makes accretive acquisitions, the Company does not expect to make cash
distributions. The Company continues to evaluate means to improve cash flows,
including the factors mentioned above. There can be no assurance that prices
will improve or that the Company will be able to take any of these actions and
it is unlikely


                                       20
<PAGE>

prices will improve or any of these actions will take effect within a short-term
horizon. Although the Company has been approached recently regarding certain
debt restructuring scenarios, discussions have been very preliminary and it is
premature to access the likelihood of pursuing any such scenario or other
material transaction.

Effects of Inflation

            Prices for the Company's stumpage and logs may be subject to sharp
cyclical fluctuations due to market or other economic conditions, including the
level of construction activity, but generally do not directly follow
inflationary trends. Costs of forest operations and general and administrative
expenses generally reflect inflationary trends.

Recent Developments

On October 17, 2002, the Master Limited Partnership announced that it had signed
a definitive agreement to be acquired by an acquisition company formed by a
group led by senior management. The definitive agreement contemplates a cash
tender offer for 100% of the outstanding common limited partnership units not
already owned by the acquisition entity or its affiliates for $3.00 per unit in
cash, followed by a merger of the acquisition company with and into the Company,
pursuant to which each common limited partnership unit not already owned by the
acquisition entity or its affiliates would be converted into the right to
receive $3.00 per unit in cash. The tender offer commenced on November 19, 2002
and was completed on March 6, 2003. Pursuant to the tender offer, approximately
71% of the Company's common units were tendered. The acquisition group therefore
controls about 87% of the outstanding common units. The remaining common units
not purchased in the tender offer will be acquired by the acquisition group in a
merger that is expected to be completed in the second quarter of 2003.

Recent Accounting Standards

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as of January 1,
2001. SFAS 133 requires the Company to recognize all derivatives in the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through earnings. If the derivative is a hedge, depending upon the nature
of the hedge, changes in fair value of the derivative will either be offset
against the changes in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Although the Company had no outstanding derivative positions at December 31,
2001, it absorbed a loss of approximately $146 from its allocable share of the
effect of the adoption as of January 1, 2001 of SFAS 133 by its affiliate, U.S.
Timberlands Yakima, LLC, to reduce the carrying value of an interest rate cap
agreement to its fair value.

In August 2001, the Financial Accounting Standards Board, (FASB), issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, for the disposal of a segment of a business. Adoption of SFAS
No. 144 by the Company as of January 1, 2002 did not significantly impact its
financial position, results of operations, or cash flows.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" as an amendment to SFAS No. 123 by
introducing two additional conversion methods when converting to the fair value
based method from the intrinsic value method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects on reported net income (loss)
of an entity's accounting policy decisions with respect to stock-based employee
compensation and amends APB Opinion No. 28 to require disclosure about those
effects in interim financial information. The disclosure provisions are
effective for fiscal years ending after December 15, 2002 and for interim
periods beginning after December 15, 2002. The Company follows the intrinsic
value method of accounting for


                                       21
<PAGE>

1. Business and Significant Accounting Policies (continued):

stock-based employee compensation, but will continue to evaluate the benefits of
a voluntary change to the fair value based method.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46) "Consolidation
of Variable interest Entities" which is an interpretation of Accounting Research
Bulletin No. 51 "Consolidated Financial Statements". FIN 46 requires the
consolidation of entities in which an enterprise absorbs a majority of the
entity's expected losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership, contractual or other financial
interests in the entity. Currently, entities are generally consolidated by an
enterprise when it has a controlling financial interest through ownership of a
majority voting interest in the entity.

The provisions of FIN 46 are required to be applied by the Company no later than
July 1,2003, and would require the Company to consolidate the financial
statements of U.S. Timberlands Yakima, LLC ("USTY"} its unconsolidated affiliate
which is presently being accounted for on the equity method (see Notes 3 and 9).
If the Company had consolidated USTY beginning January 1, 2002, there would have
been no effect on the Company's net loss for the year ended December 31, 2002,
however revenues would have increased by $6,157, expenses would have increased
by $17,203 and the $11,046 equity in net loss of affiliate would be eliminated.
In addition, although there would. be no change in Partners
Capital/(Deficiency), total assets would increase by approximately $106,000,
principally representing timber and timberlands, and total liabilities would
increase by approximately $106,000 including $96,053 of long-term debt at
December 31,2002. Such long-term debt is collateralized by all of the USTY
asssts and the debt holder does not have recourse to the Company. The Company's
maximum exposure to loss as a result of its involvement with USTY is limited to
its investment in USTY, which amounts to $38,881 at December 31, 2002.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

              Not applicable.

Item 8. Financial Statements

            The information required hereunder is included in this report as set
forth in the "Index to Financial Statements" on Page F-1.

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

      Not applicable.


                                       22
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

            The Manager manages and operates the activities of the Company. As
is commonly the case with publicly traded limited partnerships, the Company does
not directly employ any of the persons responsible for managing or operating the
Company. In general, the management of the General Partner manages and operates
the Company's business as officers and employees of the General Partner and its
affiliates. The Unitholders do not directly or indirectly participate in the
management or operation of the Company.

            In January 1999, the General Partner appointed William A. Wyman and
Alan B. Abramson, two members of the Manager's Board of Directors who are
neither officers, employees or security holders of the Manager nor directors,
officers, or employees of any affiliate of the Manager, to serve on the
Manager's Conflicts Committee. The Conflicts Committee has the authority to
review specific matters as to which the Board of Directors believes there may be
a conflict of interest in order to determine if the resolution of such conflict
proposed by the Manager is fair and reasonable to the Company. Any matters
approved by the Conflicts Committee will be conclusively deemed to be fair and
reasonable to the Company, approved by all partners of the Company and not a
breach by the Manager or its Board of Directors of any duties they may owe the
Company or the Unitholders. The Board of Directors also has an audit committee
(the "Audit Committee") composed of the two independent directors as well as
George R. Hornig, which reviews the external financial reporting of the Company,
recommends engagement of the Company's independent public accountants and
reviews the Company's procedures for internal auditing and the adequacy of the
Company's internal accounting controls. The Board of Directors also has a
compensation committee (the "Compensation Committee"), consisting of five
directors, including the two independent directors, which determines the
compensation of the officers of the Manager and administers its employee benefit
plans. In addition, the Board of Directors has a Long-Term Incentive Plan
Committee (the "LTIP Committee"), which consists of four directors, including
the two independent directors, which acts with respect to the Company's
Long-Term Incentive Plan. As of May 2001, the Board of Directors formed an
independent committee to evaluate management's proposal regarding the offer to
take the Company private. William A. Wyman and Alan B. Abramson are members of
the independent committee.

            None of the listed directors or executive officers, to the best
knowledge of the foregoing, has been convicted in a criminal proceeding or is
named subject of a pending criminal proceeding (including traffic violations and
other minor offenses) or has been party to any judicial or administrative
proceeding during the past five years that resulted in a judgment, decree or
final order enjoining the person from future violations of, or prohibiting
activities subject to federal or state securities laws, or a finding of any
violation of federal or state securities laws.


                                       23
<PAGE>

Directors, Executive Officers and Key Employees of the Manager


            The following table sets forth certain information with respect to
the members of the Board of Directors of the General Partner, its executive
officers and certain key employees. Executive officers and directors are elected
for one-year terms.

         Name           Age        Position with Manager

John M. Rudey           59         Chairman, Chief Executive Officer, President
                                   and Director (1)

Aubrey L. Cole          79         Director (2)

George R. Hornig        48         Director (3)

William A. Wyman        64         Director (4)

Alan B. Abramson        57         Director (5)

Robert F. Wright        77         Director (6)

Thomas C. Ludlow        56         Vice President and Chief Financial Officer

Martin Lugus            62         Vice President, Timberland Operations

Robert B. Longo         49         Corporate Controller

Walter L. Barnes        60         Assistant Vice President, Harvesting

Robert A. Broadhead     51         Assistant Vice President, Acquisitions &
                                   Development

Christopher J. Sokol    53         Assistant Vice President, Forestry

Travis A. Huntley       56         Assistant Vice President, Marketing


(1)   Member of the Executive (Chairman), Nominating (Chairman), Finance and
      Compensation Committees.

(2)   Member of the Compensation and LTIP Committees.

(3)   Member of the Executive, Audit, Finance (Chairman) and Compensation
      Committees.

(4)   Member of the Audit (Chairman), Conflicts (Chairman), Compensation , LTIP
      and Independent Committees.

(5)   Member of the Audit, Conflicts, Compensation (Chairman), LTIP and
      Independent Committees.

(6)   Member of the Nominating, Finance and LTIP (Chairman) Committees.

            John M. Rudey serves as Chairman, Chief Executive Officer, President
and as a Director of the Manager, having been elected to the Board in September
1996. Mr. Rudey also serves as the Chairman and Chief Executive Officer of
Holdings since September 1997. Since 1992, Mr. Rudey has served as Chief
Executive Officer of Garrin Properties Holdings, Inc., a private investment
company that manages and advises investment portfolios principally concentrated
in the timber and forest products industries and in real estate.


            Aubrey L. Cole serves as a Director of the Manager, having been
elected to the Board in September 1996. Since 1989, Mr. Cole has been a
consultant for Aubrey Cole Associates, a sole proprietorship which provides
management consulting services and makes investments. From 1986 to 1989, Mr.
Cole was the Vice Chairman of


                                       24
<PAGE>

the Board and Director of Champion International Corporation (a publicly traded
forest products company) and from 1983 to 1993, Mr. Cole was the Chairman of
Champion Realty Corporation (a land sales subsidiary of Champion International).
From 1998 to 2001, Mr. Cole served as a Director of Deotexas Inc. (a development
stage company).

            George R. Hornig serves as a Director of the Manager, having been
elected to the Board in September 1996. Since 1999, Mr. Hornig has been Managing
Director and Chief Operating Officer of Credit Suisse First Boston's Private
Equity Division. From 1993 to 1999, Mr. Hornig was an Executive Vice President
of Deutsche Bank Americas Holdings, Inc. (the United States arm of Deutsche
Bank, a German banking concern) and affiliated predecessor entities. From 1991
to 1993, Mr. Hornig was the President and Chief Operating Officer of Dubin &
Swieca Holdings, Inc., an investment management business. From 1988 to 1991, Mr.
Hornig was a co-founder, Managing Director and Chief Operating Officer of
Wasserstein Perella & Co., Inc. (a mergers and acquisitions investment bank).
From 1983 to 1988, Mr. Hornig was an investment banker in the Mergers and
Acquisitions Group of The First Boston Corporation. Prior to 1983, Mr. Hornig
was an attorney with Skadden, Arps, Slate, Meagher & Flom. Mr. Hornig is also a
director of Unity Mutual Life Insurance Company, Forrester Research, Inc., and
Veridian Corporation, a defense technology company traded on the New York Stock
Exchange.

            William A. Wyman serves as a Director of the Manager, having been
elected to the Board in January 1999. Mr. Wyman is a former President of the
Management Consulting Group of Booz, Allen & Hamilton. Mr. Wyman joined Booz
Allen in 1965, as a consultant to a variety of service, natural resources and
manufacturing and financial companies. In 1984, he formed his own consulting
firm, Oliver, Wyman & Company, to provide strategic and operating counsel to
large financial institutions. Since his retirement in 1995, he has been working
as a counselor to Chief Executives of several companies. He is a Director of
Predictive Systems Inc, Pegasystems Inc., and Internosis, Inc, and serves on the
Board of Advisors for The Sprout Group, a venture capital partnership, and
Castle Harlan Inc., a buyout partnership.

            Alan B. Abramson serves as a Director of the Manager, having been
elected to the Board in January 1999. Mr. Abramson is the President of Abramson
Brothers Incorporated, a real-estate management and investment firm, where he
has been employed since 1972. He serves as a Director of Datascope, Inc., a
medical technology company.

            Robert F. Wright serves as a Director of the Manager, having been
elected to the Board in September 1996. Since 1988, Mr. Wright has served as
President and Chief Executive Officer of Robert F. Wright Associates, Inc., a
firm making strategic investments and providing business consulting services.
Previously, Mr. Wright spent 40 years, 28 years as a partner, at Arthur Andersen
& Co. Mr. Wright was a Director of Hanover Direct, Inc. until August 2001, a
Director of Quadlogic Controls Corporation until 2001, and a Director of
Deotexis, Inc. until mid-2001. Mr. Wright is currently a director of the
following companies: Reliance Standard Life Insurance Co. and affiliates (life
insurance companies), The Navigators Group Inc. (a property insurance company),
Universal American Financial Corp. (an insurance company), CDG Technology Inc.
(growth stage systems and suppliers to water utilities), GVA Williams Real
Estate Co., Inc. (a real estate company), and U.S.I. Holdings Corporation (a
distributor of insurance products).

            Thomas C. Ludlow became Vice President and Chief Financial Officer
of the Manager in July 2000. From 1998 to 2000, Mr. Ludlow was Chief Financial
Officer of Forest Systems, LLC, a Boston based timber investment management
company. From 1995 to 1998, Mr. Ludlow was Director and head of North American
Forest Products for Deutsche Morgan Grenfell, an international investment bank.
Prior to 1995, Mr. Ludlow worked with various financial institutions.

            Martin Lugus serves as Vice President - Timberland Operations of the
Manager, responsible for all land management and operations on fee lands. Mr.
Lugus was employed by Weyerhaeuser for 28 years, during which time he served as
Forestry Manager from 1981 to 1991 and Timberlands Manager from 1991 to 1996 and
then for the Manager in his current role.


                                       25
<PAGE>

Key Employees

            Walter L. Barnes serves as Assistant Vice President - Harvesting of
the Manager, responsible for all solid wood logging and fiber operations. From
1993 to 1996, prior to joining the Manager, Mr. Barnes acted as the Operations
Harvest Manager for Weyerhaeuser. Mr. Barnes was employed by Weyerhaeuser for 28
years and has extensive experience managing different harvesting systems on both
the East and West sides of the Cascade Range.

            Robert A. Broadhead serves as Assistant Vice President - Acquisition
& Development of the Manager, a newly created position in 2002 to identify and
evaluate properties From 1996 through 2001, Mr. Broadhead served as Assistant
Vice President- Marketing of the Manager. Prior to joining the Manager in 1996,
Mr. Broadhead was employed by Weyerhaeuser for 20 years and gained additional
experience in investing and planning while serving as Planning Manager from 1981
to 1994.

