UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549



                                    FORM 10-K
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1999         Commission File No.: 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 organization)                   Identification No.)

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

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

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


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

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

   Title of Each Class:              Name of Each Exchange on Which Registered:
       Common Units                            Nasdaq National Market

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

                                   Yes _X_  No ___

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

           The 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 Nasdaq National Market on February 29, 2000, was approximately $81,262,764.

           Documents incorporated by reference: None

<PAGE>


                          U.S. TIMBERLANDS COMPANY, LP



                                TABLE OF CONTENTS



<TABLE>
<CAPTION>
                                                                                                                               Page
<S>        <C>                                                                                                                  <C>
PART I

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

PART II
           Item 5.   Market for Registrant's Common Units and Related Security Holder Matters....................................12
           Item 6.   Selected Financial Data.....................................................................................16
           Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations.......................17
           Item 7A.  Quantitative and Qualitative Disclosures About Market Risk..................................................26
           Item 8.   Financial Statements........................................................................................26
           Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................26

PART III
           Item 10.  Directors, Executive Officers, Promoters and Control Persons of the Registrant..............................27
           Item 11.  Executive Compensation......................................................................................31
           Item 12.  Security Ownership of Certain Beneficial Owners and Management..............................................38
           Item 13.  Certain Relationships and Related Transactions..............................................................39

PART IV
           Item 14.  Exhibits, Financial Statements, and Reports on Form 8-K.....................................................41
</TABLE>

                                       ii

<PAGE>




                                     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 growing trees and
the sale of logs and standing timber. The Company owns approximately 561,000 fee
acres  of  timberland  and  cutting  rights  on  approximately  3,000  acres  of
timberland (collectively the "Timberlands") containing total merchantable timber
volume  estimated as of January 1, 2000 to be  approximately  1.8 billion  board
feet  ("BBF") in Oregon  east of the  Cascade  Range (the  "Timberlands").  Logs
harvested from the  Timberlands  are sold to  unaffiliated  domestic  conversion
facilities.  These logs are processed for sale as lumber, plywood and other wood
products,  primarily  for  use  in  new  residential  home  construction,   home
remodeling and repair and general industrial applications. The Company also owns
and  operates  its own seed  orchard and  produces  approximately  five  million
conifer  seedlings  annually from its nursery,  approximately  half of which are
used for its own internal reforestation programs, with the balance sold to other
forest products companies. Except as the context otherwise requires,  references
herein to, or descriptions  of, assets and operations of the Company include the
assets and  operations  of the  Operating  Company  (as  defined  below) and the
predecessors of the Company.

           The  Timberlands'  merchantable  timber  consists of  Ponderosa  Pine
(approximately  47%) and Douglas fir  (approximately  13%),  species  which have
historically  commanded  premium  prices over other softwood  species,  with the
balance consisting of Lodgepole Pine, White Fir and other softwood species.  The
Timberlands  have stands of varying  ages and are unique in the forests  east of
the Cascade  Range in Oregon in that  approximately  149,000  acres are actively
managed tree farms (the  "Plantations").  The Plantations were first established
by Weyerhaeuser Company ("Weyerhaeuser") in the early 1960s and acreage has been
planted each year since then.  Currently,  the  Plantations  contain age classes
ranging  generally from one to 38 years old.  Initial  thinning or harvesting of
the Plantation  stands is expected to begin within the next five years.  Because
the timber on the  Plantations  is generally  not yet  considered  merchantable,
volumes of timber on the Plantations are not included in the Company's estimated
merchantable  timber  volume.  The balance of the  Timberlands  are  composed of
natural stands. For a more complete description of the Company's properties, see
"Properties."

           In August  1996,  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. The Company believes that the age classes and species mix
of the  Ochoco  Timberlands  fit well with the  Klamath  Falls  Timberlands  and
provide the Company  flexibility  in developing  its harvest  plans.  In October
1999, the Company contributed primarily non-income  producing,  pre-merchantable
pine  plantation  timberlands  for an  investment  in an affiliate  (See Item 13
Certain  Relationships  and  Related  Transactions  and  Note  4 and  10 to  the
Consolidated Financial Statements).

           During the period from January 1, 1994 through the acquisition of the
Klamath Falls Timberlands by 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;  consequently  all of the Company's  sales are
made to unaffiliated third parties.


                                       1
<PAGE>


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. The Company entered into a 10-year
log supply agreement with Collins (the "Collins Supply Agreement") providing for
the  purchase by the plywood mill and delivery by the Company of a minimum of 34
million  board feet  ("MMBF")  of logs each year at market  prices.  The Collins
Supply Agreement is extendable by Collins for two additional five-year terms. In
addition to its sales under the Collins Supply Agreement, the Company sells logs
to conversion facilities located in the area surrounding the Timberlands.  There
are currently more than 50 primary  conversion  facilities  located within a 150
mile radius of the Company's Timberlands.

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;  Old  Services  owns
1,244,565  Subordinated Units;  Holdings owns 2,894,157  Subordinated Units; and
the  Founding  Directors  own an aggregate of 143,398  Subordinated  Units.  The
4,282,120  Subordinated  Units owned by Old Services,  Holdings and the Founding
Directors represent an aggregate 32.6% interest in the 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 unsecured  senior notes (the
"Notes).  See  "Management's  Discussion  and  Analysis  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 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
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,  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 to conduct the business of the
Company.



                                       2
<PAGE>


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 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  Partners  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  160 board feet per
acre per annum. The younger plantations, that presently have little merchantable
volume,  are  growing at a rate that is  expected  to average at least 315 board
feet per acre per annum to economic maturity in 50 to 60 years. This growth rate
is based on calculated volumes at the time of maturity. The Company has achieved
higher growth rates on the  Plantations by planting high quality  seedlings,  by
eliminating  competing  non-timber  growth from the  Timberlands and by applying
modern forestry practices to assist the growth of the timber. Currently,  nearly
all of the  seedlings  planted  are grown from  superior  seed  produced  in the
Company's seed orchard.  Management  does take action to enhance the growth rate
in the natural stands as well. For example,  selective  harvesting in the slower
growing  natural  stands  opens up the timber stand  allowing for more  vigorous
growth  of the  remaining  trees.  When it is no  longer  possible  to  maintain
acceptable  growth  rates in these  stands they will be  harvested  entirely and
converted to faster growing plantations.





                                       3
<PAGE>


Harvest Plans

           The Company strives to manage all of its  Timberlands,  including the
Plantations,  in an economically prudent and environmentally sensitive manner in
order to maximize their value over time. Integral to this management process are
the Company's  long-term  harvest plans.  The Company prepares its harvest plans
annually  based  on  analyses  of the  size and age  class  distribution  of the
Timberlands  and the economic  maturity of each harvest  tract.  The factors the
Company  considers in determining  its long-term  harvest plans  include,  among
other things,  current and expected  market  conditions,  competition,  customer
requirements,  the age, size and species  distribution of the Company's  timber,
assumptions  about timber growth rates which are improving over time as a result
of technological, biological and genetic advances that improve forest management
practices,  expected  acquisitions and dispositions,  access to the Timberlands,
availability of contractors,  sales contracts and  environmental  and regulatory
constraints.  The Company's harvest plans reflect the Company's expectations for
each  year's  harvest,  including  the  sites to be  harvested,  the  manner  of
harvesting  such sites,  the volume of each species to be harvested,  the prices
expected to be received for the Company's timber,  the amount of stumpage sales,
logging and other costs, thinning operations and other relevant information. The
Company has the  flexibility to update its harvest plans during the year to take
into consideration  changes in these factors. The Company harvested or committed
to harvest  from log,  stumpage  and timber  deed sales 187  million  board feet
(MMBF) in 1999 and plans to  harvest,  or commit to harvest,  approximately  160
MMBF in 2000.  The Company  also intends to sell  approximately  29 MMBF through
property sales in 2000.  Under the current harvest plans, the Company intends to
harvest its current  Timberlands  aggressively over approximately the next eight
to ten years  after  which time the  harvest  level is  expected to decline to a
level which the Company considers to be more sustainable over the long term. The
Company  believes  these harvest plans can be achieved;  however,  since harvest
plans are based on certain  assumptions,  many of which are beyond the Company's
control,  there can be no assurance that the Company will be able to harvest the
volumes  projected in its harvest plans.  While the Company's  debt  obligations
place certain limitations on the harvest plans, the Company believes that it has
sufficient  flexibility to permit  modifications  in response to fluctuations in
the  market  for logs and  lumber and the other  factors  described  above.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations." If the Company's  current  harvest plans are pursued  unaltered for
the  next ten  years,  if it  consummates  the land  sales  contemplated  by its
strategic plan and if its other strategic assumptions prove to be accurate,  the
Company  expects  that  its  timber  inventory  will  decline  through  2010 and
Ponderosa  Pine  volume  will  increase  as a  percentage  of its  total  timber
inventory  by such date.  The Company  expects that its  inventory  would remain
relatively stable thereafter.  Long term harvest plans,  growth rates and forest
inventory levels will be reviewed during 2000 and 2001. Such harvest plans, land
sales and other  strategic  assumptions do not take into account any acquisition
that the Company may consummate during such period.

Access

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

Sales and Markets

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



                                       4
<PAGE>


         The Company  currently  sells its  sawlogs or stumpage to  unaffiliated
wood products  manufacturers  and sells its chips to unaffiliated  pulp mills or
hardboard plants. The percentage of logs which are sold as  sawlogs/stumpage  or
pulp logs is dependent upon, among other things,  the species mix and quality of
the inventory  harvested and the market dynamics  affecting the region.  Most of
the  timber  on the  Timberlands  is  softwood  which,  due to its  long  fiber,
strength,  flexibility and other  characteristics,  is generally  preferred over
hardwood  for  construction  lumber and  plywood.  Once  processed,  sawlogs are
suitable for use as structural grade lumber,  appearance  grade boards,  plywood
and laminated  veneer and can also be  manufactured  for such end uses as window
trim, molding and door jambs.  During 1999,  sawlogs,  stumpage sales and timber
deed sales accounted for approximately 55.0%, 2.0% and 42.5%,  respectively,  of
the  Company's  revenue.  Chips,  which can be used to make  hardboard  or pulp,
accounted for approximately  0.1% of the Company's  revenues in 1999. The market
price of chips has historically been volatile, rising and falling with the price
of pulp.  Sales of seedlings  accounted for the remaining  0.4% of the Company's
revenues in 1999.

           The Company's  customers include numerous  unaffiliated  operators of
conversion facilities. Since its acquisition of the Klamath Falls Timberlands in
August  1996,  the Company has sold logs and chips from such  timberlands  to 25
different customers. Concurrent with the Weyerhaeuser Acquisition, 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. The Collins Supply Agreement is extendable by Collins for
two additional five-year terms. In 1999, timber sales to Collins,  Crown Pacific
Partners,  Boise  Cascade  Corporation  and  Ochoco  Lumber  Company,  combined,
accounted  for  approximately  64% of the  Company's  revenue.  No other  single
customer  accounted  for more than 10% of the  Company's  net revenues for 1999.
Collins made its purchases  pursuant to the Collins Supply Agreement,  while the
other purchases were made pursuant to short-term arrangements. Although the loss
of one or more of such  customers or other  significant  customers  could have a
material  adverse  effect on the Company's  results of  operations,  the Company
believes that the capacity for  processing  wood fiber in the Company's  markets
currently exceeds the supply and that,  therefore,  such customers could readily
be replaced.  There are  currently  more than 50 primary  conversion  facilities
located within a 150-mile radius of the Company's Timberlands.

Seasonality

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

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



                                       5
<PAGE>


Competition

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

           The Company  competes with numerous private land and timber owners in
the  northwestern  United  States and the state  agencies of Oregon,  as well as
immaterial amounts of foreign imports, primarily from Canada and New Zealand. In
addition,  the Company  competes with the USFS, the BLM and the Bureau of Indian
Affairs.  Certain  of  the  Company's  competitors  have  significantly  greater
financial resources than the Company.

