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, 1999      Commission File No.: 1-13573-01
                                                                         1-13573
                       U.S. TIMBERLANDS KLAMATH FALLS, LLC
                         U.S. TIMBERLANDS FINANCE CORP.
             (Exact name of registrant as specified in its charter)


                       DELAWARE                                93-1217136
                       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. [ ]

           The  co-Registrants  have  not  issued  any  common  equity  held  by
non-affiliates of the co-Registrants.

           Documents incorporated by reference: None


<PAGE>



                       U.S. TIMBERLANDS KLAMATH FALLS, LLC
                         U.S. TIMBERLANDS FINANCE CORP.







<TABLE>
<CAPTION>
                                                           TABLE OF CONTENTS                                               Page
<S>        <C>                                                                                                              <C>
PART I
           Item 1.   Business.................................................................................................1
           Item 2.   Properties..............................................................................................10
           Item 3.   Legal Proceedings.......................................................................................11
           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..............................................23
           Item 8.   Financial Statements....................................................................................23
           Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................23

PART III
           Item 10.  Directors, Executive Officers, Promoters and Control Persons of the Registrant..........................24
           Item 11.  Executive Compensation..................................................................................28
           Item 12.  Security Ownership of Certain Beneficial Owners and Management..........................................33
           Item 13.  Certain Relationships and Related Transactions..........................................................33

PART IV
           Item 14.  Exhibits, Financial Statements, and Reports on Form 8-K.................................................35

</TABLE>

                                       ii

<PAGE>


                                     PART I

Item 1.  Business

General
           The  business  of U.S.  Timberlands  Klamath  Falls,  LLC, a Delaware
limited  liability  formed in 1996 (the  "Company"),  consists of the growing of
trees and the sale of logs and standing timber.  The Company owns  approximately
561,000 fee acres of timberland and cutting rights on approximately  3,000 acres
of timberland  (collectively the  "Timberlands")  containing total  merchantable
timber volume  estimated as of January 1, 2000 to be  approximately  1.8 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  five  million
conifer  seedlings  annually from its nursery,  approximately  half 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 U.S. Timberlands Company, LP (the "Master Partnership")
and the predecessors of the Company and the Master Partnership.

           The  Timberlands'  merchantable  timber  consists of  Ponderosa  Pine
(approximately  47%) and Douglas fir  (approximately  13%),  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  149,000  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 38 years old.  Initial  thinning or harvesting of
the Plantation  stands is expected to begin within the next five years.  Because
the timber on the  Plantations  is generally  not yet  considered  merchantable,
volumes of timber on the Plantations are not included in the Company's estimated
merchantable  timber  volume.  The balance of the  Timberlands  are  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,
L.L.C.,   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. The
Company believes that the age classes and species mix of the Ochoco  Timberlands
fit well with the Klamath Falls Timberlands and provide the Company  flexibility
in  developing  its harvest  plans.  In October  1999,  the Company  contributed
primarily non-income producing, pre-merchantable pine plantation timberlands for
an investment  in an affiliate  (See Item 13 Certain  Relationships  and Related
Transactions and Note 4 and 10 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  all of the Company's  sales are
made to unaffiliated third parties. Concurrent with 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  Weyerhaeuser's  Klamath Falls mill
facilities. 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.  The Collins Supply  Agreement is extendable by
Collins for two additional  five-year  terms. In addition to its sales under the
Collins  Supply  Agreement,  the  Company  sells logs to  conversion  facilities
located in the area surrounding the  Timberlands.  There are currently more than
50  primary  conversion  facilities  located  within  a 150 mile  radius  of the
Company's Timberlands.

                                       1
<PAGE>


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 "Manager" or "New Services"),  in exchange for interests
therein.  Immediately  thereafter,  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  exchange
for a general partner interest in the Master  Partnership,  the right to receive
Incentive  Distributions  (as  defined in the  Glossary  of  Certain  Terms) and
1,387,963  subordinated  units  representing  limited  partner  interests in the
Master Partnership  ("Subordinated  Units"), and Holdings contributed all of its
interest  in  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;   Old  Services  owns  1,244,565
Subordinated Units; Holdings owns 2,894,157 Subordinated Units; and the Founding
Directors  own  an  aggregate  of  143,398  Subordinated  Units.  The  4,282,120
Subordinated  Units owned by Old Services,  Holdings and the Founding  Directors
represent  an aggregate  32.6%  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 Master  Partnership's MLP 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  unsecured  senior  notes  (the  "Notes).   See
"Management's Discussion and Analysis 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
co-obligor  for the  Notes.  It has  nominal  assets  and does not  conduct  any
operations.  Accordingly,  a discussion of the results of operations,  liquidity
and capital resources of Finance Corp. is not presented.



                                       2
<PAGE>

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 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  160 board feet per
acre per annum. The younger Plantations, that presently have little 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.

                                       3
<PAGE>

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 and age  class  distribution  of the
Timberlands  and the economic  maturity of each 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, biological and genetic 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 187  million  board feet
(MMBF) in 1999 and plans to  harvest,  or commit to harvest,  approximately  160
MMBF in 2000.  The Company  also intends to sell  approximately  29 MMBF through
property sales in 2000.  Under the current harvest plans, the Company intends to
harvest its current  Timberlands  aggressively over approximately the next eight
to ten 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. The
Company  believes  these harvest plans can be achieved;  however,  since 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.  While the Company's  debt  obligations
place certain limitations on the harvest plans, the Company believes that it has
sufficient  flexibility to permit  modifications  in response to fluctuations in
the  market  for logs and  lumber and the other  factors  described  above.  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 will be reviewed during 2000 and 2001. 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 Company-owned and established  roadways or  low-maintenance  roads. 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 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.


                                       4
<PAGE>

         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 1999,  sawlogs,  stumpage sales and timber
deed sales accounted for approximately 55.0%, 2.0% and 42.5%,  respectively,  of
the  Company's  revenue.  Chips,  which can be used to make  hardboard  or pulp,
accounted for approximately  0.1% of the Company's  revenues in 1999. The market
price of chips has historically been volatile, rising and falling with the price
of pulp.  Sales of seedlings  accounted for the remaining  0.4% of the Company's
revenues in 1999.

           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 25
different  customers.  Concurrent  with the  Weyerhaeuser  Acquisition,  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. The Collins Supply Agreement is extendable by Collins for
two additional five-year terms. In 1999, timber sales to Collins,  Crown Pacific
Partners,  Boise  Cascade  Corporation  and  Ochoco,  combined,   accounted  for
approximately 64% of the Company's  revenue.  No other single customer accounted
for more than 10% of the  Company's  net  revenues  for 1999.  Collins  made its
purchases  pursuant to the Collins Supply  Agreement,  while the other purchases
were made pursuant to short-term arrangements.  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  exceeds
the supply and that, therefore,  such customers could readily be replaced. There
are  currently  more than 50  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 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.



                                       5
<PAGE>

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,  excess of demand, 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.  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
immaterial amounts of foreign imports, primarily from Canada and New Zealand. 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  1.8 BBF of  merchantable,  good
quality  timber,  approximately  149,000  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 5 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 40% 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  350 trees per acre. The Company also attempts
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


                                       6
<PAGE>

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  60% of the Company's  harvested  land.  Approximately  27% of the
Timberlands  acreage  currently  consist of Plantations.  The Company expects to
convert  approximately  3,000 to 8,000  acres of natural  stands to  Plantations
annually.  During 1999, the Company planted approximately 2.2 million seedlings.
Similar  planting  levels are expected for 2000. The Company uses seedlings from
its nursery (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  Weyerhauser  in 1973. The seed orchard  produces seed from trees
selected because they were the best genotype in their respective environments.

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  including data
for the Ochoco 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  GIS  has  been 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  Timberlands  and the
presence of bull trout in certain of its streams, which may affect harvesting on
approximately 26,000 acres.



                                       7
<PAGE>

           In 1990,  the United  States Fish and Wildlife  Service (the "USFWS")
listed the northern spotted owl as a 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  latest  survey  available  to the  Company,  there were
approximately 68 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 July, 2000.

           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 July 1999,  and
identified  approximately  28 northern  spotted owl sites  affecting the Klamath
Falls Timberlands, three of which are located 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
materially  adversely affect 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 as currently conducted.

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 affecting or utilizing water courses or in proximity
to certain  ocean and inland shore  lines,  water  anti-degradation  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
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.

                                       8
<PAGE>

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. 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 wherein the BLM did not have discretion
to disapprove a road segment due to endangered  species concerns.  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,  2000,  the  Company  had  32  salaried  employees,
including employees of the Manager that manage the business of the Company.  The
employees of the  Timberlands 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.


                                       9
<PAGE>

Item 2.  Properties

Timber Inventory

           The  Company  currently  owns and manages  approximately  561,000 fee
acres  of  timberland  and  cutting  rights  on  approximately  3,000  acres  of
timberland  containing total merchantable  timber volume estimated as of January
1, 2000 to be  approximately  1.8 BBF in Oregon east of the Cascade  Range.  The
Timberlands include substantial holdings of merchantable, good-quality timber. 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 premium species 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 and adequate 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 149,000
acres of the 561,000 acre total  consist of actively  managed  pine  Plantations
with stands  ranging in age from one to 38 years.  The  Plantations  are stocked
with  high  quality  Ponderosa  Pine  (approximately  77%)  and  Lodgepole  Pine
(approximately  23%). Because the timber on the Plantations is generally not yet
considered  merchantable,  volumes of timber on the Plantations are not included
in the Company's estimated merchantable timber volume. However, initial thinning
of the  Plantation  stands,  including the thinning of commercial  quantities of
merchantable timber, is expected to begin within the next five 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 volumes are based on
information  developed by Company  personnel.  As of January 1, 2000,  the total
timber inventory amounted to 1.8 BBF. The Company's combined timber inventory by
MMBF and  percentage  is Ponderosa  Pine (860.2  (47%)),  Lodgepole  Pine (317.7
(18%)),  White Fir (349.5  (19%)),  Douglas fir (238.7  (13%)) and other species
(54.3 (3%)).  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, 2000,  approximately  453
MMBF, or 25%, 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, 2000, the Plantations
totaled  149,000 acres.  Of the total  acreage,  57,000 acres range from 1 to 15
years of age,  82,000  acres range from 16 to 25 years of age,  and 10,000 acres
are 26 years of age or older.



                                       10
<PAGE>

Item 3.  Legal Proceedings

           There is no pending  litigation and, to the knowledge of the Company,
there is no threatened  litigation,  the  unfavorable  resolution of which could
have a  material  adverse  effect on the  business  or  financial  condition  of
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 1999.



                                       11
<PAGE>


                                  PART II

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

         In connection  with the  consummation of the  Transactions,  a 98.9899%
member interest in the Company was issued to the Master  Partnership and 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 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  distributions  to the  Master  Partnership  for the  Minimum
Quarterly  Distributions  of $0.50 per Unit for the  second,  third  and  fourth
quarters of 1998 on August 14,  1998,  November  13, 1998 and February 12, 1999,
respectively.   During  1999,  the  Company  also  made  the  Minimum  Quarterly
Distributions of $0.50 per Unit for the first, second, third and fourth quarters
on February 12, 1999, August 13, 1999, November 15, 1999, and February 14, 2000,
respectively.



