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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended December 31, 2002 Commission File No.: 0-23259

                          U.S. TIMBERLANDS COMPANY, LP
             (Exact name of registrant as specified in its charter)

        DELAWARE                                  91-1842156
   (State or other jurisdiction               (I.R.S. Employer
           of incorporation or               Identification No.)
          organization)

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

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

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

                                      None

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

     Title of Each Class:            Name of Each Exchange on Which Registered:
     --------------------            ------------------------------------------
        Common Units                              OTC Bulletin Board


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

                                 Yes [X] No [ ]

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

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

                                 Yes [ ] No [X]

         The aggregate market value of the Common Units held by non-affiliates
of the registrant, based on the last reported sale price of the Common Units on
the OTC Bulletin Board on June 28, 2002, was approximately $3,587,175.

         Documents incorporated by reference: See item 15. Exhibit Index

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                          U.S. TIMBERLANDS COMPANY, LP

                                TABLE OF CONTENTS

                                                                            Page

PART I

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

PART II

         Item 5.  Market for Registrant's Common Units and Related Security
                  Holder Matters.............................................12
         Item 6.  Selected Financial Data....................................14
         Item 7.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations..................................15
         Item 7A. Quantitative and Qualitative Disclosures About Market Risk.22
         Item 8.  Financial Statements.......................................23
         Item 9.  Changes in and Disagreements with Accountants on Accounting
                  and Financial Disclosure...................................23

PART III

         Item 10. Directors and Executive Officers of the Registrant.........24
         Item 11. Executive Compensation.....................................27
         Item 12. Security Ownership of Certain Beneficial Owners and
                  Management.................................................33
         Item 13. Certain Relationships and Related Transactions.............34
         Item 14. Controls and Procedures....................................35

PART IV

         Item 15. Exhibits, Financial Statements, and Reports on Form 8-K....36


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                                     PART I

Item 1. Business.

General

         The business of U.S. Timberlands Company, LP, a Delaware limited
partnership formed in June 1997 (the "Company"), consists of the growing of
trees and the sale of logs and standing timber. The Company owns approximately
364,000 fee acres of timberland and cutting rights on approximately 13,000 acres
of timberland (collectively the "Timberlands") containing total merchantable
timber volume estimated as of January 1, 2003 to be approximately 0.9 billion
board feet ("BBF") in Oregon east of the Cascade Range (the "Timberlands"). Logs
harvested from the Timberlands are sold to unaffiliated domestic conversion
facilities. These logs are processed for sale as lumber, plywood and other wood
products, primarily for use in new residential home construction, home
remodeling and repair and general industrial applications. The Company also owns
and operates its own seed orchard and produces approximately four million
conifer seedlings annually from its nursery, approximately 75% of which are used
for its own internal reforestation programs, with the balance sold to other
forest products companies. Except as the context otherwise requires, references
herein to, or descriptions of, assets and operations of the Company include the
assets and operations of the Operating Company (as defined below).

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

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

         During the period from January 1, 1994 through the acquisition of the
Klamath Falls Timberlands by USTK, approximately 58% of the logs harvested from
the Klamath Falls Timberlands were delivered to a plywood mill owned by
Weyerhaeuser at Klamath Falls, Oregon. Similarly, prior to the Ochoco
Acquisition, substantially all of the timber harvested from the Ochoco
Timberlands was delivered to Ochoco's mills. The Company does not currently own
any conversion facilities nor does it presently intend to own any such
facilities on a long-term basis;

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

Formation of the Company

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

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

        The purpose of the Company under the Partnership Agreement is limited to
serving as the non-managing member of the Operating Company and engaging in any
business activity that may be engaged in by the Operating Company. The Operating
Company's operating agreement provides that the Operating Company may, directly
or indirectly, engage in (i) any activity engaged in by USTK immediately prior
to the Initial Offering, (ii) any other activity approved by the General Partner
but only to the extent that the General Partner reasonably determines that, as
of the date of the acquisition or commencement of such activity, such activity
generates "qualifying income" (as such term is defined in Section 7704 of the
Internal Revenue Code) or (iii) any activity that enhances the operations of an
activity that is described in (i) or (ii) above. Although the General Partner
has the ability under the Partnership Agreement to cause the Company and the
Operating Company to engage in activities other than the ownership or operation
of timber-producing real property or related assets, the General Partner has no
current intention of doing so. The General Partner is authorized in general to
perform all acts deemed necessary to carry out such purposes and

                                        2

<PAGE>

to conduct the business of the Company.

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

Company Structure and Management

         The operations of the Company are conducted through, and the operating
assets are owned by, USTK, as the Operating Company. The Company owns a 98.9899%
member interest in the Operating Company and the General Partner owns a 1%
general partner interest in the Company and a 1.0101% managing member interest
in the Operating Company. The General Partner therefore owns an aggregate 2%
interest in the Company and the Operating Company on a combined basis.

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

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

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

The Timberlands

Timber Growth

         Timber growth rates reflect timberland productivity and the rate of
return on a timber investment. Growth rate is an important factor in determining
when to harvest timber and the harvest potential of timberlands over the long
term. Merchantable timber is economically mature for harvesting when its current
growth rate falls below the desired rate of return on the investment in the
standing trees. The average growth rate from regeneration to economic maturity
measures the capacity of the land for timber production. The Company's older and
natural stands on the Timberlands that are expected to provide the near term
harvest have a current average growth rate of approximately 150 board feet per
acre per annum. The younger plantations, that presently have less merchantable
volume, are growing at a rate that is expected to average at least 315 board
feet per acre per annum to economic maturity in 50 to 60 years. This growth rate
is based on calculated volumes at the time of maturity. The Company has achieved
higher growth rates on the Plantations by planting high quality seedlings, by
eliminating competing non-timber growth from the Timberlands and by applying
modern forestry practices to assist the growth of the

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timber. Currently, nearly all of the seedlings planted are grown from superior
seed produced in the Company's seed orchard. Management does take action to
enhance the growth rate in the natural stands as well. For example, selective
harvesting in the slower growing natural stands opens up the timber stand
allowing for more vigorous growth of the remaining trees. When it is no longer
possible to maintain acceptable growth rates in these stands they will be
harvested entirely and converted to faster growing plantations.

Harvest Plans

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

 Access

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

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Sales and Markets

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

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

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

Seasonality

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

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

Competition

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

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

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

Resource Management

Timber Resource Management

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

         Harvesting on the Timberlands is conducted using both selective and
regeneration harvesting. In selective harvesting, a partial harvest provides
merchantable timber and opens up the stand for supplemental growth on the

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remaining stand. Harvest entries are separated by approximately 1 to 15 years
and each entry is prescribed for volume to be removed, spacing to be provided,
and diameter limits to be harvested. In regeneration harvesting, which is used
to harvest approximately 60% of the Company's timber, all merchantable volume is
removed in a single harvest. After an area has been regeneration harvested, the
Company employs a reforestation contractor to plant two-year-old seedlings at an
optimal density of approximately 300 trees per acre. The Company also attempts
to protect and maintain the ecosystem within the Timberlands while providing for
a reasonable harvest. For example, the Company typically leaves a mix of green
and dead trees at the harvest site, including some large trees, snags and downed
logs to provide habitats for a variety of wildlife species while enriching the
soil for successive generations of trees.

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

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

Geographic Information System ("GIS")

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

                                        7

<PAGE>

Federal and State Regulation

Endangered Species

         The Federal Endangered Species Act and counterpart state legislation
protect species threatened with possible extinction. Protection of endangered
species may include restrictions on timber harvesting, road building and other
silvicultural activities in areas containing the affected species. A number of
species indigenous to the Pacific Northwest have been protected under the
Endangered Species Act, including the northern spotted owl, marbled murrelet,
Columbian white-tail deer, mountain caribou, grizzly bear, bald eagle and
various anadromous fish species. Currently, the Company has identified several
spotted owl and bald eagle nesting areas affecting the Timberlands and the
presence of bull trout in certain of its streams, which may affect harvesting on
approximately 27,000 acres.

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

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

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

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

Timberlands

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

                                        8

<PAGE>

Environmental Laws and Superfund

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

         Environmental laws and regulations have changed substantially and
rapidly over the last 20 years, and the Company anticipates there will be
continuing changes. The trend in environmental regulations is to place more
restrictions and limitations on activities that may affect the environment, such
as emissions of pollutants and the generation and disposal of wastes.
Increasingly strict environmental restrictions and limitations have resulted in
increased operating costs for the Company and it is possible that the costs of
compliance with environmental laws and regulations will continue to increase.

Access to Timberlands May be Limited by Federal Regulation

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

Safety and Health

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

Employees

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

                                        9

<PAGE>

Item 2. Properties

Timber Inventory

         The Company currently owns and manages approximately 364,000 fee acres
of timberland and cutting rights on approximately 13,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 2003 to
be approximately 0.9 BBF in Oregon east of the Cascade Range. A merchantable
tree is a tree of sufficient size that will produce a sound log 16 feet in
length and at least 4.6 inches in diameter, inside bark, at the small end. The
Company's merchantable timber inventory consists of a substantial percentage of
premium species of softwood, consisting of Ponderosa Pine and Douglas Fir,
species which have historically commanded premium prices over other softwood
species, as well as Lodgepole Pine, White Fir and other species. The Company
believes that the Timberlands are suitable for current operations.

