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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549

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

                                   FORM 10-K

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

                     OF THE SECURITIES EXCHANGE ACT OF 1934



FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997         COMMISSION FILE NO.: 0-23259



                         U.S. TIMBERLANDS COMPANY, L.P.

             (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.)

1301 FIFTH AVENUE, SUITE 3725, SEATTLE, WASHINGTON      98101-2636
(Address of principal executive offices)                (Zip code)

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:    206-652-5000

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

          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 March 23, 1998, was approximately $20.81.

     Documents incorporated by reference: None


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                        U.S. TIMBERLANDS COMPANY, L.P.

                               TABLE OF CONTENTS

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                                                                                             PAGE
                                                                                              NO.
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<S>            <C>                                                                            <C>
PART I
    Item 1.    Business.....................................................................    1
    Item 2.    Properties...................................................................   37
    Item 3.    Legal Proceedings............................................................   38
    Item 4.    Submission of Matters to a Vote of Security Holders..........................   38

PART II
    Item 5.    Market for Registrant's Common Units and Related Security Holder Matters.....   38
    Item 6.    Selected Financial Data......................................................   41
    Item 7.    Management's Discussion and Analysis of Financial Condition and Results of
               Operations...................................................................   43
    Item 8.    Financial Statements.........................................................   50
    Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial
               Disclosure...................................................................   50

PART III
    Item 10.   Directors, Executive Officers, Promoters and Control Persons of the
               Registrant...................................................................   51
    Item 11.   Executive Compensation.......................................................   55
    Item 12.   Security Ownership of Certain Beneficial Owners and Management...............   60
    Item 13.   Certain Relationships and Related Transactions...............................   61

PART IV
    Item 14.   Exhibits, Financial Statements, and Reports on Form 8-K......................   62
</TABLE>

                                       i
<PAGE>

                                      PART I

ITEM 1.   BUSINESS

GENERAL

     The business of U.S. Timberlands Company, L.P., a Delaware limited
partnership formed in June 1997 (the "Company"), consists of the growing of
trees and the sale of logs and standing timber.  The Company owns approximately
633,000 fee acres of timberland and cutting rights on approximately 3,000 acres
of timberland containing total merchantable timber volume estimated as of
January 1, 1998 to be approximately 2.1 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 44%) 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 180,000 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 two to 36 years old.  Initial thinning 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, USTK and U.S. Timberlands Management Company, L.L.C.,
formerly known as U.S. Timberlands Services Company, L.L.C. ("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, U.S. Timberlands Klamath  Falls, L.L.C.
("USTK"), a Delaware limited liability company 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").  Over
45% of the merchantable timber on the Ochoco Timberlands is 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 1997, the Company sold
approximately 13,000 acres from the Klamath Falls Timberlands.

     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.  In recent years, 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.  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 has entered into a 10-year

                                       1
<PAGE>

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
MMBF of logs each year (approximately 20-25% of the Company's estimated annual
harvest in the next three years) 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 base of operations in Klamath Falls, Oregon.

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 U.S. Timberlands Management
Company, L.L.C., formerly known as U.S. Timberlands Services Company, L.L.C.
("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, L.L.C., 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, L.L.C., 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") and
obtained a $25.0 million revolving credit facility to be used for working
capital purposes (the "Working Capital Facility") and a $75.0 million revolving
credit facility to be used for acquisitions and capital improvements (the
"Acquisition Facility" and, together with the Working Capital Facility, the
"Bank Credit Facility").  As of March 15, 1998, no amounts were outstanding
under the Bank Credit Facility.

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 senior executives of 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

                                       2
<PAGE>

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 Partner's discretion to review matters involving
conflicts of interest.

     The principal executive offices of the Company are located at 1301 Fifth
Avenue, Suite 3725, Seattle, Washington 98101-2636.  The telephone number at
such offices is (206) 652-5000.  The principal executive offices of 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 following chart depicts the organization and ownership of the Company
and the Operating Company as of March 15, 1998.  The percentages reflected
represent the approximate ownership interest in each of the Company and the
Operating Company individually and not on an aggregate basis.  Except in the
following chart, the ownership percentages referred to in this Annual Report
reflect the approximate effective ownership interest of the Unitholders in the
Company and the Operating Company on a combined basis.  The 2% ownership
percentage of the General Partner referred to in this Annual Report reflects the
approximate effective ownership interest of the General Partner in the Company
and the Operating Company on a combined basis.

                                       3
<PAGE>

           EFFECTIVE AGGREGATE OWNERSHIP
              OF THE COMPANY AND THE
                 OPERATING COMPANY

Public Common Unitholders................... 65.4%
U.S. Timberlands Management Company, L.L.C..  9.5%
U.S. Timberlands Holdings, L.L.C............ 22.0%
Founding Directors..........................  1.1%
General Partner's Combined Interest.........  2.0%


 [ORGANIZATIONAL CHART DEPICTING COMPANY STRUCTURE AND OWNERSHIP APPEARS HERE]


                                       4
<PAGE>

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 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 seedlings which are able to begin growing immediately (as compared to
the slower natural regeneration process) by eliminating competing non-timber
growth from the Timberlands and by applying modern forestry practices to assist
in the natural stands as well.  For example, selective harvesting in the slower
growing natural stands opens up the timber stand allowing for more vigorous
growth of the remaining trees.  When it is no longer possible to maintain
acceptable growth rates in these stands they will be harvested entirely and
converted to faster growing plantations.

   Harvest Plans

     The Company strives to manage all of its Timberlands, including the
Plantations, in an economically prudent and environmentally sensitive manner in
order to maximize their value over time.  Integral to this management process
are the Company's long-term harvest plans.  The Company prepares its harvest
plans annually based on analyses of the size and age class distribution of the
Timberlands and the economic maturity of each harvest tract.  A tract is
considered ready to be harvested when the expected value of future tree growth
on such tract falls below a target rate of return. 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 139
MMBF in 1997 and plans to harvest approximately 146 MMBF in 1998.  Under the
current harvest plans, the Company intends to harvest aggressively over
approximately the next eleven 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 12 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
would decline by the end of 2009 and that its more valuable species of timber
would decline 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 1998 and 1999.  Such harvest plans, land sales and other
strategic assumptions do not take into account any acquisition that the Company
may consummate during such period.

                                       5

<PAGE>

 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

     Once a block of timberland is ready to be harvested, the Company solicits
offers from its customers for delivery of logs.  After a price and volume have
been agreed to among the parties, the Company either (i) 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, or (ii) sells the timber on a stumpage basis where the customer
arranges to harvest and deliver the logs.  When the Company sells timber on a
stumpage basis, depending on the length of the contract, it may either receive
payment in full upon the execution of the contract, or may receive a portion of
the payment upon execution of the contract and the balance of payment when the
timber is cut.  In a stumpage sale, the Company generally retains the risk of
loss on the timber until such time as it has been harvested by the buyer.  The
Company may also occasionally sell timber to customers pursuant to timber deeds.
In a timber deed sale, the Company may receive a portion of the payment for the
timber at the time of execution of the contract and the balance of payment at
various intervals throughout the duration of the contract, and the risk of loss
on the timber covered by the contract passes immediately to the buyer,
regardless of when the buyer harvests the timber.  The Company currently sells
its sawlogs or stumpage directly 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. Sawlogs and stumpage sales accounted for
approximately 78% of the Company's revenues in 1997.  Timber deeds and timber
and timberland sales accounted for approximately 19.8% of the Company's revenues
for 1997.

     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.  Chips, which can be used to make hardboard or
pulp, accounted for approximately 1.9% of the Company's revenues in 1997.  The
market price of chips has historically been volatile, rising and falling with
the price of pulp.  Sales of seedlings accounted for the remaining 0.3% of the
Company's revenues in 1997.

     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 22
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 1997, timber sales to Collins,
Crown Pacific Partners and Boise Cascade Corporation accounted for approximately
23%,  21% and 15%, respectively, of the Company's revenue.  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.  Prior
to the Company's acquisition of the Ochoco Timberlands, virtually all of the
logs sold from such timberlands were sold to Ochoco's own facilities.  Since the
Ochoco Acquisition in July 1997, all of the sales from the Ochoco Timberlands

                                       6
<PAGE>

have been and will be made to unaffiliated customers.  There are currently more
than 50 primary conversion facilities located within a 150-mile radius of the
Company's base of operations in Klamath Falls, Oregon.

   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.

   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 over 2.1 BBF of merchantable, good quality timber,
approximately 180,000 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 senior operating management team
has an average of more than 29 years of experience in the forest products
industry, including experience in identifying, evaluating, completing and
integrating acquisitions of timber properties; (iv) 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 (v) 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.

                                       7

<PAGE>

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 who are not
employees of the Company.  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 considerations.  Due to the topography of the Timberlands, over 95% of the
Timberlands can 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 10 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 30% 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 a
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 and enrich and
protect the soil for successive generations of trees.

     Particular forestry practices vary by geographic region and depend upon
factors such as soil productivity, weather, terrain, tree size, age and
stocking.  The rain, 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 70% of the Company's harvested land.  Approximately 28% of the
Timberlands acreage currently consist of Plantations.  The Company expects to
convert approximately 3,000 to 6,000 acres of natural stands to Plantations
annually.  During 1997, the Company planted approximately 2.7 million seedlings.
The Company uses genetically improved seedlings (representing approximately 90%
to 95% 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 in 1973.  Such seeds are
generated by trees that are created by grafting selected superior genetic stock
to mature root stock.

   Geographic Information System

     The GIS is a computer software program that the Company acquired from
Weyerhaeuser as part of the acquisition of the Klamath Falls Timberlands.  The
GIS data, which has been compiled over a period of at least four years, includes
detailed topographical field maps for every stand within the Timberlands
including data for the Ochoco Timberlands which was recently added by the
Company, setting forth the characteristics, including age, species, size and
other characteristics for the timber growing on each such 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

                                       8

<PAGE>

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.  For example, the Company has recently
analyzed the impact on its Timberlands of the potential listing of the bull
trout as an endangered species under the Endangered Species Act, by using the
GIS to review the particular characteristics of the streams and rivers located
on its properties for suitability for bull trout habitat, and by overlaying the
proposed regulatory restraints on harvest at the sites it determined might be
suitable habitat for bull trout.  The GIS will also be used to evaluate
potential acquisition opportunities.

     Although GIS systems are generally available for purchase, many of the
Company's competitors do not utilize GIS systems, mainly due to the relatively
high initial cost and to the length of time necessary to collect sufficient data
to optimize the use of the GIS.  Thus, the Company believes the GIS gives it an
advantage over its competitors.

   Land Sales

     In October 1997, the Company sold approximately 13,000 acres from the
Klamath Falls Timberlands.  The Company expects to sell additional timberland
parcels in the future.  The Company has identified a tract of approximately
23,000 acres that it intends to sell within the next five years and anticipates
that a majority of this tract will be offered for sale in 1998.

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, northern
goshawk and various anadromous fish species.  Currently, the Company has
identified several spotted owl, bald eagle and northern goshawk 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.  At the time of the listing, the USFWS issued
suggested guidelines ("Guidelines") to be followed by landowners in order to
comply with the Endangered Species Act's prohibition against harming or
harassing owls.  The Guidelines recommend several measures, including the
restriction of harvest activities in areas within a certain proximity of known
owl activity centers.  The USFWS also proposed a rule for the conservation of
the owl on non-federal land.  Such proposed rule was subsequently withdrawn. 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.

     Weyerhaeuser regularly surveyed for bald eagles on its properties and
submitted the results of its surveys and its annual site management plan for
each known eagle site to the Oregon Department of Fish and Wildlife.  The latest
survey showed that there were approximately 80 eagle sites on the Klamath Falls
Timberlands.  The Company observes harvesting restrictions around the eagle
sites.  In addition, commencing in 1990, Weyerhaeuser utilized independent
wildlife consultants to survey for the presence of northern spotted owls on or
affecting the Klamath Falls Timberlands. The Company has continued all survey
processes for continuity of all voluntary survey initiatives and regulatory
compliance.  The surveys have been conducted every year in order to (i) meet the
regulatory requirements for timber

                                       9

<PAGE>

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 1997, and identified approximately 27 northern spotted owl
sites affecting the Klamath Falls Timberlands, three of which are located on the
Klamath Falls Timberlands. The Company has continued these practices for the
Klamath Falls Timberlands and is implementing such practices on the Ochoco
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 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.  A number of other timber states have
been considering legislation and regulations governing forest practices, and
some tightening of existing controls is expected.

   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.

     Although the Company does not consider current laws and regulations
relating to the environment to be materially burdensome, there can be no
assurance that future legislative, administrative or judicial actions, which are
becoming increasingly stringent, will not adversely affect the Company or its
ability to continue its activities and operations as currently conducted.  The
Company is not aware of any pending legislative, administrative or judicial
action relating to the protection of the environment that could materially and
adversely affect the Company.

                                       10

<PAGE>

     The Federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as Superfund, and comparable state laws
impose liability, without regard to fault or the legality of the original act,
on certain classes of persons that contributed to the release of a "hazardous
substance" into the environment.  These persons include the owner or operator of
a site and companies that disposed or arranged for the disposal of the hazardous
substances found at a site.  Those statutes also authorize government
environmental authorities such as the U.S. Environmental Protection Agency and,
in some instances, third parties, to take actions in response to threats to the
public health or the environment and to seek recovery of the costs incurred from
the responsible persons.  Based on environmental compliance auditing programs,
the Company is not aware of any activities by the Company or any conditions on
the Timberlands that would be likely to result in the Company being named a
potentially responsible party.

   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.

EMPLOYEES

     As of January 12, 1998, 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.  The Company's wage scale and benefits are
generally competitive with other forest products companies.  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.

     The Company employee benefits include a 401(k) savings plan for all
employees, a health insurance plan (including co-payments and deductibles) for
all employees and a medical savings plan for all employees.

                                       11

<PAGE>

FORWARD-LOOKING STATEMENTS

     This Annual Report contains forward-looking statements and information that
are based on the beliefs of the Company and the General Partner, as well as
assumptions made by, and information currently available to, the Company and the
General Partner.  All statements, other than statements of historical fact,
included in this Annual Report are forward-looking statements, including, but
not limited to, statements identified by the words "anticipate", "believe",
"estimate" and "expect" and similar expressions and statements regarding the
Company's business strategy, plans and objectives of management of the Company
for future operations.  Such statements reflect the current views of the Company
and the General Partner with respect to future events, based on what they
believe are reasonable assumptions; however, such statements are subject to
certain risks, uncertainties and assumptions.  If one or more of these risks or
uncertainties materialize, or if underlying assumptions prove incorrect, actual
results may vary materially from those in the forward-looking statements.  The
Company does not intend to update these forward-looking statements and
information.

RISK FACTORS

   Cyclicality of Forest Products Industry Will Affect the Company's Results of
     Operations

     The Company's results of operations are, and will continue to be, affected
by the cyclical nature of the forest products industry.  Prices and demand for
logs have been, and in the future can be expected to be, subject to cyclical
fluctuations.  The demand for logs is primarily affected by the level of new
residential construction activity, and, to a lesser extent, repair and
remodeling activity and other industrial uses, which are subject to fluctuations
due to changes in economic conditions, interest rates, population growth,
weather conditions and other factors.  Decreases in the level of residential
construction activity will be reflected in reduced demand for logs, which may
result in lower revenues, profits and cash flows.

   Timber Supply May Increase in the Future

     Various factors, including environmental and endangered species concerns,
have limited, and are likely to continue to limit, the amount of timber offered
for sale by certain United States government agencies, which historically have
been major suppliers of timber to the United States forest products industry.
From January 1988 to January 1998, federal timber under contract in Washington
and Oregon decreased approximately 88%.

     Although the Company believes that sales of timber by United States
government agencies are likely to remain at relatively low levels for the
foreseeable future, any reversal of policy that substantially increases such
sales could significantly reduce prices for logs, which could have a material
adverse effect on the Company.  Furthermore, increased imports from Canada (due
to the expiration in 2001 of the United States-Canada lumber trade agreement or
otherwise) and other foreign countries could reduce the prices the Company
receives for its timber.

   The Company's Ability to Harvest Timber Will be Subject to Limitations

     Revenues, net income and cash flow from the Company's operations will be
dependent to a significant extent on its ability to harvest timber at adequate
levels.  There can be no assurance that the Company will in the future achieve
harvest levels necessary to maintain or increase revenues, net income or cash
flows.  Weather conditions, timber growth cycles, access limitations and
regulatory requirements associated with the protection of wildlife and water
resources or any shortage of contract loggers may restrict harvesting of the
Timberlands, as may other factors, including damage by fire, insect infestation,
disease, prolonged drought and natural disasters.  For example in 1993,
approximately 30,000 acres of the Timberlands had to be partially salvaged due
to an infestation of the fir engraver beetle.  One or more major fires on the
Timberlands could adversely affect the Company's operating results.  Although
damage from such causes usually is localized and affects only a limited
percentage of the timber, there can be no assurance that any damage to the
Timberlands will, in fact, be so limited.  The risks to the Company described
above are somewhat heightened because of the concentration of the Timberlands in
central Oregon.  As is typical in the forest products industry, the

                                       12

<PAGE>

Company does not maintain insurance coverage with respect to damage to its
timberlands. Even if such insurance were available, the cost would be
prohibitive.

     A substantial portion of the Klamath Falls Timberlands consists of sections
of land that are intermingled with or adjacent to sections of federal land
managed by USFS and BLM.  In many cases, access is only, or most economically,
achieved through a road or roads built across adjacent federal land.  In order
to access such intermingled timberlands, the Company has in the past obtained
and will need to continue to obtain either temporary or permanent access rights
across these public lands.  Although the Company currently has legal access to
substantially all of the merchantable timber included in the Timberlands, this
process has often been, and will likely continue to be, affected by, among other
things, the requirements of the Endangered Species Act, the National
Environmental Policy Act and the Clean Water Act.  See "--Federal and State
Regulation."

   The Company is Subject to Federal and State Environmental and Endangered
     Species Regulation

     The Company is subject to regulation under various environmental laws,
including the Endangered Species Act, as well as similar state laws and
regulations.  The Endangered Species Act and state legislation protect species
threatened with possible extinction.  A number of species indigenous to the
Timberlands have been and in the future may be protected under these laws,
including the northern spotted owl, bald eagle, northern goshawk and bull trout.
Protection of endangered and threatened species may include restrictions or
prohibitions on timber harvesting, road building and other silvicultural
activities on private, federal and state land containing the affected species.
See "--Federal and State Regulation."

     Although the Company has identified bald eagle, northern spotted owl and
northern goshawk nesting areas on the Timberlands and the presence of bull trout
in certain of its streams, the Company, in cooperation with the Oregon
Department of Fish and Wildlife, has developed plans for managing such species
and does not believe that such plans will have a material adverse effect on the
Company's ability to harvest the Timberlands in accordance with current harvest
plans.  There can be no assurance, however, that species on or around 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 on or around the Timberlands.  Any such changes could
materially and adversely affect the results of operations of the Company.

     The Federal Water Pollution Control Act authorizes the regulation of
wetland areas.  Timberlands within a wetlands area may be subject to access
limitations or prohibitions, and may involve the expenditure of substantial sums
for the protection of such wetland areas.  The Federal Insecticide, Fungicide,
and Rodenticide Act regulates the use of pesticides that may be used in forestry
practices.  Violations of various statutory and regulatory programs that apply
to the Company's operations can result in civil penalties, remediation expenses,
natural resource damages, potential injunctions, cease and desist orders and
criminal penalties.  Some environmental statutes impose strict liability,
rendering a person liable for environmental damage without regard to negligence
or fault on the part of such person.  There can be no assurance that such laws
or future legislation or administrative or judicial action with respect to
protection of the environment will not adversely affect the Company.

   The Company Experiences Significant Competition

     The forest products industry is highly competitive in terms of price and
quality.  Many of the Company's competitors have substantially greater financial
and operating resources than the Company. Wood products are subject to
increasing competition from a variety of non-wood products, which affects the
demand for logs.  In addition, competition from imported logs and end-use wood
products from foreign sources into the United States may adversely affect the
demand and prices for the Company's timber.  To the extent there is a
significant increase in competitive pressures, the Company's results of
operations could be materially and adversely affected.  See "--The Timberlands--
Competition."

                                       13

<PAGE>

   Risks of Acquisition Strategy

     The Company intends to pursue acquisitions as one means of increasing both
the value of the Company's Units and its cash flow.  The Company cannot predict
whether it will be successful in consummating any such acquisitions or what the
consequences of any such acquisitions would be.  Moreover, there can be no
assurance that general economic or industry conditions will be conducive to the
Company's acquisition strategy, that the Company will be able to identify and
acquire any such assets or businesses on economically acceptable terms, that any
acquisitions will not be dilutive to earnings and distributions to Unitholders
or that any additional debt incurred to finance an acquisition will not affect
the ability of the Company to make distributions to Unitholders.  The Company is
subject to certain covenants in agreements governing its indebtedness that might
restrict the ability of the Company to incur indebtedness to finance
acquisitions.

     The Company's acquisition strategy involves numerous risks, including
difficulties inherent in the integration of operations and systems, the
diversion of management's attention from other business concerns and the
potential loss of key employees of acquired businesses. In addition, future
acquisitions also may involve the expenditure of significant funds.  Depending
upon the nature, size and timing of future acquisitions, the Company may be
required to secure additional financing.  There is no assurance that such
additional financing will be available to the Company on acceptable terms.

   The Company Will Be Dependent Upon Key Personnel

     The Company believes that its success will depend to a significant extent
upon the efforts and abilities of its operating management team. The failure by
the General Partner to retain the key members of its senior operating management
team could adversely affect the financial condition or results of operations of
the Company.  See "Executive Compensation--Employment Agreements."

   Dependence on Certain Key Customers

     The Company currently derives a significant portion of its revenues from
sales of timber to certain key customers.  The loss of these or other
significant customers could materially adversely affect the Company's results of
operations.

   Cash Distributions Are Not Guaranteed, May Fluctuate with Company Performance
     and Are Limited by Debt Instruments

     Although the Company will distribute all of its Available Cash (as defined
below), there can be no assurance regarding the amounts of Available Cash to be
generated by the Company.  The actual amounts of cash distributions may
fluctuate and will depend upon numerous factors, including cash flow generated
by operations, required principal and interest payments on the Company's debt,
the costs of acquisitions (including related debt service payments),
restrictions contained in the Company's debt instruments, issuances of debt and
equity securities by the Company, fluctuations in working capital, capital
expenditures, adjustments in reserves, prevailing economic conditions and
financial, business and other factors, a number of which will be beyond the
control of the Company and the General Partner.  Cash distributions are
dependent primarily on cash flow, including from reserves and working capital
borrowings, and not solely on profitability, which is affected by non-cash
items.  Therefore, cash distributions might be made during periods when the
Company records losses and might not be made during periods when the Company
records profits.

     The Partnership Agreement gives the General Partner broad discretion in
establishing reserves for the proper conduct of the Company's business that will
affect the amount of Available Cash.  Because the business of the Company is
seasonal, the General Partner will make additions to reserves during certain
quarters in order to fund operating expenses, interest and principal payments
and cash distributions to partners with respect to other quarters.  The effect
of the establishment of such operating reserves is to increase the likelihood
that the Minimum Quarterly Distribution

                                       14

<PAGE>

will be paid in any given quarter but to decrease the likelihood that any amount
in excess of the Minimum Quarterly Distribution will be paid in such quarter.
The Notes and the Bank Credit Facility prohibit the Company from making
distributions to Unitholders during an event of default and from distributing to
Unitholders the proceeds of harvests in excess of specified levels. The Notes
also effectively prohibit the Company, with respect to any quarter that the
Consolidated Fixed Charge Coverage Ratio (as defined in the indenture governing
the Notes) is equal to or less than 1.75 to 1.00, from distributing to
Unitholders more than $7.5 million less the aggregate amount of distributions
made with respect to any of the immediately preceding 16 quarters during which
the Consolidated Fixed Charge Coverage Ratio was equal to or less than 1.75 to
1.00. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Any subsequent refinancing of the Notes, the Bank Credit
Facility or any other indebtedness incurred by the Company may have similar
restrictions. As a result of these and other factors, there can be no assurance
regarding the actual levels of cash distributions to Unitholders by the Company.

   The Company Has a Limited Operating History

     The Klamath Falls Timberlands and the Ochoco Timberlands, prior to their
acquisition by the Company, had been part of Weyerhaeuser and Ochoco,
respectively, and had not been operated as separate businesses or divisions. In
addition, prior to the Company's acquisition of the Timberlands, sales from the
Timberlands were generally made to affiliated conversion facilities and not to
unaffiliated customers.  Although the Company has operated the Klamath Falls
Timberlands since September 1996, and sales during such period have been made
exclusively to unaffiliated customers, there can be no assurance that the
Company will be able to manage successfully the Timberlands as a separate
business on a profitable basis.

