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, 2001 Commission File No.: 1-13573-01
                                                                 1-13573

                       U.S. TIMBERLANDS KLAMATH FALLS, LLC
                         U.S. TIMBERLANDS FINANCECORP.

                                             (Exact   name
of registrant as specified in its charter)


                 DELAWARE                               91-1217136
                 DELAWARE                               91-1851612

       (State or other jurisdiction                 (I.R.S. Employer
    of incorporation or organization)              Identification No.)


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

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

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


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

           Securities registered pursuant to Section 12(g) ofthe 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]

         Documents incorporated by reference: None
<PAGE>

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



<TABLE>
<CAPTION>

                                TABLE OF CONTENTS

                                                                                                             Page
<S>       <C>                                                                                             <C>
PART I

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

PART II

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

PART III

         Item 10. Directors and Executive Officers of the Registrant...........................................23
         Item 11. Executive Compensation.......................................................................27
         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......................................37

</TABLE>

                                       ii

<PAGE>


                                     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
489,000 fee acres of timberland and cutting rights on approximately 18,000 acres
of timberland  (collectively the  "Timberlands")  containing total  merchantable
timber volume  estimated as of January 1, 2002 to be  approximately  1.2 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 75% of which are used
for its own  internal  reforestation  programs,  with the balance  sold to other
forest products companies. Except as the context otherwise requires,  references
herein to, or descriptions  of, assets and operations of the Company include the
assets and operations of the U.S. Timberlands, LP (the "Master Partnership").

         The  Timberlands'   merchantable  timber  consists  of  Ponderosa  Pine
(approximately  48%) and Douglas Fir  (approximately  14%),  species  which have
historically  commanded  premium  prices over other softwood  species,  with the
balance consisting of Lodgepole Pine, White Fir and other softwood species.  The
Timberlands  have stands of varying  ages and are unique in the forests  east of
the Cascade  Range in Oregon in that  approximately  141,000  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 40 years old.  Initial  thinning or harvesting of
the  Plantation  stands is expected to begin  within the next three  years.  The
balance of the  Timberlands is composed of natural  stands.  For a more complete
description of the Company's properties, see "Properties."

         In August 1996, the Company and U.S.  Timberlands  Management  Company,
LLC, formerly known as U.S.  Timberlands Services Company, LLC ("Old Services"),
acquired  approximately  604,000 fee acres of  timberland  (the  "Klamath  Falls
Timberlands"),   containing   an  estimated   merchantable   timber   volume  of
approximately 1.9 BBF and related assets from  Weyerhaeuser  (the  "Weyerhaeuser
Acquisition").  In July 1997, the Company, which is now the Master Partnership's
subsidiary  operating  company,  acquired  approximately  42,000  fee  acres  of
timberland and cutting rights on  approximately  3,000 acres of timberland  (the
"Ochoco  Timberlands"),  containing an estimated  merchantable  timber volume of
approximately  280  million  board feet  ("MMBF")  from  Ochoco  Lumber  Company
("Ochoco") (the "Ochoco Acquisition").  At the date of acquisition,  over 40% of
the merchantable  timber on the Ochoco Timberlands was at least 80 years old. As
of December 31, 2000,  the Company had  harvested  substantially  all of the Old
Growth  timber on the  Ochoco  Timberlands.  The  average  age of the  remaining
merchantable  timber on the Ochoco Timberlands is approximately 40 - 50 years in
age. During October 1999 and again in the first and second quarters of 2001, 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



                                       1
<PAGE>


purchase  Weyerhaeuser's  Klamath Falls mill facilities.  In September 1996, the
Company  entered into a 10-year log supply  agreement with Collins (the "Collins
Supply  Agreement")  providing for the purchase by the plywood mill and delivery
by the Company of a minimum of 34 million  board feet ("MMBF") of logs each year
at market  prices.  During 2001,  Collins  suspended  plywood  production at the
Klamath Falls mill and it was mutually  decided to cancel the remaining years on
the contract.  In addition to its sales under the Collins Supply Agreement,  the
Company sold and continues to sell logs to conversion  facilities located in the
area  surrounding  the  Timberlands.  There are  currently  more than 40 primary
conversion  facilities  located  within  a  150-mile  radius  of  the  Company's
Timberlands.

Formation of the Company

         On November 19, 1997, the Master Partnership acquired substantially all
of the  equity  interests  in the  Company  and the  business  and assets of Old
Services (the "Acquisition") and completed its initial public offering (the "MLP
Offering")  of common units  representing  limited  partner  interests  ("Common
Units").  Upon the closing of the Acquisition,  Old Services  contributed all of
its  assets,  including  its timber  operations,  to U.S.  Timberlands  Services
Company,  LLC,  a  newly  formed  Delaware  limited  liability  company  and the
Company's  Manager (the "General  Partner" or "New  Services"),  in exchange for
interests  therein.   Immediately   thereafter,   the  Company  assumed  certain
indebtedness  (the  "Holdings  Debt")  of U.S.  Timberlands  Holdings,  LLC,  an
affiliate of the Company  ("Holdings"),  and the Manager  contributed its timber
operations to the Company in exchange for a member interest in the Company. Then
the  Manager  contributed  all but a 1% member  interest  in the  Company to the
Master  Partnership  in exchange  for a General  Partner  interest in the Master
Partnership,  the right to receive  Incentive  Distributions (as defined herein)
and 1,387,963  subordinated units representing  limited partner interests in the
Master Partnership  ("Subordinated  Units"), and Holdings contributed all of its
interest in the Company to the Master  Partnership  in  exchange  for  2,894,157
Subordinated  Units. The Manager then distributed the Subordinated  Units to Old
Services.  Approximately 143,398 Subordinated Units were used by Old Services to
redeem  interests  in Old  Services  held by certain  founding  directors of the
Manager  (the  "Founding  Directors").  As a result  of such  transactions,  the
Company  became the  Operating  Company and the  Manager  owns an  aggregate  2%
interest in the Master  Partnership and the Company on a combined basis, and the
right to receive Incentive Distributions;  U.S. Timberlands Holdings Group, LLC,
a successor to Old Services and Holdings owns 3,140,162  Subordinated  Units and
the  Founding  Directors  own an aggregate of 143,398  Subordinated  Units.  The
3,283,560  Subordinated Units owned by U.S.  Timberlands Holdings Group, LLC and
the  Founding  Directors  represent an  aggregate  25.5%  interest in the Master
Partnership.  The Common Units and the Subordinated Units are referred to herein
collectively  as  "Units"  and the  holders of Units are  referred  to herein as
"Unitholders."  Concurrent with the closing of the Initial Offering, the Company
and its wholly  owned  subsidiary,  U.S.  Timberlands  Finance  Corp.  ("Finance
Corp."),  consummated the public offering (the "Public Note Offering") of $225.0
million aggregate  principal amount of unsecured senior notes (the "Notes).  See
"Management's Discussion and Analysis of Liquidity and Capital Resources."

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


                                       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  purchase  and sale of timber
and/or timber deeds,  compensation  of the directors,  officers and employees of
the Manager and the determination of fees and expenses that are allocable to the
Company.  The Manager has a conflicts  committee  (the  "Conflicts  Committee"),
consisting  of two  independent  members  of its  Board  of  Directors,  that is
available at the Manager's  discretion to review matters involving  conflicts of
interest.