           The  Company  believes  that it competes  successfully  in the timber
business for the following reasons:  (i) the Company has substantial holdings of
timber  properties which include  approximately  1.8 BBF of  merchantable,  good
quality  timber,  approximately  149,000  acres of plantation  timberland  and a
full-scale  seed  orchard  and  nursery  operation  located  in a  region  where
conversion  facilities  have been  experiencing  shortages in the supply of wood
fiber;  (ii) the Company  focuses on owning  timberlands  rather than  operating
conversion facilities,  which minimizes the Company's cost structure and capital
expenditures,  allows the  Company to seek the most  favorable  markets  for its
timber  rather than being  committed to supply its own  facilities,  and ensures
that the Company will not compete with its  customers;  (iii) the Company's lean
operating structure allows it to efficiently manage its Timberlands,  and should
enable it to acquire additional  timberlands without  commensurate  increases in
overhead;  and (iv) the Company's  computerized  geographic  information  system
("GIS")  enables the Company to evaluate the optimal  timing and patterns of the
harvest of its Timberlands and evaluate and integrate acquisitions of additional
timberlands.

Resource Management

Timber Resource Management

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

           Harvesting on the  Timberlands is conducted  using both selective and
regeneration  harvesting.  In selective  harvesting,  a partial harvest provides
merchantable  timber  and  opens up the  stand  for  supplemental  growth on the
remaining  stand.  Harvest entries are separated by  approximately 5 to 15 years
and each entry is prescribed  for volume to be removed,  spacing to be provided,
and diameter limits to be harvested. In regeneration  harvesting,  which is used
to harvest approximately 40% of the Company's timber, all merchantable volume is
removed in a single harvest. After an area has been regeneration harvested,  the
Company employs a reforestation contractor to plant two-year-old seedlings at an
optimal density of  approximately  350 trees per acre. The Company also attempts
to protect and maintain the ecosystem within the Timberlands while providing for
a reasonable harvest.  For example,  the Company typically leaves a mix of green
and dead trees at the harvest site, including some large trees, snags and downed
logs to provide  habitats for a variety of wildlife  species while enriching the
soil for successive generations of trees.



                                       6
<PAGE>

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

           The  Company's  policy is to ensure  that  every  acre  harvested  is
reforested in order to enhance the long-term value of its timberlands.  Based on
the geographic and climatic conditions of a given harvest site,  harvested areas
may be  regenerated  naturally,  by leaving  mature trees to reseed the area, or
replanted  with  seedlings.  Natural  regeneration  methods  are widely  used on
approximately  60% of the Company's  harvested  land.  Approximately  27% of the
Timberlands  acreage  currently  consist of Plantations.  The Company expects to
convert  approximately  3,000 to 8,000  acres of natural  stands to  Plantations
annually.  During 1999, the Company planted approximately 2.2 million seedlings.
Similar  planting  levels are expected for 2000. The Company uses seedlings from
its nursery (representing  approximately 90% of seedlings planted) to grow trees
with desirable  traits such as superior  growth  characteristics,  good form and
disease  resistance,  resulting in greater wood volume over a rotation than that
generated by naturally  regenerated  seedlings.  The  seedlings are grown in the
Company's nursery,  which uses seeds from the Company's seed orchard,  which was
established by  Weyerhauser  in 1973. The seed orchard  produces seed from trees
selected because they were the best genotype in their respective environments.

Geographic Information System ("GIS")

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

Federal and State Regulation

Endangered Species

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

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



                                       7
<PAGE>

           Based on the  latest  survey  available  to the  Company,  there were
approximately 68 bald eagle sites on the Klamath Falls Timberlands.  The Company
observes harvesting  restrictions around the eagle sites. Due in part to efforts
of the  Company  and its  Predecessor,  the bald eagle is expected to be removed
from the endangered species list in July, 2000.

           In addition,  the Company  conducts surveys to determine the presence
of northern spotted owls. The surveys have been conducted every year in order to
(i) meet the regulatory  requirements  for timber  harvest and other  management
activities, (ii) monitor existing sites and determine the current status of such
sites,  (iii) determine if areas  identified as containing  suitable habitat are
supporting  owls  and  (iv)  investigate  other  spotted  owl or  other  species
sightings.  The most recent of such  surveys  was  completed  in July 1999,  and
identified  approximately  28 northern  spotted owl sites  affecting the Klamath
Falls Timberlands, three of which are located on the Klamath Falls Timberlands.

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

Timberlands

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

Environmental Laws and Superfund

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

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



                                       8
<PAGE>


Access to Timberlands May be Limited by Federal Regulation

           A substantial portion of the Timberlands consists of sections of land
that are  intermingled  with or adjacent to sections of federal  land managed by
the USFS and the BLM.  Removal of trees from those  portions of the  Timberlands
requires  transportation of the logs by truck across logging and general purpose
roads. In many cases,  access is only, or most economically,  achieved through a
road or roads built  across  adjacent  federal  land  pursuant  to a  reciprocal
right-of-way  ("RROW").  Removal of federal timber often requires similar access
across the Timberlands. Recent litigation (not involving the Company) before the
United  States Court of Appeals for the Ninth  Circuit held that the BLM was not
required to consult with the USFWS,  which  administers  the Endangered  Species
Act, prior to approving a private  landowner's  proposal to build an access road
across  federal  land  pursuant to an existing  RROW  entered  into prior to the
enactment of the Endangered  Species Act wherein the BLM did not have discretion
to disapprove a road segment due to endangered  species concerns.  A reversal on
appeal  or a  rehearing  of that  case,  or  future  federal  law or  regulation
requiring  the BLM to consult with the USFWS in connection  with an RROW,  could
materially  adversely  affect the  Company's  ability to  harvest  the  affected
portion of the  Timberlands.  Certain of the Company's RROW  agreements  contain
provisions that require compliance with state and federal environmental laws and
regulations.  To the extent  that the  Company  acquires  new  Timberlands  that
require  access  through  federal  lands,  the  Company  may enter into new RROW
agreements  with  the  BLM  or  other  federal   agencies  which  would  require
consultation  with the USFWS. In addition,  the BLM has published advance notice
of its intent to revise  regulations  governing RROW agreements entered into the
future to, among other things,  expand the BLM's  consideration of environmental
and cultural factors in granting, issuing or renewing rights-of-way, provide the
BLM with  regulatory  authority  to object to the  location of roads  because of
potential  effects  on  threatened  or  endangered  species  and  allow  for the
abandonment of rights-of-way under certain circumstances.

Safety and Health

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




                                       9
<PAGE>


 Employees

           As of  March  15,  2000,  the  Company  had  32  salaried  employees,
including  employees  of the General  Partner  that  manage the  business of the
Company.  The employees of the  Timberlands  are not unionized,  and the Company
believes  that  its  employee  relations  are  good.  All of  the  silvicultural
activities  on the  Timberlands  and the  harvesting  and  delivery  of logs are
conducted by independent contractors who are not employees of the Company.

Item 2.  Properties

Timber Inventory

           The  Company  currently  owns and manages  approximately  561,000 fee
acres  of  timberland  and  cutting  rights  on  approximately  3,000  acres  of
timberland  containing total merchantable  timber volume estimated as of January
1, 2000 to be  approximately  1.8 BBF in Oregon east of the Cascade  Range.  The
Timberlands include substantial holdings of merchantable, good-quality timber. A
merchantable  tree is a tree of sufficient size that will produce a sound log 16
feet in length and at least 4.6 inches in diameter,  inside  bark,  at the small
end. The Company's  merchantable timber inventory consists of premium species of
softwood,  consisting  of  Ponderosa  Pine and Douglas fir,  species  which have
historically  commanded premium prices over other softwood  species,  as well as
Lodgepole  Pine,  White Fir and other  species.  The Company  believes  that the
Timberlands are suitable and adequate for current operations.

           The Timberlands  have stands of varying sizes and ages and are unique
in the forests east of the Cascade Range in Oregon in that approximately 149,000
acres of the 561,000 acre total  consist of actively  managed  pine  Plantations
with stands  ranging in age from one to 38 years.  The  Plantations  are stocked
with  high  quality  Ponderosa  Pine  (approximately  77%)  and  Lodgepole  Pine
(approximately  23%). Because the timber on the Plantations is generally not yet
considered  merchantable,  volumes of timber on the Plantations are not included
in the Company's estimated merchantable timber volume. However, initial thinning
of the  Plantation  stands,  including the thinning of commercial  quantities of
merchantable timber, is expected to begin within the next five years.
See "The Timberlands--Harvest Plans."

Merchantable Timber Inventory by Species

           The Company  maintains  data  regarding  the  estimated  merchantable
timber  inventory by species  within the  Timberlands.  All volumes are based on
information  developed by Company  personnel.  As of January 1, 2000,  the total
timber inventory amounted to 1.8 BBF. The Company's combined timber inventory by
MMBF and  percentage  is Ponderosa  Pine (860.2  (47%)),  Lodgepole  Pine (317.7
(18%)),  White Fir (349.5  (19%)),  Douglas fir (238.7  (13%)) and other species
(54.3 (3%)).  Other species include Cedar,  Sugar Pine,  Western Larch and Grand
Fir.

Size and Species Distribution of Merchantable Timber

           The Company's  Timberlands  are  diversified by species mix and, to a
lesser extent, by size distribution. Timber on the Timberlands generally reaches
merchantable  size between 40 and 50 years in natural  stands and between 25 and
35 years in the  Plantations.  The Company  maintains  data as to the  estimated
volume  distribution of merchantable timber on the Timberlands by species and by
diameter at  breast-height  ("DBH").  As of January 1, 2000,  approximately  453
MMBF, or 25%, of the merchantable timber had a DBH of 16 or more inches.



                                       10
<PAGE>


Acreage Distribution by Age Class on Plantations

           The Company also  maintains  data as to the acreage  distribution  of
timber on the  Plantations by age class.  As of January 1, 2000, the Plantations
totaled  149,000 acres.  Of the total  acreage,  57,000 acres range from 1 to 15
years of age,  82,000  acres range from 16 to 25 years of age,  and 10,000 acres
are 26 years of age or older.

Item 3.  Legal Proceedings

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

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

           There  were  no  matters   submitted  to  a  vote  of  the  Company's
Unitholders during the fourth quarter of 1999.





                                       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 Nasdaq  National Market
("Nasdaq")  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,  1999,  there  were  approximately  9,300  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 sales prices for the
Common Units on Nasdaq:
                                                   Common Unit Price Range
                                            ------------------------------------

                                                   High                Low
                                            -------------------- ---------------


First Quarter 1998.........................     $  21.50           $   20.31
Second Quarter 1998........................        21.88               18.00
Third Quarter 1998.........................        19.50               14.88
Fourth Quarter 1998........................        18.25               13.00
First Quarter 1999.........................        14.50               11.56
Second Quarter 1999........................        14.69               11.50
Third Quarter 1999.........................        15.75               10.75
Fourth Quarter 1999........................        13.38                9.81
First Quarter 2000 ........................        11.38*               9.50*

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


           * First Quarter 2000 high/low is through March 13, 2000.

           The last  reported  sale price of the Common Units on Nasdaq on March
13, 2000 was $ 9.50 per Common Unit.

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 the  second,  third  and  fourth
quarters of 1998 on August 14,  1998,  November  13, 1998 and February 12, 1999,
respectively.   During  1999,  the  Company  also  made  the  Minimum  Quarterly
Distributions of $0.50 per Unit for the first, second, third and fourth quarters
on February 12, 1999, August 13, 1999, November 15, 1999, and February 14, 2000,
respectively.

Cash Distribution Policy

General

           The Company currently expects to distribute 98% of its Available Cash
(defined  below) within 45 days after the end of each quarter to  Unitholders of
record and 2% to the General  Partner.  During a specified  period that will not
end earlier than December 31, 2002 (the "Subordination  Period"),  distributions
of  Available  Cash on  Subordinated  Units are  subordinated  to the  rights of
holders of the Common Units to receive  $0.50 per Common Unit per quarter,  plus
any arrearages in the Minimum Quarterly Distribution.