   The Company's Indebtedness May Affect its Operations

     As of  December 31, 1997, the Company's total long-term indebtedness was
$225.0 million, representing 60.7% of the Company's total capitalization.  As a
result, the Company is significantly leveraged and has indebtedness that is
substantial in relation to its partners' capital.  Future borrowings could
result in a significant increase in the Company's leverage.  The ability of the
Company to make principal and interest payments depends on future performance,
which performance is subject to many factors, a number of which will be outside
the Company's control. The Company's leverage may adversely affect the ability
of the Company to finance its future operations and capital needs, limit its
ability to pursue acquisitions and other business opportunities and make its
results of operations more susceptible to adverse economic or operating
conditions.  See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

   Unitholders Have Limited Voting Rights

     The General Partner manages and operates the Company.  Unlike the holders
of common stock in a corporation, Unitholders have only limited voting rights on
matters affecting the Company's business.  Unitholders have no right to elect
the General Partner on an annual or other continuing basis, and the General
Partner may not be removed except pursuant to the vote of the holders of at
least 66 2/3% of the outstanding Units (including Units owned by the General
Partner and its affiliates) and upon the election of a successor general partner
by the vote of the holders of at least a Unit Majority.  All of the other
matters requiring the approval of the Unitholders first require the support of
the General Partner and then require the approval of holders of at least a Unit
Majority.  As a result, Unitholders have limited influence on matters affecting
the operation of the Company.

   The Company May Issue Additional Units thereby Diluting Existing Unitholders'
     Interests

     The Company generally has the authority under the Partnership Agreement to
issue an unlimited number of additional Common Units, Subordinated Units or
other equity securities for such consideration and on such terms and conditions
as are established by the General Partner, in its sole discretion without the
approval of the Unitholders.  A total of 8,577,487 Common Units and 4,282,120
Subordinated Units are currently outstanding.  During the Subordination Period,
however, the Company may not issue equity securities ranking prior or senior to
the Common

                                       15

<PAGE>

Units or an aggregate of more than 7,458,684 additional Common Units (excluding
the 1,118,803 Common Units issued upon the exercise of the underwriters' over-
allotment option in connection with the Initial Offering and Common Units issued
upon conversion of Subordinated Units and for certain other limited purposes) or
an equivalent number of securities ranking on a parity with the Common Units
without the approval of holders of a Unit Majority. After the end of the
Subordination Period, the Company may issue an unlimited number of limited
partner interests of any type (including interests ranking prior or senior to
the Common Units) without the approval of the Unitholders. The Partnership
Agreement does not give the holders of Common Units the right to approve the
issuance by the Company of equity securities ranking junior to the Common Units
at any time. Based on the circumstances of each case, the issuance of additional
Common Units, Subordinated Units or other securities may reduce the cash
available for distribution to holders of previously outstanding Units, dilute
the value of the interests of the then-existing holders of Units in the net
assets of the Company or make it more difficult for a person or group to remove
the General Partner or otherwise change the management of the Company.

   No Removal of the General Partner Without Its Consent

     The Partnership Agreement contains certain provisions that may have the
effect of discouraging a person or group from attempting to remove the General
Partner or otherwise change the management of the Company.  If the General
Partner is removed as 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 arrearages in the distribution
of the Minimum Quarterly Distribution on the Common Units 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.  Further, if any person or group
(other than the General Partner or its affiliates) acquires beneficial ownership
of 20% or more of any class of Units then outstanding, such person or group will
lose voting rights with respect to all of its Units.  In addition, the Company
has substantial latitude in issuing equity securities without Unitholder
approval.  The Partnership Agreement also contains provisions limiting the
ability of Unitholders to call meetings of Unitholders or to acquire information
about the Company's operations as well as other provisions limiting the
Unitholders' ability to influence the manner or direction of management.  The
effect of these provisions may be to diminish the price at which the
Subordinated Units will trade under certain circumstances.

   Tax Treatment is Dependent on Partnership Status

     The availability to a Unitholder of the federal income tax benefits of an
investment in the Company depends on the classification of the Company as a
partnership for federal income tax purposes. The Company believes that, under
current law, the Company and the Operating Company have been and will be
classified as a partnership for federal income tax purposes. No ruling from the
IRS as to classification has been or is expected to be requested.  One of the
factors on which the Company's belief is based is that at least 90% of the
Company's gross income for each taxable year has been and will be "qualifying
income."  Whether the Company will continue to be classified as a partnership in
part depends, therefore, on the Company's ability to meet this qualifying income
test in the future.

     If the Company were classified as an association taxable as a corporation
for federal income tax purposes, the Company would pay tax on its income at
corporate rates (currently a 35% federal rate), distributions would generally be
taxed again to the Unitholders as corporate distributions, and no income, gains,
losses or deductions would flow through to the Unitholders. Because a tax would
be imposed upon the Company as an entity, the cash available for distribution to
the Unitholders would be substantially reduced. Treatment of the Company as an
association taxable as a corporation or otherwise as a taxable entity would
result in a material reduction in the anticipated cash flow and after-tax return
to the Unitholders and thus would likely result in a substantial reduction in
the value of the Units.

     There can be no assurance that the law will not be changed so as to cause
the Company to be treated as an association taxable as a corporation for federal
income tax purposes or otherwise to be subject to entity-level taxation. The
Partnership Agreement provides that, if a law is enacted or existing law is
modified or interpreted in a manner that

                                       16

<PAGE>

subjects the Company to taxation as a corporation or otherwise subjects the
Company to entity-level taxation for federal, state or local income tax
purposes, certain provisions of the Partnership Agreement will be subject to
change, including a decrease in the Minimum Quarterly Distribution and the
Target Distribution Levels to reflect the impact of such law on the Company.

   No IRS Ruling With Respect to Tax Consequences

     No ruling has been requested from the IRS with respect to classification of
the Company as a partnership for federal income tax purposes, whether the
Company's timber operations generate "qualifying income" under Section 7704 of
the Code or any other matter affecting the Company. Accordingly, the IRS may
adopt positions that differ from the conclusions expressed herein. It may be
necessary to resort to administrative or court proceedings in an effort to
sustain some or all of the conclusions, and some or all of such conclusions
ultimately may not be sustained. Any such contest with the IRS may materially
and adversely impact the market for the Units and the prices at which the Units
trade. In addition, the costs of any contest with the IRS will be borne directly
or indirectly by some or all of the Unitholders and the General Partner.

   Tax Liability Exceeding Cash Distributions

     A Unitholder will be required to pay federal income taxes and, in certain
cases, state and local income taxes on his allocable share of the Company's
income, whether or not he receives cash distributions from the Company. There is
no assurance that a Unitholder will receive cash distributions equal to his
allocable share of taxable income from the Company or even the tax liability to
him resulting from that income. Further, a Unitholder may incur a tax liability,
in excess of the amount of cash received, upon the sale of his Units.

   Ownership of Units by Tax-Exempt Organizations and Certain Other Investors

     Investment in Units by certain tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to such persons. For example,
much of the taxable income derived by most organizations exempt from federal
income tax (including IRAs and other retirement plans) from the ownership of a
Unit will be unrelated business taxable income and thus will be taxable to such
a Unitholder.

   Limitation on the Deductibility of Losses

     In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the Company will
only be available to offset future income generated by the Company and cannot be
used to offset income from other activities, including other passive activities
or investments. Passive losses which are not deductible because they exceed the
Unitholder's income generated by the Company may be deducted in full when the
Unitholder disposes of his entire investment in the Company in a fully taxable
transaction to an unrelated party. Net passive income from the Company may be
offset by unused Company losses carried over from prior years, but not by losses
from other passive activities, including losses from other publicly traded
partnerships.

   Tax Shelter Registration; Potential IRS Audit

     The Company is registered with the Secretary of the Treasury as a "tax
shelter."  No assurance can be given that the Company will not be audited by the
IRS or that tax adjustments will not be made. The rights of a Unitholder owning
less than a 1% interest in the Company to participate in the income tax audit
process are very limited. Further, any adjustments in the Company's tax returns
will lead to adjustments in the Unitholders' tax returns and may lead to audits
of Unitholders' tax returns and adjustments of items unrelated to the Company.
Each Unitholder would bear the cost of any expenses incurred in connection with
an examination of such Unitholder's personal tax return. Registration as a tax
shelter may increase the risk of an audit.

                                       17

<PAGE>

   Possible Loss of Tax Benefits Relating to Non-uniformity of Units and
     Nonconforming Depreciation Conventions

     Because the Company cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of Units must be maintained. To maintain uniformity and for other reasons, the
Company will adopt certain depreciation and amortization conventions that do not
conform with all aspects of certain proposed and final Treasury Regulations. A
successful challenge to those conventions by the IRS could adversely affect the
amount of tax benefits available to a purchaser of Units and could have a
negative impact on the value of the Units.

   State, Local and Other Tax Considerations

     In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which the Company does business or owns property. A Unitholder
will likely be required to file state and local income tax returns and pay state
and local income taxes in some or all of the various jurisdictions in which the
Company does business or owns property and may be subject to penalties for
failure to comply with those requirements. The Company currently owns property
and/or conducts business in Oregon and Washington.  Oregon currently imposes a
personal income tax.  It is the responsibility of each Unitholder to file all
United States federal, state and local tax returns that may be required of such
Unitholder.

   Tax Gain or Loss on Disposition of Units

     A Unitholder who sells Units will recognize gain or loss equal to the
difference between the amount realized (including his share of Company
nonrecourse liabilities) and his adjusted tax basis in such Units (which also
includes his share of Company nonrecourse liabilities). Thus, prior Company
distributions in excess of cumulative net taxable income in respect of a Unit
which decreased a Unitholder's tax basis in such Unit will, in effect, become
taxable income if the Unit is sold at a price greater than the Unitholder's tax
basis in such Units, even if the price is less than his original cost. A portion
of the amount realized (whether or not representing gain) may be ordinary
income.  Furthermore, should the IRS successfully contest certain conventions to
be used by the Company, a Unitholder could realize more gain on the sale of
Units than would be the case under such conventions without the benefit of
decreased income in prior years.

   Reporting of Company Tax Information and Risk of Audits

     The Company will furnish each Unitholder a Schedule K-1 that sets forth his
share of Company income, gains, losses and deductions. In preparing these
schedules, the Company will use various accounting and reporting conventions and
adopt various depreciation and amortization methods. There is no assurance that
these schedules will yield a result that conforms to statutory or regulatory
requirements or to administrative pronouncements of the IRS. Further, the
Company's tax return may be audited, and any such audit could result in an audit
of a Unitholder's individual tax return as well as increased liabilities for
taxes because of adjustments resulting from the audit.

   Cost Reimbursements and Fees Due to the General Partner May Be Substantial

     Prior to making any distribution on the Common Units, the Company will
reimburse the General Partner and its affiliates (including officers and
directors of the General Partner) for all expenses incurred by the General
Partner and its affiliates on behalf of the Company rather than by the Company
directly (including wages and salaries of employees, officers and directors of
the General Partner), which expenses are determined by the General Partner in
its sole discretion.  In addition, the General Partner and its affiliates may
provide services to the Company for which the Company will be charged reasonable
fees as determined by the General Partner, and its affiliates may provide
services to the Company for which the Company will be charged reasonable fees as
determined by the General Partner.  The reimbursement of such expenses and the
payment of any such fees could adversely affect the ability of the Company to
make distributions.

                                       18

<PAGE>

   The General Partner Will Have a Limited Call Right with Respect to the
     Limited Partner Interests

     If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class are held by persons other than the General
Partner and its affiliates, the General Partner will have the right, which it
may assign to any of its affiliates or the Company, to acquire all, but not less
than all, of the remaining limited partner interests of such class held by such
unaffiliated persons at a price generally equal to the then-current market price
of limited partner interests of such class.  As a consequence, a holder of Units
may be required to sell his Units at a time when he may not desire to sell them
or at a price that is less than the price he would desire to receive upon such
sale.  A holder may also incur a tax liability upon such sale.

   Unitholders May Not Have Limited Liability in Certain Circumstances;
     Liability for Return of Certain Distributions

     The limitations on the liability of holders of limited partner interests
for the obligations of a limited partnership have not been clearly established
in some states.  If it were determined that the Company had been conducting
business in any state without compliance with the applicable limited partnership
statute, or that the right or the exercise of the right by the Unitholders as a
group to remove or replace the General Partner, to make certain amendments to
the Partnership Agreement or to take other action pursuant to the Partnership
Agreement constituted participation in the "control" of the Company's business,
then the Unitholders could be held liable in certain circumstances for the
Company's obligations to the same extent as a general partner.  In addition,
under certain circumstances a Unitholder may be liable to the Company for the
amount of a distribution for a period of three years from the date of the
distribution.

   Conflicts of Interest and Fiduciary Responsibilities

     Conflicts of interest could arise as a result of the relationships between
the Company, on the one hand, and the General Partner and its affiliates, on the
other. The directors and officers of the General Partner have fiduciary duties
to manage the General Partner in a manner beneficial to its members.  At the
same time, the General Partner has fiduciary duties to manage the Company in a
manner beneficial to the Company and the Unitholders. The duties of the General
Partner, as general partner, to the Company and the Unitholders, therefore, may
come into conflict with the duties of management of the General Partner to its
members.

     Conflicts of interest might arise with respect to the following matters,
among others:

          (i)  Decisions of the General Partner with respect to the amount and
     timing of timber harvests, stumpage sales, property sales, cash
     expenditures, borrowings, issuances of additional Units and creation of
     reserves in any quarter will affect whether, or the extent to which, there
     is sufficient Available Cash from Operating Surplus to meet the Minimum
     Quarterly Distribution and Target Distribution Levels on all Units in a
     given quarter. In addition, actions by the General Partner may have the
     effect of enabling the General Partner to receive Incentive Distributions.
     See "--Cash Distribution Policy."

          (ii)  The Company does not have any employees and relies solely on
     employees of the General Partner and its affiliates.

          (ii)  Under the terms of the Partnership Agreement, the Company
     reimburses the General Partner and its affiliates for costs incurred in
     managing and operating the Company, including costs incurred in rendering
     corporate staff and support services to the Company.

          (iv)  Whenever possible, the General Partner limits the Company's
     liability under contractual arrangements to all or particular assets of the
     Company, with the other party thereto having no recourse against the
     General Partner or its assets.

                                       19

<PAGE>

          (v)  Any agreements between the Company and the General Partner and
     its affiliates will not grant to the Unitholders, separate and apart from
     the Company, the right to enforce the obligations of the General Partner
     and such affiliates in favor of the Company. Therefore, the General
     Partner, in its capacity as the general partner of the Company, will be
     primarily responsible for enforcing such obligations.

          (vi)  Under the terms of the Partnership Agreement, the General
     Partner is not restricted from causing the Company to pay the General
     Partner or its affiliates for any services rendered on terms that are fair
     and reasonable to the Company or entering into additional contractual
     arrangements with any of such entities on behalf of the Company. Neither
     the Partnership Agreement nor any of the other agreements, contracts and
     arrangements between the Company, on the one hand, and the General Partner
     and its affiliates, on the other, are or will be the result of arm's-length
     negotiations.

          (vii)  The General Partner may exercise its right to call for and
     purchase Units as provided in the Partnership Agreement or assign such
     right to one of its affiliates or to the Company.

          (viii)  The Partnership Agreement provides that the General Partner is
     generally restricted from engaging in any business activities other than
     those incidental to its ownership of interests in the Company. In addition,
     affiliates of the General Partner are restricted from engaging in
     Restricted Activities (as defined in the Glossary) in North America.
     Affiliates may, however, engage in any other activity in competition with
     the Company and may engage in Restricted Activities outside of North
     America. "Restricted Activities" include the (i) acquisition, exchange,
     operation or sale of timber-producing real property or rights to harvest
     timber, a principal purpose of which is producing logs or other forest
     products, (ii) harvesting of timber other than harvesting which is
     incidental to the ownership or operation of real property not owned or
     operated for a principal purpose of producing logs or other forest
     products, (iii) sale, exchange or purchase of logs other than sales,
     exchanges or purchases which are incidental to the ownership or operation
     of real property not owned or operated for a principal purpose of producing
     logs or other forest products, and (iv) any and all other activities
     relating to the forest products industry to the extent such activities
     compete with activities of the Company or the Operating Company. There can
     be no assurance that there will not be competition between the Company and
     affiliates of the General Partner in the future.

     Unless provided for otherwise in the partnership agreement, Delaware law
generally requires a general partner of a Delaware limited partnership to adhere
to fiduciary duty standards under which it owes its limited partners the highest
duties of good faith, fairness and loyalty and which generally prohibit such
general partner from taking any action or engaging in any transaction as to
which it has a conflict of interest. The Partnership Agreement expressly permits
the General Partner to resolve conflicts of interest between itself or its
affiliates, on the one hand, and the Company or the Unitholders, on the other,
and to consider, in resolving such conflicts of interest, the interests of other
parties in addition to the interests of the Unitholders. In addition, the
Partnership Agreement provides that a purchaser of Common Units is deemed to
have consented to certain conflicts of interest and actions of the General
Partner and its affiliates that might otherwise be prohibited, including those
described in clauses (i)-(viii) above, and to have agreed that such conflicts of
interest and actions do not constitute a breach by the General Partner of any
duty stated or implied by law or equity. The General Partner will not be in
breach of its obligations under the Partnership Agreement or its duties to the
Company or the Unitholders if the resolution of such conflict is fair and
reasonable to the Company. The latitude given in the Partnership Agreement to
the General Partner in resolving conflicts of interest may significantly limit
the ability of a Unitholder to challenge what might otherwise be a breach of
fiduciary duty.

     The Partnership Agreement expressly limits the liability of the General
Partner by providing that the General Partner, its affiliates and its officers
and directors will not be liable for monetary damages to the Company, the
limited partners or assignees for errors of judgment or for any acts or
omissions if the General Partner and such other persons acted in good faith. In
addition, the Company is required to indemnify the General Partner, its
affiliates and their respective officers, directors, employees, agents and
trustees to the fullest extent permitted by law against liabilities, costs and
expenses incurred by the General Partner or such other persons, if the General
Partner or such persons acted in good faith and in a manner they reasonably
believed to be in, or (in the case of a person other than the General

                                       20

<PAGE>

Partner) not opposed to, the best interests of the Company and, with respect to
any criminal proceedings, had no reasonable cause to believe the conduct was
unlawful.

     The provisions of Delaware law that allow the common law fiduciary duties
of a general partner to be modified by a partnership agreement have not been
tested in a court of law, and the General Partner has not obtained an opinion of
counsel covering the provisions set forth in the Partnership Agreement that
purport to waive or restrict the fiduciary duties of the General Partner that
would be in effect under common law were it not for the Partnership Agreement.

CASH DISTRIBUTION POLICY

   General

     The Company will distribute to its partners, on a quarterly basis, all of
its Available Cash in the manner described herein. Available Cash is defined in
the Glossary and 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.

     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 is defined in the Glossary and 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), maintenance capital
expenditures and reserves established for future Company operations, in each
case since the closing of the Transactions.

     Capital Surplus is also defined in the Glossary and 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

                                       21

<PAGE>

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.

     Subject to the limitations described under "--The Partnership Agreement--
Issuance of Additional Securities," the Company has the authority to issue
additional Units or other equity securities of the Company for such
consideration and on such terms and conditions as are established by the General
Partner in its sole discretion and without the approval of the Unitholders. It
is possible that the Company will fund acquisitions of other timber assets
through the issuance of additional Units or other equity securities of the
Company.  Holders of any additional Units issued by the Company will be entitled
to share equally with the then-existing holders of Common Units in distributions
of Available Cash by the Company.  In addition, the issuance of additional
Partnership Interests may dilute the value of the interests of the then-existing
holders of Units in the net assets of the Company. The General Partner will be
required to make an additional capital contribution to the Company or the
Operating Company (other than in connection with the exercise of the over-
allotment option) in connection with the issuance of additional Partnership
Interests.

     The discussion in the sections below indicates the percentages of cash
distributions required to be made to the General Partner and the holders of
Common Units and the circumstances under which holders of Subordinated Units are
entitled to cash distributions and the amounts thereof.

   Quarterly Distributions of Available Cash

     The Company will make distributions to its partners with respect to each
quarter of the Company prior to its liquidation in an amount equal to 100% of
its Available Cash for such quarter. The Company expects to make distributions
of all Available Cash within approximately 45 days after the end of each
quarter, commencing with the quarter ending March 31, 1998, to holders of record
on the applicable record date. The Minimum Quarterly Distribution and the Target
Distribution Levels for the period from the closing of the Initial Offering
through March 31, 1998 will be adjusted upward based on the actual length of
such period.  The Minimum Quarterly Distribution and the Target Distribution
Levels are also subject to certain other adjustments as described below under "-
-Distributions from Capital Surplus" and "--Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels."

     With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly Distribution, plus any Common Unit
Arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. This subordination feature will enhance the Company's
ability to distribute the Minimum Quarterly Distribution on the Common Units
during the Subordination Period. There is no guarantee, however, that the
Minimum Quarterly Distribution will be made on the Common Units. Upon expiration
of the Subordination Period, all Subordinated Units will be converted on a one-
for-one basis into Common Units and will participate pro rata with all other
Common Units in future distributions of Available Cash. Under certain
circumstances, up to 2,141,060 Subordinated Units may convert into Common Units
prior to the expiration of the Subordination Period. Common Units will not
accrue arrearages with respect to distributions for any quarter after the
Subordination Period and Subordinated Units will not accrue any arrearages with
respect to distributions for any quarter.

   Distributions from Operating Surplus during Subordination Period

     The Subordination Period will generally extend from the closing of the
Initial Offering 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

                                       22

<PAGE>

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 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;

                                       23

<PAGE>

          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.

     The above references to the 2% of Available Cash from Operating Surplus
distributed to the General Partner are references to the amount of the
percentage interest in distributions from the Company and the Operating Company
of the General Partner (exclusive of its or any of its affiliates' interests as
holders of Common Units or Subordinated Units). The General Partner owns a 1%
general partner interest in the Company and a 1.0101% managing member interest
in the Operating Company. Other references in this Prospectus to the General
Partner's 2% interest or to distributions of 2% of Available Cash are also
references to the amount of the combined percentage interest in the Company and
the Operating Company of the General Partner (exclusive of its or any of its
affiliates' interests as holders of Common Units or Subordinated Units). With
respect to any Common Unit, the term "Common Unit Arrearages" refers to the
amount by which the Minimum Quarterly Distribution in any quarter during the
Subordination Period exceeds the distribution of Available Cash from Operating
Surplus actually made for such quarter on a Common Unit issued in this offering,
cumulative for such quarter and all prior quarters during the Subordination
Period. Common Unit Arrearages will not accrue interest.

   Distributions from Operating Surplus after Subordination Period

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

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

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

   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 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

                                       24

<PAGE>

          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."

DISTRIBUTIONS FROM CAPITAL SURPLUS

     Distributions by the Company of Available Cash from Capital Surplus will be
made in the following manner:

          first, 98% to all Unitholders, pro rata, and 2% to the General
     Partner, until the Company has distributed, in respect of each outstanding
     Common Unit issued in the Initial Offering, Available Cash from Capital
     Surplus in an aggregate amount per Common Unit equal to the Initial Unit
     Price;

          second, 98% to the holders of Common Units, pro rata, and 2% to the
     General Partner, until the Company has distributed, in respect of each
     outstanding Common Unit, Available Cash from Capital Surplus in an
     aggregate amount equal to any unpaid Common Unit Arrearages with respect to
     such Common Unit; and

          thereafter, all distributions of Available Cash from Capital Surplus
     will be distributed as if they were from Operating Surplus.

     As a distribution of Available Cash from Capital Surplus is made, it is
treated as if it were a repayment of the Initial Unit Price. To reflect such
repayment, the Minimum Quarterly Distribution and the Target Distribution Levels
will be adjusted downward by multiplying each such amount by a fraction, the
numerator of which is the Unrecovered Capital (as defined in the Glossary) of
the Common Units immediately after giving effect to such repayment and the
denominator of which is the Unrecovered Capital of the Common Units immediately
prior to such repayment. This adjustment to the Minimum Quarterly Distribution
may make it more likely that Subordinated Units will be converted into Common
Units (whether pursuant to the termination of the Subordination Period or to the
provisions permitting early conversion of some Subordinated Units) and may
accelerate the dates at which such conversions occur.