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

The Timberlands

Timber Growth

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


                                       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  and  biological   advances  that  improve  forest  management
practices),  expected acquisitions and dispositions,  access to the Timberlands,
availability of contractors,  sales contracts and  environmental  and regulatory
constraints.  The Company's harvest plans reflect the Company's expectations for
each  year's  harvest,  including  the  sites to be  harvested,  the  manner  of
harvesting  such sites,  the volume of each species to be harvested,  the prices
expected to be received for the Company's timber,  the amount of stumpage sales,
logging and other costs, thinning operations and other relevant information. The
Company has the  flexibility to update its harvest plans during the year to take
into consideration  changes in these factors. The Company harvested or committed
to harvest  from log,  stumpage  and timber  deed sales 251  million  board feet
(MMBF) in 2001 and plans to  harvest,  or commit to harvest,  approximately  196
MMBF in 2002. The Company did not sell any MMBF through  property sales in 2001,
but intends to sell up to 90 MMBF  through  property  sales in 2002.  If current
market  conditions  do not improve,  the Company will be required to harvest its
current  Timberlands  aggressively over  approximately the next one to two years
after which time the  harvest  level is expected to decline to a level which the
Company  considers to be more  sustainable  over the long term.  Because harvest
plans are based on certain  assumptions,  many of which are beyond the Company's
control,  there can be no assurance that the Company will be able to harvest the
volumes  projected in its harvest plans.  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 2002.  Such harvest plans,  land sales
and other strategic  assumptions do not take into account any  acquisition  that
the Company may consummate during such period.

 Access

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

Sales and Markets

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



                                       4
<PAGE>

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

         The Company  currently  sells its  sawlogs or stumpage to  unaffiliated
wood products  manufacturers  and sells its chips to unaffiliated  pulp mills or
hardboard plants. The percentage of logs which are sold as  sawlogs/stumpage  or
pulp logs is dependent upon, among other things,  the species mix and quality of
the inventory  harvested and the market dynamics  affecting the region.  Most of
the  timber  on the  Timberlands  is  softwood,  which,  due to its long  fiber,
strength,  flexibility and other  characteristics,  is generally  preferred over
hardwood  for  construction  lumber and  plywood.  Once  processed,  sawlogs are
suitable for use as structural grade lumber,  appearance  grade boards,  plywood
and laminated  veneer and can also be  manufactured  for such end uses as window
trim, molding and door jambs.  During 2001,  sawlogs,  stumpage sales and timber
deed sales accounted for  approximately  48%, 0% and 52%,  respectively,  of the
Company's  revenue.  Chips,  which can be used to make  hardboard  or pulp,  and
seedlings combined accounted for less than 1% of the Company's revenues in 2001.
There were no timber and property sales in 2001.

The Company's  customers include numerous  unaffiliated  operators of conversion
facilities.  Since its  acquisition  of the Klamath Falls  Timberlands in August
1996,  the  Company  has sold logs and chips  from such  timberlands  to over 25
different customers.  Concurrent with the Weyerhaeuser Acquisition,  the Company
arranged for Collins,  a privately owned forest products  company located within
the Klamath Falls  Timberlands,  to purchase  Weyerhaeuser's  Klamath Falls mill
facilities. At such time, the Company entered into the Collins Supply Agreement,
a 10-year  log supply  agreement  with  Collins  providing  for  purchase by the
plywood  mill and  delivery  by the Company of a minimum of 34 MMBF of logs each
year at market  prices.  In the  fourth  quarter  of 2001,  the  Collins  Supply
Agreement  was  cancelled by mutual  agreement as a result of the closure of the
Collins  Klamath Falls Plywood Mill in Klamath Falls.  In 2001,  sales to Timber
Products,   Scott  Timber,   Crown  Pacific  and  Boise  Cascade  accounted  for
approximately  41% of the  Company's  revenue.  No other  single  non-affiliated
customer  accounted  for more than 5% of the  Company's  net  revenues for 2001.
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 40 primary
conversion  facilities  located  within  a  150-mile  radius  of  the  Company's
Timberlands.

Seasonality

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

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

                                       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  at a  market  clearing  price.  Additional
competitive  factors  within a market area  generally  will include  species and
grade,  quality,  ability to supply logs which  consistently meet the customers'
specifications and ability to meet delivery  requirements.  The Company believes
that  it  has  a  reputation  as  a  stable  and  consistent  supplier  of  well
merchandised,  high-quality  logs. The Company has no conversion  facilities and
therefore  does not compete with its  customers for logs.  The Company  believes
that this gives it an advantage  over certain of its  competitors  that also own
conversion facilities.

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

         The  Company  believes  that it  competes  successfully  in the  timber
business for the following reasons:  (i) the Company has substantial holdings of
timber  properties which include  approximately  1.2 BBF of  merchantable,  good
quality  timber,  approximately  141,000  acres of plantation  timberland  and a
full-scale  seed  orchard  and  nursery  operation  located  in a  region  where
conversion  facilities  have been  experiencing  shortages in the supply of wood
fiber;  (ii) the Company  focuses on owning  timberlands  rather than  operating
conversion facilities,  which minimizes the Company's cost structure and capital
expenditures,  allows the  Company to seek the most  favorable  markets  for its
timber  rather than being  committed to supply its own  facilities,  and ensures
that the Company will not compete with its  customers;  (iii) the Company's lean
operating structure allows it to efficiently manage its Timberlands,  and should
enable it to acquire additional  timberlands without  commensurate  increases in
overhead;  and (iv) the Company's  computerized  geographic  information  system
("GIS")  enables the Company to evaluate the optimal  timing and patterns of the
harvest of its Timberlands and evaluate and integrate acquisitions of additional
timberlands.

Resource Management

Timber Resource Management

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

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


                                       6
<PAGE>

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

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

         The  Company's  policy  is to  ensure  that  every  acre  harvested  is
reforested in order to enhance the long-term value of its timberlands.  Based on
the geographic and climatic conditions of a given harvest site,  harvested areas
may be  regenerated  naturally,  by leaving  mature trees to reseed the area, or
replanted  with  seedlings.  Natural  regeneration  methods  are widely  used on
approximately  40% of the Company's  harvested  land.  Approximately  29% of the
Timberlands  acreage currently  consists of Plantations.  The Company expects to
convert  an average  of 14,000  acres of  natural  stands per year over the next
three years to Plantations.  The seed orchard  produces seed from trees selected
because they were the best  genotype in their  respective  environments.  During
2001, the Company  planted  approximately  2.3 million  seedlings and expects to
plant 3.8 million  seedlings in 2002.  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



                                       7
<PAGE>

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  27,000
acres.

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

         Based on the 2001 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 2001,  and
identified  approximately  33 northern  spotted owl sites  affecting the Klamath
Falls  Timberlands,  three of which are located,  totally,  on the Klamath Falls
Timberlands.

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

Timberlands

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

Environmental Laws and Superfund

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

                                       8
<PAGE>

         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.

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.

                                       9
<PAGE>

 Employees

         As of March 15, 2002, the Company had 32 employees, including employees
of the Manager that manage the business of the Company.  The  employees  are not
unionized, and the Company believes that its employee relations are good. All of
the silvicultural  activities on the Timberlands and the harvesting and delivery
of logs are conducted by  independent  contractors  who are not employees of the
Company.

Item 2.  Properties

Timber Inventory

         The Company currently owns and manages  approximately 489,000 fee acres
of timberland  and cutting  rights on  approximately  18,000 acres of timberland
containing total  merchantable  timber volume estimated as of January 1, 2002 to
be  approximately  1.2 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  141,000
acres of the 489,000 acre total  consist of actively  managed  Pine  Plantations
with stands  ranging in age from one to 40 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, 2002,  the total
timber inventory amounted to 1.2 BBF. The Company's combined timber inventory by
MMBF and  percentage  is Ponderosa  Pine (550.1  (48%)),  Lodgepole  Pine (190.5
(16%)),  White Fir (211.6  (18%)),  Douglas Fir (163.1  (14%)) and other species
(41.8 (4%)).  Other species include Cedar,  Sugar Pine,  Western Larch and Grand
Fir.