           Available  Cash as defined  in the  Partnership  Agreement  generally
means,  with respect to any quarter of the Company,  all cash on hand at the end
of  such  quarter  less  the  amount  of cash  reserves  that  is  necessary  or
appropriate in the reasonable  discretion of the General  Partner to (i) provide
for the proper conduct of the Company's  business,  (ii) comply with  applicable
law or any Company debt  instrument or other  agreement,  or (iii) provide funds
for  distributions  to Unitholders and the General Partner in respect of any one
or more of the next four quarters.



                                       12
<PAGE>


           Cash distributions will be characterized as distributions from either
Operating  Surplus or Capital  Surplus.  This  distinction  affects  the amounts
distributed to Unitholders  relative to the General  Partner,  and under certain
circumstances  it determines  whether holders of Subordinated  Units receive any
distributions.

           Operating Surplus,  as defined in the Partnership  Agreement,  refers
generally  to (i) the cash  balance  of the  Company  on the  date  the  Company
commences operations,  plus $15.0 million, plus all cash receipts of the Company
from its operations since the closing of the Transactions, less (ii) all Company
operating  expenses,  debt service payments (including reserves therefor but not
including  payments  required  in  connection  with  the sale of  assets  or any
refinancing  with the proceeds of new  indebtedness  or an equity  offering) and
reserves  established  for  future  Company  operations,  in each case since the
closing of the Transactions.

           Capital  Surplus as also defined in the  Partnership  Agreement  will
generally  be  generated  only by  borrowings  (other than for  working  capital
purposes),  sales of debt and equity securities and sales or other  dispositions
of assets for cash (other than inventory,  accounts  receivable and other assets
all as disposed of in the ordinary course of business and up to $50.0 million of
land sales).

           To avoid the difficulty of trying to determine whether Available Cash
distributed  by the Company is from Operating  Surplus or from Capital  Surplus,
all Available Cash distributed by the Company from any source will be treated as
distributed  from  Operating  Surplus  until  the  sum  of  all  Available  Cash
distributed  since the commencement of the Company equals the Operating  Surplus
as of the end of the quarter prior to such  distribution.  Any Available Cash in
excess of such amount  (irrespective  of its  source)  will be deemed to be from
Capital Surplus and distributed accordingly.

           If Available  Cash from Capital  Surplus is distributed in respect of
each  Common  Unit in an  aggregate  amount per Common Unit equal to $21.00 (the
"Initial Unit Price"), plus any Common Unit Arrearages,  the distinction between
Operating  Surplus and Capital  Surplus  will cease,  and all  distributions  of
Available  Cash will be  treated  as if they were from  Operating  Surplus.  The
Company does not anticipate  that there will be significant  distributions  from
Capital Surplus.

           The  Subordinated  Units are a  separate  class of  interests  in the
Company,  and  the  rights  of  holders  of such  interests  to  participate  in
distributions to partners differ from the rights of the holders of Common Units.
For any given  quarter,  any Available  Cash will be  distributed to the General
Partner and to the holders of Common Units,  and may also be  distributed to the
holders of  Subordinated  Units  depending upon the amount of Available Cash for
the quarter,  the amount of Common Unit  Arrearages,  if any, and other  factors
discussed below.

           The Incentive  Distributions  are nonvoting limited partner interests
that  represent  the right to  receive an  increasing  percentage  of  quarterly
distributions  of  Available  Cash  from  Operating  Surplus  after  the  Target
Distribution Levels have been achieved. The Target Distribution Levels are based
on the amounts of Available Cash from Operating Surplus distributed in excess of
the payments made with respect to the Minimum Quarterly  Distribution and Common
Unit Arrearages, if any, and the related 2% distribution to the General Partner.

Distributions from Operating Surplus during Subordination Period

           The Subordination  Period will generally continue until the first day
of any  quarter  beginning  after  December  31,  2002 in  respect  of which (i)
distributions  of Available Cash from Operating  Surplus on the Common Units and
the  Subordinated   Units  with  respect  to  each  of  the  three   consecutive
four-quarter periods immediately preceding such date equaled or exceeded the sum
of  the  Minimum  Quarterly   Distribution  on  all  of  the  Common  Units  and
Subordinated  Units during such  periods,  (ii) the Adjusted  Operating  Surplus
generated during each of the three consecutive  four-quarter periods immediately
preceding  such  date  equaled  or  exceeded  the sum of the  Minimum  Quarterly
Distribution on all of the outstanding  Common Units and Subordinated Units that
were  outstanding  during such period on a  fully-diluted  basis and the related
distribution  on the general  partner  interest in the Company and the  managing
member  interest in the Operating  Company,  and (iii) there are no  outstanding
Common Unit Arrearages.

           Prior  to the  end of the  Subordination  Period,  a  portion  of the
Subordinated  Units will convert into Common Units on a one-for-one basis on the
first day after the record date  established for the  distribution in respect of
any quarter ending on or after (a) December 31, 2000 with respect to one-quarter
of the Subordinated Units (1,070,530  Subordinated  Units), and (b) December 31,
2001  with  respect  to  one-quarter  of  the   Subordinated   Units  (1,070,530
Subordinated  Units),  in respect of which (i)  distributions  of Available Cash
from  Operating  Surplus on the  Common  Units and the  Subordinated  Units with
respect  to each  of the  three  consecutive  four-quarter  periods  immediately
preceding  such  date  equaled  or  exceeded  the sum of the  Minimum  Quarterly
Distribution  on all of the  outstanding


                                       13
<PAGE>

Common  Units and  Subordinated  Units  during such  periods,  (ii) the Adjusted
Operating  Surplus  generated  during each of the two  consecutive  four-quarter
periods  immediately  preceding  such date  equaled or  exceeded  the sum of the
Minimum Quarterly Distribution on all of the Common Units and Subordinated Units
that  were  outstanding  during  such  period on a fully  diluted  basis and the
related  distribution  on the  general  partner  interest in the Company and the
managing  member  interest  in the  Operating  Company,  and (iii)  there are no
outstanding Common Unit Arrearages; provided, however, that the early conversion
of the second one-quarter of Subordinated Units may not occur until at least one
year following the early  conversion of the first  one-quarter  of  Subordinated
Units.

           Upon   expiration  of  the   Subordination   Period,   all  remaining
Subordinated  Units will convert into Common  Units on a  one-for-one  basis and
will  thereafter  participate,   pro  rata,  with  the  other  Common  Units  in
distributions of Available Cash. In addition,  if the General Partner is removed
as the general partner of the Company under  circumstances  where Cause does not
exist and Units held by the General  Partner and its affiliates are not voted in
favor of such removal, (i) the Subordination Period will end and all outstanding
Subordinated  Units will immediately  convert into Common Units on a one-for-one
basis,  (ii) any existing Common Unit Arrearages will be extinguished  and (iii)
the General Partner will have the right to convert its general partner  interest
(and its right to  receive  Incentive  Distributions)  into  Common  Units or to
receive cash in exchange for such interests.

           "Adjusted Operating Surplus" for any period generally means Operating
Surplus  generated  during  such  period,  less (a) any net  increase in working
capital borrowings during such period and (b) any net reduction in cash reserves
for  Operating  Expenditures  during  such period not  relating to an  Operating
Expenditure  made during such  period;  and plus (x) any net decrease in working
capital  borrowings during such period and (y) any net increase in cash reserves
for Operating  Expenditures  during such period  required by any debt instrument
for the repayment of principal, interest or premium. Operating Surplus generated
during a period is equal to the  difference  between (i) the  Operating  Surplus
determined at the end of such period and (ii) the Operating  Surplus  determined
at the beginning of such period.

           Distributions by the Company of Available Cash from Operating Surplus
with respect to any quarter during the Subordination  Period will be made in the
following manner:

               first,  98% to the Common  Unitholders,  pro rata,  and 2% to the
          General  Partner,  until there has been distributed in respect of each
          outstanding  Common  Unit an  amount  equal to the  Minimum  Quarterly
          Distribution for such quarter;

               second,  98% to the Common  Unitholders,  pro rata, and 2% to the
          General  Partner,  until there has been distributed in respect of each
          outstanding  Common Unit an amount equal to any Common Unit Arrearages
          accrued  and  unpaid  with  respect to any prior  quarters  during the
          Subordination Period;

               third, 98% to the Subordinated  Unitholders,  pro rata, and 2% to
          the General  Partner,  until there has been  distributed in respect of
          each  outstanding  Subordinated  Unit an amount  equal to the  Minimum
          Quarterly Distribution for such quarter; and

               thereafter,    in   the   manner    described   in   "--Incentive
          Distributions" below.

           Notwithstanding  the foregoing,  no distributions  may be made on the
Subordinated  Units with respect to any quarter if the Consolidated Fixed Charge
Coverage Ratio (as defined in the  Partnership  Agreement) for the  four-quarter
period ended with such quarter is equal to or less than 1.75 to 1.00.

Incentive Distributions

           For any quarter for which  Available Cash from  Operating  Surplus is
distributed to the Common and Subordinated Unitholders in an amount equal to the
Minimum Quarterly  Distribution on all Units and to the Common Unitholders in an
amount equal to any unpaid Common Unit Arrearages, then any additional Available
Cash from Operating Surplus in respect of such quarter will be distributed among
the Unitholders and the General Partner in the following manner:

               first,  98% to all  Unitholders,  pro rata, and 2% to the General
          Partner,  until the  Unitholders  have  received  (in  addition to any
          distributions   to  Common   Unitholders  to  eliminate   Common  Unit
          Arrearages)  a total of $0.550  for such  quarter  in  respect of each
          outstanding Unit (the "First Target Distribution");

               second, 85% to all Unitholders,  pro rata, and 15% to the General
          Partner,  until the  Unitholders  have  received  (in  addition to any
          distributions   to  Common   Unitholders  to  eliminate   Common  Unit



                                       14
<PAGE>


          Arrearages)  a total of $0.633  for such  quarter  in  respect of each
          outstanding Unit (the "Second Target Distribution");

               third, 75% to all  Unitholders,  pro rata, and 25% to the General
          Partner,  until the  Unitholders  have  received  (in  addition to any
          distributions   to  Common   Unitholders  to  eliminate   Common  Unit
          Arrearages)  a total of $0.822  for such  quarter  in  respect of each
          outstanding Unit (the "Third Target Distribution"); and

               thereafter,  50% to all  Unitholders,  pro  rata,  and 50% to the
          General Partner.

           The  distributions to the General Partner set forth above that are in
excess of its  aggregate 2% general  partner  interest  represent  the Incentive
Distributions.  The right to receive Incentive  Distributions is not part of the
general partner interest and may be transferred separately from such interest in
certain limited  circumstances.  See "--The Partnership  Agreement--Transfer  of
General Partner's Interests and Incentive Distribution Rights."

Adjustment of Minimum Quarterly Distribution and Target Distribution Levels

           In addition to reductions of the Minimum  Quarterly  Distribution and
Target  Distribution  Levels made upon a  distribution  of  Available  Cash from
Capital Surplus,  the Minimum Quarterly  Distribution,  the Target  Distribution
Levels, the Unrecovered  Capital, the number of additional Common Units issuable
during the Subordination  Period without a Unitholder vote, the number of Common
Units  issuable  upon  conversion  of the  Subordinated  Units and other amounts
calculated  on a per Unit  basis  will be  proportionately  adjusted  upward  or
downward,  as  appropriate,  in the event of any  combination  or subdivision of
Common  Units  (whether  effected by a  distribution  payable in Common Units or
otherwise),  but not by reason of the  issuance of  additional  Common Units for
cash or property. For example, in the event of a two-for-one split of the Common
Units (assuming no prior adjustments), the Minimum Quarterly Distribution,  each
of the  Target  Distribution  Levels and the  Unrecovered  Capital of the Common
Units would each be reduced to 50% of its initial level.

