UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




x
            Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934 for the quarterly period ended September 30,
  2010.


OR


 ̈
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934 for thetransition
      period from
                          
      to
                          .








Commission
File Number: 001-34016


United States Heating Oil Fund,
LP


(Exact
name of registrant as specified in its charter)




Delaware
            
            20-8837345(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)




1320
Harbor Bay Parkway, Suite 145


Alameda,
California 94502


(Address
of principal executive offices) (Zip code)




(510)
522-9600


(Registrant’s
telephone number, including area code)




N/A


(Former
name, former address and former fiscal year, if changed since last
report)




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 the 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
requirements for the past 90 days.




x
Yes     ̈ No




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





 ̈
Yes     ̈ No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer    ̈
              Accelerated
      filer    ̈Non-accelerated
      filer   x
              Smaller
      reporting company    ̈(Do
      not check if a smaller reporting
company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).




 ̈
Yes    x No





UNITED
STATES HEATING OIL FUND, LP


Table
of Contents




PagePart
      I. FINANCIAL INFORMATIONItem 1.  Condensed Financial
      Statements.
                  
                  1Item
      2. Management’s Discussion and Analysis of Financial Condition and
      Results of Operations.
                  
                  16Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
                  
                  33Item
      4. Controls and Procedures.
                  
                  34Part
      II. OTHER INFORMATIONItem
      1. Legal Proceedings.
                  
                  35Item
      1A. Risk Factors.
                  
                  35Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
                  
                  35Item
      3. Defaults Upon Senior Securities.
                  
                  35Item
      4. Reserved.
                  
                  35Item
      5. Other Information.
                  
                  35Item
      6. Exhibits.
                  
                  35







Part
I.FINANCIAL
INFORMATION





Item
1. Condensed Financial Statements.





Index
to Condensed Financial Statements





Documents
                    
                    PageCondensedStatements of Financial Condition
      at September 30, 2010 (Unaudited) and December 31, 2009
                    
                    
                    2CondensedSchedule of Investments
      (Unaudited) at September 30, 2010
                    
                    
                    3Condensed
      Statements of Operations (Unaudited) for the three and nine months ended
      September 30, 2010 and 2009
                    
                    
                    4Condensed
      Statement of Changes in Partners’ Capital (Unaudited) for the nine months
      ended September 30, 2010
                    
                    
                    5CondensedStatements of Cash Flows
      (Unaudited)for the
      nine months ended September 30, 2010 and
      2009
                    
                    
                    6Notes
      to Condensed Financial Statements for the period ended September 30,
      2010 (Unaudited)
                    
                    
                    7


1





United
States Heating Oil Fund, LP


Condensed
Statements of Financial Condition


At
September 30, 2010 (Unaudited) and December 31, 2009





September
      30, 2010
                  
                  
                  December
      31, 2009AssetsCash
      and cash equivalents (Note 5)
                  
                  $
                  6,437,368
                  
                  
                  $
                  13,521,796Equity
      in UBS Securities LLC trading accounts:Cash
                  
                  
                  971,557
                  
                  
                  
                  1,756,727Unrealized
      gain on open commodity futures contracts
                  
                  
                  538,910
                  
                  
                  
                  1,088,212Receivable
      from General Partner (Note 3)
                  
                  
                  145,980
                  
                  
                  
                  211,527Dividend
      receivable
                  
                  
                  258
                  
                  
                  
                  658Other
      assets
                  
                  
                  239,218
                  
                  
                  
                  181,699Total
      assets
                  
                  $
                  8,333,291
                  
                  
                  $
                  16,760,619Liabilities
      and Partners' CapitalProfessional
      fees payable
                  
                  $
                  158,970
                  
                  
                  $
                  225,750General
      Partner management fees payable (Note 3)
                  
                  
                  3,762
                  
                  
                  
                  8,010Brokerage
      commission fees payable
                  
                  
                  300
                  
                  
                  
                  675Other
      liabilities
                  
                  
                  617
                  
                  
                  
                  1,089Total
      liabilities
                  
                  
                  163,649
                  
                  
                  
                  235,524Commitments and Contingencies(Notes 3, 4 and 5)Partners'
      CapitalGeneral
      Partner
                  
                  
                  -
                  
                  
                  
                  -Limited
      Partners
                  
                  
                  8,169,642
                  
                  
                  
                  16,525,095Total
      Partners’ Capital
                  
                  
                  8,169,642
                  
                  
                  
                  16,525,095Total
      liabilities and partners’ capital
                  
                  $
                  8,333,291
                  
                  
                  $
                  16,760,619Limited
      Partners’ units outstanding
                  
                  
                  300,000
                  
                  
                  
                  600,000Net
      asset value per unit
                  
                  $
                  27.23
                  
                  
                  $
                  27.54Market
      value per unit
                  
                  $
                  27.22
                  
                  
                  $
                  27.61





See
accompanying notes to condensed financial statements.


2





United
States Heating Oil Fund, LP


Condensed
Schedule of Investments (Unaudited)


At
September 30, 2010





Gain
      onOpen
                                    
                                    
                                    %
      ofNumber
      of
                                    
                                    
                                    Commodity
                                    
                                    
                                    Partners’Contracts
                                    
                                    
                                    Contracts
                                    
                                    
                                    CapitalOpen
      Futures Contracts - LongUnited
      States ContractsNYMEX
      Heating Oil Futures HO contracts, expire November 2010
                                    
                                    
                                    86
                                    
                                    
                                    $
                                    538,910
                                    
                                    
                                    
                                    6.60Principal
                                      Amount
                                    
                                    
                                    Market
                                      ValueCash
      EquivalentsUnited
      States - Money Market FundFidelity
      Institutional Government Portfolio - Class I
                                    
                                    $
                                    5,306,148
                                    
                                    
                                    $
                                    5,306,148
                                    
                                    
                                    
                                    64.95Total
      Cash Equivalents
                                    
                                    
                                    
                                    
                                    
                                    $
                                    5,306,148
                                    
                                    
                                    
                                    64.95





See
accompanying notes to condensed financial statements.


3





United
States Heating Oil Fund, LP


Condensed
Statements of Operations (Unaudited)


For
the three and nine months ended September 30, 2010 and 2009





Three
      months
                  ended
                  September
      30,
                  2010
                
                
                Three
      months
                  ended
                  September
      30,
                  2009
                
                
                Nine
      months
                  ended
                  September
      30,
                  2010
                
                
                Nine
      months
                  ended
                  September
      30,
                  2009IncomeGain
      (loss) on trading of commodity futures contracts:Realized
      gain (loss) on closed positions
                
                $
                (287,007
                )
                
                $
                (812,470
                )
                
                $
                38,128
                
                
                $
                584,245Change
      in unrealized gain (loss) on open positions
                
                
                959,435
                
                
                
                102,371
                
                
                
                (549,302
                )
                
                
                (138,104
                )Dividend
      Income
                
                
                942
                
                
                
                3,034
                
                
                
                2,563
                
                
                
                9,559Interest
      income
                
                
                87
                
                
                
                154
                
                
                
                491
                
                
                
                468Other
      income
                
                
                -
                
                
                
                2,000
                
                
                
                3,000
                
                
                
                3,000Total
      income (loss)
                
                
                673,457
                
                
                
                (704,911
                )
                
                
                (505,120
                )
                
                
                459,168ExpensesProfessional
      fees
                
                
                30,270
                
                
                
                25,300
                
                
                
                158,970
                
                
                
                75,075General
      Partner management fees (Note 3)
                
                
                11,423
                
                
                
                16,247
                
                
                
                51,958
                
                
                
                32,798Brokerage
      commission fees
                
                
                1,685
                
                
                
                3,285
                
                
                
                7,923
                
                
                
                7,055Other
      expenses
                
                
                955
                
                
                
                807
                
                
                
                5,630
                
                
                
                1,715Total
      expenses
                
                
                44,333
                
                
                
                45,639
                
                
                
                224,481
                
                
                
                116,643Expense
      waiver (Note 3)
                
                
                (27,414
                )
                
                
                (21,238
                )
                
                
                (145,980
                )
                
                
                (66,875
                )Net
      expenses
                
                
                16,919
                
                
                
                24,401
                
                
                
                78,501
                
                
                
                49,768Net
      income (loss)
                
                $
                656,538
                
                
                $
                (729,312
                )
                
                $
                (583,621
                )
                
                $
                409,400Net
      income (loss) per limited partnership unit
                
                $
                2.19
                
                
                $
                4.22
                
                
                $
                (0.31
                )
                
                $
                3.05Net
      income (loss) per weighted average limitedpartnership
      unit
                
                $
                2.19
                
                
                $
                (1.69
                )
                
                $
                (1.32
                )
                
                $
                1.31Weighted
      average limited partnership unitsoutstanding
                
                
                300,000
                
                
                
                431,522
                
                
                
                440,659
                
                
                
                311,722





See
accompanying notes to condensed financial statements.


4





United
States Heating Oil Fund, LP


Condensed
Statement of Changes in Partners’ Capital (Unaudited)


For
the nine months ended September 30, 2010





General
      Partner
                
                
                Limited
      Partners
                
                
                TotalBalances,
      at December 31, 2009
                
                $
                -
                
                
                $
                16,525,095
                
                
                $
                16,525,095Redemption
      of 300,000 partnership units
                
                
                -
                
                
                
                (7,771,832
                )
                
                
                (7,771,832
                )Net
      loss
                
                
                -
                
                
                
                (583,621
                )
                
                
                (583,621
                )Balances,
      at September 30, 2010
                
                $
                -
                
                
                $
                8,169,642
                
                
                $
                8,169,642Net
      Asset Value Per Unit:At
      December 31, 2009
                
                $
                27.54At
      September 30, 2010
                
                $
                27.23





See
accompanying notes to condensed financial statements.





5




United
States Heating Oil Fund, LP


Condensed
Statements of Cash Flows (Unaudited)


For
the nine months ended September 30, 2010 and 2009





Nine
      months ended
                      
                      
                      Nine
      months endedSeptember
      30, 2010
                      
                      
                      September
      30, 2009Cash
      Flows from Operating Activities:Net
      income (loss)
                      
                      $
                      (583,621
                      )
                      
                      $
                      409,400Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:(Increase)
      decrease in commodity futures trading account - cash
                      
                      
                      785,170
                      
                      
                      
                      (948,120
                      )Unrealized
      loss on futures contracts
                      
                      
                      549,302
                      
                      
                      
                      138,104Decrease
      in receivable from General Partner
                      
                      
                      65,547
                      
                      
                      
                      20,823(Increase)
      decrease in dividend receivable
                      
                      
                      400
                      
                      
                      
                      (196
                      )Increase
      in other assets
                      
                      
                      (57,519
                      )
                      
                      
                      (66
                      )Increase
      (decrease) in professional fees payable
                      
                      
                      (66,780
                      )
                      
                      
                      75,075Increase
      (decrease) in General Partner management fees payable
                      
                      
                      (4,248
                      )
                      
                      
                      5,621Increase
      (decrease) in brokerage commission fees payable
                      
                      
                      (375
                      )
                      
                      
                      430Decrease
      in other liabilities
                      
                      
                      (472
                      )
                      
                      
                      (100,625
                      )Net
      cash provided by (used in) operating activities
                      
                      
                      687,404
                      
                      
                      
                      (399,554
                      )Cash
      Flows from Financing Activities:Addition
      of partnership units
                      
                      
                      -
                      
                      
                      
                      10,194,128Redemption
      of partnership units
                      
                      
                      (7,771,832
                      )
                      
                      
                      -Net
      cash provided by (used in) financing activities
                      
                      
                      (7,771,832
                      )
                      
                      
                      10,194,128Net
      Increase (Decrease) in Cash and Cash Equivalents
                      
                      
                      (7,084,428
                      )
                      
                      
                      9,794,574Cash and Cash
      Equivalents, beginning of period
                      
                      
                      13,521,796
                      
                      
                      
                      2,930,413Cash and Cash
      Equivalents, end of period
                      
                      $
                      6,437,368
                      
                      
                      $
                      12,724,987





See
accompanying notes to condensed financial statements.


6


United
States Heating Oil Fund, LP


Notes
to Condensed Financial Statements


For
the period ended September 30, 2010 (Unaudited)




NOTE 1 - ORGANIZATION AND
BUSINESS





The
United States Heating Oil Fund, LP (“USHO”) was organized as a limited
partnership under the laws of the state of Delaware on April 13, 2007. USHO is a
commodity pool that issues limited partnership units (“units”) that may be
purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). Prior to November
25, 2008, USHO’s units traded on the American Stock Exchange (the “AMEX”). USHO
will continue in perpetuity, unless terminated sooner upon the occurrence of one
or more events as described in its Amended and Restated Agreement of
Limited Partnership dated as of March 7, 2008 (the “LP Agreement”). The
investment objective of USHO is for the changes in percentage terms of its
units’ net asset value to reflect the changes in percentage terms of the spot
price of heating oil (also known as No. 2 fuel oil) for delivery to the New York
harbor as measured by the changes in the price of the futures contract for
heating oil traded on the New York Mercantile Exchange (the “NYMEX”) that is the
near month contract to expire, except when the near month contract is within two
weeks of expiration, in which case the futures contract will be the next month
contract to expire, less USHO’s expenses. USHO accomplishes its objective
through investments in futures contracts for heating oil, crude oil, gasoline,
natural gas and other petroleum-based fuels that are traded on the NYMEX, ICE
Futures or other U.S. and foreign exchanges (collectively, “Futures Contracts”)
and other heating oil-related investments such as cash-settled options on
Futures Contracts, forward contracts for heating oil, cleared swap contracts and
over-the-counter transactions that are based on the price of heating oil, crude
oil and other petroleum-based fuels, Futures Contracts and indices based on the
foregoing (collectively, “Other Heating Oil-Related Investments”). As of
September 30, 2010, USHO held 86 Futures Contracts for heating oil traded on the
NYMEX.





