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

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                                    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, 1998         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.)

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

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

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

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

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

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

      Yes |X|     No |_|

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

      The aggregate market value of the Common Units held by non-affiliates of
the registrant, based on the last reported sale price of the Common Units on the
Nasdaq National Market on February 28, 1999, was approximately $107,201,548.00.

      Documents incorporated by reference: None

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                         U.S. TIMBERLANDS COMPANY, L.P.

                                TABLE OF CONTENTS

                                                                            Page
                                                                            No.

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

PART II
         Item 5.  Market for Registrant's Common Units and Related 
                  Security Holder Matters..................................   11
         Item 6.  Selected Financial Data..................................   16
         Item 7.  Management's Discussion and Analysis of Financial 
                  Condition and Results of Operations..........               17
         Item 7A. Quantitative and Qualitative Disclosures About 
                  Market Risk..............................................   27
         Item 8.  Financial Statements.....................................   27
         Item 9.  Changes in and Disagreements with Accountants on 
                  Accounting and Financial Disclosure......................   27

PART III
         Item 10. Directors, Executive Officers, Promoters and Control 
                  Persons of the Registrant................................   29
         Item 11. Executive Compensation...................................   33
         Item 12. Security Ownership of Certain Beneficial Owners and 
                  Management...............................................   39
         Item 13. Certain Relationships and Related Transactions...........   40

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


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<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
615,000 fee acres of timberland and cutting rights on approximately 3,000 acres
of timberland (collectively the "Timberlands") containing total merchantable
timber volume estimated as of January 1, 1999 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 45%) and Douglas fir (approximately 14%), species which have
historically commanded premium prices over other softwood species, with the
balance consisting of Lodgepole Pine, White Fir and other softwood species. The
Timberlands have stands of varying ages and are unique in the forests east of
the Cascade Range in Oregon in that approximately 178,000 acres are actively
managed tree farms (the "Plantations"). The Plantations were first established
by Weyerhaeuser Company ("Weyerhaeuser") in the early 1960s and acreage has been
planted each year since then. Currently, the Plantations contain age classes
ranging generally from one to 37 years old. Initial thinning or harvesting of
the Plantation stands is expected to begin within the next five years. Because
the timber on the Plantations is generally not yet considered merchantable,
volumes of timber on the Plantations are not included in the Company's estimated
merchantable timber volume. The balance of the Timberlands are composed of
natural stands. For a more complete description of the Company's properties, see
"Properties."

      In August 1996, U.S. Timberlands Klamath Falls, LLC, a Delaware limited
liability company ("USTK") and U.S. Timberlands Management Company, 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, USTK, which is now the Company's subsidiary
operating company (in such capacity, the "Operating Company"), acquired
approximately 42,000 fee acres of timberland and cutting rights on approximately
3,000 acres of timberland (the "Ochoco Timberlands"), containing an estimated
merchantable timber volume of approximately 280 million board feet ("MMBF") from
Ochoco Lumber Company ("Ochoco") (the "Ochoco Acquisition"). Over 40% 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 and May 1998, the Company sold
approximately 13,000 and 15,300 acres from the Klamath Falls Timberlands
respectively.

      During the period from January 1, 1994 through the acquisition of the
Klamath Falls Timberlands by USTK, approximately 58% of the logs harvested from
the Klamath Falls Timberlands were delivered to a plywood mill owned by
Weyerhaeuser at Klamath Falls, Oregon. Similarly, prior to the Ochoco
Acquisition, substantially all of the timber harvested from the Ochoco
Timberlands was delivered to Ochoco's mills. The Company does not currently own
any conversion facilities nor does it presently intend to own any such
facilities on a long-term basis; consequently all of the Company's sales are
made to unaffiliated third parties. Concurrent with USTK's acquisition of the
Klamath Falls Timberlands, USTK arranged for Collins Products LLC ("Collins"), a
privately owned forest products company located
<PAGE>

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

Formation of the Company

      On November 19, 1997, the Company acquired substantially all of the equity
interests in USTK and the business and assets of Old Services (the
"Acquisition") and completed its initial public offering (the "Initial
Offering") of common units representing limited partner interests ("Common
Units"). Upon the closing of the Acquisition, Old Services contributed all of
its assets, including its timber operations, to U.S. Timberlands Services
Company, 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"). See "Management's Discussion and Analysis - Liquidity
and Capital Resources."

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


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<PAGE>

Company Structure and Management

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

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

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

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

The Timberlands

Timber Growth

      Timber growth rates reflect timberland productivity and the rate of return
on a timber investment. Growth rate is an important factor in determining when
to harvest timber and the harvest potential of timberlands over the long term.
Merchantable timber is economically mature for harvesting when its current
growth rate falls below the desired rate of return on the investment in the
standing trees. The average growth rate from regeneration to economic maturity
measures the capacity of the land for timber production. The Company's older and
natural stands on the Timberlands that are expected to provide the near term
harvest have a current average growth rate of approximately 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
the growth of the timber. Management does take action to enhance the growth rate
in the natural stands as well. For example, selective harvesting in the slower
growing natural stands opens up the timber stand allowing for more vigorous
growth of the remaining trees. When it is no longer possible to maintain
acceptable growth rates in these stands they will be harvested entirely and
converted to faster growing plantations.

Harvest Plans

      The Company strives to manage all of its Timberlands, including the
Plantations, in an economically prudent and environmentally sensitive manner in
order to maximize their value over time. Integral to this management process are
the Company's long-term harvest plans. The Company prepares its harvest plans
annually based on analyses of the size and age class distribution of the
Timberlands and the economic maturity of each harvest tract. The factors the
Company considers in determining its long-term harvest plans include, among
other things, current and expected


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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 from log, stumpage and timber deed sales
139 MMBF in 1997 and 145 MMBF in 1998 and plans to harvest, or commit to
harvest, approximately 202 MMBF in 1999. The Company also sold through property
sales, 42 MMBF in 1997 and 27 MMBF in 1998 and intends to sell approximately 12
MMBF in 1999. Under the current harvest plans, the Company intends to harvest
its current Timberlands aggressively over approximately the next ten years after
which time the harvest level is expected to decline to a level which the Company
considers to be more sustainable over the long term. The Company believes these
harvest plans can be achieved; however, since harvest plans are based on certain
assumptions, many of which are beyond the Company's control, there can be no
assurance that the Company will be able to harvest the volumes projected in its
harvest plans. While the Company's debt obligations place certain limitations on
the harvest plans, the Company believes that it has sufficient flexibility to
permit modifications in response to fluctuations in the market for logs and
lumber and the other factors described above. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." If the Company's
current harvest plans are pursued unaltered for the next ten years, if it
consummates the land sales contemplated by its strategic plan and if its other
strategic assumptions prove to be accurate, the Company expects that its timber
inventory 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 1999 and 2000. Such harvest plans, land sales and other
strategic assumptions do not take into account any acquisition that the Company
may consummate during such period.

Access

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

Sales and Markets

      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 also sells timber to customers pursuant to timber deeds. In a timber
deed sale, the Company receives 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 


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<PAGE>

hardboard plants. The percentage of logs which are sold as sawlogs/stumpage or
pulp logs is dependent upon, among other things, the species mix and quality of
the inventory harvested and the market dynamics affecting the region. Most of
the timber on the Timberlands is softwood which, due to its long fiber,
strength, flexibility and other characteristics, is generally preferred over
hardwood for construction lumber and plywood. Once processed, sawlogs are
suitable for use as structural grade lumber, appearance grade boards, plywood
and laminated veneer and can also be manufactured for such end uses as window
trim, molding and door jambs. Sawlogs and stumpage sales accounted for
approximately 78.0% and 89.2% of the Company's revenues in 1997 and 1998,
respectively. Timber deeds and timber and timberland sales accounted for
approximately 19.8% and 8.8% the Company's revenues for 1997 and 1998.

      Chips, which can be used to make hardboard or pulp, accounted for
approximately 1.9% and 1.7% of the Company's revenues in 1997 and 1998,
respectively. 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 and 1998.

      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 24
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%, and in 1998, Crown Pacific Partners, Boise Cascade Corporation, Collins and
Thomas Lumber Company accounted for approximately 27%, 18%, 17% and 16%
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 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
Timberlands.

Seasonality

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

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


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<PAGE>

Competition

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

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

      The Company believes that it competes successfully in the timber business
for the following reasons: (i) the Company has substantial holdings of timber
properties which include approximately 2.1 BBF of merchantable, good quality
timber, approximately 178,000 acres of plantation timberland and a full-scale
seed orchard and nursery operation located in a region where conversion
facilities have been experiencing shortages in the supply of wood fiber; (ii)
the Company focuses on owning timberlands rather than operating conversion
facilities, which minimizes the Company's cost structure and capital
expenditures, allows the Company to seek the most favorable markets for its
timber rather than being committed to supply its own facilities, and ensures
that the Company will not compete with its customers; (iii) the Company's lean
operating structure allows it to efficiently manage its Timberlands, and should
enable it to acquire additional timberlands without commensurate increases in
overhead; and (iv) the Company's computerized geographic information system
("GIS") enables the Company to evaluate the optimal timing and patterns of the
harvest of its Timberlands and evaluate and integrate acquisitions of additional
timberlands.

Resource Management

Timber Resource Management

      All of the silvicultural activities on the Timberlands and the harvesting
and delivery of logs are conducted by independent contractors 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 


                                       6
<PAGE>

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 1998, the Company planted approximately 2.2 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 by Weyerhauser 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 Klamath Falls Acquisition. The GIS data, which has
been compiled over a period of at least five years, includes detailed
topographical field maps for every stand within the Timberlands including data
for the Ochoco Timberlands, setting forth the characteristics, including age,
species, size and other characteristics for the timber growing on each 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 inventory annually. To maintain the integrity of the data in the GIS,
the Company performs a detailed ground survey of the remaining timber inventory
on a tract after each harvest and updates the data in the GIS for that tract.
With the aid of the GIS, the Company is able to actively manage the Timberlands,
track its inventory and develop site-specific harvest plans on multiple scales,
adding additional layers of detail, such as the location of roadways or wildlife
nesting areas, as required. The GIS also permits the Company to analyze the
impact that new legislation may have on its timberlands by inputting the
proposed constraints imposed by such legislation in light of the particular
field characteristics of its Timberlands. The GIS 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 1998, the Company sold approximately 15,300 acres from the Klamath
Falls Timberlands. The Company expects to sell additional timberland parcels in
the future.