           The Minimum Quarterly Distribution and the Target Distribution Levels
may also be adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant  governmental  authority in a manner that causes the
Company to become taxable as a corporation or otherwise  subjects the Company to
taxation as an entity for federal,  state or local income tax purposes.  In such
event, the Minimum  Quarterly  Distribution and the Target  Distribution  Levels
would be reduced to an amount equal to the product of (i) the Minimum  Quarterly
Distribution  and  each  of  the  Target  Distribution   Levels,   respectively,
multiplied by (ii) one minus the sum of (x) the maximum effective federal income
tax rate to which the Company is then subject as an entity plus (y) any increase
that results from such  legislation  in the  effective  overall  state and local
income tax rate to which the  Company  is  subject as an entity for the  taxable
year in which such event  occurs  (after  taking into account the benefit of any
deduction  allowable for federal income tax purposes with respect to the payment
of state and local  income  taxes).  For  example,  assuming the Company was not
previously  subject to state and local income tax, if the Company were to become
taxable as an entity for federal  income tax  purposes  and the  Company  became
subject to a maximum marginal federal, and effective state and local, income tax
rate of 38%, then the Minimum Quarterly Distribution and the Target Distribution
Levels would each be reduced to 62% of the amount thereof  immediately  prior to
such adjustment.




                                       15
<PAGE>




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


                                                      U.S. Timberlands (1)                       Predecessor (1)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                      August 30, 1996      January 1,
                                                                                          through           through
                                                                                        December 31,      August 29,
                                                  1999        1998         1997           1996               1996           1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>         <C>          <C>              <C>                <C>            <C>
CASH FLOWS AND OTHER DATA      (IN MILLIONS):
Modified EBITDDA (7).....................       $ 50.6      $ 44.2       $ 53.3           $ (1.4)            $ 3.6          $ 12.5
Additions to timber and timberlands (3)            1.0         0.6        111.6            283.6               0.5             1.0
Cash flow from (used in) operating
   activities ...........................         25.5        18.5         26.3             (3.0)              5.5            11.8
Cash flow from (used in) investing
   activities............................         (1.3)       (0.6)      (101.6)          (291.5)             (0.5)           (1.9)
Cash flow from (used in) financing
   activities............................        (26.2)      (23.7)        69.3            311.0              (5.1)          (10.0)

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

Operating income (loss) (2)(3)...........         27.2        16.3         27.3             (4.8)              2.7            11.1
Income (loss) before extraordinary
   items (4) ............................          6.4        (6.4)        (1.4)           (13.0)              2.7            11.6
Extraordinary items, losses on
   extinguishment of debt (5) ...........         --          --            9.3             --                --              --
Income (loss) before general partner
   and minority interest.................          6.4        (6.4)       (10.7)           (13.0)              2.7            11.6

PER UNIT DATA (6):
Basic income (loss) before
   Extraordinary items per unit:
   Common................................          0.48       (0.49)        3.05            --                --              --
   Subordinated .........................          0.48       (0.49)       (1.01)           (3.04)            --              --
Diluted income (loss) before
extraordinary
items per unit ..........................          0.48       (0.49)       (0.28)           (3.04)            --              --
Basic net income (loss) per unit:
   Common ...............................          0.48       (0.49)       (0.86)           --                --              --
   Subordinated .........................          0.48       (0.49)       (2.30)           (3.04)            --              --
Diluted net income (loss) per unit ......          0.48       (0.49)       (2.04)           (3.04)            --              --

BALANCE SHEET DATA (AT
    PERIOD END, IN MILLIONS):
Working capital .........................          2.4         1.4          1.8             21.5               0.5             1.3
Total assets (3) ........................        327.7       350.7        385.2            310.2              27.8            30.9
Long-term debt (8).......................        225.0       225.0        225.0            305.0              --              --
Equity (deficit) (9) ....................         97.2       116.9        145.6             (2.9)             27.8            29.2

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


</TABLE>



                                       16
<PAGE>



(1)        Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial
           and  operating  data after  August  30,  1996 are not  comparable  to
           financial and operating data of the  Predecessor.  In 1996,  USTK and
           Old Services were formed and subsequently  entered into the agreement
           to consummate the Weyerhaeuser  Acquisition.  As legal entities, USTK
           and Old  Services  were  not  consolidated.  However,  due to  common
           ownership and  management,  the financial  statements of USTK and Old
           Services prior to the Transactions  have been presented on a combined
           basis.
(2)        Revenues in 1999 consist of $76.6  million of log,  stumpage and deed
           sales and $0.4 million of  by-products  and other sales.  Revenues in
           1998 consist of $63.6 million of log and stumpage sales, $6.3 million
           of timber and  property  sales and $1.4  million of  by-products  and
           other  sales.  Revenues in 1997  consist of $60.4  million of log and
           stumpage  sales,  $15.2 million of timber and property sales and $1.7
           million  of  by-products  and  other  sales.  Revenues  prior to 1997
           consist  primarily of log sales.  See  "Management's  Discussion  and
           Analysis of Financial Condition and Results of Operations."
(3)        See  acquisition of Ochoco  Timberlands in July 1997 in Note 2 of the
           Notes to  Consolidated  Financial  Statements.  In August  1996,  the
           Company  acquired the Klamath Falls  Timberlands  for $283.5  million
           from Weyerhaeuser.
(4)        See effect of interest expense and amortization of deferred financing
           fees and debt guarantee fees in "Management's Discussion and Analysis
           of Financial Condition and Results of Operations."
(5)        See  effect  of  debt  extinguishment  in  Note  8 of  the  Notes  to
           Consolidated Financial Statements.
(6)        No per unit  information  is presented  for periods  ended August 29,
           1996  and  December  31,  1995  as the  Predecessor  had a  different
           ownership  structure  and  any  per  unit  information  would  not be
           relevant or  meaningful to the user of the selected  financial  data.
           See  discussion  of per unit  information  in Note 1 of the  Notes to
           Consolidated Financial Statements.
(7)        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."
(8)        See  discussion  of  long-term  debt  at  Note  8  of  the  Notes  to
           Consolidated Financial Statements.
(9)        The Weyerhaeuser Acquisition in August of 1996 was accounted for as a
           purchase.  Therefore,  the  financial  statements  as of and  for the
           periods ending prior to the date of the Weyerhaeuser  Acquisition are
           accounted  for  under  the  pre-Weyerhaeuser   Acquisition  basis  of
           accounting.  Because the Klamath Timberlands did not legally exist as
           a  stand-alone  entity,  there  are  no  separate  meaningful  equity
           accounts of the Predecessor prior to the Weyerhaeuser Acquisition.


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

Forward-Looking Statements

           Certain   information   contained  in  this  report  may   constitute
forward-looking  statements  within the meaning of the federal  securities laws.
Although   the   Company   believes   that   expectations   reflected   in  such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Forward-looking information is
subject to certain  risks,  trends and  uncertainties  that could  cause  actual
results  to differ  materially  from those  projected.  Such  risks,  trends and
uncertainties  include  the  highly  cyclical  nature  of  the  forest  products
industry, general economic conditions,  competition,  price conditions or trends
for the Company's products, the possibility that timber supply could increase if
governmental,   environmental  or  endangered   species  policies  change,   and
limitations  on the  Company's  ability  to  harvest  its  timber due to adverse
natural conditions or increased  governmental  restrictions.  The results of the
Company's  operations  and its  ability to pay  quarterly  distributions  to 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.


                                       17
<PAGE>


General

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

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


Supply and Demand Factors

Supply

           The supply of logs  available  for purchase has been most affected in
recent  years  by  significant   reductions  in  timber  harvested  from  public
timberlands,  principally  as a result of efforts  to  preserve  the  habitat of
certain  endangered  species,  as well as a change in the emphasis of government
policy toward habitat  preservation,  conservation  and recreation and away from
timber  management.  Since  the early  1970s,  environmental  and other  similar
concerns and  governmental  policies  have  substantially  reduced the volume of
timber under contract to be harvested from public lands.  The pace of regulatory
activity  accelerated in the late 1980s.  The resulting  supply  decrease caused
prices for logs to increase  significantly,  reaching  peak levels  during 1993.
Although  prices have declined from these record  levels,  current  prices still
exceed  pre-1993  levels.  The low supply of timber from public lands,  which is
expected to continue for the foreseeable  future,  has benefited  private timber
holders such as the Company through higher stumpage and log prices.

           Industry  participants  do not expect  environmental  restrictions to
ease  materially  within any reasonable  planning  horizon.  Consequently,  many
producers of lumber and wood products are  attempting to adapt to the new supply
environment by increasing their emphasis on raw material  yields,  entering into
long  term  timber  supply  arrangements  and  value  added  manufacturing,  and
accessing previously untapped supplies (such as private wood lot owners,  timber
with  difficult  access,  alternative  species and imports).  These factors have
tended to restrict prices from even greater increases. While raw material supply
is  expected  to be an  ongoing  challenge  for the  lumber  and  wood  products
industry,   such  conditions  are  likely  to  cause  the  favorable   operating
environment  for  timber  owners  such  as  the  Company  to  continue  for  the
foreseeable future.

           In  response  to an  increase  in timber  prices in the early  1990s,
imports of logs and lumber from abroad  (from  countries  such as Canada and New
Zealand)  increased.  These imports,  however,  only  partially  offset the lost
volume of  timber  from  public  timberlands  and did not  replace  the  mature,
high-quality  timber found in greater  quantities on public  timberlands.  Since
1993,  log imports have  decreased and their current  impact on timber prices is
minimal. However, pine lumber imports almost doubled in the same period.

Demand

           Changes in general  economic and demographic  factors,  including the
strength of the economy and interest rates for home  mortgages and  construction
loans,  have  historically  caused  fluctuations in housing starts and, in turn,
demand and prices for lumber and commodity wood products.  United States housing
starts for 1999 were at the highest  level since 1986.  Because of the growth of
the home center  distribution  business,  the repair and remodeling markets have
become a significant factor in terms of the demand for lumber and commodity wood
products and have dampened the wide  fluctuations that occurred when new housing
starts  were the  primary  factor.  A large  portion of the  Company's  property
consists of Pine species,  which are used in the finishing  market,  for molding
trim,  doors and windows.  This market is more affected by repair and remodeling
than new housing  construction.  Prices for these species,  primarily  Ponderosa
Pine,  reached a peak in the spring of 1993 and as a result attracted imports of
Radiata  Pine from New Zealand and Chile.  Domestic  markets  have  absorbed the
increasing  quantities of imported Radiata pine lumber,  and the result has been
relatively stable pricing for Ponderosa pine lumber.  The demand for logs in the
United  States is also affected by the level of lumber  imports.  In response to
increasing  lumber  imports from Canada,  the United States and Canada signed an
agreement in 1996 which restricts the  availability of Canadian  softwood lumber
in the United States.


                                       18
<PAGE>

The Company  believes that this  agreement has not had a material  impact on the
price or demand for logs in the United States  although its long-term  effect is
uncertain.

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

Current Market Conditions

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

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

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

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

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


                                       19
<PAGE>

Results of Operations

           The  following  table sets forth sales volume for each of 1999,  1998
and 1997 from the sale of logs, stumpage and timber deeds by thousand board feet
("MBF") and price per thousand board feet and the sales of property.


<TABLE>
<CAPTION>

                                        Sales Volume (MBF)                      Price Realization ($ Per MBF)
                                ---------------------------------------- ------------------------------------


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

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

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

</TABLE>

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

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

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

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

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


                                       20
<PAGE>


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

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

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

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

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

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

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

Partners' Capital

           During 1999 the  limited  partner  interest  in the Company  declined
$19.5 million from $115.7 million to $96.2 million.  This decline was the result
of distributions to Unitholders of $25.7 million during 1999 partially offset by
the limited  partner's  share of the Company's  net income of $6.2 in 1999.  The
General Partner interest in the Company also declined during 1999 reflecting its
share of the  Company's  distributions  and net  income  for 1999.  The  Company
currently expects to continue making distributions to Unitholders.  As a result,
the Company anticipates that partners' capital will continue to decline.