                                       12
<PAGE>


Item 6.  Selected Financial Data
<TABLE>
<CAPTION>
                                                       U.S. Timberlands (1)                          Predecessor (1)
                                                  ------------------------------     -----------------------------------------------

                                                                                      August 30, 1996      January 1,
                                                                                          through           through
                                                                                        December 31,      August 29,
                                                  1999        1998         1997            1996              1996           1995
                                                  ----        ----         ----            ----              ----           ----
<S>                                             <C>         <C>          <C>              <C>                <C>            <C>
CASH FLOWS AND OTHER DATA      (IN MILLIONS):
Modified EBITDDA (6).....................       $ 50.9      $ 44.2       $ 53.3           $ (1.4)            $ 3.6          $ 12.5
Additions to timber and timberlands (3)            1.0         0.6        111.6            283.6               0.5             1.0
Cash flow from (used in) operating
   activities ...........................         25.5        18.5         26.3             (3.0)              5.5            11.8
Cash flow from (used in) investing
   activities............................         (1.3)       (0.6)      (101.6)          (291.5)             (0.5)           (1.9)
Cash flow from (used in) financing
   activities............................        (26.2)      (23.7)        69.3            311.0              (5.1)          (10.0)

OPERATING STATEMENT DATA     (IN MILLIONS)
Revenues (2)(3)..........................         77.0        71.3         77.3             14.0              15.6            31.7
Depreciation, depletion and road
   amortization (2)(3)...................         23.3        21.9         17.3              3.3               0.9             1.5
Cost of timber and property sales  (2)(3)         --           5.9          8.7             --                --              --

Operating income (loss) (2)(3)...........         27.5        16.3         27.3             (4.8)              2.7            11.1
Income (loss) before extraordinary
   items (4) ............................          6.7        (6.4)        (1.4)           (13.0)              2.7            11.6
Extraordinary items, losses on
   extinguishment of debt (5) ...........         --          --            9.3             --                --              --
Net income (loss)........................          6.7        (6.4)       (10.7)           (13.0)              2.7            11.6

BALANCE SHEET DATA (AT
   PERIOD END, IN MILLIONS):
Working capital .........................          2.4         1.4          1.8             21.5               0.5             1.3
Total assets (3) ........................        327.9       350.7        385.2            310.2              27.8            30.9
Long-term debt (7).......................        225.0       225.0        225.0            305.0              --              --
Equity (deficit) (8).....................         98.4       118.0        147.1             (2.9)             27.8            29.2

OPERATING DATA (UNAUDITED):
Log, stumpage and timber deed sales
   volumes (MMBF) (2)(3).................        187.3       144.5        138.9             30.2              32.8            63.8
Property sales volumes (MMBF) (2)........         --          26.6         41.5             --                --              --
</TABLE>




                                       13
<PAGE>

 (1)       Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial
           and  operating  data after  August  30,  1996 are not  comparable  to
           financial and operating data of the Predecessor. In 1996, the Company
           and Old  Services  were  formed  and  subsequently  entered  into the
           agreement  to  consummate  the  Weyerhaeuser  Acquisition.  As  legal
           entities,  the  Company  and  Old  Services  were  not  consolidated.
           However,  due to  common  ownership  and  management,  the  financial
           statements of the Company and Old Services prior to the  Transactions
           have been presented on a combined basis.
 (2)       Revenues in 1999 consist of $76.6  million of log,  stumpage and deed
           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.  Revenues in 1997  consist of $60.4  million of log and
           stumpage  sales,  $15.2 million of timber and property sales and $1.7
           million  of  by-products  and  other  sales.  Revenues  prior to 1997
           consist  primarily of log sales.  See  "Management's  Discussion  and
           Analysis of Financial Condition and Results of Operations."
(3)        See  acquisition of Ochoco  Timberlands in July 1997 in Note 2 of the
           Notes to Financial  Statements.  In August 1996, the Company acquired
           the Klamath Falls Timberlands for $283.5 million from Weyerhaeuser.
(4)        See effect of interest expense and amortization of deferred financing
           fees and debt guarantee fees in "Management's Discussion and Analysis
           of Financial Condition and Results of Operations."
(5)        See effect of debt extinguishment in Note 8 of the Notes to Financial
           Statements.
(6)        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."
(7)        See  discussion of long-term debt at Note 8 of the Notes to Financial
           Statements.
(8)        The Weyerhaeuser Acquisition in August of 1996 was accounted for as a
           purchase.  Therefore,  the  financial  statements  as of and  for the
           periods ending prior to the date of the Weyerhaeuser  Acquisition are
           accounted  for  under  the  pre-Weyerhaeuser   Acquisition  basis  of
           accounting.  Because the Klamath Timberlands did not legally exist as
           a  stand-alone  entity,  there  are  no  separate  meaningful  equity
           accounts of the Predecessor prior to the Weyerhaeuser Acquisition.


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 increase 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 the
Master Partnership 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.

                                       14
<PAGE>


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.
Although  prices have declined from these record  levels,  current  prices still
exceed  pre-1993  levels.  The low supply of timber from public lands,  which is
expected to continue for the foreseeable  future,  has benefited  private timber
holders such as the Company through higher stumpage and log prices.

           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 restrict prices from even greater increases. While raw material supply
is  expected  to be an  ongoing  challenge  for the  lumber  and  wood  products
industry,   such  conditions  are  likely  to  cause  the  favorable   operating
environment  for  timber  owners  such  as  the  Company  to  continue  for  the
foreseeable future.

           In  response  to an  increase  in 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.  Since
1993,  log imports have  decreased and their current  impact on timber prices is
minimal. However, pine lumber imports almost doubled in the same period.

Demand

           Changes in general  economic and demographic  factors,  including the
strength of the economy 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 1999 were at the highest  level since 1986.  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.  A large  portion of the  Company's  property
consists of Pine species,  which are used in the finishing  market,  for molding
trim,  doors and windows.  This market is more affected by repair and remodeling
than new housing  construction.  Prices for these 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.  Domestic  markets  have  absorbed the
increasing  quantities of imported Radiata Pine lumber,  and the result has been
relatively stable pricing for Ponderosa 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 restricts the  availability of Canadian  softwood lumber
in the United  States.  The Company  believes that this  agreement has not had a
material  impact on the price or demand for logs in the United  States  although
its long-term effect 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 fluctuate with market conditions.



                                       15
<PAGE>


Current Market Conditions

         Log prices in the Northwest  generally  improved in 1999 as compared to
1998 due to the robust United States economy and supply and demand factors.

           In 1999  the  United  States  economy  continued  to  enjoy  economic
expansion. Low mortgage interest rates created favorable conditions for new home
construction, home repair and remodeling, and industrial and other construction,
which  strengthened  the  demand  for  finished  lumber  and  plywood  products,
resulting in increased demand for the Company's logs and timber.

           The supply of logs in the Pacific  Northwest  continued to tighten in
1999  due to  increased  export  activity  due to a  gradual  recovery  of Asian
markets;  the reduction of Canadian  deliveries due to an agreement  between the
United States and Canada signed in 1996 restricting the availability of Canadian
softwood lumber in the United States; weather conditions and continued legal and
governmental pressures on the availability of timber on public timberlands.  The
gradual  recovery of Asian markets has led to an increased level of log exports,
reducing  the  supply  of  logs  available  to  domestic  markets.  Dry  weather
conditions  during 1999 created  extreme fire  conditions,  resulting in reduced
wood  deliveries  for most of the summer.  In late 1999, a U.S.  District  Court
judge issued an injunction against the U.S. Forest Service (USFS), requiring the
USFS to put on hold planned  timber sales  totaling 217 million board feet.  The
supply from public  timberlands was further  threatened in the fall of 1999 when
the Clinton  administration  presented an initiative that would more than double
the  approximately 35 million acres of federal lands that are already  protected
as wilderness.

         Strong economic factors combined with increasing  demand and decreasing
supply resulted in strong prices for finished wood products.  Composite  indices
for  commodity  lumber  and  plywood  prices  were 15% - 25%  higher  in 1999 as
compared to 1998.

           The combination of the declining log supply and increased  demand for
finished wood products,  generally  pushed log prices higher in 1999 as compared
to 1998.  During 1999, the Company's  average  delivered log price for Ponderosa
Pine was consistent  with 1998. The Company's  average  delivered log prices for
Lodgepole Pine, Douglas Fir, and White Fir, however, were higher in 1999 than in
1998 by 7%, 4% and 6%, respectively.


                                       16
<PAGE>

Results of Operations

           The following  table sets fourth sales volume for each of 1999,  1998
and 1997 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 ($ Per MBF)
                                    ------------------------------------     --------------------------------


                                                           Timber                                     Timber       Timberland
Period                            Logs      Stumpage       Deeds           Logs      Stumpage         Deeds       Sales ($000)
------                            ----      --------       -----           ----      --------         -----       ------------
<S>                               <C>          <C>        <C>             <C>        <C>             <C>           <C>
    1999
Year ended 12/31                  97,170       3,645      86,463          $ 436      $ 419           $ 379             --
4th Quarter                       30,790         980      16,209          $ 432      $ 391           $ 351             --
3rd Quarter                       39,008         744      25,597          $ 444      $ 404           $ 334             --
2nd Quarter                       15,376          --      26,898          $ 455         --           $ 484             --
1st Quarter                       11,996       1,921      17,759          $ 395      $ 440           $ 308             --

    1998
Year ended 12/31                  93,557      50,894          --          $ 420      $ 479              --        $ 6,276
4th Quarter                       24,299      23,787          --          $ 396      $ 441              --             --
3rd Quarter                       29,017      22,617          --          $ 431      $ 511              --             --
2nd Quarter                       23,832       2,506          --          $ 432      $ 570              --        $ 6,276
1st Quarter                       16,409       1,984          --          $ 418      $ 447              --             --

    1997
Year ended 12/31                  97,749      30,189      11,045          $ 446      $ 556           $ 315       $ 11,760
4th Quarter                       27,415      17,830          --          $ 487      $ 576              --       $ 11,760
3rd Quarter                       25,867      10,056          --          $ 436      $ 569              --             --
2nd Quarter                       23,094       2,303          --          $ 441      $ 350              --             --
1st Quarter                       21,373          --      11,045          $ 413         --            $315             --

</TABLE>


Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

           Revenues.  Revenues  increased  $5.7  million,  or 8.0%,  from  $71.3
million in 1998 to $77.0 million in 1999. The increase is primarily attributable
to an increase in timber deed sales of $32.8 million and a $3.0 million increase
in log sales, partially offset by a $22.8 million reduction in stumpage sales, a
$1.0 million  decrease in  by-products  and other revenues and the fact that the
Company had no land sales in 1999 compared to approximately $6.3 million in land
sales in 1998. To meet its working capital  requirements,  the Company harvested
and sold logs and  stumpage  in 1999 at rates in excess of both 1998  levels and
the estimated current annual board footage growth on the timberlands.

           Timber  deed sales for 1999 were  $32.8  million on volumes of 86,463
MBF, compared to no timber deed revenue for 1998.

           Log sales for 1999 were  $42.3  million  on  volumes  of 97,170  MBF,
compared  to log sales of $39.3  million on  volumes of 93,557 MBF in 1998.  The
average  log sales  price per MBF for 1999 was $436  compared  to an average log
sales  price  per MBF of $420 for 1998,  a 3.8%  increase,  reflecting  stronger
markets, primarily for White Fir and Douglas Fir logs.

           Stumpage  sales for 1999 were $1.5  million  on volumes of 3,645 MBF,
compared with stumpage  sales of $24.4 million on volumes on 50,894 MBF in 1998.
The  average  stumpage  sales  price  per MBF for 1999 was $419  compared  to an
average  stumpage sales price per MBF of $479 for 1998, a 12.5%  reduction.  The
decrease in average stumpage sales prices from 1998 to 1999 was primarily due to
a reduction in the grade of timber  harvested from the Ochoco  Timberlands.  The
overall reduction in stumpage sales volume is due to the increased use of timber
deed sales in 1999.