Size and Species Distribution of Merchantable Timber

         The  Company's  Timberlands  are  diversified  by species mix and, to a
lesser extent, by size distribution. Timber on the Timberlands generally reaches
merchantable  size between 40 and 50 years in natural  stands and between 25 and
35 years in the  Plantations.  The Company  maintains  data as to the  estimated
volume  distribution of merchantable timber on the Timberlands by species and by
diameter at  breast-height  ("DBH").  As of January 1, 2002,  approximately  256
MMBF, or 22%, 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, 2002, the Plantations
totaled  141,000 acres.  Of the total  acreage,  67,000 acres range from 1 to 15
years of age,  51,000  acres range from 16 to 25 years of age,  and 23,000 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  General  Partner  (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.  As of March 15,
2002,  all of the  lawsuits  have  been  withdrawn,  without  prejudice,  by the
plaintiffs pending further developments in the Going Private Transaction.

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 2001.

                                       11
<PAGE>

                                     PART II

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

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

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



                                       12
<PAGE>



Item 6: Selected Financial Data
<TABLE>
<CAPTION>

                                              U.S. Timberlands (1)
                                              2001      2000        1999       1998       1997
-----------------------------------------------------------------------------------------------
<S>                                          <C>       <C>         <C>        <C>        <C>
CASH FLOWS AND OTHER DATA
    (IN MILLIONS):
Modified EBITDDA (5) . . . . . . . . . . .   $ 23.5    $ 49.5      $ 50.9     $ 44.2     $ 53.3

Additions to timber and timberlands (2)         5.6       2.3         1.0        0.6       111.6
Cash flow from operating activities             9.2      28.9        25.5       18.5        26.3
Cash flow from (used in) investing
    activities . . . . . . . . . . . . . .     (4.7)     (2.3)       (1.3)      (0.6)     (101.6)
Cash flow from (used in) financing
    activities . . . . . . . . . . . . . .     (6.6)   (26.2)      (26.2)      (23.7)        69.3

OPERATING STATEMENT DATA
    (IN MILLIONS)
Revenues (1) . . . . . . . . . . . . . . .     54.6      75.7        77.0       71.3        77.3
Depreciation, depletion and road
    amortization (1) . . . . . . . . . . .     37.3      28.8        23.3       21.9        17.3
Cost of timber and property sales (1)             --      2.6          --        5.9         8.7
Operating income (loss) (1) . . . . . . .     (13.8)     18.1        27.5       16.3        27.3
Income (loss) before extraordinary
    items                                     (36.2)     (3.9)        6.7       (6.4)       (1.4)
Extraordinary items, losses on
    extinguishment of debt (4) . . . . . .       --                    --         --         9.3
Net income (loss). . . . . . . . . . . . .    (36.2)     (3.9)        6.7       (6.4)      (10.7)


BALANCE SHEET DATA (AT
    PERIOD END, IN MILLIONS):
Working capital . . . . . . . . . . . . .      (1.7)      2.0         2.4        1.4         1.8
Total assets. . . . . . . . . . . . . . .     255.2     301.3       327.9      350.7       385.2
Long-term debt (4) . . . . . . . . . . .      225.0     225.0       225.0      225.0       225.0
Equity (deficit) (6) . . . . . . . . . .       25.5      68.2        98.4     118.0       147.1

OPERATING DATA (UNAUDITED):
Log, stumpage and timber deed sales
    volumes (MMBF) (1) . . . . . . . . . .    250.7     243.7       187.3      144.5       138.9
Property sales volumes (MMBF) (1) . . . .        --      13.6         --        26.6        41.5

----------------------------------------------------------------------------------------------------
</TABLE>


(1)      Revenues in 2001  consist of $54.1  million of log,  stumpage  and deed
         sales,  $0.0 million of timber and  property  sales and $0.4 million of
         by-products and other sales.  Revenues in 2000 consist of $72.3 million
         of log,  stumpage  and deed sales,  $2.8 million of timber and property
         sales and $0.6 million of by-products and other sales. Revenues in 1999
         consist of $76.6 million of log and stumpage  sales and $0.4 million of
         by-products and other sales.  Revenues in 1998 consist of $63.6 million
         of log and stumpage  sales,  $6.3 million of timber and property  sales
         and $1.4  million of  by-products  and other  sales.  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.  .  See  "Management's  Discussion  and  Analysis  of  Financial
         Condition and Results of Operations."

(2)      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.

(3)      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."

(4)      On July 14, 1997 the Company retired certain borrowings under it's then
         existing  revolving  credit  facility  term loan which  resulted  in an
         extraordinary   loss  on   extinguishment  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.

(5)      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."

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


                                       13
<PAGE>

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.
Prior to 1998, the low supply of timber from public lands,  which is expected to
continue for the foreseeable  future,  benefited  private timber holders such as
the Company through higher stumpage and log prices.  Since 1998, the strength of
the U.S.  dollar has decreased  exports and increased  imports and has equalized
the supply and demand equation and contributed to the general  downward trend of
prices.  Certain market  conditions for finished  products have also  negatively
impacted stumpage and log prices in 2001.

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

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

                                       15
<PAGE>

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 2001 were up  slightly  from 2000
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.
Prices for Pine species,  primarily Ponderosa Pine, reached a peak in the spring
of 1993 and as a result  attracted  imports of Radiata Pine from New Zealand and
Chile.  Given the strong,  growing  economy of the past several years,  domestic
markets have been able to absorb the increasing  quantities of imported  Radiata
Pine lumber.  With the slowing of our domestic  economy,  decreasing  demand for
repair and  remodeling  markets  and over  supply of  finished  products  in the
industry,  the level of imports  has had a negative  impact on pricing  for Pine
lumber.  The demand for logs in the United  States is also affected by the level
of lumber  imports.  In response to increasing  lumber imports from Canada,  the
United  States and Canada  signed an  agreement  in 1996  which  restricted  the
availability  of  Canadian  softwood  lumber in the United  States.  The Company
believes that this  agreement,  which  expired on March 31, 2001,  has not had a
material impact on the price or demand for logs in the United States. The United
States and Canada are presently negotiating a new softwood lumber agreement even
though it has been recommended that a 30% tariff be imposed on Canadian softwood
lumber.  The long  term  effect  of not  having  an  agreement  or  having a new
agreement is uncertain.

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

Current Market Conditions

        While log prices in the Company's market area were down 6.5% between the
fourth quarter of 2000 and the first quarter of 2001 and decreased  again by 12%
in the second  quarter,  prices showed some  improvement in the third and fourth
quarters.

        The  average  log price  realizations  in 2001 were down to $349 per MBF
from  $393  per MBF in 2000  (-11%)  continuing  a trend  where  average  prices
declined 9.8% between 1999 and 2000.  During 2001,  realizations on timber deeds
were  down to $160 per MBF from  $258 per MBF in 2000  (-37.9%).  This  decrease
follows a decrease in timber deed realizations 31.9% during 2000.

                                       16
<PAGE>

Results of Operations

         The following  table sets forth sales volume for each of 2001, 2000 and
1999 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)
     ------                     ----        --------         -----           ----         --------        -----         ------------

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

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

     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                  -
</TABLE>


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

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

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

                                       17
<PAGE>

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

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

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

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

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

         Equity in Net  Income  (Loss) of  Affiliate.  The equity in net loss of
affiliate  was $6.1  million  during 2001 as compared to equity in net income of
affiliate of $2.0 million in 2000. The loss in 2001 reflects the Company's share
of losses  absorbed from its preferred  investment in U.S.  Timberlands  Yakima,
LLC.  and the income in 2000  reflects  the  recapture of $0.6 million in losses
previously absorbed by its preferred  investment in U.S. Timberlands Yakima, LLC
and the Company's accrued return of $1.4 million on its preferred investment See
"Investment in Affiliate" included in Note 9 of the Financial  Statements for an
explanation of the preferred and common investments in U.S.  Timberlands Yakima,
LLC.