                                       7
<PAGE>

Federal and State Regulation

Endangered Species

      The federal Endangered Species Act and counterpart state legislation
protect species threatened with possible extinction. Protection of endangered
species may include restrictions on timber harvesting, road building and other
silvicultural activities in areas containing the affected species. A number of
species indigenous to the Pacific Northwest have been protected under the
Endangered Species Act, including the northern spotted owl, marbled murrelet,
Columbian white-tail deer, mountain caribou, grizzly bear, bald eagle, 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. The Oregon Forest Practices Act and related
regulations also protect endangered species and has specific provisions
governing habitat protection for the spotted owl, the bald eagle and other
threatened species.

      Based on the latest survey available to the Company, there were
approximately 80 bald eagle sites on the Klamath Falls Timberlands. The Company
observes harvesting restrictions around the eagle sites.

      In addition, the Company conducts surveys to determine the presence of
northern spotted owls. The surveys have been conducted every year in order to
(i) meet the regulatory requirements for timber harvest and other management
activities, (ii) monitor existing sites and determine the current status of such
sites, (iii) determine if areas identified as containing suitable habitat are
supporting owls and (iv) investigate other spotted owl or other species
sightings. The most recent of such surveys was completed in July 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 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. The Company believes it is in substantial
compliance with these regulations.


                                       8
<PAGE>

Environmental Laws and Superfund

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

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

Access to Timberlands May be Limited by Federal Regulation

      A substantial portion of the Timberlands consists of sections of land that
are intermingled with or adjacent to sections of federal land managed by the
USFS and the BLM. Removal of trees from those portions of the Timberlands
requires transportation of the logs by truck across logging and general purpose
roads. 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 March 15, 1999, the Company had 30 salaried employees, including
employees of the General Partner that manage the business of the Company. The
employees of the Timberlands are not unionized, and the Company believes that
its employee relations are good. All of the silvicultural activities on the
Timberlands and the harvesting and delivery of logs are conducted by independent
contractors who are not employees of the Company.


                                       9
<PAGE>

Item 2. Properties

Timber Inventory

      The Company currently owns and manages approximately 615,000 fee acres of
timberland and cutting rights on approximately 3,000 acres of timberland
containing total merchantable timber volume estimated as of January 1, 1999 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 4.6 inches in diameter, inside bark, at the small
end. The Company's merchantable timber inventory consists of premium species of
softwood, consisting of Ponderosa Pine and Douglas fir, species which have
historically commanded premium prices over other softwood species, as well as
Lodgepole Pine, White Fir and other species. The Company believes that the
Timberlands are suitable and adequate for current operations.

      The Timberlands have stands of varying sizes and ages and are unique in
the forests east of the Cascade Range in Oregon in that approximately 178,000
acres of the 615,000 acre total consist of actively managed pine Plantations
with stands ranging in age from one to 37 years. The Plantations are stocked
with high quality Ponderosa Pine (approximately 77%) and Lodgepole Pine
(approximately 23%). Because the timber on the Plantations is generally not yet
considered merchantable, volumes of timber on the Plantations are not included
in the Company's estimated merchantable timber volume. However, initial thinning
of the Plantation stands, including the thinning of commercial quantities of
merchantable timber, is expected to begin within the next five years. See "The
Timberlands--Harvest Plans."

Merchantable Timber Inventory by Species

      The Company maintains data regarding the estimated merchantable timber
inventory by species within the Timberlands. All volumes are based on
information developed by Company personnel. As of January 1, 1999, the total
timber inventory amounted to 2.1 BBF. The Company's combined timber inventory by
MMBF and percentage is Ponderosa Pine (931.3 (45%)), Lodgepole Pine (399.6
(19%)), White Fir (409.6 (20%)), Douglas fir (282.3 (14%)) and other species
(65.5 (2%)). 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, 1999, approximately 562
MMBF, or 27%, 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, 1999, the Plantations totaled
178,000 acres. Of the total acreage, 63,300 acres range from 1 to 15 years of
age, 109,800 acres range from 16 to 25 years of age, and 4,900 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

      There were no matters submitted to a vote of the Company's Unitholders
during the fourth quarter of 1998.


                                       10
<PAGE>

                                     PART II

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

      The Common Units are listed and traded on the Nasdaq National Market
("Nasdaq") under the symbol "TIMBZ." The Common Units began trading on November
14, 1997, at an initial public offering price of $21.00 per Common Unit. As of
March 15, 1999, there were approximately 158 record holders of the Company's
Common Units and four record holders of the Company's Subordinated Units. There
is no established public trading market for the Company's Subordinated Units.

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

                                                       Common Unit Price Range
                                                       -----------------------
                                                         High           Low
                                                       -----------------------
November 14 to December 31, 1997 ...................    $ 22.75       $ 20.00
First Quarter 1998 .................................      21.50         20.31
Second Quarter 1998 ................................      21.875        18.00
Third Quarter 1998 .................................      19.50         14.875
Fourth Quarter 1998 ................................      18.25         13.00
First Quarter 1999 .................................      14.50(1)      11.75(1)

----------

      (1) First Quarter 1999 high/low is through March 15, 1999

      The last reported sale price of the Common Units on Nasdaq on March 15,
1999 was 12.563 per Common Unit.

Cash Distributions

      The Company made its first cash distribution on the Common Units and the
Subordinated Units on May 15, 1998, of $0.73, representing the sum of $0.50, the
Minimum Quarterly Distribution for the first quarter of 1998, plus $0.23, the
pro rata portion of the Minimum Quarterly Distribution for the period from
November 19, 1997 through December 31, 1997. The Company made the Minimum
Quarterly Distributions of $.50 per Unit for the second, third and fourth
quarters of 1998 on August 14, 1998, November 13, 1998 and February 12, 1999,
respectively.

Cash Distribution Policy

General

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

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


                                       11
<PAGE>

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

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

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

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

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

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

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

Distributions from Operating Surplus during Subordination Period

      The Subordination Period will generally continue until the first day of
any quarter beginning after December 31, 2002 in respect of which (i)
distributions of Available Cash from Operating Surplus on the Common Units and
the Subordinated Units with respect to each of the three consecutive
four-quarter periods immediately preceding such date equaled or exceeded the sum
of the Minimum Quarterly Distribution on all of the Common Units and
Subordinated Units during such periods, (ii) the Adjusted Operating Surplus
generated during each of the three consecutive four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units that
were outstanding during


                                       12
<PAGE>

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;

            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.


                                       13
<PAGE>

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

Incentive Distributions

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

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

            second, 85% to all Unitholders, pro rata, and 15% to the General
      Partner, until the Unitholders have received (in addition to any
      distributions to Common Unitholders to eliminate Common Unit Arrearages) a
      total of $0.633 for such quarter in respect of each outstanding Unit (the
      "Second Target Distribution");

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

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

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

Adjustment of Minimum Quarterly Distribution and Target Distribution Levels

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

      The Minimum Quarterly Distribution and the Target Distribution Levels may
also be adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Company to become taxable as a corporation or otherwise subjects the Company to
taxation as an entity for federal, state or local income tax purposes. In such
event, the Minimum Quarterly Distribution and the Target Distribution Levels
would be reduced to an amount equal to the product of (i) the Minimum Quarterly
Distribution and each of the Target Distribution Levels, respectively,
multiplied by (ii) one minus the sum of (x) the maximum effective federal income
tax rate to which the Company is then subject as an entity plus (y) any increase
that results from such 


                                       14
<PAGE>

legislation in the effective overall state and local income tax rate to which
the Company is subject as an entity for the taxable year in which such event
occurs (after taking into account the benefit of any deduction allowable for
federal income tax purposes with respect to the payment of state and local
income taxes). For example, assuming the Company was not previously subject to
state and local income tax, if the Company were to become taxable as an entity
for federal income tax purposes and the Company became subject to a maximum
marginal federal, and effective state and local, income tax rate of 38%, then
the Minimum Quarterly Distribution and the Target Distribution Levels would each
be reduced to 62% of the amount thereof immediately prior to such adjustment.


                                       15
<PAGE>

Item 6.  Selected Financial Data

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                             U.S. Timberlands(1)                       Predecessor(1)
-----------------------------------------------------------------------------------------------------------
                                                               August 30,    January 1,
                                                              1996 through    through
                                                              December 31,   August 29,
                                         1998       1997          1996          1996       1995       1994
-----------------------------------------------------------------------------------------------------------
<S>                                    <C>        <C>           <C>           <C>        <C>        <C>    
CASH FLOWS AND OTHER DATA
   (IN MILLIONS):
Modified EBITDDA(7) ................   $  44.2    $  53.3       $  (1.4)      $   3.6    $  12.5    $  11.5
Additions to timber, timberlands and                                          
   logging roads(3) ................       0.3      111.4         283.5           0.0        0.2        0.0
Cash flow from (used in) operating                                            
 activities ........................      17.5       28.5          (3.0)          5.5       11.8       13.2
Cash flow from (used in) investing                                            
 activities ........................       0.4     (103.8)       (291.5)         (0.5)      (1.9)      (2.0
Cash flow from (used in) financing                                            
 activities ........................     (23.7)      69.3         311.0          (5.1)     (10.0)     (11.2)
                                                                              
OPERATING STATEMENT DATA                                                      
 (IN MILLIONS EXCEPT PER                                                      
UNIT AMOUNTS)                                                                 
Revenues(2)(3) .....................      71.3       77.3          14.0          15.6       31.7       32.3
Depreciation, depletion and road                                              
amortization(2)(3) .................      21.0       17.3           3.3           0.9        1.5        1.5
Cost of timber and property sales                                             
   (2)(3) ..........................       5.9        8.7            --            --         --         -- 
Operating income (loss)(2)(3) ......      16.3       27.3          (4.8)          2.7       11.1       10.1
Income (loss) before extraordinary                                            
   items(4) ........................      (6.4)      (1.4)        (13.0)          2.7       11.6        9.9
Extraordinary items, losses on                                                
   extinguishment of debt(5) .......        --        9.3            --            --         --         --
Income (loss) before general partner                                          
   and minority interest ...........      (6.4)     (10.7)        (13.0)          2.7       11.6        9.9
                                                                              