     When "payback" of the Initial Unit Price has occurred, i.e., when the
Unrecovered Capital of the Common Units is zero (and any accrued Common Unit
Arrearages have been paid), then in effect the Minimum Quarterly Distribution
and each of the Target Distribution Levels will have been reduced to zero for
subsequent quarters. Thereafter, all distributions of Available Cash from all
sources will be treated as if they were from Operating Surplus. Because the
Minimum Quarterly Distribution and the Target Distribution Levels will have been
reduced to zero, the General Partner will be entitled thereafter to receive 50%
of all distributions of Available Cash in its capacity as General Partner and as
holder of the Incentive Distribution Rights (in addition to any distributions to
which it or its affiliates may be entitled as holders of Units).

     Distributions of Available Cash from Capital Surplus will not reduce the
Minimum Quarterly Distribution or Target Distribution Levels for the quarter
with respect to which they are distributed.

   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

                                       25

<PAGE>

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.

   Distributions of Cash Upon Liquidation

     Following the commencement of the dissolution and liquidation of the
Company, assets will be sold or otherwise disposed of from time to time and the
partners' capital account balances will be adjusted to reflect any resulting
gain or loss. The proceeds of such liquidation will, first, be applied to the
payment of creditors of the Company in the order of priority provided in the
Partnership Agreement and by law and, thereafter, be distributed to the
Unitholders and the General Partner in accordance with their respective capital
account balances as so adjusted.

     Partners are entitled to liquidating distributions in accordance with
capital account balances. The allocations of gains and losses upon liquidation
are intended, to the extent possible, to entitle the holders of outstanding
Common Units to a preference over the holders of outstanding Subordinated Units
upon the liquidation of the Company, to the extent required to permit Common
Unitholders to receive their Unrecovered Capital plus any unpaid Common Unit
Arrearages. Thus, net losses recognized upon liquidation of the Company will be
allocated to the holders of the Subordinated Units to the extent of their
capital account balances before any loss is allocated to the holders of the
Common Units, and net gains recognized upon liquidation will be allocated first
to restore negative balances in the capital account of the General Partner and
any Unitholders and then to the Common Unitholders until their capital account
balances equal their Unrecovered Capital plus unpaid Common Unit Arrearages.
However, no assurance can be given that there will be sufficient gain upon
liquidation of the Company to enable the holders of Common Units to fully
recover all of such amounts, even though there may be cash available after such
allocation for distribution to the holders of Subordinated Units.

     The manner of such adjustment is as provided in the Amended and Restated
Agreement of Limited Partnership of the Company (the "Partnership Agreement"),
the form of which is filed as an exhibit to the Annual Report.  If the
liquidation of the Company occurs before the end of the Subordination Period,
any net gain (or unrealized gain attributable to assets distributed in kind)
will be allocated to the partners as follows:

          first, to the General Partner and the holders of Units having negative
     balances in their capital accounts to the extent of and in proportion to
     such negative balances;

          second, 98% to the holders of Common Units, pro rata, and 2% to the
     General Partner, until the capital account for each Common Unit is equal to
     the sum of (i) the Unrecovered Capital in respect of such Common Unit, (ii)
     the amount of the Minimum Quarterly Distribution for the quarter during
     which liquidation of the Company occurs and (iii) any unpaid Common Unit
     Arrearages in respect of such Common Unit;

                                       26

<PAGE>

          third, 98% to the holders of Subordinated Units, pro rata, and 2% to
     the General Partner, until the capital account for each Subordinated Unit
     is equal to the sum of (i) the Unrecovered Capital in respect of such
     Subordinated Unit and (ii) the amount of the Minimum Quarterly Distribution
     for the quarter during which the liquidation of the Company occurs;

          fourth, 98% to all Unitholders, pro rata, and 2% to the General
     Partner, until there has been allocated under this paragraph fourth an
     amount per Unit equal to (a) the sum of the excess of the First Target
     Distribution per Unit over the Minimum Quarterly Distribution per Unit for
     each quarter of the Company's existence, less (b) the cumulative amount per
     Unit of any distributions of Available Cash from Operating Surplus in
     excess of the Minimum Quarterly Distribution per Unit that were distributed
     98% to the Unitholders, pro rata, and 2% to the General Partner for each
     quarter of the Company's existence;

          fifth, 85% to the Unitholders, pro rata, and 15% to the General
     Partner, until there has been allocated under this paragraph fifth an
     amount per Unit equal to (a) the sum of the excess of the Second Target
     Distribution per Unit over the First Target Distribution per Unit for each
     quarter of the Company's existence, less (b) the cumulative amount per Unit
     of any distributions of Available Cash from Operating Surplus in excess of
     the First Target Distribution per Unit that were distributed 85% to the
     Unitholders, pro rata, and 15% to the General Partner for each quarter of
     the Company's existence;

          sixth, 75% to all Unitholders, pro rata, and 25% to the General
     Partner, until there has been allocated under this paragraph sixth an
     amount per Unit equal to (a) the sum of the excess of the Third Target
     Distribution per Unit over the Second Target Distribution per Unit for each
     quarter of the Company's existence, less (b) the cumulative amount per Unit
     of any distributions of Available Cash from Operating Surplus in excess of
     the Second Target Distribution per Unit that were distributed 75% to the
     Unitholders, pro rata, and 25% to the General Partner for each quarter of
     the Company's existence; and

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

     If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that clauses (ii)
and (iii) of paragraph second above and all of paragraph third above will no
longer be applicable.

     Upon liquidation of the Company, any loss will generally be allocated to
the General Partner and the Unitholders as follows:

          first, 98% to holders of Subordinated Units in proportion to the
     positive balances in their respective capital accounts and 2% to the
     General Partner, until the capital accounts of the holders of the
     Subordinated Units have been reduced to zero;

          second, 98% to the holders of Common Units in proportion to the
     positive balances in their respective capital accounts and 2% to the
     General Partner, until the capital accounts of the Common Unitholders have
     been reduced to zero; and

          thereafter, 100% to the General Partner.

     If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that all of
paragraph first above will no longer be applicable.

     In addition, interim adjustments to capital accounts will be made at the
time the Company  issues additional interests in the Company or makes
distributions of property. Such adjustments will be based on the fair market
value of the interests or the property distributed and any gain or loss
resulting therefrom will be allocated to the Unitholders and the General Partner
in the same manner as gain or loss is allocated upon liquidation. In the event
that positive

                                       27

<PAGE>

interim adjustments are made to the capital accounts, any subsequent negative
adjustments to the capital accounts resulting from the issuance of additional
interests in the Company, distributions of property by the Company, or upon
liquidation of the Company, will be allocated in a manner which results, to the
extent possible, in the capital account balances of the General Partner equaling
the amount which would have been the General Partner's capital account balances
if no prior positive adjustments to the capital accounts had been made.

THE PARTNERSHIP AGREEMENT

     The following paragraphs are a summary of the material provisions of the
Partnership Agreement.  The form of the Partnership Agreement for the Company is
filed as an exhibit hereto.  The form of Operating Agreement for the Operating
Company (the "Operating Company Agreement") is also filed as an exhibit hereto.
The discussions presented herein and below of the material provisions of the
Partnership Agreement are qualified in their entirety by reference to the
Partnership Agreement for the Company and the Operating Company Agreement for
the Operating Company.  The Company is the 98.9899% non-managing member of the
Operating Company, which owns the Company's business. The General Partner serves
as the general partner of the Company and the managing member of the Operating
Company, owning an aggregate 2% interest in the Company and the Operating
Company on a combined basis.  The General Partner manages and operates the
Company's business.  Unless the context otherwise requires, references herein to
the "Partnership Agreement" constitute references to the Partnership Agreement
and the Operating Company Agreement, collectively.

   Organization and Duration

     The Company was organized in June 1997, as a Delaware limited partnership.
The Operating Company was organized in 1996 to acquire the Klamath Falls
Timberlands.  The General Partner owns a 1% interest as general partner in the
Company and the right to receive Incentive Distributions and a 1.0101% managing
member interest in the Operating Company (or an aggregate 2% interest in the
Company and the Operating Company on a combined basis), and the Unitholders
(including certain affiliates of the General Partner as holders of Subordinated
Units) own a 98% interest in the Company and the Operating Company on a combined
basis.  The Company will dissolve on December 31, 2087, unless sooner dissolved
pursuant to the terms of the Partnership Agreement.

   Purpose

     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
this 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.

   Power of Attorney

     Each Limited Partner, and each person who acquires a Unit from a Unitholder
and executes and delivers a Transfer Application with respect thereto, grants to
the General Partner and, if a liquidator of the Company has been appointed, such
liquidator, a power of attorney to, among other things, execute and file certain
documents required in connection with the qualification, continuance or
dissolution of the Company or the amendment of the Partnership Agreement in
accordance with the terms thereof and to make consents and waivers contained in
the Partnership Agreement.

                                       28

<PAGE>

   Capital Contributions

     For a description of the initial capital contributions made to the Company,
see "Business--Formation of the Company."  The Unitholders; are not obligated to
make additional capital contributions to the Company, except as described below
under "--Limited Liability."

   Limited Liability

     Assuming that a Limited Partner does not participate in the control of the
business of the Company within the meaning of the Delaware Act and that he
otherwise acts in conformity with the provisions of the Partnership Agreement,
his liability under the Delaware Act will be limited, subject to certain
possible exceptions, to the amount of capital he is obligated to contribute to
the Company in respect of his Units plus his share of any undistributed profits
and assets of the Company.  If it were determined, however, that the right or
exercise of the right by the Limited Partners as a group to remove or replace
the General Partner, to approve certain amendments to the Partnership Agreement
or to take other action pursuant to the Partnership Agreement constituted
"participation in the control" of the Company's business for the purposes of the
Delaware Act, then the Limited Partners could be held personally liable for the
Company's obligations under the laws of the State of Delaware to the same extent
as the General Partner with respect to persons who transact business with the
Company reasonably believing, based on the Limited Partner's conduct, that the
Limited Partner is a general partner.

     Under the Delaware Act, a limited partnership may not make a distribution
to a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to specific property
of the partnership, exceed the fair value of the assets of the limited
partnership.  For the purpose of determining the fair value of the assets of a
limited partnership, the Delaware Act provides that the fair value of property
subject to liability for which recourse of creditors is limited shall be
included in the assets of the limited partnership only to the extent that the
fair value of that property exceeds that nonrecourse liability.  The Delaware
Act provides that a limited partner who receives such a distribution and knew at
the time of the distribution that the distribution was in violation of the
Delaware Act shall be liable to the limited partnership for the amount of the
distribution for three years from the date of the distribution.  Under the
Delaware Act, an assignee who becomes a substituted limited partner of a limited
partnership is liable for the obligations of his assignor to make contributions
to the partnership, except the assignee is not obligated for liabilities unknown
to him at the time he became a limited partner and which could not be
ascertained from the partnership agreement.

     The Operating Company currently conducts business in one state.
Maintenance of limited liability may require compliance with legal requirements
in such jurisdictions in which the Operating Company conducts business,
including qualifying the Operating Company to do business there.  Limitations on
the liability of limited partners for the obligations of a limited partnership
have not been clearly established in many jurisdictions.  If it were determined
that the Company was, by virtue of its member interest in the Operating Company
or otherwise, conducting business in any state without compliance with the
applicable limited partnership statute, or that the right or exercise of the
right by the Limited Partners as a group to remove or replace the General
Partner, to approve certain amendments to the Partnership Agreement, or to take
other action pursuant to the Partnership Agreement constituted "participation in
the control" of the Company's business for the purposes of the statutes of any
relevant jurisdiction, then the Limited Partners could be held personally liable
for the Company's obligations under the law of such jurisdiction to the same
extent as the General Partner under certain circumstances.  The Company will
operate in such manner as the General Partner deems reasonable and necessary or
appropriate to preserve the limited liability of the Limited Partners.

   Issuance of Additional Securities

     The Partnership Agreement authorizes the Company to issue an unlimited
number of additional limited partner interests and other equity securities of
the Company for such consideration and on such terms and conditions as are
established by the General Partner in its sole discretion without the approval
of any Limited Partners; provided that,

                                       29

<PAGE>

during the Subordination Period, except as provided in the next sentence below,
the Company may not issue equity securities of the Company ranking prior or
senior to the Common Units or an aggregate of more than 7,458,684 additional
Common Units (excluding the 1,118,803 Common Units issued upon the exercise of
the underwriters' over-allotment option in connection with the Initial Offering
and Common Units issued upon conversion of Subordinated Units, pursuant to
employee benefit plans, upon conversion of the general partner interests and
Incentive Distribution Rights as a result of a withdrawal of the General Partner
and subject to adjustment in the event of a combination or subdivision of Common
Units) or an equivalent number of securities ranking on a parity with the Common
Units without the approval of the holders of at least a Unit Majority. During
the Subordination Period, the Company may also issue an unlimited number of
additional Common Units or parity securities without the approval of the
Unitholders if the proceeds from such issuance are used exclusively to repay up
to $50.0 million in indebtedness of a member of the Partnership Group, in each
case only where the aggregate amount of distributions that would have been paid
with respect to such newly issued Units (including Units deemed issued as
described in the following sentence) and the related additional distributions
that would have been made to the General Partner in respect of the (actual or
pro forma) four-quarter period ending prior to the first day of the quarter in
which the issuance is to be consummated (assuming such additional Units had been
outstanding throughout such period and that distributions equal to the
distributions that were actually paid on the outstanding Units during the period
were paid on such additional Units) did not exceed the interest costs actually
incurred during such period on the indebtedness that is to be repaid (or, if
such indebtedness was not outstanding throughout the entire period, would have
been incurred had such indebtedness been outstanding for the entire period). In
the event that the Company is required to pay a prepayment penalty in connection
with the repayment of such indebtedness, for purposes of the foregoing test the
number of Common Units issued to repay such indebtedness shall be deemed
increased by the number of Common Units that would need to be issued to pay such
penalty. In accordance with Delaware law and the provisions of the Partnership
Agreement, the Company may also issue additional partnership interests that, in
the sole discretion of the General Partner, may have special voting rights to
which the other Units are not entitled.

     Upon issuance of additional Partnership Securities (other than pursuant to
the over-allotment option), the General Partner will be required to make
additional capital contributions to the extent necessary to maintain its 2%
interest in the Company and Operating Company.  Moreover, the General Partner
will have the right, which it may from time to time assign in whole or in part
to any of its affiliates, to purchase Common Units, Subordinated Units or other
equity securities of the Company from the Company whenever, and on the same
terms that, the Company issues such securities or rights to persons other than
the General Partner and its affiliates, to the extent necessary to maintain the
percentage interest of the General Partner and its affiliates in the Company
(including interests represented by Subordinated Units) that existed immediately
prior to each such issuance.  The holders of Units will not have preemptive
rights to acquire additional Units or other partnership interests that may be
issued by the Company.

   Amendment of Partnership Agreement

     Amendments to the Partnership Agreement may be proposed only by or with the
consent of the General Partner, which consent may be given or withheld in its
sole discretion.  In order to adopt a proposed amendment (other than certain
amendments discussed below), the General Partner is required to seek written
approval of the holders of the number of Units required to approve such
amendment or call a meeting of the Limited Partners to consider and vote upon
the proposed amendment, except as described below.  Proposed amendments (unless
otherwise specified) must be approved by holders of a Unit Majority, except that
no amendment may be made which would (i) enlarge the obligations of any Limited
Partner without its consent, unless approved by at least a majority of the type
or class of Units so affected, (ii) enlarge the obligations of, restrict in any
way any action by or rights of, or reduce in any way the amounts distributable,
reimbursable or otherwise payable by the Company to the General Partner or any
of its affiliates without its consent, which consent may be given or withheld in
its sole discretion, (iii) change the term of the Company, (iv) provide that the
Company is not dissolved upon the expiration of its term or upon an election to
dissolve the Company by the General Partner that is approved by holders of a
Unit Majority or (v) give any person the right to dissolve the Company other
than the General Partner's right to dissolve the Company with the approval of
holders of a Unit Majority.  Each of the foregoing provisions may be amended
with the approval of the holders of at least 90% of the Common Units and
Subordinated Units voting as a single class.

                                       30

<PAGE>

     The General Partner may generally make amendments to the Partnership
Agreement without the approval of any Limited Partner or assignee to reflect (i)
a change in the name of the Company, the location of the principal place of
business of the Company, the registered agent or the registered office of the
Company, (ii) admission, substitution, withdrawal or removal of partners in
accordance with the Partnership Agreement, (iii) a change that, in the
discretion of the General Partner, is necessary or advisable to qualify or
continue the qualification of the Company as a limited partnership or a
partnership in which the Limited Partners have limited liability under the laws
of any state or to ensure that neither the Company nor the Operating Company
will be treated as an association taxable as a corporation or otherwise taxed as
an entity for federal income tax purposes, (iv) an amendment that is necessary,
in the opinion of counsel to the Company, to prevent the Company, or the General
Partner or its directors, officers, agents or trustees, from in any manner being
subjected to the provisions of the Investment Company Act of 1940, as amended,
the Investment Advisors Act of 1940, as amended, or "plan asset" regulations
adopted under the Employee Retirement Income Security Act of 1974, as amended,
whether or not substantially similar to plan asset regulations currently applied
or proposed, (v) subject to the limitations on the issuance of additional Common
Units or other limited or general partner interests described above, an
amendment that, in the discretion of the General Partner, is necessary or
advisable in connection with the authorization of additional limited or general
partner interests, (vi) any amendment expressly permitted in the Partnership
Agreement to be made by the General Partner acting alone, (vii) an amendment
effected, necessitated or contemplated by a merger agreement that has been
approved pursuant to the terms of the Partnership Agreement, (viii) any
amendment that, in the discretion of the General Partner, is necessary or
advisable in connection with the formation by the Company of, or its investment
in, any corporation, partnership or other entity (other than the Operating
Company) as otherwise permitted by the Partnership Agreement, (ix) a change in
the fiscal year and/or taxable year of the Company and changes related thereto,
and (x) any other amendments substantially similar to any of the foregoing.

     In addition to the General Partner's right to amend the Partnership
Agreement as described above, the General Partner may make amendments to the
Partnership Agreement without the approval of any Limited Partner or assignee if
such amendments, in the discretion of the General Partner, (i) do not adversely
affect the Limited Partners in any material respect, (ii) are necessary or
advisable to satisfy any requirements, conditions or guidelines contained in any
opinion, directive, order, ruling or regulation of any federal or state agency
or judicial authority or contained in any federal or state statute, (iii) are
necessary or advisable to facilitate the trading of the Common Units (including
the division of any class or classes of outstanding Partnership Securities into
different classes to facilitate uniformity of tax consequences within such
classes of Partnership Securities) or to comply with any rule, regulation,
guideline or requirement of any securities exchange on which the Common Units
are or will be listed for trading, compliance with any of which the General
Partner deems to be in the best interests of the Company and the Limited
Partners, (iv) are necessary or advisable in connection with any action taken by
the General Partner relating to splits or combinations of Units pursuant to the
provisions of the Partnership Agreement or (v) are required to effect the intent
expressed in this Prospectus or the intent of the Partnership Agreement or
contemplated by the Partnership Agreement.

     The General Partner will not be required to obtain an Opinion of Counsel
(as defined below) in the event of the amendments described in the two
immediately preceding paragraphs.  No other amendments to the Partnership
Agreement will become effective without the approval of holders of at least 90%
of the Units unless the Company obtains an Opinion of Counsel to the effect that
such amendment will not affect the limited liability under applicable law of any
limited partner in the Company or any member of the Operating Company.

     Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding Units in relation to other
classes of Units will require the approval of at least a majority of the type or
class of Units so affected.  Any amendment that reduces the voting percentage
required to take any action is required to be approved by the affirmative vote
of limited partners constituting not less than the voting requirement sought to
be reduced.

                                       31
<PAGE>

   Merger, Sale or Other Disposition of Assets

     The General Partner is generally prohibited, without the prior approval of
holders of a Unit Majority, from causing the Company to, among other things,
sell, exchange or otherwise dispose of all or substantially all of its assets in
a single transaction or a series of related transactions (including by way of
merger, consolidation or other combination) or approving on behalf of the
Company the sale, exchange or other disposition of all or substantially all of
the assets of the Operating Company; provided that the General Partner may
mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the Company's assets without such approval.  The General
Partner may also sell all or substantially all of the Company's assets pursuant
to a foreclosure or other realization upon the foregoing encumbrances without
such approval.  Furthermore, provided that certain conditions are satisfied, the
General Partner may merge the Company or any member of the Partnership Group
into, or convey some or all of the Partnership Group's assets to, a newly formed
entity if the sole purpose of such merger or conveyance is to effect a mere
change in the legal form of the Company into another limited liability entity.
The Unitholders are not entitled to dissenters' rights of appraisal under the
Partnership Agreement or applicable Delaware law in the event of a merger or
consolidation of the Company, a sale of substantially all of the Company's
assets or any other transaction or event.

   Termination and Dissolution

     The Company will continue until December 31, 2087, unless sooner terminated
pursuant to the Partnership Agreement.  The Company will be dissolved upon (i)
the election of the General Partner to dissolve the Company, if approved by the
holders of a Unit Majority, (ii) the sale, exchange or other disposition of all
or substantially all of the assets and properties of the Company and the
Operating Company, (iii) the entry of a decree of judicial dissolution of the
Company or (iv) the withdrawal or removal of the General Partner or any other
event that results in its ceasing to be the General Partner (other than by
reason of a transfer of its general partner interest in accordance with the
Partnership Agreement or withdrawal or removal following approval and admission
of a successor).  Upon a dissolution pursuant to clause (iv), the holders of a
Unit Majority may also elect, within certain time limitations, to reconstitute
the Company and continue its business on the same terms and conditions set forth
in the Partnership Agreement by forming a new limited partnership on terms
identical to those set forth in the Partnership Agreement and having as general
partner an entity approved by the holders of a Unit Majority subject to receipt
by the Company of an opinion of counsel to the effect that (x) such action would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Company, the reconstituted limited partnership nor the Operating
Company would be treated as an association taxable as a corporation or otherwise
be taxable as an entity for federal income tax purposes upon the exercise of
such right to continue (hereinafter, an "Opinion of Counsel").

   Liquidation and Distribution of Proceeds

     Upon dissolution of the Company, unless the Company is reconstituted and
continued as a new limited partnership, the person authorized to wind up the
affairs of the Company (the "Liquidator") will, acting with all of the powers of
the General Partner that such Liquidator deems necessary or desirable in its
good faith judgment in connection therewith, liquidate the Company's assets and
apply the proceeds of the liquidation as provided in "Cash Distribution Policy--
Distributions of Cash Upon Liquidation." Under certain circumstances and subject
to certain limitations, the Liquidator may defer liquidation or distribution of
the Company's assets for a reasonable period of time or distribute assets to
partners in kind if it determines that a sale would be impractical or would
cause undue loss to the partners.

   Withdrawal or Removal of the General Partner

     The General Partner has agreed not to withdraw voluntarily as a general
partner of the Company and the managing member of the Operating Company prior to
December 31, 2007 (with limited exceptions described below), without obtaining
the approval of the holders of a Unit Majority and furnishing an Opinion of
Counsel.  On or after December 31, 2007, the General Partner may withdraw as the
General Partner (without first obtaining approval from any Unitholder) by giving
90 days' written notice, and such withdrawal will not constitute a violation of
the Partnership Agreement.  Notwithstanding the foregoing, the General Partner
may withdraw without Unitholder approval upon 90

                                       32

<PAGE>

days' notice to the Limited Partners if at least 50% of the outstanding Common
Units are held or controlled by one person and its affiliates (other than the
General Partner and its affiliates). In addition, the Partnership Agreement
permits the General Partner (in certain limited instances) to sell or otherwise
transfer all of its general partner interest in the Company without the approval
of the Unitholders. See "--Transfer of General Partner's Interests and Incentive
Distribution Rights."

     Upon the withdrawal of the General Partner under any circumstances (other
than as a result of a transfer by the General Partner of all or a part of its
general partner interest in the Company), the holders of a Unit Majority may
select a successor to such withdrawing General Partner.  If such a successor is
not elected, or is elected but an Opinion of Counsel cannot be obtained, the
Company will be dissolved, wound up and liquidated, unless within 180 days after
such withdrawal the holders of a Unit Majority agree in writing to continue the
business of the Company and to appoint a successor General Partner.  See "--
Termination and Dissolution."

     The General Partner may not be removed unless such removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding Units
(including Units held by the General Partner and its affiliates) and the Company
receives an Opinion of Counsel.  Any such removal is also subject to the
approval of a successor general partner by the vote of the holders of not less
than a Unit Majority.  The Partnership Agreement also provides that if the
General Partner is removed as 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 all the Incentive Distribution Rights)
into Common Units or to receive cash in exchange for such interests.

     Withdrawal or removal of the General Partner as a general partner of the
Company also constitutes withdrawal or removal, as the case may be, of the
General Partner as the managing member of the Operating Company.