                                       17
<PAGE>
           The Company had no revenue from timber and property sales during 1999
as compared to  approximately  $6.3 million in planned timber and property sales
during 1998.

           Gross  Profit.  Gross  profit  increased  by $9.8  million from $26.8
million in 1998 to $36.6 million in 1999 and gross margin  increased  from 37.6%
in 1998 to 47.6% in 1999.  The increase in gross margin was primarily from three
factors.  First,  the  Company's  normal  annual  review of its standing  timber
inventory  and  depletion  rate during the first  quarter of 1999  resulted in a
reduction of the Company's  depletion rate, and a savings of approximately  $4.9
million in 1999.  Also,  the  Company did not have any land sales  during  1999,
which have  typically  resulted in lower  margins  than log,  stumpage  and deed
sales.  In addition to the above items,  the Company  benefited  from an overall
increase in log prices during 1999.

           Selling,  General and Administrative  Expenses.  Selling, general and
administrative  expenses decreased by $2.0 million from $10.5 million in 1998 to
$8.5 million in 1999.  This expense also  decreased as a percentage of net sales
from 14.7% in 1998 to 11.0% in 1999. The decrease was primarily  attributable to
one-time  expenses of $1.7 million related to severance costs and the repurchase
of member  interests  in the  Manager  that were  incurred  during the first and
fourth quarters of 1998,  combined with the provision in 1998 for the closure of
the Seattle office.

           Interest  Expense.  Interest  expense  for 1999 was $21.9  million as
compared  to  $22.2  million  for  1998,  representing  a $0.3  million  or 1.4%
reduction. Interest expense for both 1999 and 1998 was incurred primarily on the
$225.0  million of Notes issued in the November 1997 Public Note  Offering.  The
slight decrease in interest expense in 1999 can be attributed to a reduced level
of borrowing  against the available  revolving credit  facilities during 1999 as
compared to 1998.

           Interest  Income.  Interest  income  for 1999 was  $0.6  million,  an
increase of $0.1 million or 20.0% from interest income for 1998 of $0.5 million.
The increase is primarily  attributable to imputed interest from deed sales with
a term of more than one  year.  Imputed  interest  income  from  deed  sales was
approximately  $0.3 million in 1999.  The increase in interest  from timber deed
sales was  partially  offset  by a  reduction  in the cash and cash  equivalents
available in 1999 compared to 1998.

           Other Income (Expense),  net. Other income, net, was $1.1 million for
1999 compared to other expense,  net, of $0.3 million for 1998,  representing an
increase to income of $1.4 million. The increase is primarily  attributable to a
mark-to-market  gain on an interest  rate collar of  approximately  $1.0 million
during 1999. In addition,  revenues from land use management  operations such as
grazing permits increased in 1999.

           Cash Flow From  Operations.  During 1999,  cash flow from  operations
increased $7.0 million or 37.8% primarily as a result of increased gross margins
and  a  reduction  of  selling,  general  and  administrative  expenses,  offset
partially by decreased  proceeds  from timber and  property  sales,  increase in
balance of notes receivable and a decrease in accrued liabilities.


                                       18
<PAGE>

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

           Revenues.  Revenues  were $71.3  million in 1998,  a decrease of $6.0
million or 7.8% from  revenues  of $77.3  million  in 1997.  This  decrease  was
primarily attributable to a $9.0 million reduction in timber and property sales,
a  $4.3  million  reduction  in  log  sales  and a  $0.2  million  reduction  in
by-products and other revenues,  partially  offset by a $7.6 million increase in
revenues from stumpage  sales.  To meet its working  capital  requirements,  the
Company  harvested and sold logs and stumpage in 1998 at rates in excess of both
1997  levels  and the  estimated  current  annual  board  footage  growth on the
timberlands.

           Revenue from  planned  timber and  property  sales  decreased to $6.2
million in 1998 from $15.2 million  during 1997,  representing a $9.0 million or
59.2% reduction.  The significant  reduction was due to a decrease in the volume
contained  in the 1998  timber and  property  sales of 26,600 MBF as compared to
52,600 MBF in 1997.

           Log sales for 1998 were  $39.3  million  on  volumes  of 93,557  MBF,
compared  to log sales of $43.6  million on  volumes of 97,749 MBF in 1997.  The
average  log sales  price per MBF for 1998 was $420  compared  to an average log
sales  price  per MBF of $446 for  1997,  a 5.8%  reduction,  reflecting  weaker
markets, primarily for Ponderosa Pine logs.

           Stumpage  sales for 1998 were $24.4 million on volumes of 50,894 MBF,
compared with stumpage  sales of $16.8 million on volumes of 30,189 MBF in 1997.
The  average  stumpage  sales  price  per MBF for 1998 was $479  compared  to an
average  stumpage sales price per MBF of $556 for 1997, a 13.8%  reduction.  The
decrease in average stumpage sales prices from 1997 to 1998 was primarily due to
a reduction in the grade of timber harvested from the Ochoco Timberlands.

           In addition,  the Company entered into six stumpage contracts in 1998
for an aggregate  estimated  revenue of $5.5 million and 16,700 MBF. The revenue
from these six contracts was recognized in 1999.

         Gross profit. Gross profit decreased by $6.7 million from $33.5 million
in 1997 to $26.8  million in 1998 and the gross margin  decreased  from 43.3% in
1997 to 37.6% in 1998. The decrease is primarily  attributable to a lower margin
on timber and property  sales in 1998 of 5.7% compared to 42.6% in 1997 combined
with an increase in depletion, depreciation and amortization expense during 1998
of $4.6 million from 1997.

           Depletion, depreciation and amortization expense was $21.9 million in
1998, a $4.6 million or 26.6% increase over $17.3 million in 1997. This increase
was primarily  attributable  to a net increase in log and stumpage sales volumes
and an increase in the Company's depletion rate per MBF, which resulted from the
Ochoco Timberlands acquisition in July 1997.

           Selling,  General and Administrative Expenses . Selling,  general and
administrative expenses were $10.5 million for 1998, an increase of $4.2 million
or 66.7% over  comparable  expenses  of $6.3  million in 1997.  The  increase in
selling,  general and  administrative  expenses was  primarily  attributable  to
one-time  expenses of $1.7 million related to severance costs and the repurchase
of member  interests in the Manager  that were  incurred in the first and fourth
quarters of 1998,  combined with increased costs  associated with operating as a
publicly  traded  company,  and  implementing  the Company's  strategy to pursue
accretive acquisitions of timberland.

           Interest  Expense.  Interest  expense  for 1998 was $22.2  million as
compared  to $25.3  million  for  1997,  representing  a $3.1  million  or 12.3%
reduction. 1998 interest expense was incurred primarily on the $225.0 million of
Notes issued in the November 1997 Public Note  Offering.  1997 interest  expense
related  primarily to $215.0 million of term debt and $90.0 million of revolving
debt incurred in connection with the Weyerhaeuser Acquisition on August 30, 1996
and $110.0  million of incremental  debt incurred in connection  with the Ochoco
Acquisition  on July 15, 1997.  The  reduction in interest  expense is primarily
attributable  to the use of a  substantial  portion  of the  proceeds  from  the
Company's Initial Offering completed on November 19, 1997, to retire outstanding
debt.



                                       19
<PAGE>


           Amortization of Deferred  Financing Fees and Debt Guarantee Fees. The
company  deferred $6.7 million of fees incurred in connection  with the issuance
of the Notes. These fees will be amortized over the term of the Notes, which are
due in  November  2007.  The  amortization  of these fees  during  1998 was $0.7
million.  During 1997 the Company  recognized $4.2 million of expense related to
debt guarantee fees and amortization of deferred financing fees.

           Interest  Income.  Interest  income  for  1998 was  $0.5  million,  a
decrease of $1.0 million or 66.7% from interest income for 1997 of $1.5 million.
The reduction in interest  income is primarily  attributable to the reduction in
the cash and cash equivalents available in 1998 compared to 1997.

           Other  expense,  net.  Other  expense,  net was $0.3 million for 1998
compared to $0.6 million for 1997,  representing  a reduction of $0.3 million or
50.0%.

           Extraordinary  Items.  During  1997 the  Company  refinanced  certain
long-term borrowings resulting in extraordinary losses on extinguishment of debt
of $9.3 million due to the write-off of existing  unamortized deferred financing
fees and other related fees.

           Cash Flow From  Operations.  During 1998,  cash flow from  operations
decreased $7.7 million or 29.3% primarily as a result of decreased proceeds from
timber and property  sales, an increase in selling,  general and  administrative
expenses and a decrease of advance payments on stumpage sales contracts.


Liquidity and Capital Resources

           Effective November 19, 1997, the Master Partnership completed its MLP
Offering of  8,577,487  Common  Units  (including  Common  Units issued upon the
exercise by the underwriter's of their over-allotment  option in December 1997).
Net proceeds from the MLP Offering were $163.2 million. In addition, the Company
issued $225.0 million of Notes in the Public Notes  Offering.  The proceeds from
the MLP Offering and the Public Notes Offering were primarily utilized to retire
all  outstanding  borrowings  under the  revolving  credit  facility  and $330.0
million of term debt. For purposes of this  discussion,  these  transactions are
hereafter  referred to as the  "Transactions."  As of  December  31,  1999,  the
Company had a cash balance of $2.8 million and $2.4 million of working capital.

           Operating Activities.  Cash flows provided by operating activities in
1999 were $25.5  million,  as  compared  to cash  flows  provided  by  operating
activities  of $18.5  million in 1998.  The $7.0 million  increase in cash flows
provided by operating  activities was primarily due to a $12.9 million  increase
in net income offset by a $3.5 million increase in notes  receivable  related to
timber deed sales and the addback of non-cash operating items.

           Investing  Activities.  Cash flows used by investing  activities were
$1.3 million in 1999, as compared to cash flows used by investing  activities of
$0.6 million  during 1998.  The  increase is  primarily  attributable  to a $0.3
million increase in the amount invested in timber and road additions during 1999
compared to 1998 as well as a $0.3 million investment in affiliate that was made
during 1999.

           Financing  Activities.  Cash flows used in financing  activities were
$26.2 million in 1999, as compared to cash flows used by financing activities of
$23.7  million  during  1998.  During 1999,  the Company  paid $26.2  million in
distributions to the Master Partnership for distributions to the unitholders and
minority  interest.  During 1998,  the Company paid $22.7  million to the Master
Partnership for  distributions to the unitholders and minority interest and paid
$1.0 million to an affiliate for redemption of a certain member's interest.

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,


                                       20
<PAGE>


payable  semiannually  in arrears on May 15 and November 15. The Notes mature on
November  15, 2007 unless  previously  redeemed.  The Notes will 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. In addition,  at any time on or prior to November 15, 2000,
the Company, at its option, may redeem the Notes with the net cash proceeds of a
Common Units offering or other equity  interests of the Master  Partnership,  at
109.625% of the  principal  amount  thereof,  plus  accrued and unpaid  interest
thereon to the  redemption  date,  provided  that at least 65% of the  principal
amount of the Notes originally issued remain outstanding  immediately  following
such redemption. 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.

           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 Charge  Coverage  Ratio is equal to or
less  than 1.75 to 1.00,  in an  aggregate  amount  after  the  closing  of this
offering  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 Company
was in compliance with these covenants at December 31, 1999 and 1998.

