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, 2000      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. [X]

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

           Documents incorporated by reference: None


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


<PAGE>


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                                               Page

<S>                                                                                                            <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 and Executive Officers 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>


<PAGE>


33

                                     PART I

Item 1.  Business.

General
         The business of U.S.  Timberlands Klamath Falls, LLC a Delaware limited
liability  company  formed in 1996 (the  "Company"),  consists of the growing of
trees and the sale of logs and standing timber.  The Company owns  approximately
553,000 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, 2001 to be  approximately  1.5 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  155,000  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 39 years old.  Initial  thinning or harvesting of
the  Plantation  stands is expected to begin  within the next three  years.  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,
LLC, formerly known as U.S.  Timberlands Services Company, LLC ("Old Services"),
acquired  approximately  604,000 fee acres of  timberland  (the  "Klamath  Falls
Timberlands"),   containing   an  estimated   merchantable   timber   volume  of
approximately 1.9 BBF and related assets from  Weyerhaeuser  (the  "Weyerhaeuser
Acquisition").  In July 1997, the Company, which is now the Master Partnership's
subsidiary  operating  company,  acquired  approximately  42,000  fee  acres  of
timberland and cutting rights on  approximately  3,000 acres of timberland  (the
"Ochoco  Timberlands"),  containing an estimated  merchantable  timber volume of
approximately  280  million  board feet  ("MMBF")  from  Ochoco  Lumber  Company
("Ochoco") (the "Ochoco Acquisition").  At the date of acquisition,  over 40% of
the merchantable  timber on the Ochoco Timberlands was at least 80 years old. As
of December 31, 2000,  the Company has  harvested  substantially  all of the Old
Growth  timber on the  Ochoco  Timberlands.  The  average  age of the  remaining
merchantable  timber on the Ochoco Timberlands is approximately 40 - 50 years in
age.  During  October  1999,  the  Company  contributed   primarily   non-income
producing,  pre-merchantable  pine  plantation  timberlands  in exchange  for an
investment  in an  affiliate  (See Item 13  Certain  Relationships  and  Related
Transactions and Notes 3 and 9 to the Consolidated Financial Statements).

         During the period from January 1, 1994 through the  acquisition  of the
Klamath  Falls  Timberlands  by the  Company,  approximately  58%  of  the  logs
harvested  from the Klamath Falls  Timberlands  were delivered to a plywood mill
owned by Weyerhaeuser at Klamath Falls, Oregon.  Similarly,  prior to the Ochoco
Acquisition,   substantially  all  of  the  timber  harvested  from  the  Ochoco
Timberlands was delivered to Ochoco's mills.  The Company does not currently own
any  conversion  facilities  nor  does  it  presently  intend  to own  any  such
facilities on a long-term  basis;  consequently  the Company's sales are made to
unaffiliated  third parties.  Concurrent  with the Company's  acquisition of the
Klamath  Falls  Timberlands,  the  Company  arranged  for Collins  Products  LLC
("Collins"),  a privately  owned  forest  products  company  located  within the
Klamath Falls  Timberlands area, to purchase  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,  the Company assumed certain indebtedness (the
"Holdings Debt") of U.S. Timberlands Holdings,  LLC, an affiliate of the Company
("Holdings"),  and the Manager  contributed its timber operations to the Company
in exchange for a member interest in the Company.  Then the Manager  contributed
all but a 1%  member  interest  in the  Company  to the  Master  Partnership  in
exchange for a general partner interest in the Master Partnership,  the right to
receive Incentive  Distributions (as defined herein) and 1,387,963  subordinated
units   representing   limited  partner  interests  in  the  Master  Partnership
("Subordinated  Units"),  and  Holdings  contributed  all of its interest in the
Company to the Master Partnership in exchange for 2,894,157  Subordinated Units.
The  Manager  then   distributed  the   Subordinated   Units  to  Old  Services.
Approximately  143,398  Subordinated  Units were used by Old  Services to redeem
interests in Old Services held by certain founding directors of the Manager (the
"Founding Directors"). As a result of such transactions,  the Company became the
Operating  Company and the Manager  owns an  aggregate 2% interest in the Master
Partnership  and the  Company  on a  combined  basis,  and the right to  receive
Incentive  Distributions;   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
Initial Offering, the Company and its wholly owned subsidiary,  U.S. Timberlands
Finance Corp.  ("Finance  Corp."),  consummated the public offering (the "Public
Note Offering") of $225.0 million aggregate principal amount of 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 the
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 less merchantable
volume,  are  growing at a rate that is  expected  to average at least 315 board
feet per acre per annum to economic maturity in 50 to 60 years. This growth rate
is based on calculated volumes at the time of maturity. The Company has achieved
higher growth rates on the  Plantations by planting high quality  seedlings,  by
eliminating  competing  non-timber  growth from the  Timberlands and by applying
modern forestry practices to assist the growth of the timber. Currently,  nearly
all of the  seedlings  planted  are grown from  superior  seed  produced  in the
Company's seed orchard.  Management  does take action to enhance the growth rate
in the natural stands as well. For example,  selective  harvesting in the slower
growing  natural  stands  opens up the timber stand  allowing for more  vigorous
growth  of the  remaining  trees.  When it is no  longer  possible  to  maintain
acceptable  growth  rates in these  stands they will be  harvested  entirely and
converted to faster growing plantations.


                                       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 244  million  board feet
(MMBF) in 2000 and plans to  harvest,  or commit to harvest,  approximately  150
MMBF in 2001. The Company also sold approximately 14 MMBF through property sales
in 2000 and intends to sell up to 90 MMBF through  property sales in 2001. Under
the  current  harvest  plans,   the  Company  intends  to  harvest  its  current
Timberlands  aggressively  over  approximately the next six to eight 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.  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 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 2000,  sawlogs,  stumpage sales and timber
deed sales accounted for approximately 49.9%, 0.3% and 45.3%,  respectively,  of
the  Company's  revenue.  Chips,  which can be used to make  hardboard  or pulp,
accounted for approximately  0.5% of the Company's  revenues in 2000. The market
price of chips has historically been volatile, rising and falling with the price
of pulp.  Sales of seedlings  accounted  for 0.2% of the  Company's  revenues in
2000.  Timber  and  property  sales  accounted  for  the  remaining  3.8% of the
Company's revenue in 2000.

         The Company's  customers  include  numerous  unaffiliated  operators of
conversion facilities. Since its acquisition of the Klamath Falls Timberlands in
August 1996,  the Company has sold logs and chips from such  timberlands to over
25  different  customers.  Concurrent  with the  Weyerhaeuser  Acquisition,  the
Company arranged for Collins,  a privately owned forest products company located
within the Klamath Falls Timberlands,  to purchase  Weyerhaeuser's Klamath Falls
mill  facilities.  At such time,  the Company  entered  into the Collins  Supply
Agreement, a 10-year log supply agreement with Collins providing for purchase by
the  plywood  mill and  delivery  by the Company of a minimum of 34 MMBF of logs
each year at market  prices.  The Collins  Supply  Agreement  is  extendable  by
Collins for two additional  five-year  terms. In 2000,  timber sales to Collins,
Crown Pacific  Partners,  Boise Cascade  Corporation  and Ochoco Lumber Company,
combined,  accounted for  approximately 58% of the Company's  revenue.  No other
single  customer  accounted  for more than 10% of the Company's net revenues for
2000. 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  1.5 BBF of  merchantable,  good
quality  timber,  approximately  155,000  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 60% of the Company's timber, all merchantable volume is
removed in a single harvest. After an area has been regeneration harvested,  the
Company employs a reforestation contractor to plant two-year-old seedlings at an
optimal density of  approximately  300 trees per acre. The Company also attempts
to protect and maintain the ecosystem within the Timberlands while providing for
a reasonable harvest.  For example,  the Company typically leaves a mix of green
and dead trees at the harvest site, including some large trees, snags and downed
logs to provide  habitats for a variety of wildlife  species while enriching the
soil for successive generations of trees.



                                       6
<PAGE>

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

         The  Company's  policy  is to  ensure  that  every  acre  harvested  is
reforested in order to enhance the long-term value of its timberlands.  Based on
the geographic and climatic conditions of a given harvest site,  harvested areas
may be  regenerated  naturally,  by leaving  mature trees to reseed the area, or
replanted  with  seedlings.  Natural  regeneration  methods  are widely  used on
approximately  40% of the Company's  harvested  land.  Approximately  27% of the
Timberlands  acreage  currently  consist of Plantations.  The Company expects to
convert  an average  of 14,000  acres of  natural  stands per year over the next
three years to Plantations.  The seed orchard  produces seed from trees selected
because they were the best  genotype in their  respective  environments.  During
2000, the Company planted approximately 1.7 million seedlings.  Similar planting
levels are  expected  for 2001.  The Company  uses the seed  collected  from its
orchard (representing approximately 90% of seedlings planted) to grow trees with
desirable traits such as superior growth characteristics,  good form and disease
resistance, resulting in greater wood volume over a rotation than that generated
by naturally  regenerated  seedlings.  The  seedlings are grown in the Company's
nursery, which uses seeds from the Company's seed orchard, which was established
by Weyerhaeuser in 1973.

Geographic Information System ("GIS")

         The GIS is a computer  software  program that the Company acquired from
Weyerhaeuser as part of the Klamath Falls  Acquisition.  The GIS data, which has
been  compiled  over  a  period  of  at  least  five  years,  includes  detailed
topographical  field maps for every stand within the Timberlands  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 Company believes the GIS may be
used to the Company's advantage to evaluate potential acquisition opportunities.