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

Merchantable Timber Inventory by Species

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

Size and Species Distribution of Merchantable Timber

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

Acreage Distribution by Age Class on Plantations

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

Item 3. Legal Proceedings

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

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

                                       10
<PAGE>

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

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

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

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

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


                                       11
<PAGE>

                                     PART II

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

         The Common Units are listed and traded on the OTC Bulletin Board under
the symbol "TIMBZ." The Common Units began trading on November 14, 1997, at an
initial public offering price of $21.00 per Common Unit. As of December 31,
2002, there were approximately 4,600 record holders of the Company's Common
Units and four record holders of the Company's Subordinated Units. There is no
established public trading market for the Company's Subordinated Units.

 The following table sets forth the high and low closing sales prices for the
Common Units on Nasdaq:

                                                       Common Unit Price Range
                                                      ------------------------
                                                      High              Low
                                                      ------------------------
First Quarter 2001 .........................          8.50              7.13
Second Quarter 2001 ........................          8.48              5.20
Third Quarter 2001 .........................          5.92              2.68
Fourth Quarter 2001 ........................          2.90              1.59
First Quarter 2002 .........................          2.04              1.68
Second Quarter 2002 ........................          2.51              1.15
Third Quarter 2002 .........................          1.35              0.70
Fourth Quarter 2002 ........................          2.85              0.73
First Quarter 2003 .........................          2.99*             2.75*

         *These are over-the-counter market quotations which reflect interdealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.

Cash Distributions

         The Company made its first cash distribution on the Common Units and
the Subordinated Units on May 15, 1998, of $0.73, representing the sum of $0.50,
the Minimum Quarterly Distribution for the first quarter of 1998, plus $0.23,
the pro rata portion of the Minimum Quarterly Distribution for the period from
November 19, 1997 through December 31, 1997. The Company made the Minimum
Quarterly Distributions of $0.50 per Unit for each subsequent quarter on August
14, 1998, November 13, 1998, February 12, 1999, May 14, 1999, August 13, 1999,
November 15, 1999, February 14, 2000, May 15, 2000, August 14, 2000, November
14, 2000 and February 14, 2001, respectively. On May 10, 2001, due to declining
log prices and deteriorating business conditions, the Board of Directors
indefinitely suspended further distributions. Given the current state of the
timber markets, the Company does not expect to be in a position to make any
distributions to the Unitholders for the foreseeable future.

         Pursuant to the provisions of the Notes, no distributions may be made
by the Operating Company to the Company with respect to any quarter if the
Consolidated Fixed Charge Coverage Ratio ( as defined in the Indenture) for the
four-quarter period ended with such quarter is equal to or less than 1.75 to
1.00.

         The Operating Company did not meet the fixed charge coverage tests at
December 31, 2002 and is therefore not permitted to make any cash distributions
to the Company. Accordingly, the Company is not able to make distributions to
its Unitholders.


                                       12
<PAGE>

Issuance of Unregistered Securities

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


                                       13
<PAGE>

Item 6: Selected Financial Data

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

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

OPERATING STATEMENT DATA
   (IN MILLIONS EXCEPT PER
   UNIT AMOUNTS):
Revenues (1) ................................        49.5        54.6         75.6         77.0         71.3
Depreciation, depletion and road
   amortization (1) .........................        27.5        37.3         28.8         23.3         21.9
Fire loss ...................................         0.6           -            -            -            -
Cost of timber and property sales (1) .......         7.3           -          2.6           --          5.9
Operating income (loss) (1) .................       (21.9)      (14.1)        17.9         27.2         16.3
Income (loss) before extraordinary
   items ....................................       (44.1)      (36.6)        (4.1)         6.4         (6.4)
Income (loss) before general partner
   and minority interest ....................       (44.1)      (36.6)        (4.1)         6.4         (6.4)
PER UNIT DATA :
Basic and diluted net income (loss) per unit:
   Common ...................................       (3.37)      (2.79)       (0.31)        0.48        (0.49)
   Subordinated .............................       (3.37)      (2.79)       (0.31)        0.48        (0.49)
BALANCE SHEET DATA (AT
   PERIOD END, IN MILLIONS):
Working capital .............................        (1.6)       (1.7)         2.0          2.4          1.4
Total assets ................................       211.0       254.4        300.9        327.7        350.7
Long-term debt (3) ..........................       225.0       225.0        225.0        225.0        225.0
Equity (deficiency) .........................       (19.4)       24.4         67.1         97.2        116.9
OPERATING DATA (UNAUDITED):
Log, stumpage and timber deed sales
   volumes (MMBF) (1) .......................       204.8       250.7        243.7        187.3        144.5
Property sales volumes (MMBF) (1) ...........         3.5          --         13.6           --         26.6
</TABLE>


                                       14
<PAGE>

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

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

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

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

Forward-Looking Statements

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

General

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

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

Supply and Demand Factors

Supply

         The supply of logs available for purchase has been most affected in
recent years by significant reductions in timber harvested from public
timberlands, principally as a result of efforts to preserve the habitat of
certain endangered species, as well as a change in the emphasis of government
policy toward habitat preservation, conservation and recreation and away from
timber management. Since the early 1970s, environmental and other similar
concerns and governmental policies have substantially reduced the volume of
timber under contract to be


                                       15
<PAGE>

harvested from public lands. The pace of regulatory activity accelerated in the
late 1980s. The resulting supply decrease caused prices for logs to increase
significantly, reaching peak levels during 1993. Prior to 1998, the low supply
of timber from public lands, which is expected to continue for the foreseeable
future, benefited private timber holders such as the Company through higher
stumpage and log prices. Since 1998, the strength of the U.S. dollar has
decreased exports and increased imports and has equalized the supply and demand
equation and contributed to the general downward trend of prices. Certain market
conditions for finished products have also negatively impacted stumpage and log
prices in 2002.

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

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

Demand

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

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

Application of Critical Accounting Policies

        The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Certain accounting policies have a significant impact


                                       16
<PAGE>

on amounts reported in the financial statements. A summary of those significant
accounting policies can be found in Note 1 to the Company's financial statements
included herein.

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

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

Current Market Conditions

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

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

Results of Operations

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

<TABLE>
<CAPTION>
                Sales Volume (MBF)              Price Realization (MBF)
             ------------------------         --------------------------
                                                 Timber                            Timber  Timberland
     Period                 Logs    Stumpage     Deeds        Logs      Stumpage    Deeds   Sales ($000)
     ------                 ----    --------     -----     ----------   --------    -----   ------------
<S>                        <C>         <C>       <C>         <C>           <C>      <C>      <C>
2002

Year ended 12/31           74,612      --         130,161     $ 330        --      $ 135    $  5,763
4th Quarter                31,015      --          19,159     $ 324        --      $ 174    $  4,700
3rd Quarter                23,998      --          20,189     $ 329        --      $ 186       1,063
2nd Quarter                14,575      --          88,480     $ 341        --      $ 114         --
1st Quarter                 5,024      --          2,333      $ 349        --      $ 169         --

2001

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

2000

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


                                       17
<PAGE>

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

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

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

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

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

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

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

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

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

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

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


                                       18
<PAGE>

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

Partners' Capital

         During 2002, the limited partner interest in the Company declined $43.4
million from $24.2 million to -$19.2 million. This decline was the result of the
limited partners' share of the Company's net loss of $43.8 million in 2002. The
General Partner interest in the Company also declined during 2002 reflecting its
share of the Company's net loss for 2002. The Company anticipates that partners'
capital will continue to decline given current operating conditions.

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


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

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

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

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

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

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

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


                                       19
<PAGE>

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

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

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

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

Partners' Capital

         During 2001, the limited partner interest in the Company declined $42.2
million from $66.4 million to $24.2 million. This decline was the result of
distributions to Unitholders of $6.4 million during 2001, as well as the limited
partners' share of the Company's net loss of $35.8 million in 2001. The General
Partner interest in the Company also declined during 2001 reflecting its share
of the Company's distributions and net loss for 2001. The Company anticipates
that partners' capital will continue to decline given current operating
conditions.

Liquidity and Capital Resources

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

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

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

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

Notes

         On November 14, 1997, the Operating Company issued $225.0 million
aggregate principal amount of Notes (the "Notes") representing unsecured general
obligations of the Operating Company which bear interest at 9 5/8% per annum,
payable semiannually in arrears on May 15 and November 15. The Notes mature on
November 15, 2007 unless previously redeemed. The Notes do not require any
mandatory redemption or sinking fund payments prior to maturity and are
redeemable at the option of the Operating Company in whole or in part, on or
after November 15, 2002, at predetermined redemption prices plus accrued
interest to the redemption date. Upon the occurrence of certain events
constituting a "change of control" (as defined in the Indenture), the Company
must offer to purchase the Notes, at a purchase price equal to 101% of the
principal amount thereof, plus accrued and


                                       20
<PAGE>

unpaid interest to the date of purchase. There can be no assurance that the
Company will have access to sufficient funds to repurchase the Notes in the
event of a change in control.