Affiliate Credit Facility

           During the second quarter of 1999,  the Company  replaced an existing
bank credit facility through a credit agreement with an affiliate of the Manager
("Affiliate Credit Facility").  The Affiliate Credit Facility allows the Company
to borrow up to $12.0 million under certain terms and  covenants.  The covenants
include restrictions on the Company's ability to make cash distributions,  incur
certain additional indebtedness or incur certain liens. In addition, the Company
is required to maintain certain financial ratios.  The Affiliate Credit Facility
will expire on June 30, 2000.  At that time,  amounts  borrowed  will be due and
payable. As of December 31, 1999 there were no outstanding  borrowings under the
Affiliate  Credit  Facility.  The  Company's  intent is to replace the Affiliate
Credit Facility with a bank facility sometime during the first half of 2000. The
Company also has the ability to generate cash flow through the  acceleration  of
planned log and timber deed sales.  In addition,  the  Company's  plan is to use
investment and commercial banks to raise funds for acquisitions.

           Under the Affiliate Credit  Facility,  so long as no Event of Default
(as  defined in the  Affiliate  Credit  Facility)  exists or would  result,  the
Company will be permitted to make  quarterly  cash  distributions  to the Master
Partnership  in an  amount  not to  exceed  Available  Cash (as  defined  in the
Affiliate Credit Facility) in the preceding quarterly period.

Capital Expenditures/Cash Distributions

           Capital   expenditures   in  1999  totaled  $1.0   million.   Capital
expenditures incurred were mainly in the nature of land management/silvicultural
expenses,  miscellaneous  equipment and computer hardware and software.  Capital


                                       21
<PAGE>


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/silvicultural   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  $1.7 million in
2000. Capital  expenditures will consist primarily of capitalized  silvicultural
costs and miscellaneous equipment purchases.

           Cash  required  to  meet  the  Company's   debt  service  and  Master
Partnership's  quarterly cash  distributions  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 Manager expects that the
debt service and quarterly cash distributions will be 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's ability in the future
to make distributions at current levels may be adversely  affected.  The Company
continues  to  evaluate  means to improve  cash  flows,  including  the  factors
mentioned above. However,  there can be no assurance that prices will improve or
that the Company will be able to take any of these actions.

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.

Year 2000 Compliance

         The  Company has  completed  its Year 2000  readiness  work and did not
experience  disruption  in its  business  related  to the Year  2000  Issue.  In
addition to  internally  assessing  its systems and business for Year 2000,  the
Company  contacted all major  external  third parties that provide  products and
services to the Company to assess  their  readiness  for Year 2000.  The Company
made certain  investments in systems,  applications  and products to address the
Year  2000  Issue.  The  Company  did not,  however,  track  internal  resources
dedicated to the  resolution of the Year 2000 Issue and  therefor,  is unable to
quantify  internal costs incurred to date that are associated with the Year 2000
Issue. The Company believes that direct and indirect expenditures to address the
Year 2000 were immaterial to the Company's operations.  To date, the Company has
not experienced any significant, known Year 2000 issues and has been informed by
material  third parties that they have also not  experienced  material Year 2000
issues. The Company will continue to monitor any on-going Year 2000 issues.

SFAS No. 133

           In June of 1998,  the  financial  Accounting  Standards  Board issued
Statement of Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting  for
Derivative Instruments and Hedging Activities," which establishes accounting for
derivative instruments and hedging activities. The statement was to be effective
for all fiscal  quarters of fiscal years  beginning  after June 15, 1999 but has
been delayed by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral  of the  Effective  Date  of  FASB  Statement  No.  133--an
amendment of FASB Statement 133". SFAS No. 137 delays the effective date of SFAS
No. 133 to all fiscal  quarters of fiscal years  beginning  after June 15, 2000.
Consistent  with SFAS No. 137, the Company will adopt SFAS No. 133 as of January
1, 2001. The Company  believes that the adoption of this statement will not have
a material impact on its financial statements; however, its effect, if any, will
depend  on the  Company's  exposure  to  derivative  instruments  at the time of
adoption and thereafter.


                                       22
<PAGE>


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

           On December 1, 1998, Arthur Andersen,  LLP (the "Former  Accountant")
resigned  as the  Company's  independent  accountant.  On January  4, 1999,  the
Registrant  engaged  Richard A. Eisner & Company,  LLP  ("Eisner")  to audit its
financial  statements  for the year ended December 31, 1998. The Company did not
consult with Eisner during the Registrant's two most recent fiscal years and any
subsequent  interim period on any matter of the type described in Item 304(a)(2)
of Regulation S-K.

           The Former Accountant's report on the Company's financial  statements
for  either  of the past two  years  did not  contain  any  adverse  opinion  or
disclaimer  of opinion and was not qualified as to  uncertainty,  audit scope or
accounting principles.

           In  connection  with the Former  Accountant's  audit of the Company's
financial statements for its fiscal year ended December 31, 1996, a period prior
to the time that the  Company  was a Reporting  Company,  the Former  Accountant
advised the Company of certain  material  weaknesses in the Company's  system of
internal  controls  over  cash.  As a  result  of such  weaknesses,  the  Former
Accountant  expanded the scope of its audit procedures  related to the Company's
cash  disbursements  in order to issue an opinion on the Company's year end 1996
Financial  Statements.  The  control  weaknesses  were  addressed  to the Former
Accountant's satisfaction.

           In addition,  in connection with the audit of the Company's Financial
Statements for its fiscal year ended December 31, 1996,  there was an accounting
principle  disagreement  regarding the  classification of a payment to a related
party prior to year end and the  repayment  of such amount after year end and an
audit scope disagreement regarding the need to confirm with the Company's lender
if the payment and repayment would result in a loan being classified as current.
Each of the foregoing  disagreements  were  resolved to the Former  Accountant's
satisfaction.

           Each of the matters described above was communicated to the Company's
audit committee on May 30, 1997.

           The Company has authorized the Former  Accountant to respond fully to
the inquiries of any successor accountant  concerning the subject matter of each
of the matters described in the two preceding paragraphs.


                                       23
<PAGE>

                                    PART III

Item 10.  Directors, Executive Officers, Promoters and Control Persons 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 January 1999, the Manager  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.



                                       24
<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 Manager, its executive officers and
certain key employees. Executive officers and directors are elected for one-year
terms.
<TABLE>
<CAPTION>

             Name                      Age                            Position with Manager
             ----                      ---                            ---------------------

<S>                                    <C>        <C>
John M. Rudey                          56        Chairman, Chief Executive Officer, President and Director (1)

Aubrey L. Cole                         76        Director (2)

George R. Hornig                       45        Director (3)

William A. Wyman                       61        Director (4)

Alan B. Abramson                       54        Director (5)

Robert F. Wright                       74        Director (6)

Greg G. Byrne                          39        Vice President and Chief Financial Officer

Martin Lugus                           59        Vice President, Timberland Operations

Toby A. Luther                         26        Corporate Controller, Western Operations

Walter L. Barnes                       57        Assistant Vice President, Harvesting

Robert A. Broadhead                    48        Assistant Vice President, Marketing

Kurt A. Muller                         41        Assistant Vice President, Planning

Christopher J. Sokol                   50        Assistant Vice President, Forestry
---------------------

  (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 and LTIP Committees.
  (5)      Member of the Audit, Conflicts, Compensation (Chairman) and LTIP Committees.
  (6)      Member of the Nominating, Finance and LTIP (Chairman) Committees.

</TABLE>

           John M. Rudey serves as Chairman, Chief Executive Officer,  President
and as a Director  of the  Manager.  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.  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 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).

           George R. Hornig serves as a Director of the Manager. Since 1999, Mr.
Hornig has been Managing Director 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


                                       25
<PAGE>


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 SL
Industries, Inc. and Forrester Research, Inc.

           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,  where,  until 1984,  he counseled a variety of service,  natural
resources and manufacturing  companies on projects  concerning  strategic profit
improvement and management  organization.  Mr. Wyman has served as a director of
Donaldson, Lufkin & Jenrette, Belvedere Reinsurance, and SS&C Technologies

           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. 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 is a director  of the  following
companies:  Hanover  Direct Inc. (a catalog  marketer),  Reliance  Standard Life
Insurance Co. and affiliates  (life insurance  companies),  The Navigators Group
Inc.  (a  property  insurance  company),  Deotexas  Inc.  (a  development  stage
company),  Universal American Financial Corp. (an insurance company),  Quadlogic
Controls Corp. (a meter manufacturer) and G.V.A.  Williams Real Estate Co., Inc.
(a real estate company).

             Greg G. Byrne became Vice President and Chief Financial  Officer of
the Manager in January,  1999.  From 1996 to 1999, Mr. Byrne was Chief Financial
Officer of P&M Cedar  Products,  a  California-based  producer of specialty wood
products.  From  1993 to 1996,  Mr.  Byrne was Vice  President  of  Finance  and
Strategic Planning for the Fibreboard Wood Products Company.  Prior to 1996, Mr.
Byrne was an Audit Manager with Coopers & Lybrand.

             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.

             Toby  A.  Luther  serves  as the  Corporate  Controller  -  Western
Operations of the Manager,  responsible for all accounting  functions.  Prior to
joining   the   Manager   in  1999,   Mr.   Luther   was  an   accountant   with
PricewaterhouseCoopers.



                                       26
<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
1993-1996,  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 - Marketing
of the Manager,  responsible  for all log and stumpage sales  transactions.  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.

           Kurt A. Muller serves as Assistant  Vice  President - Planning of the
Manager,  responsible  for  all  harvest  planning,  as well  as  operating  and
developing  the  inventory  and GIS systems.  From 1982 to 1989,  Mr. Muller was
President of Woodland  Consulting  Services,  Inc.,  during which time he gained
additional   experience  in  contracting   forestry  operations  and  forestland
management as District  Forester.  Mr. Muller was employed by  Weyerhaeuser  for
eight years.

             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 Company,  to file reports of
ownership and changes in ownership with the  Securities and Exchange  Commission
and the Nasdaq National Market. Officers, directors and greater than ten percent
securityholders  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 Company's  securities,  the
Company  believes  that during the fiscal year 1999,  all filings  required were
properly made.

                                       27
<PAGE>


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, 1999:


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                                                                                  Long-Term
                                                  Annual                                         Compensation
                                                 Compensation                                       Awards
                                                 ------------                                       ------

                                    Fiscal                                                  Securities Underlying       All Other
Name and Principal Position          Year       Salary($)         Bonus($)      Other($)       Options/SARs(#)         Compensation
---------------------------          ----       ---------         --------      --------       ---------------         ------------
<S>                                   <C>        <C>               <C>             <C>           <C>                   <C>
John M. Rudey                         1999       450,000           225,000            --               50,000              --
    Chairman and                      1998       300,000           150,000            --                   --              --
    Chief Executive Officer           1997       450,000                --            --           107,218(2)              --

Glenn A. Zane (1)                     1999       267,738(1)         70,000(1)         --                   --              --
    Acting Senior Vice President &    1998            --                --            --                   --              --
    Acting Director of Operations     1997            --                --            --                   --              --


Greg G. Byrne                         1999       150,000            90,000         9,901               50,000              --
    Vice President and                1998            --                --            --                   --              --
    Chief Financial Officer           1997            --                --            --                   --              --

Martin Lugus                          1999       120,000            35,000         4,437                   --              --
    Vice President - Timberland       1998       101,521            24,625         3,767                   --              --
                                      1997        88,500             3,000         3,638            64,331(2)              --

Walter L. Barnes                      1999        95,000            23,750         1,664                   --              --
    Assistant Vice President          1998        80,000            20,150         1,220                   --              --
    - Harvesting                      1997        74,000             3,000         1,156            34,310(2)              --
----------------------
</TABLE>

(1)        Represents  amounts  paid to Mason,  Bruce,  & Girard for Mr.  Zane's
           services under a consulting  agreement between the Company and Mason,
           Bruce & Girard.  Subsequent  to  year-end,  Mr.  Zane  resigned as an
           acting  officer,   but  he  continues  to  serve  the  Company  as  a
           consultant.
(2)        Options granted in 1997 were repriced on December 14, 1998.