USHO
commenced investment operations on April 9, 2008 and has a fiscal year ending on
December 31. United States Commodity Funds LLC (the “General Partner”)
is responsible for the management of USHO. The General Partner is a member
of the National Futures Association (the “NFA”) and became a commodity pool
operator registered with the Commodity Futures Trading Commission (the “CFTC”)
effective December 1, 2005. The General Partner is also the general partner
of the United States Oil Fund, LP (“USOF”), the United States Natural Gas
Fund, LP (“USNG”), the United States 12 Month Oil Fund, LP (“US12OF”) and the
United States Gasoline Fund, LP (“UGA”), which listed their limited partnership
units on the AMEX under the ticker symbols “USO” on April 10, 2006, “UNG”
on April 18, 2007, “USL” on December 6, 2007 and “UGA” on February 26, 2008,
respectively. As a result of the acquisition of the AMEX by NYSE Euronext, each
of USOF’s, USNG’s, US12OF’s and UGA’s units commenced trading on the NYSE Arca
on November 25, 2008.  The General Partner is also the general partner
of the United States Short Oil Fund, LP (“USSO”), the United States 12 Month
Natural Gas Fund, LP (“US12NG”) and the United States Brent Oil Fund, LP
(“USBO”), which listed their limited partnership units on the NYSE Arca under
the ticker symbols “DNO” on September 24, 2009, “UNL” on November 18, 2009 and
“BNO” on June 2, 2010, respectively.  The General Partner is also the
sponsor of the United States Commodity Index Fund (“USCI”) which listed its
units on the NYSE Arca under the ticker symbol “USCI” on August 10,
2010.




The
accompanying unaudited condensed financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X promulgated by the U.S.
Securities and Exchange Commission (the “SEC”) and, therefore, do not include
all information and footnote disclosure required under accounting principles
generally accepted in the United States of America (“GAAP”). The financial
information included herein is unaudited; however, such financial
information reflects all adjustments which are, in the opinion of management,
necessary for the fair presentation of the condensed financial statements for
the interim period.




USHO issues
units to certain authorized purchasers (“Authorized Purchasers”) by offering
baskets consisting of 100,000 units (“Creation Baskets”) through ALPS
Distributors, Inc., as the marketing agent (the “Marketing Agent”). The purchase
price for a Creation Basket is based upon the net asset value of a unit
calculated shortly after the close of the core trading session on the NYSE Arca
on the day the order to create the basket is properly received. In
addition, Authorized Purchasers pay USHO a $1,000 fee for each order placed
to create one or more Creation Baskets or to redeem one or more baskets
consisting of 100,000 units (“Redemption Baskets”). Units may be purchased
or sold on a nationally recognized securities exchange in smaller increments
than a Creation Basket or Redemption Basket. Units purchased or sold on a
nationally recognized securities exchange are not purchased or sold at the net
asset value of USHO but rather at market prices quoted on such
exchange.


7





In April
2008, USHO initially registered 10,000,000 units on Form S-1 with the
SEC.  On April 9, 2008, USHO listed its units on the AMEX under the
ticker symbol “UHN”. On that day, USHO established its initial net asset value
by setting the price at $50.00 per unit and issued 200,000 units in exchange for
$10,001,000. USHO also commenced investment operations on April 9, 2008, by
purchasing Futures Contracts traded on the NYMEX based on heating
oil.  As of September 30, 2010, USHO had registered a total of
60,000,000 units.





NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Revenue
Recognition





Commodity
futures contracts, forward contracts, physical commodities, and related options
are recorded on the trade date. All such transactions are recorded on the
identified cost basis and marked to market daily. Unrealized gains or losses on
open contracts are reflected in the condensed statement of financial
condition and represent the difference between the original contract amount and
the market value (as determined by exchange settlement prices for futures
contracts and related options and cash dealer prices at a predetermined time for
forward contracts, physical commodities, and their related options) as of the
last business day of the year or as of the last date of the condensed
financial statements. Changes in the unrealized gains or losses between periods
are reflected in the condensed statement of operations. USHO earns interest
on its assets denominated in U.S. dollars on deposit with the futures commission
merchant at the 90-day Treasury bill rate. In addition, USHO earns income
on funds held at the custodian at prevailing market rates earned on such
investments.





Brokerage
Commissions





Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.




Income
Taxes





USHO is
not subject to federal income taxes; each partner reports his/her allocable
share of income, gain, loss deductions or credits on his/her own income tax
return.




In
accordance with GAAP, USHO is required to determine whether a tax position is
more likely than not to be sustained upon examination by the applicable taxing
authority, including resolution of any tax related appeals or litigation
processes, based on the technical merits of the position.  USHO files
an income tax return in the U.S. federal jurisdiction, and may file income tax
returns in various U.S. states.  USHO is not subject to income tax
return examinations by major taxing authorities for years before 2007 (year of
inception).  The tax benefit recognized is measured as the largest
amount of benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement.  De-recognition of a tax benefit
previously recognized results in USHO recording a tax liability that reduces net
assets.  However, USHO’s conclusions regarding this policy may be
subject to review and adjustment at a later date based on factors including, but
not limited to, on-going analyses of and changes to tax laws, regulations and
interpretations thereof.  USHO recognizes interest accrued related to
unrecognized tax benefits and penalties related to unrecognized tax benefits in
income tax fees payable, if assessed.  No interest expense or
penalties have been recognized as of and for the period ended September 30,
2010.





Creations
and Redemptions





Authorized
Purchasers may purchase Creation Baskets or redeem Redemption Baskets only in
blocks of 100,000 units at a price equal to the net asset value of the units
calculated shortly after the close of the core trading session on the NYSE Arca
on the day the order is placed.




USHO
receives or pays the proceeds from units sold or redeemed within three business
days after the trade date of the purchase or redemption. The amounts due from
Authorized Purchasers are reflected in USHO’s condensed statement of
financial condition as receivable for units sold, and amounts payable to
Authorized Purchasers upon redemption are reflected as payable for units
redeemed.


8





Partnership
Capital and Allocation of Partnership Income and Losses





Profit or
loss shall be allocated among the partners of USHO in proportion to the number
of units each partner holds as of the close of each month. The General Partner
may revise, alter or otherwise modify this method of allocation as described in
the LP Agreement.





Calculation
of Net Asset Value





USHO’s
net asset value is calculated on each NYSE Arca trading day by taking the
current market value of its total assets, subtracting any liabilities and
dividing the amount by the total number of units issued and outstanding. USHO
uses the closing price for the contracts on the relevant exchange on that day to
determine the value of contracts held on such exchange.





Net
Income (Loss) per Unit





Net
income (loss) per unit is the difference between the net asset value per
unit at the beginning of each period and at the end of each period. The
weighted average number of units outstanding was computed for purposes of
disclosing net income (loss) per weighted average unit. The weighted average
units are equal to the number of units outstanding at the end of the period,
adjusted proportionately for units redeemed based on the amount of time the
units were outstanding during such period. There were no units held by the
General Partner at September 30, 2010.





Offering
Costs





Offering
costs incurred in connection with the registration of additional units after the
initial registration of units are borne by USHO. These costs include
registration fees paid to regulatory agencies and all legal, accounting,
printing and other expenses associated with such offerings. These costs are
accounted for as a deferred charge and thereafter amortized to expense over
twelve months on a straight-line basis or a shorter period if
warranted.





Cash
Equivalents





Cash
equivalents include money market funds and overnight deposits or time deposits
with original maturity dates of three months or less.





Reclassification





Certain
amounts in the accompanying condensed financial statements were reclassified to
conform with the current presentation.





Use
of Estimates





The
preparation of condensed financial statements in conformity with GAAP
requires USHO’s management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the condensed financial statements, and the
reported amounts of the revenue and expenses during the reporting period. Actual
results may differ from those estimates and assumptions.




NOTE 3
- FEES PAID BY THE FUND AND RELATED PARTY TRANSACTIONS





General
Partner Management Fee





Under
the LP Agreement, the General Partner is responsible for investing the
assets of USHO in accordance with the objectives and policies of USHO. In
addition, the General Partner has arranged for one or more third parties to
provide administrative, custody, accounting, transfer agency and other necessary
services to USHO. For these services, USHO is contractually obligated to pay the
General Partner a fee, which is paid monthly, equal to 0.60% per annum of
average daily net assets.


9


Ongoing
Registration Fees and Other Offering Expenses





USHO pays
all costs and expenses associated with the ongoing registration of its units
subsequent to the initial offering. These costs include registration or other
fees paid to regulatory agencies in connection with the offer and sale of units,
and all legal, accounting, printing and other expenses associated with such
offer and sale.For
the nine months ended September 30, 2010 and 2009, USHO incurred $1,203 and $0,
respectively, in registration fees and other offering expenses.




Directors’
Fees and Expenses




USHO is
responsible for paying its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members. These fees and expenses for the calendar year 2010 are
estimated to be a total of $1,178,870 for all funds.  Effective as of
April 1, 2010, USHO is responsible for paying its portion of any payments that
may become due tothe
independent directorspursuant to thedeferred compensationagreements entered into
between the independent directors, the General Partner and each of the
affiliated funds.  USHO shares all director fees and expenses,
including any that may become due pursuant to the deferred compensation
agreements, with USOF, USNG, US12OF, UGA, USSO, US12NG and USBO, based on the
relative assets of each fund, computed on a daily basis.





Licensing
Fees




As
discussed in Note 4 below, USHO entered into a licensing agreement with the
NYMEX on May 30, 2007. Pursuant to the agreement, USHO and the affiliated funds
managed by the General Partner, other than USBO and USCI, pay a licensing fee
that is equal to 0.04% for the first $1,000,000,000 of combined assets of
the funds and 0.02% for combined assets above $1,000,000,000. During the nine
months ended September 30, 2010 and 2009, USHO incurred $2,049 and $1,304
respectively, under this arrangement.





Investor
Tax Reporting Cost





The fees
and expenses associated with USHO’s audit expenses
and tax accounting and reporting requirements are paid by USHO.  These costs are
estimated to be $150,000 for the calendar year 2010.




Other
Expenses and Fees and Expense Waivers





In
addition to the fees described above, USHO pays all brokerage fees and other
expenses in connection with the operation of USHO, excluding costs and expenses
paid by the General Partner as outlined in Note 4 below. The General Partner,
though under no obligation to do so, agreed to pay certain expenses, to the
extent that such expenses exceed 0.15% (15 basis points) of USHO’s NAV, on an
annualized basis, through at least December 31, 2010.  The General
Partner has no obligation to continue such payments into subsequent
periods.





NOTE
4 - CONTRACTS AND AGREEMENTS





USHO is
party to a marketing agent agreement, dated as of March 10, 2008, as
amended from time to time, with the Marketing Agent and the General
Partner, whereby the Marketing Agent provides certain marketing services for
USHO as outlined in the agreement. The fee of the Marketing Agent, which is
borne by the General Partner, is equal to 0.06% on USHO’s assets up to $3
billion and 0.04% on USHO’s assets in excess of $3 billion.





The above
fee does not include the following expenses, which are also borne by the General
Partner: the cost of placing advertisements in various periodicals; web
construction and development; or the printing and production of various
marketing materials.





USHO is
also party to a custodian agreement, dated March 13, 2008, as amended from time
to time, with Brown Brothers Harriman & Co. (“BBH&Co.”) and the General
Partner, whereby BBH&Co. holds investments on behalf of USHO. The General
Partner pays the fees of the custodian, which are determined by the parties
from time to time. In addition, USHO is party to an administrative agency
agreement, dated February 7, 2008, as amended from time to time, with the
General Partner and BBH&Co., whereby BBH&Co. acts as the administrative
agent, transfer agent and registrar for USHO. The General Partner also pays
the fees of BBH&Co. for its services under such agreement and such fees are
determined by the parties from time to time.


10





Currently,
the General Partner pays BBH&Co. for its services, in the foregoing
capacities, a minimum amount of $75,000 annually for its custody, fund
accounting and fund administration services rendered to USHO and each of the
affiliated funds managed by the General Partner, as well as a $20,000 annual fee
for its transfer agency services. In addition, the General Partner pays
BBH&Co. an asset-based charge of (a) 0.06% for the first $500 million of
USHO’s, USOF’s, USNG’s, US12OF’s, UGA’s, USSO’s, US12NG’s, USBO’s and USCI’s
combined net assets, (b) 0.0465% for USHO’s, USOF’s, USNG’s, US12OF’s, UGA’s,
USSO’s, US12NG’s, USBO’s and USCI’s combined net assets greater than $500
million but less than $1 billion, and (c) 0.035% once USHO’s, USOF’s, USNG’s,
US12OF’s, UGA’s, USSO’s, US12NG’s, USBO’s and USCI’s combined net assets exceed
$1 billion. The annual minimum amount will not apply if the asset-based charge
for all accounts in the aggregate exceeds $75,000. The General Partner also pays
transaction fees ranging from $7.00 to $15.00 per transaction.