         The indenture governing the Notes (the "Indenture") contains various
affirmative and restrictive covenants applicable to the Operating Company and
its subsidiaries, including limitations on the ability of the Operating Company
and its subsidiaries to, among other things, (i) incur additional indebtedness
(other than certain permitted indebtedness) unless the Operating Company's
Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is
greater than 2.25 to 1.00, and (ii) make distributions to the Company, make
investments (other than permitted investments) in any person, create liens,
engage in transactions with affiliates, suffer to exist any restrictions on the
ability of a subsidiary to make distributions or repay indebtedness to the
Company, engage in sale and leaseback transactions, enter into a merger,
consolidation or sale of all or substantially all of its assets, sell assets or
harvest timber in excess of certain limitations or engage in a different line of
business. Under the Indenture, the Operating Company will be permitted to make
cash distributions to the Company so long as no default or event of default
exists or would exist upon making such distribution (a) if the Operating
Company's Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture)
is greater than 1.75 to 1.00, in an amount, in any quarter, equal to Available
Cash (as defined in the Indenture) for the immediately preceding fiscal quarter
or (b) if the Operating Company's Consolidated Fixed Charge Coverage Ratio is
equal to or less than 1.75 to 1.00, in an aggregate amount not to exceed (i)
$7.5 million less the aggregate of all restricted payments made under this
clause (b)(i) during the immediately preceding 16 fiscal quarters (or shorter
period, if applicable, beginning on the issue date of the Notes), plus (ii) the
net proceeds of certain capital contributions (including the sale of Units)
received by the Company. The Operating Company did not meet the fixed charge
coverage tests at December 31, 2002 and is therefore not permitted to make any
cash distributions to the Company. Accordingly, the Company is not able to make
distributions to its Unitholders.

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

Affiliate Credit Facility

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

Capital Expenditures/Cash Distributions

         Capital expenditures in 2002 totaled $3.3 million. The Company
purchased timber cutting rights from its affiliate for approximately 12.0 MMBF
of timber for $1.3 million. The remaining $2.0 million in capital expenditures
were mainly in the nature of land management/silviculture costs. Capital
expenditures were financed through cash flow generated by operations. As the
Company does not currently own and does not plan to own


                                       21
<PAGE>

manufacturing facilities, and all logging is subcontracted to third parties, it
is anticipated that capital expenditures in the future will not be significant
and will consist mainly of land management/silviculture expenditures. It is
currently anticipated that the Company will not maintain significant log
inventories, although small log inventories may be maintained for a short period
of time, or incur material capital expenditures for machinery and equipment. The
Company anticipates that capital expenditures will be approximately $1.4 million
in 2003 consisting primarily of capitalized silviculture costs and miscellaneous
equipment purchases.

         Cash required to meet the Company's debt service will be significant.
To meet its working capital requirements, the Company has been selling logs and
making timber sales at a rate in excess of the General Partner's estimate of the
current annual board footage growth on the Company's timberlands. The debt
service and, prior to the first quarter of 2001, quarterly cash distributions
have been funded from operations and borrowings. Given projected volumes for
sales of logs and timber, estimated current board footage growth on the
timberlands and the harvest restrictions in the Notes, unless prices improve,
costs are reduced, new markets are developed or the Company makes accretive
acquisitions, the Company does not expect to make cash distributions. The
Company continues to evaluate means to improve cash flows, including the factors
mentioned above. There can be no assurance that prices will improve or that the
Company will be able to take any of these actions and it is unlikely prices will
improve or any of these actions will take effect within a short-term horizon.
Although the Company has been approached recently regarding certain debt
restructuring scenarios, discussions have been very preliminary and it is
premature to access the likelihood of pursuing any such scenario or other
material transaction.

Effects of Inflation

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

Recent Developments

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

Recent Accounting Standards

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


                                       22
<PAGE>

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

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

In January 2003, the FASB issued Interpretation No. 46 (FIN 46) "Consolidation
of Variable interest Entities" which is an interpretation of Accounting Research
Bulletin No. 51 "Consolidated Financial Statements". FIN 46 requires the
consolidation of entities in which an enterprise absorbs a majority of the
entity's expected losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership, contractual or other financial
interests in the entity. Currently, entities are generally consolidated by an
enterprise when It has a controlling financial interest through ownership of a
majority voting interest in the entity. The provisions of FIN 46 are required to
be applied by the Company no later than July 1,2003, and would require the
Company to consolidate the financial statements of U.S. Timberlands Yakima, LLC
("UST"} its unconsolidated affiliate which is presently being accounted for on
the equity method (see Notes 3 and 9). If the Company had consolidated USTY
beginning January 1, 2002, there would have been no effect on the Company's net
loss for the year ended December 31, 2002, however revenues would have increased
by $6,157, expense would have increased by $ $17,203 and the $11,046 equity in
net loss of affiliate would be eliminated. In addition, although there would. be
no change in Partners Capital/(Deficiency), total assets would increase by
approximately $106,000, principally representing timber and timberlands, and
total liabilities would increase by approximately $106,000 including $96,053 of
long-term debt at December 31,2002. Such long-term debt is collateralized by all
of the USTY asssts and the debt holder does not have recourse to the Company.
The Company's maximum exposure to loss as a result of its involvement with USTY
is limited to its investment in USTY, which amounts to $38,881 at December 31,
2002.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

         Not applicable.


Item 8. Financial Statements

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

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

         Not applicable.


                                       23
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

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

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

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


                                       24
<PAGE>

Directors, Executive Officers and Key Employees of the General Partner


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

      Name           Age           Position with General Partner
      ----           ---           -----------------------------

John M. Rudey        59    Chairman, Chief Executive Officer, President and
                           Director (1)
Aubrey L. Cole       79    Director (2)

George R. Hornig     48    Director (3)

William A. Wyman     64    Director (4)

Alan B. Abramson     57    Director (5)

Robert F. Wright     77    Director (6)

Thomas C. Ludlow     56    Vice President and Chief Financial Officer

Martin Lugus         62    Vice President, Timberland Operations

Robert B. Longo      49    Corporate Controller

Walter L. Barnes     60    Assistant Vice President, Harvesting

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

Christopher J. Sokol 53    Assistant Vice President, Forestry

Travis A. Huntley    56    Assistant Vice President, Marketing

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

(2)  Member of the Compensation and LTIP Committees.

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

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

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

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

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

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


                                       25
<PAGE>

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

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

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

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

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

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

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


                                       26
<PAGE>

Key Employees

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

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

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

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

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

Compliance with Section 16(a) of the Exchange Act

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

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

Item 11. Executive Compensation

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

           The following table sets forth annual salary, bonus and all other
compensation awards and payouts earned by the General Partner's Chief Executive
Officer and the four most highly compensated executive officers


                                       27
<PAGE>

who earned in excess of $100,000 (the "Named Executive Officers") for services
rendered during the fiscal year ended December 31, 2002:

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

<TABLE>
<CAPTION>
                                                                        Long-Term
                                                     Annual            Compensation
                                                  Compensation           Awards
                                                  ------------           ------

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

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

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

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

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

</TABLE>

Long-Term Incentive Plan

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

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


                                       28
<PAGE>

           Upon exercise of a Unit Option, the General Partner will acquire
Common Units in the open market at a price equal to the then-prevailing price on
the principal national securities exchange upon which the Common Units are then
traded, or directly from the Company or any other person, or use Common Units
already owned by the General Partner, or any combination of the foregoing. The
General Partner will be entitled to reimbursement by the Company for the
difference between the cost incurred by the General Partner in acquiring such
Common Units and the proceeds received by the General Partner from an optionee
at the time of exercise. Thus, the cost of the Unit Options will be borne by the
Company. If the Company issues new Common Units upon exercise of the Unit
Options, the total number of Units outstanding will increase and the General
Partner will remit the proceeds received from the optionee to the Company.

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

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

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

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

<TABLE>
<CAPTION>
                                                            Number of Securities
                                                           Underlying/Unexercised      Value of Unexercised
                                                              Options/SARs at        In-the-Money Options/SARs at
                         Shares                              December 31, 2002           December 31, 2002
                        Acquired                             ----------------            -----------------
   Name                on Exercise   Value Realized    Exercisable     Unexercisable   Exercisable  Unexercisable
<S>                       <C>           <C>              <C>           <C>            <C>         <C>
John M. Rudey              --           $--              39,304        117,914        $--         N/A (1)
Thomas C. Ludlow           --           $--              12,500         37,500        $--         N/A (1)
Martin Lugus               --           $--              16,083         48,248        $--         N/A (1)
Walter L. Barnes           --           $--               8,577         25,733        $--         N/A (1)
Robert A. Broadhead        --           $--               8,577         25,733        $--         N/A (1)
</TABLE>

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

         Restricted Unit Plan. A Restricted Unit is a "phantom" unit that
entitles the grantee to receive a Common Unit upon the vesting of the phantom
unit. No grants have been made under the Restricted Unit Plan. The LTIP
Committee may, in the future, determine to make grants under such plan to key
employees and directors containing such terms as the Committee shall determine.
Restricted Units granted during the Subordination Period will vest


                                       29
<PAGE>

automatically upon, and in the same proportions as, the conversion of the
Subordinated Units to Common Units. Common Units to be delivered upon the
"vesting" of rights may be Common Units acquired by the General Partner in the
open market, Common Units already owned by the General Partner, Common Units
acquired by the General Partner directly from the Company or any other person,
or any combination of the foregoing. The General Partner will be entitled to
reimbursement by the Company for the cost incurred in acquiring such Common
Units. If the Company issues new Common Units, the total number of Units
outstanding will increase and the Company will receive no remuneration.