                                       28
<PAGE>


Long-Term Incentive Plan

             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 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.


                                       29
<PAGE>

             The following table sets forth certain  information with respect to
Unit  Options  granted to the named  executive  officers  during the fiscal year
1999:
<TABLE>
<CAPTION>

                                             LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
                                             -----------------------------------------------------

                                                                                                            Performance or Other
                                                                                                            Period Until
                                                                                                            Maturation
                                 Name                                          Number of Unit Options          or Payout (1)
                                 ----                                          ----------------------          -------------


<S>                                                                                    <C>                        <C>
John M. Rudey .......................................................                  50,000                     1 year

Greg G. Byrne .......................................................                  50,000                     1 year

</TABLE>


(1)      The Unit Options become exercisable automatically upon, and in the same
         proportion  as,  the  conversion  of the  Subordinated  Units to Common
         Units, which date shall be no earlier than December 31, 2000.

           The following  table sets forth certain  information  with respect to
option grants to the named executive officers during fiscal 1999:
<TABLE>
<CAPTION>

                                             OPTIONS/SAR GRANTS IN LAST FISCAL YEAR


                                                                                                        Potential Realizable Value
                                                                                                         at Assumed Annual Rates
                                Number of                                                                 of Stock Appreciation
                               Securities            % of Total                                            for Option Term (2)
                               Underlying       Options/SARs Granted    Exercise or                        --------------------
                              Options/SARs          to Employees         Base Price      Expiration

Name                             Granted         during Fiscal Year      ($/Sh) (1)         Date          10%              5%
----                             -------         ------------------      ------             ----          ---              --

<S>                             <C>                  <C>               <C>              <C>            <C>             <C>
John M. Rudey ............      50,000               14.6%             $13.375           01/01/09       $475,039        $1,239,272

Greg G. Byrne ............      50,000               14.6%             $14.000           02/01/09       $497,238        $1,297,182

</TABLE>

(1)      The Unit Options become exercisable automatically upon, and in the same
         proportion  as,  the  conversion  of the  Subordinated  Units to Common
         Units, which date shall be no earlier than December 31, 2000.

(2)        A ten year period (the  maximum  length of the Unit Option  term) was
           used for compounding purposes in the above calculations.



                                       30
<PAGE>

           The following  table sets forth certain  information  with respect to
the aggregate number and value of options at the fiscal year-end 1999:
<TABLE>
<CAPTION>

                                    AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
                                              FISCAL YEAR ENDED OPTION/SAR VALUES


                                                                   Number of Securities
                                                                  Underlying/Unexercised             Value of Unexercised
                                                                      Option/SARs at             In-the-Money Options/SARs at
                                                                    December 31, 1999                 December 31, 1999
                                                                    -----------------                 -----------------
                     Shares Acquired
                       on Exercise         Value Realized       Exercisable  Unexercisable        Exercisable    Unexercisable
                       -----------         --------------       -----------  -------------        -----------    -------------

<S>                     <C>                    <C>                  <C>            <C>              <C>            <C>
John M. Rudey              ---                  $---                ---           157,218           $---            N/A(1)

Glenn A. Zane (2)          ---                  $---                ---             ---             $---            N/A

Greg G. Byrne              ---                  $---                ---            50,000           $---            N/A(1)

Martin Lugus               ---                  $---                ---            64,331           $---            N/A(1)

Walter L. Barnes           ---                  $---                ---            34,310           $---            N/A(1)




</TABLE>

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

(1)        At the close of trading on December 31, 1999, the market value of the
           Common  Units was $9.875 per common  unit.  Since the Units  Options,
           once  exercisable,  would be  exercisable  at a range of  $13.375  to
           $14.750 per unit, the in-the-money computation is inapplicable.
(2)        Subsequent to year-end,  Mr. Zane resigned as an acting officer,  but
           he continues to serve the Company as a consultant.

           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  reimbursement  by the  Company  for the cost  incurred in
acquiring such Common Units. If the Master  Partnership 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.



                                       31
<PAGE>

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.  Each  independent  director
receives  $50,000  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,  the Manager entered into a consulting
agreement  with Mr. Wyman that  provides  for an annual  retainer of $50,000 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.

Employment Agreements

           The Manager has entered into an employment  agreement  with Mr. Rudey
(the  "Executive").  The agreement has a term expiring on December 31, 2002, 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.  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 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  re-elect  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.


                                       32
<PAGE>

           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.

           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 Option Committee for the Company's Unit Option 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,   an  executive's  acceptance  of  additional  responsibility  and
acquisition  activity.  The  above  factors  were  applied  in  determining  the
compensation and bonus levels for all executive officers.

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.  In addition,  the Manager entered into a consulting
agreement  with Mr. Wyman that  provides  for an annual  retainer of $50,000 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.

Related Party Transactions

           During  January  1999,  Glenn A. Zane,  a principal  of Mason Bruce &
Girard,  was  appointed  Acting  Senior Vice  President  and Acting  Director of
Operations  for the Company.  Subsequent  to year-end,  Mr. Zane  resigned as an
acting  officer,  but  he  continues  to  serve  the  Company  as a  consultant.
Throughout 1999, the Company paid approximately $695,000, excluding payments for
Mr. Zane's services, to Mason, Bruce & Girard.


Investment in Affiliate

           In October 1999,  the Company made an investment in U.S.  Timberlands
Yakima,  LLC (USTY),  an unconsolidated  affiliate.  USTY, a 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  Partnership  contributed  to USTY
$294,000  of  cash  for  49%  of  USTY's  common   interests  (the  "Common  LLC
Interests").  The remaining  Common LLC Interests  were acquired for $306,000 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 Manager,


                                       33
<PAGE>


hold a controlling  interest.  The Company  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 $22.0 million.
The Company  recorded  its  investment  in the Senior LLC  Interest at its $18.9
million cost basis for the contributed  timberlands.  Terms of the Preferred LLC
Interests  include  a  cumulative  annual  guaranteed  return of 5% of the $22.0
million  agreed upon value of the  contributed  timberlands.  The  Preferred LLC
Interests  are  redeemable  at the  Company's  option on December 31, 2004 or at
USTY's  option at any time prior  thereto,  for a redemption  price equal to the
agreed  upon  value of the  Preferred  LLC  Interests  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
its  Preferred  LLC interest at cost,  reduced by losses in excess of the Common
LLC Interests.  The Master  Partnership  accounts for its Common LLC Interest by
the equity method. The Manager of the Company   provides  management services to
USTY  for a  fee  equal  to  2%  of  USTY's  earnings  before  interest,  taxes,
depreciation  and  amortization.  The Company granted U.S.  Timberlands  Holding
Group,  LLC an  irrevocable  proxy to vote its Common and  Preferred  Interests.
During 1999,  concurrently with and in order to facilitate USTY's acquisition of
the Washington  timberlands  referred to above, an entity  controlled by John M.
Rudey  agreed to acquire in the future a portion of the property and any related
liabilities  that the Company and USTY were  unwilling  to acquire,  the sale of
which was a  condition  of the seller to the USTY  acquisition.  Such entity was
paid $2.7 million by the seller for its  agreement to acquire such  property and
any related liabilities. The Manager's Conflicts Committee reviewed and approved
the structure of the Company's investment in the affiliate.

Repurchase of Certain Member Interests; Severance Payments

           On  January 5,  1998,  the  Manager  made  certain  changes in senior
management.  In connection therewith,  Edward J. Kobacker,  the former Executive
Vice President and Chief Operating Officer and a former Director of the Manager,
became entitled to receive approximately $700,000 in severance payments pursuant
to his employment agreement. In addition, pursuant to the terms of the Manager's
operating agreement,  the member interests of each of Mr. Stephens, Mr. Kobacker
and John H. Beuter, a former Director of the Manager, were subject to repurchase
at  an  aggregate  price  of  $385,000  payable  in  three  annual  installments
commencing  February 1, 1998.  The Company has  reimbursed  the Manager for such
repurchase payments.

           During January 1999, the Company paid $260,000, $175,000 and $145,000
to Messrs.  Symington,  Michie and McDowell,  respectively,  as severance  under
their employment agreements with the Company. In July 1999, under the terms of a
settlement the Company reached with Messrs. Symington, Michie, and McDowell, the
Company  committed to pay an  additional  sum of $675,000 to Messrs.  Symington,
Michie, and McDowell.


                                       34
<PAGE>

                                     PART IV

Item 14.  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

<TABLE>
<CAPTION>
<S>                <C>
                    +3.2  -- Second Amended and Restated Operating Agreement of U.S. Timberlands Klamath  Falls, LLC

                   +10.2  -- Indenture among U.S. Timberlands Klamath Falls, LLC, U.S. Timberlands Finance Corp. and State Street
                             Bank and Trust Company, as trustee

                    +0.3  -- Contribution, Conveyance and Assumption Agreement among U.S. Timberlands Klamath Falls, LLC and certain
                             other parties

                   *10.4  -- Form of U.S. Timberlands Klamath Falls, LLC 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

                    **16 -- Letter from Arthur Andersen,  LLP dated December 8, 1998.

                   *21.1  -- List of Subsidiaries

                    23.1  -- Consent of Richard A. Eisner & Company, LLP dated April 14, 2000.

                    23.2 --  Consent  of Arthur  Andersen  LLP dated  April 11, 2000.

                    27.1  -- Financial Data Schedule
</TABLE>


*     Incorporated by reference to the same numbered Exhibit to the Registrant's
      Registration Statement on Form S-1 filed November 13, 1997.
+     Incorporated by reference to the same numbered Exhibit to the Registrant's
      Current Report on Form 8-K filed January 15, 1998.
**    Incorporated by referenceto Exhibit 1 to the Registrant's Form 8-K filed
      on December 8, 1998.



                                       35
<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 30th day of
March, 2000.
                        U.S. TIMBERLANDS KLAMATH FALLS, LLC

                        By: U.S. Timberlands Services Company, LLC
                               Its 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.

<TABLE>
<CAPTION>
<S>                                                            <C>                                                  <C>
   /s/ John M. Rudey                                           Chairman, Chief Executive Officer, President and      March 30, 2000
   -------------------------------------------------           Director (Principal Executive Officer)
                     John M. Rudey

   /s/ Greg G. Byrne                                           Chief Financial Officer                               March 30, 2000
   -------------------------------------------------
                     Greg G. Byrne

   /s/ Toby A. Luther                                          Corporate Controller -                                March 30, 2000
   -------------------------------------------------              Western Operations
                     Toby A. Luther                               (Principal Accounting Officer)

   /s/ Aubrey L. Cole                                          Director                                              March 30, 2000
   -------------------------------------------------
                     Aubrey L. Cole

   /s/ George R. Hornig                                        Director                                              March 30, 2000
   -------------------------------------------------
                     George R. Hornig

   /s/ Alan B. Abramson                                        Director                                              March 30, 2000
   -------------------------------------------------
                     Alan B. Abramson

   /s/ William A. Wyman                                        Director                                              March 30, 2000
   -------------------------------------------------
                     William A. Wyman

   /s/ Robert F. Wright                                        Director                                              March 30, 2000
   -------------------------------------------------
                     Robert F. Wright

</TABLE>

                                       36
<PAGE>


EXHIBIT INDEX

23.1 Consent of Richard A. Eisner & Company, LLP dated April 14, 2000.

23.2 Consent of Arthur Andersen LLP dated April 11, 2000.

27.1 Financial Data Schedule



                                       37
<PAGE>




U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY


CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

Contents                                                                                                   Page

<S>                                                                                                        <C>
Independent auditors' report (Richard A. Eisner, LLP)                                                       F-2

Report of independent public accountants (Arthur Andersen LLP)                                              F-3

Consolidated balance sheets as of December 31, 1999 and 1998                                                F-4

Consolidated statements of operations for the years ended December 31, 1999, 1998, and 1997                 F-5

Consolidated statements of changes in  members' equity (deficit) for the years ended
December 31, 1999, 1998 and 1997                                                                            F-6

Consolidated statements of cash flows for the years ended December 31, 1999, 1998 and 1997                  F-7

Consolidated notes to financial statements                                                                  F-8
</TABLE>

                                       F-1

<PAGE>



INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Members 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, 1999 and 1998,  and the
related consolidated statements of operations,  changes in members' eqity and
cash  flows  for the  years  then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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, 1999 and 1998,  and the
results of their  operations  and their cash flows for the years then ended,  in
conformity with generally accepted accounting principles.