USHO has
entered into a brokerage agreement with UBS Securities LLC (“UBS Securities”).
The agreement requires UBS Securities to provide services to USHO in connection
with the purchase and sale of Futures Contracts and Other Heating
Oil-Related Investments that may be purchased and sold by or through UBS
Securities for USHO’s account. In accordance with the agreement, UBS Securities
charges USHO commissions of approximately $7 per round-turn trade, including
applicable exchange and NFA fees for Futures Contracts and options on
Futures Contracts.





On May
30, 2007, USHO and the NYMEX entered into a licensing agreement whereby USHO was
granted a non-exclusive license to use certain of the NYMEX’s settlement prices
and service marks. Under the licensing agreement, USHO and the affiliated
funds managed by the General Partner, other than USBO and USCI, pay the NYMEX an
asset-based fee for the license, the terms of which are described in Note
3.





USHO
expressly disclaims any association with the NYMEX or endorsement of USHO by the
NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are
registered trademarks of the NYMEX.





NOTE
5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND
CONTINGENCIES





USHO engages
in the trading of futures contracts and options on futures contracts
(collectively, “derivatives”). USHO is exposed to both market risk, which is the
risk arising from changes in the market value of the contracts, and credit risk,
which is the risk of failure by another party to perform according to the terms
of a contract.





USHO may
enter into futures contracts and options on futures contracts to gain exposure
to changes in the value of an underlying commodity. A futures contract obligates
the seller to deliver (and the purchaser to accept) the future delivery of a
specified quantity and type of a commodity at a specified time and
place.  Some futures contracts may call for physical delivery of the
asset, while others are settled in cash.  The contractual obligations
of a buyer or seller may generally be satisfied by taking or making physical
delivery of the underlying commodity or by making an offsetting sale or purchase
of an identical futures contract on the same or linked exchange before the
designated date of delivery.





The
purchase and sale of futures contracts and options on futures contracts require
margin deposits with a futures commission merchant. Additional deposits may be
necessary for any loss on contract value. The Commodity Exchange Act requires a
futures commission merchant to segregate all customer transactions and assets
from the futures commission merchant’s proprietary activities.





Futures
contracts involve, to varying degrees, elements of market risk (specifically
commodity price risk) and exposure to loss in excess of the amount of variation
margin. The face or contract amounts reflect the extent of the total exposure
USHO has in the particular classes of instruments. Additional risks associated
with the use of futures contracts are an imperfect correlation between movements
in the price of the futures contracts and the market value of the underlying
securities and the possibility of an illiquid market for a futures
contract.


11


Through
September 30, 2010, all of the futures contracts held by USHO were
exchange-traded. The risks associated with exchange-traded contracts are
generally perceived to be less than those associated with over-the-counter
transactions since, in over-the-counter transactions, a party must rely solely
on the credit of its respective individual counterparties. However, in the
future, if USHO were to enter into non-exchange traded contracts, it would
be subject to the credit risk associated with counterparty non-performance. The
credit risk from counterparty non-performance associated with such instruments
is the net unrealized gain, if any, on the transaction. USHO has credit risk
under its futures contracts since the sole counterparty to all domestic and
foreign futures contracts is the clearinghouse for the exchange on which
the relevant contracts are traded. In addition, USHO bears the risk of financial
failure by the clearing broker.





USHO’s
cash and other property, such as U.S. Treasuries, deposited with a futures
commission merchant are considered commingled with all other customer funds,
subject to the futures commission merchant’s segregation requirements. In the
event of a futures commission merchant’s insolvency, recovery may be limited to
a pro rata share of segregated funds available. It is possible that the
recovered amount could be less than the total of cash and other property
deposited. The insolvency of a futures commission merchant could result in the
complete loss of USHO’s assets posted with that futures commission merchant;
however, the vast majority of USHO’s assets are held in U.S. Treasuries, cash
and/or cash equivalents with USHO’s custodian and would not be impacted by the
insolvency of a futures commission merchant. Also, the failure or insolvency of
USHO’s custodian could result in a substantial loss of USHO’s
assets.





The
General Partner invests a portion of USHO’s cash in money market funds that
seek to maintain a stable net asset value. USHO is exposed to any risk of loss
associated with an investment in these money market funds. As of September 30,
2010 and December 31, 2009, USHO had deposits in domestic and foreign financial
institutions,including
cash investments in money market funds, in the amounts of $7,408,925 and
$15,278,523, respectively. This amount is subject to loss should these
institutions cease operations.





For
derivatives, risks arise from changes in the market value of the contracts.
Theoretically, USHO is exposed to market risk equal to the value of
futures contracts purchased and unlimited liability on such contracts sold
short. As both a buyer and a seller of options, USHO pays or receives a
premium at the outset and then bears the risk of unfavorable changes in the
price of the contract underlying the option.





USHO’s
policy is to continuously monitor its exposure to market and counterparty risk
through the use of a variety of financial, position and credit exposure
reporting controls and procedures. In addition, USHO has a policy of
requiring review of the credit standing of each broker or counterparty with
which it conducts business.





The
financial instruments held by USHO are reported in its condensed
statement of financial condition at market or fair value, or at carrying amounts
that approximate fair value, because of their highly liquid nature and
short-term maturity.




NOTE 6
– FAIR VALUE OF FINANCIAL INSTRUMENTS




USHO
values its investments in accordance with Accounting Standards Codification 820
– Fair Value Measurements and Disclosures (“ASC 820”).  ASC 820
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurement. The changes to past practice resulting from the application
of ASC 820 relate to the definition of fair value, the methods used to measure
fair value, and the expanded disclosures about fair value measurement. ASC 820
establishes a fair value hierarchy that distinguishes between (1) market
participant assumptions developed based on market data obtained from sources
independent of USHO (observable inputs) and (2) USHO’s own assumptions about
market participant assumptions developed based on the best information available
under the circumstances (unobservable inputs). The three levels defined by the
ASC 820 hierarchy are as follows:




Level I –
Quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date.




Level II
– Inputs other than quoted prices included within Level I that are observable
for the asset or liability, either directly or indirectly.  Level II
assets include the following: quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability, and inputs that are derived principally
from or corroborated by observable market data by correlation or other means
(market-corroborated inputs).


12




Level III
– Unobservable pricing input at the measurement date for the asset or
liability.  Unobservable inputs shall be used to measure fair value to
the extent that observable inputs are not available.




In some
instances, the inputs used to measure fair value might fall within different
levels of the fair value hierarchy.  The level in the fair value
hierarchy within which the fair value measurement in its entirety falls shall be
determined based on the lowest input level that is significant to the fair value
measurement in its entirety.




The
following table summarizes the valuation of USHO’s securities at December 31,
2009 using the fair value hierarchy:




At December
      31, 2009
                
                Total
                
                
                Level
      I
                
                
                Level
      II
                
                
                Level
      IIIShort-Term
      Investments
                
                $
                11,797,709
                
                
                $
                11,797,709
                
                
                $
                -
                
                
                $
                -Exchange-Traded
      Futures ContractsUnited
      States Contracts
                
                
                1,088,212
                
                
                
                1,088,212
                
                
                
                -
                
                
                
                -





During
the year ended December 31, 2009, there were no significant transfers between
Level I and Level II.




The
following table summarizes the valuation of USHO’s securities at September 30,
2010 using the fair value hierarchy:




At September
      30, 2010
                
                Total
                
                
                Level
      I
                
                
                Level
      II
                
                
                Level
      IIIShort-Term
      Investments
                
                $
                5,306,148
                
                
                $
                5,306,148
                
                
                $
                -
                
                
                $
                -Exchange-Traded
      Futures ContractsUnited
      States Contracts
                
                
                538,910
                
                
                
                538,910
                
                
                
                -
                
                
                
                -





During
the nine months ended September 30, 2010, there were no significant transfers
between Level I and Level II.





Effective
January 1, 2009, USHO adopted the provisions of Accounting Standards
Codification 815 —Derivatives and Hedging, which require presentation of
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts and gains and losses on
derivatives.





Fair
Value of Derivative Instruments




Derivatives notAccounted for as
                                                
                                                Statement of Financial
                                                
                                                Fair Value
                                                
                                                
                                                Fair ValueHedging Instruments
                                                
                                                Condition Location
                                                
                                                At September 30,2010
                                                
                                                
                                                At December 31,2009Futures -Commodity
      Contracts
                                                
                                                Assets
                                                
                                                $
                                                538,910
                                                
                                                
                                                $
                                                1,088,212




The
Effect of Derivative Instruments on the Statements of
Operations





For
      the nine months ended
                              
                              
                              For
      the nine months endedSeptember
      30, 2010
                              
                              
                              September
      30, 2009Location
      of
                              
                              Realized
                              
                              
                              Change
      in
                              
                              
                              Realized
                              
                              
                              Change
      inDerivatives
      not
                              
                              Gain
      or (Loss)
                              
                              Gain
      or (Loss)
                              
                              
                              Unrealized
                              
                              
                              Gain
      or (Loss)
                              
                              
                              UnrealizedAccounted
      for as
                              
                              on
      Derivatives
                              
                              on
      Derivatives
                              
                              
                              Gain
      or (Loss)
                              
                              
                              on
      Derivatives
                              
                              
                              Gain
      or (Loss)Hedging
                              
                              Recognized
                              
                              Recognized
                              
                              
                              Recognized
                              
                              
                              Recognized
                              
                              
                              RecognizedInstruments
                              
                              in
      Income
                              
                              in
      Income
                              
                              
                              in
      Income
                              
                              
                              in
      Income
                              
                              
                              in
      IncomeFutures
      -
                              
                              Realized
      gain (loss) on
                              
                              $
                              38,128
                              
                              
                              
                              
                              
                              
                              $
                              584,245Commodity
                              
                              closed
      positionsContractsChange
      in unrealized
                              
                              
                              
                              
                              
                              $
                              (549,302)
                              
                              
                              
                              
                              
                              
                              $
                              (138,104)gain
      (loss) on openpositions


13





NOTE
7 - FINANCIAL HIGHLIGHTS





The
following table presents per unit performance data and other supplemental
financial data for the nine months ended September 30, 2010 and 2009 for the
unitholders. This information has been derived from information presented in the
condensed financial statements.


For
      the nine months
                                                            ended
                                                          
                                                          
                                                          For
      the nine months
                                                            endedSeptember
      30, 2010
                                                          
                                                          
                                                          September
      30, 2009(Unaudited)
                                                          
                                                          
                                                          (Unaudited)Per Unit Operating
    Performance:Net
      asset value, beginning of period
                                                          
                                                          $
                                                          27.54
                                                          
                                                          
                                                          $
                                                          21.94Total
      income (loss)
                                                          
                                                          
                                                          (0.13
                                                          )
                                                          
                                                          
                                                          3.21Net
      expenses
                                                          
                                                          
                                                          (0.18
                                                          )
                                                          
                                                          
                                                          (0.16
                                                          )Net
      increase (decrease) in net asset value
                                                          
                                                          
                                                          (0.31
                                                          )
                                                          
                                                          
                                                          3.05Net
      asset value, end of period
                                                          
                                                          $
                                                          27.23
                                                          
                                                          
                                                          $
                                                          24.99Total
      Return
                                                          
                                                          
                                                          (1.13
                                                          )%
                                                          
                                                          
                                                          13.90
                                                          %Ratios
      to Average Net AssetsTotal
      income (loss)
                                                          
                                                          
                                                          (4.36
                                                          )%
                                                          
                                                          
                                                          6.28
                                                          %Management
      fees*
                                                          
                                                          
                                                          0.60
                                                          %
                                                          
                                                          
                                                          0.60
                                                          %Total
      expenses excluding management fees*
                                                          
                                                          
                                                          1.99
                                                          %
                                                          
                                                          
                                                          1.53
                                                          %Expenses
      waived*
                                                          
                                                          
                                                          (1.68
                                                          )%
                                                          
                                                          
                                                          (1.22
                                                          )%Net
      expenses excluding management fees*
                                                          
                                                          
                                                          0.31
                                                          %
                                                          
                                                          
                                                          0.31
                                                          %Net
      income (loss)
                                                          
                                                          
                                                          (5.04
                                                          )%
                                                          
                                                          
                                                          5.60
                                                          %
 
 *Annualized





Total
returns are calculated based on the change in value during the period. An
individual unitholder’s total return and ratio may vary from the above total
returns and ratios based on the timing of contributions to and withdrawals from
USHO.




NOTE 8 – RECENT
ACCOUNTING PRONOUNCEMENTS





In
January 2010, the Financial Accounting Standards Board issued Accounting
Standards Update (“ASU”)No. 2010-06 “Improving
Disclosures about Fair Value Measurements.” ASU No. 2010-06 clarifies existing
disclosure andrequires additional
disclosures regarding fair value measurements. Effective for fiscal years
beginningafter
December 15, 2010, and for interim periods within those fiscal years, entities
will need to disclose informationabout purchases, sales,
issuances and settlements of Level 3 securities on a gross basis, rather than as
a net number ascurrently required. The
implementation of ASU No. 2010-06 is not expected to have a material impact on
USHO’s financial statementdisclosures.