PER UNIT DATA(6):                                                             
Basic income (loss) before                                                    
   extraordinary items per unit:                                              
   Common ..........................      (.49)      3.05            --            --         --         --
   Subordinated ....................      (.49)     (1.01)        (3.04)           --         --         --
Diluted loss before extraordinary                                             
items per unit .....................      (.49)     (0.28)        (3.04)           --         --         --
Basic net loss per unit:                                                      
   Common ..........................      (.49)     (0.86)           --            --         --         --
   Subordinated ....................      (.49)     (2.30)        (3.04)           --         --         --
Diluted net loss per unit ..........      (.49)     (2.04)        (3.04)           --         --         --
                                                                              
BALANCE SHEET DATA (AT                                                        
    PERIOD END, IN MILLIONS):                                                 
Working capital ....................       1.4        1.8          21.5           0.5        1.3        0.2
Total assets(3) ....................     350.7      385.2         310.2          27.8       30.9       29.8
Long-term debt(8) ..................     225.0      225.0         305.0            --         --         -- 
Equity (deficit)(9) ................     116.9      145.6          (2.9)         27.8       29.2       27.7
                                                                              
OPERATING DATA (UNAUDITED):                                                                  
Log, stumpage and timber deed sales                                           
   volumes (MMBF)(2)(3) ............     144.5      138.9          30.2          32.8       63.8       68.3
Property sale volume (MMBF)(2) .....      26.6       41.5            --            --         --         --
-----------------------------------------------------------------------------------------------------------
</TABLE>


                                       16
<PAGE>

(1)   Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial and
      operating data after August 30, 1996 are not comparable to financial and
      operating data of the Predecessor. See discussion of the Company and the
      Predecessor's basis of presentation in Note A of the Notes to Financial
      Statements. Also, See "Management's Discussion and Analysis of Financial
      Condition and Results of Operations."
(2)   Revenues in 1998 consist of $63.6 million of log and stumpage sales, $6.3
      million of timber and property sales and $1.4 million of by-products and
      other sales. Revenues in 1997 consist of $60.4 million of log and stumpage
      sales, $15.2 million of timber and property sales and $1.7 million of
      by-products and other sales. Revenues prior to 1997 consist primarily of
      log sales. See "Management's Discussion and Analysis of Financial
      Condition and Results of Operations."
(3)   See August 1996 acquisition of the Klamath Falls Timberlands and July 1997
      acquisition of the Ochoco Timberlands in Note C of the Notes to 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 E of the Notes to Financial
      Statements.
(6)   No per unit information is presented for periods ended August 29, 1996 and
      December 31, 1995 and 1994 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 B of the Notes to Financial Statements.
(7)   Modified EBITDDA is defined as operating income plus depreciation,
      depletion, and road amortization and cost of timber and property sales.
      Modified 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. Modified EBITDDA is not intended to
      represent cash flow and does not represent the measure of cash available
      for distribution, but provides additional information for evaluating the
      Company's ability to make the Minimum Quarterly Distribution. In addition,
      Modified EBITDDA does not necessarily represent funds available for
      management's discretionary use as it is calculated prior to debt service
      obligations and capital expenditures. See "Management's Discussion and
      Analysis of Financial Condition and Results of Operations."
(8)   See discussion of long-term debt at Note E of the Notes to Financial
      Statements.
(9)   See discussion of the Company and the Predecessor's equity (deficit) in
      Note A of the Notes to Financial Statements.

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

Forward-Looking Statements

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

General

      The basis of presentation of the Company's financial statements is
described in Note A 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).


                                       17
<PAGE>

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. 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 benefitted 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.

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.


                                       18
<PAGE>

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

Current Market Conditions

      Low mortgage interest rates have created favorable conditions for new home
construction, home repair and remodeling, and industrial and other construction,
which has strengthened the demand for the Company's logs and timber. However, as
the result of weak log markets in Asia, the supply of logs has increased on the
West Coast. Combined with the continued heavy importing of lumber from Canada,
this has put downward pressure on prices for the Company's logs and timber
during most of 1998.

      The key lumber price indicators for Ponderosa Pine dropped 26% from
mid-1997 to the end of 1997. Ponderosa Pine indicators for 1998 remained at
historically low levels and continued to decline throughout the year for a 7%
reduction. Lodgepole Pine prices experienced a decline of 5% in 1998. Douglas
Fir prices were consistently lower in 1998 from 1997 levels, with an average
year-to-year reduction of 16%. In contrast, prices for White Fir were generally
higher in 1998 than in 1997 by 14%, with significant increases in the second
half of 1998. Strong demand for panel products manufactured from this species
persisted through the second half and the Company benefitted from the demand by
shifting more production to White Fir logs to improve the overall mix.

Results of Operations

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

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

<TABLE>
<CAPTION>
                         Sales Volume (MBF)        Price Realization (MBF)
                         -------------             ------------------
                                         Timber                       Timber    Property
Period               Logs    Stumpage    Deeds    Logs     Stumpage   Deeds     Sales (000s)
------               ----    --------    -----    ----     --------   -----     ------------
<S>                  <C>       <C>                <C>       <C>                 <C>    
    1998
Year ended 12/31     93,557    50,894        --   $ 420     $   479        --   $ 6,276
4th Quarter          24,299    23,787        --     396         441        --        --
3rd Quarter          29,017    22,617        --     431         511        --        --
2nd Quarter          23,832     2,506        --     432         570        --     6,276
1st Quarter          16,409     1,984        --     418         447        --        --
                                                          
    1997                                                  
Year ended 12/31     97,749    30,189    11,045   $ 446     $   556   $   315   $11,760
4th Quarter          27,415    17,830        --     487         576        --    11,760
3rd Quarter          25,867    10,056        --     436         569        --        --
2nd Quarter          23,094     2,303        --     441         350        --        --
1st Quarter          21,373        --    11,045     413          --       315        --
</TABLE>                                                  
                                                        
      Revenues. Revenues were $71.3 million in 1998, a decrease of $6.0 million
or 8% from revenues of $77.3 million in 1997. This decrease was primarily
attributable to a $9.0 million reduction in timber and property sales, a $4.3
million reduction in log sales and a $0.2 million reduction in by-products and
other revenues, partially offset by a $7.6 million increase in revenues from
stumpage sales. To meet its working capital requirements, the Company harvested
and sold logs and stumpage in 1998 at rates in excess of both 1997 levels and
the General Partner's estimate


                                       19
<PAGE>

of the long-term sustainable annual harvest level for its current timberlands of
approximately 110,000 MBF per year.

      Revenue from planned timber and property sales decreased to $6.2 million
in 1998 from $15.2 million during 1997, representing a $9.0 million or 59%
reduction. The significant reduction was due to a decrease in the volume
contained in the 1998 timber and property sales of 26,600 MBF as compared to
52,600 MBF in 1997.

      Log sales for 1998 were $39.3 million on volumes of 93,600 MBF, compared
to log sales of $43.6 million on volumes of 97,700 MBF in 1997. The average log
sales price per MBF for 1998 was $420 compared to an average log sales price per
MBF of $446 for 1997, a 6% reduction, reflecting weaker markets, primarily for
Ponderosa Pine logs.

      Stumpage sales for 1998 were $24.4 million on volumes of 50,900 MBF,
compared with stumpage sales of $16.8 million on volumes of 30,200 MBF in 1997.
The average stumpage sales price per MBF for 1998 was $479 compared to an
average stumpage sales price per MBF of $556 for 1997, a 14% reduction. The
decrease in average stumpage sales prices from 1997 to 1998 was primarily due to
a reduction in the grade of timber harvested from the Ochoco Timberlands.

      In addition, the Company entered into six stumpage contracts in 1998 for
an aggregate estimated revenue of $5.5 million and 16,700 MBF. It is expected
that such timber will be removed, and revenue recognized, during 1999, under
such contracts.

      Operating Costs. Results for 1998 reflect a full year's ownership of the
Ochoco Timberlands whereas 1997 results include such ownership from the date of
acquisition on July 15, 1997. Operating costs were $55.0 million in 1998, an
increase of $4.9 million or 10% over operating costs of $50.1 million in 1997.
This increase was the result of a $4.6 million increase in Depletion,
Depreciation and Road Amortization ("DD&A") expense and a $4.2 million increase
in selling, general and administrative expenses partially offset by a $2.8
million decrease in cost of timber and property sales and a $1.1 million
decrease in cost of products sold.

      DD&A expense was $21.9 million in 1998, a $4.6 million or 27% increase
over DD&A expense of $17.3 million in 1997. This increase was primarily
attributable to a net increase in log and stumpage sales volumes and an increase
in the Company's depletion rate per MBF, which resulted from the Ochoco
Timberlands acquisition in July 1997.

      Selling, general and administrative expenses were $10.5 million for 1998,
an increase of $4.2 million or 67% over comparable expenses of $6.3 million in
1997. The increase in selling, general and administrative expenses was primarily
attributable to one-time expenses of $1.7 million related to severance costs and
the repurchase of member interests in the General Partner that were incurred in
the first and fourth quarters of 1998, combined with increased costs associated
with operating as a publicly traded company, and implementing the Company's
strategy to pursue accretive acquisitions of timberland.

      The reduction in the cost basis of the timber and property sales between
1998 and 1997 is due to the reduced volume contained in the 1998 sale as
compared to the 1997 sales, as previously mentioned.

      Cost of products sold was $16.7 million for 1998 as compared to $17.8
million for 1997, a $1.1 million or 6% reduction. The decrease in cost of
products sold was the result of a $0.6 million decrease in logging costs, a $0.3
million decrease in wood fiber processing costs and a $0.2 million decrease in
silviculture expenses.

      Interest Expense. Interest expense for 1998 was $22.2 million as compared
to $25.3 million for 1997, representing a $3.1 million or 12% reduction. 1998
interest expense was incurred primarily on the $225.0 million of Notes issued in
the November 1997 Public Note Offering. 1997 interest expense related primarily
to $215.0 million of term debt and $90.0 million of revolving debt incurred in
connection with the Weyerhaeuser Acquisition on August


                                       20
<PAGE>

30, 1996 and $110.0 million of incremental debt incurred in connection with the
Ochoco Acquisition on July 15, 1997. The reduction in interest expense is
primarily attributable to the use of a substantial portion of the proceeds from
the Company's Initial Offering completed on November 19, 1997, to retire
outstanding debt.