     In the event of removal of the General Partner under circumstances where
Cause exists or withdrawal of the General Partner where such withdrawal violates
the Partnership Agreement, a successor general partner will have the option to
purchase the general partner interest, managing member interest and Incentive
Distribution Rights of the departing General Partner (the "Departing Partner")
in the Company and the Operating Company for a cash payment equal to the fair
market value of such interests.  Under all other circumstances where the General
Partner withdraws or is removed by the Limited Partners, the Departing Partner
will have the option to require the successor general partner to purchase such
interests of the Departing Partner and its Incentive Distribution Rights for
such amount.  In each case, such fair market value will be determined by
agreement between the Departing Partner and the successor general partner, or if
no agreement is reached, by an independent investment banking firm or other
independent expert selected by the Departing Partner and the successor general
partner (or if no expert can be agreed upon, by an expert chosen by agreement of
the experts selected by each of them).  In addition, the Company will be
required to reimburse the Departing Partner for all amounts due the Departing
Partner, including, without limitation, all employee-related liabilities,
including severance liabilities, incurred in connection with the termination of
any employees employed by the Departing Partner for the benefit of the Company.

     If the above-described option is not exercised by either the Departing
Partner or the successor general partner, as applicable, the Departing Partner's
general partner interest in the Company and managing member interest in the
Operating Company and its Incentive Distribution Rights will automatically
convert into Common Units equal to the fair market value of such interests as
determined by an investment banking firm or other independent expert selected in
the manner described in the preceding paragraph.

                                       33
<PAGE>

   Transfer of General Partner's Interests and Incentive Distribution Rights

     Except for a transfer by the General Partner of all, but not less than all,
of its general partner interest in the Company and managing member interest in
the Operating Company to (a) an affiliate of the General Partner or (b) another
person in connection with the merger or consolidation of the General Partner
with or into another person or the transfer by such General Partner of all or
substantially all of its assets to another person, the General Partner may not
transfer all or any part of its general partner interest in the Company and
managing member interest in the Operating Company to another person prior to
December 31, 2007, without the approval of the holders of at least a Unit
Majority; provided that, in each case, such transferee assumes the rights and
duties of the General Partner to whose interest such transferee has succeeded,
agrees to be bound by the provisions of the Partnership Agreement, furnishes an
Opinion of Counsel and agrees to acquire all (or the appropriate portion
thereof, as applicable) of the General Partner's interest in the Operating
Company and agrees to be bound by the provisions of the Operating Company
Agreement.  The General Partner and its affiliates shall have the right at any
time, however, to transfer their Subordinated Units to one or more persons
without Unitholder approval.  At any time, the members of the General Partner
may sell or transfer all or part of their interest in the General Partner to an
affiliate or a third party without the approval of the Unitholders.  The General
Partner or its affiliates or a subsequent holder may transfer its Incentive
Distribution Rights to another person in connection with its merger or
consolidation with or into, or sale of all or substantially all of its assets
to, such person without the prior approval of the Unitholders.  Holders of
Incentive Distribution Rights may also transfer such rights to its affiliates
without the prior approval of the Unitholders.  Prior to December 31, 2007,
other transfers of the Incentive Distribution Rights will require the
affirmative vote of holders of at least a Unit Majority.  On or after December
31, 2007, the Incentive Distribution Rights will be freely transferable.

   Change of Management Provisions

     The Partnership Agreement contains certain provisions that are intended to
discourage a person or group from attempting to remove the General Partner as
general partner of the Company or otherwise change the management of the
Company.  If any person or group other than the General Partner and its
affiliates acquires beneficial ownership of 20% or more of any class of Units,
such person or group loses voting rights with respect to all of its Units.  The
Partnership Agreement also provides that if the General Partner is removed as a
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 partner interests (and
all of its Incentive Distribution Rights) into Common Units or to receive cash
in exchange for such interests.

   Limited Call Right

     If at any time not more than 20% of the then-issued and outstanding limited
partner interests of any class (including Common Units) are held by persons
other than the General Partner and its affiliates, the General Partner will have
the right, which it may assign in whole or in part to any of its affiliates or
to the Company, to acquire all, but not less than all, of the remaining limited
partner interests of such class held by such unaffiliated persons as of a record
date to be selected by the General Partner, on at least 10 but not more than 60
days' notice.  The purchase price in the event of such a purchase shall be the
greater of (i) the highest price paid by the General Partner or any of its
affiliates for any limited partner interests of such class purchased within the
90 days preceding the date on which the General Partner first mails notice of
its election to purchase such limited partner interests, and (ii) the Current
Market Price as of the date three days prior to the date such notice is mailed.
As a consequence of the General Partner's right to purchase outstanding limited
partner interests, a holder of limited partner interests may have his limited
partner interests purchased even though he may not desire to sell them, or the
price paid may be less than the amount the holder would desire to receive upon
the sale of his limited partner interests.  The tax consequences to a Unitholder
of the exercise of this call right are the same as a sale by such Unitholder of
his Subordinated Units in the market.

                                       34

<PAGE>

   Meetings; Voting

     Except as described below with respect to a Person or group owning 20% or
more of all Units, Unitholders or assignees who are record holders of Units on
the record date set pursuant to the Partnership Agreement will be entitled to
notice of, and to vote at, meetings of limited partners of the Company and to
act with respect to matters as to which approvals may be solicited.  With
respect to voting rights attributable to Units that are owned by an assignee who
is a record holder but who has not yet been admitted as a limited partner, the
General Partner shall be deemed to be the limited partner with respect thereto
and shall, in exercising the voting rights in respect of such Units on any
matter, vote such Units at the written direction of such record holder.  Absent
such direction, such Units will not be voted (except that, in the case of Units
held by the General Partner on behalf of Non-citizen Assignees (as defined
below), the General Partner shall distribute the votes in respect of such Units
in the same ratios as the votes of limited partners in respect of other Units
are cast).

     The General Partner does not anticipate that any meeting of Unitholders
will be called in the foreseeable future. Any action that is required or
permitted to be taken by the Unitholders may be taken either at a meeting of the
Unitholders or without a meeting if consents in writing setting forth the action
so taken are signed by holders of such number of Units as would be necessary to
authorize or take such action at a meeting of all of the Unitholders.  Meetings
of the Unitholders of the Company may be called by the General Partner or by
Unitholders owning at least 20% of the outstanding Units of the class for which
a meeting is proposed.  Unitholders may vote either in person or by proxy at
meetings.  The holders of a majority of the outstanding Units of the class or
classes for which a meeting has been called represented in person or by proxy
shall constitute a quorum at a meeting of Unitholders of such class or classes,
unless any such action by the Unitholders requires approval by holders of a
greater percentage of such Units, in which case the quorum shall be such greater
percentage.

     Each record holder of a Unit has a vote according to his percentage
interest in the Company, although additional limited partner interests having
special voting rights could be issued by the Company.  See "--Issuance of
Additional Securities."  However, if at any time any person or group (other than
the General Partner and its affiliates) acquires, in the aggregate, beneficial
ownership of 20% or more of any class of Units then outstanding, such person or
group will lose voting rights with respect to all of its Units and such Units
may not be voted on any matter and will not be considered to be outstanding when
sending notices of a meeting of Unitholders, calculating required votes,
determining the presence of a quorum or for other similar Company purposes.  The
Partnership Agreement provides that Units held in nominee or street name account
will be voted by the broker (or other nominee) pursuant to the instruction of
the beneficial owner unless the arrangement between the beneficial owner and his
nominee provides otherwise.  Except as otherwise provided in the Partnership
Agreement, Common Units will vote together with Subordinated Units as a single
class.

     Any notice, demand, request, report or proxy material required or permitted
to be given or made to Unitholders of record (whether or not such record holder
has been admitted as a limited partner) under the terms of the Partnership
Agreement will be delivered to the record holder by the Company or by the
Transfer Agent at the request of the Company.

   Status as Limited Partner or Assignee

     Except as described above under "--Limited Liability," the Units are fully
paid, and Unitholders will not be required to make additional contributions to
the Company.

     An assignee of a Unit, subsequent to executing and delivering a Transfer
Application, but pending its admission as a substituted Limited Partner in the
Company, is entitled to an interest in the Company equivalent to that of a
Limited Partner with respect to the right to share in allocations and
distributions from the Company, including liquidating distributions.  The
General Partner will vote and exercise other powers attributable to Subordinated
Units owned by an assignee who has not become a substitute Limited Partner at
the written direction of such assignee.  See "--Meetings; Voting." Transferees
who do not execute and deliver a Transfer Application will be treated neither as
assignees nor as

                                       35

<PAGE>

Unitholders of record, and will not receive cash distributions, federal income
tax allocations or reports furnished to Unitholders of record.

   Non-citizen Assignees; Redemption

     If the Company is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the General Partner, create
a substantial risk of cancellation or forfeiture of any property in which the
Company has an interest because of the nationality, citizenship or other related
status of any Limited Partner or assignee, the Company may redeem the Units held
by such Limited Partner or assignee at their Current Market Price (as defined in
the Glossary).  In order to avoid any such cancellation or forfeiture, the
General Partner may require each Limited Partner or assignee to furnish
information about his nationality, citizenship or related status.  If a Limited
Partner or assignee fails to furnish information about such nationality,
citizenship or other related status within 30 days after a request for such
information or the General Partner determines after receipt of such information
that the Limited Partner or assignee is not an eligible citizen, such Limited
Partner or assignee may be treated as a non-citizen assignee ("Non-citizen
Assignee").  In addition to other limitations on the rights of an assignee who
is not a substituted Limited Partner, a Non-citizen Assignee does not have the
right to direct the voting of his Units and may not receive distributions in
kind upon liquidation of the Company.

   Indemnification

     The Partnership Agreement provides that the Company will indemnify the
General Partner, any Departing Partner, any Person who is or was an affiliate of
a General Partner or any Departing Partner, any Person who is or was a member,
partner, officer, director, employee, agent or trustee of a General Partner or
any Departing Partner or any affiliate of a General Partner or any Departing
Partner, or any Person who is or was serving at the request of a General Partner
or any Departing Partner or any affiliate of any such person, any affiliate of a
General Partner or any Departing Partner as an officer, director, employee,
member, partner, agent, fiduciary or trustee of another Person ("Indemnitees"),
to the fullest extent permitted by law, from and against any and all losses,
claims, damages, liabilities (joint or several), expenses (including, without
limitation, legal fees and expenses), judgments, fines, penalties, interest,
settlements and other amounts arising from any and all claims, demands, actions,
suits or proceedings, whether civil, criminal, administrative or investigative,
in which any Indemnitee may be involved, or is threatened to be involved, as a
party or otherwise, by reason of its status as an Indemnitee; provided that in
each case the Indemnitee acted in good faith and in a manner that such
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company and, with respect to any criminal proceeding, had no reasonable
cause to believe its conduct was unlawful.  Any indemnification under these
provisions will be only out of the assets of the Company, and the General
Partner shall not be personally liable for, or have any obligation to contribute
or loan funds or assets to the Company to enable it to effectuate, such
indemnification.  The Company is authorized to purchase (or to reimburse the
General Partner or its affiliates for the cost of) insurance against liabilities
asserted against and expenses incurred by such persons in connection with the
Company's activities, regardless of whether the Company would have the power to
indemnify such person against such liabilities under the provisions described
above.

   Books and Reports

     The General Partner is required to keep appropriate books of the business
of the Company at the principal offices of the Company.  The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
For tax purposes and for financial reporting purposes, the fiscal year of the
Company is the calendar year.

     As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the General Partner will furnish or make available to each
record holder of Units (as of a record date selected by the General Partner) an
annual report containing audited financial statements of the Company for the
past fiscal year, prepared in accordance with generally accepted accounting
principles.  As soon as practicable, but in no event later than 90 days after
the close of each quarter (except the last quarter of each fiscal year), the
General Partner will furnish or make available to each

                                       36

<PAGE>

record holder of Units (as of a record date selected by the General Partner) a
report containing unaudited financial statements of the Company with respect to
such quarter and such other information as may be required by law.

     The Company will furnish each record holder of a Unit information
reasonably required for tax reporting purposes within 90 days after the close of
each calendar year.  Such information is expected to be furnished in summary
form so that certain complex calculations normally required of partners can be
avoided.  The Company's ability to furnish such summary information to
Unitholders will depend on the cooperation of such Unitholders in supplying
certain information to the Company.  Every Unitholder (without regard to whether
he supplies such information to the Company) will receive information to assist
him in determining his federal and state tax liability and filing his federal
and state income tax returns.

   Right to Inspect Company Books and Records

     The Partnership Agreement provides that a Limited Partner can for a purpose
reasonably related to such Limited Partner's interest as a limited partner, upon
reasonable demand and at his own expense, have furnished to him (i) a current
list of the name and last known address of each partner, (ii) a copy of the
Company's tax returns, (iii) information as to the amount of cash, and a
description and statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on which each
became a partner, (iv) copies of the Partnership Agreement, the certificate of
limited partnership of the Company, amendments thereto and powers of attorney
pursuant to which the same have been executed, (v) information regarding the
status of the Company's business and financial condition, and (vi) such other
information regarding the affairs of the Company as is just and reasonable. The
Company may, and intends to, keep confidential from the Limited Partners trade
secrets or other information the disclosure of which the Company believes in
good faith is not in the best interests of the Company or which the Company is
required by law or by agreements with third parties to keep confidential.

   Registration Rights

     Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Company has agreed to register for resale
under the Securities Act and applicable state securities laws any Units or other
securities of the Company proposed to be sold by the General Partner or any of
its affiliates if an exemption from such registration requirements is not
otherwise available for such proposed transaction.  The Company is obligated to
pay all expenses incidental to such registration, excluding underwriting
discounts and commissions.

ITEM 2.   PROPERTIES

TIMBER INVENTORY

     The Company currently owns and manages approximately 633,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 1998 to
be approximately 2.1 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 five 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 180,000 acres
of the 633,000 acre total consist of actively managed pine Plantations with
stands ranging in age from two to 36 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

                                       37

<PAGE>

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, 1998, the total
timber inventory amounted to 2,106.9 MMBF.  The Company's combined timber
inventory by MMBF and percentage is Ponderosa Pine 918.4 (44%), Lodgepole Pine
395.2 (19%), White Fir 408.8 (19%), Douglas fir 285.7 (13%) and other species
98.8 (5%).  Other species include Cedar, Sugar Pine, Western Larch and Grand
Fir.

   Size and Species Distribution of Merchantable Timber

     The Company's Timberlands are well diversified, not only by species mix but
also 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, 1998, approximately 814
MMBF, or 39%, of the merchantable timber had a DBH of 16 or more inches.

   Acreage Distribution by Age Class on Plantations

     The Company also maintains data as to the acreage distribution of timber on
the Plantations by age class.  As of January 1, 1998, the Plantations totaled
180,020 acres.  Of the total acreage, 65,400 acres range from 1 to 15 years of
age, 111,700 acres range from 16 to 25 years of age, and 2,900 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

     None

                                    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
March 23, 1998, there were approximately 118 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:

<TABLE>
<CAPTION>
                                       COMMON UNIT PRICE RANGE
                                       -----------------------
                                         HIGH            LOW
                                         ----            ---
<S>                                      <C>            <C>
November 14 to December 31, 1997..       $22.75         $20.00
First Quarter 1998................        21.50(1)       20.31(1)
</TABLE>
------------

                                       38

<PAGE>

(1) First Quarter high/low is through March 23, 1998.

     The last reported sale price of the Common Units on Nasdaq on March 23,
1998 was $20.81 per Common Unit.

     The Company expects to make its first cash distribution on the Common Units
and the Subordinated Units on May 15, 1998. Such distribution is expected to be
$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 will 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" consists generally of all of
the cash receipts of the Company adjusted for its cash disbursements and net
changes to reserves. A full definition of Available Cash and the Subordination
Period is set forth in the Partnership Agreement, a form of which is filed as an
exhibit to this Annual Report.

   Recent Sales of Unregistered Securities

     The Company issued to Holdings and Old Services, 2,894,157 and 1,387,963
Subordinated Units,  respectively, in connection with the formation of the
Company on November 19, 1997, in offerings exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended.  There have been no
other sales of unregistered securities of the Company within the past three
years.

   Use of Proceeds From Registered Securities

     On November 12, 1997, the Company's registration statement on Form S-1
(File No. 333-32811) was declared effective by the Securities and Exchange
Commission in connection with the public offering of 7,458,684 Common Units
representing limited partner interests in the Company (plus up to 1,118,803
additional Common Units upon the exercise of the underwriters' over-allotment
option), which commenced on November 14, 1997.  The Initial Offering did not
terminate prior to the sale of all the securities registered.  The underwriters
were represented by Smith Barney Inc., Deutsche Morgan Grenfell, Inc., A.G.
Edwards & Sons, Inc., PaineWebber Incorporated and Prudential Securities
Incorporated.  The Initial Offering consisted solely of the one class of Common
Units.  The number of securities registered, including the Common Units subject
to the underwriters' over-allotment option, was 8,577,487, all of which have
been sold to the public.

     The Price to Public, Underwriting Discounts and Commissions, and Proceeds
to the Company are set forth in the following table:

<TABLE>
<CAPTION>
==================================================================================================
                                Price to Public       Underwriting       Proceeds to Company /(1)/
                                                       Discounts
                                                    and Commissions
<S>                                <C>                <C>                       <C>
Per Common Unit...............     $      21.00       $      1.39               $      19.61
Total upon Initial Offering...     $156,632,364       $10,367,571               $146,264,793
Total upon exercise of over-
 allotment....................     $180,127,227       $11,922,707               $168,204,520
==================================================================================================
</TABLE>
------------
(1) Before deducting expenses estimated at $5,000,000 paid by the Company.

                                       39

<PAGE>

     The Company contributed the net proceeds from the sale of Common Units in
the Initial Offering ($141.3 million) to the Operating Company.  Concurrent with
the closing of the Initial Offering, the Operating Company and Finance Corp.
issued $225.0 million aggregate principal amount of Notes in the Public Note
Offering.  Net proceeds from the sale of the Notes ($218.3 million), together
with the net proceeds from the sale of Common Units in the Initial Offering,
$26.0 million borrowed by the Operating Company under the Acquisition Facility
and cash on hand ($25.6 million) were used by the Operating Company to repay
$411.2 million of indebtedness of the Operating Company.  The Company used the
net proceeds from the exercise of the underwriters' over-allotment option ($21.9
million) to repay borrowings under the Acquisition Facility.

      For additional information regarding the terms of the Notes and the Bank
Credit Facility, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

                                       40

<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                U.S. TIMBERLANDS (1)                  PREDECESSOR (1)
                                                --------------------    -------------------------------------------
                                                         AUGUST 30,     JANUARY 1,
                                                        1996 THROUGH     THROUGH
                                                        DECEMBER 31,    AUGUST 29,
                                                1997        1996           1996        1995     1994        1993
                                                -----   ------------    ----------    -----     -----      ------
                                                                                                         (unaudited)
<S>                                             <C>        <C>             <C>        <C>      <C>         <C>
CASH FLOWS AND OTHER DATA
 (IN MILLIONS):
EBITDA (7).....................................   53.3       (1.4)           3.6       12.5     11.5        16.6
Additions to timber, timberlands and
 logging roads (3).............................  111.4      283.5            0.0        0.2      0.0         0.1
Cash flow from (used in) operating
 activities....................................   26.3       (3.0)           5.5       11.8     13.2        15.1

OPERATING STATEMENT DATA
 (IN MILLIONS EXCEPT PER
 UNIT AMOUNTS):
Revenues (2) (3)............................... $ 77.3     $ 14.0          $15.6      $31.7    $32.3       $36.3
Depreciation, depletion and road
 amortization (2) (3)..........................   17.3        3.3            0.9        1.5      1.5         1.4
Cost of timber and property
 sales (2) (3).................................    8.7         --             --         --       --         0.1
Operating income (loss) (2) (3)................   27.3       (4.8)           2.7       11.1     10.1        15.1
Income (loss) before extraordinary
 items (4).....................................   (1.4)     (13.0)           2.7       11.6      9.9        14.8
Extraordinary items, losses on
 extinguishment of debt (5)....................    9.3         --             --         --       --          --
Net income (loss)..............................  (10.7)     (13.0)           2.7       11.6      9.9        14.8

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

BALANCE SHEET DATA (AT
 PERIOD END, IN MILLIONS):
Working capital................................    1.8       21.5            0.5        1.3      0.2         2.1
Total assets (3)...............................  385.2      310.2           27.8       30.9     29.8        32.3
Long-term debt (8).............................  225.0      305.0             --         --       --          --
Equity (deficit) (9)...........................  145.6       (2.9)          27.8       29.2     27.7        29.6

OPERATING DATA (UNAUDITED):
Log, stumpage and timber deed sales
 volumes (MMBF) (2) (3)........................  138.9       30.2           32.8       63.8     68.3        66.3
Property sale volume (MMBF) (2)................   41.5         --             --         --       --         9.4
</TABLE>
---------------
(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.  See discussion of the Company and the
    Predecessor's basis of presentation in Note 1 of the Notes to the
    Consolidated Financial Statements.  Also, see "Management's Discussion and
    Analysis of Financial Condition and Results of Operations."

(2) 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.  Timber
    and property sales were $4.2 million in 1993. See "Management's Discussion
    and Analysis of Financial Condition and Results of Operations."

                                       41

<PAGE>

(3) See August 1996 acquisition of the Klamath Falls Timberlands and July 1997
    acquisition of the Ochoco Timberlands in Note 3 of the Notes to the
    Consolidated Financial Statements.
(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 5 of the Notes to the 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 2 of the Notes to the Consolidated Financial Statements.
(7) EBITDDA is defined as operating income plus depreciation, depletion and road
    amortization and cost of timber and property sales. EBITDA 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.
    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, 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 5 of the Notes to the Consolidated
    Financial Statements.
(9) See discussion of the Company and the Predecessor's equity (deficit) in Note
    1 of the Notes to the Consolidated Financial Statements.

                                       42
<PAGE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

   General

     The basis of presentation of the Company's financial statements is
described in Note 1 to the consolidated financial statements.  The comparability
of the financial results of the Company and the Predecessor is primarily
affected by (i) increased revenues resulting from increased harvest levels on
the Klamath Falls Timberlands, (ii) revenues realized from harvesting on the
Ochoco Timberlands acquired by the Company in July 1997, (iii) increased
depletion charges resulting from the step-up in asset values of the Timberlands,
(iv) reduced per MBF logging and hauling costs resulting from the use of
independent contractors rather than Company employees to conduct silvicultural
activities and the harvesting and delivery of logs due to lower hourly wage
rates, the elimination of compensation payments during seasonal down time and
the reduction in associated capital costs and (v) a different customer base, as
a majority of the Predecessor's sales were to an affiliated customer at
internally established transfer prices whereas all of the Company's sales are to
unaffiliated conversion facilities at market based prices (although whether the
transfer prices or market-based prices were higher changed from time to time).

SUPPLY AND DEMAND FACTORS

     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

     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.  From January 1988 to January 1998, federal timber under contract in
Washington and Oregon decreased approximately 88%.  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, imports
have decreased and their current impact on timber prices is minimal.

                                       43

<PAGE>

   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.  With 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.  The market absorbed these relatively
small quantities with little impact on prices.  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.  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.

RESULTS OF OPERATIONS

   Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

     The results of operations for the year ended December 31, 1996 are based on
combining the periods of January 1, 1996 through August 29, 1996 (the period
prior to the Weyerhaeuser Acquisition) and August 30, 1996 through December 31,
1996 both as shown in the historical financial statements appearing elsewhere in
this Annual Report.  The principal effect of the Weyerhaeuser Acquisition in
1996 was an increase in depletion, depreciation and road amortization (DD&A)
expense (due to a higher cost basis for the Company's timber, timberlands and
logging roads) and interest expense (due to borrowings to finance the
Weyerhaeuser Acquisition).

     Revenues.  Revenues in 1997 were $77.3 million, an increase of 161% over
revenues of $29.6 million in 1996. This increase was primarily attributable to a
$32.8 million increase in revenues from log and stumpage sales and a $15.2
million increase in timber and property sales, partially offset by a decrease of
$0.3 million in by-products and other revenues.

     Log and stumpage sales volumes in 1997 were 127,900 MBF, an increase of
103% over log and stumpage sales volumes of 63,000 MBF in 1996.  The significant
increase in the volume harvested was mainly due to the Company's aggressive
harvest plan compared to that of the Predecessor for the first eight months of
1996, as well as the commencement of log and stumpage sales from the Ochoco
Timberlands which were acquired on July 15, 1997. Average log and stumpage
prices increased by 8%, from $439 per MBF in 1996 to $472 per MBF in 1997,
primarily due to a larger proportion of higher valued timber harvested from the
Ochoco Timberlands during the last half of 1997.