14





NOTE 9 – SUBSEQUENT
EVENTS





USHO has
performed an evaluation of subsequent events through the date the financial
statements were issued. This evaluation did not result in any subsequent events
that necessitated disclosures and/or adjustments.


15


Item 2.  Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.




The
following discussion should be read in conjunction with the condensed financial
statements and the notes thereto of the United States Heating Oil Fund, LP
(“USHO”) included elsewhere in this quarterly report on Form 10-Q.




Forward-Looking
Information




This
quarterly report on Form 10-Q, including this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements regarding the plans and objectives of management for
future operations. This information may involve known and unknown risks,
uncertainties and other factors that may cause USHO’s actual results,
performance or achievements to be materially different from future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and
describe USHO’s future plans, strategies and expectations, are generally
identifiable by use of the words “may,” “will,” “should,” “expect,”
“anticipate,” “estimate,” “believe,” “intend” or “project,” the negative of
these words, other variations on these words or comparable terminology. These
forward-looking statements are based on assumptions that may be incorrect, and
USHO cannot assure investors that the projections included in these
forward-looking statements will come to pass. USHO’s actual results could
differ materially from those expressed or implied by the forward-looking
statements as a result of various factors.




USHO has
based the forward-looking statements included in this quarterly report on Form
10-Q on information available to it on the date of this quarterly report on
Form 10-Q, and USHO assumes no obligation to update any such
forward-looking statements. Although USHO undertakes no obligation to revise or
update any forward-looking statements, whether as a result of new information,
future events or otherwise, investors are advised to consult any additional
disclosures that USHO may make directly to them or through reports that
USHO in the future files with the U.S. Securities and Exchange Commission
(the “SEC”), including annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K.





Introduction





USHO, a
Delaware limited partnership, is a commodity pool that issues units that
may be purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). The
investment objective of USHO is for the changes in percentage terms of its
units’ net asset value (“NAV”) to reflect the changes in percentage terms of the
spot price of heating oil (also known as No. 2 fuel oil), for delivery to the
New York harbor, as measured by the changes in the price of the futures contract
for heating oil traded on the New York Mercantile Exchange (the “NYMEX”) that is
the near month contract to expire, except when the near month contract is within
two weeks of expiration, in which case it will be measured by the futures
contract that is the next month contract to expire (the “Benchmark Futures
Contract”), less USHO’s expenses.





USHO
invests in futures contracts for heating oil, crude oil, gasoline, natural gas
and other petroleum-based fuels that are traded on the NYMEX, ICE Futures or
other U.S. and foreign exchanges (collectively, “Futures Contracts”) and other
heating oil-related investments such as cash-settled options on Futures
Contracts, forward contracts for heating oil, cleared swap contracts and
over-the-counter transactions that are based on the price of heating oil, crude
oil and other petroleum-based fuels, Futures Contracts and indices based on the
foregoing (collectively, “Other Heating Oil-Related Investments”). For
convenience and unless otherwise specified, Futures Contracts and Other Heating
Oil-Related Investments collectively are referred to as “Heating Oil Interests”
in this quarterly report on Form 10-Q.





USHO
seeks to achieve its investment objective by investing in a combination of
Futures Contracts and Other Heating Oil-Related Investments such that daily
changes in its NAV, measured in percentage terms, will closely track the
daily changes in the price of the Benchmark Futures Contract, also measured
in percentage terms. USHO’s general partner believes the daily changes in the
price of the Benchmark Futures Contracts have historically exhibited a
close correlation with the daily changes in the spot price of heating oil. It is
not the intent of USHO to be operated in a fashion such that the NAV will equal,
in dollar terms, the spot price of heating oil or any particular futures
contract based on heating oil.  Management believes that it is not
practical to manage the portfolio to achieve such an investment goal when
investing in Futures Contracts and Other Heating Oil-Related
Investments.


16





On any
valuation day, the Benchmark Futures Contract is the near
month futures contract for heating oil traded on the NYMEX unless the
near month contract is within two weeks of expiration, in which case the
Benchmark Futures Contract is the next month contract for heating oil
traded on the NYMEX. “Near month contract” means the next contract traded on the
NYMEX due to expire. “Next month contract” means the first contract traded on
the NYMEX due to expire after the near month contract.





The
regulation of commodity interests in the United States is a rapidly changing
area of law and is subject to ongoing modification by governmental and judicial
action.  On July 21, 2010, a broad financial regulatory reform bill,
“The Dodd-Frank Wall Street Reform and Consumer Protection Act,” was signed into
law. The legislation includes provisions altering the regulation of
commodity interests.  Provisions in the new law include the
requirement that position limits on energy-based commodity futures contracts be
established; new registration, recordkeeping, capital and margin requirements
for “swap dealers” and “major swap participants” as determined by the new law
and applicable regulations; and the forced use of clearinghouse mechanisms for
most over-the-counter transactions. Additionally, the new law requires the
aggregation, for purposes of position limits, of all positions in energy futures
held by a single entity and its affiliates, whether such positions exist on U.S.
futures exchanges, non-U.S. futures exchanges, or in over-the-counter contracts.
The U.S. Commodity Futures Trading Commission (the “CFTC”), along with the SEC
and other federal regulators, has been tasked with developing the rules and
regulations enacting the provisions noted above.  The new law and the
rules to be promulgated may negatively impact USHO’s ability to meet its
investment objective either through limits or requirements imposed on it or upon
its counterparties.  In particular, new position limits imposed on
USHO or its counterparties may impact USHO’s ability to invest in a manner that
most efficiently meets its investment objective, and new requirements, including
capital and mandatory clearing, may increase the cost of USHO’s investments and
doing business, which could adversely affect USHO’s investors.





The
general partner of USHO, United States Commodity Funds LLC (the “General
Partner”), which is registered as a commodity pool operator (“CPO”) with
the CFTC, is authorized by the Amended and Restated Agreement of Limited
Partnership of USHO (the “LP Agreement”) to manage USHO. The General Partner is
authorized by USHO in its sole judgment to employ and establish the terms of
employment for, and termination of, commodity trading advisors or futures
commission merchants.





Price
Movements





Heating
oil futures prices were volatile during the nine months ended September 30, 2010
and exhibited moderate daily swings along with an uneven upward trend between
January and late April 2010, a brief downward trend in May 2010, followed by
another uneven upward trend from late May to late September 2010.  The
price of the Benchmark Futures Contract started the period at $2.1156 per
gallon. It hit a peak on May 3, 2010 with a price of $2.3451 per
gallon.  The low of the period was on February 5, 2010 when the price
dropped to $1.8748 per gallon. The period ended with the Benchmark Futures
Contract at $2.2678 per gallon, up approximately 7.19% over the
period.  USHO’s NAV began the period at $27.54 per unit and reached
its high for the period on May 3, 2010 at $29.65 per unit.  USHO’s NAV
reached its low for the period on May 25, 2010 at $23.64 per unit. USHO’s NAV on
September 30, 2010 was $27.23, down approximately 1.13% for the
period.  The Benchmark Futures Contract prices listed above began with
the February 2010 contract and ended with the November 2010 contract. The return
of approximately 7.19% on the Benchmark Futures Contract listed above is a
hypothetical return only and could not actually be achieved by an investor
holding Futures Contracts.  An investment in heating oil Futures
Contracts would need to be rolled forward during the time period described in
order to achieve such a result.  Furthermore, the change in the
nominal price of these differing heating oil Futures Contracts, measured from
the start of the period to the end of the period, does not represent the actual
benchmark results that USHO seeks to track, which are more fully described below
in the section titled “Tracking USHO’s Benchmark”.





During
the nine months ended September 30, 2010, the heating oil futures market was in
a state of contango, meaning that the price of the near month heating oil
Futures Contract was typically lower than the price of the next month heating
oil Futures Contract, or contracts further away from expiration.  A
backwardation market is one in which the price of the near month heating oil
Futures Contract is higher than the price of the next month heating oil Futures
Contract, or contracts further away from expiration. For a discussion of the
impact of backwardation and contango on total returns, see “Term Structure of
Heating Oil Futures Prices and the Impact on Total Returns.”


17





Valuation
of Futures Contracts and the Computation of the NAV





The NAV
of USHO units is calculated once each NYSE Arca trading day. The NAV for a
particular trading day is released after 4:00 p.m. New York time. Trading during
the core trading session on the NYSE Arca typically closes at 4:00 p.m. New York
time. USHO’s administrator uses the NYMEX closing price (determined at the
earlier of the close of the NYMEX or 2:30 p.m. New York time) for the
contracts held on the NYMEX, but calculates or determines the value of all other
USHO investments, including ICE Futures contracts or other
futures contracts, as of the earlier of the close of the NYSE Arca or
4:00 p.m. New York time.




Results
of Operations and the Heating Oil Market





Results of
Operations.On April 9, 2008, USHO listed its units on the American
Stock Exchange (the “AMEX”) under the ticker symbol “UHN.”  On that
day, USHO established its initial offering price at $50.00 per unit and issued
200,000 units to the initial authorized purchaser Merrill Lynch Professional
Clearing Corp., in exchange for $10,001,000 in cash. As a result of the
acquisition of the AMEX by NYSE Euronext, USHO’s units no longer trade on the
AMEX and commenced trading on the NYSE Arca on November 25, 2008.





Since its
initial offering of 10,000,000 units, USHO registered an additional 50,000,000
units with the SEC on April 30, 2010. As of September 30, 2010, USHO had issued
800,000 units, 300,000 of which were outstanding. As of September 30, 2010,
there were 59,200,000 units registered but not yet issued.




More
units may have been issued by USHO than are outstanding due to the redemption of
units.  Unlike funds that are registered under the Investment
Company Act of 1940, as amended, units that have been redeemed by USHO cannot be
resold by USHO. As a result, USHO contemplates that additional offerings of its
units will be registered with the SEC in the future in anticipation of
additional issuances and redemptions.





For the Nine Months Ended
September 30, 2010 Compared to the Nine Months Ended September 30,
2009





As of
September 30, 2010, the total unrealized gain on Futures Contracts owned or held
on that day was $538,910, and USHO established cash deposits, including cash
investments in money market funds, that were equal to $7,408,825. USHO held
86.89% of its cash assets in overnight deposits and money market funds at its
custodian bank, while 13.11% of the cash balance was held as margin deposits for
the Futures Contracts purchased.  The ending per unit NAV on September
30, 2010 was $27.23.





By
comparison, as of September 30, 2009, the total unrealized loss on Futures
Contracts owned or held on that day was $207,354 and USHO established cash
deposits, including cash investments in money market funds, that were equal to
$15,214,199. USHO held 83.64% of its cash assets in overnight deposits and
money market funds at its custodian bank, while 16.36% of the cash balance was
held as margin deposits for the Futures Contracts purchased. The ending per unit
NAV on September 30, 2009 was $24.99. The increase in the per unit NAV for
September 30, 2010 as compared to September 30, 2009 was primarily a result of
an increase in the value of the Benchmark Futures Contracts that USHO had
invested in between the period ended September 30, 2009 and the period ended
September 30, 2010.





Portfolio Expenses. USHO’s
expenses consist of investment management fees, brokerage
fees and commissions, certain offering costs, licensing fees, the fees and
expenses of the independent directors of the General Partner and expenses
relating to tax accounting and reporting requirements.  The management
fee that USHO pays to the General Partner is calculated as a percentage of the
total net assets of USHO. USHO pays the General Partner a management fee of
0.60% of its average net assets.  The fee is accrued daily and paid
monthly.





During
the nine months ended September 30, 2010, the daily average total net assets
of USHO were $11,578,025. The management fee incurred by USHO during
the period amounted to $51,958. By comparison, during the nine months ended
September 30, 2009, the daily average total net assets of USHO
were $7,308,505. The management fee paid by USHO during the period amounted
to $32,798.


18





In
addition to the management fee, USHO pays all brokerage fees and other
expenses, including certain tax reporting costs, licensing fees for the use of
intellectual property, ongoing registration or other fees paid to the
SEC, the Financial Industry Regulatory Authority (“FINRA”) and any
other regulatory agency in connection with offers and sales of its units
subsequent to the initial offering and all legal, accounting, printing and other
expenses associated therewith. The total of these fees and expenses for the
nine months ended September 30, 2010 was $172,523, as compared to $83,845 for
the nine months ended September 30, 2009. The increase in expenses for the nine
months ended September 30, 2010 as compared to the nine months ended September
30, 2009 was partially due to the relative size of USHO and activity that
resulted from its increased size, including increased licensing fees and
increased projected costs for certain tax reporting costs and auditing fees, the
majority of which were covered by the expense waiver described below.
USHO incurred $1,203 and $0 in fees and other expenses relating to the
registration and offering of additional units during the nine months ended
September 30, 2010 and 2009, respectively. During the nine months ended
September 30, 2010, an expense waiver was in effect which offset certain of the
expenses incurred by USHO.  The total amount of the expense waiver was
$145,980.  For the nine months ended September 30, 2010, the expenses
of USHO, including management fees, commissions, and all other expenses, before
allowance for the expense waiver, totaled $224,481, and after allowance for the
expense waiver, totaled $78,501.