      Amortization of Deferred Financing Fees and Debt Guarantee Fees. The
company deferred $6.7 million of fees incurred in connection with the issuance
of the Notes. These fees will be amortized over the term of the Notes, which are
due in November 2007. The amortization of these fees during 1998 was $0.7
million. During 1997 the Company recognized $4.2 million of expense related to
debt guarantee fees and amortization of deferred financing fees.

      Interest Income. Interest income for 1998 was $0.5 million, a decrease of
$1.0 million or 67% from interest income for 1997 of $1.5 million. The reduction
in interest income is primarily attributable to the reduction in the cash and
cash equivalents available in 1998 compared to 1997.

      Other expense, net. Other expense, net was $0.3 million for 1998 compared
to $0.6 million for 1997, representing a reduction of $0.3 million or 50%.

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

      Cash Flow From Operations. During 1998, cash flow from operations
decreased $11.0 million or 39% primarily as a result of decreased proceeds from
timber and property sales, an increase in selling, general and administrative
expenses and a decrease of advance payments on stumpage sales contracts.

Partners' Capital

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

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 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.


                                       21
<PAGE>

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.

      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 and property sales with a combined cost basis of
$8.7 million. No sales of tracts of timber or property 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.


                                       22
<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. 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.

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

      Extraordinary Items. 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.

Liquidity and Capital Resources

      Effective November 19, 1997, the Company completed its Initial Offering of
8,577,487 Common Units (including Common Units issued upon the exercise by the
underwriter's of their over-allotment option in December 1997). Net proceeds
from the Initial Offering were $163.2 million. In addition, the Operating
Company issued $225.0 million of Notes in the Public Notes Offering. The
proceeds from the Initial Offering and the Public Notes Offering were primarily
utilized to retire all outstanding borrowings under the revolving credit
facility and $330.0 million of term debt. For purposes of this discussion, these
transactions are hereafter referred to as the "Transactions." As of December 31,
1998, the Company has a cash balance of $4.8 million and $1.4 million of working
capital.

      Operating Activities. Cash flows provided by operating activities in 1998
were $17.5 million, as compared to cash flows provided by operating activities
of $28.5 million in 1997. The $11.0 million decrease in cash flows provided by
operating activities was primarily due to a $9.0 million decrease in the
proceeds from timber and property sales, $4.2 million increase in selling,
general and administrative expenses and $4.1 million decrease of advance
deposits on stumpage sales contracts. The decrease in operating cash flows was
partially offset by a substantial decrease in interest and debt guarantee fees
in 1998 as compared to 1997, of $3.1 million and $3.5 million, respectively.

      Investing Activities. Cash flows provided by investing activities were
$0.4 million in 1998, as compared to cash flows used by investing activities of
$103.8 million during 1997. During 1998, a $1.1 million receivable from a
customer was paid and $0.7 million was used in timber and road additions and
orchard and nursery operations. During 1997, $110.9 million was used in the
Ochoco Acquisition and a $10.0 million receivable from an affiliate was repaid.

      Financing Activities. Cash flows used in financing activities were $23.7
million in 1998, as compared to cash flows provided by financing activities of
$69.3 million during 1997. During 1998, the Company paid $22.7 million in
distributions to unitholders and minority interest and paid $1.0 million to an
affiliate for redemption of a certain member's interest. 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 


                                       23
<PAGE>

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.

Notes

      On November 14, 1997, the Operating Company issued $225.0 million
aggregate principal amount of Notes (the "Notes") representing unsecured general
obligations of the Operating Company which bear interest at 9 5/8% per annum,
payable semiannually in arrears on May 15 and November 15. The Notes mature on
November 15, 2007 unless previously redeemed. The Notes will not require any
mandatory redemption or sinking fund payments prior to maturity and are
redeemable at the option of the Operating Company in whole or in part, on or
after November 15, 2002 at predetermined redemption prices plus accrued interest
to the redemption date. In addition, at any time on or prior to November 15,
2000, the Operating Company, at its option, may redeem the Notes with the net
cash proceeds of a Common Units offering or other equity interests of the
Company, at 109.625% of the principal amount thereof, plus accrued and unpaid
interest thereon to the redemption date, provided that at least 65% of the
principal amount of the Notes originally issued remain outstanding immediately
following such redemption. Upon the occurrence of certain events constituting a
"change of control" (as defined in the Indenture), the Company must offer to
purchase the Notes, at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of purchase.

      The indenture governing the Notes (the "Indenture") contains various
affirmative and restrictive covenants applicable to the Operating Company and
its subsidiaries, including limitations on the ability of the Operating Company
and its subsidiaries to, among other things, (i) incur additional indebtedness
(other than certain permitted indebtedness) unless the Operating Company's
Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is
greater than 2.25 to 1.00, and (ii) make distributions to the Company, make
investments (other than permitted investments) in any person, create liens,
engage in transactions with affiliates, suffer to exist any restrictions on the
ability of a subsidiary to make distributions or repay indebtedness to the
Company, engage in sale and leaseback transactions, enter into a merger,
consolidation or sale of all or substantially all of its assets, sell assets or
harvest timber in excess of certain limitations (which limitations are similar
to those for the Bank Credit Facility) or engage in a different line of
business. Under the Indenture, the Operating Company will be permitted to make
cash distributions to the Company so long as no default or event of default
exists or would exist upon making such distribution (a) if the Operating
Company's Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture)
is greater than 1.75 to 1.00, in an amount, in any quarter, equal to Available
Cash (as defined in the Indenture) for the immediately preceding fiscal quarter
or (b) if the Operating Company's Consolidated Fixed Charge Coverage Ratio is
equal to or less than 1.75 to 1.00, in an aggregate amount after the closing of
this offering not to exceed (i) $7.5 million less the aggregate of all
restricted payments made under this clause (b)(i) during the immediately
preceding 16 fiscal quarters (or shorter period, if applicable, beginning on the
issue date of the Notes), plus (ii) the net proceeds of certain capital
contributions (including the sale of Units) received by the Company. The Company
was in compliance with these covenants at December 31, 1998 and 1997.

Bank Credit Facility

      Simultaneously with the Closing of the Initial Offering, the Company
obtained the Bank Credit Facility, which consists of the $75.0 million
Acquisition Facility and the $25.0 million Working Capital Facility. As of
December 31, 1998, 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% (9.75% at December 31, 1998) or LIBOR plus a
margin of 2.5% (7.6% at December 31, 1998). 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 


                                       24
<PAGE>

the conversion to a term loan, subject to certain provisions contained in the
agreement governing the Bank Credit Facility. As of December 31, 1998, the
Company was not in compliance with certain covenants of the Bank Credit
Facility. On February 11, 1999, the required majority of the banks comprising
the lending group waived such noncompliance. In exchange for the waiver, the
Company agreed that future borrowings in excess of $2.0 million will require the
consent of a majority of the lending group members. On April 6, 1999, the
Company advised the Agent Bank that, as of March 31, 1999, the Company may be in
violation of the Minimum Asset Value to Funded Debt covenant (the "MAVFD
Covenant") contained in the Credit Agreement, which is based upon values set by
the California State Board of Equalization ("SBE"). The Banks have agreed to
modify the MAVFD Covenant, effective March 31, 1999, to provide that the asset
value shall be based upon the fair market value of the Company's Merchantable
Timber as set forth in the Company's Annual Timber Report, which Management
believes more accurately reflects the value of the Company's properties. As
modified, the Company is in compliance with such covenant. In connection with
the modification, the Company agreed to terminate the Working Capital loan
agreement as of June 30, 1999 and to terminate the Acquisition Facility,
effective April 6, 1999. As of March 31, 1999, there was $1.3 million
outstanding under the Working Capital Facility. The Company is currently is in
discussions with several of the banks to continue the Working Capital Facility,
and one of them has agreed to act as agent bank. In the interim, an affiliate of
the General Partner has agreed to make available to the Company, from time to
time, loans of up to $12.0 million with terms and covenants substantially
consistent with the current Bank Credit Facility. In addition, the Company's
plan is to engage investment banks to assist it in raising money for
acquisitions.

      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) (calculated on a four quarter rolling basis) of 2.25 to 1.0
through June 30, 1999 and 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 4.75 to 1.0 (calculated on
a four quarter rolling basis) through June 30, 1999, and 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 Bank Credit
Facility, the Company's average annual harvest volume over any period of four
consecutive years cannot exceed 150 MMBF (as adjusted for timberland sales and
purchases). The agreements also limit one-year harvest levels and average annual
harvest levels for consecutive two and three year periods.

      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 1998 totaled $1.8 million. Capital expenditures
incurred were mainly in the nature of land management/silvicultural expenses,
miscellaneous equipment and computer hardware and software. Capital expenditures
were financed through cash flow generated by operations. As the Company does not


                                       25
<PAGE>

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 $1.5 million in 1999. Capital expenditures will consist
primarily of capitalized silvicultural costs and miscellaneous equipment
purchases.

      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 currently expects to make cash distributions from current funds and
cash generated from operations. Given projected harvest levels, the long term
sustainable harvest levels of the timberlands and the harvest restrictions in
the Notes and Bank Credit Facility, unless prices improve, costs are reduced,
new markets are developed or the Company makes accretive acquisitions, the
Company's ability in the future to make distributions at current levels may be
adversely affected. The Company continues to evaluate means to improve cash
flows, including the factors mentioned above. However, there can be no assurance
that prices will improve or that the Company will be able to take any of these
actions.

Effects of Inflation

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

Year 2000 Compliance

      The Company is aware of the "Year 2000" issue associated with the
programming code in existing computer systems as the millennium (year 2000)
approaches. The Year 2000 issue is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of a two-digit
year value to 00. The issue is whether computer systems will properly recognize
data sensitive information when the year changes to 2000. Systems that do not
recognize such information could generate erroneous data or cause a system to
fail.

      Since early 1998, the Company has been assessing its computer hardware and
information systems needs and upgrading its systems as appropriate. In 1998 the
Company completed the installation of several major hardware and software
upgrades: general ledger, accounts payable, accounts receivable, log accounting
and telecommunications. Along with this assessment and upgrade of its systems,
the Company is also reviewing its systems and applications to ensure its
computer and information systems will function properly at Year 2000. The
Company anticipates completing this internal assessment by June 30, 1999. At
this time, management of the Company believes that the specific cost of
achieving Year 2000 compliance for its current systems will not have a material
effect on the Company's consolidated financial statements.