                                       21
<PAGE>



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

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

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

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

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

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

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

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

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

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

           Amortization of Deferred  Financing Fees and Debt Guarantee Fees. The
company  deferred $6.7 million of fees incurred in connection  with the issuance
of the Notes. These fees will be amortized over the term of the Notes, which are
due in November 2007.


                                       22
<PAGE>

The  amortization  of these fees during 1998 was $0.7  million.  During 1997 the
Company  recognized  $4.2 million of expense  related to debt guarantee fees and
amortization of deferred financing fees.

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

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

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

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

Partners' Capital

           During 1998 the  limited  partner  interest  in the Company  declined
$28.5 million from $144.2 million to $115.7 million.  This decline is the result
of the limited  partner's share of the Company's net loss and  distributions  to
Unitholders   during  1998,   which  were  $6.3   million  and  $22.2   million,
respectively.  The General Partner  interest in the Company also declined during
1998 reflecting its share of the Company's net loss and  distributions for 1998.
The Company  currently  expects to continue to incur  operating  losses and make
distributions  to its  Unitholders.  As a result,  the Company  anticipates that
partners' capital will continue to decline.


Liquidity and Capital Resources

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

           Operating Activities.  Cash flows provided by operating activities in
1999 were $25.5  million,  as  compared  to cash  flows  provided  by  operating
activities  of $18.5  million in 1998.  The $7.0 million  increase in cash flows
provided by operating  activities was primarily due to a $12.6 million  increase
in net income offset by a $3.5 million increase in notes  receivable  related to
timber deed sales and the addback of non-cash operating items.

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

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




                                       23
<PAGE>


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 will 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.  In addition,  at any time on or prior to November 15,
2000, the Operating  Company,  at its option,  may redeem the Notes with the net
cash  proceeds of a Common  Units  offering  or other  equity  interests  of the
Company,  at 109.625% of the principal  amount thereof,  plus accrued and unpaid
interest  thereon  to the  redemption  date,  provided  that at least 65% of the
principal amount of the Notes originally issued remain  outstanding  immediately
following such redemption.  Upon the occurrence of certain events constituting a
"change of control"  (as defined in the  Indenture),  the Company  must offer to
purchase the Notes,  at a purchase  price equal to 101% of the principal  amount
thereof, plus accrued and unpaid interest to the date of purchase.

           The indenture governing the Notes (the "Indenture")  contains various
affirmative and restrictive  covenants  applicable to the 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 after the closing of
this  offering  not to  exceed  (i)  $7.5  million  less  the  aggregate  of all
restricted  payments  made  under this  clause  (b)(i)  during  the  immediately
preceding 16 fiscal quarters (or shorter period, if applicable, beginning on the
issue  date of the  Notes),  plus  (ii)  the net  proceeds  of  certain  capital
contributions (including the sale of Units) received by the Company. The Company
was in compliance with these covenants at December 31, 1999 and 1998.





                                       24
<PAGE>



Affiliate Credit Facility

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

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

Capital Expenditures/Cash Distributions

           Capital   expenditures   in  1999  totaled  $1.0   million.   Capital
expenditures incurred were mainly in the nature of land management/silvicultural
expenses,  miscellaneous  equipment and computer hardware and software.  Capital
expenditures  were financed  through cash flow generated by  operations.  As the
Company  does  not  currently  own  and  does  not  plan  to  own  manufacturing
facilities, and all logging is subcontracted to third parties, it is anticipated
that capital expenditures in the future will not be significant and will consist
mainly  of  land   management/silvicultural   expenditures.   It  is   currently
anticipated  that the Company will not  maintain  significant  log  inventories,
although small log  inventories may be maintained for a short period of time, or
incur material  capital  expenditures  for machinery and equipment.  The Company
anticipates  that capital  expenditures  will be  approximately  $1.7 million in
2000. Capital  expenditures will consist primarily of capitalized  silvicultural
costs and miscellaneous equipment purchases.

           Cash required to meet the Company's  debt service and quarterly  cash
distributions will be significant. To meet its working capital requirements, the
Company has been selling logs and making timber sales at a rate in excess of the
General  Partner's  estimate of the current  annual board footage  growth on the
Company's  timberlands.  The General  Partner  expects that the debt service and
quarterly cash  distributions  will be funded from  operations  and  borrowings.
Given projected  volumes for sales of logs and timber,  estimated  current board
footage growth on the  timberlands  and the harvest  restrictions  in the Notes,
unless  prices  improve,  costs are  reduced,  new markets are  developed or the
Company makes  accretive  acquisitions,  the Company's  ability in the future to
make  distributions  at current  levels may be adversely  affected.  The Company
continues  to  evaluate  means to improve  cash  flows,  including  the  factors
mentioned above. However,  there can be no assurance that prices will improve or
that the Company will be able to take any of these actions.

Effects of Inflation

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




                                       25
<PAGE>




Year 2000 Compliance

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

SFAS No. 133

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

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

           Not applicable.

Item 8.  Financial Statements

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

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

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

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

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



                                       26
<PAGE>

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

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

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


                                    PART III

Item 10.  Directors,  Executive  Officers,  Promoters and Control Persons 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.





                                       27
<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.
<TABLE>
<CAPTION>

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

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

Aubrey L. Cole                            76        Director (2)

George R. Hornig                          45        Director (3)

William A. Wyman                          61        Director (4)

Alan B. Abramson                          54        Director (5)

Robert F. Wright                          74        Director (6)

Greg G. Byrne                             39        Vice President and Chief Financial Officer

Martin Lugus                              59        Vice President, Timberland Operations

Toby A. Luther                            26        Corporate Controller, Western Operations

Walter L. Barnes                          57        Assistant Vice President, Harvesting

Robert A. Broadhead                       48        Assistant Vice President, Marketing

Kurt A. Muller                            41        Assistant Vice President, Planning

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


  (1)      Member of the Executive (Chairman), Nominating (Chairman), Finance and Compensation Committees.
  (2)      Member of the Compensation and LTIP Committees.
  (3)      Member of the Executive, Audit, Finance (Chairman) and Compensation Committees.
  (4)      Member of the Audit (Chairman), Conflicts (Chairman), Compensation and LTIP Committees.
  (5)      Member of the Audit, Conflicts, Compensation (Chairman) and LTIP Committees.
  (6)      Member of the Nominating, Finance and LTIP (Chairman) Committees.
</TABLE>

           John M. Rudey serves as Chairman, Chief Executive Officer,  President
and as a Director of the General  Partner.  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.  Since
1989  Mr.  Cole  has  been a  consultant  for  Aubrey  Cole  Associates,  a sole
proprietorship   which  provides   management   consulting  services  and  makes
investments.  From 1986 to 1989, Mr. Cole was the Vice Chairman of the Board and
Director  of  Champion  International  Corporation  (a  publicly  traded  forest
products  company) and from 1983 to 1993,  Mr. Cole was the Chairman of Champion
Realty Corporation (a land sales subsidiary of Champion International).

           George R. Hornig serves as a Director of the General  Partner.  Since
1999,  Mr.  Hornig has been Managing  Director of Credit  Suisse First  Boston's
Private  Equity  Division.  From 1993 to 1999,  Mr. Hornig was an Executive Vice
President of Deutsche  Bank  Americas  Holdings,  Inc. (the United States arm of
Deutsche Bank, a German banking  concern) and affiliated  predecessor  entities.
From 1991 to 1993, Mr. Hornig was the President and Chief  Operating  Officer of
Dubin & Swieca Holdings,  Inc., an investment management business.  From 1988 to


                                       28
<PAGE>

1991, Mr. Hornig was a co-founder, Managing Director and Chief Operating Officer
of Wasserstein Perella & Co., Inc. (a mergers and acquisitions investment bank).
From 1983 to 1988,  Mr.  Hornig  was an  investment  banker in the  Mergers  and
Acquisitions  Group of The First Boston  Corporation.  Prior to 1983, Mr. Hornig
was an attorney with Skadden,  Arps, Slate, Meagher & Flom. Mr. Hornig is also a
director of SL Industries, Inc. and Forrester Research, Inc.

           William A. Wyman serves as a Director of the 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,  where,  until 1984,  he counseled a variety of service,  natural
resources and manufacturing  companies on projects  concerning  strategic profit
improvement and management  organization.  Mr. Wyman has served as a director of
Donaldson, Lufkin & Jenrette, Belvedere Reinsurance, and SS&C Technologies. Alan
B. Abramson serves as a Director of the 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.  Since
1988, Mr. Wright has served as President and Chief  Executive  Officer of Robert
F. Wright  Associates,  Inc., a firm making strategic  investments and providing
business consulting services. Previously, Mr. Wright spent 40 years, 28 years as
a partner,  at Arthur  Andersen & Co. Mr.  Wright is a director of the following
companies:  Hanover  Direct Inc. (a catalog  marketer),  Reliance  Standard Life
Insurance Co. and affiliates  (life insurance  companies),  The Navigators Group
Inc.  (a  property  insurance  company),  Deotexas  Inc.  (a  development  stage
company),  Universal American Financial Corp. (an insurance company),  Quadlogic
Controls Corp. (a meter manufacturer) and G.V.A.  Williams Real Estate Co., Inc.
(a real estate company).

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

           Martin Lugus serves as Vice President - Timberland  Operations of the
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.

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



                                       29
<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 1993-1996,  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 - Marketing of
the General  Partner,  responsible for all log and stumpage sales  transactions.
Mr.  Broadhead was employed by Weyerhaeuser  for 20 years and gained  additional
experience in investing and planning while serving as Planning Manager from 1981
to 1994.

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

           Christopher J. Sokol serves as Assistant Vice President - Forestry of
the  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 Nasdaq National Market. Officers,  directors and greater than
ten  percent  securityholders  are  required  by SEC  regulation  to furnish the
Company with copies of all Section 16(a) forms they file.

           Based on its review of the copies of such  forms  received  by it, or
written  representations  regarding ownership of the Company's  securities,  the
Company  believes  that during the fiscal year 1999,  all filings  required were
properly made.


                                       30
<PAGE>


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 who earned in
excess of $100,000 (the "Named Executive Officers") for services rendered during
the fiscal year ended December 31, 1999:


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>


                                                                                               Long-Term
                                                    Annual Compensation                       Compensation
                                                                                                 Awards

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

<S>                                  <C>             <C>             <C>         <C>                <C>              <C>
John M. Rudey                        1999            450,000         225,000       --               50,000              --
    Chairman and                     1998            300,000         150,000       --                   --              --
    Chief Executive Officer          1997            450,000              --       --           107,218(2)              --

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


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

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

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

(1)        Represents  amounts  paid to Mason,  Bruce,  & Girard for Mr.  Zane's
           services under a consulting  agreement between the Company and Mason,
           Bruce & Girard.  Subsequent  to  year-end,  Mr.  Zane  resigned as an
           acting  officer,   but  he  continues  to  serve  the  Company  as  a
           consultant.

(2)        Options granted in 1997 were repriced on December 14, 1998.



                                       31
<PAGE>


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).

             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.




                                       32
<PAGE>




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


<TABLE>
<CAPTION>
                                             LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
                                             -----------------------------------------------------

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

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

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

</TABLE>


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

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



<TABLE>
<CAPTION>
                                            OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

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

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

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

</TABLE>

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

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


                                       33
<PAGE>

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


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

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

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

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

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

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

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

-----
</TABLE>

(1)  At the close of trading  on  December  31,  1999,  the market  value of the
     Common  Units was $9.875 per common  unit.  Since the  Unit  Options,  once
     exercisable,  would be  exercisable  at a range of $13.375  to $14.750  per
     unit, the in-the-money computation is inapplicable.

(2)  Subsequent  to year-end,  Mr. Zane  resigned as an acting  officer,  but he
     continues to serve the Company as a consultant.