USHO is
responsible for paying its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members.  USHO shares these fees and expenses with the
United States Oil Fund, LP (“USOF”), the United States Natural Gas Fund, LP
(“USNG”), the United States 12 Month Oil Fund, LP (“US12OF”), the United
States Gasoline Fund, LP (“UGA”), the United States Short Oil Fund, LP (“USSO”),
the United States 12 Month Natural Gas Fund, LP (“US12NG”) and the United States
Brent Oil Fund, LP (“USBO”), based on the relative assets of each fund computed
on a daily basis.  These fees and expenses for the calendar year 2010
are estimated to be a total of $1,178,870 for all funds. By comparison, for the
year ended December 31, 2009, these fees and expenses amounted to a total of
$433,046 for all funds, and USHO’s portion of such fees and expenses was $645.
Directors’ expenses are expected to increase in 2010 due to an increase in the
amount of directors’ and officers’ liability insurance coverage and the
incurrence of the independent directors’ deferred compensation
expense.  Effective as of March 3, 2009, the General Partner obtained
directors’ and officers’ liability insurance covering all of the directors and
officers of the General Partner. Previously, the General Partner did not have
liability insurance for its directors and officers; instead, the independent
directors received a payment in lieu of directors’ and officers’ liability
insurance coverage. Effective as of April 1, 2010, USHO is also responsible for
paying its portion of any payments that may become due tothe independent
directorspursuant to
thedeferred
compensationagreements entered into
between the independent directors, the General Partner and USHO, USOF, USNG,
US12OF, UGA, USSO, US12NG and USBO.





USHO also
incurs commissions to brokers for the purchase and sale of Futures Contracts,
Other Heating Oil-Related Investments or short-term obligations of the United
States of two years or less (“Treasuries”). During the nine months ended
September 30, 2010, total commissions paid to brokers amounted to $7,923. By
comparison, during the nine months ended September 30, 2009, total commissions
paid to brokers amounted to $7,055. The increase in the total commissions paid
to brokers for the nine months ended September 30, 2010 as compared to the nine
months ended September 30, 2009 was primarily a function of the increase in
USHO’s average total net assets during the nine months ended September 30, 2010.
The increase in average total net assets required USHO to purchase a greater
number of Futures Contracts and incur a larger amount of broker commissions. As
an annualized percentage of total net assets, the figure for the nine
months ended September 30, 2010 represents approximately 0.09% of total net
assets. By comparison, the figure for the nine months ended September 30, 2009
represented approximately 0.13% of total net assets. However, there can be no
assurance that commission costs and portfolio turnover will not cause commission
expenses to rise in future quarters.





The fees
and expenses associated with USHO’s audit expenses
and tax accounting and reporting requirements are paid by USHO.  These
costs are estimated to be $150,000 for the calendar year 2010. The General
Partner, though under no obligation to do so, agreed to pay certain expenses, to
the extent that such expenses exceed 0.15% (15 basis points) of USHO’s NAV, on
an annualized basis, through at least December 31, 2010.  The General
Partner has no obligation to continue such payments into subsequent
periods.


19





Dividend and Interest Income.
USHO seeks to invest its assets such that it holds Futures Contracts and Other
Heating Oil-Related Investments in an amount equal to the total net assets of
its portfolio. Typically, such investments do not require USHO to pay the full
amount of the contract value at the time of purchase, but rather require USHO to
post an amount as a margin deposit against the eventual settlement of the
contract. As a result, USHO retains an amount that is approximately equal to its
total net assets, which USHO invests in Treasuries, cash and/or cash
equivalents. This includes both the amount on deposit with the futures
commission merchant as margin, as well as unrestricted cash and cash equivalents
held with USHO’s custodian bank. The Treasuries, cash and/or cash
equivalents earn income that accrues on a daily basis. For the nine months
ended September 30, 2010, USHO earned $3,054 in dividend and interest income on
such cash and/or cash equivalents. Based on USHO’s average daily total net
assets, this was equivalent to an annualized yield of 0.04%. USHO did not
purchase Treasuries during the nine months ended September 30, 2010 and
held only cash and/or cash equivalents during this time period. By comparison,
for the nine months ended September 30, 2009, USHO earned $10,027 in dividend
and interest income on such cash and/or cash equivalents. Based on USHO’s
average daily total net assets, this was equivalent to an annualized yield of
0.18%. USHO did not purchase Treasuries during the nine months ended September
30, 2009 and held only cash and/or cash equivalents during this time period.
Interest rates on short-term investments, including cash, cash equivalents and
Treasuries, were lower during the nine months ended September 30, 2010 compared
to the nine months ended September 30, 2009. As a result, the amount of income
earned by USHO as a percentage of total net assets was lower during the nine
months ended September 30, 2010 compared to the nine months ended September 30,
2009.





For the Three Months Ended
September 30, 2010 Compared to the Three Months Ended September 30,
2009





Portfolio Expenses. During
the three months ended September 30, 2010, the daily average total net assets
of USHO were $7,553,379. The management fee incurred by USHO during
the period amounted to $11,423. By comparison, during the three months ended
September 30, 2009, the daily average total net assets of USHO
were $10,743,430. The management fee paid by USHO during the period
amounted to $16,247.





In
addition to the management fee, USHO pays all brokerage fees and other
expenses, including certain tax reporting costs, licensing fees for the use of
intellectual property, ongoing registration or other fees paid to the
SEC, FINRA and any other regulatory agency in connection with offers
and sales of its units subsequent to the initial offering and all legal,
accounting, printing and other expenses associated therewith. The total of
these fees and expenses for the three months ended September 30, 2010 was
$32,910, as compared to $29,392 for the three months ended September 30, 2009.
The increase in expenses for the three months ended September 30, 2010 as
compared to the three months ended September 30, 2009 was primarily due to
increased projected costs for certain tax reporting costs and auditing fees, the
majority of which were covered by the expense waiver described below.
USHO incurred $368 and $0 in fees and other expenses relating to the
registration and offering of additional units during the three months ended
September 30, 2010 and 2009, respectively. During the three months ended
September 30, 2010, an expense waiver was in effect which offset certain of the
expenses incurred by USHO.  The total amount of the expense waiver was
$27,414.  For the three months ended September 30, 2010, the expenses
of USHO, including management fees, commissions, and all other expenses, before
allowance for the expense waiver, totaled $44,333, and after allowance for the
expense waiver, totaled $16,919.





USHO is
responsible for paying its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members.  USHO shares these fees and expenses with USOF,
USNG, US12OF, UGA, USSO, US12NG and USBO, based on the relative assets of each
fund computed on a daily basis. These fees and expenses for the calendar year
2010 are estimated to be a total of $1,178,870 for all funds. By comparison, for
the year ended December 31, 2009, these fees and expenses amounted to a total of
$433,046 for all funds, and USHO’s portion of such fees and expenses was $645.
Directors’ expenses are expected to increase in 2010 due to an increase in the
amount of directors’ and officers’ liability insurance coverage and the
incurrence of the independent directors’ deferred compensation
expense.  Effective as of March 3, 2009, the General Partner obtained
directors’ and officers’ liability insurance covering all of the directors and
officers of the General Partner. Previously, the General Partner did not have
liability insurance for its directors and officers; instead, the independent
directors received a payment in lieu of directors’ and officers’ liability
insurance coverage. Effective as of April 1, 2010, USHO is also responsible
for paying its portion of any payments that may become due tothe independent
directorspursuant to
thedeferred
compensationagreements entered into
between the independent directors, the General Partner and USHO, USOF, USNG,
US12OF, UGA, USSO, US12NG and USBO.


20





USHO also
incurs commissions to brokers for the purchase and sale of Futures Contracts,
Other Heating Oil-Related Investments or Treasuries. During the three
months ended September 30, 2010, total commissions paid to brokers amounted to
$1,685. By comparison, during the three months ended September 30, 2009, total
commissions paid to brokers amounted to $3,285. The decrease in the total
commissions paid to brokers for the three months ended September 30, 2010 as
compared to the three months ended September 30, 2009 was primarily a function
of reduced creation and redemption activity and a decrease in the number of
futures contracts held by USHO since September 30, 2009.  As an
annualized percentage of total net assets, the figure for the three months
ended September 30, 2010 represents approximately 0.09% of total net assets. By
comparison, the figure for the three months ended September 30, 2009 represented
approximately 0.12% of total net assets. However, there can be no assurance that
commission costs and portfolio turnover will not cause commission expenses to
rise in future quarters.





The fees
and expenses associated with USHO’s audit expenses
and tax accounting and reporting requirements are paid by USHO. These costs are
estimated to be $150,000 for the calendar year 2010. The General Partner, though
under no obligation to do so, agreed to pay certain expenses, to the extent that
such expenses exceed 0.15% (15 basis points) of USHO’s NAV, on an annualized
basis, through at least December 31, 2010.  The General Partner has no
obligation to continue such payments into subsequent periods.





Dividend and Interest Income.
USHO seeks to invest its assets such that it holds Futures Contracts and Other
Heating Oil-Related Investments in an amount equal to the total net assets of
its portfolio. Typically, such investments do not require USHO to pay the full
amount of the contract value at the time of purchase, but rather require USHO to
post an amount as a margin deposit against the eventual settlement of the
contract. As a result, USHO retains an amount that is approximately equal to its
total net assets, which USHO invests in Treasuries, cash and/or cash
equivalents. This includes both the amount on deposit with the futures
commission merchant as margin, as well as unrestricted cash and cash equivalents
held with USHO’s custodian bank. The Treasuries, cash and/or cash
equivalents earn income that accrues on a daily basis. For the three months
ended September 30, 2010, USHO earned $1,029 in dividend and interest income on
such cash and/or cash equivalents. Based on USHO’s average daily total net
assets, this was equivalent to an annualized yield of 0.05%. USHO did not
purchase Treasuries during the three months ended September 30, 2010 and
held only cash and/or cash equivalents during this time period. By comparison,
for the three months ended September 30, 2009, USHO earned $3,188 in dividend
and interest income on such cash and/or cash equivalents. Based on USHO’s
average daily total net assets, this was equivalent to an annualized yield of
0.12%. USHO did not purchase Treasuries during the three months ended September
30, 2009 and held only cash and/or cash equivalents during this time
period.  Interest rates on short-term investments, including cash,
cash equivalents, and Treasuries, were lower during the three months ended
September 30, 2010 compared to the three months ended September 30, 2009. As a
result, the amount of income earned by USHO as a percentage of total net assets
was lower during the three months ended September 30, 2010 compared to the three
months ended September 30, 2009.





Tracking
USHO’s Benchmark





USHO’s
management seeks to manage USHO’s portfolio such that changes in its average
daily NAV, on a percentage basis, closely track the changes in the average daily
price of the Benchmark Futures Contract, also on a percentage basis.
Specifically, USHO’s management seeks to manage the portfolio such that over any
rolling period of 30-valuation days, the average daily change in USHO’s NAV is
within a range of 90% to 110% (0.9 to 1.1) of the average daily change in the
price of the Benchmark Futures Contract. As an example, if the average
daily movement of the price of the Benchmark Futures Contract for a particular
30-valuation day time period was 0.5% per day, USHO’s management would attempt
to manage the portfolio such that the average daily movement of the NAV during
that same time period fell between 0.45% and 0.55% (i.e., between 0.9 and 1.1 of
the benchmark’s results). USHO’s portfolio management goals do not include
trying to make the nominal price of USHO’s NAV equal to the nominal price of the
current Benchmark Futures Contract or the spot price for heating oil.
Management believes that it is not practical to manage the portfolio to achieve
such an investment goal when investing in listed heating oil Futures
Contracts.


21





For the
30 valuation days ended September 30, 2010, the simple average daily change in
the Benchmark Futures Contract was 0.318%, while the simple average daily change
in the NAV of USHO over the same time period was 0.316%. The average daily
difference was -0.002% (or -0.2 basis points, where 1 basis point
equals 1/100 of 1%). As a percentage of the daily movement of the Benchmark
Futures Contract, the average error in daily tracking by the NAV was -1.855%,
meaning that over this time period USHO’s tracking error was within the plus or
minus 10% range established as its benchmark tracking goal. The first chart
below shows the daily movement of USHO’s NAV versus the daily movement of the
Benchmark Futures Contract for the 30-valuation day period ended September 30,
2010. The second chart below shows the monthly total returns of USHO as compared
to the monthly value of the Benchmark Futures Contracts since
inception.


Since the
commencement of the offering of USHO’s units to the public on April 9, 2008
to September 30, 2010, the simple average daily change in the
Benchmark Futures Contract was -0.062%, while the simple average daily
change in the NAV of USHO over the same time period was -0.063%. The average
daily difference was -0.0009% (or -0.09 basis points, where 1 basis point equals
1/100 of 1%). As a percentage of the daily movement of the
Benchmark Futures Contract, the average error in daily tracking by the NAV
was -0.684%, meaning that over this time period USHO’s tracking error was within
the plus or minus 10% range established as its benchmark tracking
goal.








*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS


22


An
alternative tracking measurement of the return performance of USHO versus the
return of its Benchmark Futures Contract can be calculated by comparing the
actual return of USHO, measured by changes in its NAV, versus the expected changes in its NAV
under the assumption that USHO’s returns had been exactly the same as the daily
changes in its Benchmark Futures Contract.
 