            Robert B. Longo serves as the Corporate Controller of the Manager,
responsible for accounting functions. Prior to joining the Manager in 2001, Mr.
Longo was Chief Financial Officer of Desert Lake Technologies, LLC and The New
Algae Company, Inc. From 1980 to 1995, Mr. Longo held various financial and
management positions at American Cyanamid Company.

            Travis A. Huntley serves as Assistant Vice President - Marketing of
the Manager, responsible for all log and stumpage sales transactions. Prior to
joining the Manager in 2000, Mr. Huntley was Log Coordinator for Collins
Products LLC. Before Collins Products Mr. Huntley was Timber Manager for Medite
Corporation and managed 170,000 acres of Timberlands in South Central Oregon.

            Christopher J. Sokol serves as Assistant Vice President - Forestry
of the Manager, responsible for forestry operations, environmental
relationships, harvest prescriptions and nursery/orchard operations. Prior to
joining the Manager in 1996, Mr. Sokol was employed by Weyerhaeuser for 22 years
and gained additional experience in forest regeneration and timber sales while
serving as District Forester from 1982 to 1991 and as Forestry Manager
thereafter.

Compliance with Section 16(a) of the Exchange Act

            Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Manager's officers and directors, and persons who own more than 10%
of a registered class of equity securities of the Master Partnership, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the OTC Bulletin Board. Officers, directors and greater than ten
percent security holders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.

            Based on its review of the copies of such forms received by it, or
written representations regarding ownership of the Master Partnership's
securities, the Company believes that during the fiscal year 2002, all filings
required were properly made.

Item 11. Executive Compensation

            The Master Partnership and the Manager were formed in June 1997.
Under the terms of the Operating Company Agreement, the Company is required to
reimburse the Manager for expenses relating to the operation of the Company,
including salaries and bonuses of employees employed on behalf of the Company,
as well as the costs of providing benefits to such persons under employee
benefit plans and for the costs of health and life insurance.

            The following table sets forth annual salary, bonus and all other
compensation awards and payouts earned by the Manager's Chief Executive Officer
and the four most highly compensated executive officers who earned in excess of
$100,000 (the "Named Executive Officers") for services rendered during the
fiscal year ended December 31, 2002:


                                       26
<PAGE>

<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE
                           --------------------------
                                                                                            Long-Term
                                                             Annual             Compensation
                                                          Compensation             Awards
                                                                                 Securities
Name and Principal                    Fiscal                                     Underlying      All Other
Position                               Year         Salary ($)      Bonus ($)  Options/SARs(#)  Compensation
--------                               ----         ----------      ---------  ---------------  ------------
<S>                                     <C>        <C>            <C>              <C>           <C>
John M . Rudey                          2002       $463,500       $     --             --         --
    Chairman and                        2001        463,500             --             --         --
    Chief Executive Officer             2000        463,500        256,750             --         --

Thomas C. Ludlow                        2002        225,000             --
    Vice President and                  2001        225,000             --
    Chief Financial Officer             2000         80,208         75,000         50,000         --

Martin Lugus                            2002        123,600             --
    Vice President - Timberland         2001        123,600             --
                                        2000        123,600         30,900             --         --

Walter L. Barnes                        2002         97,850             --
    Assistant Vice President            2001         97,850             --
    - Harvesting                        2000         97,850         24,463             --         --

Robert A. Broadhead                     2002         92,700             --
    Assistant Vice President            2001         92,700             --
    - Acquisitions & Development        2000         92,700         23,175             --         --

Long-Term Incentive Plan
</TABLE>

               The Manager has adopted the U.S. Timberlands Company, LP Amended
and Restated 1997 Long-Term Incentive Plan (the "Long-Term Incentive Plan") for
key employees and directors of the Manager and its affiliates. The summary of
the Long-Term Incentive Plan contained herein does not purport to be complete
and is qualified in its entirety by reference to the Long-Term Incentive Plan,
which is filed as an exhibit to the Company's Form S-1 Registration Statement.
The Long-Term Incentive Plan consists of two components, a unit option plan (the
"Unit Option Plan") and a restricted unit plan (the "Restricted Unit Plan"). The
Long-Term Incentive Plan currently permits the grant of Unit Options and
Restricted Units covering an aggregate of 857,748 Common Units.

            Unit Option Plan. The Unit Option Plan currently permits the grant
of options ("Unit Options") covering 857,748 Common Units. Unit Options granted
during the Subordination Period will become exercisable automatically upon, and
in the same proportions as, the conversion of the Subordinated Units to Common
Units. If a grantee's employment is terminated by reason of his death,
disability or retirement, the grantee's Unit Options will become immediately
exercisable. In addition, a grantee's Unit Options will become immediately
exercisable in the event of a "change of control" of the Company (as defined in
the Long-Term Incentive Plan).

               Upon exercise of a Unit Option, the Manager will acquire Common
Units in the open market at a price equal to the then-prevailing price on the
principal national securities exchange upon which the Common Units are then
traded, or directly from the Company or any other person, or use Common Units
already owned by the


                                       27
<PAGE>

Manager, or any combination of the foregoing. The Manager will be entitled to
reimbursement by the Company for the difference between the cost incurred by the
Manager in acquiring such Common Units and the proceeds received by the Manager
from an optionee at the time of exercise. Thus, the cost of the Unit Options
will be borne by the Company. If the Master Partnership issues new Common Units
upon exercise of the Unit Options, the total number of Units outstanding will
increase and the Manager will remit the proceeds received from the optionee to
the Company.

               The Unit Option Plan has been designed to furnish additional
compensation to key executives and key directors and to increase their
proprietary interest in the future performance of the Company measured in terms
of growth in the market value of Common Units.

            There were no option grants to the named executive officers during
fiscal 2002.

            The following table sets forth certain information with respect to
the aggregate number and value of options at the fiscal year-end 2002:

             AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND

                      FIS CAL YEAR ENDED OPTION/SAR VALUES

<TABLE>
<CAPTION>
                                                                        Number of Securities
                                                                       Underlying/Unexercised            Value of Unexercised
                                                                          Options/S ARs at          In-the-Money Options/S ARs at
                        Shares                                          December 31, 2002                December 31, 2002
                        ------                                          -----------------                -----------------
                        Acquired
   Name                on Exercise     Value Realized          Exercisable       Unexercisable    Exercisable   Unexercisable
<S>                        <C>                 <C>                   <C>                 <C>             <C>       <C>
John M . Rudey             --                  $--                   39,304              117,914          $--      N/A (1)

Thomas C. Ludlow           --                  $--                   12,500               37,500          $--      N/A (1)

Martin Lugus               --                  $--                   16,083               48,248          $--      N/A (1)

Walter L. Barnes           --                  $--                    8,577               25,733          $--      N/A (1)

Robert A. Broadhead        --                  $--                    8,577               25,733          $--      N/A (1)

</TABLE>

(1)         At the close of trading on December 31, 2002, the market value of
            the Common Units was $2.76 per common unit. Since the Unit Options,
            once exercisable, would be exercisable at a range of $9.813 to
            $14.750 per unit, the in-the-money computation is inapplicable.

            Restricted Unit Plan. A Restricted Unit is a "phantom" unit that
entitles the grantee to receive a Common Unit upon the vesting of the phantom
unit. No grants have been made under the Restricted Unit Plan. The LTIP
Committee may, in the future, determine to make grants under such plan to key
employees and directors containing such terms as the Committee shall determine.
Restricted Units granted during the Subordination Period will vest automatically
upon, and in the same proportions as, the conversion of the Subordinated Units
to Common Units. Common Units to be delivered upon the "vesting" of rights may
be Common Units acquired by the Manager in the open market, Common Units already
owned by the Manager, Common Units acquired by the Manager directly from the
Company or any other person, or any combination of the foregoing. The Manager
will be entitled to


                                       28
<PAGE>

reimbursement by the Company for the cost incurred in acquiring such Common
Units. If the Company issues new Common Units, the total number of Units
outstanding will increase and the Company will receive no remuneration.

            The issuance of the Common Units pursuant to the Restricted Unit
Plan is intended to serve as a means of incentive compensation for performance
and not primarily as an opportunity to participate in the equity appreciation in
respect of the Common Units. Therefore, no consideration will be payable by the
plan participants upon vesting and issuance of the Common Units.

            The Manager's Board of Directors in its discretion may terminate the
Long-Term Incentive Plan at any time with respect to any Common Units or Unit
Options for which a grant has not theretofore been made. The Manager's Board of
Directors will also have the right to alter or amend the Long-Term Incentive
Plan or any part thereof from time to time; provided, however, that no change in
any outstanding grant may be made that would impair the rights of the
participant without the consent of such participant.

Compensation of Directors

            Compensation for Directors of the Manager covers services rendered
for both the Company and the Master Partnership. No additional remuneration will
be paid to employees who also serve as directors. The independent directors
receive $50,000 to $100,000 annually, for which they each agree to participate
in four regular meetings of the Board of Directors and four Audit/Conflicts
Committee meetings. Each other non-employee director receives $50,000 annually
(to be paid in cash or Subordinated Units, as determined by each director), for
which they each agree to participate in four regular meetings of the Board of
Directors. Each non-employee director will receive $1,250 for each additional
meeting in which he participates. In addition, each non-employee director will
be reimbursed for his out-of-pocket expenses in connection with attending
meetings of the Board of Directors or committees thereof. Each director will be
fully indemnified by the Company for his actions associated with being a
director to the extent permitted under Delaware law.

            The Manager has entered into consulting agreements with each of
Aubrey Cole Associates (a consulting firm affiliated with Mr. Cole), Robert F.
Wright Associates, Inc. (a consulting firm affiliated with Mr. Wright) and Mr.
Hornig pursuant to which each such person or firm provides consulting services
to the Manager. Each such agreement provides for an annual retainer of $25,000,
plus $150 per hour (with a maximum per diem of $1,200) for services rendered at
the request of the Manager. In addition, for the first half of 2002, the Manager
entered into a consulting agreement with Mr. Wyman that provided for an annual
retainer of $50,000 for services rendered at the request of the Manager. As of
July 1, 2002, Mr. Wyman's consulting fees were reduced to zero and were offset
by increased director fees. Each consulting agreement will be reviewed annually
by a majority of the directors who do not have consulting agreements.

            The Company paid approximately $112,000, $98,000, and $129,000 to
the Directors of the Manager for consulting services during 2002, 2001 and 2000,
respectively.

Employment Agreements

            The Manager has entered into an employment agreement with Mr. Rudey
(the "Executive"). The agreement has a term expiring on December 31, 2003, and
includes confidentiality and non-compete provisions.

            The agreement provides for an annual base salary of $450,000,
subject to such increases as the Board of Directors of the Manager may authorize
from time to time. Effective January 1, 2001, the Board of Directors authorized
an increase to $463,500. In addition, the Executive is eligible to receive an
annual cash bonus to be determined by the Compensation Committee not to exceed
100% of his base salary. The Executive will be entitled to participate in such
other benefit plans and programs as the Manager may provide for its employees in
general.

            The agreement provides that in the event the Executive's employment
is terminated without "Cause" (as defined in the Employment Agreements) or if
the Executive terminates his employment for "Good Reason" (as defined below),
such individual will be entitled to receive a severance payment in an amount
equal to his base salary


                                       29
<PAGE>

for the remainder of the employment term under the Employment Agreement or 12
months, whichever is less, plus a prorated bonus for the year of such
termination calculated based on the bonus being equal to 100% of base salary. In
the event of termination due to death or disability, the Executive will be
entitled to accrued salary and benefits up to the date of the termination. In
the event the individual's employment is terminated for "Cause," he will receive
accrued salary and benefits up to the date of termination.

            Good Reason is defined in the agreement generally as: (i) failure of
the Manager's members to elect or reelect the Executive to the Board of
Directors, (ii) failure of the Manager to vest in the Executive the position,
duties and responsibilities contemplated by his Employment Agreement, (iii)
failure of the Manager to pay any portion of the Executive's compensation, (iv)
any material breach by the Manager of any material provision of the Employment
Agreement and (v) a material reduction in the individual's duties,
responsibilities or status upon a "change of control" as defined in the
Employment Agreement. "Cause" is defined generally as: (i) any felony
conviction, (ii) any material breach by the Executive of a material written
agreement between the Executive and the Company, (iii) any breach caused by the
Executive of the Partnership Agreement, (iv) any willful misconduct by the
Executive materially injurious to the Company, (v) any willful failure by the
Executive to comply with any material policies, procedures or directives of the
Board of Directors of the Manager or (vi) any fraud, misappropriation of funds,
embezzlement or other similar acts of misconduct with respect to the Company.

Committee Interlocks and Insider Participation in Compensation Decisions

            The Compensation Committee of the Manager is composed of Messrs.
Rudey, Abramson, Wyman, Hornig and Cole. Mr. Rudey also serves as Chairman of
the Manager. Other than Mr. Rudey and Mr. Hornig, none of the members are
officers or employees of the Company or the Manager.

            The duties of the Compensation Committee are to (i) determine the
annual salary, bonus and benefits, direct and indirect, of all executive
officers, (ii) review and recommend to the full Board any and all matters
related to benefit plans covering the foregoing officers and any other employees
and (iii) serve as the Long-Term Incentive Plan Committee for the Company's
Long-Term Incentive Plan.

            When setting executive officer compensation levels, the Compensation
Committee considers a variety of quantitative and qualitative criteria tied to
the strategic goals of the Company, such as maintaining the Minimum Quarterly
Distribution, and an executive's acceptance of additional responsibility and
acquisition activity. The above factors were applied by the Compensation
Committee in determining the salary and bonus amounts for all executives,
including the CEO.

            The Committee believes that for 2002 the compensation terms for Mr.
Rudey, as well as the other executive officers, were clearly related to the
realization of the goals and strategies established by the Company.

Item 12. Security Ownership of Certain Beneficial Owners and Management

             None.

Item 13. Certain Relationships and Related Transactions

            The Company is managed by the Manager pursuant to the Operating
Company Agreement. Under the Operating Company Agreement the Manager is entitled
to reimbursement of certain costs of managing the Company. These costs included
compensation and benefits payable to officers and employees of the Manager,
payroll taxes, general and administrative expenses and legal and professional
fees.