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

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

         Cash Flow  From  Operations.  During  2001,  cash flow from  operations
decreased $19.7 million or 68% over 2000,  primarily  because of a $32.1 million
increase in net loss.

                                       18
<PAGE>

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

         Revenues. Revenues decreased $1.4 million, or 2%, from $77.0 million in
1999 to $75.6  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 $2.8 million  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 10% decrease, reflecting weaker markets for the Company's log sales.

         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%  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 were 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 $2.8 million in revenue from timber and property  sales
in 2000 compared to no revenue from timber and property sales during 1999.

         Gross Profit.  Gross profit  decreased $12.3 million from $36.6 million
in 1999 to $24.3 million in 2000 and gross margin  decreased from 48% in 1999 to
32% 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 $2.0  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.  During 1999, the Company absorbed $0.6 million in losses
absorbed by its  preferred  investment  in U.S.  Timberlands  Yakima,  LLC.  See
"Investment  in Affiliate"  included in Note 9 of the Financial  Statements  for
explanation of the preferred and common investments in U.S.  Timberlands Yakima,
LLC.

         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.

                                       19
<PAGE>

         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% over 1999  primarily  because of a $10.4  million
decrease in net  income,  which was more than offset by the add back of non-cash
items and changes in assets and 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,
2001,  the  Company  had a cash  balance of $1.1  million  and had $1.7  million
working capital deficit.

         Operating  Activities.  Cash flows provided by operating  activities in
2001 were $9.2 million,  compared to cash flows provided by operating activities
of $28.9 million in 2000.  The $19.7 million  decrease in cash flows provided by
operating  activities was primarily  attributable to a $32.3 million increase in
net loss.

         Investing Activities. Cash flows used in investing activities were $4.7
million in 2001, as compared to cash flows used in investing  activities of $2.3
million during 2000, principally for reforestation, timber acquisitions and road
additions in each year.

         Financing  Activities.  Cash flows used in  financing  activities  were
$26.2 and $6.6 million in 2000 and 2001.  During 2000 and 2001, the Company paid
$26.2 and $6.6 million in  distributions  to  Unitholders,  Manager and minority
interest.  Beginning in the second  quarter of 2001,  the Company  ceased making
distributions to its members.

Notes

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

         The indenture  governing the Notes (the  "Indenture")  contains various
affirmative  and  restrictive  covenants  applicable  to  the  Company  and  its
subsidiaries,  including  limitations  on the  ability  of the  Company  and its
subsidiaries to, among other things,  (i) incur additional  indebtedness  (other
than certain permitted  indebtedness)  unless the Company's  Consolidated  Fixed
Charge  Coverage  Ratio (as defined in the  Indenture)  is greater  than 2.25 to
1.00, and (ii) make  distributions to the Master  Partnership,  make investments
(other than  permitted  investments)  in any  person,  create  liens,  engage in
transactions with affiliates, suffer to exist any restrictions on the ability of
a  subsidiary  to  make  distributions  or  repay  indebtedness  to  the  Master
Partnership,  engage in sale and  leaseback  transactions,  enter into a merger,



                                       20
<PAGE>

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 Operating  Company was not in  compliance  with
these fixed charge  coverage  tests at December  31, 2001 and is  therefore  not
permitted  to make any  cash  distributions  to the  Company.  Accordingly,  the
Company is not able to make distributions to its Unitholders.

Affiliate Credit Facility

         During the second  quarter of 2001,  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.
The  Affiliate  Credit  Facility  will expire on April 30,  2002.  At that time,
amounts borrowed will be due and payable. As of December 31, 2001, 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 2002.
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.

Capital Expenditures/Cash Distributions

         Capital   expenditures  in  2001  totaled  $5.6  million.  The  Company
purchased timber cutting rights from its affiliate for  approximately  17.2 MMBF
of timber for $4.5 million.  The remaining $0.8 million in capital  expenditures
incurred  were  mainly  in the  nature  of land  management/silviculture  costs.
Capital expenditures were financed through cash flow generated by operations. As
the  Company  does not  currently  own and  does  not plan to own  manufacturing
facilities, and all logging is subcontracted to third parties, it is anticipated
that capital expenditures in the future will not be significant and will consist
mainly of land management/silviculture expenditures. It is currently anticipated
that the Company will not maintain  significant log inventories,  although small
log  inventories may be maintained for a short period of time, or incur material
capital  expenditures for machinery and equipment.  The Company anticipates that
capital  expenditures  will be  approximately  $1.1  million  in  2002.  Capital
expenditures  will  consist  primarily  of  capitalized  silviculture  costs and
miscellaneous equipment purchases.

         Cash required to meet the Company's  debt service will be  significant.
To meet its working capital requirements,  the Company has been selling logs and
making timber sales at a rate in excess of the Manager's estimate of the current
annual board footage growth on the Company's timberlands.  The debt service and,
prior to the first  quarter  of 2001,  quarterly  cash  distributions  have been
funded from operations and borrowings. Given projected volumes for sales of logs
and timber,  estimated  current board footage growth on the  timberlands and the
harvest restrictions in the Notes, unless prices improve, costs are reduced, new



                                       21
<PAGE>

markets are developed or the Company makes accretive  acquisitions,  the Company
does not expect to make cash  distributions.  The Company  continues to evaluate
means to improve cash flows, including the factors mentioned above. There can be
no  assurance  that prices will improve or that the Company will be able to take
any of these  actions  and it is unlikely  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  2001,  management  amended  its  offer to take the  Master
Partnership private,  reducing the offer to a total of $3.75 per unit, $1.875 in
cash and $1.875 in 7 year notes. As of this date, the offer is being reviewed by
the independent committee.

New Accounting Standard - SFAS No. 133

         In June 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.  Although the Company
had no  outstanding  derivative  positions at December 31, 2001 or 2000,  it has
absorbed a loss of approximately $146 from its allocable share of the effect of
adoption of SFAS 133 and  therefore  believes  that  adoption of SFAS 133 by its
affiliate,  to reduce the carrying  ovalue of an interest  rate cap agreement to
its fair value.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

         Not applicable.



Item 8.  Financial Statements

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

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

         Not applicable.


                                       22
<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

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

         In 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.  As of May 2001,  the Board of  Directors  formed an
independent  committee to evaluate  management's proposal regarding the offer to
take the Company  private.  William A. Wyman and Alan B. Abramson are members of
the independent committee.


                                       23
<PAGE>



Directors, Executive Officers and Key Employees of the Manager

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

<TABLE>
<CAPTION>

     Name                              Age                                  Position with Manager
     ----                              ---                                  ---------------------
<S>                                    <C>          <C>
    John M. Rudey                      58          Chairman, Chief Executive Officer, President and Director (1)
------------------------------------------------------------------------------------------------------------------------------
    Aubrey L. Cole                     78          Director (2)
------------------------------------------------------------------------------------------------------------------------------
    George R. Hornig                   47          Director (3)
------------------------------------------------------------------------------------------------------------------------------
    William A. Wyman                   63          Director (4)
------------------------------------------------------------------------------------------------------------------------------
    Alan B. Abramson                   56          Director (5)
------------------------------------------------------------------------------------------------------------------------------
    Robert F. Wright                   76          Director (6)
------------------------------------------------------------------------------------------------------------------------------
    Thomas C. Ludlow                   55          Vice President and Chief Financial Officer
------------------------------------------------------------------------------------------------------------------------------
    Martin Lugus                       61          Vice President, Timberland Operations
------------------------------------------------------------------------------------------------------------------------------
    Robert B. Longo                    48          Corporate Controller
------------------------------------------------------------------------------------------------------------------------------
    Walter L. Barnes                   59          Assistant Vice President, Harvesting
------------------------------------------------------------------------------------------------------------------------------
    Robert A. Broadhead                50          Assistant Vice President, Marketing
------------------------------------------------------------------------------------------------------------------------------
    Jay Jeffrey Vermilya               45          Assistant Vice President, Planning
------------------------------------------------------------------------------------------------------------------------------
    Christopher J. Sokol               52          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 , LTIP
     and Independent Committees.