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

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

Compensation of Directors

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

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

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

Employment Agreements

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

         The agreement provides for an annual base salary of $450,000, subject
to such increases as the Board of Directors of the General Partner may authorize
from time to time. Effective January 1, 2001, the Board of Directors authorized
an increase to $463,500. In addition, the Executive is eligible to receive an
annual cash bonus to be determined by the Compensation Committee not to exceed
100% of his base salary. The Executive will be entitled


                                       30
<PAGE>

to participate in such other benefit plans and programs as the General Partner
may provide for its employees in general.

         The agreement provides that in the event the Executive's employment is
terminated without "Cause" (as defined in the Employment Agreements) or if the
Executive terminates his employment for "Good Reason" (as defined below), such
individual will be entitled to receive a severance payment in an amount equal to
his base salary for the remainder of the employment term under the Employment
Agreement or 12 months, whichever is less, plus a prorated bonus for the year of
such termination calculated based on the bonus being equal to 100% of base
salary. In the event of termination due to death or disability, the Executive
will be entitled to accrued salary and benefits up to the date of the
termination. In the event the individual's employment is terminated for "Cause,"
he will receive accrued salary and benefits up to the date of termination.

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

Committee Interlocks and Insider Participation in Compensation Decisions

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

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

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

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

Performance Table

         The table below compares the total return of the Common Units of the
Company (TIMBZ) from November 1997 through December 2002 with the Wilshire 5000
Index (WFKX) and a portfolio (TIMBER) consisting of Boise Cascade Corporation,
Plum Creek Timber Co., LP and Crown Pacific Partners, LP. The total shareholder
return assumes $1.00 invested at the beginning of the period in the Company's
common units, the Wilshire 5000 Index and the TIMBER portfolio. The graph
assumes dividends are reinvested.


                                       31
<PAGE>

                 TIMBZ  Wilshire 5000      Timber Index*
December-97       100.0        100.0              100.0
December-98       71.3         123.4              98.7
December-99       61.8         152.5              115.9
December-00       52.0         135.9              111.2
December-01       18.7         138.5              127.5
December-02       22.8         109.6              107.6

 *Timber Index contains:    Boise Cascade Corp.
                            Plum Creek Timber Co., LP
                            (merged with The Timber Company October 2001)
                            Crown Pacific Partners, LP


                                       32
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management


         The following table sets forth, as of March 15, 2003, the beneficial
ownership of Units held by (i) beneficial owners of five percent or more of the
Units (ii) directors and executive officers of the General Partner and (iii) all
directors and executive officers of the General Partner as a group.

<TABLE>
<CAPTION>
                                                                                Percentage of
                                                      Percentage of  Subordinated Subordinated  Percentage of
                                       Common Units    Common Units     Units        Units       Total Units
                                       Beneficially   Beneficially   Beneficially Beneficially  Beneficially
     Name of Beneficial Owners            Owned          Owned           Owned        Owned          Owned
     -------------------------            -----          -----           -----        -----          -----
<S>                                     <C>                <C>        <C>            <C>             <C>
U.S. Timberlands Acquisition Co, LLC(1)  6,911,122          71.98%                                    53.9%
U.S. Timberlands Holdings Group, LLC(1)  8,454,002          88.05%     3,211,590      100.0%          91.0%
John M. Rudey(2)                         8,682,306          90.43%     3,211,590      100.0%          92.8%
Thomas C. Ludlow(3)                         12,500               *          --           --              *
George R. Hornig(4)                         39,305               *          --           --              *
Robert F. Wright(5)                        189,000            1.97%                      --             1.5%
Aubrey L. Cole(6)                          189,000            1.97%                      --             1.5%
Alan B. Abramson(7)                         12,500               *          --           --              *
William A. Wyman(8)                         12,500               *          --           --              *
All Directors and Executive Officers
   as a Group (7 persons)                9,137,111          95.16%     3,211,590      100.0%          96.4%
</TABLE>

 *-Less than 1% of class.

         (1)      Current address is 625 Madison Ave nue, Suite 10-B, New York,
                  NY 10022.

         (2)      Current address is 625 Madison Ave nue, Suite 10-B, New York,
                  NY 10022.

         (3)      Current address is 625 Madison Avenue, Suite 10-B, New York,
                  NY 10022. Includes 3,211,590 Subordinated Units and 8,452,292
                  Common Units owned by Holdings Group. Mr. Rudey is attributed
                  100% beneficial ownership of all units owned by Holdings Group
                  through his interests therein. In addition, Mr. Rudey's units
                  include all 189,000 of Common Units owned by U.S. Timberlands
                  Services Co., LLC. Mr. Rudey owns a 78.75% interest in U.S.
                  Timberlands Services Company, LLC, the Partnership's General
                  Partner. Also includes 39,305 Common Unit equivalents
                  representing exercisable unit options at April 15, 2002.

         (4)      Current address is 625 Madison Avenue, Suite 10-B, New York,
                  NY 10022.

         (5)      Current address is 1220 Park Avenue, New York, NY
                  10128.Includes 39305 Common Unit equivalents representing
                  exercisable unit options at March 30, 2002.

         (6)      Current address is 57 West 57th Street, Suite 704, New York,
                  NY 10019. Includes all 189,000 Common Units owned by U.S.
                  Timberlands Services Co., LLC. Mr. Wright owns a 2.5% interest
                  in U.S. Timberlands Services Company, LLC, the Partnership's
                  General Partner.

         (7)      Current address is 16825 Northchase Drive, Suite 800, Houston,
                  TX 77060. Includes all 189,000 Common Units owned by U.S.
                  Timberlands Services Co., LLC. Mr. Cole owns a 2.5% interest
                  in U.S. Timberlands Services Company, LLC, the Partnership's
                  General Partner.

         (8)      Current address is 501 Fifth Avenue, New York, NY 10017.
                  Common Units beneficially owned are Common Unit equivalents
                  representing exercisable unit options at April 15, 2002.

         (9)      Current address is 4 North Balch Street, Hanover, NH 03755.
                  Common Units beneficially owned are Common Unit equivalents
                  representing exercisable unit options at March 30,2002.


                                       33
<PAGE>

         All of the outstanding member interests in the General Partner are
owned by management, directors and related persons and entities. The members of
the General Partner are parties to an operating agreement, which, among other
things, provides that the member interests of management and directors who
retire, resign or otherwise terminate their relationship with the General
Partner will be repurchased by the General Partner. In addition, each member
other than affiliates of Mr. Rudey is provided certain "tag along" and "bring
along" rights with respect to sales of member interests in the General Partner
by Mr. Rudey's affiliates. See "Certain Relationships and Related
Transactions--Repurchase of Certain Member Interests; Severance Payments."

Item 13. Certain Relationships and Related Transactions

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

Consulting Agreements

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

Investment in Affiliate

         In October 1999, the Company made an investment in U.S. Timberlands
Yakima, LLC (USTY), an unconsolidated affiliate. USTY, an entity organized to
acquire timber properties located in Central Washington and Central Oregon, is
engaged in the growing of trees and sale of logs and standing timber to third
party wood processors. The Company contributed to USTY $294,000 of cash for 49%
of USTY's common interests (the "Common LLC Interests"). The remaining Common
LLC Interests were acquired for $306,000 in cash by U.S. Timberlands Holding
Group, LLC, a Delaware limited liability company in which John Rudey and George
Hornig, respectively, the Chairman of the Board and a director of the Company's
General Partner, hold a controlling interest. The Company also acquired all of
the senior preferred interests in USTY (the "Senior or Preferred LLC Interests")
for its contribution to USTY of timberlands consisting primarily of non-income
producing, pre-merchantable pine plantations having an agreed upon value of
$22.0 million. The Company recorded its investment in the Senior LLC interest at
its $18.9 million cost basis for the contributed timberlands. Terms of the
Preferred LLC Interests include a cumulative annual guaranteed return of 5% of
the $22.0 million agreed upon value of the contributed timberlands until
December 31, 2001 and 6% thereafter. The Preferred LLC Interests are redeemable
at USTY's option for a redemption price equal to the agreed upon value of the
Preferred LLC Interests less any portion of the guaranteed return not received
by the Company prior to the redemption date. Generally, USTY's net income or
losses are allocated to the Common LLC Interests. However, net losses exceeding
the account balances of the Common LLC Interests are allocated to the Preferred
LLC Interest. The Company accounts for the Preferred LLC Interest at cost,
reduced by losses, if any, in excess of the Common LLC Interests. The Company
accounts for its Common LLC Interest by the equity method. A subsidiary of the
General Partner of the Company provides management services to USTY for a fee
equal to 2% of USTY's agreed upon assets under management.

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

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


                                       34
<PAGE>

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

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

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

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

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

During the twelve months ended December 31, 2002, the Company contributed
cutting rights and timberland located in Central Oregon to its affiliate, USTY.
The contributions have an aggregate agreed upon value of $18.5 million and were
added to the Company's Preferred Interest in USTY. Terms of the additional
senior preferred interest acquired are the same terms as the senior preferred
interest previously issued to the Company. The Company recorded its additional
preferred interest at its basis for the cutting rights and timberland of
approximately $18.3 million. All property that has been contributed for the
Company's preferred interest in USTY has been pledged as collateral by USTY
under its credit facility with its lender.