     Revenues from timber and property sales were $15.2 million during 1997.
There were no such timber or property sales during 1996.

     The reduction in by-products and other revenue was primarily attributable
to a 36% decrease in the volume of fiber sold for use as chips.  Due to low
demand in the pulp and paper industry, chip prices had decreased to a level
where it was no longer profitable for the Company to process residual fiber for
use as chips for much of 1997.  Demand for these chips, however, increased in
the last quarter of 1997.

                                       44

<PAGE>

     Operating Costs.  Operating costs were $50.1 million in 1997, an increase
of 58% over operating costs of $31.7 million in 1996.  This increase was the
result of a $2.4 million increase in cost of products sold, an $8.7 million
increase in the cost of timber and property sales and a $13.1 million increase
in DD&A expense.  These increases were partially offset by a $5.8 million
decrease in selling, general and administrative expenses.

     The increase in cost of products sold was primarily the result of a $4.3
million increase in logging costs and a $0.3 million increase in severance
taxes.  Partially offsetting these increases were a $1.2 million decrease in
wood fiber processing costs and a $1.0 million decrease in outside log
purchases.  Logging costs and severance taxes increased primarily as a result of
a 55% increase in the level of merchantable grade logs harvested and sold,
partially offset by a 14% decrease in the Company's logging cost per MBF.  The
decrease in the Company's logging cost per MBF was primarily the result of the
Company's changing from a mix of internal logging crews and outside contractors
during the first eight months of 1996 to the use of outside contractors for all
its logging operations during the last four months of 1996 and in 1997.  Wood
fiber processing costs decreased by 58% as a result of a 14% decrease in the
volume of fiber processed and sold as chips and a write-down to fiber log
inventories during 1996, resulting from a decline in chip prices during the
period.  During 1997, the Company had timber deed sales with a combined cost
basis of $8.7 million.  No sales of tracts of timber or timberland were made
during 1996.

     DD&A expense was $17.3 million in 1997, a $13.1 million increase over DD&A
expense of $4.2 million in 1996.  This increase was primarily due to the
significant increase in the Company's depletion rate combined with the large
increase in the volume of logs harvested and sold as previously mentioned.  The
increase in the depletion rate was primarily the result of the step-up in asset
values of the Klamath Falls Timberlands upon their acquisition from
Weyerhaeuser.

     Selling, general and administrative expenses were $6.2 million in 1997, a
decrease of 48% from comparable expenses of $12.0 million in 1996.  This
decrease in selling, general and administrative expenses was primarily the
result of $4.9 million in one-time payments for advisory services paid to
affiliates of the Company in connection with the Weyerhaeuser Acquisition and
$2.8 million of one-time management fees paid to an affiliate of the Company for
management services in 1996.  The advisory fees were incurred in connection with
the Weyerhaeuser Acquisition and its initial financing.  The management fee
generally relates to services rendered in connection with the initial formation
of USTK and Old Services.  Primarily offsetting these advisory and management
fees were increases in salaries and wages as well as professional fees resulting
from the Company operating as an independent entity rather than as a division of
Weyerhaeuser.

     Interest Expense.  Interest expense was $25.3 million during 1997 and
primarily related to $215.0 million of term debt and $90.0 million of revolving
debt incurred in connection with the Weyerhaeuser Acquisition in August 1996 and
$110.0 million of incremental debt incurred in connection with the Ochoco
Acquisition on July 15, 1997.  The Company refinanced $225.0 million of its
existing debt on November 19, 1997 by issuing the Notes in the Public Note
Offering and paid down the remaining $190.0 million of outstanding debt between
July 15, 1997 and December 31, 1997 with the proceeds from the Initial Offering
and cash flows from operating activities.  The Company incurred $7.3 million in
interest expense during the last four months of 1996.  There was no interest
expense and no debt outstanding during the first eight months of 1996, as the
Predecessor participated in Weyerhaeuser's centralized cash management system.

     Amortization of Deferred Financing Fees and Debt Guarantee Fees.  The
Company deferred $4.1 million of fees incurred in connection with the financing
of the Weyerhaeuser Acquisition. The Company deferred $6.0 million of fees in
connection with the financing of the Ochoco Acquisition and related term debt
refinancing.  These costs were being amortized over the life of the debt.  The
Company deferred $6.7 million of fees incurred in connection with the issuance
of $225.0 million of Notes in the Public Note Offering.  The Company also
incurred $4.4 million of debt guarantee fees from August 30, 1996 through the
extinguishment of the $130.0 million of debt guaranteed by Weyerhaeuser on
November 19, 1997.  The amortization of deferred financing fees and debt
guarantee fee expense during 1997 and 1996 were $4.2 million and $1.3 million,
respectively.  There was no deferred financing fee amortization or debt
guarantee fee expense during the first eight months of 1996.

                                       45
<PAGE>

     Interest Income.  Interest income was $1.5 million during 1997.  For the
last four months of 1996, there was $0.4 million in interest income.  There was
no interest income during the first eight months of 1996, as the Predecessor
participated in Weyerhaeuser's centralized cash management system.

     Other (Income) Expense.  Other (income) expense, net changed from
approximately zero in 1996 to $0.6 million in 1997.  Other (income) expense in
1997 primarily represents a $0.6 million charge related to an unrealized loss on
an unhedged financial instrument as of December 31, 1997.

     Losses on Extinguishment of Debt.  The Company refinanced certain long-term
borrowings during 1997 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.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

     The results of operations for 1996 are based on combining the periods
January 1, 1996 through August 29, 1996 (the period prior to the Weyerhaeuser
Acquisition) and August 30, 1996 through December 31, 1996 both as shown in the
historical financial statements.  The principal effect of the Weyerhaeuser
Acquisition in 1996 was an increase in DD&A expense (due to a higher cost basis
for the Company's timber, timberlands and logging roads) and interest expense
(due to borrowings to finance the Weyerhaeuser Acquisition).

     Revenues.  Revenues were $29.6 million in 1996, a decrease of 7% from
revenues of $31.7 million in 1995. Revenues from the sale of logs were $27.7
million in 1996, as compared to $29.1 million in 1995 while by-products and
other revenues were $1.9 million in 1996, as compared to $2.6 million in 1995.

     Log sales volumes remained relatively constant, decreasing from 63,800 MBF
in 1995 to 63,000 MBF in 1996. The majority of the revenue decrease was due to a
reduction in the average log sales price of $17 per MBF from $456 in 1995 to
$439 in 1996.  Sales prices were negatively affected in 1996 by uncertainty
surrounding the possible sale of the Klamath Falls Timberlands, as some
customers obtained other sourcing commitments.  The average sales price was also
reduced due to a change in the species mix of the logs sold, with a higher
percentage of lower valued White Fir and a lower percentage of higher valued
Douglas fir logs.

     The reduction in revenues from by-products and other was primarily
attributable to a 26% decrease in chip sales revenue.  Due to low demand in the
pulp and paper industry, average chip prices decreased by 26% in 1996 compared
to 1995.

     Operating Costs.  Operating costs were $31.7 million in 1996, a 53%
increase over operating costs of $20.7 million in 1995.  This increase was the
result of a $7.8 million increase in selling, general and administrative
expenses, a $2.8 million increase in DD&A expense and a $0.4 million increase in
cost of products sold.  The increase in selling, general and administrative
expenses was primarily the result of $4.9 million in one time payments for
advisory services paid to affiliates of the Company in connection with the
Weyerhaeuser Acquisition and $2.8 million of management fees paid to an
affiliate of the Company for management services.  The advisory fees were
incurred in connection with the Weyerhaeuser Acquisition and its initial
financing.  The management fee generally relates to services rendered in
connection with the initial formation of USTK and Old Services.  The increase in
DD&A was primarily due to the significant increase in the Company's depletion
rate as a result of the step-up in asset values of the Klamath Falls Timberlands
upon their acquisition from Weyerhaeuser.  The increase in cost of goods sold
was primarily due to an increase in wood fiber processing costs.

     Interest Expense.  Interest expense was $7.3 million in 1996 and related to
$215.0 million of term debt and $90.0 million of revolving debt incurred in
connection with the Weyerhaeuser Acquisition in August 1996.  There was no
interest expense and no debt outstanding during 1995, as the Predecessor
participated in Weyerhaeuser's centralized cash management system.

                                       46
<PAGE>

     Amortization of Deferred Financing Fees and Debt Guarantee Fees.  The
Company deferred $4.1 million of fees incurred in connection with the financing
of the Weyerhaeuser Acquisition.  These costs are being amortized over the life
of the related debt.  In addition, the Company is accreting $3.6 million of
estimated debt guarantee fees from August 30, 1996 through the estimated
Holdings Debt extinguishment date of November 15, 1997.  The debt guarantee fees
payable to Weyerhaeuser relate to the Holdings Debt which was incurred in
connection with the Weyerhaeuser Acquisition.  The amortization of deferred
financing fees and debt guarantee fee expense during 1996 were $0.2 million and
$1.1 million, respectively.  There was no deferred financing fee amortization or
debt guarantee fee expense during 1995.

     Interest Income.  Interest income was $0.4 million during 1996.  There was
no interest income during 1995, as the Predecessor participated in
Weyerhaeuser's centralized cash management system.

     Other (Income) Expense, Net.  Other (income) expense, net changed from
income of $0.6 million in 1995 to near zero in 1996.  Nonrecurring income from
easements and road use permits represents $0.4 million of the 1995 other income,
net.

LIQUIDITY AND CAPITAL RESOURCES

     Prior to the transactions discussed below, the Company's primary source of
liquidity has been cash and cash equivalents from borrowings under its revolving
credit facility drawn on at the closing of the Weyerhaeuser Acquisition. On July
14, 1997, the Company refinanced its original revolving credit facility and
certain term debt and incurred an additional $110.0 million of term debt in
connection with the Ochoco Acquisition.  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, 1997, the Company has a cash balance of
$10.6 million, $1.8 million of working capital and $100.0 million of internal
borrowing capacity under the Bank Credit Facility.

     For purposes of the following comparison of cash flows from operating,
investing and financing activities, the 1996 period cash flows are based on
combining January 1, 1996 through August 29, 1996 (the period prior to the
Weyerhaeuser Acquisition) and August 30, 1996 through December 31, 1996.

     Operating Activities.  Cash flows provided by operating activities in 1997
were $26.3 million, as compared to cash flows provided by operating activities
of $2.5 million in 1996.  The $23.8 million increase in cash flows provided by
operating activities was primarily due to an increase in the volume of log and
stumpage sales, proceeds from timber and property sales and $5.7 million of
advance deposits on stumpage sales contracts.  In addition, 1996 operating cash
flows included $4.9 million of one-time payments to certain affiliates of the
Company in connection with the Weyerhaeuser Acquisition and $2.8 million in one-
time management fees paid to an affiliate of the Company.  The increase in
operating cash flows was partially offset by a substantial increase in interest
and debt guarantee fees in 1997 as compared to 1996.

     Investing Activities.  Cash flows used by investing activities were $101.6
million in 1997, as compared to cash flows used by investing activities of
$291.9 million during 1996.  During 1997, $110.9 million was used in the Ochoco
Acquisition and a $10.0 million receivable from an affiliate was repaid.  During
1996, $283.5 million was used in the Weyerhaeuser Acquisition and $10.0 million
was paid to an affiliate.  The results for 1996 also include $2.4 million in
proceeds from logging equipment dispositions as a result of the Company's
discontinuance of its logging crews upon consummation of the Weyerhaeuser
Acquisition.

                                       47
<PAGE>

     Financing Activities.  Cash flows provided by financing activities were
$69.3 million in 1997, as compared to cash flows provided by financing
activities of $306.0 million during 1996.  During 1997, the Company refinanced
$175.0 million of long-term debt incurred in connection with the Weyerhaeuser
Acquisition and incurred an additional $110.0 million of long-term debt in
connection with the Ochoco Acquisition.  The Company incurred $6.0 million of
deferred financing fees in connection with the refinancing of long-term debt and
the incurrence of financing for the Ochoco Acquisition. In addition, the Company
distributed $1.2 million to a member related to his 1997 estimated tax
liability.  The Company received $163.2 million in net proceeds from the Initial
Offering and $218.3 million in proceeds, net of financing fees related to the
issuance of the Notes.  Cash flows provided by financing activities during 1996
principally represent borrowings under debt facilities and equity contributions
from members in connection with the Weyerhaeuser Acquisition.  These 1996 cash
flows are partially offset by deferred financing fees incurred in connection
with obtaining financing for the Weyerhaeuser Acquisition and the Predecessor's
normal distributions of net operating and investment cash flows to Weyerhaeuser.

Notes

     The following summary of the terms of the Notes is qualified in its
entirety by the terms of the Indenture which is included as an exhibit to this
Report and is hereby incorporated by reference herein.  The $225.0 million
aggregate principal amount of Notes represent unsecured general obligations of
the Operating Company and 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 hereof, 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 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.

                                       48
<PAGE>

Bank Credit Facility

     The following summary of the terms of the Bank Credit Facility is qualified
in its entirety by the Form of Bank Credit Facility which is included as an
exhibit to this Report and is hereby incorporated by reference.  The Bank Credit
Facility consists of the $75.0 million Acquisition Facility and the  $25.0
million Working Capital Facility.  As of December 31, 1997, there were no
outstanding borrowings under the Bank Credit Facility.  The Bank Credit Facility
bears interest at the lower of the Bank's prime rate plus a margin of 2.0%
(10.5% at December 31, 1997) or LIBOR plus a margin of 2.5% (8.41% at December
31, 1997).  The Working Capital Facility expires on November 19, 2000 and all
amounts borrowed thereunder shall then be due and payable.  At November 19,
2000, the Company may elect to amortize any outstanding loans under the
Acquisition Facility in sixteen equal quarterly installments beginning one
quarter after the conversion to a term loan, subject to certain provisions
contained in the agreement governing the Bank Credit Facility.

     The Bank Credit Facility contains various affirmative and restrictive
covenants applicable to the Operating Company, including limitations on the
ability of the Operating Company to, among other things, (i) incur certain
additional indebtedness, (ii) incur any liens other than (a) liens on accounts
receivable and inventory to secure indebtedness under a refinancing facility for
the Working Capital Facility and (b) liens for purchase money financing of
acquired assets up to an aggregate $10.0 million, (iii) sell assets or harvest
timber in excess of certain limitations (which limitations are similar to those
under the Indenture) and (iv) make investments, engage in transactions with
affiliates, and enter into a merger, consolidation or sale of assets.  The Bank
Credit Facility requires that the Operating Company maintain at all times the
following financial ratios: (i) Minimum Pro Forma EBITDDA (as defined in the
Bank Credit Facility) to Pro Forma Interest Expense (as defined in the Bank
Credit Facility) of 2.10 to 1.0 (calculated on a four quarter rolling basis)
from the closing date through June 30, 1998, increasing to 2.25 to 1.0
thereafter and through June 30, 1999 and further increasing to 2.35 to 1.0
thereafter, (ii) Maximum Funded Debt (as defined in the Bank Credit Facility) to
Pro Forma EBITDDA (as defined in the Bank Credit Facility) of not more than 5.25
to 1.0 (calculated on a four quarter rolling basis) from the closing date
through June 30, 1998, reducing to 4.75 to 1.0 thereafter and through June 30,
1999, and further reducing to 4.50 to 1.0 thereafter and (iii) Minimum Asset
Value (as defined in the Bank Credit Facility) to Funded Debt Ratio (as defined
in the Bank Credit Facility) of 175% measured on a quarterly basis based on
quarter end numbers.

     Under the Bank Credit Facility, so long as no Event of Default (as defined
in the Bank 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 Bank Credit Facility) in the
preceding quarterly period. Available Cash shall reflect a reserve equal to 50%
of the interest projected to be paid on the Notes in the next succeeding
quarter, as well as 100% of the aggregate amount of all accrued and unpaid
interest in respect of the Bank Credit Facility on the date of determination.
In addition, in the third, second and first quarters preceding a quarter in
which a scheduled principal payment is to be made on the Notes, Available Cash
will be required to reflect a reserve equal to 25%, 50% and 75%, respectively,
of the principal amount to be repaid on such date.  The Bank Credit Facility
also requires Available Cash to reflect a reserve for certain net proceeds from
asset sales and excess harvests pending reinvestment.

Capital Expenditures/Cash Distributions

     Capital expenditures in 1997 totaled $1.1 million.  Capital expenditures
incurred were mainly in the nature of land management/silvicultural expenses and
office equipment and vehicle purchases.  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 material and will consist mainly of land
management/silvicultural expenditures.  It is not currently anticipated that the
Company will either maintain 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 $1.8 million in 1998. Capital expenditures will consist

                                       49
<PAGE>

primarily of capitalized silvicultural costs and miscellaneous equipment and
computer hardware and software expenditures.

     Cash required to meet the Company's quarterly cash distributions, and
interest and principal payments on indebtedness will be significant.  The
General Partner expects that the debt service will be funded from current
operations.  The Company expects to make cash distributions from current funds
and cash generated from operations.

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.

Year 2000 Compliance

     In connection with the Company's business activities, the Company is
assessing the computer and information system needs of the overall organization.
Along with this assessment, the Company is also reviewing its computer-based
systems and applications to ensure that its computer and information systems
will function properly at Year 2000.  At this time, management of the Company
believes that the specific costs of achieving Year 2000 compliance for its
current systems will not have a material effect on the Company's consolidated
financial statements.

Other

     Pursuant to an agreement dated as of July 29, 1997 between John J.
Stephens, the former President and Chief Executive Officer and a former Director
of the General Partner and one of the Founding Directors, and USTK, Old
Services, Mr. Rudey and certain of his affiliates, Mr. Stephens' interest in Old
Services was redeemed for 95,238 Subordinated Units upon the consummation of the
Transactions and $1.0 million payable in January 1998.  Pursuant to an agreement
dated as of July 29, 1997 between George R. Hornig, a Director of the General
Partner and one of the Founding Directors, and USTK, Old Services, Mr. Rudey and
certain of his affiliates, Mr. Hornig's interest in Old Services was redeemed
upon the closing of the Transactions for 48,160 Subordinated Units.

ITEM 8.   FINANCIAL STATEMENTS

     The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on Page 73.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
     FINANCIAL DISCLOSURE

     None

                                       50
<PAGE>

                                   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 USTK 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 1998, the General Partner appointed Spencer R. Stuart and Thomas
C. Theobald, two members of the 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 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 Robert F.
Wright, 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 four
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 three directors,
including the two independent directors, which acts with respect to the
Company's Long-Term Incentive Plan.

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE GENERAL PARTNER

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

          NAME          AGE              POSITION WITH GENERAL PARTNER
----------------------  ---  --------------------------------------------------
John M. Rudey            54  Chairman and Director(1)
Allen E. Symington       58  President and Chief Financial Officer and
                             Director(2)
Robert E.L. Michie, Jr   50  Vice President - Operations
John C. McDowell         48  Vice President - Finance and Controller
Aubrey L. Cole           74  Director(3)
George R. Hornig         43  Director(4)
Spencer R. Stuart        75  Director(5)
Thomas C. Theobald       60  Director(6)
Robert F. Wright         72  Director(7)
Walter L. Barnes         55  Harvesting Manager
Robert A. Broadhead      46  Marketing Manager
Martin Lugus             57  General Manager

                                       51
<PAGE>

          NAME          AGE              POSITION WITH GENERAL PARTNER
----------------------  ---  --------------------------------------------------
Kurt A. Muller           39  Planning Manager
Christopher J. Sokol     48  Forestry Manager

------------
(1)  Member of the Executive (Chairman), Nominating (Chairman), Finance and
     Compensation (Chairman) Committees.
(2)  Member of the Executive and Finance Committees.
(3)  Member of the Executive and Nominating Committees.
(4)  Member of the Executive and Finance Committees.
(5)  Member of the Audit, Conflicts (Chairman), Compensation and LTIP
     Committees.
(6)  Member of the Audit, Conflicts, Compensation, Finance (Chairman) and LTIP
     Committees.
(7)  Member of the Nominating, Finance, Compensation, Audit (Chairman) and LTIP
     (Chairman) Committees.

      John M. Rudey serves as Chairman and 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.  He has previously acquired and managed for his family
investment group a subsidiary of Westinghouse Electric Co. and a division of
Monumental Life Insurance Company.  Mr. Rudey holds a B.A. from Harvard College
and an M.B.A. from Harvard Business School.

      Allen E. Symington serves as President and Chief Financial Officer and a
Director of the General Partner. From 1996-98, Mr. Symington was Vice President,
Finance of Simpson Timber Investment Company ("Simpson") (a private timberlands
owner and forest products manufacturer) and from 1995-96 he served as Vice
President -Investments and Treasurer.  From 1988-94, Mr. Symington served as
Vice President--Investments.  Mr. Symington joined Simpson in 1962 and served in
various capacities.  Mr. Symington is currently Vice Chairman of the Washington
State Employees Retirement Board and a director of Enterprises International (a
company which produces manufacturing equipment for the pulp and paper industry).
Mr. Symington holds a B.S. in Forest Products with a minor in Business and
Finance from the University of Washington.

      Robert E.L. Michie, Jr. serves as Vice President - Operations of the
General Partner.  From 1989-98, Mr. Michie was the Timberlands Manager of
Simpson Timber Company, managing its timberland properties in Oregon and
Washington.  Prior to joining Simpson, Mr. Michie served in various capacities
with Crown Zellerbach Corporation and its successor, Cavenham Forest Industries,
Inc.  Mr. Michie holds a B.S. in Industrial Engineering from Texas Tech
University and an M.B.A. in Management from the University of Alaska.

      John C. McDowell serves as Vice President - Finance and Controller of the
General Partner.  From 1989-97, Mr. McDowell served as Vice President -
Controller for Simpson, and from 1986-88 he served as Assistant Treasurer for
Simpson.  From 1982-85, Mr. McDowell was Vice President - Controller for Simlog
Leasing Company.  From 1980-81, Mr. McDowell served as Controller for Farmer
Construction Company; and from 1974-79, Mr. McDowell was an Audit Manager for
Ernst & Young.  Mr. McDowell holds a B.A. in Business Administration from the
University of Washington and is a Certified Public Accountant.

      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).  Mr. Cole holds a B.B.A. from the
University of Texas and serves on the Advisory Board of the Business School.

      George R. Hornig serves as a Director of the General Partner.  Since 1993,
Mr. Hornig has been a Managing Director of Deutsche Bank North America Holdings,
Inc. (the United States arm of Deutsche Bank, a German banking concern) and
affiliated entities.  From 1991 to 1993, Mr. Hornig was the President and Chief
Operating Officer of Dubin

                                       52
<PAGE>

& Swieca Holdings, Inc., an investment management business. From 1988 to 1991,
Mr. Hornig was a co-founder, Managing Director and Chief Operating Officer of
Wasserstein Perella & Co., Inc. (a mergers and acquisitions investment bank).
From 1983 to 1988, Mr. Hornig was an investment banker in the Mergers and
Acquisitions Group of The First Boston Corporation. Prior to 1983, Mr. Hornig
was an attorney with Skadden, Arps, Slate, Meagher & Flom. Mr. Hornig holds a
B.A. from Harvard College, a J.D. from Harvard Law School and an M.B.A. from
Harvard Business School. Mr. Hornig is also a director of SL Industries, Inc.
and Forrester Research, Inc.

      Spencer R. Stuart serves as a Director of the General Partner.  Mr. Stuart
currently serves as honorary Chairman of Stuart Spencer & Associates/Management
Consultants - Executive Searches, an international executive search and
management consulting firm, which he founded in 1956, and from which he retired
as Chairman and Chief Executive Officer in 1974.  From 1990-92, Mr. Stuart was
Chairman of Dean Witter Council of Management Advisors, a division of Dean
Witter Investment Banking.  Mr. Stuart is a director of Enhance Financial
Services Group, Inc., Enhance Reinsurance Company and Asset Guaranty Inc.  Mr.
Stuart holds a B.S. from Haverford College.

      Thomas C. Theobald serves as a Director of the General Partner.  Since
1994, Mr. Theobald has been a Managing Director of William Blair Capital
Partners, L.L.C. From 1987-94, Mr. Theobald served as Chairman and Chief
Executive Officer of Continental Bank Corporation.  From 1960-87, Mr. Theobald
was Vice Chairman of Citicorp and Citibank N.A. Mr. Theobald holds a B.A. from
Holy Cross College and an M.B.A. from Harvard Graduate School of Business.  Mr.
Theobald is also a director of the following companies: Xerox Corporation,
Mutual Life Insurance Company of New York, Anixter International, LaSalle U.S.
Realty Income and Growth Fund, Stein Roe Funds and LaSalle Partners.