 For the
nine months ended September 30, 2010, the actual total return of USHO as
measured by changes in its NAV was -1.13%. This is based on an initial
NAV of $27.54 on December 31, 2009 and an ending NAV as of September 30,
2010 of $27.23. During this time period, USHO made no distributions to its
unitholders. However, if USHO’s daily changes in its NAV had instead exactly
tracked the changes in the daily return of the Benchmark Futures Contract, USHO
would have had an estimated NAV of $27.28 as of September 30, 2010, for a total
return over the relevant time period of -0.944%. The difference between the
actual NAV total return of USHO of -1.13% and the expected total return based on
the Benchmark Futures Contract of -0.944% was an error over the time period of
-0.186%, which is to say that USHO’s actual total return underperformed the
benchmark result by that percentage. Management believes that a portion of the
difference between the actual return and the expected benchmark return can be
attributed to the net impact of the expenses that USHO pays, offset in part by
the income that USHO collects on its cash and cash equivalent holdings. During
the nine months ended September 30, 2010, USHO received dividend and interest
income of $3,054, which is equivalent to a weighted average income rate of 0.04%
for such period.  In addition, during the nine months ended September
30, 2010, USHO also collected $3,000 from its Authorized Purchasers for creating
or redeeming baskets of units. This income also contributed to USHO’s actual
return. During the nine months ended September 30, 2010, USHO incurred net
expenses of $78,501. Income from dividends and interest and Authorized Purchaser
collections net of expenses was $(72,447), which is equivalent to an annualized
weighted average net income rate of -0.84% for the nine months ended September
30, 2010.
  By
comparison, for the nine months ended September 30, 2009, the actual total
return of USHO as measured by changes in its NAV was 13.90%.  This was
based on an initial NAV of $21.94 on December 31, 2008 and an ending NAV as
of September 30, 2009 of $24.99. During this time period, USHO made no
distributions to its unitholders. However, if USHO’s daily changes in its NAV
had instead exactly tracked the changes in the daily return of the Benchmark
Futures Contract, USHO would have had an estimated NAV of $25.03 as of September
30, 2009, for a total return over the relevant time period of 14.08%. The
difference between the actual NAV total return of USHO of 13.90% and the
expected total return based on the Benchmark Futures Contract of 14.08% was an
error over the time period of 0.18%, which is to say that USHO’s actual total
return underperformed the benchmark result by that percentage. Management
believes that a portion of the difference between the actual return and the
expected benchmark return can be attributed to the net impact of the expenses
that USHO paid, offset in part by the income that USHO collected on its cash and
cash equivalent holdings. During the nine months ended September 30, 2009, USHO
received dividend and interest income of $10,027, which is equivalent to a
weighted average income rate of 0.18% for such period. In addition, during the
nine months ended September 30, 2009, USHO also collected $3,000 from its
Authorized Purchasers for creating or redeeming baskets of units. This income
also contributed to USHO’s actual return. During the nine months ended September
30, 2009, USHO incurred net expenses of $49,798. Income from dividends and
interest and Authorized Purchaser collections net of expenses was $(36,741),
which is equivalent to an annualized weighted average net income rate of -0.67%
for the nine months ended September 30, 2009.








*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





23





There are
currently three factors that have impacted or are most likely to impact
USHO’s ability to accurately track its Benchmark Futures
Contract.





First,
USHO may buy or sell its holdings in the then current Benchmark Futures Contract
at a price other than the closing settlement price of that contract on the day
during which USHO executes the trade. In that case, USHO may pay a price that is
higher, or lower, than that of the Benchmark Futures Contract,
which could cause the changes in the daily NAV of USHO to either be too
high or too low relative to the changes in the Benchmark Futures
Contract.  During the nine months ended September 30, 2010, management
attempted to minimize the effect of these transactions by seeking to execute its
purchase or sale of the Benchmark Futures Contract at, or as close as
possible to, the end of the day settlement price. However, it may not always be
possible for USHO to obtain the closing settlement price and there is no
assurance that failure to obtain the closing settlement price in the future will
not adversely impact USHO’s attempt to track the Benchmark Futures Contract
over time.




Second,
USHO earns dividend and interest income on its cash and cash equivalents. USHO
is not required to distribute any portion of its income to its unitholders and
did not make any distributions to unitholders during the nine months ended
September 30, 2010. Interest payments, and any other income, were retained
within the portfolio and added to USHO’s NAV. When this income exceeds the level
of USHO’s expenses for its management fee, brokerage commissions and other
expenses (including ongoing registration fees, licensing fees and the fees
and expenses of the independent directors of the General Partner),
USHO will realize a net yield that will tend to cause daily changes in the
NAV of USHO to track slightly higher than daily changes in the
Benchmark Futures Contract.  During the nine months ended
September 30, 2010, USHO earned, on an annualized basis, approximately 0.04% on
its cash holdings. It also incurred cash expenses on an annualized basis of
0.60% for management fees and approximately 0.09% in brokerage commission costs
related to the purchase and sale of futures contracts, and 0.22% for other net
expenses. The foregoing fees and expenses resulted in a net yield on an
annualized basis of approximately -0.87% and affected USHO’s ability to track
its benchmark. If short-term interest rates rise above the current levels, the
level of deviation created by the yield would decrease. Conversely, if
short-term interest rates were to decline, the amount of error created by the
yield would increase. When short-term yields drop to a level lower than the
combined expenses of the management fee and the brokerage commissions, then the
tracking error becomes a negative number and would tend to cause the daily
returns of the NAV to underperform the daily returns of the
Benchmark Futures Contract.





Third,
USHO may hold Other Heating Oil-Related Investments in its portfolio that
may fail to closely track the Benchmark Futures Contract’s total return
movements. In that case, the error in tracking the Benchmark Futures
Contract could result in daily changes in the NAV of USHO that are either too
high, or too low, relative to the daily changes in the Benchmark Futures
Contract. During the nine months ended September 30, 2010, USHO did not hold any
Other Heating Oil-Related Investments. If USHO increases in size, and due to its
obligations to comply with regulatory limits, USHO may invest in Other Heating
Oil-Related Investments, which may have the effect of increasing transaction
related expenses and may result in increased tracking error.


24





Term Structure of Heating Oil
Futures Prices and the Impact on Total Returns.Several
factors determine the total return from investing in a futures contract
position. One factor that impacts the total return that will result from
investing in near month futures contracts and “rolling” those contracts
forward each month is the price relationship between the current near month
contract and the next month contract.  For example, if the price of
the near month contract is higher than the next month contract (a situation
referred to as “backwardation” in the futures market), then absent any other
change there is a tendency for the price of a next month contract to rise in
value as it becomes the near month contract and approaches expiration.
Conversely, if the price of a near month contract is lower than the next month
contract (a situation referred to as “contango” in the futures market), then
absent any other change there is a tendency for the price of a next month
contract to decline in value as it becomes the near month contract and
approaches expiration.





As an
example, assume that the price of heating oil for immediate delivery (the “spot”
price), was $2.00 per gallon, and the value of a position in the near month
futures contract was also $2.00. Over time, the price of a gallon of heating oil
will fluctuate based on a number of market factors, including demand for
heating oil relative to its supply. The value of the near month contract will
likewise fluctuate in reaction to a number of market factors. If investors
seek to maintain their position in a near month contract and not take delivery
of the heating oil, every month they must sell their current near month contract
as it approaches expiration and invest in the next month contract.





If the
futures market is in backwardation, e.g., when the expected price
of heating oil in the future would be less, the investor would be buying a next
month contract for a lower price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing heating oil
prices or the price relationship between the spot price, the near month contract
and the next month contract (and ignoring the impact of commission costs and the
income earned on cash and/or cash equivalents), the value of the next month
contract would rise as it approaches expiration and becomes the new near month
contract. In this example, the value of the $2.00 investment would tend to rise
faster than the spot price of heating oil, or fall slower. As a result, it would
be possible in this hypothetical example for the spot price of heating oil to
have risen to $2.50 after some period of time, while the value of the investment
in the futures contract would have risen to $2.60, assuming backwardation is
large enough or enough time has elapsed. Similarly, the spot price of heating
oil could have fallen to $1.50 while the value of an investment in the futures
contract could have fallen to only $1.60. Over time, if backwardation remained
constant, the difference would continue to increase.




If the
futures market is in contango, the investor would be buying a next month
contract for a higher price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing heating oil
prices or the price relationship between the spot price, the near month contract
and the next month contract (and ignoring the impact of commission costs and the
income earned on cash and/or cash equivalents), the value of the next month
contract would fall as it approaches expiration and becomes the new near month
contract. In this example, it would mean that the value of the $2.00 investment
would tend to rise slower than the spot price of heating oil, or fall faster. As
a result, it would be possible in this hypothetical example for the spot price
of heating oil to have risen to $2.50 after some period of time, while the
value of the investment in the futures contract will have risen to only $2.40,
assuming contango is large enough or enough time has elapsed. Similarly, the
spot price of heating oil could have fallen to $1.50 while the value of an
investment in the futures contract could have fallen to $1.40. Over time, if
contango remained constant, the difference would continue to
increase.





The chart
below compares the price of the near month contract to the price of the next
month contract over the last 10 years (2000-2009) for heating oil. When the
price of the near month contract is higher than the price of the next month
contract, the market would be described as being in backwardation. When the
price of the near month contract is lower than the price of the next month
contract, the market would be described as being in contango. Although the
prices of the near month contract and the price of the next month contract do
tend to move up or down together, it can be seen that at times the near month
prices are clearly higher than the price of the next month contract
(backwardation), and other times they are below the price of the next month
contract (contango). In addition, investors can observe that heating oil prices,
both near month and next month, often display a seasonal pattern in which the
price of heating oil tends to rise in the winter months and decline in the
summer months. This mirrors the physical demand for heating oil, which typically
peaks in the winter.


25








*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS





An
alternative way to view backwardation and contango data over time is to subtract
the dollar price of the next month heating oil futures contract from the dollar
price of the near month heating oil futures contract. If the resulting number is
a positive number, then the price of the near month contract is higher than the
price of the next month and the market could be described as being in
backwardation. If the resulting number is a negative number, then the near month
price is lower than the price of the next month and the market could be
described as being in contango. The chart below shows the results from
subtracting the next month contract price from the price of the near month
contract for the 10 year period between 2000 and 2009. Investors will note
that the near month heating oil futures contract spent time in both
backwardation and contango. Investors will further note that the markets display
a very seasonal pattern that corresponds to the seasonal demand patterns for
heating oil mentioned above. That is, in many, but not all cases, the price of
the near month is higher than the next month during the middle of the winter
months as the price of heating oil for delivery in those winter months rises to
meet peak demand. At the same time, the price of the near month contract, when
that month is just before the onset of fall, does not rise as far or as fast as
the price of a next month contract whose delivery falls closer to the start of
the winter season.


26











*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS





While the
investment objective of USHO is not to have the market price of its units match,
dollar for dollar, changes in the spot price of heating oil, contango and
backwardation have impacted the total return on an investment in USHO units
during the past year relative to a hypothetical direct investment in
heating oil. For example, an investment in USHO units made on December 31, 2010
and held to September 30, 2010 decreased, based upon the changes in the NAV for
USHO units on those days, by -1.13%, while the spot price of heating oil for
immediate delivery during the same period increased by 5.9% (note: this
comparison ignores the potential costs associated with physically owning and
storing heating oil, which could be substantial). By comparison, an investment
in USHO units made on December 31, 2008 and held to September 30, 2009
increased, based upon the changes in the NAV for USHO units on those days, by
13.90%, while the spot price of heating oil for immediate delivery during the
same period increased by 14.08% (note: this comparison ignores the potential
costs associated with physically owning and storing heating oil, which could be
substantial).





Periods
of contango or backwardation do not materially impact USHO’s investment
objective of having the percentage changes in its per unit NAV track the
percentage changes in the price of the Benchmark Futures Contract since the
impact of backwardation and contango tend to equally impact the percentage
changes in price of both USHO’s units and the Benchmark Futures
Contract. It is impossible to predict with any degree of certainty whether
backwardation or contango will occur in the future. It is likely that both
conditions will occur during different periods.





Heating Oil
Market.  During the nine months ended September 30, 2010, the
price of heating oil in the United States, as measured by changes in the price
of the futures contract traded on the NYMEX that was closest to expiration, rose
by approximately 5.9% from $2.1188 per gallon to $2.2440 per gallon. (Investors
are cautioned that these represent prices for heating oil on a wholesale basis
and should not be directly compared to retail prices.)


27





During
the nine months ended September 30, 2010, prices for crude oil, the raw
material from which heating oil is refined, were impacted by several factors. On
the consumption side, demand increased inside
and outside the United States as global economic growth, including emerging
economies such as China and India, improved for the third quarter of the year.
On the supply side, efforts to reduce production by the Organization of the
Petroleum Exporting Countries to more closely match global consumption were
partially successful. Crude oil prices finished the third quarter of 2010
approximately 1% higher than
at the beginning of the year, though investors looked forward to continued
improvements in the global economy. Management believes, however, that should
the global economic situation cease to improve, or decline, there is a
meaningful possibility that crude oil prices could further retreat from their
current levels.





Management
believes that over both the medium-term and the long-term, changes in the price
of crude oil will exert the greatest influence on the price of refined petroleum
products such as heating oil. At the same time, there can be other factors that,
particularly in the short term, cause the price of heating oil to rise (or
fall), more (or less) than the price of crude oil. For example, warmer weather
during the high demand period of the winter season could cause American
consumers to reduce their heating oil consumption. Furthermore, heating oil
prices are impacted by the availability of refining capacity. As a result, it is
possible that changes in heating oil prices may not match the changes in crude
oil prices.