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

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

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

Affiliate Credit Facility

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

Item 14. Controls and Procedures

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

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

        On February 28, 2003, our executive officers completed an evaluation of
the disclosure controls and procedures and has determined them to be functioning
properly and effectively. They did not discover any significant deficiencies or
material weaknesses within the controls and procedures that required
modification. Since the completion of that evaluation, there have been no
significant changes in internal controls or in other factors that could
significantly affect internal controls.


                                       35
<PAGE>

                                     PART IV

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

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

(a)(3) Exhibits
      T3.1 - Amended and Restated Agreement of Limited Partnership of U.S.
             Timberlands Company, LP

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

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

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

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

     *10.5 - Employment Agreement for Mr. Rudey

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

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

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

     *21.1 - List of Subsidiaries

      23.1 - Consent of Eisner LLP dated April 14, 2003

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

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

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

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

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

(b.) Reports on Form 8-K

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


                                       36
<PAGE>

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

                                   SIGNATURES

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

                               U.S. TIMBERLANDS COMPANY, LP


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

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

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

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

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

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

                                                                  April 14, 2003
/s/ Aubrey L. Cole                Director
----------------------------
Aubrey L. Cole

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

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

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

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


                                       37
<PAGE>

  EXHIBIT INDEX

                                                                        Page No.
                                                                        --------

23.1 Consent of Eisner LLP dated April 14, 2003.                           39



                                       38
<PAGE>

                                  CERTIFICATION

I, John M. Rudey, certify that:

I have reviewed this annual report on Form 10-K of U.S. Timberlands Company, LP.

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

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

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

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

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

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

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

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

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

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


      Date: April 14, 2003


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


                                      F-1
<PAGE>

                                  CERTIFICATION


I, Thomas Ludlow, certify that:


I have reviewed this annual report on Form 10-K of U.S. Timberlands Company, LP.

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

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

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

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

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

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

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

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

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

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

      Date: April 14, 2003

                                                    /s/ Thomas C. Ludlow
                                                    -----------------
                                                    Thomas C. Ludlow
                                                    Chief Financial Officer



<PAGE>

CONSOLIDATED FINANCIAL STATEMENTS

Contents Page

U.S. Timberlands Company, LP:

Independent auditors' report                                                F-2

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

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

Consolidated statements of changes in partners' capital (deficiency)
for the years ended December 31, 2002, 2001 and 2000                        F-5

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

Notes to consolidated financial statements                                  F-7

U.S. Timberlands Yakima, LLC:

Independent auditors' report                                                F-21
Balance sheets as of December 31, 2002 and 2001                             F-22

Statements of operations for the years ended December 31, 2002, 2001,
and 2000                                                                    F-23

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

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

Notes to financial statements                                               F-26


                           F-1

<PAGE>

INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Partners of U.S.
Timberlands Company, LP



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

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

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

Eisner LLP

New York, New York

April 11, 2003
                                                                             F-1

<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Consolidated Balance Sheets
(in thousands, except unit information)
<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                                   2002       2001
                                                                                ---------      --------
<S>                                                                             <C>            <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                          965      $  1,070
   Accounts receivable, net                                                         1,028           311
   Due from general partner                                                             6            --
   Other receivables                                                                  211           280
   Notes receivable                                                                 1,344         1,153
   Prepaid expenses and other current assets                                          331           225
                                                                                ---------      --------
        Total current assets                                                        3,885         3,039
Timber and timberlands, net                                                       163,980       214,511
Investment in affiliate                                                            38,881        31,609
Property, plant and equipment, net                                                    905           811
Notes receivable, less current portion                                                 10           428
Restricted cash                                                                        82
Deferred financing fees, net                                                        3,298         3,973
                                                                                ---------      --------
        Total assets                                                            $ 211,041      $254,371
                                                                                =========      ========

LIABILITIES AND PARTNERS' CAPITAL/ (DEFICIENCY)
Current liabilities:
   Accounts payable                                                                 1,454      $  1,334
   Accrued liabilities                                                              3,990         3,331
   Payable to general partner                                                          --            41
                                                                                ---------      --------
        Total current liabilities                                                   5,444         4,706
                                                                                ---------      --------
Long-term debt                                                                    225,000       225,000
                                                                                ---------      --------
Minority interest                                                                      --           247
                                                                                ---------      --------
Partners' capital /(deficiency):
   General partner interest                                                          (196)          247
   Limited partners interest (12,859,607 units issued and outstanding as of
     December 31, 2002 and 2001)                                                  (19,207)       24,171
                                                                                ---------      --------
                                                                                  (19,403)       24,418
                                                                                ---------      --------
        Total liabilities and partners' capital (deficiency)                    $ 211,041      $254,371
                                                                                =========      ========
</TABLE>

See notes to consolidated financial statements


                                      F-2
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Consolidated Statements of Operations
(in thousands, except unit and per unit amounts)

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                             2002              2001              2000
                                                                          ------------      ------------      ------------
<S>                                                                      <C>               <C>               <C>
Revenues:
   Log, timber deed and stumpage sales,
     including $9,900 (2002), $19,015 (2001) and $2,900 (2000) to an     $     42,256      $     54,128      $     72,268
     affiliate
   Timber and property sales
     including $4,700 in 2002 to an affiliate                                   5,763                 -             2,773
   By-products and other                                                        1,455               436               571
                                                                          ------------      ------------      ------------
                                                                               49,474            54,564            75,612
                                                                          ------------      ------------      ------------
Cost of products sold:
   Cost of timber harvested                                                   (17,477)          (16,652)          (19,853)
   Cost of timber and property sales                                           (7,273)                -            (2,641)
   Fire loss                                                                     (591)                -                 -
   Depletion, depreciation and road amortization                              (27,476)          (37,287)          (28,816)
                                                                          ------------      ------------      ------------
                                                                              (52,817)          (53,939)          (51,310)
                                                                          ------------      ------------      ------------
        Gross profit (loss)                                                    (3,343)              625            24,302

Selling, general and administrative expenses                                   (7,518)           (8,340)           (8,428)
Equity in net income (loss) of affiliate                                      (11,046)           (6,403)            1,990
                                                                          ------------      ------------      ------------
Operating income (loss)                                                       (21,907)          (14,118)           17,864

Interest expense                                                              (21,657)          (21,993)          (21,921)
Amortization of deferred financing fees                                          (675)             (675)             (675)
Interest income                                                                    13               101               403
Other income, net                                                                 158               131               208
                                                                          ------------      ------------      ------------
Loss before minority interest                                                 (44,068)          (36,554)           (4,121)
Minority interest                                                                 247               366                41
                                                                          ------------      ------------      ------------
Net loss                                                                      (43,821)          (36,188)           (4,080)
General partner interest                                                          443               366                41
                                                                          ------------      ------------      ------------
Net loss applicable to common and subordinated units                     $    (43,378)     $    (35,822)     $     (4,039)
                                                                         ============      ============      ============

Net loss per each common and subordinated unit-
          basic and diluted                                                    ($3.37)           ($2.79)           ($0.31)

Weighted average units outstanding                                         12,859,607        12,859,607        12,859,607
</TABLE>

See notes to consolidated financial statements


                                      F-3
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

 Consolidated Statements of Changes in Partners' Capital (Deficiency)
 (in thousands, except per unit amounts)

<TABLE>
<CAPTION>
                                             General Partner   Limited Partner         Total
                                                Interest          Interest       Partners' Capital
                                                                                    (Deficiency)
<S>                                                <C>         <C>                <C>
Balance, December 31, 1999                          981           96,182             97,163
Distributions to unitholders ($2.00 per unit)      (262)         (25,719)           (25,981)
Net loss                                            (41)          (4,039)            (4,080)
                                               --------       ----------         ----------
Balance, December 31, 2000                          678           66,424             67,102
Distributions to unitholders ($0.50 per unit)       (65)          (6,431)            (6,496)
Net loss                                           (366)         (35,822)           (36,188)
                                               --------       ----------         ----------
Balance, December 31, 2001                          247           24,171             24,418
Net loss                                           (443)         (43,378)           (43,821)
                                               --------       ----------         ----------
Balance, December 31, 2002                        $(196)      $  (19,207)        $  (19,403)
                                               ========       ==========         ==========
</TABLE>


See notes to consolidated financial statements


                                      F-4
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

<TABLE>
<CAPTION>
   Consolidated Statements of Cash Flows
   (in thousands)
                                                                                                   Year Ended December 31,
                                                                                       2002              2001                2000
                                                                                       ----              ----                ----
   Cash flows from operating activities:
<S>                                                                                    <C>               <C>               <C>
  Net (loss)                                                                           $(43,821)         $(36,188)         $ (4,080)
  Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
       Depreciation, depletion, amortization and cost of
          timber and property sold                                                       34,749            37,287            31,457
       Fire loss                                                                            574                --                --
       Gain on disposal of assets                                                            --                (2)              (39)
       Amortization of deferred financing fees                                              675               675               675
       Equity in net (income) loss of affiliate                                          11,046             6,403            (1,990)
       Other non-cash items                                                                 173               233               127
       Minority interest                                                                   (247)             (366)              (41)
       Changes in assets and liabilities:
          Accounts receivable                                                              (717)            4,119            (3,758)
          Other receivables                                                                  69              (120)              (36)
          Notes receivable                                                                  227               704             2,363
          Prepaid expenses and other current assets                                        (106)             (190)              946
          Accounts payable                                                                  120               112               876
          Accrued liabilities                                                               659                 5                40
          Deferred revenue                                                                   --            (1,474)            1,435
          Payable to general partner and affiliate                                         (168)           (2,024)              896
                                                                                       --------          --------          --------