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

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

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

                                       24
<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,  as a consultant to a variety of service,  natural  resources and
manufacturing  and financial  companies.  In 1984, he formed his own  consulting
firm,  Oliver,  Wyman & Company,  to provide  strategic and operating counsel to
large financial institutions.  Since his retirement in 1995, he has been working
as a counselor to Chief  Executives  of several  companies.  He is a Director of
Predictive Systems Inc, Pegasystems Inc., and Internosis, Inc, and serves on the
Board of Advisors  for The Sprout  Group,  a venture  capital  partnership,  and
Castle Harlan Inc., a buyout partnership.

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

         Robert F. Wright serves as a Director of the Manager.  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:  Reliance  Standard Life Insurance Co. and affiliates (life insurance
companies), The Navigators Group Inc. (a property insurance company),  Universal
American Financial Corp. (an insurance company),  C.D.G. Technology Inc. (growth
stage systems and suppliers to water utilities) 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. .

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

                                       25
<PAGE>

Key Employees

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

           Robert A. Broadhead serves as Assistant Vice President - 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.

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

           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  security  holders are  required  by SEC  regulation  to furnish the
Company with copies of all Section 16(a) forms they file.

           Based on its review of the copies of such  forms  received  by it, or
written   representations   regarding  ownership  of  the  Master  Partnership's
securities,  the Company  believes that during the fiscal year 2001, all filings
required were properly made.

                                       26
<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, 2001:

<TABLE>
<CAPTION>

                SUMMARY COMPENSATION TABLE
                                                                                             Long-Term
                                                          Annual                           Compensation
                                                       Compensation                           Awards
                                                                                            Securities
    Name and Principal                     Fiscal                                           Underlying               All Other
    Position                                 Year       Salary ($)        Bonus ($)         Options/SARs(#)         Compensation
    --------                                 ----       ----------        ---------        ---------------          ------------
<S>                                          <C>          <C>            <C>                  <C>                   <C>
    John M. Rudey                            2001         $ 463,500      $       --                      --                   --
      Chairman and                           2000           463,500         256,750                      --                   --
      Chief Executive Officer                1999           450,000         225,000                  50,000                   --
-----------------------------------------------------------------------------------------------------------------------------------
    Thomas C. Ludlow                         2001           225,000               -
      Vice President and                     2000            80,208          75,000                  50,000                   --
      Chief Financial Officer                1999                --              --                      --                   --
-----------------------------------------------------------------------------------------------------------------------------------
    Martin Lugus                             2001           123,600              --
      Vice President - Timberland            2000           123,600          30,900                      --                   --
                                             1999           120,000          35,000                      --                   --
-----------------------------------------------------------------------------------------------------------------------------------
    Walter L. Barnes                         2001            97,850              --
      Assistant Vice President               2000            97,850          24,463                      --                   --
      - Harvesting                           1999            95,000          23,750                      --                   --
-----------------------------------------------------------------------------------------------------------------------------------
    Robert A. Broadhead                      2001            92,700               -
      Assistant Vice President               2000            92,700          23,175                      --                   --
      - Marketing                            1999            90,000          22,500                      --                   --
</TABLE>




                                       27
<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.



         There  were no option  grants to the named  executive  officers  during
fiscal 2001.




                                       28
<PAGE>


         The following table sets forth certain  information with respect to the
aggregate number and value of options at the fiscal year-end 2001:


             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, 2001               December 31, 2001
                          Acquired                             ----------------                -----------------
          Name           on Exercise    Value Realized   Exercisable    Unexercisable     Exercisable    Unexercisable
          ----           -----------    --------------   -----------    -------------     -----------    -------------

<S>                          <C>              <C>            <C>            <C>              <C>            <C>
   John M. Rudey              --              $--            39,304         117,914          $--             N/A (1)

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

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

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

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


</TABLE>


 (1)   At the close of trading on December  31,  2001,  the market  value of the
       Common  Units was $1.66 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.


                                       29
<PAGE>



         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 Company issues new Common Units,  the total
number of Units  outstanding  will  increase  and the  Company  will  receive no
remuneration.

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

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

                                       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  $98,000,  $129,000, and $117,000 to the
Directors of the Manager for  consulting  services  during 2001,  2000 and 1999,
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 Manager may  authorize  from
time to time.  Effective  January 1, 2001, the Board of Directors  authorized an
increase to  $463,500.  In  addition,  the  Executive  is eligible to receive an
annual cash bonus to be determined by the  Compensation  Committee not to exceed
100% of his base salary.  The Executive  will be entitled to participate in such
other benefit plans and programs as the Manager may provide for its employees in
general.


                                       31
<PAGE>

         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.

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.

Investment in Affiliate

         In October 1999,  the Company made an  investment  in U.S.  Timberlands
Yakima,  LLC (USTY), an unconsolidated  affiliate.  USTY, an 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



                                       33
<PAGE>

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% until December 31, 2001 and 6%  thereafter,  of the $22.0 million agreed upon
value of the contributed timberlands. The Preferred LLC Interests are redeemable
at USTY's  option for a  redemption  price equal to the agreed upon value of the
Preferred LLC Interests 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.  A
subsidiary of the Manager of the Company  provides  management  services to USTY
for a fee equal to 2% of USTY's agreed upon assets under management.

During the twelve  months  ended  December  31,  2001,  the Company  contributed
cutting rights and timberland located in Central Oregon to its affiliate,  USTY.
The contributions  have an aggregate agreed upon value of $18.5 million and were
added to the  Company's  Preferred  Interest  in USTY.  Terms of the  additional
senior  preferred  interest  acquired are the same terms as the senior preferred
interest  previously issued to the Company.  The Company recorded its additional
preferred  interest  at its basis  for the  cutting  rights  and  timberland  of
approximately  $16.3  million.  All property that has been  contributed  for the
Company's  preferred  interest in USTY has been  pledged as  collateral  by USTY
under its credit  facility  with its  lender.

On March 30, 2001, the Company purchased timber cutting rights for approximately
17.2 million board feet from USTY for $4.5 million.  These timber cutting rights
expire in March 2004.

On August 29, 2001 the Company sold timber cutting rights for approximately 80.6
million board feet to USTY for $12.0 million. These timber cutting rights expire
in August 2004.

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

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



     +3.1 -- Amended  and  Restated  Agreement  of Limited  Partnership  of U.S.
             Timberlands Company, LP

     +3.2 -- Second Amended and Restated Operating Agreement of U.S. Timberlands
             Klamath Falls, LLC


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

    +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. -- 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 12, 2002.

(b)  Reports on Form 8-K

         One report  dated  November  13, 2001 on Form 8-K was filed  during the
quarter ended December 31, 2001.



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

(psi)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 12th day of
April 2002.