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



                                       34
<PAGE>

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.  Each
independent  director  receives $50,000  annually,  for which they each agree to
participate  in four  regular  meetings  of the  Board  of  Directors  and  four
Audit/Conflicts  Committee meetings.  Each other non-employee  director receives
$50,000  annually (to be paid in cash or  Subordinated  Units,  as determined by
each  director),  for  which  they each  agree to  participate  in four  regular
meetings of the Board of  Directors.  Each  non-employee  director  will receive
$1,250 for each additional meeting in which he participates.  In addition,  each
non-employee  director  will be  reimbursed  for his  out-of-pocket  expenses in
connection  with  attending  meetings of the Board of  Directors  or  committees
thereof.  Each director will be fully indemnified by the Company for his actions
associated with being a director to the extent permitted under Delaware law.

           The 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,  the
General Partner entered into a consulting agreement with Mr. Wyman that provides
for an annual  retainer of $50,000 for  services  rendered at the request of the
General  Partner.  Each  consulting  agreement  will be  reviewed  annually by a
majority of the directors who do not have consulting agreements.

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, 2002,
and includes confidentiality and non-compete provisions.

           The agreement provides for an annual base salary of $450,000, subject
to such increases as the Board of Directors of the General Partner may authorize
from time to time.  In addition,  the Executive is eligible to receive an annual
cash bonus to be determined by the Compensation  Committee not to exceed 100% of
his base salary.  The Executive  will be entitled to  participate  in such other
benefit plans and programs as the 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.



                                       35
<PAGE>

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.

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

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



                                       36
<PAGE>

Performance Table

           The table below  compares the total return of the Common Units of the
Company (TIMBZ) from November 1997 through  December 1999 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.



                                 TIMBZ             WFKX            TIMBER
          Nov-97                100.0000         100.0000         100.0000
          Dec-97                100.0000         101.7040          94.7896
          Jan-98                102.1080         102.1700         103.0213
          Feb-98                101.5060         109.4510         105.7293
          Mar-98                102.4100         114.7910         106.6437
          Apr-98                102.4100         116.0480         110.3357
          May-98                 99.9036         112.8170         103.2819
          Jun-98                 94.5963         116.6350         102.2340
          Jul-98                 93.6597         113.9770          93.3651
          Aug-98                 78.2635          96.0982          83.0294
          Sep-98                 89.8106         102.2350          91.1188
          Oct-98                 93.6596         109.7320          95.9207
          Nov-98                 78.4894         116.4920          96.2398
          Dec-98                 70.5745         123.7920          93.2971
          Jan-99                 76.5107         128.2460          94.4472
          Feb-99                 71.7288         123.4470          93.9306
          Mar-99                 65.5806         128.0590          98.6318
          Apr-99                 74.4613         134.0930         109.4997
          May-99                 72.3339         131.0020         110.3187
          Jun-99                 79.4254         137.6400         116.7763
          Jul-99                 89.3536         133.3330         112.8773
          Aug-99                 75.1705         132.0170         106.2294
          Sep-99                 63.3790         128.1260         109.7563
          Oct-99                 72.9596         133.4120         105.1845
          Nov-99                 65.2796         133.4120          99.5907
          Dec-99                 60.6716         133.4120         102.8240



                                       37
<PAGE>


Item 12.  Security Ownership of Certain Beneficial Owners and Management

           The following table sets forth the beneficial ownership of Units held
by  beneficial  owners of five percent or more of the Units,  by  directors  and
executive  officers of the General  Partner and by all  directors  and executive
officers of the General Partner as a group as of February 28, 2000.

<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>
 Rudey Timber Company, LLC (1)                306,550              3.6%            2,894,157           67.6%              24.9%

 U.S. Timberlands Management Company,          ----                ----            1,244,565            29.1              9.7%
 LLC (2)

 U.S. Timberlands Holdings, LLC (3)            ----                ----            2,894,157            67.6              22.5%

 John M. Rudey (4)                            551,535              6.4%            4,138,722            96.7              36.5%

 Greg Byrne (5)                                ----                ----               ----              ----              ----

 George R. Hornig (6)(11)                      ----                ----              48,160             1.1                 *

 Robert F. Wright (7)(11)                      ----                ----               ----              ----              -----

 Aubrey L. Cole (8)(11)                        ----                ----               ----              ----              ----

 Alan B. Abramson (9)                          ----                ----               ----              ----              ----

 William Wyman (10)                            ----                ----               ----              ----              ----

 All Directors and Executive Officers         551,535              6.4%            4,186,882            97.8              36.8%
  as a Group (7 Persons)
-----------------------------
</TABLE>

* Less than 1% of class.

(1)     Current  address is 625 Madison  Avenue,  Suite  10-B,  New
        York, NY 10022.  Includes all 2,894,157 of the Subordinated
        Units owned by Holdings.  Rudey Timber  Company,  LLC has a
        99% member interest in Holdings.
(2)     Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.
(3)     Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.
(4)     Current  address is 625 Madison  Avenue,  Suite  10-B,  New
        York,  NY  10022.  Includes  1,244,565  Subordinated  Units
        beneficially   owned   by  Old   Services   and   2,894,157
        Subordinated  Units  beneficially  owned by  Holdings.  Mr.
        Rudey  is  attributed  100%  beneficial  ownership  of  all
        Subordinated  Units  owned  by Old  Services  and  Holdings
        through his interests  therein and in Rudey Timber Company,
        LLC. Includes an aggregate of 541,450  Common Units owned by
        Rudey Timber Company,  John Rudey's minor children,  Garrin
        Properties Group and U.S. Timberlands Service Company, LLC,
        respectively.  In addition Mr. Rudey owns a 78.75% interest
        in U.S. Timberlands Service Company, LLC, the Partnership's
        General Partner.
(5)     Current address is 625 Madison Avenue, Suite 10-B, New York, NY 10022.
(6)     Current address is 1220 Park Avenue, New York, NY 10128.
(7)     Current address is 57 West 57th Street, Suite 704, New York, NY 10019.
(8)     Current address is 16825 Northchase Drive, Suite 800, Houston, TX 77060.
(9)     Current address is 501 Fifth Avenue, New York, NY 10017
(10)    Current address is 4 North Balch Street, Hanover, NH 03755.
(11)    None of the Units owned by U.S. Timberlands Services,  LLC,
        in which Messrs. Hornig, Wright and Cole owned 16.25%, 2.5%
        and 2.5%, respectively,  are reported as beneficially owned
        by such person.


                                       38
<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.  In addition,  the General  Partner entered into a
consulting  agreement  with Mr. Wyman that  provides  for an annual  retainer of
$50,000 for services rendered at the request of the General Partner.

Related Party Transactions

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


Investment in Affiliate

           In October 1999,  the Company made an investment in U.S.  Timberlands
Yakima,  LLC (USTY),  an unconsolidated  affiliate.  USTY, a newly formed entity
organized to acquire timber properties located in Central Washington and Central
Oregon,  is engaged in the growing of trees and sale of logs and standing timber
to third party wood processors. The 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.  The
Preferred LLC Interests are  redeemable at the Company's  option on December 31,
2004 or at USTY's option at any time prior thereto, for a redemption price equal
to the agreed upon value of the Preferred LLC Interests  plus any portion of the
guaranteed  return not  received by the Company  prior to the  redemption  date.
Generally, USTY's net income or losses are allocated to the Common LLC Interest.
However,  net losses  exceeding the account  balances of the Common LLC Interest
are  allocated  to the  Preferred  LLC  Interest.  The Company  accounts for the
Preferred  LLC  Interest at cost,  reduced by losses in excess of the Common LLC
Interests.  The  Company  accounts  for its  Common LLC  Interest  by the equity
method. The General Partner of the Company  provides management services to USTY
for a fee equal to 2% of USTY's earnings before  interest,  taxes,  depreciation
and  amortization.  The Company granted U.S.  Timberlands  Holding Group, LLC an
irrevocable  proxy to vote its  Common and  Preferred  Interests.  During  1999,
concurrently  with  and  in  order  to  facilitate  USTY's  acquisition  of  the
Washington  timberlands referred to above, an entity controlled by John M. Rudey
agreed to  acquire  in the  future a portion  of the  property  and any  related
liabilities  that the Company and USTY were  unwilling  to acquire,  the sale of
which was a  condition  of the seller to the USTY  acquisition.  Such entity was
paid $2.7 million by the seller for its  agreement to acquire such  property and
any related liabilities.  The General Partner's Conflicts Committee reviewed and
approved the structure of the Company's investment in the affiliate.


                                       39
<PAGE>



Repurchase of Certain Member Interests; Severance Payments

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

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



                                       40
<PAGE>


                                     PART IV

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

(a)(1) and (2) Financial Statements

           See "Index to Financial Statements" set forth on page F-1.

(a)(3) Exhibits

<TABLE>
<CAPTION>

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

                     +10.3 -- Contribution, Conveyance and Assumption Agreement among U.S. Timberlands Company, LP and certain other
                              parties
                    *10.4  -- Form of U.S. Timberlands Company, LP 1997 Long-Term Incentive Plan

                    *10.5  -- Employment Agreement for Mr. Rudey

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

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

                    *21.1  -- List of Subsidiaries

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

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

                     27.1  -- Financial Data Schedule

</TABLE>


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



                                       41
<PAGE>

                                SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized on this 30th day of
March, 2000.
                                 U.S. TIMBERLANDS COMPANY, LP

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

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

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

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


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

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

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

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

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



                                       42
<PAGE>

EXHIBIT INDEX



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

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

27.1  Financial Data Schedule



                                       43




<PAGE>



CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>


Contents                                                                                                           Page

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

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

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

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

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

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

Notes to consolidated financial statements                                                                          F-8

</TABLE>




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

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

In our opinion, the consolidated  financial statements  enumerated above present
fairly, in all material  respects,  the financial  position of U.S.  Timberlands
Company,  LP and  subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.



Richard A. Eisner & Company, LLP

New York, New York
January 21, 2000



                                      F-2
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



Report of Independent Public Accountants

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

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

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

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



Arthur Andersen, LLP
Portland, Oregon
January 23, 1998


                                      F-3
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except unit information)
<TABLE>
<CAPTION>

                                                                                                             December 31,
                                                                                                             ------------
                                                                                                        1999          1998
                                                                                                        ----          ----
<S>                                                                                                    <C>        <C>
ASSETS
Current assets:
    Cash and cash equivalents                                                                          $  2,798   $  4,824
    Accounts receivable, net of allowance for doubtful accounts of $200                                     672      1,527
    Other receivables                                                                                       124      1,113
    Notes receivable                                                                                      2,344      1,179
    Prepaid expenses and other current assets                                                               981        426
                                                                                                       --------   --------
          Total current assets                                                                            6,919      9,069

Timber and timberlands, net                                                                             293,828    334,476
Investment in affiliate                                                                                  18,243          -
Property,  plant and equipment, net                                                                       1,038      1,154
Notes receivable, less current portion                                                                    2,304          -
Deferred financing fees, less accumulated amortization of $1,427 and $752, respectively                   5,323      5,998
                                                                                                        --------   --------

          Total assets                                                                                 $327,655   $350,697
                                                                                                       ========   ========

LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
    Accounts payable                                                                                   $    346   $    733
    Accrued liabilities                                                                                   3,286      4,405
    Deferred revenue                                                                                         39      1,614
    Payable to general partner                                                                              840        914
                                                                                                       --------   --------

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

Long-term debt                                                                                          225,000    225,000
                                                                                                       --------   --------
Commitments and contingencies

Minority interest                                                                                           981      1,180
                                                                                                       --------   --------

Partners' capital:
    General partner interest                                                                                981      1,180
    Limited partner interest (12,859,607 units issued and outstanding as of
       December 31, 1999 and 1998)                                                                       96,182    115,671
                                                                                                       --------   --------

                                                                                                         97,163    116,851

          Total liabilities and partners' capital                                                      $327,655   $350,697
                                                                                                       ========   ========

</TABLE>


                                      F-4

See notes to consolidated financials
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per unit amounts)
<TABLE>
<CAPTION>