Heating Oil Price Movements in
Comparison to Other Energy Commodities and Investment
Categories.  The General Partner believes that investors
frequently measure the degree to which prices or total returns of one investment
or asset class move up or down in value in concert with another investment or
asset class. Statistically, such a measure is usually done by measuring the
correlation of the price movements of the two different investments or asset
classes over some period of time. The correlation is scaled between 1 and -1,
where 1 indicates that the two investment options move up or down in price or
value together, known as “positive correlation,” and -1 indicating that they
move in completely opposite directions, known as “negative correlation.” A
correlation of 0 would mean that the movements of the two are neither positively
or negatively correlated, known as “non-correlation.” That is, the investment
options sometimes move up and down together and other times move in opposite
directions.





For the
ten year time period between 2000 and 2009, the chart below compares the monthly
movements of heating oil prices versus the monthly movements of the prices of
several other energy commodities, such as natural gas, crude oil and unleaded
gasoline, as well as several major non-commodity investment asset classes, such
as large cap U.S. equities, U.S. government bonds and global equities. It can be
seen that over this particular time period, the movement of heating oil on a
monthly basis was not strongly correlated, positively or negatively, with the
movements of large cap U.S. equities, U.S. government bonds or global equities.
However, movements in heating oil had a strong positive correlation to movements
in crude oil and unleaded gasoline. Finally, heating oil had a positive, but
weak, correlation with natural gas.





10 Year Correlation Matrix
                                                    2000-2009
                                                  
                                                  Large
                                                    Cap
      U.S.
                                                    Equities
                                                    (S&P
                                                    500)
                                                  
                                                  U.S. Gov't.
                                                    Bonds
                                                    (EFFAS
                                                    U.S.
                                                    Gov’t.
                                                    Bond
                                                    Index)
                                                  
                                                  Global
                                                    Equities
                                                    (FTSE
                                                    World
                                                    Index)
                                                  
                                                  Crude
                                                    Oil
                                                  
                                                  Unleaded
                                                    Gasoline
                                                  
                                                  Natural
                                                    Gas
                                                  
                                                  Heating
                                                    OilLarge
      Cap U.S. Equities (S&P 500)
                                                  
                                                  
                                                  1.000
                                                  
                                                  
                                                  -0.259
                                                  
                                                  
                                                  0.966
                                                  
                                                  
                                                  0.152
                                                  
                                                  
                                                  0.135
                                                  
                                                  
                                                  0.023
                                                  
                                                  
                                                  0.087U.S.
      Gov't. Bonds (EFFAS U.S. Gov’t. Bond Index)
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  1.000
                                                  
                                                  
                                                  -0.237
                                                  
                                                  
                                                  -0.127
                                                  
                                                  
                                                  -0.214
                                                  
                                                  
                                                  0.128
                                                  
                                                  
                                                  -0.078Global
      Equities (FTSE World Index)
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  1.000
                                                  
                                                  
                                                  0.246
                                                  
                                                  
                                                  0.196
                                                  
                                                  
                                                  0.084
                                                  
                                                  
                                                  0.165Crude
      Oil
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  1.000
                                                  
                                                  
                                                  0.724
                                                  
                                                  
                                                  0.334
                                                  
                                                  
                                                  0.783Unleaded
      Gasoline
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  1.000
                                                  
                                                  
                                                  0.257
                                                  
                                                  
                                                  0.613Natural
      Gas
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  1.000
                                                  
                                                  
                                                  0.466Heating
      Oil
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  1.000Source:
      Bloomberg, NYMEX




PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS




28





The chart
below covers a more recent, but much shorter, range of dates than the above
chart. Over the one year period ended September 30, 2010, heating oil continued
to have a strong positive correlation with crude oil and unleaded gasoline.
During this period, it also had no positive or negative correlation with the
movements of natural gas versus the positive correlation it had displayed over
the ten year period ended December 31, 2009. Notably, the correlation between
heating oil and both global equities and large-cap U.S. equities, which had been
essentially non-correlated over the ten year period ended December 31, 2009,
displayed results that indicated that they had a strong positive correlation
over this shorter time period. Finally, the results showed that heating oil and
U.S. government bonds, which had essentially been non-correlated for the ten
year period ended December 31, 2009, were negatively correlated over this more
recent time period.





Correlation Matrix 12 months
                                                                    ended
                                                                    September 30, 2010
                                                                  
                                                                  Large Cap
                                                                    U.S.
                                                                    Equities
                                                                    (S&P 500)
                                                                  
                                                                  U.S. Gov't.
                                                                    Bonds
                                                                    (EFFAS
                                                                    U.S.
      Gov’t.
                                                                    Bond
      Index)
                                                                  
                                                                  Global
                                                                    Equities
                                                                    (FTSE
                                                                    World
                                                                    Index)
                                                                  
                                                                  Crude
                                                                    Oil
                                                                  
                                                                  Unleaded
                                                                    Gasoline
                                                                  
                                                                  Natural
                                                                    Gas
                                                                  
                                                                  Heating
                                                                    OilLarge
      Cap U.S. Equities (S&P 500)
                                                                  
                                                                  
                                                                  1.000
                                                                  
                                                                  
                                                                  -0.504
                                                                  
                                                                  
                                                                  0.973
                                                                  
                                                                  
                                                                  0.715
                                                                  
                                                                  
                                                                  0.676
                                                                  
                                                                  
                                                                  -0.075
                                                                  
                                                                  
                                                                  0.717U.S.
      Gov't. Bonds (EFFAS U.S. Gov’t. Bond Index)
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  1.000
                                                                  
                                                                  
                                                                  -0.504
                                                                  
                                                                  
                                                                  -0.559
                                                                  
                                                                  
                                                                  -0.569
                                                                  
                                                                  
                                                                  -0.282
                                                                  
                                                                  
                                                                  -0.587Global
      Equities (FTSE World Index)
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  1.000
                                                                  
                                                                  
                                                                  0.743
                                                                  
                                                                  
                                                                  0.687
                                                                  
                                                                  
                                                                  -0.074
                                                                  
                                                                  
                                                                  0.748Crude
      Oil
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  1.000
                                                                  
                                                                  
                                                                  0.958
                                                                  
                                                                  
                                                                  0.115
                                                                  
                                                                  
                                                                  0.943Unleaded
      Gasoline
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  1.000
                                                                  
                                                                  
                                                                  -0.004
                                                                  
                                                                  
                                                                  0.914Natural
      Gas
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  1.000
                                                                  
                                                                  
                                                                  0.003Heating
      Oil
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  1.000Source:
      Bloomberg, NYMEX





PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Investors
are cautioned that the historical price relationships between heating oil and
various other energy commodities, as well as other investment asset classes, as
measured by correlation may not be reliable predictors of future price movements
and correlation results. The results pictured above would have been different if
a different range of dates had been selected. The General Partner believes that
heating oil has historically not demonstrated a strong correlation with equities
or bonds over long periods of time. However, the General Partner also believes
that in the future it is possible that heating oil could have long term
correlation results that indicate prices of heating oil more closely track the
movements of equities or bonds. In addition, the General Partner believes that,
when measured over time periods shorter than ten years, there will always be
some periods where the correlation of heating oil to equities and bonds will be
either more strongly positively correlated or more strongly negatively
correlated than the long term historical results suggest.


29





The correlations between
heating oil, crude oil, natural gas and gasoline are relevant because the
General Partner endeavors to invest USHO’s assets in Futures Contracts and Other
Heating Oil-Related Investments so that daily changes in percentage terms in
USHO’s NAV correlate as closely as possible with daily changes in percentage
terms in the price of the Benchmark Futures Contract. If certain other
fuel-based commodity Futures Contracts do not closely correlate with the
Benchmark Futures Contract, then their use could lead to greater tracking error.
As noted above, the General Partner also believes that the changes in percentage
terms in the price of the Benchmark Futures Contract will closely correlate with
changes in percentage terms in the spot price of heating oil.





Critical
Accounting Policies





Preparation
of the condensed financial statements and related disclosures in compliance with
accounting principles generally accepted in the United States of America
requires the application of appropriate accounting rules and guidance, as well
as the use of estimates. USHO’s application of these policies involves judgments
and actual results may differ from the estimates used.




The
General Partner has evaluated the nature and types of estimates that
it makes in preparing USHO’s condensed financial statements and related
disclosures and has determined that the valuation of its investments which
are not traded on a United States or internationally recognized futures exchange
(such as forward contracts and over-the-counter contracts) involves a critical
accounting policy. The values which are used by USHO for its Futures Contracts
are provided by its commodity broker who uses market prices when available,
while over-the-counter contracts are valued based on the present value of
estimated future cash flows that would be received from or paid to a third party
in settlement of these derivative contracts prior to their delivery date and
valued on a daily basis. In addition, USHO estimates interest and dividend
income on a daily basis using prevailing rates earned on its cash and cash
equivalents. These estimates are adjusted to the actual amount received on a
monthly basis and the difference, if any, is not considered
material.




Liquidity
and Capital Resources





USHO has
not made, and does not anticipate making, use of borrowings or other lines of
credit to meet its obligations. USHO has met, and it is anticipated that USHO
will continue to meet, its liquidity needs in the normal course of business from
the proceeds of the sale of its investments or from the Treasuries, cash and/or
cash equivalents that it intends to hold at all times. USHO’s liquidity needs
include: redeeming units, providing margin deposits for its existing Futures
Contracts or the purchase of additional Futures Contracts and posting collateral
for its over-the-counter contracts, if applicable, and, except as noted below,
payment of its expenses, summarized below under “Contractual Obligations.”





USHO currently
generates cash primarily from (i) the sale of baskets consisting of 100,000
units (“Creation Baskets”) and (ii) income earned on cash and/or cash
equivalents. USHO has allocated substantially all of its net assets to
trading in Heating Oil Interests. USHO invests in Heating Oil Interests to the
fullest extent possible without being leveraged or unable to satisfy its current
or potential margin or collateral obligations with respect to its investments in
Futures Contracts and Other Heating Oil-Related Investments. A significant
portion of USHO’s NAV is held in cash and cash equivalents that are used as
margin and as collateral for its trading in Heating Oil Interests. The
balance of the net assets is held in USHO’s account at its custodian bank.
Income received from USHO’s money market funds is paid to USHO. During the nine
months ended September 30, 2010, USHO’s expenses exceeded the income USHO earned
and the cash earned from the sale of Creation Baskets and the redemption of
Redemption Baskets. To the extent expenses exceed income, USHO’s NAV will be
negatively impacted.





USHO’s
investments in Heating Oil Interests may be subject to periods of illiquidity
because of market conditions, regulatory considerations and other reasons. For
example, most commodity exchanges limit the fluctuations in futures
contracts prices during a single day by regulations referred to as “daily
limits.” During a single day, no trades may be executed at prices beyond the
daily limit. Once the price of a futures contract has increased or
decreased by an amount equal to the daily limit, positions in the contracts can
neither be taken nor liquidated unless the traders are willing to effect trades
at or within the specified daily limit. Such market conditions could prevent
USHO from promptly liquidating its positions in Futures Contracts. During
the nine months ended September 30, 2010, USHO was not forced to purchase or
liquidate any of its positions while daily limits were in effect; however, USHO
cannot predict whether such an event may occur in the future.


30





Prior to
the initial offering of USHO, all payments with respect to USHO’s expenses were
paid by the General Partner. USHO does not have an obligation or intention to
refund such payments by the General Partner. The General Partner is under no
obligation to pay USHO’s current or future expenses. Since the initial offering
of units, USHO has been responsible for expenses relating to (i) management
fees, (ii) brokerage fees and commissions, (iii) licensing fees for the use
of intellectual property, (iv) ongoing registration expenses in connection
with offers and sales of its units subsequent to the initial offering, (v)
other expenses, including certain tax reporting costs, (vi) fees and expenses of
the independent directors of the General Partner and (vii) other extraordinary
expenses not in the ordinary course of business, while the General Partner has
been responsible for expenses relating to the fees of USHO’s marketing agent,
administrator and custodian and registration expenses relating to the initial
offering of units. If the General Partner and USHO are unsuccessful in
raising sufficient funds to cover these respective expenses or in locating any
other source of funding, USHO will terminate and investors may lose all or part
of their investment.





Market
Risk





Trading
in Futures Contracts and Other Heating Oil-Related Investments, such as
forwards, involves USHO entering into contractual commitments to purchase
or sell heating oil at a specified date in the future. The aggregate market
value of the contracts will significantly exceed USHO’s future cash
requirements since USHO intends to close out its open positions prior to
settlement. As a result, USHO is generally only subject to the
risk of loss arising from the change in value of the contracts. USHO considers
the “fair value” of its derivative instruments to be the unrealized gain or loss
on the contracts. The market risk associated with USHO’s commitments to purchase
heating oil is limited to the aggregate market value of the contracts held.
However, should USHO enter into a contractual commitment to sell heating oil, it
would be required to make delivery of the heating oil at the contract price,
repurchase the contract at prevailing prices or settle in cash. Since there are
no limits on the future price of heating oil, the market risk to USHO could be
unlimited.




USHO’s
exposure to market risk depends on a number of factors, including the
markets for heating oil, the volatility of interest rates and foreign exchange
rates, the liquidity of the Futures Contracts and Other Heating Oil-Related
Investments markets and the relationships among the contracts held by USHO.
Drastic market occurrences could ultimately lead to the loss of all or
substantially all of an investor’s capital.