              U.S. TIMBERLANDS KLAMATH FALLS, LLC

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

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

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

<TABLE>
<CAPTION>
<S>                                               <C>                                               <C>
                                                                                                     April 15, 2002
/s/ John M. Rudey                                   Chairman, Chief Executive Officer,
--------------------------------------------        President and Director (Principal Executive
                  John M. Rudey                     Officer)

                                                                                                     April 15, 2002
/s/ Thomas C. Ludlow                                Chief Financial Officer
--------------------------------------------
                  Thomas C. Ludlow

                                                                                                     April 15, 2002
/s/ Robert B. Longo
--------------------------------------------        Corporate Controller
                  Robert B. Longo                  (Principal Accounting Officer)
                                                                                                     April 15, 2002
/s/ Aubrey L. Cole                                  Director
--------------------------------------------
                  Aubrey L. Cole

                                                                                                     April 15, 2002
/s/ George R. Hornig                                Director
--------------------------------------------
                  George R. Hornig

                                                                                                     April 15, 2002
/s/ Alan B. Abramson                                Director
--------------------------------------------
                  Alan B. Abramson

                                                                                                     April 15, 2002
/s/ William A. Wyman                                Director
--------------------------------------------
                  William A. Wyman

                                                                                                     April 15, 2002
/s/ Robert F. Wright                                Director
--------------------------------------------
                  Robert F. Wright

</TABLE>



                                       36
<PAGE>



EXHIBIT INDEX



     23.1 Consent of Richard A. Eisner & Company, LLP dated April 12, 2002.






                                       37
<PAGE>



CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>


Contents                                                                                                       Page

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

Consolidated balance sheets as of December 31, 2001 and 2000                                                    F-3

Consolidated statements of operations for the years ended December 31, 2001, 2000, and 1999                     F-4

Consolidated statements of changes in members' equity for the years ended December 31, 2001,
2000 and 1999                                                                                                   F-5

Consolidated statements of cash flows for the years ended December 31, 2001, 2000 and 1999                      F-6

Notes to consolidated financial statements                                                                      F-7

</TABLE>

<PAGE>

INDEPENDENT AUDITORS' REPORT


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


We have audited the accompanying consolidated balance sheets of U.S. Timberlands
Klamath  Falls,  LLC and  subsidiary  as of December 31, 2001 and 2000,  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,
2001.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements  enumerated above present
fairly, in all material  respects,  the financial  position of U.S.  Timberlands
Klamath  Falls,  LLC and  subsidiary  as of December 31, 2001 and 2000,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended  December  31,  2001,  in  conformity  with  accounting
principles generally accepted in the United States of America.

Richard A. Eisner & Company, LLP

New York, New York

    February 1, 2002,  except as to the final
    paragraph of Note 14, as to which the
    date is March 15, 2002


                                      F-2

<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY

    Consolidated Balance Sheets
    (in thousands)

<TABLE>
<CAPTION>

                                                                   December 31,
                                                                      2001             2000
                                                                 ---------------   --------------
<S>                                                                     <C>              <C>
    ASSETS
    Current assets:
        Cash and cash equivalents                                       $ 1,070          $ 3,168
        Accounts receivable, net                                            311            4,430
        Other receivables                                                   280              160
        Notes receivable                                                  1,153            2,285
        Prepaid expenses and other current assets                           225               35
                                                                 ---------------   --------------
                Total current assets                                      3,039           10,078

    Timber and timberlands, net                                         215,298          265,109
    Investment in affiliate                                              31,609           20,588
    Property, plant and equipment, net                                      811              926
    Notes receivable, less current portion                                  428                -
    Deferred financing fees, net                                          3,973            4,648
                                                                 ---------------   --------------

                Total assets                                          $ 255,158        $ 301,349
                                                                 ===============   ==============


    LIABILITIES AND MEMBERS' EQUITY
    Current liabilities:
        Accounts payable                                                $ 1,334          $ 1,222
        Accrued liabilities                                               3,331            3,326
        Deferred revenue                                                      -            1,474
        Payable to general partner and affiliate                             41            2,065
                                                                 ---------------   --------------
                Total current liabilities                                 4,706            8,087
                                                                 ---------------   --------------

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

    Commitments and contingencies

    Members' Equity:
        Managing member's interest                                          266              683
        Nonmanaging members' interest                                    25,186           67,579
                                                                 ---------------   --------------
                                                                         25,452           68,262
                                                                 ---------------   --------------

                Total liabilities and members' equity                 $ 255,158        $ 301,349
                                                                 ===============   ==============
</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,
                                                                             2001             2000             1999
                                                                        ---------------  ---------------  ----------------
<S>                                                                           <C>              <C>               <C>
   Revenues:
       Log, timber deed and stumpage sales including $19,015 (2001)
                 and $2,900 (2000) to an affiliate                            $ 54,128         $ 72,268          $ 76,594
       Property sales                                                                -            2,900                 -
       By-products and other                                                       436              571               400
                                                                        ---------------  ---------------  ----------------
                                                                                54,564           75,739            76,994
                                                                        ---------------  ---------------  ----------------

   Cost of products sold:
       Cost of timber harvested                                                (16,652)         (19,853)          (17,056)
       Cost of property sales                                                        -           (2,641)                -
       Depletion, depreciation and road amortization                           (37,287)         (28,816)          (23,318)
                                                                        ---------------  ---------------  ----------------
                                                                               (53,939)         (51,310)          (40,374)
                                                                        ---------------  ---------------  ----------------

            Gross profit                                                           625           24,429            36,620

   Selling, general and administrative expenses                                 (8,340)          (8,428)           (8,477)
   Equity in net income (loss) of affiliate                                     (6,098)           2,051              (607)
                                                                        ---------------  ---------------  ----------------
   Operating income (loss)                                                     (13,813)          18,052            27,536

   Interest expense                                                            (21,993)         (21,921)          (21,937)
   Amortization of deferred financing fees                                        (675)            (675)             (675)
   Interest income                                                                 101              403               565
   Other income, net                                                               131              208             1,162
                                                                        ---------------  ---------------  ----------------
   Net income (loss)                                                         $ (36,249)        $ (3,933)         $  6,651
                                                                        ===============  ===============  ================
</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)

<TABLE>
<CAPTION>

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

<S>                                                               <C>                   <C>                    <C>
    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
    Distributions to members                                          (65)                 (6,496)                (6,561)
    Net loss                                                         (352)                (35,897)               (36,249)
                                                    ----------------------  ----------------------   --------------------

    Balance, December 31, 2001                                      $ 266                $ 25,186               $ 25,452

</TABLE>

See notes to consolidated financial statements.

                                      F -5


<PAGE>

U.S. TIMBERLANDS KLAMATH FALLS, LLC AND SUBSIDIARY



   Consolidated Statements of Cash Flows
   (in thousands)

<TABLE>
<CAPTION>

                                                                               Year Ended December 31,
                                                                        2001           2000            1999
                                                                    -------------- --------------  --------------
<S>                                                                     <C>             <C>              <C>
   Cash flows from operating activities:
      Net income (loss)                                                 $ (36,249)      $ (3,933)        $ 6,651
      Adjustments to reconcile net income (loss) to net cash
         provided by operating activities:
            Depreciation, depletion, amortization and cost of
               timber and property sold                                    37,287         31,457          23,318
            (Gain) loss on disposal of assets                                  (2)           (39)             66
            Amortization of deferred financing fees                           675            675             675
            Equity in net (income) loss of affiliate                        6,098         (2,051)            607
            Other non-cash items                                              233              -               -
            Changes in assets and liabilities:
               Accounts receivable                                          4,119         (3,758)            855
               Other receivables                                             (120)           (36)            989
               Notes receivable                                               704          2,363          (3,469)
               Prepaid expenses and other current assets                     (190)           946            (555)
               Accounts payable                                               112            876            (387)
               Accrued liabilities                                              5             40          (1,119)
               Deferred revenue                                            (1,474)         1,435          (1,575)
               Payable to general partner and affiliate                    (2,024)           896            (553)
                                                                    -------------- --------------  --------------