Federal and State Regulation

Endangered Species

         The Federal  Endangered  Species Act and counterpart  state legislation
protect species  threatened with possible  extinction.  Protection of endangered
species may include  restrictions on timber harvesting,  road building and other
silvicultural  activities in areas containing the affected species.  A number of
species  indigenous  to the  Pacific  Northwest  have been  protected  under the
Endangered  Species Act,  including the northern spotted owl, marbled  murrelet,
Columbian  white-tail  deer,  mountain  caribou,  grizzly  bear,  bald eagle and
various anadromous fish species.  Currently,  the Company has identified several
spotted owl and bald eagle  nesting  areas  affecting  the  Timberlands  and the
presence of bull trout in certain of its streams, which may affect harvesting on
approximately 26,000 acres.

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



                                       7
<PAGE>

         Based on the 2000 survey year,  there were  approximately 70 bald eagle
sites  on  the  Klamath  Falls  Timberlands.  The  Company  observes  harvesting
restrictions  around the eagle sites.  Due in part to efforts of the Company and
its  Predecessor,  the bald eagle is expected to be removed from the  endangered
species list in the near future.

         In addition,  the Company conducts surveys to determine the presence of
northern  spotted owls. The surveys have been  conducted  every year in order to
(i) meet the regulatory  requirements  for timber  harvest and other  management
activities, (ii) monitor existing sites and determine the current status of such
sites,  (iii) determine if areas  identified as containing  suitable habitat are
supporting  owls  and  (iv)  investigate  other  spotted  owl or  other  species
sightings.  The most recent of such surveys was  completed  in August 2000,  and
identified  approximately  31 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 have
a material adverse effect on the Company's ability to harvest the Timberlands in
accordance with current harvest plans. There can be no assurance,  however, that
species within the Timberlands may not  subsequently  receive  protected  status
under the Endangered Species Act or that currently  protected species may not be
discovered in significant  numbers within the Timberlands.  Additionally,  there
can  be  no  assurance  that  future  legislative,  administrative  or  judicial
activities related to protected species will not adversely affect the Company or
its ability to continue its activities and operations 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  which may affect water courses or in proximity to
certain  ocean and inland shore lines,  water  protection  and  enhancement  and
certain grading and road construction activities.  The Company believes it is in
substantial compliance with these regulations.

Environmental Laws and Superfund

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

         Environmental  laws and  regulations  have  changed  substantially  and
rapidly  over the last 20  years,  and the  Company  anticipates  there  will be
continuing  changes.  The trend in  environmental  regulations  is to place more
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.  The Company has entered into road use  agreements  with the USFS and the
BLM. The majority of the Company's timberland  management  activities to include
the  transportation  of timber products across federal land and roads fall under
such  agreements,  which  describe  the Company's  exclusive rights to transport
timber  products across federal lands and roads without USFWS  consultation.  In
many cases,  access is only, or most  economically,  achieved  through a road or
roads built across adjacent  federal land pursuant to a reciprocal  right-of-way
("RROW").  Removal of federal  timber often  requires  similar access across the
Timberlands.  Recent  litigation  (not involving the Company)  before the United
States Court of Appeals for the Ninth Circuit held that the BLM was not required
to consult with the USFWS,  which administers the Endangered  Species Act, prior
to  approving  a private  landowner's  proposal  to build an access  road across
federal land pursuant to an existing RROW entered into prior to the enactment of
the Endangered Species Act. A reversal on appeal or a rehearing of that case, or
future federal law or regulation  requiring the BLM to consult with the USFWS in
connection with an RROW, could materially adversely affect the Company's ability
to harvest the affected  portion of the  Timberlands.  Certain of the  Company's
RROW  agreements  contain  provisions  that  require  compliance  with state and
federal  environmental  laws and  regulations.  To the extent  that the  Company
acquires new Timberlands  that require access through federal lands, the Company
may enter into new RROW agreements with the BLM or other federal  agencies which
would require  consultation  with the USFWS. In addition,  the BLM has published
advance notice of its intent to revise  regulations  governing  RROW  agreements
entered into the future to, among other things,  expand the BLM's  consideration
of  environmental  and  cultural  factors  in  granting,   issuing  or  renewing
rights-of-way,  provide  the BLM with  regulatory  authority  to  object  to the
location of roads  because of  potential  effects on  threatened  or  endangered
species  and  allow  for  the   abandonment  of   rights-of-way   under  certain
circumstances.

Safety and Health

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


Employees

         As of March 15, 2001, the Company had 29 salaried  employees, including
employees of the Manager that manage the business of the Company.  The employees
are not  unionized,  and the Company  believes  that its employee  relations are
good. All of the silvicultural  activities on the Timberlands and the harvesting
and  delivery  of logs are  conducted  by  independent  contractors  who are not
employees of the Company.


                                       9
<PAGE>

Item 2.  Properties

Timber Inventory

         The Company currently owns and manages  approximately 553,000 fee acres
of  timberland  and cutting  rights on  approximately  3,000 acres of timberland
containing total  merchantable  timber volume estimated as of January 1, 2001 to
be  approximately  1.5 BBF in Oregon east of the Cascade  Range.  A merchantable
tree is a tree of  sufficient  size  that  will  produce  a sound log 16 feet in
length and at least 4.6 inches in diameter,  inside bark,  at the small end. The
Company's  merchantable timber inventory consists of a substantial percentage of
premium  species of  softwood,  consisting  of  Ponderosa  Pine and Douglas fir,
species which have  historically  commanded  premium  prices over other softwood
species,  as well as Lodgepole  Pine,  White Fir and other species.  The Company
believes that the Timberlands are suitable for current operations.

         The Timberlands have stands of varying sizes and ages and are unique in
the forests east of the Cascade  Range in Oregon in that  approximately  155,000
acres of the 553,000 acre total  consist of actively  managed  pine  Plantations
with stands  ranging in age from one to 39 years.  The  Plantations  are stocked
with  high  quality  Ponderosa  Pine  (approximately  78%)  and  Lodgepole  Pine
(approximately  22%). Initial thinning of the Plantation  stands,  including the
thinning of commercial  quantities of merchantable  timber, is expected to begin
within the next three years. See "The Timberlands--Harvest Plans."

Merchantable Timber Inventory by Species

         The Company maintains data regarding the estimated  merchantable timber
inventory  by  species  within  the  Timberlands.   All  volumes  are  based  on
information  developed by Company  personnel.  As of January 1, 2001,  the total
timber inventory amounted to 1.5 BBF. The Company's combined timber inventory by
MMBF and  percentage  is Ponderosa  Pine (692.2  (47%)),  Lodgepole  Pine (253.2
(17%)),  White Fir (286.3  (20%)),  Douglas fir (181.6  (13%)) and other species
(47.2 (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, 2001,  approximately  343
MMBF, or 23%, 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, 2001, the Plantations
totaled  155,000 acres.  Of the total  acreage,  62,000 acres range from 1 to 15
years of age,  73,000  acres range from 16 to 25 years of age,  and 20,000 acres
are 26 years of age or older.


                                       10
<PAGE>


Item 3. Legal Proceedings

         In November  2000,  six  purported  class  action  lawsuits  were filed
against the  Manager and the Board of  Directors  of the Manager  (the  "Board")
alleging breach of fiduciary duty and  self-dealing by the Manager and the Board
in  connection  with an  announcement  on  November  2, 2000 that a group led by
senior management has begun the process to explore taking the Master Partnership
private (the "Going-Private Transaction").

         All six  lawsuits  were filed in the Court of  Chancery of the State of
Delaware for the County of New Castle. Each lawsuit was filed by a unitholder of
the  Master  Partnership,  on  behalf  of all other  unitholders  of the  Master
Partnership  who are similarly  situated,  and seeks to have the class certified
and the unitholder bringing the lawsuit named as representative of the class. In
addition, the lawsuits seek to enjoin the Going-Private Transaction,  to rescind
the Going-Private  Transaction if it is consummated,  and to recover damages and
attorneys'  fees. In addition to naming the Manager and the Board as defendants,
all six lawsuits name the Master Partnership as a defendant.

         In the opinion of management,  after consultation with outside counsel,
the pending  lawsuits are not expected to have a material  adverse effect on the
Master Partnership or the Company's financial position or results of operations.

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 2000.


                                       11
<PAGE>


                                     PART II

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

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

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



                                       12
<PAGE>

Item 6. Selected Financial Data

<TABLE>
<CAPTION>

                                                  U.S. Timberlands (1)                                          Predecessor (1)
                                                --------------------------------------------        -----------------------------


                                                                                                      August 30,       January 1,
                                                                                                     1996 through     1996 through
                                                                                                     December 31,      August 29,

                                                   2000       1999        1998           1997            1996             1996
<S>                                               <C>        <C>         <C>          <C>             <C>               <C>
CASH FLOWS AND OTHER DATA
    (IN MILLIONS):
Modified EBITDDA (6) . . . . . . . . . . . . . .   $ 49.9     $ 50.9      $ 44.2       $ 53.3          $ (1.4)           $ 3.6.4
Additions to timber and timberlands (3)               2.3        1.0         0.6        111.6           283.6                0.5
Cash flow from (used in) operating
    activities . . . . . . . . . . . . . . . . . . ..28.9       25.5        18.5           26.3          (3.0)              5.5
Cash flow from (used in) investing
    activities . . . . . . . . . . . . . . . . . . . (2.3)      (1.3)      (0.6)       (101.6)         (291.5)             (0.5)
Cash flow from (used in) financing
    activities . . . . . . . . . . . . . . . . . . .(26.2)     (26.2)      (23.7)         69.3          311.0              (5.1)

OPERATING STATEMENT DATA
    (IN MILLIONS):
Revenues (2)(3) . . . . . . . . . . . . . . . . . .  75.7       77.0        71.3          77.3           14.0              15.6
Depreciation, depletion and road
    amortization (2)(3) . . . . . . . . . . . . . .  28.8       23.3        21.9          17.3            3.3               0.9