Richard A. Eisner & Company, LLP

New York, New York
January 21, 2000


                                      F-2
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated statements of operations,  changes
in members' equity (deficit),  and cash flows of U.S. Timberlands Klamath Falls,
LLC for the year ended  December 31, 1997.  These  financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

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

           In our opinion,  the financial  statements  referred to above present
fairly,  in all material  respects,  the results of operations and cash flows of
U.S.  Timberlands  Klamath  Falls,  LLC for the year ended  December 31, 1997 in
conformity with accounting principles generally accepted in the United States.



                                                             Arthur Andersen LLP
Portland, Oregon
January 23, 1998



                                      F-3
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY



Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>

                                                                                                                December 31,
                                                                                                                ------------
                                                                                                              1999          1998
                                                                                                              ----          ----
<S>                                                                                                          <C>        <C>
ASSETS
Current assets:
    Cash and cash equivalents                                                                                $  2,798   $  4,824
    Accounts receivable, net of allowance for doubtful accounts of $200                                           672      1,527
    Other receivables                                                                                             124      1,113
    Notes receivable                                                                                            2,344      1,179
    Prepaid expenses and other current assets                                                                     981        426
                                                                                                             --------   --------

          Total current assets                                                                                  6,919      9,069

Timber and timberlands, net                                                                                   293,828    334,476
Investment in affiliate                                                                                        18,537       --
Property,  plant and equipment, net                                                                             1,038      1,154
Notes receivable, less current portion                                                                          2,304       --
Deferred financing fees, less accumulated amortization of $1,427 and $752, respectively                         5,323      5,998
                                                                                                             --------   --------

          Total assets                                                                                       $327,949   $350,697
                                                                                                             ========   ========

LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
    Accounts payable                                                                                         $    346   $    733
    Accrued liabilities                                                                                         3,286      4,405
    Deferred revenue                                                                                               39      1,614
    Payable to affiliate                                                                                          840        914
                                                                                                             --------   --------

          Total current liabilities                                                                             4,511      7,666
                                                                                                             --------   --------

Long-term debt                                                                                                225,000    225,000
                                                                                                             --------   --------

Commitments and contingencies

Members' equity:
    Managing member's interest                                                                                    984      1,180
    Nonmanaging member's interest                                                                              97,454    116,851
                                                                                                             --------   --------

                                                                                                               98,438    118,031
                                                                                                             --------   --------

          Total liabilities and members' equity                                                              $327,949   $350,697
                                                                                                             ========   ========

</TABLE>


                                      F-4


 See Notes to consolidated financial statements
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY

Consolidated Statements of Operations
(in thousands)
<TABLE>
<CAPTION>

                                                                        Year Ended
                                                                       December 31,
                                                            ------------------------------------
                                                                 1999       1998       1997
                                                                 ----       ----       ----
<S>                                                          <C>        <C>        <C>
Revenues:
    Log and stumpage sales                                   $ 76,594    $ 63,636    $ 60,445
    Timber and property sales                                    --         6,275      15,244
    By-products and other                                         400       1,413       1,656
                                                             --------    --------    --------

                                                               76,994      71,324      77,345
                                                             --------    --------    --------
Cost of products sold:
    Costs of timber harvested                                  17,056      16,683      17,778
    Cost of timber and property sales                            --         5,917       8,746
    Depletion, depreciation and road amortization              23,318      21,938      17,303
                                                             --------    --------    --------

                                                               40,374      44,538      43,827
                                                             --------    --------    --------

              Gross profit                                     36,620      26,786      33,518
                                                             --------    --------    --------

Selling, general and administrative expenses                    8,477      10,462       6,250
Share of net loss of affiliate                                    607        --            --
                                                             --------    --------    --------

Operating income                                               27,536      16,324      27,268

Interest expense                                               21,937      22,183      25,321
Amortization of deferred financing fees and debt guarantee
    fees                                                          675         675       4,193
Interest income                                                  (565)       (460)     (1,452)
Other (income) expense, net                                    (1,162)        309         574
                                                             --------    --------    --------

Income (loss) before extraordinary items                        6,651      (6,383)     (1,368)
Extraordinary items, losses on extinguishment of debt                         --       (9,337)
                                                             --------    --------    --------



Net income (loss)                                            $  6,651    $ (6,383)   $(10,705)
                                                             ========    ========    ========

</TABLE>


                                      F-5

See notes to consolidated financial statements
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY

Consolidated Statements of Changes in Members' Equity (Deficit)
(in thousands)
<TABLE>
<CAPTION>

                                                U.S.
                                            Timberlands
                                             Management                       U.S. Timberlands Klamath Falls, LLC
                                              Company,
                                                LLC
                                             ----------                       -----------------------------------
                                                             Members'
                                                              Equity                                                  Total
                                           Members'          (Deficit)          Managing         Nonmanaging         Members'
                                            Equity         Prior to the         Member's          Member's            Equity
                                          (Deficit)         Transaction         Interest          Interest          (Deficit)
                                          ---------         -----------         --------          --------          ---------

<S>              <C>                     <C>                 <C>              <C>                <C>             <C>
Balance, January 1, 1997                 $    (1,127)        $   (1,809)                                          $  (2,936)
Members' distribution                         (1,191)                  -                                             (1,191)
Net loss January 1, 1997 through
     November 18, 1997                        (2,009)            (7,424)                                             (9,433)
Redemption of members' interest               (1,000)                                                                (1,000)
Assumption of Old Services net
     liabilities                                5,327            (5,584)                                               (257)
Allocation of managing and
     nonmanaging members' interests in
members' deficit                                    -             14,817     $    (148)           (14,669)                 -
Members' contributions                              -                  -          1,632            161,574           163,206
Net loss November 19, 1997 through
     December 31, 1997                              -                 -            (13)            (1,259)           (1,272)
                                                    -                 -        ---------            ------            ------

Balance, December 31, 1997                    $      -           $      -          1,471           145,646           147,117
                                              ========           ========

Distributions to members                                                           (227)           (22,476)          (22,703)
Net loss
                                                                                   (64)            (6,319)           (6,383)
                                                                                   ----            -------           -------

Balance, December 31, 1998                                                        1,180            116,851           118,031
Distributions to members                                                          (263)           (25,981)          (26,244)
Net income                                                                         67                6,584             6,651
                                                                                   --                -----             -----



Balance, December 31, 1999                                                    $     984        $    97,454        $  98,438
                                                                              =========        =============      =========

</TABLE>



                                      F-6


See notes to consolidated financial statements
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY

Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>                                                                                          Year Ended
                                                                                                  December 31,
                                                                                    ---------------------------------------
                                                                                    1999             1998             1997
                                                                                     ----             ----             ----
<S>                                                                             <C>             <C>                 <C>
Cash flows from operating activities:
    Net income (loss)                                                           $    6,651      $    (6,383)        $ (10,705)
    Adjustments to reconcile net income (loss) to net cash provided by
       operating activities:
          Depreciation, depletion, amortization and cost of timber and
             property sold                                                          23,318            27,855            26,775
          Loss on disposal of assets                                                    66                 -                 -
          Write-off and amortization of deferred financing fees                        675               675             9,148
          Share of net loss of affiliate                                               607                 -                 -
          Other noncash items                                                            -               361               630
          Changes in assets and liabilities:
             Accounts receivable                                                       855               999            (1,006)
             Interest receivable from affiliate                                          -                 -               121
             Inventories                                                                 -                 -                78
             Other receivables                                                         989             (939)                 -
             Notes receivable                                                      (3,469)             1,065           (2,244)
             Prepaid expenses and other current assets                               (555)               108               146
             Accounts payable                                                        (387)             (671)               515
             Accrued liabilities                                                   (1,119)             (653)           (3,171)
             Deferred revenue                                                      (1,575)           (4,130)             5,744
             Payable to affiliate
                                                                                     (553)               257               252
                                                                                 ---------         ---------          --------
                Net cash provided by operating activities                           25,503            18,544            26,283
                                                                                 ---------         ---------          --------


Cash flows from investing activities:
    Receivable from affiliate                                                        (294)                 -            10,000
    Purchase of property, plant and equipment                                         (44)              (32)             (319)
    Proceeds from sale of assets                                                         8                 -               400
    Acquisition of Ochoco Timberlands                                                    -                 -         (110,873)
    Timber and road additions                                                        (955)             (610)             (774)
                                                                                 ---------         ---------          --------

                Net cash used in investing activities                              (1,285)             (642)         (101,566)
                                                                                 ---------         ---------          --------

Cash flows from financing activities:
    Member's contributions                                                               -                 -           163,206
    Distributions to members                                                      (26,244)          (22,703)           (1,191)
    Deferred financing fees                                                              -                 -          (12,720)
    Long-term borrowings                                                                 -                 -           510,000
    Repayment of long-term borrowings                                                    -                 -         (590,000)
    Payment to affiliate                                                                 -           (1,000)                 -
                                                                                 ---------         ---------          --------

                Net cash (used in) provided by financing activities               (26,244)          (23,703)            69,295
                                                                                 ---------         ---------          --------

Net decrease in cash and cash equivalents                                          (2,026)           (5,801)           (5,988)
Cash and cash equivalents, beginning of period                                       4,824            10,625            16,613
                                                                                 ---------         ---------          --------

Cash and cash equivalents, end of period                                        $    2,798         $   4,824        $   10,625
                                                                                 =========         =========        ==========

Supplemental cash flow information:
    Cash paid for interest                                                      $   21,746          $ 21,418       $   28,083

Noncash activities:
    Contribution of timberlands for investment in affiliate.                    $   18,850          $       -      $         -
    Redemption of member's interest in Old Services.                            $   -               $       -      $     1,000


</TABLE>



                                      F-7

See notes to consolidated financial statements
<PAGE>


U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)



1.       Business and Significant Accounting Policies:
Business and Consolidation
The accompanying  consolidated financial statements include the accounts of U.S.
Timberlands  Klamath Falls, LLC ("USTK"),  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 USTK'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,  reduced by
losses in excess of common  members'  interest in the  investee (See Notes 4 and
10).

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

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  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.