Consulting Agreements

            The Manager has entered into consulting agreements with each of
Aubrey Cole Associates (a consulting firm affiliated with Mr. Cole), Robert F.
Wright Associates, Inc. (a consulting firm affiliated with Mr. Wright) and Mr.
Hornig pursuant to which each such person or firm provides consulting services
to the Manager. Each such agreement provides for an annual retainer of $25,000,
plus $150 per hour (with a maximum per Diem of $1,200) for services rendered at
the request of the Manager. Each consulting agreement will be reviewed annually
by a majority of the directors who do not have consulting agreements. See also
Compensation of Directors included in Item 11.


                                       30
<PAGE>

Investment in Affiliate

In October 1999, the Company made an investment in U.S. Timberlands Yakima, LLC
(USTY), an unconsolidated affiliate. USTY, a then newly formed entity organized
to acquire timber properties located in Central Washington and Central Oregon,
is engaged in the growing of trees and sale of logs and standing timber to third
party wood processors. The Master Limited Partnership contributed to USTY $294
of cash for 49% of USTY's common interests (the "Common LLC Interests"). The
remaining Common LLC Interests were acquired for $306 in cash by U.S.
Timberlands Holding Group, LLC, a Delaware limited liability company in which
John Rudey and George Hornig, respectively, the Chairman of the Board and a
director of the Company's Manager, hold a controlling interest. The Company also
acquired all of the senior preferred interests in USTY (the "Senior or Preferred
LLC Interests") for its contribution to USTY of timberlands consisting primarily
of non-income producing, pre-merchantable pine plantations having an agreed upon
value of $22,000. The Company recorded its investment in the Senior LLC interest
at its $18,850 cost basis for the contributed timberlands. Terms of the
Preferred LLC Interests include a cumulative annual guaranteed return of 5%
until December 31, 2001 and 6% thereafter of the $22,000 agreed upon value of
the contributed timberlands. The Preferred LLC Interests are redeemable at
USTY's option for a redemption price equal to the agreed upon value of the
Preferred LLC Interests, either in cash or by returning the contributed
timberlands, plus any portion of the guaranteed return not received by the
Company prior to the redemption date. Generally, USTY's net income or losses are
allocated to the Common LLC Interests. However, net losses exceeding the account
balances of the Common LLC Interests are allocated to the Preferred LLC
Interest. The Company accounts for the Preferred LLC Interest at cost plus
accrued dividends to the extent earned, reduced by losses, if any, in excess of
the Common LLC Interests. The Master Limited Partnership accounts for its Common
LLC Interest by the equity method.

As a result of a refinancing transaction entered into by USTY in September 2001,
the Company's common beneficial interest in USTY is now held through the
Company's 49% common interest in a holding company, UST Yakima Holdings II, LLC.

On September 14, 2001, management of USTY was taken over by US Timberlands
Yakima Services, LLC ("Yakima Services"), a wholly owned subsidiary of the
Manager of the Company. Yakima Services is paid a fee equal to 2% of the agreed
upon valuation of the assets under management. Prior thereto, the Manager
provided management services for a fee equal to 2% of USTY's earnings before
interest, taxes, depletion, depreciation and amortization. Such fees charged to
operations by USTY amounted to $2,555 in 2002, $1,137 in 2001, and $119 in 2000.
The Master Limited Partnership and the Company granted U.S. Timberlands Holding
Group, LLC an irrevocable proxy to vote its Common and Preferred Interests.

In June 2000, the Company purchased timber cutting rights for approximately 4.2
million board feet from USTY for $1.3 million. These timber cutting rights
expire in June 2003.

In December 2000, the Company sold approximately 8,000 acres of timberland
located in Central Oregon to USTY for $2,900.

During 2001, the Company contributed cutting rights and timberland located in
Central Oregon to USTY. The contributions have an aggregate agreed upon value of
$18.5 million and were added to the Company's Preferred Interest in USTY. Terms
of the additional senior preferred interest acquired are the same terms as the
senior preferred interest previously issued to the Company. The Company recorded
its additional preferred interest at its cost for the cutting rights and
timberland of approximately $16.3 million. All property that has been
contributed for the Company's preferred interest in USTY has been pledged as
collateral by USTY under its credit facility with its lender.

In March of 2001, the Company purchased timber cutting rights for approximately
17.2 million board feet from USTY for $4.5 million. These timber cutting rights
expire in March 2004.

In September of 2001 the Company sold timber cutting rights for approximately
80.6 million board feet to USTY for $12.0 million. These timber cutting rights
expire in August 2004.

In November of 2001 the Company sold timber cutting rights for approximately
44.8 million board feet to USTY for $7.0 million. These timber cutting rights
expire in October 2004.


                                       31
<PAGE>

9. Certain Relationships and Related Party Transactions (continued):

In June 2002, the Company sold timber cutting rights for approximately 87.3
million board feet to USTY for $9.9 million. These timber cutting rights expire
in May 2005.

In August 2002, the Company purchased timber cutting rights for approximately
12.0 million board feet from USTY for $1.3 million. These timber cutting rights
expire in August 2003.

In November 2002, the Company sold timberland to USTY for $4.7 million.

During 2002, the Company contributed timberland located in Central Oregon to
USTY. The contributions have an aggregate agreed upon value of $18.5 million and
were added to the Company's Preferred Interest in USTY. Terms of the additional
senior preferred interest acquired are the same terms as the senior preferred
interest previously issued to the Company. The Company recorded its additional
preferred interest at its cost for the timberland of approximately $18.3
million. All property that has been contributed for the Company's preferred
interest in USTY has been pledged as collateral by USTY under its credit
facility with its lender.

In addition to the preceding, in July 2002, the Company purchased timber cutting
rights for approximately 5.1 million board feet from USTY Services for $0.5
million. These timber cutting rights expire in July 2005.

Gross profits realized on the Company's sales of timber cutting rights to USTY,
to the extent of the Company's ownership interest in USTY, have been eliminated
and are recognized in operations upon USTY's sale of the timber to third parties
with corresponding adjustments to the carrying value of the investment in USTY.
In addition, the Company's equity in net income (loss) of affiliate has been
adjusted to eliminate its share of gross profits realized by USTY on sales of
timber cutting rights to the Company, until the Company sells the timber to
third parties

In February 2003, the Company contributed timberland located in Central Oregon
to USTY. The contributions have an aggregate agreed upon value of $6.2 million
and were added to the Company's Preferred Interest in USTY. Terms of the
additional senior preferred interest acquired are the same terms as the senior
preferred interest previously issued to the Company. The Company recorded its
additional preferred interest at its cost for the timberland of approximately
$4.8 Million.

Affiliate Credit Facility

            See the description of the Affiliate Credit Facility included in the
Liquidity and Capital Resources section of Item 7.

Item 14. Controls and Procedures

          The Company's management maintains an adequate system of internal
controls to promote the timely identification and reporting of material,
relevant information. The Company's senior management team meets regularly to
discuss significant transactions and events affecting the Company's operations.
The Company's President and Chief Executive Officer, Vice President and Chief
Financial Officer, lead these meetings and consider whether topics discussed
represent information that should be disclosed under the rules of the SEC. The
Board of Directors of the General Partner includes an Audit Committee. The Audit
Committee reviews the earnings release and all reports on Form 10-Q and 10-K
prior to their filing. The Audit Committee is responsible for hiring the
Company's external auditors and meets with those auditors at least three times
each year.

          The Company's President and Chief Executive Officer, Vice President
and Chief Financial Officer are responsible for establishing and maintaining
disclosure controls and procedures. They have designed such controls to ensure
that others make all material information known to them within the organization.
Management regularly evaluates ways to improve internal controls.

            On February 28, 2003, our executive officers completed an evaluation
of the disclosure controls and procedures and has determined them to be
functioning properly and effectively. They did not discover any significant
deficiencies or material weaknesses within the controls and procedures that
required modification. Since


                                       32
<PAGE>

the completion of that evaluation, there have been no significant changes in
internal controls or in other factors that could significantly affect internal
controls.

                                     PART IV

Item 15. Exhibits, Financial Statements, and Reports on Form 8-K

(a)(1) and (2) Financial Statements
            See "Index to Financial Statements" set forth on page F-1.

(a)(3) Exhibits

      T3.1  - Amended and Restated Agreement of Limited Partnership of U.S.
              Timberlands Company, LP

      T3.2  - Second Amended and Restated Operating Agreement of U.S.
              Timberlands Klamath Falls, LLC

      T10.2 - Indenture among U.S. Timberlands Klamath Falls, LLC, U.S.
              Timberlands Finance Corp. and State Street Bank and Trust Company,
              as trustee

      T10.3 - Contributions, Conveyance and Assumption Agreement among U.S.
              Timberlands Company, LP and certain other parties

      *10.4 - Form of U.S. Timberlands Company, LP 1997 Long-Term Incentive Plan

      *10.5 - Employment Agreement for Mr. Rudey

      *10.9 - Supply Agreement between U.S. Timberlands Klamath Falls, LLC and
              Collins Products, LLC

    ++10.10 - Operating Agreement of U.S. Timberlands Yakima, LLC

      10.11 - Agreement and Plan of Merger by and among U.S. Timberlands
              Holdings Group, LLC, U.S. Timberlands Acquisition Co., LLC and
              U.S. Timberlands Company, L.P. Dated as of October 16, 2002

     *21.1  - List of Subsidiaries

      23.1  - Consent of Eisner LLP dated April 14, 2003

      99.1  - Certification of CEO pursuant to 18 U.S.C. Section 1350, as
              adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

      99.2  - Certification of CFO pursuant to 18 U.S.C. Section 1350, as
              adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*     Incorporated by reference to the same numbered Exhibit to the Registrant's
      Registration Statement on Form S-1 filed November 13, 1997.

T     Incorporated by reference to the same numbered Exhibit to the Registrant's
      Current Report on Form 8-K filed January 15, 1998.

++    Incorporated by reference to the same numbered exhibit to the Registrant's
      Form 10-Q filed on May 15, 2000.

(b.) Reports on Form 8-K

         On October 17, 2002, the Company filed a Form 8-K containing a news
release relating to the execution of a definitive agreement with respect to a
privatization and the tentative settlement of certain purported class action


                                       33
<PAGE>

lawsuits.

         On May 2, 2002, the Company filed a form 8-K attaching two news
releases relating to the receipt of a revised offer with respect to a tender
offer and the filing of certain purported class action lawsuits


                                       34
<PAGE>

                                   SIGNATURES

            Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on this
14th day of April 2003.

                                 U.S. TIMBERLANDS KLAMATH FALLS, LLC


                                 By: U.S. Timberlands Services Company, LLC
                                     It's Manager


                                 By: /s/ John M. Rudey
                                 ---------------------------------------------
                                 John M. Rudey, Chairman, Chief Executive
                                 Officer and President

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

                                                                  April 14, 2003
/s/ John M. Rudey         Chairman, Chief Executive Officer,
---------------------     President and Director (Principal
     John M. Rudey        Executive Officer)

                                                                  April 14, 2003
/s/ Thomas C. Ludlow      Chief Financial Officer
---------------------
      Thomas C. Ludlow

                                                                  April 14, 2003
/s/ Robert B. Longo       Corporate Controller
---------------------     (Principal Accounting Officer)
      Robert B. Longo
                                                                  April 14, 2003
/s/ Aubrey L. Cole        Director
---------------------
       Aubrey L. Cole

                                                                  April 14, 2003
/s/ George R. Hornig      Director
-----------------------
       George R. Hornig

                                                                  April 14, 2003
/s/ Alan B. Abramson      Director
-----------------------
Alan B. Abramson

                                                                  April 14, 2003
/s/ William A. Wyman      Director
-----------------------
William A. Wyman

                                                                  April 14, 2003
/s/ Robert F. Wright      Director
-----------------------
Robert F. Wright


                                       35
<PAGE>

EXHIBIT INDEX

                                                                   Page No.
                                                                   --------
23.1 Consent of Eisner LLP dated April 14, 2003                         39



                                       36
<PAGE>


                                  CERTIFICATION

I, John M. Rudey, certify that:


I have reviewed this annual report on Form 10-K of U.S. Timberlands Klamath
Falls, LLC.

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

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

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

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

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

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

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

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

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

      5.    The registrant's other certifying officers and I have indicated in
            this annual report whether or not there were significant changes in
            internal controls or in other factors that could significantly
            affect internal controls subsequent to the date of our most recent
            evaluation, including any corrective actions with regard to
            significant deficiencies and material weaknesses.

Date: April 14, 2003
                               /s/ John M. Rudey
                              --------------------------------------------------
                                 John M. Rudey
                                 Chairman, Chief Executive Officer and President


                                       37
<PAGE>



                                  CERTIFICATION

I, Thomas Ludlow, certify that:

I have reviewed this annual report on Form 10-K of U.S. Timberlands Klamath
Falls, LLC.

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

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

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

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

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

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

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

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

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

      5.    The registrant's other certifying officers and I have indicated in
            this annual report whether or not there were significant changes in
            internal controls or in other factors that could significantly
            affect internal controls subsequent to the date of our most recent
            evaluation, including any corrective actions with regard to
            significant deficiencies and material weaknesses.

Date: April 14, 2003
                                          /s/ Thomas C. Ludlow
                                          ------------------------------------
                                          Thomas C. Ludlow Chief Financial
                                          Officer


                                       38
<PAGE>


CONSOLIDATED FINANCIAL STATEMENTS

Contents                                                                   Page

U.S. Timberlands Klamath Falls, LLC:

Independent auditors' report                                                 F-2

Consolidated balance sheets as of December 31, 2002 and 2001                 F-3

Consolidated statements of operations for the years ended
December 31, 2002, 2001, and 2000                                            F-4

Consolidated statements of changes in member's equity (deficiency)
for the years ended December 31, 2002, 2001, 2000 and 1999                   F-5

Consolidated statements of cash flows for the years ended
December 31, 2002, 2001 and 2000                                             F-6

Notes to consolidated financial statements                                   F-7

U.S. Timberlands Yakima, LLC:

Independent auditors' report                                                F-21

Balance sheets as of December 31, 2002 and 2001                             F-22

Statements of operations for the years ended December 31, 2002, 2001,
and 2000 for the years ended

December 31 2002, 2001, 2000 and 1999                                       F-23

Statements of redeemable preferred member interest and members' equity      F-24

Statements of cash flows for the years ended December 31, 2002,
2001 and 2000                                                               F-25

Notes to financial statements                                               F-26

                                       F-1


<page>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Partners of
U.S. Timberlands Klamath Falls, LLC

We have audited the accompanying consolidated balance sheets of U.S. Timberlands
Klamath Falls, LLC and subsidiary as of December 31, 2002 and 2001, and the
related consolidated statements of operations, changes in members' equity
(deficiency) and cash flows for each of the years in the three-year period ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the financial position of U.S. Timberlands
Klamath Falls, LLC and subsidiary as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.