Cost of timber and property sales (2)(3)              2.6         -          5.9          8.7               -                -
Operating income (loss) (2)(3) . . . . . . . . . .   18.1       27.5        16.3         27.3            (4.8)              2.7
Income (loss) before extraordinary
    items (4) . . . . . . . . . . . . .  . . . . . . (3.9)       6.7        (6.4)        (1.4)          (13.0)              2.7
Extraordinary items, losses on
    extinguishment of debt (5) . . . . . . . . . .     -          -           -          (9.3)              -                -
Net income (loss)                                    (3.9)       6.7        (6.4)       (10.7)          (13.0)              2.7

BALANCE SHEET DATA (AT
    PERIOD END, IN MILLIONS):
Working capital . . . . . . . . . . . . . . . . . .   2.0        2.4        1.4           1.8            21.5               0.5
Total assets (3) . . . . . . . . . . . . . . . . . .301.3      327.9      350.7         385.2           310.2              27.8
Long-term debt (7) . . . . . . . . . . . . . . . . .225.0      225.0      225.0         225.0           305.0                -
Equity (deficit) (8) . . . . . . . . . . . . . . . ..68.2       98.4      118.0         147.1            (2.9)            27.8

OPERATING DATA (UNAUDITED):
Log, stumpage and timber deed sales
    volumes (MMBF) (2)(3) . . . . . . . . . . . .   243.7      187.3       144.5        138.9            30.2             32.8
Property sales volumes (MMBF) (2) . . . .            13.6        -         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 2000  consist of $72.3  million of log,  stumpage  and deed
         sales,  $2.9 million of timber and  property  sales and $0.5 million of
         by-products and other sales.  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)      In July 1997,  the Company  acquired  the Ochoco  Timberlands  for $110
         million  from  Ochoco  Lumber  Company.  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)      On July 14, 1997 the Company retired certain  borrowings under its then
         existing  revolving  credit  facility  term loan which  resulted  in an
         extraordinary   loss  on  extingjuishment  of  debt  of  $3.6  million.
         Additionally,  in  conjunction  with the  issuance  of the  Notes,  the
         Company retired all existing debt under certain pre-existing  long-term
         financing   arrangements   resulting  in  an   extraordinary   loss  on
         extinguishment of debt of $5.7 million.  Such extraordinary losses were
         due  principally  to the  write-off  of existing  unamortized  deferred
         financing fees.
(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 7 of the Notes to Consolidated
         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 be affected
if  governmental,  environmental  or endangered  species  policies  change,  and
limitations  on the  Company's  ability  to  harvest  its  timber due to adverse
natural conditions or increased  governmental  restrictions.  The results of the
Company's  operations  and its  ability to pay  quarterly  distributions  to its
Unitholders  depend  upon a number  of  factors,  many of which are  beyond  its
control.  These  factors  include  general  economic  and  industry  conditions,
domestic and export prices, supply and demand for logs, seasonality,  government
regulations  affecting  the  manner  in  which  timber  may  be  harvested,  and
competition  from other  supplying  regions and substitute  products.  These and
other risks are  described  in the  Company's  other  reports  and  registration
statements,  which are available from the United States  Securities and Exchange
Commission.


                                       14
<PAGE>


General

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

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


Supply and Demand Factors

Supply

         The supply of logs  available  for purchase  has been most  affected in
recent  years  by  significant   reductions  in  timber  harvested  from  public
timberlands,  principally  as a result of efforts  to  preserve  the  habitat of
certain  endangered  species,  as well as a change in the emphasis of government
policy toward habitat  preservation,  conservation  and recreation and away from
timber  management.  Since  the early  1970s,  environmental  and other  similar
concerns and  governmental  policies  have  substantially  reduced the volume of
timber under contract to be harvested from public lands.  The pace of regulatory
activity  accelerated in the late 1980s.  The resulting  supply  decrease caused
prices for logs to increase significantly, reaching peak levels during 1993. 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.  Certain market  conditions for finished
products, however, have negatively impacted stumpage and log prices in 2000.

         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 significant increases.  While raw material supply
is  expected  to be an  ongoing  challenge  for the  lumber  and  wood  products
industry,  such  conditions  would likely be favorable for timber owners such as
the Company.

         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.  Imports are likely to
continue to increase over the next few years and could significantly  affect the
raw material supplies in the domestic lumber and wood products industry.

Demand

         Changes in general  economic and  demographic  factors,  including  the
strength  of the  economy,  unemployment  rates  and  interest  rates  for  home
mortgages and  construction  loans,  have  historically  caused  fluctuations in
housing  starts and, in turn,  demand and prices for lumber and  commodity  wood
products.  United States  housing starts for 2000 were down  significantly  from
1999 levels. 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.
Given the strong,  growing economy of the past several years,  domestic  markets
have been able to absorb the  increasing  quantities  of imported  Radiata  pine
lumber. With the current slowing of our domestic economy,  decreasing demand for
repair and  remodeling  markets  and over  supply of  finished  products  in the
industry,  the level of imports could have a negative impact on pricing for Pine
lumber.  The demand for logs in the United  States is also affected by the level
of lumber  imports.  In response to increasing  lumber imports from Canada,  the
United  States and Canada  signed an  agreement  in 1996  which  restricted  the
availability  of  Canadian  softwood  lumber in the United  States.  The Company
believes that this  agreement,  which  expires on March 31, 2001,  has not had a
material  impact on the price or demand for logs in the United  States  although
its long-term effect, as well as the effect of its termination, is uncertain.



                                       15
<PAGE>

         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.

Current Market Conditions

        Log prices in the Northwest drastically declined during 2000 as compared
to 1999 due to the slowing United States economy and supply and demand factors.

        During 2000,  the United States economy began  experiencing  an economic
slow-down.  Mortgage interest rates were climbing to levels significantly higher
than those  experienced  over the past few years and as such  created  weakening
conditions for new home construction, home repair and remodeling, and industrial
and other  construction,  which  weakened  the  demand for  finished  lumber and
plywood  products.  As a result of the  decreased  demand and excess  production
capacity  within the  industry  the  markets  for  finished  lumber and  plywood
products  dropped to their lowest  levels in the last ten years.  As a result of
the weakening in the finished  products  markets,  the prices being realized for
the Company's logs and timber declined  significantly  from 1999 levels.  Prices
for the Company's logs and stumpage are also at or near ten year lows.

        Prices for the fourth  quarter of 2000 remained weak  continuing a trend
started near the end of the second quarter.  For the fourth quarter of 2000, the
Company's  average  delivered  log  prices  for  Ponderosa  Pine,  Douglas  Fir,
Lodgepole  Pine,  and White Fir were down  approximately  16%, 8%, 17%, and 10%,
respectively, from the same period in 1999.

        The excess  production  levels of 2000 are expected to continue into the
first half of 2001, reducing the chances of a near-term recovery of wood product
prices.  In addition,  the impact of the  expiration  of the  agreement  between
Canada and United States  limiting the Canadians  lumber imports into the United
States  through March 31, 2001 is yet to be determined and could add to the over
supply of  finished  wood  products.  As a result of the above  conditions,  the
Company does not expect a significant increase in prices during 2001.


                                       16
<PAGE>

Results of Operations

         The following  table sets forth sales volume for each of 2000, 1999 and
1998 from the sale of logs,  stumpage  and timber  deeds by thousand  board feet
("MBF") and price per thousand board feet and the sales of property.

<TABLE>
<CAPTION>

                                 Sales Volume (MBF)                          Price Realization (MBF)
                               -------------------------------------       --------------------------------------
                                                             Timber                                      Timber          Timberland
        Period                   Logs         Stumpage        Deeds          Logs         Stumpage        Deeds         Sales ($000)
        ------                   ----         --------        -----          ----         --------        -----         ------------
<S>                           <C>               <C>         <C>             <C>            <C>           <C>               <C>

         2000
    Year ended 12/31           96,112            503         147,083         $ 393          $ 379         $ 246             $ 2,900
    4th Quarter                38,922             --          57,844         $ 382             --         $ 174             $ 2,900
    3rd Quarter                22,718             --          29,501         $ 372             --         $ 189                  --
    2nd Quarter                13,908             --          51,037         $ 432             --         $ 346                  --
    1st Quarter                20,564            503           8,701         $ 425          $ 379         $ 325                  --

         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            --             $ 6,275
    4th Quarter                24,299         23,787              --         $ 396          $ 441            --                  --
    3rd Quarter                29,017         22,617              --         $ 431          $ 511            --                  --
    2nd Quarter                23,832          2,506              --         $ 432          $ 570            --             $ 6,275
    1st Quarter                16,409          1,984              --         $ 418          $ 447            --                  --

</TABLE>


Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

         Revenues.  Revenues decreased $1.3 million, or 1.7%, from $77.0 million
in 1999 to $75.7 million in 2000.  The decrease is primarily  attributable  to a
decrease in log sales of $4.5  million and a $1.3  million  decrease in stumpage
sales,  partially offset by a $1.5 million increase in timber deed sales and the
fact that the Company had a $2.9  million  dollar  timber and  property  sale in
2000. To meet its working capital  requirements,  the Company harvested and sold
logs and  stumpage  in 2000 at rates  in  excess  of both  1999  levels  and the
estimated current annual board footage growth on the Timberlands.

         Log  sales  for 2000 were  $37.8  million  on  volumes  of 96,112  MBF,
compared to log sales of $42.3 million on volumes of 97,170 in 1999. The average
log sales price for 2000 was $393 compared to an average log sales price of $436
in 1999, a 9.9% decrease, reflecting weaker markets for the Company's log sales.