Initial Public Offering and Related Transactions
On November 19, 1997, the MLP completed an initial public  offering (the "Common
Units Offering") of 8,577,487 common units (including the 1,118,803 common units
issued upon exercise of the underwriters' overallotment option in December 1997)
representing  limited  partner  interests  ("Common  Units").  In addition,  the
Company  issued  $225,000 of senior  unsecured  notes in a public  offering (the
"Notes").  Concurrent with the Common Units Offering,  Old Services  contributed
all of its assets to the Manager in exchange for interests therein.  Immediately
thereafter,  USTK assumed certain indebtedness of U.S. Timberlands Holdings, LLC
("Holdings"),  an  affiliate  of USTK,  and the Manager  contributed  its timber
operations to USTK in exchange for a member's interest in USTK. The Manager then
contributed  all but a 1% member  interest in USTK to the MLP in exchange  for a
general partner interest,  1,387,963  subordinated  units  representing  limited
partner  interests  ("Subordinated  Units")  and the  right to  receive  certain
incentive  distributions.  The Manager  distributed  the 1,387,963  Subordinated
Units to Old Services and Old Services used a portion of such Subordinated Units
to redeem interests in Old Services. Holdings also contributed all of its member
interest in USTK to the MLP in exchange for 2,894,157  Subordinated Units. (This
series of transactions is hereafter  referred to as the  "Transactions").  Since
the  controlling  owner of Old Services and USTK prior to the  Transactions  now
controls the Manager,  the Transactions were recorded as a reorganization  under
common control and therefore remain at their historical costs. In addition,  the
accompanying  1997  financial  statements  include the results of operations and
cash  flows of of Old  Services  and USTK prior to the  Transactions,  after the
elimination of intercompany transactions.

Use of Estimates
The preparation of financial  statements in conformity  with generally  accepted
accounting principles 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 are 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. Deferred revenue as of December 31, 1999 and 1998, represents cash
received in advance of logs harvested under stumpage contracts.

                                      F-8
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)

1.       Business and Significant Accounting Policies: (continued)
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  customers
accounted for  approximately  18%, 17%, 15%, and 14% of the Company's  aggregate
net  revenues  from log,  stumpage,  and  timber  deed  sales for the year ended
December 31, 1999. In 1998, these customers represented  approximately 19%, 27%,
18%, and 10%,  respectively,  of aggregate net revenues  from log,  stumpage and
deed sales. In 1997, these four customers  accounted for approximately 16%, 24%,
16%, and 12% of aggregate  net revenues  from log,  stumpage and deed sales.  No
other single customer accounted for more than 10% of aggregate net revenues from
log,  stumpage,  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's four largest customers accounted for 90% of the Company's accounts
receivable at December 31, 1998 and none of the Company's accounts receivable at
December 31, 1999.

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 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, 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
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.


                                      F-9
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)

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, which approximates the effective interest method.

Income Taxes
USTK  and  Old  Services  are  both  limited  liability   companies   ("LLC's").
Accordingly,  they are not liable for  federal or state  income  taxes since the
respective  LLC'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
The Company accounts for the granting of unit options to employees and directors
of the MLP's Manager  under the MLP's  unit-based  compensation  plans under the
provisions of the Accounting  Principles Board's Opinion No. 25, "Accounting for
Stock  Issued to  Employees".  The  Company  has  adopted  the  disclosure  only
provisions of the Financial  Accounting Standards Board Statement No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation" (see Note 11).

New Accounting Standard
In June of 1998, the Financial  Accounting  Standards Board issued  Statement of
Financial  Accounting  Standards  (SFAS) No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities," which establishes accounting for derivative
instruments  and hedging  activities.  The statement was to be effective for all
fiscal  quarters  of fiscal  years  beginning  after June 15,  1999 but has been
delayed by SFAS No. 137,  "Accounting  for  Derivative  Instruments  and Hedging
Activities--Deferral  of the  Effective  Date  of  FASB  Statement  No.  133--an
amendment of FASB Statement 133". SFAS No. 137 delays the effective date of SFAS
No. 133 to all fiscal  quarters of fiscal years  beginning  after June 15, 2000.
Consistent  with SFAS No. 137, the Company will adopt SFAS No. 133 as of January
1, 2001. The Company  believes that the adoption of this statement will not have
a material impact on its financial statements; however, its effect, if any, will
depend  on the  Company's  exposure  to  derivative  instruments  at the time of
adoption and thereafter.

Reclassifications
Certain amounts in prior years have been reclassified for comparability purposes
and have no impact on net income.

2.       Timberland Acquisition:
On July 15, 1997, the Company acquired  approximately 42,000 acres of timber and
timberlands and  approximately  3,000 acres of timber cutting rights from Ochoco
Lumber Company LP for $110,873 (the "Ochoco Timberlands").  Substantially all of
the purchase price was allocated to timber,  timberlands and logging roads.  The
acquisition was principally financed through $110,000 of debt financing. Because
the  Company's  acquisition  of the  Ochoco  Timberlands  did not  represent  an
acquisition of an existing business,  the pro forma impact on 1997 operations as
if the acquisition had occurred on January 1, 1997 has not been disclosed.


                                      F-10
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)


Timber and Timberlands:
Timber and Timberlands consisted of the following at December 31:
<TABLE>
<CAPTION>

                                                                                           1999            1998
                                                                                           ----            ----

<S>                                                                                      <C>              <C>
             Timber and logging roads                                                    $317,856         332,047
             Timberlands                                                                   39,338          43,118
             Seed orchard and nursery stock                                                 1,277           1,159
                                                                                   -------------   --------------
                                                                                          358,471         376,324
             Less accumulated depletion and amortization                                   64,643          41,848
                                                                                   --------------  --------------
                                                                                   $      293,828  $      334,476
                                                                                   ==============  ==============
</TABLE>


4.    Investment in Affiliate:
Following is summarized financial  information for U.S. Timberlands Yakima, LLC,
the MLP's  equity  basis  affiliate  (See Note 10), as of and for the year ended
December 31, 1999.
<TABLE>
<CAPTION>

                                                                                          1999
                                                                                          ----

<S>                                                                                      <C>
             Current assets                                                              $9,129
             Noncurrent assets, primarily timber and timberlands                         74,726
             Current liabilities                                                          5,611
             Noncurrent liabilities- long-term debt                                      60,000
             Redeemable preferred member interest (Owned by USTK)                        18,243
             Net sales                                                                      560
             Gross profit                                                                   342
             Net loss                                                                   (1,207)
</TABLE>


5.    Property, Plant and Equipment:
Property, plant and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>

                                                                                           1999           1998
                                                                                           ----           ----

<S>                                                                                <C>             <C>
             Equipment                                                             $          674  $          637
             Buildings and improvements                                                       843             843
                                                                                   --------------  ---------------
                                                                                            1,517           1,480
             Less accumulated depreciation and amortization                                   479             326
                                                                                   --------------  ---------------

                                                                                   $        1,038  $        1,154
                                                                                   ==============  ==============

</TABLE>

6.    Accrued Liabilities:
Accrued liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>

                                                                                           1999           1998
                                                                                           ----           ----

<S>                                                                                      <C>       <C>
             Interest                                                                    $  2,729  $        2,729
             Severance and harvest tax                                                        242             224
             Employee compensation                                                              -             300
             Mark-to-market loss on interest rate collar                                        -             991
             Other                                                                            315             161
                                                                                   --------------  ---------------

                                                                                   $        3,286   $       4,405
                                                                                   ==============   ==============
</TABLE>


                                      F-11
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)

7.    Short-Term Debt:

In 1999 the Company  established  a credit  facility  with an  affiliate  of the
Manager (the "Affiliate  Credit Facility") which allows the Company to borrow up
to $12.0 million. The Company's  obligations under the Affiliate Credit Facility
represent unsecured general  obligations.  Borrowings under the Affiliate Credit
Facility bear interest at the prime lending rate as published in the Wall Street
Journal plus applicable  margin (1.25% at December 31, 1999),  which is based on
the Company's  leverage ratio.  The prime lending rate was 8.50% at December 31,
1999.  The Affiliate  Credit  Facility  expires on June 30, 2000 and all amounts
borrowed  thereunder  shall then be due and payable.  There were no  outstanding
borrowings  under the  Affiliate  Credit  Facility at December  31,  1999.  Peak
borrowings  were $3,000  under the  Affiliate  Credit  Facility  during  1999. A
commitment fee of 0.5% is payable  quarterly on the unused available  portion of
the Affiliate  Credit  Facility.  Total interest and commitment fees paid to the
affiliate in 1999 were $25 and $29,  respectively.  Average  borrowings  under a
bank working capital  facility which was terminated as of June 30, 1999 amounted
to $259 and $14,512 in 1998 and 1997, respectively.

The Affiliate Credit Facility contains certain restrictive covenants,  including
limits the  ability of the  Company to make cash  distributions,  incur  certain
additional  indebtedness or incur certain liens.  The Affiliate  Credit Facility
also contains financial ratio covenants as to EBITDDA (earnings before interest,
taxes, depreciation,  depletion, and amortization), interest coverage ratio, and
leverage  ratio.  The Company was in compliance with these covenants at December
31, 1999.

8.       Long-Term Debt:
Senior Notes
The $225,000 of Notes, which were issued concurrent with the Transactions,  were
issued jointly and severally by the USTK and its wholly owned subsidiary Finance
Corp.  (collectively,  the  "Issuers").  The Issuers serve as co-obligors of the
Notes. The Notes represent unsecured general obligations of the Issuers 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.

In addition, at any time on or prior to November 15, 2000, the Issuers, at their
option,  may  redeem  the Notes  with the net cash  proceeds  of a common  units
offering  or other  equity  interests  of USTK or the MLP,  at  106.625%  of the
principal  amount  thereof,  plus  accrued  and unpaid  interest  thereon to the
redemption date, provided that at least 65% of the principal amount of the Notes
originally issued remain outstanding immediately following such redemption.  The
Notes contain certain restrictive  covenants,  including limiting the ability of
USTK  and  its  subsidiary  to  make  cash   distributions,   incur   additional
indebtedness, sell assets or harvest timber in excess of certain limitations.

In  conjunction  with the Notes  issuance,  USTK retired all existing debt under
certain  pre-existing  long-term  financing  arrangements.  This  resulted in an
extraordinary  loss on  extinguishment of debt of $5,766 in 1997 due principally
to the write-off of existing unamortized deferred financing fees.

USTK Debt - Prior to the Transactions
On July 14,  1997,  USTK  entered into a long-term  financing  arrangement  with
certain  banks to finance  the  Ochoco  Acquisition  discussed  in Note 2 and to
refinance  certain  borrowings  under  USTK's  then  existing  revolving  credit
facility term loan. The retirement of debt under credit  facilities  existing as
of July 14, 1997 resulted in an extraordinary  loss on extinguishment of debt of
$3,571 due principally to the write-off of unamortized deferred financing fees.




                                      F-12
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)


9.    Members' Equity (Deficit):
Members' Equity
On November 19, 1997, the MLP issued 7,458,684 Common Units.  Proceeds from such
offering  were  $141,266,  net of  underwriter  fees and other  related costs of
$15,367. Concurrent with such offering, 4,282,120 Subordinated Units were issued
in exchange for all members' interests in USTK and Old Services. On December 12,
1997, the underwriters  exercised their overallotment  option and the MLP issued
an  additional  1,118,803  Common  Units.  Proceeds  from  the  exercise  of the
overallotment  option were $21,940,  net of $1,555 of  underwriters'  fees.  Net
proceeds of $163,206 from the common units were  contributed  by the MLP to USTK
upon closing of the transactions.

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.  The Company distributes cash to the
MLP to the extent  necessary  for the MLP to meet its  required  quarterly  cash
distributions,  in accordance with USTK's Operating Agreement.  Generally,  cash
distributions  are paid in order of  preferences:  first the  minimum  quarterly
distribution  of $0.50 per unit (the "MQD") to the MLP's Common  Unitholders and
the Manager,  and second, to the extent cash remains available,  to Subordinated
Unitholders.

The MLP Agreement set forth certain cash  distribution  target rates for the MLP
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 $0.550 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 $0.633 per Common and
Subordinated  Unit, the manager receives 25% of the excess Available Cash and to
the  extent  that the  quarterly  distributions  exceed  $0.822  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 1999 or 1998, the Manager did not receive any such  Incentive  Distributions
for those years.