            Net cash provided by operating activities                                     3,233             9,174            28,871
                                                                                       --------          --------          --------

Cash flows from investing activities:
  Purchase of property, plant and equipment                                                (160)               --               (55)
  Proceeds from sale of assets                                                               --               904                50
  Timber, timberlands and road additions                                                 (3,096)           (5,615)           (2,253)
  Restricted cash                                                                           (82)               --                --
                                                                                       --------          --------          --------


            Net cash used in investing activities                                        (3,338)           (4,711)           (2,258)
                                                                                       --------          --------          --------

Cash flows from financing activities:
  Distributions to partners                                                                  --            (6,496)          (25,981)
  Distributions to minority interest                                                         --               (65)             (262)
                                                                                       --------          --------          --------

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

Net (decrease) increase in cash and cash equivalents                                       (105)           (2,098)              370
Cash and cash equivalents, beginning of period                                            1,070             3,168             2,798
                                                                                       --------          --------          --------

Cash and cash equivalents, end of period                                               $    965          $  1,070          $  3,168
                                                                                       ========          ========          ========

Supplemental cash flow information:
  Cash paid for interest expense                                                       $ 21,657          $ 22,033          $ 21,786
Noncash activities:
  Contribution of timberlands for investment in affiliate                              $ 18,317          $ 16,289          $     --
</TABLE>

See notes to consoliodated financial statements


                                      F-5
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

Business and Significant Accounting Policies:

Business

U.S. Timberlands Company, LP (the "MLP"), a Delaware limited partnership, was
formed in 1997 to acquire and own 99% of the equity interests in U.S.
Timberlands Klamath Falls, LLC ("USTK" and the "Operating Company") and through
the Operating Company to acquire and own the business and assets of U.S.
Timberlands Management Company, LLC, formerly known as U.S. Timberlands Services
Company, LLC. As used herein, "Company" refers to the consolidated entities of
the MLP and the Operating Company.

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

U.S. Timberlands Services Company, LLC (the "General Partner" and "New
Services") manages the businesses of the MLP and the Operating Company. The
General Partner owns a 1% general partner interest in the MLP and a 1% general
partner interest in the Operating Company. All management decisions related to
the Company are made by the General Partner.

Consolidation

The accompanying consolidated financial statements include the accounts of the
MLP and its subsidiary, the Operating Company. All material intercompany
transactions and balances have been eliminated. An investment in an affiliate is
accounted for by the equity method (See Note 3).

Use of Estimates

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

Revenue Recognition

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

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts and notes receivable. The
majority of the Company's trade accounts and notes receivable are derived from
sales to third party wood processors. The Company's four largest, non-affiliated
customers accounted for approximately 25%, 10%, 10%, and 10% of the Company's
aggregate net revenues from log, stumpage, and timber deed sales for the year
ended December 31, 2002. In 2001, these customers represented approximately 22%,
6%, 7%, and 6%, respectively, of aggregate net revenues from log, stumpage and
deed sales. In 2000, these four customers accounted for approximately 14%, 16%,
8%, and 2% of aggregate net revenues from log, stumpage and deed sales. No other
single customer accounted for more than 6% of aggregate net revenues from log,
stumpage,


                                      F-6
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

 1. Business and Significant Accounting Policies (continued):

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

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

Cash and Cash Equivalents

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

Timber and Timberlands

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

Timber, timberlands and roads

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

Seed orchard and nursery stock

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

Property, Plant and Equipment

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

The cost of property, plant and equipment is depreciated using the straight-line
method over the estimated useful lives of the related assets. Buildings and
improvements are generally depreciated over 40 years and equipment is
depreciated over 3 to 5 years. Leasehold improvements are amortized under the
straight-line method based on the shorter of the lease periods or the estimated
useful lives of the improvements.

Deferred Financing Fees

Deferred financing fees consist of fees incurred in connection with obtaining
the related debt financing. The Company amortizes deferred financing fees over
the terms of the related debt. The Company presents deferred


                                      F-7
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

1. Business and Significant Accounting Policies (continued):

financing fees net of accumulated amortization. The accumulated amortization of
deferred financing fees as of December 31, 2002 and 2001 was $3,452 and $2,777,
respectively.

Minority Interest

The General Partner holds a 1% ownership interest in the Operating Company (the
"Minority Interest"). A pro rata share of the Operating Company's results of
operations is allocated to the Minority Interest in the accompanying financial
statements. Losses allocated to the Minority Interest in 2002 did not exceed the
balance in its account.

Income Taxes

The MLP is a master limited partnership and USTK is a limited liability company
("LLC"). Accordingly, the MLP and the LLC are not liable for federal or state
income taxes since the MLP's and the LLC's income or loss is reported on the
separate tax returns of the individual Unitholders or members. Accordingly, no
provision for current or deferred income taxes has been reflected in the
accompanying financial statements.

Per Unit Information

Net income (loss) per unit is calculated using the weighted average number of
common and subordinated units outstanding, divided into net income (loss), after
adjusting for the 1% General Partner interest in the MLP. Unit options will be
included in calculating diluted net income (loss) per unit, assuming the results
would be dilutive, upon achievement of the performance criteria which, if
maintained for the required period, would result in the options becoming
exercisable (See Note 10). Unit options have not been included in the diluted
calculation as the effect is anti-dilutive.

Unit-Based Compensation Plans

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

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

Basic and diluted net (loss) percent
     - as reported                                                         (3.37)      (2.79)     (0.36)

Basic and diluted net (loss) percent
     - pro forma                                                           (3.43)      (2.84)     (0.36)
</TABLE>


                                      F-8
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

1. Business and Significant Accounting Policies (continued):

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

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

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

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

Recent Accounting Standards

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

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

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

In January 2OO3, the FASB issued Interpretation No. 46 (FIN 46) "Consolidation
of Variable interest Entities" which is an interpretation of Accounting Research
Bulletin No. 51 "Consolidated Financial Statements". FIN 46


                                      F-9
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

1. Business and Significant Accounting Policies (continued):

requires the consolidation of entities in which an enterprise absorbs a majority
of the entity's expected losses, receives a majority of the entity's expected
residual returns, or both, as a result of ownership, contractual or other
financial interests in the entity. Currently, entities are generally
consolidated by an enterprise when It has ~a controlling financial interest
through ownership of a majority voting interest in the entity.

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


2. Timber and Timberlands:

Timber and timberlands consisted of the following at December 31:

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

3. Investment in Affiliate:

Following is summarized financial information for U.S. Timberlands Yakima, LLC,
the Company's equity basis affiliate (See Note 9), as of and for the years ended
December 31:


                                      F-10
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

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


                                      F-11
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

4. Property, Plant and Equipment:

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

                                                                  2002     2001
                                                                  -----   -----
   Equipment                                                   $    654  $  646
   Buildings and improvements                                       995     843
                                                               --------  ------
                                                                  1,649   1,489
   Less accumulated depreciation and amortization                   744     678
                                                               --------  ------
                                                               $    905  $  811
                                                               ========  ======
5. Accrued Liabilities:
Accrued liabilities consisted of the following at December 31:

                                                                2002     2001
                                                               -----    -----
   Interest                                                 $  2,752 $   2,752
   Severance and harvest tax                                     144        65
   Other                                                       1,094       514
                                                            -------- ---------
                                                            $  3,990 $   3,331
                                                            ======== =========
6. Short-Term Debt:

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

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


                                      F-12
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

The affiliate has made no commitment to continue to lend funds to the Company
and each request is considered on a case by case basis.

7.  Long-Term Debt:

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

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

8. Partners' Capital:

Partnership Equity

The MLP had 9,648,017 Common Units and 3,211,590 Subordinated Units outstanding
on December 31, 2002 and 2001 and 8,577,487 Common Units and 4,282,120
Subordinated Units on December 31, 2000. In February 2001, 1,070,530
Subordinated Units converted into Common Units.

Partnership Income (loss)

As provided in the MLP Agreement and the Operating Company's Operating
Agreement, income and losses are allocated 98% to the holders of outstanding
Common Units (the Common Unitholders) and Subordinated Units (the Subordinated
Unitholders), 1% to the General Partner's general partner interest in the MLP
and 1% to the General Partner's minority interest in the Operating Company.

Cash Distributions

The Company is required to make quarterly cash distributions from Available
Cash, as defined in the MLP Agreement, if cash is available for distributions.
If made, cash distributions are paid in order of preferences: first, the minimum
quarterly distribution of $.50 per unit (the "MQD") to Common Unitholders and
the General Partner, and second, to the extent cash remains available, to
Subordinated Unitholders. On February 14, 2001, the Company made a $0.50 per
unit distribution. The Company announced on May 10, 2001 that it has
indefinitely suspended further distributions due to declining log prices and
deteriorating business conditions.