                                       17
<PAGE>

         Timber  deed  sales for 2000 were  $34.3  million on volumes of 147,083
MBF,  compared to timber deed revenue of $32.8  million on volumes of 86,463 MBF
in 1999.  The average timber deed sales price per MBF for 2000 was $246 compared
to an average  timber deed sales price of $379 in 1999,  a 35.1%  decrease.  The
significant decrease in timber deed sales realization is due to overall declines
in market  conditions  as well as a  reduction  in the quality of the timber mix
being  sold in timber  sales.  During  2000 there  were less  timber  deed sales
containing larger, old growth timber which commands a premium,  than in 1999. In
addition  the  Company's  timber  deed sales in the second  quarter  represented
substantially all of the remaining old growth timber on the Ochoco  Timberlands.
and was of a lower  grade  species  mix  than  sales  of  timber  on the  Ochoco
Timberlands in previous years.

         Stumpage  sales for 2000  were  $0.2  million  on  volumes  of 503 MBF,
compared  with  stumpage  sales of $1.5 million on volumes of 3,645 MBF in 1999.
The  reduction  in  stumpage  volumes  is a result  of the  Company's  strategic
decision to utilize  log sales and timber  deed sales as its  primary  source of
revenue.

         The  Company  had $2.9  million  in  revenue  from  planned  timber and
property  sales in 2000  compared to no revenue from timber and  property  sales
during 1999.

         Gross Profit.  Gross profit  decreased $12.2 million from $36.6 million
in 1999 to $24.4 million in 2000 and gross margin  decreased  from 47.6% in 1999
to 32.3% in 2000. The decrease in gross margin was primarily from three factors.
First,  contracted log and haul costs on a per MBF basis were  approximately 20%
higher  during 2000 as compared to 1999 due to longer hauls for  delivered  logs
and higher fuel costs.  Second, the Company's timber deed sales were composed of
a lower value grade mix as compared to 1999.  Finally continued  declines in the
timber markets have resulted in lower realizations on delivered log and stumpage
values.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses  were $8.4 million in 2000,  consistent  with  selling,
general and  administrative  expenses of $8.5 million in 1999.  Within  selling,
general and administrative  expenses salaries and wages were up $0.3 million and
professional  services  were up $0.5 million  over 1999.  Those  increases  were
offset by a settlement with previous employees of $0.7 million in 1999.

         Equity in Net Income (Loss) of  Affiliate.  The equity in net income of
affiliate  was $2.1  million  during  2000 as  compared to equity in net loss of
affiliate of $0.6 million in 1999.  The income in 2000 reflects the recapture of
$0.6  million  in  losses  absorbed  from  its  preferred   investment  in  U.S.
Timberlands Yakima, LLC, and the Company's accrued return of $1.4 million on its
preferred investment.

         Interest  Expense.  Interest expense was $21.9 million in 2000 and 1999
consisting  primarily of interest  expense on the  Company's  $225.0  million of
Senior Notes.

         Other Income  (Expense),  net. Other income,  net, was $0.2 million for
2000,  compared to $1.1 million for 1999,  representing  a decrease in income of
$0.9 million. The decrease is primarily attributable to a mark-to-market gain on
an interest rate collar of  approximately  $1.0 million  during 1999 and no such
gains in 2000.

         Cash Flow  From  Operations.  During  2000,  cash flow from  operations
increased $3.4 million or 13.3% over 1999  primarily  because of a $10.4 million
decrease  in net  income,  which was more than offset by the addback of non-cash
items and changes in assets and liabilities.


                                       18
<PAGE>

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 of 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.

         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 General  Partner 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 other  interest  income due to a
decrease in cash and cash equivalents available in 1999 compared to 1998.


                                       19
<PAGE>

         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.


Liquidity and Capital Resources

         The Company's  primary  sources of liquidity have been cash provided by
operating  activities as well as debt and equity financings.  As of December 31,
2000 the Company  had a cash  balance of $3.2  million  and had $2.0  million of
working capital.

         Operating  Activities.  Cash flows provided by operating  activities in
2000 were $28.9 million, compared to cash flows provided by operating activities
of $25.5 million in 1999.  The $3.4 million  increase in cash flows  provided by
operating  activities was primarily  attributable to a $10.4 million decrease in
net income which was more than offset by the addback of non-cash operating items
and the changes in assets and liabilities.

         Investing Activities. Cash flows used in investing activities were $2.3
million in 2000, as compared to cash flows used in investing  activities of $1.3
million  during 1999.  The increase is primarily  attributable  to a purchase of
cutting rights in June 2000 for approximately $1.3 million,  partially offset by
the Company's $0.3 million investment in affiliate in 1999.

         Financing  Activities.  Cash flows used in  financing  activities  were
$26.2  million in 1999 and 2000.  During 1999 and 2000,  the Company  paid $26.2
million in distributions to its members.



                                       20
<PAGE>


Notes

         On November 14,  1997,  the Company  issued  $225.0  million  aggregate
principal  amount  of  Notes  (the  "Notes")   representing   unsecured  general
obligations  of the Company  which bear  interest  at 9 5/8% per annum,  payable
semiannually  in arrears on May 15 and November 15. The Notes mature on November
15, 2007 unless  previously  redeemed.  The Notes 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.
Upon the  occurrence of certain  events  constituting  a "change of control" (as
defined in the  Indenture),  the Company must offer to purchase the Notes,  at a
purchase price equal to 101% of the principal  amount thereof,  plus accrued and
unpaid  interest to the date of  purchase.  There can be no  assurance  that the
Company  will have access to  sufficient  funds to  repurchase  the Notes in the
event of a change in control.

         The indenture  governing the Notes (the  "Indenture")  contains various
affirmative  and  restrictive  covenants  applicable  to  the  Company  and  its
subsidiaries,  including  limitations  on the  ability  of the  Company  and its
subsidiaries to, among other things,  (i) incur additional  indebtedness  (other
than certain permitted  indebtedness)  unless the Company's  Consolidated  Fixed
Charge  Coverage  Ratio (as defined in the  Indenture)  is greater  than 2.25 to
1.00, and (ii) make  distributions to the Master  Partnership,  make investments
(other than  permitted  investments)  in any  person,  create  liens,  engage in
transactions with affiliates, suffer to exist any restrictions on the ability of
a  subsidiary  to  make  distributions  or  repay  indebtedness  to  the  Master
Partnership,  engage in sale and  leaseback  transactions,  enter into a merger,
consolidation or sale of all or substantially all of its assets,  sell assets or
harvest timber in excess of certain limitations or engage in a different line of
business.  Under the  Indenture,  the  Company  will be  permitted  to make cash
distributions  to the  Master  Partnership  so long as no  default  or  event of
default exists or would exist upon making such distribution (a) if the Company's
Consolidated  Fixed  Charge  Coverage  Ratio (as  defined in the  Indenture)  is
greater than 1.75 to 1.00, in an amount, in any quarter, equal to Available Cash
(as defined in the Indenture) for the  immediately  preceding  fiscal quarter or
(b) if the Company's  Consolidated  Fixed Charge  Coverage  Ratio is equal to or
less than 1.75 to 1.00,  in an  aggregate  amount not to exceed (i) $7.5 million
less the  aggregate of all  restricted  payments  made under this clause  (b)(i)
during the  immediately  preceding  16 fiscal  quarters (or shorter  period,  if
applicable,  beginning  on the  issue  date of the  Notes),  plus  (ii)  the net
proceeds of certain capital contributions (including the sale of Units) received
by the Master Partnership. The Company was in compliance with these covenants at
December 31, 2000 and 1999.

Affiliate Credit Facility

         During the second  quarter of 2000,  the Company  renewed its  existing
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, 2001. At that time,  amounts  borrowed  will be due and payable.  As of
December  31,  2000 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  during 2001.  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  intent is to use new funds raised  through
investment and commercial banks for acquisitions,  if any, although there can be
no assurance that such  financing  will be available on terms  acceptable to the
Company.

         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.


                                       21
<PAGE>


Capital Expenditures/Cash Distributions

         Capital   expenditures  in  2000  totaled  $2.3  million.  The  Company
purchased  timber cutting rights for  approximately  4.2 MMBF of timber for $1.3
million. The remaining $1.0 million in capital expenditures incurred were mainly
in the nature of land  management/silvicultural  costs,  miscellaneous equipment
and computer  hardware.  Capital  expenditures  were financed  through cash flow
generated by operations. As the Company does not currently own and does not plan
to own  manufacturing  facilities,  and all  logging is  subcontracted  to third
parties,  it is anticipated that capital  expenditures in the future will not be
significant   and  will   consist   mainly   of  land   management/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 $1.5 million in 2001. Capital  expenditures will consist primarily
of capitalized silvicultural costs and miscellaneous equipment purchases.

         Cash  required  to meet  the  Company's  debt  service  and the  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  debt  service  and
quarterly cash  distributions  have been funded from  operations and borrowings.
Given projected  volumes for sales of logs and timber,  estimated  current board
footage growth on the  timberlands  and the harvest  restrictions  in the Notes,
unless  prices  improve,  costs are  reduced,  new markets are  developed or the
Company makes  accretive  acquisitions,  the Company's  ability in the future to
make  distributions  at current levels will be adversely  affected.  The Company
continues  to  evaluate  means to improve  cash  flows,  including  the  factors
mentioned above.  There can be no assurance that prices will improve or that the
Company will be able to take any of these actions and it is unlikely prices will
improve or any of these actions will take effect within a short-term horizon.

Effects of Inflation

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

Recent Developments

        In November 2000, the Company announced that an independent committee of
the board of directors had been formed to evaluate management  proposals to take
the Master Partnership private. The independent  committee has retained separate
legal  counsel  and  intends  to  retain  financial  advisors  to assist in this
process. To date, a proposal from management has not been received.