      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 holds a B.A. from Michigan
State University and an M.B.A. from New York University.  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), Norweb North America
Corporation (an Irish investment company), Rose Technology Group Limited (a
Canadian professional engineering company), Deotexas Inc. (a development stage
company) and Williams Real Estate Co., Inc. (a real estate company).

      Walter L. Barnes serves as Harvesting Manager 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.  Mr. Barnes holds a B.S. degree from
the University of Wyoming.

      Robert A. Broadhead serves as Marketing Manager 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.  Mr.
Broadhead holds a B.S. degree from Humboldt State University.

      Martin Lugus serves as General Manager 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.  Mr. Lugus holds a B.S.
from University of Connecticut and a M.F. from Yale School of Forestry and
Environmental Studies.

      Kurt A. Muller serves as Planning Manager 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

                                       53
<PAGE>

forest land management as District Forester. Mr. Muller was employed by
Weyerhaeuser for eight years and holds a B.S. degree from Oregon State
University.

      Christopher J. Sokol serves as Forestry Manager 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.  Mr.
Sokol holds a B.S. from Oregon State University.

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 1997, all filings required were properly
made, with the exception of: (i) one Form 3 filing for each of Messrs. Stuart
and Symington, both of which were filed after the required 10-day filing period,
and (ii) one Form 5 filing for Mr. Rudey, which was timely filed but did not
initially reflect his indirect beneficial ownership of 1,000 Common Units held
by each of his two minor children, though an amendment to Mr. Rudey's Form 5 was
filed on March 31, 1998 to reflect such transactions.

                                       54

<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

      The Company and the General Partner were formed in June 1997.
Accordingly, the General Partner paid no compensation to its directors and
officers with respect to 1996 or earlier, nor did any obligations accrue in
respect of management incentive or retirement benefits for the directors and
officers with respect to such year.  Prior to the closing of the Initial
Offering, all executive officers were employees of Old Services.  Upon the
closing of the Initial Offering on November 19, 1997, the executive officers
became employees of the General Partner; therefore, the following disclosure
covers the period from November 19, 1997 through December 31, 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 named executive officers for services rendered during the fiscal
year ended December 31, 1997:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                                       ALL OTHER
                                        ANNUAL COMPENSATION                LONG-TERM COMPENSATION                    COMPENSATION
                            ------------------------------------------  ---------------------------------------  -------------------
                                                                                      SECURITIES
                                                                         RESTRICTED   UNDERLYING
                                                          OTHER ANNUAL      STOCK      OPTIONS/
     NAME AND POSITION       YEAR    SALARY     BONUS     COMPENSATION     AWARDS      SARS (#)    LTIP PAYOUTS
-------------------------   ------------------------------------------  -----------  -----------  -------------  ------------------
<S>                          <C>    <C>        <C>        <C>            <C>          <C>          <C>           <C>
John J. Stephens,            1997    $52,500   $    --    $       --     $     --                  $    --           $    --
 President and Chief
 Executive Officer (1)

Michael J. Morgan, Vice      1997    $14,700   $100,000   $  --          $  --                     $    --           $    --
 President and Chief
 Financial Officer (2)
</TABLE>
------------------
(1) Mr. Stephens resigned as President and Chief Executive Officer effective
    January 2, 1998.
(2) Mr. Morgan was terminated as Vice President and Chief Financial Officer
    effective January 5, 1998.  Edward J. Kobacker was terminated as Executive
    Vice President and Chief Operating Officer effective January 5, 1998.
    Pursuant to the terms of his termination, Mr. Kobacker received severance
    payments of $700,000.  In addition, pursuant to the terms of his employment
    agreement, he is entitled to receive $450,000 in three equal installments of
    $150,000 on January 1, 1998, 1999 and 2000 as compensation for having
    forfeited his right to exercise certain -in-the-money stock options granted
    him by a prior employer.

LONG-TERM INCENTIVE PLAN

     The General Partner has adopted the U.S. Timberlands Company, L.P. 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 hereto.  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).

                                       55
<PAGE>

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

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

     The following table sets forth certain information with respect to Unit
Options granted to the named executive officers during the fiscal year 1997:

             LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR

       NAME          NUMBER OF UNIT OPTIONS     PERFORMANCE OR OTHER
                                               PERIOD UNTIL MATURATION
                                                     OR PAYOUT (3)
-------------------  ----------------------  ---------------------------
John J. Stephens                107,218 (1)             3 years
Michael J. Morgan                64,332 (2)             3 years

------------
(1) Mr. Stephens ceased to be a member of the General Partner's Board of
    Directors on January 2, 1998.  The 107,218 Unit Options granted to Mr.
    Stephens expired unexercised as a result of his termination.
(2) The 64,332 Unit Options granted to Mr. Morgan expired unexercised as a
    result of his termination.
(3) 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.

                                       56
<PAGE>

     The following table sets forth certain information with respect to option
grants to the named executive officers during fiscal 1997:

                     OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>




                                                 INDIVIDUAL GRANTS
                             -----------------------------------------------------------    POTENTIAL REALIZABLE VALUE AT
                                                % OF TOTAL                                  ASSUMED ANNUAL RATES OF STOCK
                                NUMBER OF        OPTIONS/                                       PRICE APPRECIATION FOR
                               SECURITIES      SARS GRANTED    EXERCISE                           OPTION TERM (4)
                               UNDERLYING      TO EMPLOYEES    OR BASE                       -----------------------------
                              OPTIONS/ SARS     IN FISCAL       PRICE       EXPIRATION
  NAME                            GRANTED           YEAR       ($/SH) (3)       DATE               5%            10%
--------------------------   ---------------  --------------  -----------  --------------    -----------------------------
<S>                          <C>               <C>            <C>         <C>                <C>              <C>
John J. Stephens..........         107,218(1)          12.5%      $21.00      11/19/07 (1)   $1,416,350       $3,588,586
Michael J. Morgan.........          64,332(2)           7.5%      $21.00      11/19/07 (2)   $  849,826       $2,153,192
</TABLE>
---------
(1) The 107,218 Unit Options granted to Mr. Stephens expired unexercised as a
    result of his termination.
(2) The 64,332 Unit Options granted to Mr. Morgan expired unexercised as a
    result of his termination.
(3) 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.
(4) A ten year period (the maximum length of the Unit Option term) was used for
    compounding purposes in the above calculations.

     The following table sets forth certain information with respect to the
aggregate number and value of options at the fiscal year-end 1997:



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

<TABLE>
<CAPTION>
                                                     NUMBER OF SECURITIES
                                                    UNDERLYING UNEXERC                  VALUE OF UNEXERCISED
                                                       OPTIONS/SARS AT             IN-THE-MONEY OPTIONS/ SARS AT
                       SHARES                         DECEMBER 31, 1997                  DECEMBER 31, 1997
                     ACQUIRED ON      VALUE    ----------------------------    ------------------------------------
     NAME            EXERCISE (#)   REALIZED     EXERCISABLE  UNEXERCISABLE     EXERCISABLE       UNEXERCISABLE
------------------   ------------  ---------   -------------  -------------    --------------  --------------------
<S>                  <C>            <C>        <C>           <C>                 <C>                  <C>
John J. Stephens...      None       $  --             --      107,218(1)         $  --                $  N.A. (3)
Michael J. Morgan..      None       $  --             --       64,332(2)         $  --                $  N.A. (3)
</TABLE>
---------
(1) The 107,218 Unit Options granted to Mr. Stephens expired unexercised as a
    result of his termination.
(2) The 64,332 Unit Options granted to Mr. Morgan expired unexercised as a
    result of his termination.
(3) At the close of trading on December 31, 1997, the market value of the Common
    Units was $20.75 per share.  Since the Units Options, once exercisable,
    would be exercisable at $21.00 per share, the in-the-money computation is
    inapplicable.

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

                                       57
<PAGE>

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

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

COMPENSATION OF DIRECTORS

     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.  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 employment agreements with Messrs.
Rudey, Symington, Michie and McDowell (the "Executives").  The summary of the
Employment Agreements which follows does not purport to be complete and is
qualified in its entirety by reference to the forms of Employment Agreement,
which are filed as exhibits to this Annual Report.  Each agreement has a term of
approximately five years and includes confidentiality provisions and noncompete
provisions.  In each agreement, the confidentiality provisions will continue for
18 months following the later to occur of the Executive's termination of
employment or, in the case of Messrs.  Rudey and Symington, his resignation or
removal from the Board, and, unless the Executive is terminated without "Cause,"
or the Executive terminates his employment for "Good Reason" or due to
disability, the noncompete provisions will continue for a period of 12 months
after the termination of such employment.

     The agreements provide for an annual base salary of $300,000, $260,000,
$175,000 and $145,000 for each of Messrs.  Rudey, Symington, Michie and
McDowell, respectively, subject to such increases as the Board of Directors of
the General Partner may authorize from time to time.  In addition, each of the
Executives will be eligible to receive an annual cash bonus to be determined by
the Compensation Committee not to exceed 100% of his base salary.  Each of
Messrs.  Symington, Michie and McDowell has been guaranteed a minimum bonus
equal to 50% of his base salary for each of 1998 and 1999.  Each of the
Executives also participates in the Long-Term Incentive Plan of the General
Partner as described above.  The Executives will also be entitled to participate
in such other benefit plans and programs as the General Partner may provide for
its employees in general.

     The agreements provide that in the event an 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),

                                       58
<PAGE>

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

COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS

     The Compensation Committee of the General Partner is composed of Messrs.
Rudey, Stuart, Theobald and Wright.  Mr. Rudey also serves as Chairman of
the General Partner.

                                       59
<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 March 15, 1998.

<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 OWNER            OWNED           OWNED          OWNED           OWNED           OWNED
------------------------------------   --------------  --------------  -------------  --------------  --------------
<S>                                         <C>              <C>         <C>               <C>             <C>
Rudey Timber Company, L.L.C. (1)......         --             --%        2,894,157         67.6%           22.5%
U.S. Timberlands Management
 Company, L.L.C (2)...................         --             --         1,244,565         29.1             9.7
U.S. Timberlands Holdings,
 L.L.C. (3)...........................         --             --         2,894,157         67.6            22.5
John M. Rudey (4).....................      2,000              *         4,138,722         96.7            32.2
Allen E. Symington(5).................        300              *                --           --               *
Robert E.L. Michie(5).................         --             --                --           --              --
John C. McDowell(5)...................         --             --                --           --              --
George R. Hornig (6)..................         --             --            48,160          1.1               *
Robert F. Wright(7)...................         --             --                --           --              --
Aubrey L. Cole(8).....................         --             --                --           --              --
Spencer R. Stuart(9)..................         --             --                --           --              --
Thomas C. Theobald(10)................      5,000              *                --           --               *
All directors and executive officers
 as a group (9 persons) (11)..........      7,300              *         4,186,882         97.8%           32.6%
</TABLE>

------------
<TABLE>
<CAPTION>
<S>  <C>
*    Less than 1% of class.
(1)  Current address is 625 Madison Avenue, Suite 10-B, New York, New York
     10022. Includes all 2,894,157 of the Subordinated Units owned by Holdings.
     Rudey Timber Company, L.L.C. has a 99% member interest in Holdings.
(2)  Current address is 625 Madison Avenue, Suite 10-B, New York, New York 10022.
(3)  Current address is 625 Madison Avenue, Suite 10-B, New York, New York 10022.
(4)  Current address is 625 Madison Avenue, Suite 10-B, New York, New York 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, L.L.C.
(5)  Current address is 1301 Fifth Avenue, Suite 3725, Seattle, Washington 98101.
(6)  Current address is 1220 Park Avenue, New York, New York 10128.
(7)  Current address is 57 West 57th Street, Suite 704, New York, New York 10019.
(8)  Current address is 16825 Northchase Drive, Suite 800, Houston, Texas 77060.
(9)  Current address is 1725 Buttonbush Circle, Palm City, Florida 34990.
(10) Current address is 222 West Adams Street, Suite 3300, Chicago, Illinois
     60606.
</TABLE>

                                       60

<PAGE>

(11) Includes interests directly and indirectly owned by such persons.  With
     respect to beneficial ownership which may be attributable to Mr. Rudey, see
     footnote (4).

     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

MANAGEMENT OF THE COMPANY

     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.


RIGHTS OF THE GENERAL PARTNER

     As of March 15, 1998, Old Services owns 1,244,565 Subordinated Units,
Holdings, an affiliate of the General Partner, owns 2,894,157 Subordinated
Units, and Mr. Hornig, a Founding Director and member of the General Partner,
owns 48,160 Subordinated Units.  The 4,186,882 Subordinated Units owned by Old
Services, Holdings and Mr. Hornig represents an aggregate 32.6% limited partner
interest in the Company.  Through the General Partner's ability to manage and
operate the Company and the ownership of outstanding Subordinated Units by
affiliates of the General Partner (effectively giving the General Partner the
ability to veto certain actions of the Company), the General Partner will have
the ability to control the management of the Company.

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.

RELATED PARTY TRANSACTIONS

     Pursuant to an agreement dated as of July 29, 1997 between John J.
Stephens, a Founding Director and the former President and Chief Executive
Officer of the General Partner, and USTK, Old Services, Mr, Rudey and certain of
his affiliates, Mr. Stephen's interest in Old Services was redeemed for 95,238
Subordinated Units upon the consummation of the Transactions and $1.0 million
paid in January 1998.  Pursuant to an agreement dated as of July 29, 1997
between Mr. Hornig and USTK, Old Services, Mr. Rudey and certain of his
affiliates, Mr. Hornig's interest in Old Services was redeemed upon the closing
of the Transactions for 48,160 Subordinated Units.

                                       61
<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 will
reimburse the General Partner for such repurchase payments.

                                       62
<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 73.

(A)(3) EXHIBITS

<TABLE>
<C>    <S>
 +3.1  --Amended and Restated Agreement of Limited Partnership of U.S. Timberlands
       Company, L.P.
 +3.2  --Second Amended and Restated Operating Agreement of U.S. Timberlands Klamath
       Falls, L.L.C.
+10.1  --Credit Agreement among U.S. Timberlands Klamath Falls, L.L.C. and certain banks
+10.2  --Indenture among U.S. Timberlands Klamath Falls, L.L.C., U.S. Timberlands Finance
       Corp. and State Street Bank and Trust Company, as trustee
+10.3  --Contribution, Conveyance and Assumption Agreement among U.S. Timberlands
       Company, L.P. and certain other parties
*10.4  --Form of U.S. Timberlands Company, L.P. 1997 Long-Term Incentive Plan
*10.5  Employment Agreement for Mr. Rudey
 10.6  Employment Agreement for Mr. Symington
 10.7  Employment Agreement for Mr. Michie
 10.8  Employment Agreement for Mr. McDowell
*10.9  --Supply Agreement between U.S. Timberlands Klamath Falls, L.L.C. and Collins
       Products LLC
*21.1  --List of Subsidiaries
 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.

(B) REPORTS ON FORM 8-K

  No reports on Form 8-K were filed by the Company during the last quarter of
the period covered by the Annual Report.

                                       63
<PAGE>

                                                                      APPENDIX A

                           GLOSSARY OF CERTAIN TERMS

  Acquisition:  The acquisition by the Company of substantially all of the
equity interests in USTK and the business and assets of U.S. Timberlands
Management Company, L.L.C., on November 19, 1997.

  Acquisition Facility:  A $75.0 million revolving credit facility entered into
by the Operating Company used for acquisitions and improvements.

  Adjusted Operating Surplus:  With respect to any period, Operating Surplus
generated during such period (a) less (i) any net increase in working capital
borrowings during such period and (ii) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period, and (b) plus (i) any net decrease in
working capital borrowings during such period and (ii) 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.  Adjusted
Operating Surplus does not include that portion of Operating Surplus included in
clause (a)(i) of the definition of Operating Surplus.

  Available Cash:  With respect to any quarter prior to liquidation:

(a)  the sum of (i) all cash and cash equivalents of the Partnership Group on
     hand at the end of such quarter and (ii) all additional cash and cash
     equivalents of the Partnership Group on hand on the date of determination
     of Available Cash with respect to such quarter resulting from borrowings
     for working capital purposes made subsequent to the end of such quarter,
     less

(b)  the amount of any cash reserves that is necessary or appropriate in the
     reasonable discretion of the General Partner to (i) provide for the proper
     conduct of the business of the Partnership Group (including reserves for
     future capital expenditures and for anticipated future credit needs of the
     Partnership Group) subsequent to such quarter, (ii) comply with applicable
     law or any loan agreement, security agreement, mortgage, debt instrument or
     other agreement or obligation to which any member of the Partnership Group
     is a party or by which it is bound or its assets are subject, or (iii)
     provide funds for distributions under Section 6.4 or 6.5 of the Partnership
     Agreement in respect of any one or more of the next four quarters;
     provided, however, that the General Partner may not establish cash reserves
     pursuant to (iii) above if the effect of such reserves would be that the
     Company is unable to distribute the Minimum Quarterly Distribution on all
     Common Units with respect to such quarter; and, provided further, that
     disbursements made by a Group Member or cash reserves established,
     increased or reduced after the end of such quarter but on or before the
     date of determination of Available Cash with respect to such quarter shall
     be deemed to have been made, established, increased or reduced for purposes
     of determining Available Cash within such quarter if the General Partner so
     determines.  Notwithstanding the foregoing, "Available Cash" with respect
     to the quarter in which the liquidation of the Company occurs and any
     subsequent quarter shall equal zero.

  Bank Credit Facility:  The $75.0 million Acquisition Facility and the $25.0
million Working Capital Facility both entered into by the Operating Company.

  BBF:  One billion board feet.

  BLM:  The U.S. Department of Interior Bureau of Land Management.

  Board Foot (BF):  A unit of lumber measurement 1 foot square and 1 inch thick.

  Capital Account:  The capital account maintained for a Partner pursuant to the
Partnership Agreement.  The Capital Account of a Partner in respect of a general
partner interest, a Common Unit, a Subordinated Unit, an Incentive Distribution
Right or any other Partnership Interest shall be the amount which such Capital
Account would be if such

                                       64
<PAGE>

general partner interest, Common Unit, Subordinated Unit, Incentive Distribution
Right, or other Partnership Interest were the only interest in the Company held
by a Partner from and after the date on which such general partner interest,
Common Unit, Subordinated Unit, Incentive Distribution Right or other
Partnership Interest was first issued.

  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
excess Available Cash will be deemed to be Capital Surplus.

  Cause:  Means a court of competent jurisdiction has entered a final, non-
appealable judgment finding the General Partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as a general partner
of the Company.

  CERCLA and Superfund:  Refer generally to the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended.

  Chips:  Wood generated either in a whole log chip mill or as a by-product of
the manufacture of lumber and plywood and used in the manufacture of pulp and
paper and various composite panel products such as medium density fiberboard,
particle board and oriented strand board.

  Closing Date:  November 19, 1997.

  Code:  Internal Revenue Code of 1986, as amended.

  Collins:  Collins Products LLC.

  Collins Supply Agreement:  The 10-year log supply agreement that the Company
has entered into with Collins, extendable by Collins for two additional five-
year terms.

  Common Unit Arrearage:  The amount by which the Minimum Quarterly Distribution
in respect of a quarter during the Subordination Period exceeds the distribution
of Available Cash from Operating Surplus actually made for such quarter on a
Common Unit, cumulative for such quarter and all prior quarters during the
Subordination Period.

  Common Units:  A Unit representing a fractional part of the Partnership
Interests of all limited partners and assignees and having the rights and
obligations specified with respect to Common Units in the Partnership Agreement.

  Company:  U.S. Timberlands Company, L.P., a Delaware limited partnership, and
any successors thereto.

  Compensation Committee:  A committee of the board of directors of the General
Partner which initially consists of five directors, including two independent
directors, which determines the compensation of the officers of the General
Partner and administer its employee benefit plans.

  Conflicts Committee:  A committee of the board of directors of the General
Partner composed entirely of two or more directors who are neither members,
officers nor employees of the General Partner nor officers, directors, employees
or security holders of any affiliate of the General Partner.

  Current Market Price:  With respect to any class of Units listed or admitted
to trading on any national securities exchange as of any date, the average of
the daily Closing Prices (as hereinafter defined) for the 20 consecutive Trading
Days (as hereinafter defined) immediately prior to such date.  "Closing Price"
for any day means the last sale price on such day, regular way, or in case no
such sale takes place on such day, the average of the closing bid and asked
prices on such day, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the principal national securities exchange (other than
the Nasdaq

                                       65
<PAGE>

Stock Market) on which the Units of such class are listed or admitted to trading
or, if the Units of such class are not listed or admitted to trading on any
national securities exchange (other than the Nasdaq Stock Market), the last
quoted price on such day, or, if not so quoted, the average of the high bid and
low asked prices on such day in the over-the-counter market, as reported by the
Nasdaq Stock Market or such other system then in use, or if on any such day the
Units of such class are not quoted by any such organization, the average of the
closing bid and asked prices on such day as furnished by a professional market
maker making a market in the Units of such class selected by the General
Partner, or if on any such day no market maker is making a market in the Units
of such class, the fair value of such Units on such day as determined reasonably
and in good faith by the General Partner. "Trading Day" means a day on which the
principal national securities exchange on which Units of any class are listed or
admitted to trading is open for the transaction of business or, if the Units of
a class are not listed or admitted to trading on any national securities
exchange, a day on which banking institutions in New York City generally are
open.

  DBH:  "Diameter at breast height," a term frequently used to describe a tree
measurement taken 4  1/2  feet above ground level.

  DD&A:  Depreciation, depletion and road amortization.

  Departing Partner:  A former General Partner from and after the effective date
of any withdrawal or removal of such former General Partner pursuant to the
Partnership Agreement.

  EBITDDA:  Operating income plus depreciation, depletion and amortization and
cost of timber and property sales.  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.  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.

  Fee Timber:  Timber which is located on property owned in fee, as opposed to
timber that is located on lands owned by other parties and is acquired pursuant
to cutting contracts.

  Founding Directors:  John J. Stephens and George R. Hornig, individuals who
received approximately 143,398 Subordinated Units upon redemption of their
interests in Old Services, and the other individuals who were directors of the
General Partner at the Closing Date.

  General Partner or New Services:  U.S. Timberlands Services Company, L.L.C.
(formerly known as New Services, L.L.C.), a Delaware limited liability company,
and its successors and permitted assigns as general partner of the Company.

  GIS:  The Company's computerized geographic information system.

  Guidelines: The guidelines, suggested by the United States Fish and Wildlife
Service in 1990, are to be followed by landowners in order to comply with the
Endangered Species Act's prohibition against harming or harassing owls.

  Holdings:  U.S. Timberlands Holdings, L.L.C., a Delaware limited liability
company.

  Holdings Debt:  The $130.0 million of bank indebtedness incurred by Holdings
in connection with USTK's acquisition of the Klamath Falls Timberlands in August
1996.

  Incentive Distribution Right:   A non-voting limited partner Partnership
Interest issued to the General Partner in connection with the transfer of
substantially all of its member interest in the Operating Company to the Company
pursuant to the Partnership Agreement, which Partnership Interest will confer
upon the holder thereof only the rights

                                       66
<PAGE>

and obligations specifically provided in the Partnership Agreement with respect
to Incentive Distribution Rights (and no other rights otherwise available to or
other obligations of holders of a Partnership Interest).

  Incentive Distributions:  The distributions of Available Cash from Operating
Surplus initially made to the General Partner that are in excess of the General
Partner's aggregate 2% general partner interest.

  Indenture:  The indenture pursuant to which the Notes were issued, which is
filed as an exhibit hereto.

  Initial Offering:  The Company's initial public offering of Common Units
completed on November 19, 1997 (including the sale of Common Units pursuant to
the exercise by the underwriters of their over-allotment option).

  Initial Unit Price:  $21.00, the amount per Unit equal to the initial public
offering price of the Common Units in the Initial Offering.

  Klamath Falls Timberlands:  The approximately 604,000 fee acres of timberland
acquired by USTK and Old Services in August 1996 from Weyerhaeuser.

  Logs:  The stem of the tree after it has been felled.  The raw material from
which lumber, plywood and other wood products are processed.

  Long-Term Incentive Plan:  The U.S. Timberlands Company, L.P. Amended and
Restated 1997 Long-Term Incentive Plan.

  LTIP Committee:  A committee of the board of directors of the General Partner,
which initially consists of three directors, including the two independent
directors, which acts with respect to the Company's Long-Term Incentive Plan.

  Management Incentive Plan:  The U.S. Timberlands Company, L.P. Management
Incentive Plan.

  MBF:  One thousand board feet.  A common unit of measure for pricing standing
timber as well as lumber.

  MMBF:  One million board feet.