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

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

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

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

Selling, general and administrative expenses                                         8,477           10,462            6,250
Equity in net loss of affiliate                                                        901              -                  -
                                                                              ------------    -------------   -------------

Operating income                                                                    27,242           16,324          27,268

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

Income (loss) before extraordinary items                                             6,357           (6,383)         (1,368)
Extraordinary items, losses on extinguishment of debt                                    -               -           (9,337)
                                                                              ------------    -------------   -------------


Income (loss) before general partner and minority interest                           6,357           (6,383)        (10,705)
Minority interest                                                                       64              (64)              -
                                                                              ------------    -------------   -------------
Net income (loss)                                                                    6,293           (6,319)        (10,705)
General partner interest                                                                64              (64)            107
                                                                              ------------    -------------   -------------

Net income (loss) applicable to common and subordinated
     units                                                                    $      6,229    $     (6,255)   $    (10,598)
                                                                              ============    ============    ============

Basic income (loss) per unit: Income (loss) before extraordinary items:
       Common                                                                         $ .48           $(.49)          $ 3.05
                                                                                      =====           =====           ======
       Subordinated                                                                   $ .48           $(.49)         $(1.01)
                                                                                      =====           =====          ======

    Extraordinary item:
       Common                                                                         $               $              $(3.92)
                                                                                      ======          ======         ======
       Subordinated                                                                   $               $              $(1.29)
                                                                                      ======          ======         ======

    Net income (loss):
       Common                                                                         $ .48           $(.49)          $ (.86)
                                                                                      =====           =====           ======
       Subordinated                                                                   $ .48           $(.49)         $(2.30)
                                                                                      =====           =====           ======

Diluted income (loss) per unit:
    Income (loss) before extraordinary items                                          $ .48           $(.49)          $ (.28)
    Extraordinary items                                                                                                (1.76)
                                                                                          -               -              -
                                                                                      -----           ----            ------
    Net income (loss)                                                                 $ .48           $(.49)          $(2.04)
                                                                                      =====           =====           ======

</TABLE>
See notes to consolidated financial statements


                                      F-5
<PAGE>



U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Consolidated Statements of Changes in Partners' Capital and Members' Deficit
(in thousands)
<TABLE>

                                                U.S.
                                              Timberlands        U.S.
                                              Management        Timberlands
                                               Company,          Klamath                U.S. Timberlands
                                                 LLC             Falls, L.L.C             Company, LP
                                              ---------          -----------   ------------------------------------
                                                                                   Partners'         Partners'
                                                                                   Capital -         Capital -          Members'
                                                                                    General           Limited          Deficit and
                                               Members'          Member's           Partner           Partner           Partners'
                                               Deficit           Deficit           Interest           Interest           Capital
                                               -------           -------           --------           --------           -------

<S>                                            <C>              <C>                <C>              <C>                <C>
Balance, January 1, 1997                      $   (1,127)      $  (1,809)                                               $   (2,936)

Members' distribution                             (1,191)                -                                                  (1,191)
Initial partner contribution                            -                -                               $    1                  1
Net loss January 1, 1997 through
     November 18, 1997                            (2,009)          (7,424)                                                  (9,433)
Redemption of members' interest                   (1,000)                                                                   (1,000)
Assumption of Old Services and USTK's net
     liabilities by the MLP                         5,327            9,233            $  (148)         (14,521)               (109)
Issuance of partner interests                           -                -               1,801         176,525             178,326
Equity issuance costs                                   -                -               (169)         (16,584)            (16,753)
Net loss November 19, 1997 through
     December 31, 1997                                  -                -                (13)          (1,246)             (1,259)
                                                 ------------    -----------              ----          ------              ------
Balance, December 31, 1997                    $         -       $       -               1,471          144,175              145,646
Distributions to unitholders                     ============   ============             (227)         (22,249)             (22,476)
Net loss
                                                                                          (64)          (6,255)             (6,319)
                                                                                          ----          -------             -------

Balance, December 31, 1998                                                               1,180          115,671             116,851
Distributions to unitholders                                                             (263)         (25,718)             (25,981)
Net income                                                                                  64            6,229               6,293
                                                                                            --            -----               -----

Balance, December 31, 1999                                                     $           981      $   96,182          $   97,163
                                                                               ================      ==========          ==========


</TABLE>


                                      F-6

See notes to consolidated financials.
<PAGE>
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>

                                                                                           Year Ended
                                                                                           December 31,
                                                                                           ------------
                                                                                      1999        1998      1997
                                                                                      ----        ----      ----
<S>                                                                               <C>        <C>        <C>
Cash flows from operating activities:
    Net income (loss)                                                             $ 6,293    $ (6,319)  $ (10,705)

    Adjustments to reconcile net income (loss) to net cash provided by operating
       activities:
          Depreciation, depletion, amortization and cost of timber and
             property sold                                                          23,318       27,855     26,775
                Loss on disposal of assets                                              66            -          -
          Write-off and amortization of deferred financing fees                        675          675      9,148
         Equity in net loss of affiliate                                               901            -          -
          Other noncash items                                                            -          361        630
          Minority interest                                                             64         (64)          -
          Changes in assets and liabilities:
             Accounts receivable                                                       855          999    (1,006)
             Interest receivable from affiliate                                          -            -        121
             Inventories                                                                 -            -         78
             Other receivables                                                         989        (939)          -
                      Notes receivable                                             (3,469)        1,065    (2,244)
             Prepaid expenses and other current assets                               (555)          108        146
             Accounts payable                                                        (387)        (671)        515
             Accrued liabilities                                                   (1,119)        (653)    (3,171)
             Deferred revenue                                                      (1,575)      (4,130)      5,744
             Payable to general partner                                              (553)          257        252
                                                                                  -------       -------     ------


                Net cash provided by  operating activities                          25,503       18,544     26,283
                                                                                    ======       ======     ======

Cash flows from investing activities:
    Receivable from affiliate                                                            -            -     10,000
    Purchase of property, plant and equipment                                         (44)         (32)      (319)
     Proceeds from sale of assets                                                        8            -        400
    Acquisition of Ochoco Timberlands                                                    -            -  (110,873)
    Timber and road additions                                                        (955)        (610)      (774)
    Investment in affiliate                                                          (294)            -          -
                                                                                  -------       -------     ------
                Net cash used in investing activities                              (1,285)        (642)  (101,566)
                                                                                  -------       -------     ------
Cash flows from financing activities:
    Partner contributions                                                                -            -         1
    Member's distribution                                                                -            -    (1,191)
    Distributions to unitholders                                                  (25,981)     (22,476)
    Distributions to minority interest                                               (263)        (227)          -
    Deferred financing fees                                                              -           -    (12,720)
    Long-term borrowings                                                                 -           -     510,000
    Repayment of long-term borrowings                                                    -           -    (590,000)
    Common units offering costs                                                          -           -     (16,922)
    Common units offering proceeds                                                                         180,127
    Payment to affiliate                                                                 -       (1,000)       -
                                                                                  -------        -------     ------
                Net cash (used in) provided by financing activities                (26,244)      (23,703)    69,295
                                                                                  -------        -------     ------


Net decrease in cash and cash equivalents                                           (2,026)       (5,801)    (5,988)
Cash and cash equivalents, beginning of period                                       4,824        10,625     16,613
                                                                                  -------       -------     ------
Cash and cash equivalents, end of period                                            $ 2,798      $ 4,824    $ 10,625
                                                                                    =======      =======    ========

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

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

</TABLE>


                                      F-7

See notes to consolidated financials.
<PAGE>


U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

1. 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  ("Old  Services").  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  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 Partnership.  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 Partnership 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 4).

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

In addition,  the accompanying 1997 financial  statements include the results of
operations  and cash flows of Old Services  and USTK prior to the  Transactions,
after the elimination of intercompany transactions.



                                      F-8
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES
Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

1.  Business and Significant Accounting Policies (Continued):
Use of Estimates
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  liabilities at the date of the financial statements and the reported
amounts of revenues and expenses  during the reporting  period.  Actual  results
could differ from those estimates.

Revenue Recognition
Revenue on delivered  log sales are  recognized  upon  delivery to the customer.
Revenue on timber deeds and timber and property  sales are generally  recognized
upon  closing.  Revenue from timber sold under  stumpage  contracts  (i.e.,  the
customer arranges to harvest and deliver the logs) is recognized when the timber
is harvested. Deferred revenue as of December 31, 1999 and 1998, represents cash
received in advance of logs harvested under stumpage contracts.

Concentration of Credit Risk
Financial  instruments that potentially subject the Company to concentrations of
credit risk consist  principally  of trade  accounts and notes  receivable.  The
majority of the Company's  trade accounts and notes  receivable are derived from
sales to third party wood  processors.  The  Company's  four  largest  customers
accounted for  approximately  18%, 17%, 15%, and 14% of the Company's  aggregate
net  revenues  from log,  stumpage,  and  timber  deed  sales for the year ended
December 31, 1999. In 1998, these customers represented  approximately 19%, 27%,
18%, and 10%,  respectively,  of aggregate net revenues  from log,  stumpage and
deed sales. In 1997, these four customers  accounted for approximately 16%, 24%,
16%, and 12% of aggregate  net revenues  from log,  stumpage and deed sales.  No
other single customer accounted for more than 10% of aggregate net revenues from
log,  stumpage,  and timber  deed  sales in those  years.  Credit  risk on trade
receivables is mitigated by control  procedures to monitor the credit worthiness
of customers.  The Company  mitigates credit risk related to notes receivable by
obtaining asset lien rights or performing credit worthiness  procedures or both.
The Company's four largest customers accounted for 90% of the Company's accounts
receivable at December 31, 1998 and none of the Company's accounts receivable at
December 31, 1999.

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

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

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


                                      F-9
<PAGE>
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

1.  Business and Significant Accounting Policies (Continued):
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.

Minority Interest
The General  Partner  holds a 1% minority  interest  ownership in the  Operating
Company (the "Minority  Interest").  A pro rata share of the Operating Company's
net equity at the  completion of the  Transactions  and the Operating  Company's
results of operations since the date of the Transactions  have been allocated to
the Minority Interest in the accompanying  financial statements.  The portion of
the Operating  Company's net loss  attributable to the Minority Interest in 1997
was insignificant.

Income Taxes
The MLP is a master limited partnership.  USTK and Old Services are both limited
liability companies ("LLC's"). Accordingly, the MLP and respective LLC's are not
liable for  federal or state  income  taxes  since the MLP's and the  respective
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.



                                      F-10
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

1.  Business and Significant Accounting Policies (Continued):
Per Unit Information
The Company  accounts for income (loss) per unit in accordance with Statement of
Financial  Accounting  Standards  (SFAS) No. 128,  ("SFAS  128")  "Earnings  Per
Share."  Under SFAS No. 128,  the Company is  required to present  basic  income
(loss) per Common and Subordinated  Unit, and diluted loss per unit information.
Weighted  average units  outstanding  used in calculating  per unit  information
presented on the face of the statements of operations follows:
<TABLE>
<CAPTION>

                                                                                       Basic (a)
                                                                             -----------------------------
                                                                             Common            Subordinated           Diluted (b)
                                                                             ------            ------------           -----------
<S>                                                                          <C>                  <C>                  <C>
        1999
        Weighted average units outstanding                                   8,577,487            4,282,120            12,859,607

        1998
        Weighted average units outstanding                                   8,577,487            4,282,120            12,859,607

        1997
        Weighted average units outstanding                                    943,064             4,282,120             5,225,184

</TABLE>


(a)        Basic income (loss) per Common and Subordinated Unit is calculated by
           dividing the net income (loss)  allocable to Common and  Subordinated
           Units by the weighted average number of Common and Subordinated Units
           outstanding.  Net income for the year ended  December 31,  1999,  net
           loss for the year ended December 31, 1998 and net loss for the period
           from  November  19, 1997  through  December  31, 1997 is allocated to
           Common and Subordinated  Units utilizing the book liquidation  method
           which  allocates   income  (loss)  in  accordance  with   liquidation
           preferences,  as set forth in the Company's partnership agreement, of
           the Common and Subordinated  Unitholders' partners' capital accounts.
           For the  purpose of the basic  income  (loss) per unit  calculations,
           losses for the period  January 1, 1997 through  November 18, 1997 are
           allocated to the Subordinated Units.