                                      F-13
<PAGE>
U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)

10.     Certain Relationships and Related Party Transactions:
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 USTK's Operating Agreement and in the MLP's Partnership  Agreement.
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.
USTK'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  noninterest  bearing  receivables and
payables  between the Manager and the Company are settled in the ordinary course
of business.  As of December 31, 1999 and 1998, the Company had a payable to the
Manager of $840 and $914,  respectively.  During 1999,  1998 and 1997,  expenses
allocated to and  reimbursed  by the Company  totaled  $8,347,  $9,058 and $310,
respectively.

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, 1999,  the Manager has  consulting  agreements  with certain
affiliated  parties  pursuant  to which  each such  person or firm has  provided
and/or will provide consulting services to the Manager.  Each agreement provides
for an annual retainer of $25 to $50, plus an hourly rate for services  rendered
at the request of the  Manager.  Payments by the Manager  related to  consulting
agreements in 1999, 1998 and in 1997 were not significant.

Investment in Affiliate
In October 1999, the Company made an investment in U.S.  Timberlands Yakima, LLC
(USTY), an unconsolidated  affiliate of the Company. USTY, a 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 MLP 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  Manager,  hold a
controlling interest. The Company 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% of the $22,000 agreed upon value of
the contributed  timberlands.  The Preferred LLC Interests are redeemable at the
Company's  option on  December  31,  2004 or at USTY's  option at any time prior
thereto,  for a redemption price equal to the agreed upon value of the Preferred
LLC  Interests  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 at cost, reduced by losses
in excess of the  Common  LLC  Interests.  The MLP  accounts  for its Common LLC
Interest by the equity method.  The Manager of the Company  provides  management
services  to USTY for a fee  equal to 2% of  USTY's  earnings  before  interest,
taxes,  depreciation  and  amortization.  The Company  granted U.S.  Timberlands
Holding  Group,  LLC an  irrevocable  proxy to vote  its  Common  and  Preferred
Interests.  During 1999,  concurrently  with and in order to  facilitate  USTY's
acquisition  of  the  Washington   timberlands  referred  to  above,  an  entity
controlled  by John M.  Rudey  agreed to  acquire in the future a portion of the
property and any related liabilities that the Company and USTY were unwilling to
acquire,  the  sale  of  which  was a  condition  of  the  seller  to  the  USTY
acquisition.  Such  entity was paid  $2,700 by the seller for its  agreement  to
acquire  such  property  and any  related  liabilities.  The  General  Partner's
Conflicts  Committee  reviewed  and  approved  the  structure  of the  Company's
investment in the affiliate.



                                      F-14
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)


10. Certain Relationships and Related Party Transactions (Continued):
the  seller  for  its  agreement  to  acquire  such  property  and  any  related
liabilities.  The  Manager's  Conflicts  Committee  reviewed  and  approved  the
structure of the Company's investment in the affiliate.

Payments to Affiliate
In connection with the Transactions,  the member interest of John J. Stephens in
Old Services was redeemed for $1,000 and certain subordinated units. The Company
paid the $1,000 to Old Services in January 1998. The above  transaction has been
reflected  as a  direct  reduction  of  equity  in  the  accompanying  financial
statements.

See Note 7 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 1999 included $675 related to
settlement with former  employees of the Company.  In 1998,  selling general and
administrative  expenses  included  approximately  $1,280 in severance to former
employees. In addition, pursuant to the terms of the General Partner's operating
agreement,  the member  interests  of three  former  employees  were  subject to
repurchase  at an aggregate  price of $385 payable in three annual  installments
commencing on February 1, 1998. The aggregate repurchase of the member interests
was  included in selling,  general and  administrative  expenses in 1998 and the
Company has reimbursed the Manager for such repurchase payments.

Other Related Party Transactions
During 1999, Glenn A. Zane was appointed Acting Senior Vice President and Acting
Director  of  Operations  for the  Company.  Subsequent  to  year-end,  Mr. Zane
resigned  as an acting  officer,  but he  continues  to serve the  Company  as a
consultant. Throughout 1999, the Company paid approximately $695 ($183 in 1998),
excluding Mr. Zane's compensation,  to Mason , Bruce & Girard, of which Mr. Zane
is a partner, for consulting services.

11. Management Incentive Plans:
Unit Option Plans
The MLP  maintains a Unit Option Plan which  provides  for the  granting of unit
options ("Unit Options") to employees and directors of the Manager.

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.
Concurrent with the consummation of the Transactions,  604,153 Unit Options were
granted  to key  employees  and  directors  of the  MLP's  General  Partner.  An
additional  90,622 Unit Options were granted to key  employees  and directors on
December  12,  1997,  in  connection  with the closing of the sale of  1,118,803
Common Units pursuant to the exercise by the underwriters of their overallotment
option.  In 1998,  100,000 Unit  Options  were granted to directors  and 240,170
options  were  granted to  employees,  and in 1999,  200,000  Unit  Options were
granted to directors  and 142,620  options were granted to  employees.  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  MLP's
Subordinated  Units  to  Common  Units.  Provided  that  the  minimum  quarterly
distribution  (as that term is  defined in the MLP  Agreement)  has been paid to
Common and Subordinated  Unitholders for three consecutive four-quarter periods,
25% of the Subordinated Units will convert to Common Units as early as 2001, 25%
as early as 2002 and the  remaining  50% may convert to Common Units as early as
2003.  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 partnership capital.
As of December 31, 1997, none of the performance criteria had been


                                      F-15
<PAGE>


U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)

11. Management Incentive Plans (Continued):
achieved.  Although  the  performance  criteria  were  met for the  years  ended
December 31, 1999 and 1998,  no  compensation  expense was recorded  during such
years,  as the market price of the units was less than the exercise price during
such years.

Activity with respect to the MLP's unit option plan follows:

<TABLE>
<CAPTION>

                                                                                                  Weighted
                                                                                                  Average
                                                                                 Number           Exercise
                                                                               of Shares           Price
                                                                               ---------           -----

<S>                                                                           <C>                   <C>
             Outstanding, December 31, 1996                                                -               -
             Unit options granted                                                    694,775          14.75 (a)
             Unit options exercised                                                        -              -
             Unit options cancelled                                                        -              -
                                                                            -----------------

             Outstanding, December 31, 1997                                          694,775          14.75
             Unit options granted                                                    340,170          14.75
             Unit options exercised                                                        -              -
             Unit options cancelled                                                (584,628)          14.75
                                                                            -----------------

             Outstanding, December 31, 1998                                          450,317          14.75
             Unit options granted                                                    342,620          13.16
             Unit options exercised                                                        -              -
             Unit options cancelled                                                 (35,310)          14.71
                                                                            -----------------

             Outstanding, December 31, 1999                                          757,627          14.02
                                                                            =================

</TABLE>

(a)               Options were  originally  granted with exercise prices ranging
                  from  $21.00 to $21.44 per unit.  During  December  1998,  the
                  exercise  price was reduced to $14.75 per unit by the Board of
                  Directors.

As of December 31, 1999  exercise  prices for options  outstanding  were between
$11.75 and $14.75 with a weighted average exercise price of $14.02 per unit. The
weighted average remaining  contractual life of the options was 8.5 years. There
were no unit options exercisable at December 31, 1999, 1998 or 1997.


                                      F-16
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)


11.        Management Incentive Plans (Continued):
The Company has computed,  for pro forma disclosure purposes as required by SFAS
123,  the value of the Unit  Options  granted  by the MLP under the Unit  Option
Plan. These computations were made using the Black-Scholes option-pricing model,
as prescribed by SFAS 123, with the following  weighted average  assumptions for
1999, 1998 and 1997:


                                            1999           1998           1997


   Risk-free interest rate                  4.88%          5.50%          6.00%
   Expected dividend yield                  9.52%          9.52%          9.52%
   Expected life of the Unit Options       5 Years        5 years        5 years
   Expected volatility                     49.65%         25.50%         20.32%


The weighted-average  fair value of unit options was $2.87, $2.02, and $1.50 for
options granted in 1999, 1998 and 1997, respectively.

If the Company had adopted the  expensing  provisions of SFAS 123, the impact on
1999, 1998 and 1997's net income (loss) would have been as follows:
<TABLE>
<CAPTION>

                                                                                        Year Ended December 31,
                                                                                        -----------------------
                                                                             1999                1998                1997
                                                                             ----                ----                ----

<S>                                                                       <C>             <C>                      <C>
    Net income (loss) - as reported                                       $    6,651      $     ( 6,383)           $  (10,705)

    Net income (loss) - pro forma                                              6,204             (6,629)              (10,732)
</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 units conversion period (see Note 9).

Restricted Unit Plan
Effective  with  the  closing  of  the  Transactions,  the  MLP  authorized  the
establishment  of a  restricted  unit plan (the  "Restricted  Unit Plan")  which
allows it 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, 1999.


                                      F-17
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)


11.  Management Incentive Plans (Continued):
Income Interests of the General Partner:
In connection  with the Common Units  offering and the related  formation of the
MLP's  General  Partner,  who is also the Manager,  the General  Partner  issued
income  interests to certain officers and directors of the General Partner at no
cost. Such income interests participate pro rata in cash distributions from USTK
and the MLP.  Under certain  circumstances,  the 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 10, Severance and Settlement).

12.  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 $207,000 and $225,000 at December 31, 1999 and
           1998, respectively, based on published market quotations.

(c)        Interest  rate collar  agreement - The Company  entered into interest
           rate collar  agreements to manage  interest  rate risk.  Contemplated
           variable  rate  borrowings  did not  occur,  and  accordingly,  these
           agreements are marked to market.  The fair value of these  agreements
           is the  estimated  amount that the Company  would receive or pay upon
           termination  of the  agreements  at the  balance  sheet date or other
           specific  point in time.  The Company  terminated  the interest  rate
           collar  agreements  effective in October 1999.  Unrealized  losses on
           these  agreements  were estimated to be $991 and $630 at December 31,
           1998 and 1997, respectively.  Income or losses on these agreements is
           reflected in other income(expense) in the accompanying  statements of
           operations  in the amount of $991 in 1999,  ($361) in 1998 and ($630)
           in 1997.


                                      F-18
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)



13.       Quarterly Results (Unaudited):
<TABLE>
<CAPTION>

                                                    QUARTER ENDED
                          -------------------------------------------------------------------------
                          December 31         September 30            June 30               March 31          Total Year
                                                                          (a)
                          -----------         ------------         ------------          ------------       ------------
<S>                          <C>                   <C>                <C>                    <C>                 <C>
1999
Revenues                     $19,394               $26,175            $20,296                $11,129             $76,994
Gross profit (b)               7,853                11,389             12,254                  5,124              36,620
Net income (loss)               (55)                 3,981              4,457                (1,732)               6,651

1998
Revenues                     $20,417              $ 24,528           $ 18,622                $ 7,757            $ 71,324
Gross profit (b)               8,409                11,531              4,503                  2,343              26,786
Net income (loss)                649                 2,570            (2,886)                (6,716)             (6,383)

</TABLE>


(a)        The  quarter  ended June 30,  1998  includes  revenues  of $6,275 and
           related costs of $5,917 from a property sale.

(b)        Gross profit is calculated  as revenues  less cost of products  sold,
           cost of timber and property  sales and  depreciation,  depletion  and
           road amortization.



                                      F-19
<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollar amounts in thousands)


14.       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
$34 in 1999, $26 in 1998 and $20 in 1997.

15.       Commitments and Contingencies:
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 is ten years and is renewable for two additional  terms of five years,
each at the option of Collins.

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-20