      Like other companies, the Company relies on its customers for revenues and
on its vendors for products and services of all kinds; these third parties all
face the Year 2000 issue. An interruption in the ability of any of them to
provide goods or services, or to pay for goods and services provided to them, or
an interruption in the business operations of customers causing a decline in
demand for services, could have a material adverse effect on the Company.

      In addition, there is a risk, the probability of which the Company is not
in a position to estimate, that the Year 2000 will cause wholesale, perhaps
prolonged, failures of electrical generation, banking, telecommunications or
transportation systems in the United States or abroad, disrupting the general
infrastructure of the economy. The effect of such disruptions on the Company
could be material.

      The Company is in the process of identifying and surveying its key vendors
and customers regarding their progress on the Year 2000 issue. The Company's


                                       26
<PAGE>

efforts to determine the readiness of its key vendors and customers are expected
to be ongoing through year-end 1999. However, because so many entities are
exposed to the risk of failure not only of their own systems, but the systems of
other entities, the ultimate effect of the Year 2000 issue is subject to a high
degree of uncertainty.

      The Company believes that its preparations currently underway are adequate
to access and manage the risks presented by the year 2000 issue, and does not
have a formal contingency plan at this time.

      The statements in this section regarding the Year 2000 and the Company's
responses to it are forward-looking statements. They are based on assumptions
that the Company believes to be reasonable in light of its current knowledge and
experience. A number of events could cause actual results to differ materially
from those described in the forward-looking statements made on behalf of the
Company.

SFAS No. 133

      In June 1998, the Financial Accounting Standards Board issued Statement of
Financing Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company will adopt SFAS No. 133 by
January 1, 2000. The Company believes that adoption of this statement will not
have a material impact on the Company.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      Not applicable.

Item 8. Financial Statements

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

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

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

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

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

      In addition, in connection with the audit of the Company's Financial
Statements for its fiscal year ended December 31, 1996, there was an accounting
principle disagreement regarding the classification of a payment to a related


                                       27
<PAGE>

party prior to year end and the repayment of such amount after year end and an
audit scope disagreement regarding the need to confirm with the Company's lender
if the payment and repayment would result in a loan being classified as current.
Each of the foregoing disagreements were resolved to the Former Accountant's
satisfaction.

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

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


                                       28
<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 1999, the General Partner appointed William A. Wyman and Alan
B. Abramson, 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 and George R. Hornig, which reviews the external financial reporting of
the Company, recommends engagement of the Company's independent public
accountants and reviews the Company's procedures for internal auditing and the
adequacy of the Company's internal accounting controls. The Board of Directors
also has a compensation committee (the "Compensation Committee"), consisting of
five directors, including the two independent directors, which determines the
compensation of the officers of the General Partner and administers its employee
benefit plans. In addition, the Board of Directors has a Long-Term Incentive
Plan Committee (the "LTIP Committee"), which consists of four directors,
including the two independent directors, which acts with respect to the
Company's Long-Term Incentive Plan.


                                       29
<PAGE>

Directors, Executive Officers and Key Employees of the General Partner

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

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

John M. Rudey           55       Chairman, Chief Executive Office, President and
                                 Director(1)

Aubrey L. Cole          75       Director(2)

George R. Hornig        44       Director(3)

William A. Wyman        60       Director(4)

Alan B. Abramson        53       Director(5)

Robert F. Wright        73       Director(6)

Glenn A. Zane           59       Acting Senior Vice President and Director of
                                 Operations

Greg G. Byrne           38       Vice President and Chief Financial Officer

Martin Lugus            58       Vice President, Timberland Operations

Jeffrey B. Groom        30       Corporate Controller, Western Operations

Walter L. Barnes        56       Assistant Vice President, Harvesting

Robert A. Broadhead     47       Assistant Vice President, Marketing

Kurt A. Muller          40       Assistant Vice President, Planning

Christopher J. Sokol    49       Assistant Vice President, Forestry

----------

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

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

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

      George R. Hornig serves as a Director of the General Partner. Since 1993,
Mr. Hornig has been an Executive Vice President of Deutsche Bank Americas
Holdings, Inc. (the United States arm of Deutsche Bank, a German banking
concern) and affiliated predecessor entities. From 1991 to 1993, Mr. Hornig was
the President and Chief Operating Officer of Dubin & Swieca Holdings, Inc., an
investment management business. From 1988 to 1991, Mr. Hornig was a co-founder,
Managing Director and Chief Operating Officer of Wasserstein Perella & Co., Inc.
(a


                                       30
<PAGE>

mergers and acquisitions investment bank). From 1983 to 1988, Mr. Hornig was an
investment banker in the Mergers and Acquisitions Group of The First Boston
Corporation. Prior to 1983, Mr. Hornig was an attorney with Skadden, Arps,
Slate, Meagher & Flom. Mr. Hornig is also a director of SL Industries, Inc. and
Forrester Research, Inc.

      William A. Wyman serves as a Director of the General Partner, having been
elected to the Board in January, 1999. Mr. Wyman is a former President of the
Management Consulting Group of Booz, Allen & Hamilton. Mr. Wyman joined Booz
Allen in 1965, where, until 1984, he counseled a variety of service, natural
resources and management manufacturing companies on projects concerning
strategic profit improvement and management organization. Mr. Wyman has served
as a director of Donaldson, Lufkin & Jenrette, Belvedere Reinsurance, and SS&C
Technologies.

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

      Robert F. Wright serves as a Director of the General Partner. Since 1988,
Mr. Wright has served as President and Chief Executive Officer of Robert F.
Wright Associates, Inc., a firm making strategic investments and providing
business consulting services. Previously, Mr. Wright spent 40 years, 28 years as
a partner, at Arthur Andersen & Co. Mr. Wright 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), Rose Technology Group
Limited (a Canadian professional engineering company), Deotexas Inc. (a
development stage company), Universal American Financial Corp. (an insurance
company), Quadlogic Controls Corp. (a meter manufacturer) and G.V.A. Williams
Real Estate Co., Inc. (a real estate company).

      Glenn A. Zane became Acting Senior Vice President and Director of
Operations in January 1999. Since 1975, Mr. Zane has been a principal of Mason,
Bruce & Girard, a forestry consulting firm.

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

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

      Jeffrey B. Groom was appointed Corporate Controller-Western Operations in
January 1999. Prior to joining the Company in 1997, Mr. Groom was a financial
analyst with Fort James Corporation from 1996 until 1997. From 1994 until 1996
he was controller of Ochoco Lumber Company; and from 1991 until 1994 was an
accountant with Arthur Andersen, LLP.

Key Employees

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


                                       31
<PAGE>

      Robert A. Broadhead serves as Assistant Vice President - Marketing of the
General Partner, responsible for all log and stumpage sales transactions. Mr.
Broadhead was employed by Weyerhaeuser for 20 years and gained additional
experience in investing and planning while serving as Planning Manager from 1981
to 1994.

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

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

Compliance with Section 16(a) of the Exchange Act

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

      Based on its review of the copies of such forms received by it, or written
representations regarding ownership of the Company's securities, the Company
believes that during the fiscal year 1998, all filings required were properly
made.


                                       32
<PAGE>

Item 11. Executive Compensation

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

      The following table sets forth annual salary, bonus and all other
compensation awards and payouts earned by the General Partner's Chief Executive
Officer and those executive officers who earned in excess of $100,000 (the
"Named Executive Officers") for services rendered during the fiscal year ended
December 31, 1998:

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                           Long Term
                                      Annual Compensation                 Compensation
                                      -------------------                    Awards
                                                                             ------
                                                                           Securities
                                Fiscal                                     Underlying       All Other
Name and Principal Position      Year    Salary($)   Bonus($)   Other    Options/SARs(#)   Compensation
---------------------------      ----    ---------   --------   ------   ---------------   ------------
<S>                              <C>       <C>        <C>       <C>         <C>            <C>         
John M. Rudey(1)                 1998      300,000    150,000       --      107,218(7)               --
 Chairman and                                                                                     
 Chief Executive Officer                                                                          
                                                                                                  
Allen E. Symington(2)(5)(6)      1998      249,167    130,000       --      107,218(8)               --
  President and                                                                                   
  Chief Financial Officer                                                                         

Robert E.L. Michie(3)(5)(6)      1998      163,782     87,000   10,500       64,332(8)               --
  Vice President - Operations                                                                     
                                                                                                  
John C. McDowell(4)(5)(6)        1998      138,958     72,500    9,328       34,310(8)               --
  Vice President - Finance                                                                        
and Controller                                                                                    

Martin Lugus                     1998      101,521     24,625    3,767       64,331(7)               --
 Vice President - Timberland                                                                      
Operations                      
</TABLE>

----------

      (1)   Mr. Rudey served as Chairman of the Board of Directors during 1998.
            Effective January 1, 1999, Mr. Rudey assumed the additional title of
            President.
      (2)   Mr. Symington's employment was terminated effective January 1, 1999.
      (3)   Mr. Michie's employment was terminated effective January 1, 1999.
      (4)   Mr. McDowell's employment was terminated effective January 1, 1999.
      (5)   Pursuant to their respective employment agreements, Messrs.
            Symington, Michie and McDowell each received one year's salary as
            severance upon their termination.
      (6)   Excludes severance payments made in January 1999. See, "Repurchase
            of Certain Members' Interest; Severance Payments."
      (7)   Options granted in 1997 were repriced on December 14, 1998.


                                       33
<PAGE>

      (8)   Options were granted on January 5 or 12, 1998, repriced on December
            14, 1998 and expired on January 1, 1999 as a result of his
            termination as an officer of the Company.

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 to the Company's Form S-1
Registration Statement. The Long-Term Incentive Plan consists of two components,
a unit option plan (the "Unit Option Plan") and a restricted unit plan (the
"Restricted Unit Plan"). The Long-Term Incentive Plan currently permits the
grant of Unit Options and Restricted Units covering an aggregate of 857,748
Common Units.

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

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

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

      The following table sets forth certain information with respect to Unit
Options granted to the named executive officers during the fiscal year 1998:

              Long-Term Incentive Plans--Awards in Last Fiscal Year

                                                           Performance or Other
                                                         Period Until Maturation
                  Name          Number of Unit Options        or Payout (3)

John M. Rudey ...............         107,218(1)                2 years

Allen E. Symington ..........         107,218(2)                2 years

Robert E. L. Michie .........          64,332(2)                2 years

John C. McDowell ............          34,310(2)                2 years

Martin Lugus.................          64,331(1)                2 years

----------

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


                                       34
<PAGE>

      (2)   These Unit Options granted to Messrs. Symington, Michie and McDowell
            in January 1998 were repriced on December 14, 1998 and expired
            unexercised on January 1, 1999 as a result of their 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.