Eisner LLP

New York, New York
April 11, 2003


                                      F-2
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY

Consolidated Balance Sheets
(in thousands, except unit information)
<TABLE>
<CAPTION>
                                                                December 31,
                                                               2002       2001
                                                             -------     -------
<S>                                                        <C>           <C>
ASSETS
Current assets:
    Cash and cash equivalents                                     965    $   1,070
    Accounts receivable, net                                    1,028          311
    Due from general partner                                        6           --
    Other receivables                                             211          280
    Notes receivable                                            1,344        1,153
    Prepaid expenses and other current assets                     331          225
                                                            ---------    ---------
       Total current assets                                     3,885        3,039

Timber and timberlands, net                                   163,980      214,511
Investment in affiliate                                        38,881       31,609
Property, plant and equipment, net                                905          811
Notes receivable, less current portion                             10          428
Restricted cash                                                    82
Deferred financing fees, net                                    3,298        3,973
                                                            ---------    ---------
       Total assets                                         $ 211,041    $ 254,371
                                                            ---------    ---------
LIABILITIES AND MEMBER' EQUITY (DEFICIENCY)
Current liabilities:
    Accounts payable                                            1,454    $   1,334
    Accrued liabilities                                         3,990        3,331
    Payable to general partner                                     --           41
                                                            ---------    ---------
       Total current liabilities                                5,444        4,706
                                                            ---------    ---------
Long-term debt                                                225,000      225,000
                                                            ---------    ---------
Members' equity (deficiency):
    Managing member's interest                                   (196)         247
    Nonmanaging members' interest                             (19,207)      24,418
                                                            ---------    ---------
                                                              (19,403)      24,665
                                                            ---------    ---------
       Total liabilities and members' equity (deficiency)   $ 211,041    $ 254,371
                                                            ---------    ---------
</TABLE>

                                       F-3


<page>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY

Consolidated Statements of Operations
(in thousands, except unit and per unit amounts)
<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                                  2002        2001        2000
                                                                                --------    --------    --------
<S>                                                                             <C>         <C>         <C>
Revenues:
    Log, timber deed and stumpage sales,
    including $9,900 (2002), $19,015 (2001) and $2,900 (2000) to an affiliate   $ 42,256    $ 54,128    $ 72,268
    Timber and property sales
       including $4,700 in 2002 to an affiliate                                    5,763          --       2,900
    By-products and other                                                          1,455         436         571
                                                                                --------    --------    --------
                                                                                  49,474      54,564      75,739
                                                                                --------    --------    --------
Cost of products sold:
    Cost of timber harvested                                                     (17,477)    (16,652)    (19,853)
    Cost of timber and property sales                                             (7,273)         --      (2,641)
    Fire loss                                                                       (591)         --          --
    Depletion, depreciation and road amortization                                (27,476)    (37,287)    (28,816)
                                                                                --------    --------    --------
                                                                                 (52,817)    (53,939)    (51,310)
                                                                                --------    --------    --------
           Gross profit (loss)                                                    (3,343)        625      24,429

Selling, general and administrative expenses                                      (7,518)     (8,340)     (8,428)
Equity in net income (loss) of affiliate                                         (11,046)     (6,885)      2,051
                                                                                --------    --------    --------
Operating income (loss)                                                          (21,907)    (14,600)     18,052

Interest expense                                                                 (21,657)    (21,993)    (21,921)
Amortization of deferred financing fees                                             (675)       (675)       (675)
Interest income                                                                       13         101         403
Other income, net                                                                    158         131         208
                                                                                --------    --------    --------
Net loss                                                                         (44,068)    (37,036)     (3,933)

</TABLE>


See notes to consolidated financial statements


                                      F-4
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY

Consolidated Statements of Changes in Members' Equity (Deficiency)
(in thousands)

<TABLE>
<CAPTION>
                                                Managing    Nonmanaging    Total
                                                Member's     Members'     Members'
                                                Interest     Interest     Equity
                                                                        (Deficiency)
<S>                                              <C>         <C>         <C>
Balance, December 31, 1999                       $    984    $ 97,454    $ 98,438
Distributions to members                             (262)    (25,981)    (26,243)
Net loss                                              (39)     (3,894)     (3,933)
                                                 --------    --------    --------
Balance, December 31, 2000                            683      67,579      68,262
Distributions to members                              (65)     (6,496)     (6,561)
Net loss                                             (371)    (36,665)    (37,036)
                                                 --------    --------    --------
Balance, December 31, 2001                            247      24,418      24,665
Net loss                                             (443)    (43,625)    (44,068)
                                                 --------    --------    --------
Balance, December 31, 2002                       $   (196)   $(19,207)   $(19,403)
                                                 --------    --------    --------
</TABLE>


See notes to consolidated financial statements

                                      F-5
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>

                                                                                             Year Ended December 31,
                                                                                     2002                 2001               2000
                                                                                 --------------      ------------        ---------
Cash flows from operating activities:
<S>                                                                                <C>                 <C>                 <C>
   Net (loss)                                                                      $(44,068)           $(37,036)           $ (3,933)
   Adjustments to reconcile net (loss) to net cash
      provided by operating activities:
         Depreciation, depletion, amortization and cost of
            timber and property sold                                                 34,749              37,287              31,457
         Fire loss                                                                      574                   -                   -
         (Gain) loss on disposal of assets                                                -                  (2)                (39)
         Amortization of deferred financing fees                                        675                 675                 675
         Equity in net (income) loss of affiliate                                    11,046               6,685              (2,051)
         Other non-cash items                                                           173                 233                   -
         Changes in assets and liabilities:
            Accounts receivable                                                        (717)              4,818              (3,758)
            Other receivables                                                            69                (120)                (36)
            Notes receivable                                                            227                 704               2,363
            Prepaid expenses and other current assets                                  (106)               (190)                946
            Accounts payable                                                            120                 112                 876
            Accrued liabilities                                                         659                   5                  40
            Deferred revenue                                                              -              (1,474)              1,435
            Payable to general partner and affiliate                                   (168)             (2,024)                896
                                                                                   --------            --------            --------
                Net cash provided by operating activities                             3,233               8,974              28,871
                                                                                   --------            --------            --------

Cash flows from investing activities:

   Purchase of property, plant and equipment - net                                     (160)                  -                 (55)
   Proceeds from sale of assets                                                           -                 904                  50
   Timber, timberlands and road additions                                            (3,096)             (5,615)             (2,253)
   Restricted cash                                                                      (82)                  -                   -
                                                                                   --------            --------            --------
                Net cash used in investing activities                                (3,338)             (4,711)             (2,258)
                                                                                   --------            --------            --------

Cash flows from financing activities:

   Distributions to members                                                               -              (6,561)            (26,243)

                Net cash used in financing activities                                     -              (6,561)            (26,243)
                                                                                   --------            --------            --------
Net (decrease) increase in cash and cash equivalents                                   (105)             (2,098)                370
Cash and cash equivalents, beginning of period                                        1,070               3,168               2,798
                                                                                   --------            --------            --------
Cash and cash equivalents, end of period                                           $    965            $  1,070            $  3,168
                                                                                   ========            ========            ========

Supplemental cash flow information:

   Cash paid for interest expense                                                  $ 21,657            $ 22,033            $ 21,786

Noncash activities:

   Contribution of timberlands for investment in affiliate                         $ 18,317            $ 16,289                 $ -
</TABLE>

                 See notes to consolidated financial statements



                                      F-6
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

1.   Business and Significant Accounting Policies:

Business

The accompanying consolidated financial statements include the accounts of U.S.
Timberlands Klamath Falls, LLC ("the Company"), a Delaware limited liability
company, and its wholly owned subsidiary, U.S. Timberlands Finance Corp.
("Finance Corp."), collectively referred to hereafter as the Company. Finance
Corp. serves as the co-obligor for The Company's notes (defined below). It has
nominal assets and does not conduct operations. All intercompany transactions
have been eliminated in consolidation. An investment in affiliate is carried at
cost, plus accrued dividends to the extent earned, reduced by losses, if any, in
excess of the common members' interest in the investee . The financial
statements for 2001 have been restated to reflect the elimination of all of the
gross profits realized by the affiliate on the sale of timber cutting rights to
the Company. The effect of this restatement was to reduce the carrying value of
timber and timberlands at December 31, 2001 by $787 and to increase equity in
net loss of affiliate for the year ended December 31, 2001 by a like amount.(See
Notes 3 and 9).

U.S. Timberlands Company, LP (the "MLP") owns a 99% non-managing member interest
in the Company. The MLP was formed on June 27, 1997 to acquire and own
substantially all of the equity interests in The Company and through the Company
to acquire and own business and assets of U.S. Timberlands Management Company,
LLC, formerly known as U.S. Timberlands Services Company, LLC. U.S. Timberlands
Services Company, LLC (the "Manager") manages the business of the Company and
owns a 1% managing member interest in The Company.

The primary activity of the Company is the growing of trees and the sale of logs
and standing timber to third party wood processors. The Company's timber is
located principally in Oregon, east of the Cascade Range. Logs harvested from
the timberlands are sold to unaffiliated domestic conversion facilities. These
logs are processed for sale as lumber, plywood and other wood products,
primarily for use in new residential home construction, home remodeling and
repair and general industrial applications.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Revenue on delivered log sales is recognized upon delivery to the customer.
Revenue on timber deeds and timber and property sales is generally recognized
upon closing. Revenue from timber sold under stumpage contracts (i.e., the
customer arranges to harvest and deliver the logs) is recognized when the timber
is harvested.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts and notes receivable. The
majority of the Company's trade accounts and notes receivable are derived from
sales to third party wood processors. The Company's four largest, non-affiliated
customers accounted for approximately 25%, 10%, 10%, and 10% of the Company's
aggregate net revenues from log, stumpage, and timber deed sales for the year
ended December 31, 2002. In 2001, these customers represented approximately 22%,
6%, 7%, and 6%, respectively, of aggregate net revenues from log, stumpage and
deed sales. In 2000, these four customers accounted for approximately 14%, 16%,
8%, and 2% of aggregate net revenues from log, stumpage and


                                      F-7
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

deed sales. No other single customer accounted for more than 6% of aggregate net
revenues from log, stumpage,

1. Business and Significant Accounting Policies (continued):

and timber deed sales in those years. Credit risk on trade receivables is
mitigated by control procedures to monitor the credit worthiness of customers.

The Company mitigates credit risk related to notes receivable by obtaining asset
lien rights or performing credit worthiness procedures or both. The Company
periodically reviews its allowance for doubtful accounts and reserves an
estimated amount for such accounts. As of December 31, 2002 and 2001 the Company
had an allowance for doubtful accounts of $0 and $100, respectively.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with maturities
at date of purchase of 90 days or less.

Timber and Timberlands

Timber and timberlands is comprised of timber, timberlands, logging roads, and
seed stock and nursery stock.

Timber, timberlands and roads


Timber, timberlands and roads are stated at cost less depletion and road
amortization for timber previously harvested. The cost of the timber harvested
(including logging roads) is determined based on the volume of timber harvested
in relation to the amount of estimated net merchantable volume, primarily
utilizing a single composite pool. The Company estimates its timber inventory
using statistical information and data obtained from physical measurements, site
maps, photo-types and other information gathering techniques. These estimates
are updated annually and may result in adjustments of timber volumes and
depletion rates, which are recognized prospectively. Changes in these estimates
have no effect on the Company's cash flow.

Seed orchard and nursery stock


The Company operates and maintains a seed orchard and nursery. Costs incurred by
the orchard and nursery to produce seed and seedlings utilized in the
reforestation of the Company's timberlands are capitalized to seed orchard and
nursery stock in the accompanying balance sheets. A certain amount of seed and
seedling stock is sold to unaffiliated customers and is reflected as a component
of by-products and other revenues in the accompanying statements of operations.

Property, Plant and Equipment

Property, plant and equipment, including significant improvements thereto, are
stated at cost less accumulated depreciation and amortization. Cost includes
expenditures for major improvements and replacements. Maintenance and repairs
are charged to expense as incurred. When assets are sold, retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in income.

The cost of property, plant and equipment is depreciated using the straight-line
method over the estimated useful lives of the related assets. Buildings and
improvements are generally depreciated over 40 years and equipment is


                                      F-8
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

depreciated over 3 to 5 years. Leasehold improvements are amortized under the
straight-line method based on the shorter of the lease periods or the estimated
useful lives of the improvements.

1. Business and Significant Accounting Policies (continued):

Deferred Financing Fees

Deferred financing fees consist of fees incurred in connection with obtaining
the related debt financing. The Company amortizes deferred financing fees over
the terms of the related debt. The Company presents deferred financing fees net
of accumulated amortization. The accumulated amortization of deferred financing
fees as of December 31, 2002 and 2001 was $3,452 and $2,777, respectively.

Income Taxes

The Company is a limited liability company. Accordingly, the Company is not
liable for federal or state income taxes since the Company's income or loss is
reported on the separate tax returns of the members. Accordingly, no provision
for current or deferred income taxes has been reflected in the accompanying
financial statements.

Unit-Based Compensation Plans

At December 31, 2002, the Master Limited Partnership has a Unit Option Plan
which is described more fully in Note 10. As permitted under SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, which was
issued in December 2002 and amended SFAS No. 123, Accounting for Stock-Based
Compensation, the Company has elected to continue to follow the intrinsic value
method in accounting for its stock-based employee compensation arrangements as
defined by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. The following table
illustrates the effect on net loss if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation.

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                          2002       2001         2000
                                                         ------      ------       -----
<S>                                                     <C>         <C>         <C>
Net income (loss) as reported                           $(43,821)   $(36,188)   $ (4,080)
Unit-based employee compensation determined under the
    fair value method                                   $    320         323         537
Net income (loss) pro forma                              (44,141)    (36,511)     (4,617)
</TABLE>

For purposes of the pro forma disclosures, the estimated fair value of the unit
options is amortized to expense over their estimated exercise period, which
corresponds to the assumed subordinated unit's conversion period.