New Accounting Standard - 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 as amended, is required to
be adopted for fiscal  quarters of fiscal years  beginning  after June 15, 2000.
SFAS 133 requires the Company to recognize all  derivatives in the balance sheet
at fair  value.  Derivatives  that are not hedges must be adjusted to fair value
through earnings. If the derivative is a hedge, depending upon the nature of the
hedge, changes in fair value of the derivative will either be offset against the
changes in fair  value of the hedged  assets,  liabilities  or firm  commitments
through  earnings or recognized in other  comprehensive  income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be  immediately  recognized  in earnings.  The Company had no
outstanding  derivative  positions at December 31, 2000, and therefore  believes
that  adoption  of  SFAS  133  will  not  significantly   affect  its  financial
statements.


                                       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

         Not applicable.


                                       23
<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

         The Manager  manages and operates the activities of the Company.  As is
commonly the case with publicly  traded limited  partnerships,  the Company does
not directly employ any of the persons responsible for managing or operating the
Company.

         In 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 General Partner
     ----                                    ---                              -----------------------------

<S>                                          <C>             <C>
    John M. Rudey                            57           Chairman, Chief Executive Officer, President and Director (1)

    Aubrey L. Cole                           77           Director (2)

    George R. Hornig                         46           Director (3)

    William A. Wyman                         62           Director (4)

    Alan B. Abramson                         55           Director (5)

    Robert F. Wright                         75           Director (6)

    Thomas C. Ludlow                         54           Vice President and Chief Financial Officer

    Martin Lugus                             60           Vice President, Timberland Operations

    Toby A. Luther                           27           Assistant Vice President, Corporate Controller - Western Operations

    Walter L. Barnes                         58           Assistant Vice President, Harvesting

    Robert A. Broadhead                      49           Assistant Vice President, Marketing

    Jay Jeffrey Vermilya                     44           Assistant Vice President, Planning

    Christopher J. Sokol                     51           Assistant Vice President, Forestry

</TABLE>


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

(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.

         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).  Mr. Cole is a Director of Deotexas
Inc. (a development stage company).


                                       25
<PAGE>

         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 banking concern) and affiliated predecessor entities.  From 1991 to 1993,
Mr.  Hornig  was the  President  and Chief  Operating  Officer of Dubin & Swieca
Holdings, Inc., an investment management business. From 1988 to 1991, Mr. Hornig
was a co-founder,  Managing  Director and Chief Operating Officer of Wasserstein
Perella & Co., Inc. (a mergers and acquisitions  investment  bank). From 1983 to
1988, Mr. Hornig was an investment banker in the Mergers and Acquisitions  Group
of The First Boston Corporation.  Prior to 1983, Mr. Hornig was an attorney with
Skadden,  Arps,  Slate,  Meagher & Flom.  Mr. Hornig is also a director of Unity
Mutual Life Insurance Company 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 when he  retired,  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,  SS&C  Technologies,  Prime
Response, Predictive Systems, Internosis, and Pega Systems.

         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).

           Thomas C. Ludlow became Vice President and Chief Financial Officer of
the  Manager in July 2000.  From 1998 to 2000,  Mr.  Ludlow was Chief  Financial
Officer of Forest  Systems,  LLC, a Boston  based timber  investment  management
company.  From 1995 to 1998,  Mr. Ludlow was Director and head of North American
Forest Products for Deutsche Morgan Grenfell, an international  investment bank.
Prior to 1995, Mr. Ludlow worked with various financial institutions. Mr. Ludlow
holds an HBA in Business from the University of Western  Ontario and an MBA from
the Anderson School at the University of California, Los Angeles.

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

           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 since 1996, responsible for all log and stumpage sales transactions.
Prior to joining the Manager in 1996, Mr. Broadhead was employed by Weyerhaeuser
for 20 years and gained  additional  experience in investing and planning  while
serving as Planning Manager from 1981 to 1994.

           Jay Jeffrey Vermilya 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 1979 to 1987 Mr. Vermilya worked
for Crown  Zellerbach Corp. and them from 1987 to 1994 as Chief Forester for the
Cambell  Group.  Mr.  Vermilya  then went to work for  Weyerhaeuser  as district
forester  and then for the Manager in 1996 in the same role until 2000,  when he
assumed his current responsibilities.

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

Compliance with Section 16(a) of the Exchange Act

           Section  16(a) of the  Securities  Exchange Act of 1934,  as amended,
requires the Manager's officers and directors, and persons who own more than 10%
of a registered class of equity  securities of the Master  Partnership,  to file
reports of ownership and changes in ownership  with the  Securities and Exchange
Commission and the 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  Master  Partnership's
securities,  the Company  believes that during the fiscal year 2000, 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, 2000:


               SUMMARY COMPENSATION TABLE
               --------------------------

<TABLE>
<CAPTION>

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

                                                                                           Securities
    Name and Principal                      Fiscal                                         Underlying              All Other
    Position                                 Year       Salary ($)      Bonus ($)        Options/SARs(#)          Compensation
    --------                                 ----       ----------      ---------        ---------------          ------------

<S>                                          <C>           <C>            <C>                <C>                   <C>
    John M. Rudey                            2000          $ 463,500      $ 256,750                --                    --
      Chairman and                           1999            450,000        225,000            50,000                    --
      Chief Executive Officer                1998            300,000        150,000                --                    --

    Thomas C. Ludlow                         2000             80,208         75,000            50,000                    --
      Vice President and                     1999                 --             --                --                    --
      Chief Financial Officer                1998                 --             --                --                    --

    Martin Lugus                             2000            123,600         30,900                --                    --
      Vice President - Timberland            1999            120,000         35,000                --                    --
                                             1998            101,521         24,625                --                    --

    Walter L. Barnes                         2000             97,850         24,463                --                    --
      Assistant Vice President               1999             95,000         23,750                --                    --
      - Harvesting                           1998             80,000         20,150                --                    --

    Robert A. Broadhead                      2000             92,700         23,175                --                    --
      Assistant Vice President               1999             90,000         22,500                --                    --
      - Marketing                            1998             77,150         19,275                --                    --

    Greg G. Byrne (1)                        2000            110,833         41,833                --                    --
      Vice President and                     1999            150,000         90,000            50,000                    --
      Chief Financial Officer                1998                 --             --                --                    --



----------------------
(1)      In August of 2000 Mr. Byrne resigned as the CFO of U.S. Timberlands.

</TABLE>

                                       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
option grants to the named executive officers during fiscal 2000:




                 OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>


                                                                                                        Potential Realizable Value
                     Number of               % of Total                                                   at Assumed Annual Rates
                     Securities             Options/SARs                                                   of Unit Appreciation
                     Underlying               Granted              Exercise or                             for Option Term (2)
                                                                                                           --------------------
                    Options/SARs            to Employees           Base Price       Expiration
         Name         Granted            During Fiscal Year       ($/Unit) (1)         Date               5%                  10%
         ----         -------            ------------------       -------------        ----               --                  ---

<S>                    <C>                     <C>                   <C>             <C>               <C>                 <C>
Thomas C. Ludlow       50,000                  92.6%                 $9.813          07/03/10          $308,567            $781,970
</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 the date of record for the distribution
     for the quarter ended 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.



<PAGE>


         The following table sets forth certain  information with respect to the
aggregate number and value of options at the fiscal year-end 2000:





             AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
                       FISCAL YEAR ENDED OPTION/SAR VALUES
                       -----------------------------------
<TABLE>
<CAPTION>


                                                                  Number of Securities
                                                                 Underlying/Unexercised                 Value of Unexercised
                                                                    Options/SARs at                 In-the-Money Options/SARs at
                            Shares                                 December 31, 2000                     December 31, 2000
                                                                   -----------------                     -----------------
                           Acquired
            Name         on Exercise      Value Realized    Exercisable       Unexercisable       Exercisable        Unexercisable
            ----         -----------      --------------    -----------       -------------       -----------        -------------

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

   Thomas C. Ludlow           --                $--              --                      50,000        $--                N/A (1)

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

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

   Robert A. Broadhead        --                $--              --                      34,310        $--                N/A (1)

   Greg G. Byrne (2)          --                $--              --                 --                 $--                N/A

</TABLE>




(1)  At the close of trading  on  December  31,  2000,  the market  value of the
     Common  Units was $6.69  per  common  unit.  Since the Unit  Options,  once
     exercisable, would be exercisable at a range of $9.813 to $14.750 per unit,
     the in-the-money computation is inapplicable.

(2)  In August of 2000 Mr. Byrne resigned as the CFO of U.S. Timberlands.

         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.


                                       30
<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.

         The Company paid approximately  $129,000,  $117,000 and $144,000 to the
Directors of the Manager for  consulting  services  during 2000,  1999 and 1998,
respectively.

Employment Agreements

         The Manager has entered  into an  employment  agreement  with Mr. Rudey
(the  "Executive").  The agreement has a term expiring on December 31, 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 General Partner may authorize
from time to time.  Effective January 1, 2001, the Board of Directors authorized
an increase to $463,500.  In addition,  the  Executive is eligible to receive an
annual cash bonus to be determined by the  Compensation  Committee not to exceed
100% of his base salary.  The Executive  will be entitled to participate in such
other benefit plans and programs as the Manager may provide for its employees in
general.

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




                                       31
<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  Long-Term  Incentive  Plan  Committee  for the Company's
Long-Term Incentive Plan.

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



                                       32
<PAGE>


Item 12.  Security Ownership of Certain Beneficial Owners and Management

         None.

Item 13.  Certain Relationships and Related Transactions

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

Consulting Agreements

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

Related Party Transactions

         Glenn A. Zane,  a  principal  of Mason,  Bruce & Girard,  served as the
Acting Senior Vice  President and Acting  Director of Operations for the Company
during  1999.  In January  2000,  Mr. Zane  resigned  as the Acting  Senior Vice
President  and Acting  Director of Operations  for the Company.  The Company has
continued to utilize Mr. Zane and Mason, Bruce & Girard for consulting services.
The Company paid approximately  $821,000 and $925,000 to Mason, Bruce and Girard
during 2000 and 1999,  respectively.  Such payments were for consulting services
and include Mr. Zane's  compensation  as Acting Senior Vice President and Acting
Director of Operations during 1999.