  Merchantable Timber:  A tree that will produce a sound log 16 feet in length
and at least 5" in diameter, inside bark, at the small end.  Timber may be
merchantable even if it has not reached its optimum sale value.

  Minimum Quarterly Distribution:  $0.50 per Unit with respect to each quarter
or $2.00 per Unit on an annualized basis, subject to adjustment.

  Non-citizen Assignee:  A Limited Partner or assignee who (i) fails to furnish
information about nationality, citizenship, residency or other related  status
within 30 days after a request by the General Partner for such information, or
(ii) the General Partner determines after receipt of such information is not an
eligible citizen.

  Notes:  The $225.0 million aggregate principal amount of unsecured senior
notes due 2007, offered publicly by the Company on November 13, 1997.

  Ochoco:  Ochoco Lumber Company.

  Ochoco Acquisition:  The acquisition of the Ochoco Timberlands by USTK from
Ochoco on July 15, 1997.

  Ochoco Timberlands:  The approximately 42,000 fee acres of timberland and
cutting rights on approximately 3,000 acres of timberland acquired by USTK on
July 15, 1997 from Ochoco.

                                       67
<PAGE>

  Old Services:  U.S. Timberlands Management Company, L.L.C., formerly known as
U.S. Timberlands Services Company, L.L.C.

  Operating Company:  U.S. Timberlands Klamath Falls, L.L.C., a Delaware limited
liability company, and any successors thereto.

  Operating Company Agreement:  The Second Amended and Restated Operating
Agreement of the Operating Company, as it may be amended, supplemented or
restated from time to time (which is filed as an exhibit hereto).

  Operating Expenditures:  All Partnership Group expenditures, including, but
not limited to, taxes, reimbursements of the General Partner, debt service
payments and capital expenditures, subject to the following:

(a)  Payments (including prepayments) of principal and premium on indebtedness
     shall not be an Operating Expenditure if the payment is (i) required in
     connection with the sale or other disposition of assets or (ii) made in
     connection with the refinancing or refunding of indebtedness with the
     proceeds from new indebtedness or from the sale of equity interests.  For
     purposes of the foregoing, at the election and in the reasonable discretion
     of the General Partner, any payment of principal or premium shall be deemed
     to be refunded or refinanced by any indebtedness incurred or to be incurred
     by the Partnership Group within 180 days before or after such payment to
     the extent of the principal amount of such indebtedness.

(b)  Operating Expenditures shall not include (i) capital expenditures made for
     Acquisitions or for Capital Improvements, (ii) payment of transaction
     expenses relating to Interim Capital Transactions or (iii) distributions to
     partners.  Where capital expenditures are made in part for Acquisitions or
     Capital Improvements and in part for other purposes, the General Partner's
     good faith allocation between the amounts paid for each shall be
     conclusive.

  Operating Surplus:  As to any period prior to liquidation, on a cumulative
basis and without duplication:

(a)  the sum of (i) $15.0 million plus all cash and cash equivalents of the
     Partnership Group on hand as of the close of business on the Closing Date,
     (ii) all cash receipts of the Partnership Group for the period beginning on
     the Closing Date and ending with the last day of such period, other than
     cash receipts from Interim Capital Transactions and (iii) all cash receipts
     of the Partnership Group after the end of such period but on or before the
     date of determination of Operating Surplus with respect to such period
     resulting from borrowings for working capital purposes, less

(b)  the sum of (i) Operating Expenditures for the period beginning on the
     Closing Date and ending with the last day of such period and (ii) the
     amount of cash reserves that is necessary or advisable in the reasonable
     discretion of the General Partner to provide funds for future Operating
     Expenditures, provided however, that disbursements made (including
     contributions to a member of the Partnership Group or disbursements on
     behalf of a member of the Partnership Group) or cash reserves established,
     increased or reduced after the end of such period but on or before the date
     of determination of Available Cash with respect to such period shall be
     deemed to have been made, established, increased or reduced for purposes of
     determining Operating Surplus, within such period if the General Partner so
     determines.  Notwithstanding the foregoing, "Operating Surplus" with
     respect to the quarter in which the liquidation occurs and any subsequent
     quarter shall equal zero.

  Opinion of Counsel:  A written opinion of counsel, acceptable to the General
Partner in its reasonable discretion, to the effect that the taking of a
particular action will not result in the loss of the limited liability of the
limited partners of the Company or cause the Company to be treated as an
association taxable as a corporation or otherwise taxed as an entity for federal
income tax purposes.

  OSHA:   Federal Occupational Safety and Health Act.

                                       68
<PAGE>

  Partnership Agreement:  The Amended and Restated Agreement of Limited
Partnership of the Company (which is filed as an exhibit hereto), as it may be
amended, restated or supplemented from time to time.  Unless the context
requires otherwise, references to the Partnership Agreement constitute
references to the Partnership Agreement of the Company and to the Operating
Company Agreement, collectively.

  Partnership Group:  The Company, the Operating Company and any subsidiary of
either such entity, treated as a single consolidated entity.

  Partnership Interest:  An ownership interest in the Company, which shall
include the general partner interests and limited partner interests.

  Plantations:  The 184,000 acres of the Timberlands which are actively managed
tree farms.

  Predecessor: The southern Oregon timberlands operations of Weyerhaeuser
acquired by the Company in the Weyerhaeuser Acquisition.

  Public Note Offering:  The public offering by the Operating Company of the
Notes.

  Registration Statement:  The Registration Statement on Form S-1 (No. 333-
32811), filed by the Company with the United States Securities and Exchange
Commission, relating to the Common Units.

  Restricted Activities:  The (i) acquisition, exchange, operation or sale of
timber-producing real property or rights to harvest timber, a principal purpose
of which is producing logs or other forest products, (ii) harvesting of timber
other than harvesting which is incidental to the ownership or operation of real
property not owned or operated for a principal purpose of producing logs or
other forest products, (iii) sale, exchange or purchase of logs other than
sales, exchanges or purchases which are incidental to the ownership or operation
of real property not owned or operated for a principal purpose of producing logs
or other forest products, and (iv) any and all other activities relating to the
forest products industry to the extent such activities compete with activities
of the Company or the Operating Company.

  RROW: Reciprocal right-of-way.

  Seedling:  A young tree generally less than three years of age used as
planting stock for reforestation.

  Securities Act:  The Securities Act of 1933, as amended.

  Silviculture:  The practice of cultivating forest crops based on the knowledge
of forestry; more particularly, controlling the establishment, composition and
growth of forests.

  Softwoods:  Coniferous trees, usually evergreen and having needles or
scalelike leaves, such as Ponderosa. pine, Douglas fir, white pine and spruce.

  Stand:  An area of trees possessing sufficient uniformity of age, size and
composition to be distinguished from adjacent areas so as to form a management
unit.  The term is usually applied to forests of commercial value.

  Stumpage:  Standing timber (timber as it stands uncut in the woods).

  Subordinated Unit:  A Unit representing a fractional part of the partnership
interests of all limited partners and assignees (other than of holders of the
Incentive Distribution Rights) and having the rights and obligations specified
with respect to Subordinated Units in the Partnership Agreement.  The term
"Subordinated Unit" as used herein does not include a Common Unit.

                                       69
<PAGE>

  Subordination Period:  The Subordination Period will generally extend from the
closing of the Initial Offering until the first to occur of:  (a) the first day
of any quarter beginning after December 31, 2002 in respect of which (i)
distributions of Available Cash from Operating Surplus on each of the
outstanding Common Units and the Subordinated Units with respect to each of the
three consecutive, non-overlapping 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 during such periods,
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping 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
periods on a fully-diluted basis (i.e., taking into account for purposes of such
determination all Outstanding Common Units, all Outstanding Subordinated Units,
all Common Units and Subordinated Units issuable upon exercise of employee
options that have, as of the date of determination, already vested or are
scheduled to vest prior to the end of the quarter immediately following the
quarter with respect to which such determination is made, and all Common Units
and Subordinated Units that have as of the date of determination, been earned by
but not yet issued to management of the Partnership in respect of incentive
compensation), plus 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; and (b) the date on which the
General Partner is removed as general partner of the Company upon the requisite
vote by holders of Outstanding Units 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.  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 by the General Partner for
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 an additional one-quarter of the Subordinated Units
(1,070,530 Subordinated Units), on a cumulative basis, 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, non-
overlapping 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 two consecutive, non-overlapping 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 periods on a fully diluted basis (i.e.,
taking into account for purposes of such determination all Outstanding Common
Units, all Outstanding Subordinated Units, all Common Units and Subordinated
Units issuable upon exercise of employee options that have, as of the date of
determination, already vested or are scheduled to vest prior to the end of the
quarter immediately following the quarter with respect to which such
determination is made, and all Common Units and Subordinated Units that have as
of the date of determination, been earned by but not yet issued to management of
the Partnership in respect of incentive compensation), plus 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 quarter of Subordinated Units may not occur until at least one year
following the early conversion of the first quarter of Subordinated Units.  In
addition, if the General Partner is removed as 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 and automatically 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 combined 2% interest in the
Company and the Operating Company (and all the rights to the Incentive
Distribution) into Common Units or to receive cash in exchange for such
interests.

  Target Distribution Levels:  See "Cash Distribution Policy--Incentive
Distributions--Hypothetical Annualized Yield."

  Thinning:  Removal of selected trees, usually to eliminate overcrowding, to
remove dead, dying, deformed or diseased trees and to promote more rapid growth
of desired trees.  "Pre-commercial thinning" refers to thinning that does not
directly produce merchantable timber.  "Commercial thinning" results directly in
merchantable timber.

  Timber:  Standing trees not yet harvested.

                                       70
<PAGE>

  Timberlands:  The timber properties of the Company.

  Transactions:  The transactions related to the formation of the Company, the
issuance of the Notes, the entering into of the Bank Credit Facility and the
other transactions that occurred in connection with the Initial Offering.

  Transfer Agent:  American Stock Transfer & Trust Company serves as registrar
and transfer agent for the Common Units.

  Transfer Application:  An application for transfer of Units in the form set
forth on the back of a certificate.

  Unitholders:  Holders of the Common Units and the Subordinated Units,
collectively.

  Unit Majority:  During the Subordination Period, at least a majority of the
outstanding Common Units, voting as a class, and at least a majority of the
outstanding Subordinated Units, voting as a class and, thereafter, at least a
majority of the outstanding Units.

  Units:  The Common Units and the Subordinated Units, collectively, but not
including the right to receive Incentive Distributions.

  Unrecovered Capital:  At any time, the Initial Unit Price, less the sum of all
distributions theretofore made in respect of an Initial Common Unit constituting
Capital Surplus and any distributions of cash (or the net agreed value of any
distributions in kind) in connection with the dissolution and liquidation of the
Company theretofore made in respect of such Unit, adjusted as the General
Partner determines to be appropriate to give effect to any distribution,
subdivision or combination of such Units.

  USFS:  United States Department of Agriculture--Forest Service.

  USFWS:  United States Fish and Wildlife Service.

  USTK:  U.S. Timberlands Klamath Falls, L.L.C., a Delaware limited liability
Company which, upon consummation of the Transactions, became the Company's
Operating Company.

  USTK Debt:  The $285.0 million of bank indebtedness incurred by USTK in July
1997 to refinance indebtedness incurred in connection with the acquisition of
the Klamath Falls Timberlands and to finance the acquisition of the Ochoco
Timberlands.

  Weyerhaeuser:  Weyerhaeuser Company.

  Weyerhaeuser Acquisition:  The acquisition by USTK and Old Services in August
1996 of the Klamath Falls Timberlands from Weyerhaeuser.

  Working Capital Facility:  A $25.0 million revolving credit facility entered
into by the Operating Company to be used for working capital purposes.

                                       71
<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,
1998.

                               U.S. TIMBERLANDS COMPANY, L.P.

                               By:  U.S. Timberlands Services Company, L.L.C.
                                    Its General Partner

                               By:   /s/ John M. Rudey
                                    -------------------------------------------
                                    John M. Rudey
                                    Chairman

  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>
<S>                          <C>                                      <C>
/s/ John M. Rudey            Chairman and Director                    March 30, 1998
--------------------------   (Principal Executive Officer)
John M. Rudey

/s/ Allen E. Symington       President, Chief Financial Officer and   March 30, 1998
--------------------------   Director (Principal Financial Officer)
Allen E. Symington

/s/ Robert E. L. Michie, Jr. Vice President - Operations              March 30, 1998
--------------------------
Robert E. L. Michie, Jr.


/s/ John C. McDowell         Vice President - Finance and             March 30, 1998
--------------------------   Controller
John C. McDowell             (Principal Accounting Officer)


/s/ Aubrey L. Cole           Director                                 March 30, 1998
--------------------------
Aubrey L. Cole


/s/ George R. Hornig         Director                                 March 30, 1998
--------------------------
George R. Hornig


/s/ Spencer R. Stuart        Director                                 March 30, 1998
--------------------------
Spencer R. Stuart


/s/ Thomas C. Theobald       Director                                 March 30, 1998
--------------------------
Thomas C. Theobald


/s/ Robert F. Wright         Director                                 March 30, 1998
--------------------------
Robert F. Wright
</TABLE>

                                       72
<PAGE>

                         U.S. TIMBERLANDS COMPANY, L.P.

                         INDEX TO FINANCIAL STATEMENTS


Report of Independent Public Accountants...........................  74

Consolidated Balance Sheets -- December 31, 1997 and 1996..........  75

Consolidated Statements of Operations..............................  77

Consolidated Statements of Cash Flows..............................  78

Consolidated Statements of Changes in Partners' Capital and
 Members' Deficit and Weyerhaueser Investment and Advances.........  80

Notes to Consolidated Financial Statements.........................  81

                                       73
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



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

     We have audited the accompanying consolidated balance sheets of U.S.
Timberlands, as described in Note 1, as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in partners' capital and
members' deficit, and cash flows for the year ended December 31, 1997 and the
period from inception (August 30, 1996) through December 31, 1996.  We have also
audited the statements of operations, changes in Weyerhaeuser investment and
advances and cash flows of the Predecessor for the year ended December 31, 1995
and the period from January 1, 1996 through August 29, 1996.  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 financial statements referred to above present fairly,
in all material respects, the financial position of U.S. Timberlands as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the year ended December 31, 1997 and the period from inception (August 30,
1996) through December 31, 1996, and the results of the Predecessor's operations
and cash flows for the year ended December 31, 1995 and the period from January
1, 1996 through August 29, 1996 in conformity with generally accepted accounting
principles.


                              ARTHUR ANDERSEN LLP
Portland, Oregon,
 January 23, 1998

                                       74
<PAGE>

                                U.S. TIMBERLANDS

                          CONSOLIDATED BALANCE SHEETS

                    (in thousands, except Unit information)

                                     ASSETS
                                     ------

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                           --------------------
                                                                              1997        1996
                                                                           ---------   --------
<S>                                                                        <C>         <C>
CURRENT ASSETS:
Cash and cash equivalents...............................................    $ 10,625    $ 16,613
Accounts receivable, net of allowance for doubtful
 accounts of $100 and $0, respectively..................................       2,526       1,563
Other receivables.......................................................       1,247         131
Receivable from affiliate...............................................          --      10,121
Inventories.............................................................          --          78
Prepaid expenses........................................................         534         680
Logging equipment held for resale.......................................          --         400
                                                                            --------    --------
Total current assets....................................................      14,932      29,586
                                                                            --------    --------

TIMBER, TIMBERLANDS AND LOGGING ROADS, net..............................     359,349     273,457

SEED ORCHARD AND NURSERY STOCK..........................................       1,828       1,901

PROPERTY, PLANT AND EQUIPMENT, at cost:
Equipment...............................................................         605         801
Buildings and land improvements.........................................         843         677
Less- Accumulated depreciation..........................................        (187)        (58)
                                                                            --------    --------
Total property, plant and equipment.....................................       1,261       1,420

LONG-TERM RECEIVABLE....................................................       1,171          --

DEFERRED FINANCING FEES.................................................       6,673       3,827
                                                                            --------    --------
Total assets............................................................    $385,214    $310,191
                                                                            ========    ========

            LIABILITIES AND PARTNERS' CAPITAL AND MEMBERS' DEFICIT
            ------------------------------------------------------

CURRENT LIABILITIES:
Accounts payable........................................................    $  1,404    $    889
Accrued liabilities.....................................................       4,949       7,238
Deferred revenue........................................................       5,744          --
Payable to affiliate....................................................       1,000          --
                                                                            --------    --------
Total current liabilities...............................................      13,097       8,127

BORROWINGS UNDER REVOLVING CREDIT FACILITY..............................          --      90,000
LONG-TERM DEBT..........................................................     225,000     215,000
MINORITY INTEREST.......................................................       1,471          --
PARTNERS' CAPITAL AND MEMBERS' DEFICIT:
  Members' deficit
  Old Services..........................................................          --      (1,127)
</TABLE>

                                       75
<PAGE>

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                            --------------------
                                                                             1997        1996
                                                                            --------   ---------
<S>                                                                        <C>         <C>
  USTK..................................................................         --       (1,809)
Partners' capital
  General partner interest..............................................      1,471           --
  Limited partner interest (12,859,607 units issued
    and outstanding as of December 31, 1997)............................    144,175           --
                                                                            --------    --------
                                                                             145,646      (2,936)
                                                                            --------    --------
      Total liabilities and partners' capital and members' deficit......    $385,214    $310,191
                                                                            ========    ========
</TABLE>

   The accompanying notes are an integral part of these consolidated balance
                                    sheets.

                                       76
<PAGE>

                                U.S. TIMBERLANDS

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                    (in thousands, except per Unit amounts)
<TABLE>
<CAPTION>
                                              U.S. TIMBERLANDS              PREDECESSOR
                                         ------------------------   ----------------------------
                                                      AUGUST 30,      JANUARY 1,
                                                     1996 THROUGH    1996 THROUGH
                                                     DECEMBER 31,     AUGUST 29,
                                           1997          1996            1996         1995
                                         ---------   -------------   ------------   ------------
                                            (a)           (a)
<S>                                      <C>         <C>             <C>          <C>
REVENUES:
Log and stumpage sales.................   $ 60,445        $ 13,590       $14,077      $29,110
Timber and property sales..............     15,244              --            --           --
By-products and other..................      1,656             429         1,501        2,623
                                          --------        --------       -------      -------
Total revenues.........................     77,345          14,019        15,578       31,733

OPERATING COSTS:
Cost of products sold..................     17,778           6,179         9,225       14,951
Cost of timber and property sales......      8,746              --            --           --
Depreciation, depletion and road
 amortization..........................     17,303           3,323           927        1,486
Selling, general and administrative
 expenses..............................      6,250           9,284         2,730        4,235
                                          --------        --------       -------      -------
   Operating income (loss).............     27,268          (4,767)        2,696       11,061

INTEREST EXPENSE.......................     25,321           7,316            --           --
AMORTIZATION OF DEFERRED
 FINANCING FEES AND DEBT
 GUARANTEE FEES........................      4,193           1,326            --           --
INTEREST INCOME........................     (1,452)           (409)           --           --
OTHER (INCOME) EXPENSE, net............        574              36             1         (555)
                                          --------        --------       -------      -------
INCOME (LOSS) BEFORE
 EXTRAORDINARY ITEMS...................     (1,368)        (13,036)        2,695       11,616
EXTRAORDINARY ITEMS, losses on
 extinguishment of debt................      9,337              --            --           --
                                          --------        --------       -------      -------
NET INCOME (LOSS)......................   $(10,705)       $(13,036)      $ 2,695      $11,616
                                          ========        ========       =======      =======
BASIC INCOME (LOSS) BEFORE
 EXTRAORDINARY ITEMS PER UNIT:
Common.................................   $   3.05        $   0.00
Subordinated...........................   $  (1.01)       $  (3.04)
DILUTED LOSS BEFORE
 EXTRAORDINARY ITEMS PER UNIT..........   $   (.28)       $  (3.04)
                                          ========        ========
</TABLE>
-----------------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the consolidated
    statement of operations for 1997 and the combined statement of operations
    for the period from August 30, 1996 through December 31, 1996 are not
    comparable to the statements of operations of the Predecessor.  See the
    accompanying notes for additional information.

 The accompanying notes are an integral part of these consolidated statements.

                                       77
<PAGE>

                                U.S. TIMBERLANDS

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)

<TABLE>
<CAPTION>
                                                       U.S. TIMBERLANDS                PREDECESSOR
                                                  ------------------------     ----------------------------
                                                                 AUGUST 30,      JANUARY 1,
                                                                1996 THROUGH    1996 THROUGH
                                                                DECEMBER 31,     AUGUST 29,
                                                    1997            1996            1996         1995
                                                  ---------     -------------   ------------   ------------
                                                     (a)           (a)
<S>                                               <C>         <C>             <C>            <C>
CASH FLOWS FROM OPERATING
 ACTIVITIES:
Net income (loss)................................ $ (10,705)      $ (13,036)        $ 2,695       $11,616
Adjustments to reconcile net income (loss) to
 cash provided by (used in) operating
 activities......................................
Depreciation, depletion, amortization and cost
 of timber and property sold.....................    26,775           3,549             927         1,486
Write-off of deferred financing fees.............     9,148              --              --            --
Other noncash items..............................       630              51               6          (200)
Changes in operating accounts
Receivables......................................    (3,250)         (1,694)            699         1,057
Interest receivable from affiliate...............       121            (121)             --            --
Inventories......................................        78             921           1,348        (1,535)
Prepaid expenses.................................       146            (680)            371          (308)
Accounts payable.................................       515             889            (292)         (272)
Accrued liabilities..............................    (2,919)          7,137            (242)          (34)
Deferred revenue.................................     5,744              --              --            --
                                                  ---------       ---------         -------       -------
Net cash provided by (used in) operating
 activities......................................    26,283          (2,984)          5,512        11,810

CASH FLOWS FROM INVESTING
 ACTIVITIES:
Weyerhaeuser Acquisition.........................        --        (283,464)             --            --
Receivable from affiliate........................    10,000         (10,000)             --            --
Purchase of property, plant and equipment........      (319)           (212)             (6)       (1,124)
Proceeds from sales of property, plant and
 equipment.......................................       400           2,374              --           223
Ochoco Acquisition...............................  (110,873)             --              --            --
Timber and road additions........................      (534)            (12)            (26)         (224)
Capitalized seed orchard and nursery  costs......      (240)           (136)           (427)         (734)
                                                  ---------       ---------         -------       -------
Net cash used in investing activities............  (101,566)       (291,450)           (459)       (1,859)

CASH FLOWS FROM FINANCING
 ACTIVITIES:
Weyerhaeuser investment and advances,  net.......        --              --          (5,054)       (9,951)
Members' contributions...........................        --          10,100              --            --
Partner Contribution.............................         1              --              --            --
Member's distribution............................    (1,191)             --              --            --
Deferred financing fees..........................   (12,720)         (4,053)             --            --
Long-term borrowings.............................   510,000         305,000              --            --
Repayment of long-term borrowings................  (590,000)             --              --            --
Common Units Offering costs......................   (16,922)             --              --            --
Common Units Offering proceeds...................   180,127              --              --            --
                                                  ---------       ---------         -------       -------
</TABLE>

                                       78
<PAGE>

<TABLE>
<CAPTION>
                                                       U.S. TIMBERLANDS              PREDECESSOR
                                                  ------------------------   ----------------------------
                                                               AUGUST 30,      JANUARY 1,
                                                              1996 THROUGH    1996 THROUGH
                                                              DECEMBER 31,     AUGUST 29,
                                                    1997          1996            1996         1995
                                                  ---------   -------------   ------------   ------------
                                                     (a)           (a)
<S>                                               <C>         <C>             <C>            <C>
Net cash provided by (used in) financing
 activities.....................................     69,295         311,047          (5,054)       (9,951)

NET (DECREASE) INCREASE IN CASH
 AND CASH EQUIVALENTS...........................     (5,988)         16,613              (1)           --
CASH AND CASH EQUIVALENTS, beginning
 of period......................................     16,613              --               1             1
CASH AND CASH EQUIVALENTS, end of                 ---------       ---------         -------       -------
 period.........................................  $  10,625       $  16,613         $    --       $     1
                                                  =========       =========         =======       =======
SUPPLEMENTAL CASH FLOW
 INFORMATION:
Cash paid for interest..........................  $  28,083       $   2,062         $    --       $    --

NONCASH ACTIVITIES:
Net asset transfers (to) from Weyerhaeuser
 Company, principally property, plant and
 equipment......................................  $      --       $      --         $ 1,043       $  (255)
Redemption of Member's Interest in Old
 Services.......................................  $   1,000       $      --         $    --       $    --
</TABLE>
------------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the consolidated
    statement of cash flows for 1997 and the combined statement of cash flows
    for the period from August 30, 1996 through December 31, 1996 are not
    comparable to statements of cash flows of the Predecessor.  See the
    accompanying notes for additional information.