      The following table sets forth certain information with respect to option
grants to the named executive officers during fiscal 1998:

                     Options/SAR Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                                                                                     Potential Realizable Value
                       Number of        % of Total                                     at Assumed Annual Rates
                      Securities       Options/SARs                                     of Stock Appreciation
                      Underlying          Granted        Exercise or                     for Option Term(4)
                     Options/SARs      to Employees      Base Price    Expiration        ---------------
Name                    Granted     during Fiscal Year   ($/Sh)(3)        Date           5%               10%
----                    -------     ------------------   ------           ----           --               ---
<S>                   <C>                       <C>         <C>         <C>     >       <C>           <C>      
John M. Rudey         107,218(1)                14.2%       14.750      11/19/07        994,983       2,520,695

Allen E. Symington    107,218(2)                14.2%       14.750      1/5/08(2)       994,983       2,520,695

Robert E.L. Michie     64,332(2)                 8.5%       14.750      1/12/08(2)      597,001       1,512,445

John C. McDowell       34,310(2)                 4.5%       14.750      1/5/08(2)       318,397         806,628

Martin Lugus           64,331(1)                 8.5%       14.750      11/19/07        596,992       1,512,422
</TABLE>

----------

      (1)   Options granted in 1997 were repriced on December 14, 1998.
      (2)   The Unit Options granted to Messrs. Symington, Michie and McDowell
            expired unexercised as a result of their 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 1998:

             Aggregated Option/SAR Exercises in Last Fiscal Year and
                       Fiscal Year Ended Option/SAR Values

<TABLE>
<CAPTION>
                                                          Number of Securities
                                                         Underlying/Unexercised          Value of Unexercised
                                                             Option/SARs at          In-the-Money Options/SARs at
                                                           December 31, 1998              December 31, 1998
                                                           -----------------              -----------------
                     Shares Acquired
                       on Exercise     Value Realized   Exercisable  Unexercisable   Exercisable    Unexercisable
                       -----------     --------------   -----------  -------------   -----------    -------------
<S>                    <C>              <C>             <C>             <C>          <C>               <C>
John M. Rudey                --         $     --            --          107,218      $      --          N/A(2)

Allen E. Symington           --         $     --            --          107,218(1)   $      --          N/A(2)

Robert E.L. Michie           --         $     --            --           64,332(1)   $      --          N/A(2)

John C. McDowell             --         $     --            --           34,310(1)   $      --          N/A(2)

Martin Lugus                 --         $     --            --           64,331      $      --          N/A(2)
</TABLE>

----------


                                       35
<PAGE>

      (1)   The Unit Options granted to Messrs. Symington, Michie and McDowell
            expired unexercised as a result of their termination.
      (2)   At the close of trading on December 31, 1998, the market value of
            the Common Units was $13.375 per common unit. Since the Units
            Options, once exercisable, would be exercisable at $14.750 per unit,
            the in-the-money computation is inapplicable.

      Restricted Unit Plan. A Restricted Unit is a "phantom" unit that entitles
the grantee to receive a Common Unit upon the vesting of the phantom unit. No
grants have been made under the Restricted Unit Plan. The LTIP Committee may, in
the future, determine to make grants under such plan to key employees and
directors containing such terms as the Committee shall determine. Restricted
Units granted during the Subordination Period will vest automatically upon, and
in the same proportions as, the conversion of the Subordinated Units to Common
Units. Common Units to be delivered upon the "vesting" of rights may be Common
Units acquired by the General Partner in the open market, Common Units already
owned by the General Partner, Common Units acquired by the General Partner
directly from the Company or any other person, or any combination of the
foregoing. The General Partner will be entitled to reimbursement by the Company
for the cost incurred in acquiring such Common Units. If the Company issues new
Common Units, the total number of Units outstanding will increase and the
Company will receive no remuneration.

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

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

Compensation of Directors

      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 an employment agreement with Mr.
Rudey (the "Executive"). The agreement has a term expiring on December 31, 2002,
and includes confidentiality and noncompete provisions.


                                       36
<PAGE>

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

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

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

      The Company had similar agreements with Messrs. Symington, Michie and
McDowell, each of whose employment was terminated effective January 1, 1999.

Committee Interlocks and Insider Participation in Compensation Decisions

      The Compensation Committee of the General Partner is composed of Messrs.
Rudey, Abramson, Wyman, Hornig and Cole. Mr. Rudey also serves as Chairman of
the General Partner.


                                       37
<PAGE>

Performance Table

      The table below compares the total return of the Common Units of the
Company (TIMBZ) from November 1997 through February 1999 with the Wilshire 5000
Index (WFKX) and a portfolio (TIMBER) consisting of Boise Cascade Corporation,
Plum Creek Timber Co., LP and Crown Pacific Partners, LP.

                                 TIMBZ       WFKX      TIMBER

                       Feb-99    71.7288   123.4470    93.9306
                       Jan-99    76.5107   128.2460    94.4472
                       Dec-98    70.5745   123.7920    93.3271
                       Nov-98    78.4894   116.4920    96.2398
                       Oct-98    93.6596   109.7320    95.9207
                       Sep-98    89.8106   102.2350    91.1188
                       Aug-98    78.2635    96.0982    83.0294
                       Jul-98    93.6597   113.9770    93.3651
                       Jun-98    94.5963   116.6390   102.2340
                       May-98    99.9036   112.8170   103.2819
                       Apr-98   102.4100   116.0480   110.3357
                       Mar-98   102.4100   114.7910   106.6437
                       Feb-98   101.5060   109.4510   105.7293
                       Jan-98   102.1080   102.1700   103.0213
                       Dec-97   101.0090   101.7040    94.7896
                       Nov-97   100.0000   100.0000   100.0000


                                       38
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management

      The following table sets forth the beneficial ownership of Units held by
beneficial owners of five percent or more of the Units, by directors and
executive officers of the General Partner and by all directors and executive
officers of the General Partner as a group as of February 28, 1999.

<TABLE>
<CAPTION>
                                                                                   Percentage of
                                                    Percentage of   Subordinated    Subordinated   Percentage of
                                     Common Units   Common Units       Units           Units        Total Units
                                     Beneficially   Beneficially    Beneficially    Beneficially   Beneficially
    Name of Beneficial Owners           Owned           Owned          Owned           Owned           Owned
    -------------------------           -----           -----          -----           -----           -----
<S>                                    <C>              <C>          <C>               <C>             <C>  
Rudey Timber Company, LLC(1)           306,550          3.6%         2,894,157         67.6%           24.9%

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

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

John M. Rudey(4)                       409,750          4.8%         4,138,722         96.7            35.4%

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

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

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

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

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

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

All Directors and Executive Officer                                                                  
 as a Group(7 Persons)                 409,750          4.8%         4,186,882         97.8            35.8%
</TABLE>

----------

* 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. Includes
            an aggregate of 390,850 Common Units owned by Rudey Timber Company,
            John Rudey's minor children, Garrin Properties Group and U.S.
            Timberlands Service Company, LLC, respectively. In addition Mr.
            Rudey owns a 78.75% interest in U.S. Timberlands Service Company,
            LLC, the Partnership's General Partner.
      (5)   Current address is 625 Madison Avenue, Suite 10-B, New York, New
            York 10022.
      (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 501 Fifth Avenue, New York, NY.
      (10)  Current address is 4 North Balch Street, Hanover, NH 03755.
      (11)  None of the Units owned by U.S. Timberlands Services, LLC, in which
            Messrs. Hornig, Wright and Cole owned 16.25%, 2.5% and 2.5%,
            respectively, are reported as beneficially owned by such person.


                                       39
<PAGE>

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

Item 13. Certain Relationships and Related Transactions

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

Consulting Agreements

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

Related Party Transactions

      During January 1999, Glenn A. Zane was appointed Acting Senior Vice
President and Director of Operations for the Company. Throughout 1998, the
Company paid approximately $183,000 to Mason, Bruce & Girard, of which Mr. Zane
is a partner, for consulting services.

      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
$1,000,000 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.

Repurchase of Certain Member Interests; Severance Payments

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

      During January 1999, the Company paid $260,000, $175,000 and $145,000 to
Messrs. Symington, Michie and McDowell, respectively, as severance under their
employment agreements with the Company.


                                       40
<PAGE>

                                     PART IV

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

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

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

(a)(3) Exhibits

            +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

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

             23.1    Consent of Richard A. Eisner & Company, LLP dated April 14,
                     1999.

             23.2    Consent of Arthur Andersen LLP dated April 14, 1999.

            *21.1 -- List of Subsidiaries

             27.1 -- Financial Data Schedule

----------

*     Incorporated by reference to the same numbered Exhibit to the Registrant's
      Registration Statement on Form S-1 filed November 13, 1997.
+     Incorporated by reference to the same numbered Exhibit to the Registrant's
      Current Report on Form 8-K filed January 15, 1998.
**    Incorporated by reference to the same numbered Exhibit to the Registrant's
      Annual Report on Form 10-K filed March 31, 1998.


                                       41
<PAGE>

*** Incorporated by reference to Exhibit 1 to the Registrant's Form 8-K filed on
    December 8, 1998.

(b) Reports on Form 8-K

      On December 8, 1998, the Company filed a Form 8-K reporting the
resignation, on December 1, 1998 of its former accountant.


                                       42
<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 15 day of
April, 1999.