Investment in Affiliate

         In October 1999,  the Company made an  investment  in U.S.  Timberlands
Yakima,  LLC (USTY),  an  unconsolidated  affiliate.  USTY,  a then newly formed
entity organized to acquire timber properties  located in Central Washington and
Central Oregon, is engaged in the growing of trees and sale of logs and standing
timber to third party wood  processors.  The Master  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 Company's Manager, hold a controlling interest.  The
Company also acquired all of the senior preferred interests in USTY (the "Senior
or  Preferred  LLC  Interests")  for its  contribution  to  USTY of  timberlands
consisting primarily of non-income producing,  pre-merchantable pine plantations
having  an  agreed  upon  value of  $22.0  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 the Preferred LLC Interest at cost,  reduced
by losses, if any, 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  Holdings 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.



                                       33
<PAGE>

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.

Affiliate Credit Facility

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


                                       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>
                  +3.1  -- Amended and Restated Agreement of Limited Partnership of U.S. Timberlands Company, LP
                        -- Second Amended and Restated Operating Agreement of U.S. Timberlands Klamath Falls, LLC
                  +3.2
                        -- Indenture among U.S. Timberlands Klamath Falls, LLC, U.S. Timberlands Finance Corp. and
                 +10.2    State Street Bank and Trust Company, as trustee

                 +10.3  -- Contribution, Conveyance and Assumption Agreement among U.S. Timberlands Company, LP
                          and certain other parties

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

                 *10.5  -- Employment Agreement for Mr. Rudey

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

                 *21.1  -- List of Subsidiaries

                  23.1  -- Consent of Richard A. Eisner & Company, LLP dated April 13, 2001.
</TABLE>

(b)  Reports on Form 8-K

               No  reports  on Form 8-K were  filed  during  the  quarter  ended
December 31, 2000.



*    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.


                                       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 16th day of
April 2001.
                       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>

                                                                                                     April 16, 2001
/s/  John M. Rudey                                  Chairman, Chief Executive Officer,
-------------------------------------------
                  John M. Rudey                     President and Director (Principal Executive
                                                    Officer)
                                                                                                     April 16, 2001
/s/ Thomas C. Ludlow                                Chief Financial Officer
--------------------------------------------
                  Thomas C. Ludlow
                                                                                                     April 16, 2001
/s/ Toby A. Luther                                  Corporate Controller -
--------------------------------------------           Western Operations
                  Toby A. Luther                       (Principal Accounting Officer)

                                                                                                     April 16, 2001
/s/ Aubrey L. Cole                                  Director
--------------------------------------------
                  Aubrey L. Cole
                                                                                                     April 16, 2001
/s George R. Hornig                                 Director
--------------------------------------------
                  George R. Hornig
                                                                                                     April 16, 2001
/s/  Alan B. Abramson                               Director
--------------------------------------------
                  Alan B. Abramson
                                                                                                     April 16, 2001
/s/  William A. Wyman                               Director
--------------------------------------------
                  William A. Wyman
                                                                                                     April 16, 2001
/s/  Robert F. Wright                               Director
--------------------------------------------
                  Robert F. Wright
</TABLE>


                                       36
<PAGE>






EXHIBIT INDEX



    23.1  Consent of Richard A. Eisner & Company, LLP dated April 13, 2001.




                                       37
<PAGE>




<TABLE>
<CAPTION>

CONSOLIDATED FINANCIAL STATEMENTS


Contents                                                                                                       Page

<S>                                                                                                             <C>
Independent auditors' report                                                                                    F-2

Consolidated balance sheets as of December 31, 2000 and 1999                                                    F-3

Consolidated statements of operations for the years ended December 31, 2000, 1999, and 1998                     F-4

Consolidated statements of changes in members' equity for the years ended December 31, 2000,
1999 and 1998                                                                                                   F-5

Consolidated statements of cash flows for the years ended December 31, 2000, 1999 and 1998                      F-6

Notes to consolidated financial statements                                                                      F-7

</TABLE>



<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, 2000 and 1999,  and the
related  consolidated  statements of operations,  changes in members' equity and
cash flows for each of the years in the  three-year  period  ended  December 31,
2000.  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, 2000 and 1999,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with generally accepted
accounting principles.



Richard A. Eisner & Company, LLP

New York, New York
January 24, 2001, except as to Note 15, as
        to which the date is February 26, 2001


                                                                             F-2




<PAGE>


U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY


    Consolidated Balance Sheets
    (in thousands)

<TABLE>
<CAPTION>

                                                                                December 31,
                                                                                    2000                1999
                                                                                  ---------           ---------
<S>                                                                               <C>                 <C>
    ASSETS
    Current assets:
          Cash and cash equivalents                                               $   3,168           $   2,798
          Accounts receivable, net                                                    4,430                 672
          Other receivables                                                             160                 124
          Notes receivable                                                            2,285               2,344
          Prepaid expenses and other current assets                                      35                 981
                                                                                  ---------           ---------
                   Total current assets                                              10,078               6,919

    Timber and timberlands, net                                                     265,109             293,828
    Investment in affiliate                                                          20,588              18,537
    Property, plant and equipment, net                                                  926               1,038
    Notes receivable, less current portion                                                -               2,304
    Deferred financing fees, net                                                      4,648               5,323
                                                                                  ---------           ---------
                   Total assets                                                   $ 301,349           $ 327,949
                                                                                  =========           =========


    LIABILITIES AND MEMBERS' EQUITY
    Current liabilities:
          Accounts payable                                                        $   1,222           $     346
          Accrued liabilities                                                         3,326               3,286
          Deferred revenue                                                            1,474                  39
          Payable to manager and affiliate                                            2,065                 840
                                                                                  ---------           ---------
                   Total current liabilities                                          8,087               4,511
                                                                                  ---------           ---------
    Long-term debt                                                                  225,000             225,000
                                                                                  ---------           ---------
    Commitments and contingencies (Note 14)

    Members' Equity:
          Managing member's interest                                                    683                 984
          Nonmanaging member's interest                                              67,579              97,454
                                                                                  ---------           ---------
                                                                                     68,262              98,438
                                                                                  ---------           ---------
                   Total liabilities and members' equity                          $ 301,349           $ 327,949
                                                                                  =========           =========

</TABLE>





See notes to consolidated financial statements.                              F-3
<PAGE>


U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY


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

                                                                        Year Ended December 31,

                                                                    2000                 1999                 1998
                                                                  --------             --------             --------
<S>                                                               <C>                  <C>                  <C>
   Revenues:
         Log and stumpage sales                                   $ 72,268             $ 76,594             $ 63,636

         Timber and property sales                                   2,900                    -                6,275
         By-products and other                                         571                  400                1,413
                                                                  --------             --------             --------
                                                                    75,739               76,994               71,324
                                                                  --------             --------             --------

   Cost of products sold:
         Cost of timber harvested                                  (19,853)             (17,056)             (16,683)
         Cost of timber and property sales                          (2,641)                   -               (5,917)
         Depletion, depreciation and road amortization             (28,816)             (23,318)             (21,938)
                                                                  --------             --------             --------
              Gross profit                                          24,429               36,620               26,786

   Selling, general and administrative expenses                     (8,428)              (8,477)             (10,462)
   Share of  net income (loss) of affiliate                          2,051                 (607)                   -
                                                                  --------             --------             --------
   Operating income                                                 18,052               27,536               16,324

   Interest expense                                                (21,921)             (21,937)             (22,183)
   Amortization of deferred financing fees                            (675)                (675)                (675)
   Interest income                                                     403                  565                  460
   Other income (expense), net                                         208                1,162                 (309)
                                                                  --------             --------             --------
   Net income (loss)                                              $ (3,933)             $ 6,651             $ (6,383)
                                                                  ========              =======             ========

</TABLE>

See notes to consolidated financial statements.                              F-4

<PAGE>


U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY


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


                                      Managing      Nonmanaging
                                      Member's       Member's         Total
                                      Interest       Interest    Members' Equity

    Balance, January 1, 1998          $ 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
    Distributions to members             (262)        (25,981)      (26,243)
    Net loss                              (39)         (3,894)       (3,933)
                                    ----------   -------------  ------------

    Balance, December 31, 2000          $ 683        $ 67,579      $ 68,262
                                    ==========   =============  ============




See notes to consolidated financial statements.                              F-5

<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
<TABLE>
<CAPTION>

   Consolidated Statements of Cash Flows
   (in thousands)
                                                                                      Year Ended December 31,
                                                                                2000              1999              1998
                                                                             --------           -------          --------
<S>                                                                            <C>               <C>               <C>
   Cash flows from operating activities:
       Net income (loss)                                                     $ (3,933)          $ 6,651          $ (6,383)