   The accompanying notes are an integral part of these consolidated balance
                                    sheets.

                                       79
<PAGE>

                                U.S. TIMBERLANDS

                CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'
                 CAPITAL AND MEMBERS' DEFICIT AND WEYERHAEUSER
                            INVESTMENT AND ADVANCES
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                             U.S.
                                                         TIMBERLANDS         U.S.
                                                          MANAGEMENT     TIMBERLANDS
                                                           COMPANY,        KLAMATH       U.S. TIMBERLANDS COMPANY,        U.S.
                                         PREDECESSOR        L.L.C.      FALLS, L.L.C.               L.P.              TIMBERLANDS
                                       --------------    -----------    -------------    -------------------------    -----------
                                                             (a)             (a)            (a)            (a)            (a)

                                                                                                                        TOTAL
                                                                                                                       MEMBERS'
                                                                                          PARTNERS'      PARTNERS'      EQUITY
                                                                                          CAPITAL--      CAPITAL--     (DEFICIT)
                                        WEYERHAEUSER                                       GENERAL        LIMITED         AND
                                       INVESTMENT AND      MEMBER'S        MEMBERS'        PARTNER        PARTNER      PARTNER'S
                                          ADVANCES         DEFICIT         DEFICIT        INTEREST       INTEREST       CAPITAL
                                       --------------    -----------    -------------    ----------      ---------    -----------
<S>                                       <C>              <C>             <C>             <C>           <C>            <C>
BALANCE, December 31, 1994...........     $27,745          $    --         $     --        $   --        $     --       $     --
  Net income.........................      11,616               --               --            --              --             --
  Net distributions to
    Weyerhaeuser Company.............      (9,951)              --               --            --              --             --
  Net asset transfers to
    Weyerhaeuser Company.............        (255)              --               --            --              --             --
                                          -------          -------         --------        ------        --------       --------

BALANCE, December 31, 1995...........      29,155               --               --            --              --             --
  Net income.........................       2,695
  Net distributions to
    Weyerhaeuser Company.............      (5,054)              --               --            --              --             --
  Net asset transfers from
    Weyerhaeuser Company.............       1,043               --               --            --              --             --
                                          -------

BALANCE, August 29, 1996.............     $27,839               --               --            --              --             --
                                          =======
  Members' contributions.............                          100           10,000            --              --         10,100
  Net loss...........................                       (1,227)         (11,809)           --              --        (13,036)
                                                           -------         --------        ------        --------       --------

BALANCE, December 31, 1996...........                       (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 member's.............                       (1,000)              --            --              --         (1,000)
    interest
  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
                                                           =======         ========         ======       ========       ========
</TABLE>

---------------
(a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the consolidated
    statement of partners' capital for the year ended December 31, 1997 and the
    combined statement of changes in members' deficit for the period from August
    30, 1996 through December 31, 1996 are not comparable to the statements of
    changes in Weyerhaeuser investment and advances of the Predecessor.  See the
    accompanying notes for additional information.

 The accompanying notes are an integral part of these consolidated statements.

                                       80

<PAGE>

                                U.S. TIMBERLANDS

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (All dollar amounts in thousands except unit and per Unit amounts)

1.   ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION:

ORGANIZATION

     The accompanying consolidated financial statements include the accounts of
U.S. Timberlands Company, L.P. (the MLP), a Delaware master limited partnership
and its 99% owned subsidiary U.S. Timberlands Klamath Falls, L.L.C. (USTK and
the Operating Company), collectively referred to hereafter as the Company.  All
intercompany transactions have been eliminated in consolidation.  The MLP was
formed on June 27, 1997 to acquire and own substantially all of the equity
interests in USTK and to acquire and own the business and assets of U.S.
Timberlands Management Company, L.L.C., formerly known as U.S. Timberlands
Services Company, L.L.C. (Old Services).  U.S. Timberlands Services Company,
L.L.C. (the General Partner and New Services) manages the businesses of the
Company and owns a 1% general partner interest in the MLP.  The General Partner
also owns a 1% member's interest in the Operating Company.

NATURE OF OPERATIONS

     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.

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, L.L.C. (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 cost.

                                       81
<PAGE>

BASIS OF PRESENTATION -- PRIOR TO THE TRANSACTIONS

     During 1996, USTK and Old Services were formed and subsequently entered
into an agreement with Weyerhaeuser Company on August 30, 1996 to purchase
approximately 601,000 acres of timber and timberlands and certain other assets
(the Weyerhaeuser Acquisition) as discussed further in Note 3.  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.  All
intercompany transactions between the above entities have been eliminated in the
accompanying financial statements.

BASIS OF PRESENTATION -- PREDECESSOR

     As a result of the Weyerhaeuser Acquisition, USTK acquired the Klamath
Falls Timberlands and certain related assets of Weyerhaeuser Company (as used
herein, the acquired timberlands and related assets are referred to as the
Predecessor).  All of the financial statements provided herein (including the
financial statements pertaining to the Predecessor) were prepared by, and are
solely the responsibility of the Company.  The Weyerhaeuser Acquisition was
accounted for as a purchase and, therefore, the accompanying financial
statements as of and for the periods ended prior to the date of the Weyerhaeuser
Acquisition are accounted for under the pre-Weyerhaeuser Acquisition basis of
accounting.  Because the Predecessor did not operate or legally exist as a
stand-alone entity, there are no separate meaningful equity accounts of the
Predecessor prior to the Weyerhaeuser Acquisition.  Significant changes could
have occurred in the funding and operations of the Predecessor were it to have
operated as an independent stand-alone entity. As a result, the financial
information included herein is not necessarily indicative of the financial
position and results of operations of the Predecessor which may have occurred if
it were an independent, stand-alone company during the periods presented.

     Revenues for the Predecessor principally represent logs harvested for sale
to Weyerhaeuser's Klamath Falls wood conversion facilities at prices determined
in accordance with Weyerhaeuser's transfer pricing policy.  These transfer
prices are not necessarily indicative of the prices the Predecessor would have
achieved if the logs had been sold to unaffiliated wood processors.  Revenues to
Weyerhaeuser wood conversion facilities and unaffiliated wood processors are
summarized as follows:

                                         JANUARY 1, 1996
                                             THROUGH
      SOURCE OF REVENUES                 AUGUST 29, 1996     1995
      ------------------                 ---------------   -------
Weyerhaeuser Company..................       $10,157       $20,065
Unaffiliated wood processors..........         5,421        11,668
                                             -------       -------
Total.................................       $15,578       $31,733
                                             =======       =======

     Concurrent with the Weyerhaeuser Acquisition, Collins Products Company
L.L.C. (Collins), an unaffiliated party, acquired Weyerhaeuser's Klamath Falls
wood conversion facilities.  The Company has entered into a 10-year log supply
agreement with Collins providing for the delivery by the Company to Collins of
34 million board feet of merchantable timber each year at market prices as
discussed in Note 9.

     The Predecessor participated in Weyerhaeuser Company's centralized cash
management system and, as such, its operating and capital expenditure needs were
met by Weyerhaeuser Company.  The net advances from and distributions to
Weyerhaeuser Company are presented in the accompanying combined balance sheets
as a component of Weyerhaeuser investment and advances prior to the Weyerhaeuser
Acquisition.  The Weyerhaeuser investment and advances account is noninterest
bearing.

     Certain costs incurred by Weyerhaeuser Company for financial services,
information systems and other indirect costs have been allocated to the
Predecessor on a revenue and volume harvested basis.  The resulting charge to
the

                                       82

<PAGE>

Predecessor was $445 in the period from January 1, 1996 through August 29, 1996
and $622 in 1995, and is included in selling, general and administrative
expenses in the accompanying combined statements of operations. Management of
the Company believes the allocation methods used provide the Predecessor with a
reasonable share of such expenses.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     The significant accounting policies summarized below include both those of
the Company and the Predecessor, unless otherwise noted.

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 timberland 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,
1997, represents cash received in advance of logs harvested under stumpage
contracts.

CONCENTRATION OF CREDIT RISK

     As of December 31, 1997, the Company had accounts receivable from five
individual customers that represent 25%, 21%, 20%, 17% and 12% of total accounts
receivable, respectively.

     The Company had sales to individual customers that were greater than 10% of
total sales for the respective periods as follows:

<TABLE>
<CAPTION>
                                      U.S. TIMBERLANDS                 PREDECESSOR
                               ------------------------------   -------------------------
                                                                 JANUARY 1, 1996
                                      AUGUST 30, 1996 THROUGH   THROUGH AUGUST 29,
                               1997      DECEMBER 31, 1996             1996          1995
                               ----   -----------------------   ------------------   ----
<S>                             <C>             <C>                     <C>           <C>
Weyerhaeuser Company..........  --              --                      65%           63%
Unaffiliated customer.........  23%             54%                     14%           14%
Unaffiliated customer.........  21%             14%                     10%           --
Unaffiliated customer.........  15%             11%                     --            --
Unaffiliated customer.........  11%             --                      --            --
</TABLE>

CASH AND CASH EQUIVALENTS

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

                                       83

<PAGE>

LOGGING EQUIPMENT HELD FOR RESALE

     Logging equipment held by the Company as of December 31, 1996, is recorded
as logging equipment held for resale in the accompanying consolidated balance
sheet, as the Company changed to the use of outside contractors for all of its
logging operations concurrent with the Weyerhaeuser Acquisition.

TIMBER, TIMBERLANDS AND LOGGING ROADS

     Timber, timberlands and logging roads are stated at cost less depletion and
amortization for timber previously harvested.  The depletion rate is calculated
using a single composite pool by dividing the total cost of merchantable timber
by its estimated net merchantable volume.  Depletion in any given year
represents the net merchantable volume harvested multiplied by the depletion
rate.  These estimates are subject to change based on periodic reevaluations of
merchantable volume.  Logging road costs for main and spur roads are amortized
based on the net merchantable volume harvested.

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 are stated at cost.  Additions and
betterments to buildings and equipment are capitalized.  Maintenance and repairs
are expensed as incurred.  Depreciation is provided over the useful lives of the
assets on the straight-line method.  Estimated useful lives for buildings and
land improvements is 40 years and equipment ranges from 3 to 5 years.

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 which approximates the effective
interest method.

MINORITY INTEREST

     The General Partner holds a 1% minority interest ownership in USTK (the
Minority Interest).  A pro rata share of the Company's net equity at the
completion of the Transactions and the Company's net loss since the date of the
Transactions have been allocated to the Minority Interest in the accompanying
financial statements.  The portion of the 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 (L.L.C.s).  Accordingly, the MLP and respective
L.L.C.s are not liable for federal or state income taxes since the MLP's and the
respective L.L.C.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.

                                       84
<PAGE>

PER UNIT INFORMATION

     The Company accounts for income (loss) per unit in accordance with
Statement of Financial Accounting Standards (SFAS) No. 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.
As the Company recorded extraordinary items in 1997, the Company reflected basic
income (loss) before extraordinary items per Common and Subordinated Unit
information on the face of the statements of operations.  See additional per
unit information discussion below:

                                                BASIC(a)
                                        ------------------------

1997                                     COMMON    SUBORDINATED   DILUTED(b)
                                        --------  --------------  ----------
Extraordinary items, losses per unit    $  (3.92)    $    (1.29)  $    (1.76)
Net loss per unit                       $  (0.86)    $    (2.30)  $    (2.04)
Weighted average units outstanding       943,064      4,282,120    5,225,184

1996(c)
Extraordinary items, losses per unit    $     --     $       --   $       --
Net loss per unit                       $     --     $    (3.04)  $    (3.04)
Weighted average units outstanding            --      4,282,120    4,282,120

(a) Basic income (loss) per Common and Subordinated Unit is calculated by
    dividing the income (loss) allocable to Common and Subordinated Units by the
    weighted average number of Common and Subordinated Units outstanding.
    Income (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 periods from January 1, 1997 through November 18, 1997 and
    from August 30, 1996 through December 31, 1996 are allocated to the
    Subordinated Units.
(b) Diluted loss per unit is calculated by dividing loss, after adjusting for
    the General Partner's effective 2% interest during the period from November
    19, 1997 through December 31, 1997, by the weighted average number of Common
    and Subordinated Units outstanding.
(c) The per unit information presented below is for the period from August 30,
    1996 through December 31, 1996.

     No per unit information is presented for the 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
financial statements.

       Pro Forma Loss Per Unit: Following is a summary of the pro forma loss per
       -----------------------
unit for 1997 as if the Common and Subordinatd Units were issued as of January
1, 1997:

            1997                                         PRO FORMA
                                                         ---------
            Loss before extraordinary items per unit.....  $(0.11)
            Extraordinary items, losses per unit.........  $(0.71)
            Net loss per unit............................  $(0.82)


FINANCIAL INSTRUMENTS

     All of the Company's material financial instruments are recognized in its
balance sheets.  Except as noted below, the carrying values generally
approximate fair market value for these financial assets and liabilities:

Notes -- The estimated fair value of the Company's Notes, based upon interest
rates at December 31, 1997 for similar obligations with like maturities, was
$235,328 and was carried at $225,000.

                                       85
<PAGE>

Interest Rate Collar Agreement -- The Company enters into interest rate collar
agreements to manage interest rate risk.  The fair value of interest rate collar
agreements is the estimated amount that the Company would receive or pay upon
termination of the agreement, taking into consideration the current credit
worthiness of the counterpart.  As of December 31, 1997, the Company has an
outstanding interest rate collar agreement. The Company estimates that it would
have to pay $630 to terminate this agreement.  Accordingly, the Company has
recognized an unrealized loss related to the interest rate collar agreement in
other (income) expense in the accompanying statement of operations.

UNIT-BASED COMPENSATION PLANS

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

3.   ACQUISITIONS:

WEYERHAEUSER

     The total purchase price for the Weyerhaeuser Acquisition referred to in
Note 1 was $283,464, including direct costs of the acquisition.  The
Weyerhaeuser Acquisition was accounted for as a purchase with the purchase price
allocated first to current assets acquired, principally inventory, and the
remaining balance being allocated to noncurrent assets acquired, primarily
timber, timberlands and logging roads based on the relative fair market values
of the noncurrent assets as determined by an appraisal.  Concurrent with the
Weyerhaeuser Acquisition, the Company changed to the use of outside contractors
for all of its logging operations.  Accordingly, logging equipment acquired was
recorded at its estimated resale value.

     Pro forma results of operations for 1996 had the Weyerhaeuser Acquisition
occurred on January 1, 1996 are as follows:


               1996
            -----------
            (Unaudited)

Revenues....  $ 29,597
Net loss....   (25,845)

OCHOCO

     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 L.P. 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
operations for 1997 of this acquisition has not been disclosed.

4.   ACCRUED LIABILITIES:

     The Company's accrued liabilities consist of the following:

                                       86
<PAGE>

                                 DECEMBER      DECEMBER
                                    31,           31,
                                   1997          1996
                                 --------      ---------
Interest........................  $2,492        $5,254
Debt guarantee fee..............      --         1,100
Severance and harvest tax.......     269           230
Employee compensation...........     703            81
Equity issuance costs...........     617            --
Other...........................     868           573
                                      --            --
                                  ------        ------
                                  $4,949        $7,238
                                  ======        ======

5.   DEBT:

     Debt consists of the following:

<TABLE>
<CAPTION>
                                                       DECEMBER      DECEMBER
                                                          31,           31,
                                                         1997          1996
                                                       ---------     ---------
<S>                                                     <C>          <C>
USTK -- 9-5/8% Notes due 2007........................   $225,000     $      --
Holdings -- Term loan, paid November 1997............         --       130,000
USTK -- Borrowings under revolving credit
  facility, refinanced July 1997 and paid
  November 1997......................................         --        90,000
USTK -- Term loan payable quarterly, refinanced
  July 1997 and paid November 1997...................                   85,000
                                                        --------      --------
                                                        $225,000      $305,000
                                                        ========      ========
</TABLE>

USTK DEBT -- PRIOR TO THE TRANSACTIONS

     As of December 31, 1996, USTK had $90,000 of outstanding borrowings under a
revolving credit facility and an outstanding $85,000 term loan related to the
Weyerhaeuser Acquisition.

     On July 14, 1997, USTK entered into a long-term financing arrangement with
certain banks to finance the Ochoco Acquisition discussed in Note 3 and to
refinance borrowings under the USTK revolving credit facility and USTK term loan
(the Long-Term Financing Arrangement).  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.  This write-off is recorded as an extraordinary item in
the accompanying statement of operations.

     In connection with the Long-Term Financing Arrangement, the Company
incurred $5,970 of fees which were deferred.

HOLDINGS DEBT -- PRIOR TO THE TRANSACTION

     As of December 31, 1996, Holdings had $130,000 of outstanding term loan
debt related to the Weyerhaeuser Acquisition (the Holdings Debt).  The Holdings
Debt was guaranteed by Weyerhaeuser.  In connection with the Holdings Debt,
Holdings was required to pay Weyerhaeuser a debt guarantee fee.  The Holdings
Debt and the related debt guarantee fee of $4,368 were paid with proceeds from
the Transactions.  The debt guarantee fee is included in amortization of
deferred financing fees and debt guarantee fees in the accompanying statements
of operations.

                                       87

<PAGE>

NOTES

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

     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 109.625% of the principal
amount hereof, 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 the Long-Term Financing Arrangement.  This resulted in an
extraordinary loss on extinguishment of debt of $5,766 due principally to the
write-off of existing unamortized deferred financing fees.  This write-off is
recorded in the accompanying statement of operations.

BANK CREDIT FACILITY

     Concurrent with the Transactions, the Operating Company entered into a
revolving credit facility (the Bank Credit Facility) with a commercial bank (the
Bank).  The Bank Credit Facility consists of a $75,000 acquisition facility (the
Acquisition Facility) and a $25,000 working capital facility (the Working
Capital Facility).  The Operating Company's obligations under the Bank Credit
Facility represent unsecured general obligations.  Average borrowings on the
Bank Credit Facility were $14,512,000.  As of December 31, 1997, there were no
outstanding borrowings on the Bank Credit Facility.

     The Bank Credit Facility bears interest at the lower of the Bank's prime
rate, plus a margin of 2.0% (10.5% at December 31, 1997) or LIBOR plus a margin
of 2.5% (8.41% at December 31, 1997).  The Working Capital Facility expires on
November 19, 2000 and all amounts borrowed thereunder shall then be due and
payable.  At November 19, 2000, the Company may elect to amortize any
outstanding loans under the Acquisition Facility in sixteen equal quarterly
installments beginning one quarter after the conversion to a term loan, subject
to certain provisions contained in the Bank Credit Facility agreement.

     The Bank Credit Facility contains certain restrictive covenants, including
limiting the ability of the Operating Company to make cash distributions, incur
certain additional indebtedness, incur certain liens, or sell assets or harvest
timber in excess of certain limitations.  In addition, the Bank Credit Facility
requires that the Operating Company maintain certain financial ratios.  As of
December 31, 1997, the Operating Company was in compliance with all covenants of
the Bank Credit Facility.

6.   PARTNERS' CAPITAL:

COMMON UNITS OFFERING

     On November 19, 1997, the Company issued 7,458,684 Common Units.  Proceeds
from such offering were $141,265, 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

                                       88
<PAGE>

Units. Proceeds from the exercise of the overallotment option were $21,940, net
of $1,555 of underwriters' fees. As of December 31, 1997, the Company has
8,577,487 Common Units and 4,282,120 Subordinated Units outstanding.

PARTNERSHIP INCOME (LOSS)

     As provided in the MLP's Partnership 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's Partnership 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's Partnership 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.  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.

SUBORDINATED UNITS

     The Subordinated Units are subordinated in right of distributions to the
Common Unitholders.  Provided that the MQD has been paid to Common and
Subordinated Unitholders for three consecutive four-quarter periods and earned
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.

7.   CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS:

RELATIONSHIP WITH THE GENERAL PARTNER

     The General Partner has the ability to control management of the Company
and has all voting rights of the Company except for certain matters set forth in
the MLP's Partnership Agreement.  The ownership of the Subordinated 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's Partnership 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

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<PAGE>

Company are settled in the ordinary course of business. As of December 31, 1997,
the Company had a payable to the General Partner of $253. During 1997, expenses
allocated to and reimbursed by the Company totaled $310.

     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, 1997, the General Partner has consulting agreements with
certain affiliated parties pursuant to which each such person or firm will
provide consulting services to the General Partner.  Each agreement provides for
an annual retainer of $25, plus an hourly rate for services rendered at the
request of the General Partner.  Payments by the General Partner related to
consulting agreements in 1997 were not significant.

PAYABLE 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 $1,000 is payable to Old Services by the Company in January 1998. The above
transaction has been reflected as a direct reduction of equity in the
accompanying financial statements.

MANAGEMENT AND ADVISORY FEES

     In connection with the Weyerhaeuser Acquisition, the Company paid a fee of
$4,135 to Timberlands Management Group (TMG), an entity 100% owned and
controlled by John M. Rudey, Chairman.  In addition, during the period from
August 30, 1996 to December 31, 1996, the Company paid TMG management fees of
$2,800.  These payments have been recorded in selling, general and
administrative expenses in the accompanying statement of operations.

RECEIVABLE FROM AFFILIATE

     During the period from August 30, 1996 through December 31, 1996, the
Company paid $10,000 to TMG. The receivable and the related interest were repaid
in February 1997.

8.   MANAGEMENT INCENTIVE PLANS:

UNIT OPTION PLAN

     The Company has a Unit Option Plan which permits the grant of options (Unit
Options) covering 857,749 Common Units.  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.  The Unit Options granted in 1997 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.
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 partners' capital.  As of
December 31, 1997, none of the performance criteria had been achieved.  Unit
Options 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.  All options granted as
of December 31, 1997 have an exercise price of $21 per Common Unit.

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<PAGE>

     The Company has computed, for pro forma disclosure purposes as required by
SFAS 123, the value of 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:


Risk-free interest rate...................  6.00%
Expected dividend yield...................  9.52%
Expected life of the Unit Option Plan.....  5 years
Expected volatility.......................  20.32%

     If the Company had accounted for these plans in accordance with SFAS 123,
the impact on the Company's 1997 net loss and net loss per unit would have been
insignificant.

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 (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 will 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, 1997.

INCOME INTERESTS IN 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.  No such
cash distributions from USTK or the Company were made in 1997.  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.  The fair value of
these income interests will then be recorded as compensation expense in the
Company's financial statements with a corresponding increase to contributed
capital.

9.   COMMITMENTS:

     On August 30, 1996, the Company entered into a wood supply agreement with
Collins to supply a volume of approximately 34 million board feet of
merchantable timber 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.

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<PAGE>

10.  QUARTERLY RESULTS FOR 1997 AND 1996 (UNAUDITED):

     (thousands of dollars, except Unit amounts)

<TABLE>
<CAPTION>
                                                                   QUARTER ENDED
                                            -----------------------------------------------------------
                                            DECEMBER 31 /(a)/   SEPTEMBER 30   JUNE 30   MARCH 31 /(a)/   TOTAL YEAR
                                            -----------------   ------------   -------   --------------   ----------
<S>                                              <C>               <C>         <C>          <C>             <C>
1997
Revenues..................................       $36,288           $17,261     $11,462      $12,334         $77,345
Gross profit/(b)/.........................        16,511             7,608       4,141        5,258          33,518
Income (loss) before extraordinary item...         5,457            (1,051)     (3,827)      (1,947)         (1,368)
Basic income (loss) before
  extraordinary item per
  Unit:/(d)/
  Common..................................           .77                --          --           --            3.05
  Subordinated............................           .58              (.25)       (.89)        (.45)          (1.01)
Diluted income (loss) before
  extraordinary item per Unit/(d)/........           .67              (.25)       (.89)        (.45)           (.28)

1996/(c)/
Revenues..................................        12,103
Gross Profit /(b)/........................         4,245
Net Loss..................................        (3,023)
Basic net loss per Unit/(d)/..............
  Common..................................            --
  Subordinated............................          (.71)
Diluted net loss per Unit /(d)/...........          (.71)
</TABLE>

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

(a) The quarter ended December 31, 1997 includes revenues of $11,750 and related
    costs of $7,555 from a property sale.  The quarter ended March 31, 1997
    includes revenues of $3,494 and related costs of $1,191 from a timber deed
    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) Due to a separate basis of presentation prior to the Weyerhaeuser
    Acquisition on August 30, 1996 and a different ownership structure by the
    Predecessor, no information for the quarters ended September 30, 1996 and
    prior is presented.  See discussion of the Company and the Predecessor's
    basis of presentation in Note 1 of the Notes to the Consolidated Financial
    Statements.

(d) See discussion of per unit information in Note 2 of the Notes to the
    Consolidated Financial Statements.

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