(b)        Diluted net income  (loss) per unit is  calculated  by  dividing  net
           income  (loss)  allocable  to  the  units  by  the  weighted  average
           aggregate number of Common and Subordinated Units  outstanding.  Unit
           options have not been included in the calculation.  Unit options will
           be included in calculating  diluted  earnings per unit,  assuming the
           result would be dilutive,  upon  achievement of performance  criteria
           which,  if maintained  for the required  periods,  will result in the
           options becoming exercisable (see Notes 9 and 11).

Unit-Based Compensation Plans
The Company accounts for unit-based  compensation  plans under the provisions of
the Accounting  Principles  Board's Opinion No. 25, "Accounting for Stock Issued
to  Employees".  The Company has adopted the disclosure  only  provisions of the
Financial Accounting Standards Board Statement No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" (see Note 11).


                                      F-11
<PAGE>
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

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

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

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

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

                                                         1999           1998

 Timber and logging roads                            $317,856          332,047
 Timberlands                                           39,338           43,118
 Seed orchard and nursery stock                         1,277            1,159
                                                     --------         --------

                                                      358,471         376,324
 Less accumulated depletion and amortization           64,643          41,848
                                                    ---------         --------

                                                      $293,828       $334,476
                                                    ==========       =========




                                      F-12
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

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

     Current assets                                                    $9,129
     Noncurrent assets, principally timber and timberlands             74,726
     Current liabilities                                                5,611
     Noncurrent liabilities - long-term debt                           60,000
     Redeemable preferred member interest (owned by the
     Company)                                                          18,243
     Net sales                                                            560
     Gross profit                                                         342
     Net loss                                                         (1,207)

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

                                                             1999           1998
                                                             ----           ----
<S>                                                                <C>              <C>
    Equipment                                           $          674  $           637
    Buildings and improvements                                     843              843
                                                        --------------  ---------------
                                                                 1,517            1,480
    Less accumulated depreciation and amortization                 479              326
                                                        --------------  ---------------

                                                        $        1,038   $        1,154
                                                        ==============   ==============
</TABLE>

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

                                                        1999           1998
                                                        ----           ----

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

                                                  $     3,286   $        4,405
                                                  ============   =============


                                      F-13
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

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

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

8. Long-Term Debt:
Senior Notes
The $225,000 of Notes, which were issued concurrent with the Transactions,  were
issued  jointly and  severally  by the  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-obligators 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.

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

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

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




                                      F-14
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

9.  Partners' Capital:
Partnership Equity
On November 19, 1997,  the Company issued  7,458,684  Common Units in an initial
public offering.  Proceeds from such offering were $141,266,  net of underwriter
fees and  other  related  costs  of  $15,367.  Concurrent  with  such  offering,
4,282,120  Subordinated Units were issued in exchange for all members' interests
in USTK and Old Services. On December 12, 1997, the underwriters exercised their
overallotment  option and the  Company  issued an  additional  1,118,803  Common
Units.  Proceeds from the exercise of the overallotment option were $21,940, net
of $1,555 of  underwriters'  fees. As of December 31, 1999 and 1998, the Company
has 8,577,487 Common Units and 4,282,120 Subordinated Units outstanding.

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. Generally, 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.

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  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 1999 or 1998, 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. Provided that the MQD has been paid to
Common and Subordinated  Unitholders for three consecutive  four-quarter periods
and that such  distributions  are 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, 25% of the Subordinated Units will convert to
Common Units as early as 2001,  25% as early as 2002 and the  remaining  50% may
convert to Common Units as early as 2003.

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.


                                      F-15
<PAGE>


U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

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

Certain  conflicts  of  interest  could  arise as a result of the  relationships
described  above.  The Board of Directors and management of the 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, 1999,  the General  Partner has  consulting  agreements  with
certain  affiliated  parties  pursuant  to which  each  such  person or firm has
provided and/or will provide  consulting  services to the General  Partner.  The
agreements provide for an annual retainer of $25 to $50, plus an hourly rate for
services rendered at the request of the General Partner. Payments by the General
Partner  related  to  consulting  agreements  in 1999,  1998,  and 1997 were not
significant.

Investment in Affiliate
In October 1999, the Company made an investment in U.S.  Timberlands Yakima, LLC
(USTY),  an unconsolidated  affiliate.  USTY, a newly formed entity organized to
acquire timber properties  located in Central  Washington and Central Oregon, is
engaged in the  growing of trees and sale of logs and  standing  timber to third
party wood processors.  The Company  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 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
$22,000.  The Company  recorded its investment in the Senior LLC interest at its
$18,850 cost basis for the contributed  timberlands.  Terms of the Preferred LLC
Interests  include a cumulative  annual  guaranteed  return of 5% of the $22,000
agreed upon value of the  contributed  timberlands.  The Preferred LLC Interests
are redeemable at the Company's  option on December 31, 2004 or at USTY's option
at any time prior thereto, for a redemption price equal to the agreed upon value
of the  Preferred LLC Interests  plus any portion of the  guaranteed  return not
received by the Company  prior to the  redemption  date.  Generally,  USTY's net
income or losses are allocated to the Common LLC Interests.  However, net losses
exceeding the account  balances of the Common LLC Interests are allocated to the
Preferred LLC Interest.  The Company  accounts for its Preferred LLC Interest at
cost,  reduced  by losses in excess of the  Common LLC  Interests.  The  Company
accounts for its Common LLC Interest by the equity method.  The General  Partner
of the  Company  provides  management  services to USTY for a fee equal to 2% of
USTY's earnings before  interest,  taxes,  depreciation  and  amortization.  The
Company granted U.S. Timberlands Holding Group, LLC an irrevocable proxy to vote
its Common and Preferred Interests.  During 1999, concurrently with and in order
to facilitate  USTY's  acquisition  of the  Washington  timberlands  referred to
above,  an entity  controlled by John M. Rudey agreed to acquire in the future a
portion of the property and any related liabilities that the Company and

                                      F-16
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

10. Certain Relationships and Related Party Transactions (Continued):
USTY were unwilling to acquire,  the sale of which was a condition of the seller
to the USTY  acquisition.  Such  entity  was paid  $2,700 by the  seller for its
agreement to acquire  such  property  and any related  liabilities.  The General
Partner's  Conflicts  Committee  reviewed  and  approved  the  structure  of the
Company's investment in the affiliate.

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

See Note 7 regarding  interest and  commitment  fees paid to an affiliate of the
General Partner under the Affiliate Credit Facility.

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

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


                                      F-17
<PAGE>
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

11.  Management Incentive Plans:
Unit Option Plans
The Company  has a Unit Option  Plan,  which  permits the grant of options  (the
"Unit Options")  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.  Concurrent with the consummation of
the  Transactions,  604,153  Unit  Options  were  granted to key  employees  and
directors of the General Partner. An additional 90,622 Unit Options were granted
to key employees  and  directors on December 12, 1997,  in  connection  with the
closing of the sale of 1,118,803  Common  Units  pursuant to the exercise by the
underwriters of their  overallotment  option and, in 1998,  100,000 Unit Options
were granted to directors  and 240,170  options  were granted to  employees.  In
1999,  200,000 Unit Options were granted to directors  and 142,620  options were
granted to employees. The Unit Options granted expire ten years from the date of
grant and become  exercisable  automatically  upon and in the same proportion as
the conversion of Subordinated Units to Common Units. See further explanation of
subordinated  units  and  related  performance  criteria  in  Note 9.  Once  the
performance criteria are achieved,  the Company will record compensation expense
for the  difference  between  the  exercise  price and fair  value of the Common
Units, with a corresponding  increase to partnership capital. As of December 31,
1997,  none  of  the  performance  criteria  had  been  achieved.  Although  the
performance criteria were met for the years ended December 31, 1999 and 1998, no
compensation  expense was recorded during such years, as the market price of the
units was less than the exercise price during the years.
<TABLE>
<CAPTION>

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

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

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

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

             Outstanding, December 31, 1999                                    757,627         14.02
                                                                     =================
</TABLE>


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

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


                                      F-18
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

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


                                             1999         1998           1997
                                             ----         ----           ----


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


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

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

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

<S>                                                               <C>                  <C>                    <C>
    Net income (loss) - as reported                               $         6,293      $      (6,319)          $  (10,705)
    Net income (loss) - pro forma                                           5,846             (6,565)             (10,732)
    Diluted income (loss) per unit - as reported                              .48               (.49)               (2.04)
    Diluted income (loss) per unit - pro forma                                .45               (.51)               (2.05)

</TABLE>

For purposes of the pro forma disclosures,  the estimated fair value of the unit
options is amortized  to expense over their  estimated  exercise  period,  which
corresponds to the assumed subordinated units conversion period (see Note 9).

Restricted Unit Plan:
Effective  with the  closing of the  Transactions,  the 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, 1999.


                                      F-19
<PAGE>
U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

11.  Management Incentive Plans (Continued):
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 10, severance
and settlement).

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

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

(b)        Long-term debt - The estimated fair value of the Company's  long-term
           debt was approximately $207,000 and $225,000 at December 31, 1999 and
           1998, respectively, based on published market quotations.

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


                                      F-20
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)


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

                                                                      QUARTER ENDED
                                            -----------------------------------------------------------------------
                                            December 31         September 30            June 30           March 31      Total Year
                                                                                            (a)
                                            -----------         -----------            -----------      -----------    -----------
1999
<S>                                            <C>                   <C>                <C>                <C>          <C>
Revenues                                       $19,394               $26,175            $20,296            $11,129      $76,994
Gross profit (b)                                 7,853                11,389             12,254              5,124       36,620
Net income (loss)                                (346)                 3,941              4,413            (1,715)        6,293
Basic net income (loss) Per unit (c):
       Common                                    (.03)                   .30                .34              (.13)          .48
       Subordinated                              (.03)                   .30                .34              (.13)          .48
Diluted net income (loss) per
    unit (c)                                     (.03)                   .30                .34              (.13)          .48

1998
Revenues                                       $20,417              $ 24,528           $ 18,622            $ 7,757     $ 71,324
Gross profit (b)                                 8,409                11,531              4,503              2,343       26,786
Net income (loss)                                  642                 2,545            (2,857)            (6,649)      (6,319)
Basic net income (loss) Per unit (c):
       Common                                      .05                   .20              (.22)              (.51)        (.49)
       Subordinated                                .05                   .20              (.22)              (.51)        (.49)
Diluted net income (loss) per
    unit (c)                                       .05                   .20              (.22)              (.51)        (.49)


(a)      The quarter ended June 30, 1998 includes revenues of $6,275 and related costs of $5,917 from a property sale.
(b)      Gross profit is calculated  as revenues less cost of products  sold,  cost of timber and property  sales and  depreciation,
         depletion and road amortization.
(c)      See discussion of per unit information in Note 1 of the notes to consolidated financial statements.
</TABLE>


                                      F-21
<PAGE>

U.S. TIMBERLANDS COMPANY, LP AND SUBSIDIARIES

Notes to Consolidated  Financial  Statements  December  31,1999 and 1998 (dollar
amounts in thousands, except per unit amounts)

14.      401(K) Defined Contribution Plan:
The  Company   sponsors  a  401(k)  defined   contribution   plan  which  covers
substantially all full-time employees. Company contributions to the plan totaled
$34 in 1999, $26 in 1998 and $20 in 1997.

15.      Commitments and Contingencies:
Log Supply Agreement
On August 30,  1996,  the  Company  entered  into a wood supply  agreement  with
Collins Products,  LLC to supply a volume of approximately 34 million board feet
of  merchantable  timber  annually to Collins at market prices.  The term of the
agreement is ten years and is renewable for two additional  terms of five years,
each at the option of Collins.

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


                                      F-22