                                      F-9
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

1. Business and Significant Accounting Policies (continued):

The computations of the estimate of fair value of unit options granted in 2000
were made using the Black-Scholes option-pricing model, as prescribed by SFAS
123, with the following weighted average assumptions:

                                                  2000
                                                  ----

Risk-free rate of return                           5.98%
Expected dividend yield                            9.52%
Expected life of the Unit Options               5 Years
Expected volatility                               80.59%

No options were granted in 2001 and 2002. The weighted-average fair value of
unit options granted in 2000 was $3.61.

Recent Accounting Standards

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as of January 1,
2001. SFAS 133 requires the Company to recognize all derivatives in the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through earnings. If the derivative is a hedge, depending upon the nature
of the hedge, changes in fair value of the derivative will either be offset
against the changes in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Although the Company had no outstanding derivative positions at December 31,
2001, it absorbed a loss of approximately $146 from its allocable share of the
effect of the adoption as of January 1, 2001 of SFAS 133 by its affiliate, U.S.
Timberlands Yakima, LLC, to reduce the carrying value of an interest rate cap
agreement to its fair value.

In August 2001, the Financial Accounting Standards Board, (FASB), issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, for the disposal of a segment of a business. Adoption of SFAS
No. 144 by the Company as of January1, 2002 did not significantly impact its
financial position, results of operations, or cash flows.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" as an amendment to SFAS No. 123 by
introducing two additional conversion methods when converting to the fair value
based method from the intrinsic value method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects on reported net income (loss)
of an entity's accounting policy decisions with respect to stock-based employee
compensation and amends APB Opinion No. 28 to require disclosure about those
effects in interim financial information. The disclosure provisions are
effective for fiscal years ending after December 15, 2002 and for interim


                                      F-10
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

periods beginning after December 15, 2002. The Company follows the intrinsic
value method of accounting for stock-based employee compensation, but will
continue to evaluate the benefits of a voluntary change to the fair value based
method.

1. Business and Significant Accounting Policies (continued):

In January 2003, the FASB issued Interpretation No. 46 (FIN 46) "Consolidation
of Variable interest Entities" which is an interpretation of Accounting Research
Bulletin No. 51 "Consolidated Financial Statements". FIN 46 requires the
consolidation of entities in which an enterprise absorbs a majority of the
entity's expected losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership, contractual or other financial
interests in the entity. Currently, entities are generally consolidated by an
enterprise when It has ~a controlling financial interest through ownership of a
majority voting interest in the entity.

The provisions of FIN 46 are required to be applied by the Company no later than
July 1,2003, and would require the Company to consolidate the financial
statements of U.S. Timberlands Yakima, LLC ("USTY"} its unconsolidated affiliate
which is presently being accounted for on the equity method (see Notes 3 and 9).
If the Company had consolidated USTY beginning January 1, 2002, there would have
been no effect on the Company's net loss for the year ended December 31, 2002,
however revenues would have increased by $6,157, expenses would have increased
by $17,203 and the $11,046 equity in net loss of affiliate would be eliminated.
In addition, although there would. be no change in Member's deficiency, total
assets would increase by approximately $106,000, principally representing timber
and timberlands, and total liabilities would increase by approximately $106,000
including $96,053 of long-term debt at December 31,2002. Such long-term debt is
collateralized by all of the USTY assets and the debt holder does not have
recourse to the Company. The Company's maximum exposure to loss as a result of
its involvement with USTY is limited to its investment in USTY, which amounts to
$38,881 at December 31, 2002.

2.  Timber and Timberlands:

Timber and timberlands consisted of the following at December 31:

                                                           2002       2001
                                                         --------   --------
Timber and logging roads                                 $294,208   $309,759
Timberlands                                                26,043     34,566
Seed orchard and nursery stock                              1,375      1,437
                                                         --------   --------
                                                          321,626    345,762
Less accumulated depletion and road amortization          157,646    131,251
                                                         --------   --------
                                                         $163,980   $214,511
                                                         ========   ========
3.  Investment in Affiliate:

Following is summarized financial information for U.S. Timberlands Yakima, LLC,
the Company, as of and for the years ended December 31:


                                      F-11
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

<TABLE>
<CAPTION>
                                                                 2002         2001         2000
                                                            ---------    ---------    ---------
<S>                                                         <C>          <C>          <C>
    Current assets                                          $   2,091    $   5,779    $   3,887
    Noncurrent assets, principally timber and timberlands     142,884      116,558       71,174
    Current liabilities                                         9,811        1,883       11,195
    Noncurrent liabilities - long-term debt                    96,053       88,435       42,807
    Redeemable preferred member interest (owned by the
        Company)                                               39,111       32,019       20,295
    Net sales                                                  22,018       13,574       25,606
    Gross profit (loss)                                        (1,449)       3,121       10,018
    Net income (loss)                                         (11,225)      (5,329)       2,815
</TABLE>


4.  Property, Plant and Equipment:

Property, plant and equipment consisted of the following at December 31:

                                                          2002     2001
                                                          ----     ----
        Equipment                                        $  654   $  646
        Buildings and improvements                          995      843
                                                         ------   ------
                                                          1,649    1,489
        Less accumulated depreciation and amortization      744      678
                                                         ------   ------
                                                         $  905   $  811
                                                         ======   ======
5.  Accrued Liabilities:

Accrued liabilities consisted of the following at December 31:

                                                          2002     2001
                                                          ----     ----
        Interest                                         $2,752   $2,752
        Severance and harvest tax                           144       65
        Other                                             1,094      514
                                                         ------   ------
                                                         $3,990   $3,331
                                                         ======   ======


                                      F-12
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

6.  Short-Term Debt:

The Company had a credit facility with an affiliate of the Manager (the
"Affiliate Credit Facility") consisting of a revolving line of credit of up to
$12.0 million. Borrowings under the Affiliate Credit Facility bore interest at
the prime lending rate as published in the Wall Street Journal plus applicable
margin, which was based on the Company's leverage ratio. The Affiliate Credit
Facility expired, by its terms, at the end of April 2002. The Company is seeking
to replace the Affiliate Credit Facility with a working capital facility from an
unaffiliated third party. However, there can be no assurance that the Company
will be able to obtain a working capital credit facility in amounts sufficient
to fund its working capital needs from a traditional commercial lender. The
Company and the affiliated lender have also initiated discussions with respect
to a further extension of the credit facility on terms comparable to those that
would be obtained from an unaffiliated financing source. While the Company
continues to seek a credit facility from an unaffiliated source, affiliated
lenders have agreed to make short term advances to the Company, payable on
demand to the affiliates, at an annual interest rate of 10%. The affiliate has
made no commitment to continue to lend funds to the company, and each request is
considered on a case by case basis.

There were no outstanding borrowings under the Affiliate Credit Facility at
December 31, 2002 and 2001. Peak borrowings were $1,325 and $10,370 under the
Affiliate Credit Facility during 2002 and 2001, respectively. Total interest and
commitment fees paid to the affiliate were $0 and $0 respectively in 2002, $330
and $75 in 2001, and $130 and $58 in 2000.

7.   Long-Term Debt:

The $225,000 of Senior Notes, which were issued in 1997, were issued jointly and
severally by the Company and U.S. Timberlands Finance Corp. ("Finance Corp."), a
wholly owned subsidiary of the Company (collectively, the "Issuers"). The
Issuers serve as co-obligors of the Notes. The Notes represent unsecured general
obligations of the Company and bear interest at 9-5/8% payable semiannually in
arrears on May 15 and November 15, and mature on November 15, 2007 unless
previously redeemed. The Notes are redeemable at the option of the Issuers in
whole or in part, on or after November 15, 2002 at predetermined redemption
prices plus accrued interest to the redemption date.

            The Notes contain certain restrictive covenants, including limiting
the ability of the Operating Company and its subsidiaries to make cash
distributions, incur additional indebtedness, sell assets or harvest timber in
excess of certain limitations. Under certain restrictive covenants, during 2002,
the Company was and presently is prohibited from making distributions to the
members. In 2002, because of the accelerated harvesting during the fourth
quarter 2002 of salvage timber resulting from the Toolbox Fire, the Company
exceeded the allowable four year harvest by 6.9 MMBF and, as required under the
Indenture has placed $662 in a restricted account during the first quarter of
2003 only to be used in ways prescribed in the Indenture.


                                      F-13
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

8.  Members' Equity:

Allocation of Income (Loss)

As provided in the Company's Operating Agreement, income and losses are
allocated 99% to the MLP and 1% to the Manager.

Cash Distributions

The MLP is required to make quarterly cash distributions from Available Cash, as
defined in the MLP's Partnership Agreement, if cash is available for
distributions. The Company distributes cash to the MLP to fund such
distributions in accordance with the Company's Operating Agreement. The Company
is presently prohibited from making cash distributions to the members (see note
7). If made, cash distributions are paid by the MLP in order of preferences:
first, the minimum quarterly distribution of $.50 per unit (the "MQD") to Common
Unitholders and the Manager, and second, to the extent cash remains available,
to Subordinated Unitholders.

The MLP Agreement sets forth certain cash distribution target rates for the
Company to meet in order for the Manager's share of Available Cash to increase
(such increases referred to as "Incentive Distributions"). To the extent that
the quarterly distributions exceed $.550 per Common and Subordinated Unit, the
Manager receives 15% of the excess Available Cash rather than the base amount of
2%. To the extent that the quarterly distributions exceed $.633 per Common and
Subordinated Unit, the Manager receives 25% of the excess Available Cash and to
the extent that the quarterly distributions exceed $.822 per Common and
Subordinated Unit, the Manager receives 50% of the excess Available Cash. Since
the quarterly distributions did not exceed the minimum quarterly distributions
for 2002, 2001 or 2000, the Manager did not receive any such Incentive
Distributions for those years.

9.  Certain Relationships and Related Party Transactions:

Manager

The Manager has the ability to control management of the Company and the MLP and
has all voting rights of the Company and the MLP except for certain matters set
forth in the Company's Operating Agreement and in the MLP's Partnership
Agreement, as amended. The ownership of Subordinated and Common Units by certain
affiliates of the Manager effectively gives the Manager the ability to prevent
its removal.

The Manager does not receive any management fee or other compensation in
connection with its management of the Company. The Manager and its affiliates
perform services for the Company and are reimbursed for all expenses incurred on
behalf of the Company, including the costs of employee, officer and director
compensation properly allocable to the Company, and all other expenses necessary
or appropriate to the conduct of the business of, and allocable to, the Company.
The Company's Operating Agreement provides that the Manager will determine the
expenses that are allocable to the Company in any reasonable manner determined
by the Manager in its sole discretion. Related non-interest bearing receivables
and payables between the Manager and the Company are settled in the ordinary
course of business. As of December 31, 2002 and 2001, the Company had a payable
to the Manager of $0 and $41, respectively. During 2002, 2001, and 2000 expenses
allocated to and reimbursed by the Company totaled $3,323, $6,760, and $7,717,
respectively.


                                      F-14
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

9.  Certain Relationships and Related Party Transactions (continued):

Certain conflicts of interest could arise as a result of the relationships
described above. The Board of Directors and management of the Manager have a
duty to manage the Company in the best interests of the Unitholders and,
consequently, must exercise good faith and integrity in handling the assets and
affairs of the Company.

Consulting Agreements

As of December 31, 2002, the Manager has consulting agreements with affiliates
of certain Directors of the Manager, pursuant to which each such person or firm
has provided and/or will provide consulting services to the Manager. The
agreements provide for an annual retainer of $25, plus an hourly rate for
services rendered at the request of the Manager. Payments by the Manager related
to consulting agreements in 2002, 2001, and 2000 amounted to $112, $98, and
$129, respectively.

Investment in and Transactions with Affiliates

In October 1999, the Company made an investment in U.S. Timberlands Yakima, LLC
(USTY), an unconsolidated affiliate. USTY, a then newly formed entity organized
to acquire timber properties located in Central Washington and Central Oregon,
is engaged in the growing of trees and sale of logs and standing timber to third
party wood processors. The Master Limited Partnership contributed to USTY $294
of cash for 49% of USTY's common interests (the "Common LLC Interests"). The
remaining Common LLC Interests were acquired for $306 in cash by U.S.
Timberlands Holding Group, LLC, a Delaware limited liability company in which
John Rudey and George Hornig, respectively, the Chairman of the Board and a
director of the Company's Manager, hold a controlling interest. The Company also
acquired all of the senior preferred interests in USTY (the "Senior or Preferred
LLC Interests") for its contribution to USTY of timberlands consisting primarily
of non-income producing, pre-merchantable pine plantations having an agreed upon
value of $22,000. The Company recorded its investment in the Senior LLC interest
at its $18,850 cost basis for the contributed timberlands. Terms of the
Preferred LLC Interests include a cumulative annual guaranteed return of 5%
until December 31, 2001 and 6% thereafter of the $22,000 agreed upon value of
the contributed timberlands. The Preferred LLC Interests are redeemable at
USTY's option for a redemption price equal to the agreed upon value of the
Preferred LLC Interests, either in cash or by returning the contributed
timberlands, plus any portion of the guaranteed return not received by the
Company prior to the redemption date. Generally, USTY's net income or losses are
allocated to the Common LLC Interests. However, net losses exceeding the account
balances of the Common LLC Interests are allocated to the Preferred LLC
Interest. The Company accounts for the Preferred LLC Interest at cost plus
accrued dividends to the extent earned, reduced by losses, if any, in excess of
the Common LLC Interests. The Master Limited Partnership accounts for its Common
LLC Interest by the equity method.

As a result of a refinancing transaction entered into by USTY in September 2001,
the Company's common beneficial interest in USTY is now held through the
Company's 49% common interest in a holding company, UST Yakima Holdings II, LLC.

On September 14, 2001, management of USTY was taken over by US Timberlands
Yakima Services, LLC ("Yakima Services"), a wholly owned subsidiary of the
Manager of the Company. Yakima Services is paid a fee equal to 2% of the agreed
upon valuation of the assets under management. Prior thereto, the Manager
provided management services for a fee equal to 2% of USTY's earnings before
interest, taxes, depletion, depreciation and amortization. Such fees charged to
operations by USTY amounted to $2,555 in 2002, $1,137 in 2001, and $119 in 2000.
The Master Limited Partnership and the Company granted U.S. Timberlands Holding
Group, LLC an irrevocable proxy to vote its Common and Preferred Interests.