       Adjustments to reconcile net income (loss) to net cash
           provided by operating activities:
              Depreciation, depletion, amortization and cost of
                  timber and property sold                                     31,457            23,318            27,855
              (Gain) loss on disposal of assets                                   (39)               66                 -
              Amortization of deferred financing fees                             675               675               675
              Share of net (income) loss of affiliate                          (2,051)              607                 -
              Other non-cash items                                                  -                 -               361
              Changes in assets and liabilities:
                  Accounts receivable                                          (3,758)              855               999
                  Other receivables                                               (36)              989              (939)
                  Notes receivable                                              2,363            (3,469)            1,065
                  Prepaid expenses and other current assets                       946              (555)              108
                  Accounts payable                                                876              (387)             (671)
                  Accrued liabilities                                              40            (1,119)             (653)
                  Deferred revenue                                              1,435            (1,575)           (4,130)
                  Payable to manager and affiliate                                896              (553)              257
                                                                             --------           -------          --------
                     Net cash provided by operating activities                 28,871            25,503            18,544
                                                                             --------           -------          --------
   Cash flows from investing activities:
       Receivable from affiliate                                                    -              (294)                -
       Purchase of property, plant and equipment                                  (55)              (44)              (32)
       Proceeds from sale of assets                                                50                 8                 -
       Timber and road additions                                               (2,253)             (955)             (610)
                                                                             --------           -------          --------
                     Net cash used in investing activities                     (2,258)           (1,285)             (642)
                                                                             --------           -------          --------
   Cash flows from financing activities:
       Distributions to members                                               (26,243)          (26,244)          (22,703)
       Payment to affiliate                                                         -                 -            (1,000)
                                                                             --------           -------          --------
                     Net cash used in financing activities                    (26,243)          (26,244)          (23,703)
                                                                             --------           -------          --------
   Net increase (decrease) in cash and cash equivalents                           370            (2,026)           (5,801)
   Cash and cash equivalents, beginning of period                               2,798             4,824            10,625
                                                                             --------           -------          --------
   Cash and cash equivalents, end of period                                  $  3,168           $ 2,798          $  4,824
                                                                             ========           =======          ========

   Supplemental cash flow information:
       Cash paid for interest                                                $ 21,786          $ 21,746          $ 21,418

   Noncash activities:
       Contribution of timberlands for investment in affiliate                    $ -          $ 18,850               $ -

</TABLE>



See notes to consolidated financial statements.                              F-6


<PAGE>



U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(dollar amounts in thousands)


1. Business and Significant Accounting Policies:

Business
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,  plus accrued
dividends  to the  extent  earned,  reduced  by losses, if any, in excess of the
common members' interest in the investee (See Notes 3 and 9).

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

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 are  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, 2000  represents a customer
deposit for a timber deed sale that was closed in January  2001. At December 31,
1999 deferred  revenue  represents  cash  received in advance of logs  harvested
under stumpage contracts.

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  22%, 14%, 11%, and 10% of the Company's  aggregate
net  revenues  from log,  stumpage,  and  timber  deed  sales for the year ended
December 31, 2000. In 1999, these customers represented  approximately 17%, 15%,
18%, and 14%,  respectively,  of aggregate net revenues  from log,  stumpage and
deed sales. In 1998, these four customers  accounted for approximately 27%, 18%,
19%, and 10% 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 27% of the Company's accounts
receivable at December 31, 2000 and none of the Company's accounts receivable at
December 31, 1999. The Company  periodically  reviews its allowance for doubtful
accounts and reserves an estimated amount for such accounts.  As of December 31,
2000 and 1999 the Company had an  allowance  for  doubtful  accounts of $550 and
$200, respectively.

                                                                             F-7
<PAGE>



1. Business and Significant Accounting Policies (Continued):

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.

Deferred Financing Fees
Deferred  financing  fees consist of fees incurred in connection  with obtaining
the related debt financing.  The Company amortizes  deferred financing fees over
the terms of the related debt. The Company presents deferred  financing fees net
of accumulated amortization.  The accumulated amortization of deferred financing
fees as of December 31, 2000 and 1999 was $2,102 and $1,427, respectively.

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


                                                                             F-8

<PAGE>



1.  Business and Significant Accounting Policies (Continued):
Unit-Based Compensation Plans
The Company accounts for its 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 10).

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 as amended, is required to be adopted
for fiscal  quarters of fiscal years  beginning  after June 15,  2000.  SFAS 133
requires the Company to recognize all  derivatives  in the balance sheet at fair
value.  Derivatives  that are not hedges must be adjusted to fair value  through
earnings. If the derivative is a hedge,  depending upon the nature of the hedge,
changes  in fair  value of the  derivative  will  either be offset  against  the
changes in fair  value of the hedged  assets,  liabilities  or firm  commitments
through  earnings or recognized in other  comprehensive  income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be  immediately  recognized  in earnings.  The Company had no
outstanding  derivative  positions at December 31, 2000, and therefore  believes
that  the  adoption  of SFAS 133 will not  significantly  affect  its  financial
statements.

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

2.  Timber and Timberlands:
Timber and Timberlands consisted of the following at December 31:


                                                    2000           1999
                                                  -----------   ------------

Timber and logging roads                          $  317,651    $   317,856
Timberlands                                           39,111         39,338
Seed orchard and nursery stock                         1,364          1,277
                                                  -----------   ------------

                                                     358,126        358,471
Less accumulated depletion and road amortization      93,017         64,643
                                                  -----------   ------------

                                                  $  265,109    $   293,828
                                                  ===========   ============



                                                                             F-9
<PAGE>



3.  Investment in Affiliate:
Following is summarized financial  information for U.S. Timberlands Yakima, LLC,
the MLP's  equity  basis  affiliate  (See Note 9), as of and for the years ended
December 31:
<TABLE>
<CAPTION>

                                                                                      2000          1999
                                                                                  ------------  ------------

<S>                                                                                 <C>          <C>
       Current assets                                                               $   3,887    $    9,129
       Noncurrent assets, principally timber and timberlands                           71,174        74,726
       Current liabilities                                                             11,195         5,611
       Noncurrent liabilities - long-term debt                                         42,807        60,000
       Redeemable preferred member interest (owned by the
                     Company)                                                          20,295        18,243
       Net sales                                                                       25,606           560
       Gross profit                                                                    10,018           342
       Net income (loss)                                                                2,815        (1,207)



4.  Property, Plant and Equipment:
Property, plant and equipment consisted of the following at December 31:

                                                                                      2000          1999
                                                                                  ------------  ------------

       Equipment                                                                    $     661     $     674
       Buildings and improvements                                                         843           843
                                                                                  ------------  ------------

                                                                                        1,504         1,517
       Less accumulated depreciation and amortization                                     578           479
                                                                                  ------------  ------------

                                                                                    $     926    $    1,038
                                                                                  ============  ============




5.  Accrued Liabilities:
Accrued liabilities consisted of the following at December 31:

                                                                                      2000          1999
                                                                                  ------------  ------------

       Interest                                                                     $   2,792    $    2,729
       Severance and harvest tax                                                          217           242
       Other                                                                              317           315
                                                                                  ------------  ------------

                                                                                    $   3,326    $    3,286
                                                                                  ============  ============

</TABLE>



                                                                            F-10

<PAGE>



6.  Short-Term Debt:
In 2000, the Company extended 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, 2000),  which is based on
the Company's  leverage ratio.  The prime lending rate was 9.50% at December 31,
2000.  The Affiliate  Credit  Facility  expires on June 30, 2001 and all amounts
borrowed  thereunder  shall then be due and payable.  There were no  outstanding
borrowings  under the Affiliate  Credit  Facility at December 31, 2000 and 1999.
Peak  borrowings  were $6,000 and $3,000  under the  Affiliate  Credit  Facility
during  2000  and  1999,  respectively.  A  commitment  fee of 0.5%  is  payable
quarterly on the unused  available  portion of the  Affiliate  Credit  Facility.
Total  interest and fees paid to the affiliate were $130 and $58 in 2000 and $25
and $29 in 1999, respectively.

The Affiliate Credit Facility contains certain restrictive covenants,  including
limits on 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, 2000.

7. Long-Term Debt:

Senior Notes
The  $225,000  of Notes,  which were  issued in 1997,  were  issued  jointly and
severally  by the  Company  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 Company and bear interest
at 9-5/8% payable  semiannually in arrears on May 15 and November 15, and mature
on November 15, 2007 unless previously redeemed. The Notes are redeemable at the
option of the  Issuers in whole or in part,  on or after  November  15,  2002 at
predetermined redemption prices plus accrued interest to the redemption date.

The Notes contain certain restrictive covenants,  including limiting the ability
of the Company and its subsidiary to make cash  distributions,  incur additional
indebtedness, sell assets or harvest timber in excess of certain limitations.


                                                                            F-11

<PAGE>



8.  Members' Equity:
Allocation of Income (Loss)
As  provided  in the  Company's  Operating  Agreement,  income  and  losses  are
allocated 99% to the MLP and 1% to the Manager.

Cash Distributions
The MLP is required to make quarterly cash distributions from Available Cash, as
defined in the MLP's Partnership Agreement.  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  sets forth  certain cash  distribution  target rates for the
Company to meet in order for the Manager's  share of Available  Cash to increase
(such increases  referred to as "Incentive  Distributions").  To the extent that
the quarterly  distributions  exceed $.550 per Common and Subordinated Unit, the
Manager receives 15% of the excess Available Cash rather than the base amount of
2%. To the extent that the quarterly  distributions  exceed $.633 per Common and
Subordinated  Unit, the Manager receives 25% of the excess Available Cash and to
the  extent  that the  quarterly  distributions  exceed  $.822  per  Common  and
Subordinated  Unit, the Manager receives 50% of the excess Available Cash. Since
the quarterly  distributions did not exceed the minimum quarterly  distributions
for  2000,  1999 or  1998,  the  Manager  did not  receive  any  such  Incentive
Distributions for those years.

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

The  Manager  does not  receive  any  management  fee or other  compensation  in
connection  with its  management of the Company.  The Manager and its affiliates
perform services for the Company and are reimbursed for all expenses incurred on
behalf of the Company,  including  the costs of  employee,  officer and director
compensation properly allocable to the Company, and all other expenses necessary
or appropriate to the conduct of the business of, and allocable to, the Company.
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, 2000 and 1999, the Company had a payable to the
Manager of $955 and $840,  respectively.  During 2000,  1999,  and 1998 expenses
allocated to and reimbursed by the Company totaled $7,717,  $8,347,  and $9,058,
respectively.