                                   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, Chief Executive 
                                         Officer and President

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

/s/ John M. Rudey           Chairman, Chief Executive Officer,   April 15, 1999
-------------------------   President and Director (Principal
       John M. Rudey        Executive Officer)
                            
/s/ Greg G. Byrne           Chief Financial Officer              April 15, 1999
-------------------------   
       Greg G. Byrne

/s/ Jeffrey B. Groom        Corporate Controller -               April 15, 1999
-------------------------   Western Operations
     Jeffrey B. Groom       (Principal Accounting Officer)

/s/ Aubrey L. Cole          Director                             April 15, 1999
-------------------------
      Aubrey L. Cole

/s/ George R. Hornig        Director                             April 15, 1999
-------------------------
     George R. Hornig

/s/ Alan B. Abramson        Director                             April 15, 1999
-------------------------
     Alan B. Abramson

/s/ William A. Wyman        Director                             April 15, 1999
-------------------------
       William Wyman

/s/ Robert F. Wright        Director                             April 15, 1999
-------------------------
     Robert F. Wright       


                                       43
<PAGE>


                 U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Contents

                                                                            Page
                                                                            ----

Consolidated Financial Statements

      Independent auditors' report                                           F-2

      Balance sheets as of December 31, 1998 and 1997                        F-3

      Statements of operations for the years ended December 31, 1998
           and 1997, for the period from August 30, 1996 through
           December 31, 1996 (Company) and for the period from January
           1, 1996 through August 29, 1996 (Predecessor)                     F-4

      Statements of changes in partners' capital and members' deficit
           and Weyerhaeuser investment and advances for the years
           ended December 31, 1998 and 1997, for the period from
           August 30, 1996 through December 31, 1996 (Company) and for
           the period from January 1, 1996 through August 29, 1996
           (Predecessor)                                                     F-5

      Statements of cash flows for the years ended December 31, 1998
           and 1997, for the period from August 30, 1996 through
           December 31, 1996 (Company) and for the period from January
           1, 1996 through August 29, 1996 (Predecessor)                     F-6

      Notes to financial statements                                          F-7


                                                                             F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheet of U.S.
Timberlands Company, L.P. and subsidiaries as of December 31, 1998,
and the related consolidated statements of operations, changes in
partners' capital and cash flows for the year then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

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

RICHARD A. EISNER & COMPANY, LLP.

New York, New York 
January 27, 1999, except as to the 
third and fourth paragraphs of Note E[2], the dates
of which are February 16, 1999 and April 12, 1999, respectively


                                                                             F-2
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

      We have audited the accompanying consolidated balance sheet of U.S.
Timberlands, as described in Note 1, as of December 31, 1997, 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 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 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 period from January 1, 1996 through August 29, 1996 in
conformity with generally accepted accounting principles.

                                            ARTHUR ANDERSEN LLP

Portland, Oregon,
  January 23, 1998


                                      F-2a
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Consolidated Balance Sheets
(in thousands, except unit information)

                                                              December 31,
                                                         ----------------------
                                                            1998         1997
                                                         ---------    ---------
ASSETS
Current assets:
  Cash and cash equivalents                              $   4,824    $  10,625 
  Accounts receivable, net of allowance for              
     doubtful accounts of $200 and $100,                 
     respectively                                            1,527        2,526
  Other receivables                                          1,113          174
  Notes receivable                                           1,179        1,073
  Prepaid expenses                                             426          534
                                                         ---------    ---------
                                                         
      Total current assets                                   9,069       14,932
                                                         ---------    ---------
                                                         
Timber, timberlands and logging roads, net                 332,593      359,349
                                                         ---------    ---------
                                                         
Seed orchard and nursery stock                               1,883        1,828
                                                         ---------    ---------
                                                         
Property, plant and equipment, at cost:                  
  Equipment                                                    637          605
  Buildings and land improvements                              843          843
  Less accumulated depreciation                               (326)        (187)
                                                         ---------    ---------
                                                         
      Property, plant and equipment, net                     1,154        1,261
                                                         ---------    ---------
                                                         
Long-term notes receivable                                      --        1,171
                                                         ---------    ---------
                                                         
Deferred financing fees, less accumulated                
     amortization of $752 $77, respectively                  5,998        6,673
                                                         ---------    ---------
                                                         
      Total assets                                       $ 350,697    $ 385,214
                                                         =========    =========
                                                         
LIABILITIES AND PARTNERS' CAPITAL                        
Current liabilities:                                     
  Accounts payable                                       $     733    $   1,404
  Accrued liabilities                                        4,405        4,697
  Deferred revenue                                           1,614        5,744
  Payable to affiliate                                          --        1,000
  Payable to general partner                                   914          252
                                                         ---------    ---------
                                                         
      Total current liabilities                              7,666       13,097
                                                         ---------    ---------
                                                         
Long-term debt                                             225,000      225,000
                                                         ---------    ---------
                                                         
Minority interest                                            1,180        1,471
                                                         ---------    ---------
                                                         
Partners' capital:                                       
  General partner interest                                   1,180        1,471
  Limited partner interest (12,859,607 units             
     issued and outstanding as of December 31,           
     1998 and 1997)                                        115,671      144,175
                                                         ---------    ---------
                                                         
                                                           116,851      145,646
                                                         ---------    ---------

      Total liabilities and partners' capital            $ 350,697    $ 385,214
                                                         =========    =========

See notes to financial statements


                                                                             F-3
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                           U.S. Timberlands Company, L.P. and 
                                                      Subsidiaries              Predecessor(a)
                                           ----------------------------------   -------------
                                                                  August 30,      January 1,
                                               Year Ended            1996           1996
                                               December 31,        Through         Through
                                           --------------------  December 31,     August 29,
                                             1998        1997        1996           1996
                                           --------    --------  ------------   -------------
<S>                                        <C>         <C>         <C>            <C>     
Revenues:
  Log and stumpage sales                   $ 63,636    $ 60,445    $ 13,590       $ 14,077
  Timber and property sales                   6,275      15,244          --             --
  By-products and other                       1,413       1,656         429          1,501
                                           --------    --------    --------       --------
                                                                                  
                                             71,324      77,345      14,019         15,578
                                           --------    --------    --------       --------
Operating costs:                                                                  
  Costs of products sold                     16,683      17,778       6,179          9,225
  Cost of timber and property sales           5,917       8,746          --             --
  Depreciation, depletion and road                                                
    amortization                             21,938      17,303       3,323            927
  Selling, general and administrative                                             
    expenses                                 10,462       6,250       9,284          2,730
                                           --------    --------    --------       --------
                                                                                  
                                             55,000      50,077      18,786         12,882
                                           --------    --------    --------       --------
                                                                                  
Operating income (loss)                      16,324      27,268      (4,767)         2,696
                                                                                  
Interest expense                             22,183      25,321       7,316             --
Amortization of deferred financing fees                                           
  and debt guarantee fees                       675       4,193       1,326             --
Interest income                                (460)     (1,452)       (409)            --
Other expense, net                              309         574          36              1
                                           --------    --------    --------       --------
                                                                                  
Income (loss) before extraordinary items     (6,383)     (1,368)    (13,036)         2,695
Extraordinary items, losses on                                                    
  extinguishment of debt                         --      (9,337)         --             --
                                           --------    --------    --------       --------
                                                                                  
Income (loss) before general partner and                                          
  minority interest                          (6,383)    (10,705)    (13,036)      $  2,695
Minority interest                                64          --          --       ========
                                           --------    --------    --------    

Net loss                                     (6,319)    (10,705)    (13,036)
General partner interest                         64         107         130
                                           --------    --------    --------

Net loss applicable to common and
  subordinated units                       $(6,255)    $(0,598)    $ (12,906)
                                           ========    ========    ========

Basic earnings (loss) per unit:
  Income (loss) before extraordinary
    items:
      Common                               $   (.49)   $   3.05    $     --
                                           ========    ========    ========
      Subordinated                         $   (.49)   $  (1.01)   $  (3.04)
                                           ========    ========    ========

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

  Net loss:
      Common                               $   (.49)   $   (.86)   $     --
                                           ========    ========    ========
      Subordinated                         $   (.49)   $  (2.30)   $  (3.04)
                                           ========    ========    ========

Diluted loss per unit:
  Loss before extraordinary items          $   (.49)   $   (.28)   $  (3.04)
  Extraordinary items                            --       (1.76)         --
                                           --------    --------    --------

  Net loss                                 $   (.49)   $  (2.04)   $  (3.04)
                                           ========    ========    ========
</TABLE>

(a) Due to the Weyerhauser Acquisition on August 30, 1996, the consolidated
    results of operations subsequent to that date are not comparable with the
    results of operations of the Predecessor.

See notes to financial statements


                                                                             F-4
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

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
                                Predecessor         L.L.C.        Falls, L.L.C          Company, L.P.
                                -----------         ------        ------------          -------------
                                                                                  Partners        Partners'
                                Weyerhaeuser                                     Capital  -      Capital -         Members'
                                 Investment                                        General         Limited       Deficit and
                                    and            Members'        Member's        Partner         Partner         Partners'
                                  Advances         Deficit         Deficit         Interest        Interest        Capital
                                ------------     -----------      ------------   ----------      ----------      -----------
<S>                               <C>             <C>             <C>             <C>             <C>               <C>    
Balance, January 1, 1996          $  29,155
Net income for the period             2,695
Net distributions to
  Weyerhaeuser Company               (5,054)
Net asset transfer 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
  interest                                           (1,000)             --                              --          (1,000)
Assumption of Old Services
  and USTK's net
  liabilities by the MLP                              5,327           9,233       $    (148)        (14,521)           (109)
Issuance of partner
  interests                                              --              --           1,801         176,525         178,326
Equity issuance costs                                    --              --            (169)        (16,584)        (16,753)
Net loss November 19, 1997
  through December 31, 1997                              --              --             (13)         (1,246)         (1,259)
                                                  ---------       ---------       ---------       ---------       ---------

Balance, December 31, 1997                        $       0       $       0           1,471         144,175         145,646
                                                  =========       =========
Distributions to unitholders                                                           (227)        (22,249)        (22,476)
Net loss                                                                                (64)         (6,255)         (6,319)
                                                                                  ---------       ---------       ---------

Balance, December 31, 1998                                                        $   1,180       $ 115,671         116,851
                                                                                  =========       =========       =========
</TABLE>

----------

Due to the Weyerhaeuser Acquisition on August 30, 1996, the consolidated
statements of changes in partners' capital for the years ended December 31, 1998
and 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.