The MLP Agreement sets forth certain cash distribution target rates for the
Company to meet in order for the General Partner's share of Available Cash to
increase (such increases referred to as "Incentive Distributions"). To the
extent that the quarterly distributions exceed $.550 per Common and Subordinated
Unit, the General Partner


                                      F-13
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

8.  Partners' Capital (continued):

receives 15% of the excess Available Cash rather than the base amount of 2%. To
the extent that the quarterly distributions exceed $.633 per Common and
Subordinated Unit, the General Partner receives 25% of the excess Available Cash
and to the extent that the quarterly distributions exceed $.822 per Common and
Subordinated Unit, the General Partner receives 50% of the excess Available
Cash. Since the quarterly distributions did not exceed the minimum quarterly
distributions for 2002, 2001 or 2000, the General Partner did not receive any
such Incentive Distributions for those years.

Subordinated Units

The Subordinated Units are subordinated in right of distributions to the right
of Common Unitholders to receive the MQD. Because the MQD was paid to Common and
Subordinated Unitholders for three consecutive four-quarter periods and such
distributions were equal to or less than the Company's Adjusted Operating
Surplus, as that term is defined in the MLP Agreement, for two consecutive
four-quarter periods, in February 2001 25% of the then outstanding Subordinated
Units converted. Since no distributions have been made since February 2001 and
the Company has announced an indefinite suspension of distributions, conversion
of the remaining Subordinated Units is unlikely in the foreseeable future.

Liquidation Preference

During the subordination period, Common Unitholders will generally be entitled
to receive more per unit in liquidating distributions than Subordinated
Unitholders. Following conversion of the Subordinated Units into Common Units,
all units will receive the same liquidation treatment.

 9. Certain Relationships and Related Party Transactions:

General Partner

The General Partner has the ability to control management of the Company and has
all voting rights of the Company except for certain matters set forth in the MLP
Agreement, as amended ("MLP Agreement"). The ownership of Subordinated and
Common Units by certain affiliates of the General Partner effectively gives the
General Partner the ability to prevent its removal.

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

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

Consulting Agreements

As of December 31, 2002, the General Partner has consulting agreements with
affiliates of certain Directors of the


                                      F-14
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

Investment in Affiliate

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

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

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

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

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

During 2001, the Company contributed cutting rights and timberland located in
Central Oregon to USTY. The contributions have an aggregate agreed upon value of
$18.5 million and were added to the Company's Preferred Interest in USTY. Terms
of the additional senior preferred interest acquired are the same terms as the
senior preferred interest previously issued to the Company. The Company recorded
its additional preferred interest at its cost for the cutting rights and


                                      F-15
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

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

timberland of approximately $16.3 million. All property that has been
contributed for the Company's preferred interest in USTY has been pledged as
collateral by USTY under its credit facility with its lender.

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

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

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

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

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

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

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

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

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

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

Payments to Affiliate

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

Severance and Settlement

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


                                      F-16
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

Other Related Party Transactions

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

10. Management Incentive Plans:


Unit Option Plans

The Company has a Unit Option Plan, which permits the grant of options (the
"Unit Options") to employees and directors of the General Partner who perform
services for the Company, covering 857,749 Common Units. Unit Options granted
under the Company's Unit Option Plan are determined by the Long-Term Incentive
Plan Committee of the Board of Directors (the "LTIP Committee") and are granted
at fair market value at the date of the grant. In 1999, 200,000 Unit Options
were granted to directors and 142,620 options were granted to employees. In
2000, 54,000 Unit Options were granted to employees. In 2001 and 2002, there
were no Unit Options granted. The Unit Options granted expire ten years from the
date of grant and become exercisable automatically upon and in the same
proportion as the conversion of Subordinated Units to Common Units. See further
explanation of subordinated units and related performance criteria in Note 8.
Once the performance criteria are achieved, the Company will record compensation
expense for the difference between the exercise price and fair value of the
Common Units, with a corresponding increase to partnership capital. Although the
performance criteria were met for the years ended December 31, 2000 and 1999, no
compensation expense was recorded during such years, as the market price of the
units was less than the exercise price during the years. As indicated in Note 8,
distributions have been suspended and accordingly the performance criteria had
not been met for the years ended December 31, 2002 and 2001.

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

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

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


                                      F-17
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

10. Management Incentive Plans (continued):

Restricted Unit Plan:

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

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

Income Interests of the General Partner

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

11. Fair Value of Financial Instruments:


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

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

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


                                      F-18
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

12. Quarterly Results (Unaudited):

<TABLE>
<CAPTION>
                                                                        Quarter Ended
                                       ---------------------------------------------------------------------------------------------
                                            December 31          September 30         June 30           March 31         Total Year
                                       ------------------   -------------------  ----------------   -------------     --------------
<S>                                             <C>                <C>                <C>                <C>               <C>
2002
Revenues                                        $ 18,536           $ 13,323           $ 15,460           $ 2,155           $ 49,474
Gross profit (loss)                               (1,868)               204             (1,731)               52             (3,343)
Net  (loss)                                      (13,072)            (9,624)           (12,054)           (9,071)           (43,821)
Net (loss) per unit (1)(2)                         (1.00)             (0.74)             (0.93)            (0.70)             (3.37)

                                                                                                                               2001
2001
Revenues                                        $ 13,471           $ 24,299           $  7,327           $ 9,467           $ 54,564
Gross profit (loss)                                  245                764               (252)             (132)               625
Net  (loss)                                      (10,190)            (8,583)            (8,600)           (8,815)           (36,188)
Net (loss) per unit (1)(2)                         (0.78)             (0.66)             (0.66)            (0.68)             (2.79)
</TABLE>

(1)      See discussion of per unit information in Note 1 of the notes to
         consolidated financial statements

(2)      Basic and diluted.


13. 401(K) Defined Contribution Plan:

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

14.  Commitments, Contingencies and Other:


Log Supply Agreement

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

Fire Loss

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

Going Private Transaction

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


                                      F-19
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(dollar amounts in thousands, except per unit amounts)

14. Commitments, Contingencies and Other (continued):

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

Litigation

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

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

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

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

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

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


                                      F-20
<PAGE>

Independent Auditor's Report

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




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

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

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

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

Eisner LLP

New York, New York
April 11, 2003

                                      F-21
<PAGE>


US TIMBERLANDS YAKIMA, LLC

                                    BALANCE SHEETS
                                    (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                              December 31,
                                                                         ---------------------
                                                                            2002        2001
                                                                          -------     --------
<S>                                                                       <C>         <C>
ASSETS
Current assets:
   Cash and cash equivalents (including restricted
   cash of $829 at December 31, 2002 and $1,818 at December 31, 2001)     $ 1,754     $  3,824
   Accounts receivable                                                        126        1,728
   Other receivables                                                           81          114
   Notes receivable                                                            49           --
   Prepaid expenses and other current assets                                   80          113
                                                                          -------     --------
     Total current assets                                                   2,090        5,779
Timber and timberlands, net                                                124,79     9103,964
Equipment, net                                                                 33           53
Restricted cash                                                            12,791        6,809
Deposits                                                                       52           --
Interest rate cap agreement                                                 1,142        1,973
Notes receivable, less current                                                 32           --
portion
Deferred financing costs, net                                               4,036        3,759
                                                                          -------     --------
     Total assets                                                         $144,97     $122,337
                                                                          =======     ========

LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses                                  $   529     $  1,614
   Current portion of long-term debt                                          282          269
   Non-refundable deposit                                                   9,000           --
                                                                          -------     --------
     Total current liabilities                                              9,811        1,883
Long-term debt - credit facility, less current portion                     94,400       86,500
Other long-term debt, less current portion                                  1,653        1,935
Redeemable preferred member interest                                       39,111       32,019

Members' equity:
   Common members' interest                                                    --           --
                                                                          -------     --------
               Total liabilities and members' equity                     $144,975     $122,337
                                                                         ========     ========
</TABLE>

See notes to financial statements

                                      F-22
<PAGE>


US TIMBERLANDS YAKIMA, LLC

                            STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)

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

                                                                     23,467           10,453           15,588
                                                                   --------         --------         --------
       Gross                                                         (1,449)           3,121           10,018
       profit
       (loss)

Operating, general and administrative                                 4,437            3,082            1,368
                                                                   --------         --------         --------
       Operating income (loss)                                       (5,886)              39            8,650
                                                                   --------         --------         --------
Interest expense and commitment fees                                 (5,172)          (4,654)          (5,587)
Amortization of deferred financing fees                                (374)            (637)            (401)
Interest income                                                         160               52              138
Other income (expense), net                                              47               23               15
                                                                   --------         --------         --------
                                                                     (5,339)          (5,216)          (5,835)
                                                                   --------         --------         --------

(Loss) income before cumulative effect of accounting change         (11,225)          (5,177)           2,815
   Cumulative effect of accounting change                                --             (152)              --
                                                                   --------         --------         --------
       Net income (loss)                                           $(11,225)        $ (5,329)        $  2,815
                                                                   ========         ========         ========
</TABLE>


See notes to financial statements

                                      F-23
<PAGE>


US TIMBERLANDS YAKIMA, LLC
          STATEMENTS OF REDEEMABLE PREFERRED MEMBER INTEREST AND MEMBERS' EQUITY
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                             Reedemable       Common
                                                                              Preferred       Members'
                                                                           Member Interest     Equity