In June 2000, the Company purchased timber cutting rights for approximately 4.2
million board feet from USTY for


                                      F-15
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

 9.  Certain Relationships and Related Party Transactions (continued):


$1.3 million. These timber cutting rights expire in June 2003.

In December 2000, the Company sold approximately 8,000 acres of timberland
located in Central Oregon to USTY for $2,900.

During 2001, the Company contributed cutting rights and timberland located in
Central Oregon to USTY. The contributions have an aggregate agreed upon value of
$18.5 million and were added to the Company's Preferred Interest in USTY. Terms
of the additional senior preferred interest acquired are the same terms as the
senior preferred interest previously issued to the Company. The Company recorded
its additional preferred interest at its cost for the cutting rights and
timberland of approximately $16.3 million. All property that has been
contributed for the Company's preferred interest in USTY has been pledged as
collateral by USTY under its credit facility with its lender.

In March of 2001, the Company purchased timber cutting rights for approximately
17.2 million board feet from USTY for $4.5 million. These timber cutting rights
expire in March 2004.

In September of 2001 the Company sold timber cutting rights for approximately
80.6 million board feet to USTY for $12.0 million. These timber cutting rights
expire in August 2004.

In November of 2001 the Company sold timber cutting rights for approximately
44.8 million board feet to USTY for $7.0 million. These timber cutting rights
expire in October 2004.

In June 2002, the Company sold timber cutting rights for approximately 87.3
million board feet to USTY for $9.9 million. These timber cutting rights expire
in May 2005.

In August 2002, the Company purchased timber cutting rights for approximately
12.0 million board feet from USTY for $1.3 million. These timber cutting rights
expire in August 2003.

In November 2002, the Company sold timberland to USTY for $4.7 million.

During 2002, the Company contributed timberland located in Central Oregon to
USTY. The contributions have an aggregate agreed upon value of $18.5 million and
were added to the Company's Preferred Interest in USTY. Terms of the additional
senior preferred interest acquired are the same terms as the senior preferred
interest previously issued to the Company. The Company recorded its additional
preferred interest at its cost for the timberland of approximately $18.3
million. All property that has been contributed for the Company's preferred
interest in USTY has been pledged as collateral by USTY under its credit
facility with its lender.

In addition to the preceding, in July 2002, the Company purchased timber cutting
rights for approximately 5.1 million board feet from USTY Services for $0.5
million. These timber cutting rights expire in July 2005.

Gross profits realized on the Company's sales of timber cutting rights to USTY,
to the extent of the Company's ownership interest in USTY, have been eliminated
and are recognized in operations upon USTY's sale of the timber to third parties
with corresponding adjustments to the carrying value of the investment in USTY.
In addition, the Company's equity in net income (loss) of affiliate has been
adjusted to eliminate its share of gross profits realized by USTY on sales of
timber cutting rights to the Company, until the Company sells the timber to
third parties, with corresponding adjustments to the carrying value of timber
and timberlands.


                                      F-16
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

9.  Certain Relationships and Related Party Transactions (continued):

In February 2003, the Company contributed timberland located in Central Oregon
to USTY. The contributions have an aggregate agreed upon value of $6.2 million
and were added to the Company's Preferred Interest in USTY.

Terms of the additional senior preferred interest acquired are the same terms as
the senior preferred interest previously issued to the Company. The Company
recorded its additional preferred interest at its cost for the timberland of
approximately $4.8 million.

Payments to Affiliate

See Note 6 regarding interest and commitment fees paid to an affiliate of the
Manager under the Affiliate Credit Facility.

Severance and Settlement

Selling, general and administrative expenses in 2000 included $203 related to
settlement with former employees of the Company.

Other Related Party Transactions

During 1999, Glenn A. Zane served as Acting Senior Vice President and Acting
Director of Operations for the Company. The Company paid approximately $0, $323
and $821 during 2002, 2001 and 2000, respectively, to Mason, Bruce & Girard, of
which Mr. Zane is a partner. Such payments were for consulting services and
include Mr. Zane's compensation.

10. Management Incentive Plans:

Unit Option Plans

The MLP maintains a Unit Option Plan, which provides for the granting of options
(the "Unit Options") to employees and directors of the Manager who perform
services for the Company. The plan permits the grant of Unit Options covering
857,749 of the MLP's Common Units. Unit Options granted under the MLP's Unit
Option Plan are determined by the Long-Term Incentive Plan Committee of the
MLP's Board of Directors (the "LTIP Committee") and are granted at fair market
value at the date of the grant. In 1999, 200,000 Unit Options were granted to
directors and 142,620 options were granted to employees. In 2000, 54,000 Unit
Options were granted to employees. In 2001 and 2002, there were no Unit Options
granted. The Unit Options granted expire ten years from the date of grant and
become exercisable automatically upon and in the same proportion as the
conversion of Subordinated Units to Common Units provided that the minimum
quarterly distributions (as defined in the MLP Agreement) has been made. Once
the performance criteria are achieved, the Company will record compensation
expense for the difference between the exercise price and fair value of the
Common Units, with a corresponding increase to Members' Equity. Although the
performance criteria were met for the years ended December 31, 2000 and 1999,
and 25% of the outstanding Subordinated Units were converted into Common in
February 2001, no compensation expense was recorded during such years, as the
market price of the units was less than the exercise price during the years. As
indicated in Note 7, distributions have been suspended and accordingly the
performance criteria had not been met for the years ended December 31, 2002 and
2001. Since no distributions have been made by the MLP since February 2001 and
the MLP has indefinitely suspended further distributions, conversion of the
remaining Subordinated Units is unlikely in the foreseeable future.


                                      F-17
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

10. Management Incentive Plans (continued):

The following table summarizes the activity related to unit options for three
years ended December 31, 2002:

                                                                        Weighted
                                                                         Average
                                                         Number of      Exercise
                                                           Shares         Price
                                                         --------       --------
Outstanding, December 31, 1999                            757,627          14.02
Unit options granted                                       54,000           9.70
Unit options cancelled                                    (54,000)         13.89
                                                         --------
Outstanding, December 31, 2000                            757,627          13.75
Unit options cancelled                                    (70,620)         13.22
                                                         --------
Outstanding, December 31, 2001                            687,007          13.78
Unit options cancelled                                     (4,000)         12.69
                                                         --------
Outstanding, December 31, 2002                            683,007          13.77
                                                          =======

As of December 31, 2002 exercise prices for options outstanding were between
$5.84 and $14.75 with a weighted average exercise price of $13.77 per unit. The
weighted average remaining contractual life of the options was 5 years. There
were no unit options exercisable at December 31, 2000. Options for 170,752 and
171,752 units were exercisable at December 31, 2002 and 2001 respectively, with
a weighed average exercise price of $13.76 and $13.78 per unit, respectively.

Restricted Unit Plan:


During 1997, the MLP authorized the establishment of a restricted unit plan (the
"Restricted Unit Plan"), which allows the Company to grant units (the
"Restricted Units") to employees at the discretion of the LTIP Committee. No
consideration will be payable by the plan participants upon vesting and issuance
of the Restricted Units.

Restricted Units granted during the subordination period would vest
automatically upon and in the same proportion as the conversion of Subordinated
Units to Common Units. Restricted Units granted subsequent to the subordination
period are the equivalent of Common Units. No Restricted Units have been granted
as of December 31, 2002.

Income Interests of the Manager

In connection with the Common Units offering and the related formation of the
MLP's General Partner, the Manager issued income interests to certain officers
and directors of the General Partner at no cost. Such income


                                      F-18
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

interests participate pro rata in cash distributions from the Company and the
MLP. Under certain circumstances, the MLP's General Partner is required to
repurchase the income interests from officers and directors upon termination of
their employment at fair market value as determined by independent appraisal
(see Note 9, severance and settlement).

11. Fair Value of Financial Instruments:

A summary of the fair value of the Company's significant financial instruments
and the methods and significant assumptions used to estimate those values is as
follows:

      (a)   Short-term financial instruments - The fair value of short-term
            financial instruments, including cash and cash equivalents, trade
            and other receivables, notes receivable, trade accounts payable and
            certain accrued liabilities, approximates their carrying amounts in
            the financial statements due to the short maturities of such items.

      (b)   Long-term debt - The estimated fair value of the Company's long-term
            debt was approximately $139,500 and $150,750 at December 31, 2002
            and 2001, respectively, based on published market quotations.


12. Quarterly Results (Unaudited):

                                     Quarter Ended
                    ------------------------------------------------------------
                    December 31  September 30  June 30     March 31   Total Year
                    -----------  ------------  -------     --------   ----------

2002
Revenues             $ 18,536    $ 13,323    $ 15,460    $  2,155    $ 49,474
Gross profit (loss)    (1,868)        204      (1,731)         52      (3,343)
Net (loss)            (13,071)     (9,658)    (12,176)     (9,163)    (44,068)

2001
Revenues             $ 13,471    $ 24,299    $  7,327    $  9,467    $ 54,564
Gross profit (loss)       245         764        (252)       (132)        625
Net (loss)            (11,038)     (8,583)     (8,600)     (8,815)    (37,036)

13. 401(K) Defined Contribution Plan:


The Company sponsors a 401(k) defined contribution plan which covers
substantially all full-time employees. Company contributions to the plan totaled
$45 in 2002, $56 in 2001 and $30 in 2000.

14.  Commitments, Contingencies and Other:


                                      F-19
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

Log Supply Agreement

On August 30, 1996, the Company entered into a wood supply agreement with
Collins Products, LLC to supply a volume of approximately 34 million board feet
of merchantable timber annually to Collins at market prices. The term of the
agreement was ten years and was renewable for two additional terms of five
years, each at the option of Collins. As a result of Collins Products closing
its plywood mill in Klamath Falls in 2001, the Company and Collins mutually
decided to cancel the log supply agreement. Revenues from Collins Products were
approximately $64, $2,125 and $10,842 for 2002, 2001 and 2000 respectively.

Fire Loss

In accordance with industry practice, the Company self-insures for fire loss.

Going Private Transaction

On October 17, 2002, the MLP entered into a definitive agreement to be acquired
by an acquisition company formed by a group led by senior management. The
definitive agreement contemplates a cash tender offer for 100% of the
outstanding common limited partnership units not already owned by the entity or
its affiliates for $3.00 per unit in cash, followed by a merger of the
acquisition company with and into the MLP, pursuant to which each common limited
partnership unit not already owned by the entity or its affiliates would be
converted into the right to receive $3.00 per unit in cash. The tender offer
commenced on November 19, 2002 and was completed on March 6,

2003. Pursuant to the tender offer, approximately 71% of the MLP's common units
were tendered. The acquisition group therefore controls about 87% of the
outstanding common units. The remaining common units not purchased in the tender
offer will be acquired by the acquisition group in a merger offer that is
expected to be completed in the second quarter of 2003.

Litigation

On April 25, 2002 the Company announced that several purported class action
lawsuits were filed in the Court of Chancery of the State of Delaware for the
County of New Castle against the Company, the general partner of the Company and
the board of directors of the general partner alleging, among other things,
breach of fiduciary duty and self-dealing by the general partner and the board
in connection with the going private transaction.

The lawsuits seek to enjoin the going private transaction, to rescind the going
private transaction if it is consummated, and to recover damages and attorneys'
fees.

On July 12, 2002 the Company was notified that all of the purported class action
lawsuits were consolidated into one class action lawsuit by the Court of
Chancery of the State of Delaware.

On October 17, 2002, the Company announced that it had reached a tentative
settlement of the purported class action lawsuits, subject to court approval and
other customary conditions. The settlement provided, among other things, for an
increase in the consideration provided in the offer to purchase the common units
to $3.00 per unit. On December 12, 2002 the parties executed a Stipulation of
Settlement which the Court of Chancellery approved as a settlement at a hearing
on January 30, 2003.

14. Commitments, Contingencies and Other (continued):


                                      F-20
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

On June 21, 2002 the Company was notified that it was named in a lawsuit filed
in State Court in Oregon as a codefendant seeking medical expenses and up to
$12.0 million in damages for injuries sustained by the minor child of an
employee of the General Partner while riding on equipment owned by the General
Partner. At the time, liability insurance was in place, however, the insurance
underwriter has since gone bankrupt and coverage is limited and is being
administered by the Oregon Guarantee Insurance Association.

Management and its counsel are still reviewing the facts of the injury claims
and it is still too early to assess its effect on the Company.


                                      F-21
<PAGE>

Independent Auditor's Report

To the Board of Directors and Members of U.S. Timberlands Yakima, LLC

We have audited the accompanying balance sheets of U.S. Timberlands Yakima, LLC
as of December 31, 2002 and 2001, and the related statements of operations,
redeemable preferred member interest and members' equity and cash flows for each
of the years in the three-year period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of U.S. Timberlands Yakima, LLC as of
December 31, 2002 and 2001, and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.

As discussed in Note 1 to the financial statements, effective January 1, 2001,
the Company changed its method of accounting for derivative instruments and
hedging activities.