                  Net cash provided by operating activities                 9,174         28,871          25,503
                                                                    -------------- --------------  --------------

   Cash flows from investing activities:
      Purchase of property, plant and equipment                                 -            (55)            (44)
      Proceeds from sale of assets                                            904             50               8
      Timber and road additions                                            (5,615)        (2,253)           (955)
      Investment in affiliate                                                   -              -            (294)
                                                                    -------------- --------------  --------------

                  Net cash used in investing activities                    (4,711)        (2,258)         (1,285)
                                                                    -------------- --------------  --------------

   Cash flows from financing activities:
      Distributions to members                                             (6,561)       (26,243)        (26,244)

                  Net cash used in financing activities                    (6,561)       (26,243)        (26,244)
                                                                    -------------- --------------  --------------

   Net increase (decrease) in cash and cash equivalents                    (2,098)           370          (2,026)
   Cash and cash equivalents, beginning of period                           3,168          2,798           4,824
                                                                    -------------- --------------  --------------

   Cash and cash equivalents, end of period                               $ 1,070        $ 3,168         $ 2,798
                                                                    ============== ==============  ==============

   Supplemental cash flow information:
      Cash paid for interest                                             $ 22,033       $ 21,786        $ 21,746

   Noncash activities:
      Contribution of timberlands for investment in affiliate            $ 16,289            $ -        $ 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, 2001 and 2000
(dollar amounts in thousands, except per unit amounts)

1.   Business and Significant Accounting Policies:

Business

The accompanying  consolidated financial statements include the accounts of U.S.
Timberlands  Klamath Falls,  LLC ("the Company"),  a Delaware limited  liability
company,  and its  wholly  owned  subsidiary,  U.S.  Timberlands  Finance  Corp.
("Finance Corp."),  collectively  referred to hereafter as the Company.  Finance
Corp.  serves as the co-obligor for the Company's notes (defined below).  It has
nominal assets and does not conduct  operations.  All intercompany  transactions
have been eliminated in consolidation.  An investment in affiliate is carried at
cost, plus accrued dividends to the extent earned, reduced by losses, if any, in
excess of the common members' interest in the investee (See Notes 3 and 9).

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

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

Use of Estimates

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

Revenue Recognition

Revenue on delivered  log sales is  recognized  upon  delivery to the  customer.
Revenue on timber deeds, timber and property sales is generally  recognized upon
closing.  Revenue from timber sold under stumpage  contracts (i.e., the customer
arranges  to harvest  and  deliver  the logs) is  recognized  when the timber is
harvested.  Deferred  revenue as of  December  31,  2000  represents  a customer
deposit for a timber deed sale that was closed in January 2001.

                                      F-7
<PAGE>

1.  Business and Significant Accounting Policies (Continued):

Concentration of Credit Risk

Financial  instruments that potentially subject the Company to concentrations of
credit risk consist  principally  of trade  accounts and notes  receivable.  The
majority of the Company's  trade accounts and notes  receivable are derived from
sales to third party wood processors. The Company's four largest, non-affiliated
customers  accounted  for  approximately  22%,  7%, 6%, and 6% of the  Company's
aggregate  net revenues from log,  stumpage,  and timber deed sales for the year
ended December 31, 2001. In 2000, these customers represented approximately 14%,
8%, 2%, and 16%, respectively,  of aggregate net revenues from log, stumpage and
deed sales. In 1999, these four customers  accounted for approximately  13%, 4%,
0%, and 17% 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  periodically  reviews  its  allowance  for  doubtful  accounts  and
reserves an estimated amount for such accounts. As of December 31, 2001 and 2000
the  Company  had  an  allowance  for  doubtful   accounts  of  $100  and  $550,
respectively.

Cash and Cash Equivalents

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

Timber and Timberlands

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

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

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

                                      F-8
<PAGE>

1.  Business and Significant Accounting Policies (Continued):

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, 2001 and 2000 was $2,777 and $2,102, respectively.

Income Taxes

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

Unit-Based Compensation Plans

The Company accounts for the granting of unit options to employees and directors
of the  MLP's  Manager  under  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).


                                      F-9

<PAGE>

1.  Business and Significant Accounting Policies (Continued):

New Accounting Standards

The Company adopted Statement of Financial  Accounting Standards (SFAS) No. 133,
"Accounting for Derivative  Instruments and Hedging Activities" as of January 1,
2001.  SFAS 133 requires the Company to recognize all derivatives in the balance
sheet at fair  value.  Derivatives  that are not hedges must be adjusted to fair
value through earnings. If the derivative is a hedge,  depending upon the nature
of the  hedge,  changes in fair value of the  derivative  will  either be offset
against  the  changes in fair value of the hedged  assets,  liabilities  or firm
commitments through earnings or recognized in other  comprehensive  income until
the  hedged  item is  recognized  in  earnings.  The  ineffective  portion  of a
derivative's  change in fair value will be  immediately  recognized in earnings.
Although  the Company had no  outstanding  derivative  positions at December 31,
2001 or 2000,  it has absorbed a loss of  approximately  $146 from its allocable
share of the  effect of  adoption  of SFAS 133 by its  affiliate,  to reduce the
carrying value of an interest rate cap agreement to its fair value.

2.  Timber and Timberlands:

Timber and Timberlands consisted of the following at December 31:

                                                             2001         2000
                                                           --------     --------

Timber and logging roads                                   $310,546     $317,651
Timberlands                                                  34,566       39,111
Seed orchard and nursery stock                                1,437        1,364
                                                           --------     --------

                                                            346,549      358,126
Less accumulated depletion and road amortization            131,251       93,017
                                                           --------     --------

                                                           $215,298     $265,109
                                                           ========     ========



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>

                                                          2001         2000        1999
                                                        ---------    ---------   ---------

<S>                                                     <C>          <C>         <C>
Current assets                                          $   5,779    $   3,887   $   9,129
Noncurrent assets, principally timber and timberlands     116,558       71,174      74,726
Current liabilities                                         1,883       11,195       5,611
Noncurrent liabilities - long-term debt                    88,435       42,807      60,000
Redeemable preferred member interest (owned by the
     Company)                                              32,019       20,295      18,243
Net sales                                                  13,574       25,606         560
Gross profit                                                3,120       10,018         342
Net income (loss)                                          (5,329)       2,815      (1,207)

</TABLE>

                                      F-10
<PAGE>

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

                                                   2001     2000
                                                 ------   ------

Equipment                                        $  646   $  661
Buildings and improvements                          843      843
                                                 ------   ------

                                                  1,489    1,504
Less accumulated depreciation and amortization      678      578
                                                 ------   ------

                                                 $  811   $  926
                                                 ======   ======


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

                             2001     2000
                            ------   ------

Interest                    $2,752   $2,792
Severance and harvest tax       65      217
Other                          514      317
                            ------   ------

                            $3,331   $3,326
                            ======   ======


6.  Short-Term Debt:
In 2001, 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, 2001),  which is based on
the Company's  leverage ratio.  The prime lending rate was 4.75% at December 31,
2001. The Affiliate  Credit  Facility  expires on April 30, 2002 and all amounts
borrowed  thereunder  shall then be due and payable.  There were no  outstanding
borrowings  under the Affiliate  Credit  Facility at December 31, 2001 and 2000.
Peak  borrowings  were $10,370 and $6,000 under the  Affiliate  Credit  Facility
during  2001  and  2000,  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 $330 and $75 in 2001,  $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.