<S>                                                                         <C>               <C>
Balance, December 31, 1999                                                 $     18,243      $       --
Recapture of loss allocated to preferred interest                                   608              --
Guaranteed return to preferred interest                                           1,444              --
Balance of net income                                                                --             764
                                                                           ------------      -----------
Balance, December 31, 2000                                                       20,295             764
Timberlands and related cutting rights contributed                               16,289              --
Net loss                                                                         (4,565)           (764)
                                                                           ------------      -----------
Balance, December 31, 2001                                                       32,019              --
Timberlands and related cutting rights contributed                               18,317              --
Net loss                                                                        (11,225)             --
                                                                           ------------      -----------
Balance, December 31, 2002                                                 $     39,111      $       --
                                                                           ============      ===========
</TABLE>

See notes to financial statements


                                      F-24
<PAGE>

US TIMBERLANDS YAKIMA, LLC

                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                              Twelve Months Ended December 31,

                                                                                          2002              2001              2000
                                                                                         -----              -----             ---

 Cash Flows from Operating Activities:
<S>                                                                                     <C>               <C>               <C>
   Net Income (Loss)                                                                    $(11,225)         $ (5,329)         $ 2,815

Adjustments to reconcile net income (loss) to net cash provided by
          operating activities:
   Depreciation, depletion and amortization and cost of timber
       property sold                                                                      11,955             5,046            6,535
   Fire loss                                                                                 827                --               --
   Loss on disposal of assets                                                                  3                --               --
   Amortization of deferred financing fees                                                   374               637              401
   Accretion of discount on other long-term debt                                              96                26               --
   Cumulative effect of accounting change                                                     --               152               --
   Fair value adjustment of interest rate cap agreement                                      831               304               --
   Change in:
       Accounts receivable                                                                 1,602              (153)          (1,554)
       Receivable from preferred member                                                       --             1,110           (1,110)
       Other receivables                                                                      33                --               --
       Notes receivable                                                                      (81)              761             (761)
       Prepaid expenses and other current assets                                              34              (219)              25
       Accounts payable and accrued expenses                                              (1,088)              418            1,070
       Advance payment from customer                                                       9,000                --           (5,486)
                                                                                        --------          --------          -------

          Net cash provided by operating activities                                       12,361             2,753            1,935

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

          Net cash used in investing activities                                          (15,332)          (22,285)          (3,125)

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

          Net cash provided by (used in) financing activities                                901            22,922           (7,453)

Net (decrease) increase in cash, cash equivalents and restricted cash                     (2,070)            3,390           (8,642)
Cash, cash equivalents and restricted cash, beginning of year                              3,824               434            9,076
                                                                                        --------          --------          -------

Cash, cash equivalents and restricted cash, end of year                                 $  1,754          $  3,824          $   434
                                                                                        ========          ========          =======

Supplemental Cash Flow Information:
Cash paid during the year for interest                                                  $  2,744          $  4,419          $ 5,142

Noncash Investing and Financing Activities:
Timberlands received for preferred member interest                                      $ 18,317          $ 16,289          $    --
Interest rate cap agreement acquired for debt                                           $     --          $  2,270          $    --


</TABLE>

                        See notes to financial statements

                                      F-25
<PAGE>

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

1. Accounting Policies:

LINE OF BUSINESS:

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

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

USE OF ESTIMATES:

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

REVENUE RECOGNITION:

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

CONCENTRATION OF CREDIT RISK:

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

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

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

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

TIMBER AND TIMBERLANDS:

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



                                      F-26
<PAGE>

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

1.     Accounting Policies (Continued):

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

EQUIPMENT:

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

DEFERRED FINANCING COSTS:

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

INCOME TAXES:

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

RECENT ACCOUNTING STANDARDS:

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

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


                                      F-27
<PAGE>

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

2. Certain Timberland Transactions:

YAKIMA TIMBERLANDS:

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

ACQUISITIONS FOR PREFERRED INTERESTS:

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

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

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

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

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

TIMBER DEED PURCHASES FROM AND SALES TO AFFILIATE:

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

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

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


                                      F-28
<PAGE>

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

2. Certain Timberland Transactions (continued):

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

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

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

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

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

3. Timber and Timberlands:

Timber and timberlands consisted of the following at December 31:

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

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

4. Equipment:

Equipment consisted of the following at December 31:

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


                                      F-29
<PAGE>


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

5.  Long-Term Debt - Credit Facility:

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

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

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

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

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

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

The Refinancing also requires the establishment and maintenance of a series of
restricted cash accounts in the name of the trustee under the indenture
agreement, into which substantially all of the Company's cash collections are
required to be deposited. A portion of these funds is then released to the
Company to pay debt service and operating expenses as provided for in the
indenture agreement, and a portion is allocated to the various long-term
restricted cash accounts required by the indenture agreement The Company
estimates that $845 is required to be added to long-term restricted cash during
2003 respectively pursuant to the indenture provisions.

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

                                      F-30
<PAGE>

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

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

Maturities of Long-Term Debt:

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

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

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

6.   Members' Interests and Redeemable Preferred Interest:

Common Interests:


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

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

Preferred Interest:

Concurrent with the acquisition of the Yakima Timberlands, USTK contributed the
Antelope Timberlands having an agreed upon value of $22.0 million for all senior
preferred interests ("Preferred Interest") in the Company. At December 31, 2002
and 2001, as a result of contributions of timber cutting rights and additional
timberlands by USTK to the Company, the agreed upon value of the Preferred
Interest aggregated $59.0 million and $40.5 million respectively (see Note 2).
Terms of the Preferred Interest include a cumulative annual guaranteed return of
5% of the agreed upon value through December 31, 2001 and 6% thereafter. The
Preferred Interest is redeemable in whole or in part at the Company's option
while its long-term debt is outstanding and for one year and one day thereafter,
and at the preferred member's option thereafter for a redemption price equal to
the agreed upon value of the Preferred Interest, either in cash or by returning
the contributed timberlands, plus any portion of the guaranteed return not yet
paid by the Company prior to the redemption date. As of December 31, 2002, the
unpaid cumulative guaranteed return amounted to $5,020. The guaranteed return
for 2002 and 2001 has not been recorded by the Company due to the absence of
allocable net income for such years. No payments of the return have been made.

Allocation of Income (Loss):

As provided by the Company's operating agreement, income attributable to the
Common Interests is generally allocated according to their percentage of the
outstanding Common Interests. However, net losses exceeding the


                                      F-31
<PAGE>

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

account balances of the Common Interests are allocated to the Preferred
Interest. Losses, if any, allocated to the Preferred Interest are recaptured
prior to any income being allocated to the Common Interests. At December 31,
1999, $607 in losses had been absorbed by the Preferred Interest. These losses
were fully recovered by the Preferred Interest during 2000. Losses absorbed by
the Preferred Interest totaled $11,225 and $4,565 during 2002 and 2001,
respectively.

7. Fair Value of Financial Instruments:

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

Short-term financial instruments:

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

Long-term debt:

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

Interest rate Cap agreement:

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

8. Interest Rate Cap Agreement:

In September 2001, the Company entered into an interest rate cap agreement,
which expires in September 2013, and which will provide the Company with
interest rate protection should the interest rate payable on its long-term debt
incurred in 2001 (see Note 5) exceed 8% per annum. The agreement was purchased
for $2,270, payable in varying monthly amounts through September 2013. The
agreement is carried at fair value at the end of each financial reporting
period, and changes in its value are recorded currently in income. Should
interest rates on the Company's long term debt exceed 8% per annum, the cap
agreement will become effective as a cash flow hedge and periodic changes in its
value related to remaining future interest payments will be recorded in other
comprehensive income. The Company had entered into an earlier interest rate cap
agreement during 2000 which expired during 2001. Interest expense and commitment
fees include $831 (2002) and $304 (2001) related to the interest rate caps.

9.  Commitments and Contingencies:

Lease Agreement:

The Company leases office facilities under a non-cancelable operating lease
expiring in October 2004. Other office facilities are leased from a related
party under a non-cancelable lease expiring in 2024. Rent expense was $35, $27


                                      F-32
<PAGE>

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


and $17 for the years ended December 31, 2002, 2001 and 2000, respectively.
Future minimum payments required under the lease agreements are:

        Year ending December 31:

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

Log Supply Agreement:

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

Fire Loss:

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

Litigation:

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

Property Sale:

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

10. Related Party Transactions:

Prior to September 14, 2001, the Manager received reimbursement for reasonable
and necessary direct and indirect expenses related to managing the Company in
addition to a fee (the "Manager's Fee") of 2% of the Company's EBITDDA (as
defined in the Company's operating agreement). Under agreements then in effect,
there was an annual cap of $750 on the total payments to the Manager including
the Manager's Fee. On September 14, 2001 management of the Company was taken
over by US Timberlands Yakima Services, LLC ("Yakima Services"), a wholly owned
subsidiary of the Manager, which is paid a flat fee for management services
equal to 2% of the agreed


                                      F-33
<PAGE>

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


upon total timber and timberland asset valuation annually. Management fee
expense charged to operations for the years ended December 31, 2002, 2001 and
2000 amounted to $2,555, $1,137, including $298 applicable to the year 2000
which had previously been waived, and $0, respectively. Reimbursed expenses
totaled $205 in 2002, $866 in 2001 and $531 in 2000.

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

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

9. Subsequent Event

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


                                      F-34