Eisner LLP

New York, New York
April 11, 2003


                                      F-22
<PAGE>

US TIMBERLANDS YAKIMA, LLC

                                 BALANCE SHEETS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                        December 31,
                                                                      2002       2001
                                                                   --------   --------
<S>                                                                <C>        <C>
ASSETS

Current assets:
    Cash and cash equivalents (including restricted cash of $829
       at December 31, 2002 and $1,818 at December 31, 2001)       $  1,754   $  3,824
    Accounts receivable                                                 126      1,728
    Other receivables                                                    81        114
    Notes receivable                                                     49         --
    Prepaid expenses and other current assets                            80        113
                                                                   --------   --------
       Total current assets                                           2,090      5,779
Timber and timberlands, net                                         124,799    103,964
Equipment, net                                                           33         53
Restricted cash                                                      12,791      6,809
Deposits                                                                 52         --
Interest rate cap agreement                                           1,142      1,973
Notes receivable, less current portion                                   32         --
Deferred financing costs, net                                         4,036      3,759
                                                                   --------   --------
       Total assets                                                $144,975   $122,337
                                                                   ========   ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
    Accounts payable and accrued expenses                          $    529   $  1,614
    Current portion of long-term debt                                   282        269
    Non-refundable deposit                                            9,000         --
                                                                   --------   --------
       Total current liabilities                                      9,811      1,883
Long-term debt - credit facility, less current portion               94,400     86,500
Other long-term debt, less current portion                            1,653      1,935
Redeemable preferred member interest                                 39,111     32,019
Members' equity:
    Common members' interest                                             --         --
                                                                   --------   --------
       Total liabilities and members' equity                       $144,975   $122,337
                                                                   ========   ========
</TABLE>

See notes to financial statements


                                      F-23
<PAGE>

US TIMBERLANDS YAKIMA, LLC

                            STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              Twelve Months Ended December 31
                                                                2002        2001        2000
<S>                                                           <C>         <C>         <C>
Revenues:
       Log, timber deed and stumpage sales, including
           $1,261 (2002), $4,500 (2001) and
           $1,300 (2000) to preferred member                  $ 20,215    $ 13,531    $ 25,232
       Timber and property sales                                 1,800          --          --
       By-products and other                                         3          43         374
                                                              --------    --------    --------
                                                                22,018      13,574      25,606
                                                              --------    --------    --------
Cost of products sold:
       Cost of timber harvested                                 10,654       5,406       9,053
       Cost of timber and property sales                         1,322          --          --
       Depletion, depreciation and road amortization            10,664       5,047       6,535
       Fire loss                                                   827          --          --
                                                              --------    --------    --------
                                                                23,467      10,453      15,588
                                                              --------    --------    --------
       Gross profit (loss)                                      (1,449)      3,121      10,018

Operating, general and administrative                            4,437       3,082       1,368
                                                              --------    --------    --------
       Operating income (loss)                                  (5,886)         39       8,650
                                                              --------    --------    --------
Interest expense and commitment fees                            (5,172)     (4,654)     (5,587)
Amortization of deferred financing fees                           (374)       (637)       (401)
Interest income                                                    160          52         138
Other income (expense), net                                         47          23          15
                                                              --------    --------    --------
                                                                (5,339)     (5,216)     (5,835)
                                                              --------    --------    --------
(Loss) income before cumulative effect of accounting change    (11,225)     (5,177)      2,815
    Cumulative effect of accounting change                          --        (152)         --
                                                              --------    --------    --------
       Net income (loss)                                      $(11,225)   $ (5,329)   $  2,815
                                                              =========   =========   ========
</TABLE>


       See notes to financial statements


                                      F-24
<PAGE>

US TIMBERLANDS YAKIMA, LLC

     STATEMENTS OF REDEEMABLE PREFERRED MEMBER INTEREST AND MEMBERS' EQUITY
                                 (IN THOUSANDS)


                                                      Reedemable
                                                      Preferred     Common
                                                        Member      Members'
                                                       Interest     Equity
                                                       --------     ------
Balance, December 31, 1999                            $ 18,243    $     --
  Recapture of loss allocated to preferred interest        608          --
  Guaranteed return to preferred interest                1,444          --
  Balance of net income                                     --         764
                                                      --------    --------
Balance, December 31, 2000                              20,295         764
Timberlands and related cutting rights contributed      16,289          --
Net loss                                                (4,565)       (764)
                                                      --------    --------
Balance, December 31, 2001                              32,019          --
Timberlands and related cutting rights contributed      18,317          --
Net loss                                               (11,225)         --
                                                      --------    --------
Balance, December 31, 2002                            $ 39,111    $     --
                                                      ========    ========

See notes to financial statements


                                      F-25
<PAGE>

US TIMBERLANDS YAKIMA, LLC

                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                         Twelve Months Ended December 31,
                                                                         --------------------------------
                                                                          2002        2001        2000
<S>                                                                     <C>         <C>         <C>
Cash Flows from Operating Activities:
    Net Income (Loss)                                                   $(11,225)  $  (5,329)   $  2,815
Adjustments to reconcile net income (loss) to net cash provided
       by operating activities:
    Depreciation, depletion and amortization and cost of timber
       property sold                                                      11,955       5,046       6,535
    Fire loss                                                                827          --          --
    Loss on disposal of assets                                                 3          --          --
    Amortization of deferred financing fees                                  374         637         401
    Accretion of discount on other long-term debt                             96          26          --
    Cumulative effect of accounting change                                    --         152          --
    Fair value adjustment of interest rate cap agreement                     831         304          --
    Change in:
       Accounts receivable                                                 1,602        (153)     (1,554)
       Receivable from preferred member                                       --       1,110      (1,110)
       Other receivables                                                      33          --          --
       Notes receivable                                                      (81)        761        (761)
       Prepaid expenses and other current assets                              34        (219)         25
       Accounts payable and accrued expenses                              (1,088)        418       1,070
       Advance payment from customer                                       9,000          --      (5,486)
                                                                        --------    --------    --------
           Net cash provided by operating activities                      12,361       2,753       1,935

Cash flows form investing activities:
    Acquisition of timber and timberlands                                (15,280)    (22,282)     (3,078)
    Deposit on seedlings                                                     (52)         --          --
    Purchase of equipment                                                     --          (3)        (47)
                                                                        --------    --------    --------
           Net cash used in investing activities                         (15,332)    (22,285)     (3,125)

Cash flows form financing activities:
    Proceeds from bank credit facility                                     7,900      86,500          --
    Payments made on bank credit facility                                     --     (52,807)     (7,193)
    Payments of other long-term debt                                        (365)        (91)         --
    Deferred financing fees                                                 (652)     (3,871)       (260)
    Restricted cash, noncurrent portion                                   (5,982)     (6,809)         --
                                                                        --------    --------    --------
           Net cash provided by (used in) financing activities               901      22,922      (7,453)

Net (decrease) increase in cash, cash equivalents and restricted cash     (2,070)      3,390      (8,642)
Cash, cash equivalents and restricted cash, beginning of year              3,824         434       9,076
                                                                        --------    --------    --------
Cash, cash equivalents and restricted cash, end of year                 $  1,754    $  3,824    $    434
                                                                        ========    ========    ========
</TABLE>


                                      F-26
<PAGE>

U.S. Timberlands Yakima, LLC
Notes to Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

1. Accounting Policies:

LINE OF BUSINESS:


U.S. Timberlands Yakima, LLC (the "Company") was formed in 1999 to acquire
approximately 56,000 acres of timberland in Central Washington and approximately
54,000 acres of timberland in Central Oregon (see Note 2). The primary business
activity of the Company is the growing of trees and the sale of logs and
standing timber to third party wood processors located primarily in Central
Washington and Central Oregon.

U.S. Timberlands Services Company, LLC (the "Manager"), an entity under common
control with U.S. Timberlands Holding Group, LLC which controls the common
membership interest in the Company, managed the businesses of the Company prior
to September 14, 2001. Thereafter, management of the Company was taken over by a
wholly-owned subsidiary of the Manager. All management decisions related to the
Company are made by the Manager or its subsidiary.

USE OF ESTIMATES:

The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

REVENUE RECOGNITION:

Revenues from delivered log sales are recognized upon delivery to the customer.
Revenues from timber deeds and timberland sales are generally recognized upon
closing. Revenue from timber sold under stumpage contracts (i.e., where the
customer arranges the harvest and delivery of the logs but without being granted
a deed) are recognized at the time the timber is harvested.

CONCENTRATION OF CREDIT RISK:

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable. Substantially all of the
Company's accounts receivable are derived from sales to third party wood
processors. The Company's three largest customers accounted for 45%, 31% and 80%
of the Company's aggregate net revenues from log, timber deed and stumpage sales
for the year ended December 31, 2002, 2001 and 2000, respectively. The loss of
these customers could have a material, negative impact on the Company's results
of operations. Management does not, however, expect these relationships to be
discontinued. Credit risk on accounts receivable is mitigated by control
procedures to monitor the credit worthiness of customers.

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

Cash and cash equivalents consists primarily of demand deposits and money market
accounts.

On September 14, 2001 the Company refinanced its existing bank debt with the
Bank of Montreal under an agreement with a new lender (see Note 5) which calls
for a series of Cash or Letter of Credit Reserve Accounts. The obligations under
these Reserve Accounts were met with restricted cash totaling $13,620 and $8,627
at December 31, 2002 and 2001, respectively, of which $829 and $1,818 of
restricted cash was available to meet the Company's short term obligations at
December 31, 2002 and 2001, respectively. With respect to non-current restricted
cash balance at December 31, 2002, $700 is expected to be returned to the
Company in March, 2003, and $12,091 is expected to remain restricted pending
satisfaction of long-term obligations.

TIMBER AND TIMBERLANDS:

Timber and timberlands are stated at cost less depletion and amortization for
timber previously harvested. Depletion expense (including amortization of
logging roads) from the Company's sales of logs and timber is based on the


                                      F-27
<PAGE>

U.S. Timberlands Yakima, LLC
Notes to Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

1. Accounting Policies (Continued):

relation of sales volume to the estimated net merchantable inventory volume on
the timberlands. The Company estimates net merchantable timber inventory using
statistical information and data obtained from physical measurements, site maps,
photo-types and other information gathering techniques. These estimates are
updated periodically and may result in adjustments of timber volumes and
depletion rates, which are recognized prospectively. Changes in these estimates
have no effect on the Company's cash flow.

EQUIPMENT:

Equipment is stated at cost less accumulated depreciation. Maintenance and
repairs are charged to expense as incurred. When assets are sold, retired or
otherwise disposed of, the cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is reflected in income. The cost of
equipment is depreciated using the straight-line method over the estimated
useful lives of the assets. Equipment is depreciated over 3 to 5 years.

DEFERRED FINANCING COSTS:


At December 31, 2002 and 2001, deferred financing costs consist of fees and
other costs incurred in connection with the refinancing of the bank credit
facility (see Note 5). The Company amortizes the deferred financing costs over
the term of the related debt.

INCOME TAXES:


The Company is a limited liability company. Accordingly, the Company is not
liable for federal or state income taxes since the Company's income or loss is
reported on the separate tax returns of the members. Accordingly, no provision
for current or deferred income taxes has been reflected in the accompanying
financial statements.

RECENT ACCOUNTING STANDARDS:


The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133
"Accounting for Derivative Instruments and Hedging Activities" as of January 1,
2001. SFAS 133 requires the Company to recognize all derivatives in the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through earnings. If the derivative is a hedge, depending upon the nature
of the hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company recognized a loss of $152 as of January 1, 2001 from the cumulative
effect of adoption of SFAS 133 to reduce the carrying value of an interest rate
cap agreement to its fair value of $7.

In August 2001, the Financial Accounting Standards Board, ("the FASB"), issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30 for the disposal of a segment of the business, Adoption of SFAS
No. 144 by the Company as of January1, 2002 did not significantly impact its
financial position, results of operations, or cash flows.


                                      F-28
<PAGE>

U.S. Timberlands Yakima, LLC
Notes to Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

2. Certain Timberland Transactions:

YAKIMA TIMBERLANDS:

On October 4, 1999, the Company acquired approximately 56,000 acres of timber
and timberlands and approximately 700 acres of timber cutting rights from Boise
Cascade Corporation for approximately $55.1 million (the "Yakima Timberlands").
Substantially all of the purchase price was allocated to timber, timberlands and
logging roads. The acquisition was financed through a credit facility obtained
by the Company (see Note 5).

ACQUISITIONS FOR PREFERRED INTERESTS:

On October 4, 1999, the Company issued a redeemable preferred member interest
(see Note 6) to an affiliate, U.S. Timberlands Klamath Falls, LLC ("USTK") for
USTK's contribution of approximately 54,000 acres of timberland located in
Central Oregon (the "Antelope Timberlands"). The Company recorded the
acquisition of timberlands (and the related preferred interest) at USTK's basis
for the timberlands of $18,850. This contribution had an agreed upon value of
$22 million.

On February 26, 2001, the Company issued a redeemable preferred member interest
(see Note 6) to USTK for USTK's contribution of approximately 80,640,000 board
feet of timber located in Central Oregon. The Company recorded the acquisition
of timber (and the related preferred interest) at USTK's basis for the
timberlands of $10,886. This contribution had an agreed upon value of $12
million and was added to USTK's preferred interest in the Company.

On June 30, 2001 the Company issued a redeemable preferred member interest (see
Note 6) to USTK for USTK's contribution of approximately 30,585,000 board feet
of timber located in Central Oregon. The Company recorded the acquisition of
timber (and the related preferred interest) at USTK's basis for the timberlands
of $5,403. This contribution had an agreed upon value of $6.5 million and was
added to USTK's preferred interest in the Company.

On December 20, 2002, the Company issued a redeemable preferred member interest
(see Note 6) to USTK for USTK's contribution of approximately 55,000 acres of
timberland located in Central Oregon (the "Camp 6" Timberlands). The Company
recorded the acquisition of timberlands (and the related preferred interest) at
USTK's basis for the timberlands of $14,363. This contribution had an agreed
upon value of $14,100.

On December 20, 2002, the Company issued a redeemable preferred member interest
(see Note 6) to USTK for USTK's contribution of approximately 22,500 acres of
timberland located in Central Oregon (the "West Chemult" Timberlands). The
Company recorded the acquisition of timberlands (and the related preferred
interest) at USTK's basis for the timberlands of $3,954. This contribution had
an agreed upon value of $4,400.

TIMBER DEED PURCHASES FROM AND SALES TO AFFILIATE:

On December 29, 2000, the Company purchased approximately 8,000 acres of
timberland located in Central Oregon (Yainax Timberlands) from its affiliate,
USTK, for $2,900. Substantially all of the purchase price was allocated to
timber, timberlands and logging roads.

During 2001, the Company purchased 125.4 million board feet of timber located in
central Oregon from USTK for $19,000. All of the purchase price was allocated to
timber. The timber deeds expire in August and October 2004.

During June 2000, the Company sold timber cutting rights for approximately 4.2
million board feet to USTK for $1,300. Those cutting rights expire in June 2003.


                                      F-29
<PAGE>

U.S. Timberlands Yakima, LLC
Notes to Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

2. Certain Timberland Transactions (continued):

During March 2001, the Company sold timber cutting rights for approximately 17.2
million board feet to USTK for $4,500. These cutting rights expire in March
2004.