Credit
Risk





When USHO
enters into Futures Contracts and Other Heating Oil-Related Investments, it
is exposed to the credit risk that the counterparty will not be able to meet its
obligations. The counterparty for the Futures Contracts traded on the NYMEX
and on most other futures exchanges is the clearinghouse associated with
the particular exchange. In general, in addition to margin required to be posted
by the exchange or clearinghouse in connection with trades on the exchange or
through the clearinghouse, clearinghouses are backed by their members who may be
required to share in the financial burden resulting from the nonperformance of
one of their members and, therefore, this additional member support should
significantly reduce credit risk. Some foreign exchanges are not backed by their
clearinghouse members but may be backed by a consortium of banks or other
financial institutions. There can be no assurance that any counterparty,
clearinghouse, or their members or their financial backers will satisfy their
obligations to USHO in such circumstances.




The
General Partner attempts to manage the credit risk of USHO by following
various trading limitations and policies. In particular, USHO generally posts
margin and/or holds liquid assets that are approximately equal to the market
value of its obligations to counterparties under the Futures Contracts and
Other Heating Oil-Related Investments it holds. The General Partner has
implemented procedures that include, but are not limited to, executing and
clearing trades only with creditworthy parties and/or requiring the posting of
collateral or margin by such parties for the benefit of USHO to limit its credit
exposure. UBS Securities LLC, USHO’s commodity broker, or any other broker that
may be retained by USHO in the future, when acting as USHO’s futures commission
merchant in accepting orders to purchase or sell Futures Contracts on United
States exchanges, is required by CFTC regulations to separately
account for and segregate as belonging to USHO, all assets of USHO relating to
domestic Futures Contracts trading. These futures commission merchants are not
allowed to commingle USHO’s assets with their other assets. In addition, the
CFTC requires commodity brokers to hold in a secure account USHO’s assets
related to foreign Futures Contracts trading.


31





If, in
the future, USHO purchases over-the-counter contracts, see “Item 3. Quantitative
and Qualitative Disclosures About Market Risk” of this quarterly report on Form
10-Q for a discussion of over-the-counter contracts.





As of
September 30, 2010, USHO had deposits in domestic and foreign financial
institutions,including
cash investments in money market funds, in the amount of $7,408,925. This amount
is subject to loss should these institutions cease operations.





Off
Balance Sheet Financing





As of
September 30, 2010, USHO has no loan guarantee, credit support or other
off-balance sheet arrangements of any kind other than agreements entered into in
the normal course of business, which may include indemnification provisions
relating to certain risks that service providers undertake in performing
services which are in the best interests of USHO. While USHO’s exposure under
these indemnification provisions cannot be estimated, they are not expected to
have a material impact on USHO’s financial position.





Redemption
Basket Obligation





In order
to meet its investment objective and pay its contractual obligations described
below, USHO requires liquidity to redeem units, which redemptions must be
in blocks of 100,000 units called “Redemption Baskets”. USHO has to date
satisfied this obligation by paying from the cash or cash equivalents it holds
or through the sale of its Treasuries in an amount proportionate to the number
of units being redeemed.




Contractual
Obligations





USHO’s
primary contractual obligations are with the General Partner. In return for its
services, the General Partner is entitled to a management fee calculated monthly
as a fixed percentage of USHO’s NAV, currently 0.60% of NAV on its average daily
net assets.




The
General Partner agreed to pay the start-up costs associated with the
formation of USHO, primarily its legal, accounting and other costs in connection
with the General Partner’s registration with the CFTC as a CPO and the
registration and listing of USHO and its units with the SEC, FINRA and the
AMEX, respectively. However, since USHO’s initial offering of units, offering
costs incurred in connection with registering and listing additional units of
USHO are directly borne on an ongoing basis by USHO, and not by the General
Partner.





The
General Partner pays the fees of USHO’s marketing agent, ALPS Distributors,
Inc., and the fees of the custodian and transfer agent, Brown Brothers Harriman
& Co. (“BBH&Co.”), as well as BBH&Co.’s fees for performing
administrative services, including those in connection with the preparation of
USHO’s condensed financial statements and its SEC and CFTC reports. The General
Partner and USHO have also entered into a licensing agreement with the
NYMEX pursuant to which USHO and the affiliated funds managed by the General
Partner, other than USBO, pay a licensing fee to the NYMEX. USHO also pays the
fees and expenses associated with its tax accounting and reporting requirements
with the exception of certain initial implementation service fees and base
service fees which are borne by the General Partner. The General Partner, though
under no obligation to do so, agreed to pay certain costs for tax reporting and
audit expenses normally borne by USHO to the extent that such expenses exceed
0.15% (15 basis points) of USHO’s NAV, on an annualized basis, through at least
December 31, 2010. The General Partner has no obligation to continue such
payments into subsequent periods.





In
addition to the General Partner’s management fee, USHO pays its brokerage fees
(including fees to a futures commission merchant), over-the-counter dealer
spreads, any licensing fees for the use of intellectual property, and,
subsequent to the initial offering, registration and other fees paid to the SEC,
FINRA, or other regulatory agencies in connection with the offer and sale of
units, as well as legal, printing, accounting and other expenses associated
therewith, and extraordinary expenses. The latter are expenses not incurred in
the ordinary course of USHO’s business, including expenses relating to the
indemnification of any person against liabilities and obligations to the extent
permitted by law and under the LP Agreement, the bringing or defending of
actions in law or in equity or otherwise conducting litigation and incurring
legal expenses and the settlement of claims and litigation. Commission payments
to a futures commission merchant are on a contract-by-contract, or round turn,
basis.  USHO also pays a portion of the fees and expenses of the
independent directors of the General Partner.  See Note 3 to the Notes
to Condensed Financial Statements (Unaudited).


32





The parties cannot anticipate the
amount of payments that will be required under these arrangements for future
periods, as USHO’s NAVs and trading levels to meet its investment objectives
will not be known until a future date. These agreements are effective for a
specific term agreed upon by the parties with an option to renew, or, in some
cases, are in effect for the duration of USHO’s existence. Either party may
terminate these agreements earlier for certain reasons described in the
agreements.





As of
September 30, 2010, USHO’s portfolio consisted of 86 Heating Oil Futures HO
Contracts traded on the NYMEX.  For a list of USHO’s current holdings,
please see USHO’s website at www.unitedstatesheatingoilfund.com.





Item 3.  Quantitative and Qualitative Disclosures
About Market Risk.





Over-the-Counter
Derivatives




In the
future, USHO may purchase over-the-counter contracts. Unlike most
exchange-traded futures contracts or exchange-traded options on such futures,
each party to an over-the-counter contract bears the credit risk that the other
party may not be able to perform its obligations under its
contract.




Some
heating oil-based derivatives transactions contain fairly generic terms and
conditions and are available from a wide range of participants. Other heating
oil-based derivatives have highly customized terms and conditions and are not as
widely available. Many of these over-the-counter contracts are cash-settled
forwards for the future delivery of heating oil- or petroleum-based fuels that
have terms similar to the Futures Contracts. Others take the form of “swaps” in
which the two parties exchange cash flows based on pre-determined formulas tied
to the spot price of heating oil, forward heating oil prices or heating oil
futures prices. For example, USHO may enter into over-the-counter derivative
contracts whose value will be tied to changes in the difference between
the spot price of heating oil, the price of Futures Contracts traded
on the NYMEX and the prices of other Futures Contracts in which USHO may
invest.




To
protect itself from the credit risk that arises in connection with such
contracts, USHO may enter into agreements with each counterparty that provide
for the netting of its overall exposure to such counterparty, such as the
agreements published by the International Swaps and Derivatives Association,
Inc. USHO also may require that the counterparty be highly rated and/or
provide collateral or other credit support to address USHO’s exposure to the
counterparty. In addition, it is also possible for USHO and its counterparty to
agree to clear their transactions under the agreement through an established
futures clearinghouse such as those connected to the NYMEX or the ICE Futures.
In that event, USHO would no longer bear the credit risk of its original
counterparty, as the clearinghouse would now be USHO’s counterparty. USHO would
still retain any price risk associated with its transaction and would be
required to deposit margin to secure the clearinghouse’s exposure
to USHO.





The
creditworthiness of each potential counterparty is assessed by the General
Partner. The General Partner assesses or reviews, as appropriate, the
creditworthiness of each potential or existing counterparty to an
over-the-counter contract pursuant to guidelines approved by the General
Partner’s board of directors (the “Board”). Furthermore, the
General Partner on behalf of USHO only enters into over-the-counter
contracts with counterparties who are, or are affiliates of, (a) banks
regulated by a United States federal bank regulator, (b) broker-dealers
regulated by the SEC, (c) insurance companies domiciled in the United
States, or (d) producers, users or traders of energy, whether or not
regulated by the CFTC. Any entity acting as a counterparty shall be
regulated in either the United States or the United Kingdom unless
otherwise approved by the Board after consultation with its legal counsel.
Existing counterparties are also reviewed periodically by the General
Partner.





USHO
anticipates that the use of Other Heating Oil-Related Investments together with
its investments in Futures Contracts will produce price and total return results
that closely track the investment goals of USHO.  However, there can
be no assurance of this. Over-the-counter contracts may result in higher
transaction-related expenses than the brokerage commissions paid in connection
with the purchase of Futures Contracts, which may impact USHO’s ability to
successfully track the Benchmark Futures Contract.


33





USHO may
employ spreads or straddles in its trading to mitigate the differences in its
investment portfolio and its goal of tracking the price of the
Benchmark Futures Contract. USHO would use a spread when it chooses to take
simultaneous long and short positions in futures written on the same underlying
asset, but with different delivery months. The effect of holding such combined
positions is to adjust the sensitivity of USHO to changes in the price
relationship between futures contracts which will expire sooner and those that
will expire later. USHO would use such a spread if the General Partner felt that
taking such long and short positions, when combined with the rest of its
holdings, would more closely track the investment goals of USHO, or if the
General Partner felt it would lead to an overall lower cost of trading to
achieve a given level of economic exposure to movements in heating oil prices.
USHO would enter into a straddle when it chooses to take an option position
consisting of a long (or short) position in both a call option and put option.
The economic effect of holding certain combinations of put options and call
options can be very similar to that of owning the underlying futures contracts.
USHO would make use of such a straddle approach if, in the opinion of the
General Partner, the resulting combination would more closely track the
investment goals of USHO or if it would lead to an overall lower cost of trading
to achieve a given level of economic exposure to movements in heating oil
prices.





During
the nine months ended September 30, 2010, USHO did not employ any hedging
methods such as those described above since all of its investments were made
over an exchange. Therefore, during such period, USHO was not exposed to
counterparty risk.





Item 4.  Controls and
Procedures.




Disclosure
Controls and Procedures




USHO
maintains disclosure controls and procedures that are designed to ensure that
material information required to be disclosed in USHO’s periodic reports
filed or submitted under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time period specified in
the SEC’s rules and forms.




The duly
appointed officers of the General Partner, including its chief executive
officer and chief financial officer, who perform functions equivalent
to those of a principal executive officer and principal financial officer of
USHO if USHO had any officers, have evaluated the effectiveness of USHO’s
disclosure controls and procedures and have concluded that the disclosure
controls and procedures of USHO have been effective as of the end of the period
covered by this quarterly report on Form
10-Q.





Change
in Internal Control Over Financial Reporting




There
were no changes in USHO’s internal control over financial reporting during
USHO’s last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, USHO’s internal control over financial
reporting.


34


Part II. OTHER INFORMATION





Item
1.  Legal Proceedings.





Not applicable.





Item
1A.  Risk Factors.





There has
not been a material change from the risk factors previously disclosed in USHO’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed on
March 30, 2010, and USHO’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2010, filed on August 16, 2010.





Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds.





Not applicable.





Item
3.  Defaults Upon Senior Securities.





Not applicable.





Item 4.Reserved.





Item 5.  Other
Information.




Monthly
Account Statements




Pursuant
to the requirement under Rule 4.22 under the Commodity Exchange Act, each month
USHO publishes an account statement for its unitholders, which includes a
Statement of Income (Loss) and a Statement of Changes in NAV. The account
statement is furnished to the SEC on a current report on Form 8-K pursuant to
Section 13 or 15(d) of the Exchange Act and posted each month on USHO’s website
at www.unitedstatesheatingoilfund.com.




Item 6. Exhibits.


Listed
below are the exhibits which are filed as part of this quarterly report on Form
10-Q (according to the number assigned to them in Item 601 of Regulation
S-K):




ExhibitNumber
              
              Description of Document31.1*
              
              Certification
      by Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2*
              
              Certification
      by Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1*
              
              Certification
      by Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2*
              
              Certification
      by Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.





*           Filed
herewith.


35





SIGNATURES




Pursuant
to the requirements 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.





United
States Heating Oil Fund, LP (Registrant)


By:
United States Commodity Funds LLC, its general partner







By:
                /s/
      Nicholas D. GerberNicholas
      D. GerberPresident
      and Chief Executive Officer(Principal
      executive officer)





Date:  November
15, 2010







By:
              /s/
      Howard MahHoward
      MahChief
      Financial Officer(Principal
      financial and accounting
officer)





Date:  November
15, 2010


36