                                                                            F-12
<PAGE>



9.  Certain Relationships and Related Party Transactions (Continued):
Certain  conflicts  of  interest  could  arise as a result of the  relationships
described  above.  The Board of Directors  and  management of the Manager have a
duty to manage the Company and the MLP 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, 2000, the Manager has consulting  agreements  with affiliates
of certain Directors of the Manager,  pursuant to which each such person or firm
has  provided  and/or  will  provide  consulting  services to the  Manager.  The
agreements provide for an annual retainer of $25 to $50, plus an hourly rate for
services rendered at the request of the Manager. Payments by the Manager related
to consulting  agreements in 2000,  1999,  and 1998 amounted to $129,  $117, and
$144, respectively.

Investment in Affiliate
In October 1999, the Company made an investment in U.S.  Timberlands Yakima, LLC
(USTY), an unconsolidated affiliate.  USTY, a then newly formed entity organized
to acquire timber properties  located in Central  Washington and Central Oregon,
is engaged in the growing of trees and sale of logs and standing timber to third
party  wood  processors.  The 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 Company's Manager,
hold a  controlling  interest.  The  Company  also  acquired  all of the  senior
preferred  interests in USTY (the "Senior or Preferred LLC  Interests")  for its
contribution  to  USTY  of  timberlands   consisting   primarily  of  non-income
producing,  pre-merchantable  pine  plantations  having an agreed  upon value of
$22,000.  The Company  recorded its investment in the Senior LLC interest at its
$18,850 cost basis for the contributed  timberlands.  Terms of the Preferred LLC
Interests  include a cumulative  annual  guaranteed  return of 5% 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 Interest at
cost plus accrued dividends to the extent earned,  reduced by losses, if any, 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 MLP and Company granted U.S.  Timberlands  Holding Group, LLC an irrevocable
proxy to vote their  respective  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 Manager's Conflicts Committee reviewed and approved the
structure of the Company's investment in the affiliate.

In June 2000, the Company  purchased timber cutting rights for approximately 4.2
million  board feet from USTY for $1.3  million.  These  timber  cutting  rights
expire in June 2003.  In December  2000,  the Company sold  approximately  8,000
acres of timberland located in Central Oregon to USTY for $2,900.


                                                                            F-13
<PAGE>



9.  Certain Relationships and Related Party Transactions (Continued):
Payments to Affiliate
See Note 6 regarding  interest and  commitment  fees paid to an affiliate of the
Manager under the Affiliate Credit Facility.

Severance and Settlement
Selling,  general and  administrative  expenses in 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 Manager'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  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 served as Acting  Senior Vice  President  and Acting
Director of Operations for the Company.  The Company paid approximately $821 and
$925 during 2000 and 1999, respectively,  to Mason, Bruce & Girard, of which Mr.
Zane is a partner.  Such payments were for  consulting  services and include Mr.
Zane's compensation.

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

The Plan permits the grant of Unit Options  covering 857,749 of the MLP's Common
Units.  Unit Options  granted under the MLP's Unit Option Plan are determined by
the  Long-Term  Incentive  Plan  Committee of the MLP's Board of Directors  (the
"LTIP Committee") and are granted at fair market value at the date of the grant.
During 1997, in connection with the reorganization of the Company and concurrent
with the initial  offering of public units by the MLP, 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.  In 2000,
54,000 Unit 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 members'  equity.  Although the performance  criteria
were met for the years ended December 31, 2000,  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.


                                                                            F-14

<PAGE>



10.  Management Incentive Plans (Continued):
Activity with respect to the MLP's unit option plan follows:


<TABLE>

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

<S>                                                           <C>                    <C>
       Outstanding, December 31, 1997                               694,775                14.75 (a)
       Unit options granted                                         340,170                14.75
       Unit options cancelled                                      (584,628)               14.75
                                                          ------------------


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


       Outstanding, December 31, 1999                               757,627                14.02
       Unit options granted                                          54,000                 9.70
       Unit options cancelled                                       (54,000)               13.89
                                                          ------------------


       Outstanding, December 31, 2000                               757,627                13.75
                                                          ==================
</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, 2000  exercise  prices for options  outstanding  were between
$5.84 and $14.75 with a weighted  average exercise price of $13.75 per unit. The
weighted average  remaining  contractual life of the options was 8 years.  There
were no unit options exercisable at December 31, 2000, 1999 or 1998.



                                                                            F-15

<PAGE>



10.  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
2000, 1999 and 1998:

<TABLE>
<CAPTION>


                                                             2000                 1999                 1998
                                                       ------------------   ------------------   ------------------

<S>                                                          <C>                  <C>                  <C>
       Risk-free rate of return                              5.98%                4.88%                5.50%

       Expected dividend yield                               9.52%                9.52%                9.52%

       Expected life of the Unit Options                    5 Years              5 Years              5 Years

       Expected volatility                                  80.59%               49.65%               25.50%


</TABLE>




The  weighted-average  fair value of unit options was $3.61, $2.87 and $2.02 for
options granted in 2000, 1999 and 1998, respectively.

If the Company had adopted the  expensing  provisions of SFAS 123, the impact on
2000, 1999 and 1998's net income (loss) would have been as follows:


<TABLE>
<CAPTION>


                                                            Year Ended December 31,
                                                       2000              1999               1998
                                                   --------           -------           --------
<S>                                                <C>                <C>               <C>
     Net income (loss) as reported                 $ (3,933)          $ 6,651           $ (6,383)

     Net income (loss) pro forma                     (4,470)            6,204             (6,629)


</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.

Restricted Unit Plan:
During 1997, 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, 2000.

Income Interests of the Manager
In connection  with the Common Units  offering and the related  formation of the
MLP's General  Partner,  the Manager issued income interests to certain officers
and  directors  of  the  General  Partner  at no  cost.  Such  income  interests
participate pro rata in cash  distributions from USTK and the MLP. Under certain
circumstances,  the MLP's General  Partner is required to repurchase  the income
interests  from officers and directors upon  termination of their  employment at
fair market value as determined by independent  appraisal (see Note 9, severance
and settlement).


                                                                            F-16

<PAGE>



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

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

(b)      Long-term  debt - The estimated  fair value of the Company's  long-term
         debt was  approximately  $180,000 and $207,000 at December 31, 2000 and
         1999, 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.  Income or losses on these  agreements  is  reflected in
         other income (expense) in the accompanying  statements of operations in
         the amount $991 in 1999 and ($361) in 1998.


12.      Quarterly Results (Unaudited):

<TABLE>
<CAPTION>

                                               Quarter Ended
                            December 31 (a)     September 30         June 30           March 31          Total Year
                           -------------------  -------------     -----------     --------------     -----------------
<S>                                   <C>              <C>            <C>                <C>               <C>
    2000
   Revenues                        $ 25,791         $ 14,064        $ 23,960          $ 11,924           $ 75,739
   Gross profit                       4,598            2,716          12,881             4,234             24,429
   Net income (loss)                 (2,306)          (5,229)          5,559            (1,957)            (3,933)

   1999
   Revenues                        $ 19,394         $ 26,175        $ 20,296          $ 11,129           $ 76,994
   Gross profit                       7,853           11,389          12,254             5,124             36,620
   Net income (loss)                    (55)           3,981           4,457            (1,732)             6,651

</TABLE>




(a)  The quarter ended December 31, 2000 includes revenues of $2,773 and related
     costs of $2,641 from a property sale.

13.      401(K) Defined Contribution Plan:
The  Company   sponsors  a  401(k)  defined   contribution   plan  which  covers
substantially all full-time employees. Company contributions to the plan totaled
$30 in 2000, $34 in 1999 and $26 in 1998.



                                                                            F-17

<PAGE>



14.     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
In November  2000,  six purported  class action  lawsuits were filed against the
Manager and the Board of Directors of the Manager (the "Board")  alleging breach
of fiduciary  duty and  self-dealing  by the Manager and the Board in connection
with an announcement  on November 2, 2000 that a group led by senior  management
has begun the  process to explore  taking the MLP  private  (the  "Going-Private
Transaction").

All six  lawsuits  were filed in the Court of  Chancery of the State of Delaware
for the County of New Castle. Each lawsuit was filed by a unitholder of the MLP,
on behalf of all other  unitholders of the MLP who are similarly  situated,  and
seeks to have the class certified and the unitholder  bringing the lawsuit named
as  representative  of the class.  In addition,  the lawsuits seek to enjoin the
Going-Private  Transaction,  to rescind the  Going-Private  Transaction if it is
consummated,  and to recover damages and attorneys'  fees. In addition to naming
the  Manager and the Board as  defendants,  all six  lawsuits  name the MLP as a
defendant.

In the opinion of  management,  after  consultation  with outside  counsel,  the
pending  lawsuits  are not  expected  to have a material  adverse  effect on the
Company's financial position or results of operations.

15.     Subsequent Event:
Distribution
In January 2001, the Board of Directors of the Manager authorized the Company to
make  a   distribution   applicable  to  the  fourth  quarter  2000.  The  total
distribution in the amount of $6,561 (including $131 to the Manager) was paid on
February 14, 2001 to Unitholders of record as of February 2, 2001.

Preferred Investment
On February 26, 2001, the Company  contributed  cutting rights on  approximately
31,000 acres of timberland located in Central Oregon to its affiliate, USTY. The
cutting  rights have an agreed upon value of $12.0 million and were added to the
Company's  Preferred  Interest in USTY. Terms of the additional senior preferred
interest  include  a  cumulative  annual  guaranteed  return  of 5% of the $12.0
million  agreed  upon  value.  The  additional  senior  preferred   interest  is
redeemable at the Company's  option on December 31, 2004 or at USTY's option any
time prior thereto for a redemption  price equal to the agreed upon value of the
Preferred Interest,  either in cash or by returning the contributed timberlands,
plus any  portion  of the  guaranteed  return  not yet paid by USTY prior to the
redemption date. The Company recorded its additional  preferred  interest at its
basis for the timber of approximately $10.9 million.


                                                                            F-18