On April 30, 2002, the Company sold timber cutting rights for approximately 5.1
million board feet to an affiliate, U.S. Timberlands Services Holdings, LLC for
$516. Those cutting rights expire in March 2005.

On June 12, 2002, the Company purchased approximately 87.3 million board feet of
timber located in central Oregon from USTK for $9,900. All of the purchase price
was allocated to timber. On November 13, 2002, the Company purchased the
underlying approximately 45,000 acres of timberland located in central Oregon
(the "Ochoco Timberlands") from USTK for $4,700. Substantially all of the
purchase price was allocated to timberlands and logging roads.

On August 30, 2002, the Company sold timber cutting rights for 12.0 million
board feet to USTK for $1,261. Those cutting rights expire in August 2003.

In February 2003, The Company issued a redeemable preferred member interest (see
note 6) to an affiliate, USTK for USTK's contribution of timberland located in
Central Oregon. The company recorded the acquisition of timberlands (and the
related preferred interest) at USTK's cost basis for the timberlands aggregating
$4,838. These contributions had an agreed upon aggregate value of $6,200.

 3. Timber and Timberlands:


Timber and timberlands consisted of the following at December 31:

                                                     2002       2001
                                                   --------   --------
Timber and logging roads                           $113,868   $ 92,103
Timberlands                                          33,137     23,424
Water rights                                            119        119
                                                   --------   --------
                                                    147,124    115,646
Less accumulated depletion and road amortization     22,325     11,682
                                                   --------   --------
                                                   $124,799   $103,964
                                                   ========   ========


In November 2002, the Company agreed to sell the Ochoco timberlands, which it
had acquired from USTK to an unrelated buyer for proceeds of $14,600. Closing is
scheduled on or before November 15, 2003. In this connection, the Company has
received a non-refundable deposit of $9,000 from the buyer of the property,
which is reflected as a liability at December 31, 2002.

 4.       Equipment:


Equipment consisted of the following at December 31:



                                      F-30
<PAGE>

U.S. Timberlands Yakima, LLC
Notes to Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

                                                    2002   2001
                                                  ------  ------
   Equipment                                      $   82  $   88
   Less accumulated depreciation                      49      35
                                                  ------  ------
                                                  $   33  $   53
                                                  ======  ======

5.  Long-Term Debt - Credit Facility:

            At December 31, 2000, the Company had a bank credit facility with
the Bank of Montreal (the "Bank"), consisting of a revolving bank line of credit
("Line of Credit") and a term credit facility ("Term Note"), collectively
referred to hereafter as the "Credit Facility". The Credit Facility was obtained
in 1999 by the Company to facilitate the acquisition of the Yakima Timberlands
(see Note 2). The Line of Credit provided for borrowings of up to $2.0 million
and the Term Note was for $58.0 million. The Credit Facility was collateralized
by all of the Company's assets.

            The Credit Facility agreement provided for floating rate interest at
either (a) the LIBOR plus applicable margin; or (b) the Bank's prime rate plus
applicable margin.

            Under the terms of the Credit Facility, the borrowing base was based
upon eligible receivables and merchantable timber. The term of the Credit
Facility was through September 30, 2002.

            On September 14, 2001 the Company repaid the bank credit facility
with the Bank of Montreal, and closed on a replacement term credit facility with
BNY Midwest Trust Company as Trustee and MBIA Insurance Corporation as Insurer
(the "Refinancing"). The Refinancing provides for borrowings of up to $95.0
million for a term of 12 years. The Refinancing is collateralized by all of the
Company's assets. The Refinancing indenture provides for floating rate note
interest at the applicable commercial paper funding cost of the Company plus
applicable margin (0.60% at December 31, 2002 and 2001). At December 31, 2002
and 2001, the effective rate was 2.23% and 2.92%, respectively. At December 31,
2002 and 2001, $94,400 and $86,500 respectively was outstanding in borrowings
under the Refinancing.

            Under the terms of the Refinancing, the borrowing base is equal to
75% of the sum of eligible receivables and total timber and timberland value as
determined by the Company and reviewed by an approved independent consultant on
a quarterly basis. The borrowing base recalculation triggers a pay down of all
borrowings under the Refinancing in excess of the borrowing base. The
Refinancing requires payment of interest only through September 14, 2004, and
then requires amortization in equal monthly principal reductions for the next
108 months. Under certain circumstances, the commencement of the amortization
period may be extended for one year.

            The Refinancing contains certain restrictive covenants, including
limits on the ability of the Company to make capital expenditures, make cash
distributions (including the preferred interest guaranteed return), incur liens,
incur additional indebtedness and to make loans and investments. In addition,
the Refinancing contains certain financial ratio covenants. The Company was in
compliance with these covenants at December 31, 2002.

            The Refinancing also requires the establishment and maintenance of a
series of restricted cash accounts in the name of the trustee under the
indenture agreement, into which substantially all of the Company's cash
collections are required to be deposited. A portion of these funds is then
released to the Company to pay debt service and


                                      F-31
<PAGE>

U.S. Timberlands Yakima, LLC
Notes to Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)


      6 Long Term Credit facility (continued):

operating expenses as provided for in the indenture agreement, and a portion is
allocated to the various long-term restricted cash accounts required by the
indenture agreement The Company estimates that $845 is required to be added to
long-term restricted cash during 2003 pursuant to the indenture provisions.

            Other long-term debt consists of amounts payable to a financial
institution for the purchase in September 2001 of an interest rate cap agreement
(see Note 8). Payments are due monthly starting in October 2001 at the rate of
$30 per month for 36 months, and thereafter at varying monthly amounts through
September 2013. Each payment includes interest imputed at an effective rate of
4.7% per annum.

            The aggregate amount of payments due under this agreement at
December 31, 2002 and 2001 was $2,280 and $2,645 respectively, before the
discounts for imputed interest of $345 and $441 respectively.

Maturities of Long-Term Debt:


At December 31, 2002, payments of long-term debt are due as follows:

       2003                                   $          282
       2004                                            2,908
       2005                                           10,735
       2006                                           10,707
       2007                                           10,682
    Thereafter                                        61,021
                                              --------------
                                                      96,335

Less current maturities                                  282
                                              --------------
                                              $       96,053
                                              ==============


6. Members' Interests and Redeemable Preferred Interest:

Common Interests:

Concurrent with the acquisition of the Yakima Timberlands (see Note 2), U.S.
Timberlands Holding Group, LLC and U.S. Timberlands Company, LP contributed $306
and $294, respectively, for common member interests of 51% and 49%,
respectively, (the "Common Interests") in the Company.

As a result of the refinancing transaction entered into by the Company in
September 2001, the Common Interests in the Company are now held through a
holding company, U.S. Timberlands Yakima Holdings II, LLC.

Preferred Interest:


Concurrent with the acquisition of the Yakima Timberlands, USTK contributed the
Antelope Timberlands having an agreed upon value of $22.0 million for all senior
preferred interests ("Preferred Interest") in the Company. At December 31, 2002
and 2001, as a result of contributions of timber cutting rights and additional
timberlands by USTK to the Company, the agreed upon value of the Preferred
Interest aggregated $59.9 million and $41.4 million respectively (see Note 2).
Terms of the Preferred Interest include a cumulative annual guaranteed return of
5% of


                                      F-32
<PAGE>

U.S. Timberlands Yakima, LLC
Notes to Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)


6. Members' Interests and Redeemable Preferred Interest (continued):

the agreed upon value through December 31, 2001 and 6% thereafter. The Preferred
Interest is redeemable in whole or in part at the Company's option while its
long-term debt is outstanding and for one year and one day thereafter, and at
the preferred member's option thereafter for a redemption price equal to the
agreed upon value of the Preferred Interest, either in cash or by returning the
contributed timberlands, plus any portion of the guaranteed return not yet paid
by the Company prior to the redemption date. As of December 31, 2002, the unpaid
cumulative guaranteed return amounted to $5,020. The guaranteed return for 2002
and 2001 has not been recorded by the Company due to the absence of allocable
net income for such years. No payments of the return have been made.

Allocation of Income (Loss):

As provided by the Company's operating agreement, income attributable to the
Common Interests is generally allocated according to their percentage of the
outstanding Common Interests. However, net losses exceeding the account balances
of the Common Interests are allocated to the Preferred Interest. Losses, if any,
allocated to the Preferred Interest are recaptured prior to any income being
allocated to the Common Interests. At December 31, 1999, $607 in losses had been
absorbed by the Preferred Interest. These losses were fully recovered by the
Preferred Interest during 2000. Losses absorbed by the Preferred Interest
totaled $11,225 and $4,565 during 2002 and 2001, respectively.

7. Fair Value of Financial Instruments:

The fair value of the Company's financial instruments is presented below. The
estimates require subjective judgments and are approximate. Changes in
methodologies and assumptions could significantly affect estimates.

Short-term financial instruments:

The fair value of short-term financial instruments, including cash and cash
equivalents, trade and other receivables, trade accounts payable and certain
accrued liabilities, approximate their carrying amounts in the financial
statements due to the short maturities of such items.

Long-term debt:

The estimated fair value approximates the carrying value of $94,400 and $86,500
at December 31, 2002 and 2001, respectively, given the nature of the debt and
because it is tied to major interest rate indexes.

Interest rate cap agreement:

This agreement is carried at fair value which was determined based on quotations
from the issuing financial institutions.

8. Interest Rate Cap Agreement:

In September 2001, the Company entered into an interest rate cap agreement,
which expires in September 2013, and which will provide the Company with
interest rate protection should the interest rate payable on its long-term debt
incurred in 2001 (see Note 5) exceed 8% per annum. The agreement was purchased
for $2,270, payable in varying monthly amounts through September 2013. The
agreement is carried at fair value at the end of each financial reporting
period, and changes in its value are recorded currently in income. Should
interest rates on the Company's long term debt exceed 8% per annum, the cap
agreement will become effective as a cash flow hedge and periodic


                                      F-33
<PAGE>

U.S. Timberlands Yakima, LLC
Notes to Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)


9. Commitments and Contingencies:


changes in its value related to remaining future interest payments will be
recorded in other comprehensive income. The Company had entered into an earlier
interest rate cap agreement during 2000 which expired during 2001. Interest
expense and commitment fees include $831 (2002) and $304 (2001) related to the
interest rate caps.

Lease Agreement:


The Company leases office facilities under a non-cancelable operating lease
expiring in October 2004. Other office facilities are leased from a related
party under a non-cancelable lease expiring in 2024. Rent expense was $35, $27
and $17 for the years ended December 31, 2002, 2001 and 2000, respectively.
Future minimum payments required under the lease agreements are:

                 Year ending December 31:

            2003                                          $     31
            2004                                                27
            2005                                                12
            2006                                                12
            2007                                                12
            Thereafter                                         261
                                                          --------
            Total minimum lease commitments               $    355
                                                          ========

Log Supply Agreement:

Concurrently with the acquisition of the Yakima Timberlands, the Company entered
into a log supply agreement (the "Agreement") with Boise Cascade Corporation
("Boise") to supply a volume of approximately 11 million board feet ("MMBF"), 25
MMBF, 25 MMBF, 9 MMBF, and 9MMBF in 1999, 2000, 2001, 2002, and 2003,
respectively, of merchantable timber to Boise at market prices. The term of the
Agreement is through November 2003 and may be renewed by mutual agreement of the
parties for successive five year periods. Boise shall have the right to
terminate the Agreement upon permanent closure of its Yakima, Washington sawmill
or upon permanent closure of its Yakima, Washington plywood plant.

Fire Loss:

In accordance with industry practice, the Company self-insures for fire loss.

Litigation:

The Company is involved in legal proceedings and claims arising in the normal
course of business. In the opinion of management, the outcome of such legal
proceedings and claims will not have a material adverse effect on the Company's
results of operations and financial position.



                                      F-34
<PAGE>

U.S. Timberlands Yakima, LLC
Notes to Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)


Property Sale:

In November 2002, the Company agreed to sell the remaining land and timber on
the Ochoco property to an unrelated third party. An escrow has been opened with
a non-refundable deposit of $9,000 and a maturity of November 15, 2003.

10. Related Party Transactions:


Prior to September 14, 2001, the Manager received reimbursement for reasonable
and necessary direct and indirect expenses related to managing the Company in
addition to a fee (the "Manager's Fee") of 2% of the Company's EBITDDA (as
defined in the Company's operating agreement). Under agreements then in effect,
there was an annual cap of $750 on the total payments to the Manager including
the Manager's Fee. On September 14, 2001 management of the Company was taken
over by US Timberlands Yakima Services, LLC ("Yakima Services"), a wholly owned
subsidiary of the Manager, which is paid a flat fee for management services
equal to 2% of the agreed upon total timber and timberland asset valuation
annually. Management fee expense charged to operations for the years ended
December 31, 2002, 2001 and 2000 amounted to $2,555, $1,137, including $298
applicable to the year 2000 which had previously been waived, and $0,
respectively. Reimbursed expenses totaled $205 in 2002, $866 in 2001 and $531 in
2000.

In July 2000, the Company entered into a Road Upgrade Agreement with U.S.
Timberlands Holding Group, LLC, which controls the common membership interest in
the Company, whereby U.S. Timberlands Holding Group, LLC is responsible for
paying the costs of all road construction, reconstruction, improvements,
upgrades, new or repaired bridges, culverts, fords and other stream-crossing
structures on the Yakima Timberlands. U.S. Timberlands Holding Group, LLC
charges a quarterly fee to the Company for use of the roads that have been built
or upgraded per the agreement. During 2000, U.S. Timberlands Holding Group, LLC
reimbursed the Company for approximately $1.0 million in road upgrade
expenditures and the Company was charged $48 for road use fees for 2000 under
the agreement. As of December 31, 2000 the Company had a payable due to U.S.
Timberlands Holding Group, LLC for the $48 in road use fees. There were no road
use fees for 2002 or 2001. In September 2001, the Company purchased road
improvements from U.S. Timberlands Holding Group, LLC for $1,750.

See Note 2 for timber deed purchases from, and sales to, and other Timberlands
transactions with USTK.

 9. Subsequent Event

In March 2003, the Company increased its outstanding indebtedness under the
long-term debt agreement by $32,000. The Company subsequently lent $32,000 to an
affiliate, US Timberlands Acquisition Co, LLC ("USTA"), to complete the
acquisition of the units of US Timberlands Company, LP by USTA.


                                      F-35