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



                                      F-11
<PAGE>

7.  Long-Term Debt (Continued)

arrears on May 15 and  November  15,  and mature on  November  15,  2007  unless
previously  redeemed.  The Notes are  redeemable at the option of the Issuers in
whole or in part,  on or after  November  15, 2002 at  predetermined  redemption
prices plus accrued interest to the redemption date.

The Notes contain certain restrictive covenants,  including limiting the ability
of the Operating Company and its subsidiaries to make cash distributions,  incur
additional  indebtedness,  sell  assets or  harvest  timber in excess of certain
limitations.  Under  certain  restrictive  covenants,  The Company is  presently
prohibited from making distributions to the members.

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

Cash Distributions

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

The MLP  Agreement  sets forth  certain cash  distribution  target rates for the
Company to meet in order for the Manager's  share of Available  Cash to increase
(such increases  referred to as "Incentive  Distributions").  To the extent that
the quarterly  distributions  exceed $.550 per Common and Subordinated Unit, the
Manager receives 15% of the excess Available Cash rather than the base amount of
2%. To the extent that the quarterly  distributions  exceed $.633 per Common and
Subordinated  Unit, the Manager receives 25% of the excess Available Cash and to
the  extent  that the  quarterly  distributions  exceed  $.822  per  Common  and
Subordinated  Unit, the Manager receives 50% of the excess Available Cash. Since
the quarterly  distributions did not exceed the minimum quarterly  distributions
for  2001,  2000 or  1999,  the  Manager  did not  receive  any  such  Incentive
Distributions for those years.

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

The  Manager  does not  receive  any  management  fee or other  compensation  in
connection  with its  management of the Company.  The Manager and its affiliates
perform services for the Company and are reimbursed for all expenses incurred on
behalf of the Company,  including  the costs of  employee,  officer and director
compensation properly allocable to the Company, and all other expenses necessary
or appropriate to the conduct of the business of, and allocable to, the Company.
The Company's  Operating  Agreement provides that the Manager will determine the
expenses that are allocable to the Company in any reasonable  manner  determined
by the Manager in its sole discretion.  Related non-interest bearing receivables
and  payables  between the  Manager and the Company are settled in the  ordinary
course of business.  As of December 31, 2001 and 2000, the Company had a payable
to the  Manager  of $41 and $955,  respectively.  During  2001,  2000,  and 1999
expenses allocated to and reimbursed by the Company totaled $6,760,  $7,717, and
$8,347, 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 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, 2001, 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 2001,  2000,  and 1999 amounted to $98,  $129,  and
$117, respectively.

Investment in and Transactions with Affiliates

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

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

During 1999,  concurrently with and in order to facilitate USTY's acquisition of
the Washington  timberlands  referred to above, an entity  controlled by John M.
Rudey  agreed to acquire in the future a portion of the property and any related
liabilities  that the Company and USTY were  unwilling  to acquire,  the sale of
which was a  condition  of the seller to the USTY  acquisition.  Such entity was
paid $2,700 by the seller for its  agreement to acquire such property

                                      F-13
<PAGE>

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

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

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

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

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

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

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 and 2000 included $675 and
$203 respectively related to settlement with former employees of the Company.

Other Related Party Transactions

During 1999,  Glenn A. Zane served as Acting  Senior Vice  President  and Acting
Director of Operations  for the Company.  The Company paid  approximately  $323,
$821 and $925  during  2001,  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.


                                      F-14
<PAGE>

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

The following  table  summarizes the activity  related to unit options for three
years ended December 31, 2001

                                                                   Weighted
                                                                    Average
                                                 Number of         Exercise
                                                  Shares             Price
                                            ----------------  ----------------
 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
 Unit options granted                                     -                 -
 Unit options cancelled                             (70,620)            13.22
                                            ----------------

 Outstanding, December 31, 2001                     687,007             13.78


As of December 31, 2001  exercise  prices for options  outstanding  were between
$5.84 and $14.75 with a weighted  average exercise price of $13.78 per unit. The
weighted average  remaining  contractual life of the options was 7 years.  There
were no unit  options  exercisable  at December  31,  2000 or 1999.  Options for
171,752  units were  exercisable  at December 31, 2001,  with a weighed  average
exercise price of $13.78 per unit.

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 and

                                      F-15
<PAGE>

10.  Management Incentive Plans (Continued):
1999:

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

      Risk-free rate of return                    5.98%            4.88%

      Expected dividend yield                     9.52%            9.52%

      Expected life of the Unit Options          5 Years           5 Years

      Expected volatility                        80.59%            49.65%




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

If the Company had adopted the  expensing  provisions of SFAS 123, the impact on
2001,  2000 and 1999's net  income  (loss) and net income  (loss) per unit would
have been as follows:

<TABLE>
<CAPTION>

                                                           Year Ended December 31,
                                                       2001              2000              1999
                                                   ---------          --------           -------
<S>                                                <C>                <C>                <C>
      Net income (loss) as reported                $ (36,249)         $ (3,933)          $ 6,651

      Net income (loss) pro forma                    (36,572)           (4,470)            6,204
</TABLE>

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

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, 2001.

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

                                      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



                                      F-17
<PAGE>



11.  Fair Value of Financial Instruments (Continued):

     (b)  accrued  liabilities,  approximates  their  carrying  amounts  in  the
          financial statements due to the short maturities of such items.

     (c)  Long-term debt - The estimated  fair value of the Company's  long-term
          debt was approximately  $150,750 and $180,000 at December 31, 2001 and
          2000, respectively, based on published market quotations.

12.      Quarterly Results (Unaudited):


<TABLE>
<CAPTION>

                                                                  Quarter Ended
                                     --------------------------------------------------------------------
                                     December 31 (a)       September 30          June          March 31       Total Year
<S>                                          <C>                  <C>               <C>            <C>            <C>
   2001
   Revenues                                  $ 13,471             $ 24,229          $ 7,327        $ 9,467        $ 54,564
   Gross profit                                   245                  764             (252)          (132)            625
   Net income (loss)                          (10,251)              (8,583)          (8,600)        (8,815)        (36,249)

   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)
</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
$56 in 2001, $30 in 2000 and $34 in 1999.

14.      Commitments, Contingencies and Other:
Log Supply Agreement
On August 30,  1996,  the  Company  entered  into a wood supply  agreement  with
Collins Products,  LLC to supply a volume of approximately 34 million board feet
of  merchantable  timber  annually to Collins at market prices.  The term of the
agreement  was ten  years and was  renewable  for two  additional  terms of five
years,  each at the option of Collins.  As a result of Collins  Products closing
its plywood  mill in Klamath  Falls in 2001,  the  Company and Collins  mutually
decided to cancel the log supply agreement.  Revenues from Collins Products were
approximately $2,125, $10,842 and $11,160 for 2001, 2000 and 1999 respectively.

Interest Rate Collar Agreement

The Company entered into interest rate collar agreements to manage interest rate
risk,  the last of which ended in October 1999.  Income of $991 in 1999 on these
agreements  is  included  in other  income  in the  accompanying  statements  of
operations.



                                      F-18
<PAGE>

14. Commitments, Contingencies and Other(Continued):
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").

In February 2001  management  put forward a formal offer for the "Going  Private
Transaction" at $7.75 per unit in cash and notes.  In November 2001,  management
amended  its offer to $3.75 per unit (50% in cash and 50% in 7 year notes of the
MLP).

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.

         As of March 15, 2002,  all six lawsuits  have been  withdrawn,  without
prejudice, by the plaintiffs,  pending further developments in the Going Private
Transaction.


                                      F-19