See notes to financial statements


                                                                             F-5
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(in thousands)

<TABLE>
<CAPTION>
                                                  U.S. Timberlands Company, L.P. and
                                                             Subsidiaries                Predecessor
                                                 --------------------------------------  -----------
                                                                           August 30,    January 1,
                                                       Year Ended             1996         1996
                                                      December 31,          Through       Through
                                                 -----------------------   December 31,  August 29,
                                                     1998         1997        1996          1996
                                                 ----------    ---------   ------------  ----------
<S>                                               <C>          <C>          <C>          <C>      
Cash flows from operating activities:
  Net income (loss)                               $  (6,319)   $ (10,705)   $ (13,036)   $   2,695
  Adjustments to reconcile net income (loss) to
    net cash provided by (used in) operating
    activities:
      Depreciation, depletion, amortization and
        cost of timber and property sold             27,855       26,775        3,549          927
      Write-off and amortization of deferred
        financing fees                                  675        9,148           --           --
      Other noncash items                               361          630           51            6
      Minority interest                                 (64)          --           --           --
      Changes in assets and liabilities:
        Receivables                                     999       (1,006)      (1,694)         699
        Interest receivable from affiliate               --          121         (121)          --
        Inventories                                      --           78          921        1,348
        Other receivables                              (939)          --           --           --
        Prepaid expenses                                108          146         (680)         371
        Accounts payable                               (671)         515          889         (292)
        Accrued liabilities                            (653)      (3,171)       7,137         (242)
        Deferred revenue                             (4,130)       5,744           --           --
        Payable to general partner                      257          252           --           --
                                                  ---------    ---------    ---------    ---------

          Net cash provided by (used in)
            operating activities                     17,479       28,527       (2,984)       5,512
                                                  ---------    ---------    ---------    ---------

Cash flows from investing activities:
  Acquisition of Weyerhaeuser timberlands                --           --     (283,464)          --
  Receivable from affiliate                              --       10,000      (10,000)          --
  Purchase of property, plant and equipment             (32)        (319)        (212)          (6)
  Decrease (increase) in note receivable              1,065       (2,244)          --           --
  Proceeds from sales of property, plant and
    equipment                                            --          400        2,374           --
  Acquisition of Ochoco Timberlands                      --     (110,873)          --           --
  Timber and road additions                            (347)        (534)         (12)         (26)
  Capitalized seed orchard and nursery costs           (263)        (240)        (136)        (427)
                                                  ---------    ---------    ---------    ---------

          Net cash provided by (used in)
            investing activities                        423     (103,810)    (291,450)        (459)
                                                  ---------    ---------    ---------    ---------

Cash flows from financing activities:
  Weyerhaeuser investment and advances, net              --           --           --       (5,054)
  Members' contributions                                 --           --       10,100           --
  Partner contributions                                  --            1           --           --
  Member's distribution                                  --       (1,191)          --           --
  Distributions to unitholders                      (22,476)          --           --           --
  Distributions to minority interest                   (227)          --           --           --
  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           --           --
  Payment to affiliate                               (1,000)          --           --           --
                                                  ---------    ---------    ---------    ---------

         Net cash provided by (used in)
           financing activities                     (23,703)      69,295      311,047       (5,054)
                                                  ---------    ---------    ---------    ---------

Net (decrease) increase in cash and cash
  equivalents                                        (5,801)      (5,988)      16,613           (1)
Cash and cash equivalents, beginning of period       10,625       16,613           --            1
                                                  ---------    ---------    ---------    ---------

Cash and cash equivalents, end of period          $   4,824    $  10,625    $  16,613    $      --
                                                  =========    =========    =========    =========

Supplemental cash flow information:
  Cash paid for interest                          $  21,418    $  28,083    $   2,062    $      --

Noncash activities:
  Net asset transfers from Weyerhaeuser
    Company, principally property, plant
    and equipment                                 $      --    $      --    $      --    $   1,043
  Redemption of member's interest in old
    services                                      $      --    $   1,000    $      --    $      --
</TABLE>

----------

Due to the Weyerhaeuser Acquisition on August 30, 1996, the consolidated
statements of cash flows for 1998 and 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.

See notes to financial statements


                                                                             F-6
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE A - ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION

[1]   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 Service 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.

[2]   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.

[3]   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 costs.

[4]   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 604,000 acres of timber and timberlands and certain other
      assets (the "Weyerhaeuser Acquisition") as discussed further in Note C. 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.


                                                                             F-7
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE A - ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION
(CONTINUED)

[5]   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 as owned by
      Weyerhaeuser 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 from Weyerhaeuser wood conversion facilities and
      unaffiliated wood processors are summarized as follows:

                                                  For the
                                                  Period
                                              January 1, 1996
                                                  Through
                     Source of Revenues       August 29, 1996
               ----------------------------   ---------------

               Weyerhaeuser Company              $10,157
               Unaffiliated wood processors        5,421
                                                 -------

                                                 $15,578
                                                 =======

      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 I.

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


                                                                             F-8
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

[1]   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.

[2]   Revenue recognition:

      Revenue on delivered log sales are recognized upon delivery to the
      customer. Revenue on timber deeds and timber and property sales are
      generally recognized upon closing. Revenue from timber sold under stumpage
      contracts (i.e., the customer arranges to harvest and deliver the logs) is
      recognized when the timber is harvested. Deferred revenue as of December
      31, 1998 and 1997, represents cash received in advance of logs harvested
      under stumpage contracts.

[3]   Concentration of credit risk:

      As of December 31, 1998, the Company had accounts receivable from three
      individual customers that represent 53%, 24% and 13% of total accounts
      receivable, respectively. 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:

                                              The Company           Predecessor
                                      ---------------------------   -----------
                                                       For the        For the
                                                        Period        Period
                                                      August 30,    January 1,
                                       Year Ended        1996          1996
                                      December 31,     Through        Through
                                      ------------   December 31,   August 29,
                                      1998   1997        1996          1996
                                      ----   -----   ------------   -----------
          Unaffiliated customer         27%   23%         54%            14%
          Unaffiliated customer         18%   21%         14%            10%
          Unaffiliated customer         17%   15%         11%            --
          Unaffiliated customer         16%   11%         --             --
          Weyerhaeuser Company          --    --          --             65%

[4]   Cash and cash equivalents:

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


                                                                             F-9
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[5]   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 the related 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.

      The components of timber, timberlands, logging roads and related
      accumulated depletion and amortization is as follows:

                                          December 31,
                                      -------------------
                                        1998       1997
                                      --------   --------

         Timber                       $329,520   $333,721
         Timberlands                    43,118     44,189
         Logging roads                   1,803      1,847
         Accumulated depletion         (41,552)   (20,243)
         Accumulated road
         amortization                     (296)      (165)
                                      --------   --------

                                      $332,593   $359,349
                                      ========   ========

[6]   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.

[7]   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. The estimated useful life
      of buildings and land improvements is 40 years and equipment ranges from
      three to five years.

[8]   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.

[9]   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.


                                                                            F-10
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[10]  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.

[11]  Per unit information:

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

                                                   Basic(a)
                                            ----------------------
                                             Common    Subordinated  Diluted(b)
                                            ---------  -----------   ----------

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

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

      1996(c)
      Weighted average units outstanding          -     4,282,120    4,282,120

      (a)   Basic loss per Common and Subordinated Unit is calculated by
            dividing the loss allocable to Common and Subordinated Units by the
            weighted average number of Common and Subordinated Units
            outstanding. Loss for the year ended December 31, 1998 and 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
            year ended December 31, 1998 and for the period from November 19,
            1997 through December 31, 1997, by the weighted average number of
            Common and Subordinated Units outstanding. Unit options have not
            been included in the calculation. Unit options will be included in
            calculating diluted earnings per unit, assuming the result would be
            dilutive, upon achievement of performance criteria which, if
            maintained for the required periods, will result in the options
            becoming exercisable (see Notes F[4] and H[1]).


                                                                            F-11
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[11]  Per unit information: (continued)

      (c)   The per unit information presented is for the period from August 30,
            1996 through December 31, 1996.

      No per unit information is presented for the period ended August 29, 1996
      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.

[12]  Financial instruments:

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

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

      (b)   Long-term debt - The estimated fair value of the Company's long-term
            debt, which was based upon the quoted market prices of the related
            senior notes at December 31, 1998, approximated its carrying amount
            of $225,000. The estimated fair value at December 31, 1997, based
            upon interest rates and maturity dates for similar obligations with
            like maturities, was $235,328.

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

[13]  Unit-based compensation plans:

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

NOTE C -  TIMBERLAND ACQUISITIONS

[1]   Weyerhaeuser Company:

      The total purchase price for the Weyerhaeuser Acquisition referred to in
      Note A 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.


                                                                            F-12
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE C - ACQUISITIONS (CONTINUED)

[1]   Weyerhaeuser Company: (continued)

      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)

[2]   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 periods prior
      to and including the acquisition has not been disclosed.

NOTE D - ACCRUED LIABILITIES

The Company's accrued liabilities consist of the following:

                                                   December 31,
                                                 ---------------
                                                  1998     1997
                                                 ------   ------

         Interest                                $2,729   $2,492
         Severance and harvest tax                  224      269
         Employee compensation                      300      450
         Equity issuance costs                        -      617
         Loss on interest rate collar               991      630
         Other                                      161      239
                                                 ------   ------
                                                          
                                                 $4,405   $4,697
                                                 ======   ======

NOTE E - DEBT

[1]   Senior notes:

      At December 31, 1998 and 1997, long-term debt consists of $225,000 of
      principal amount of 9-5/8% notes due in 2007.

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


                                                                            F-13
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE E - DEBT (CONTINUED)

[1]   Senior notes: (continued)

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

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

[2]   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 $259 and
      $14,512 in 1998 and 1997, respectively. As of December 31, 1998 and 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% (9.75% at December 31, 1998) or LIBOR plus a
      margin of 2.5% (7.6% at December 31, 1998). 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, 1998, the Operating Company was not
      in compliance with certain covenants of the Bank Credit Facility. On
      February 16, 1999, the required majority of the banks comprising the
      lending group waived such noncompliance. In exchange for the waiver, the
      Company agreed that future borrowings in excess of $2,000 will require the
      consent of a majority of the lending group members.

      On April 6, 1999, the Operating Company advised the Agent Bank that, as of
      March 31, 1999, it may be in violation of another covenant of the Bank
      Credit Facility. The banks have agreed to modify such covenant, effective
      March 31, 1999, and as modified, the Company is in compliance with such
      covenant. In connection with the modification, the Company agreed to
      terminate the Working Capital Facility as of June 30, 1999 and to
      terminate the Acquisition Facility effective April 6, 1999. As of March
      31, 1999, there was $1,300 outstanding under the working capital line.


                                                                            F-14
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE E - DEBT (CONTINUED)

[3]   USTK debt - prior to the Transactions:

      On July 14, 1997, USTK entered into a long-term financing arrangement with
      certain banks to finance the Ochoco Acquisition discussed in Note C and to
      refinance certain 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.

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

[4]   Holdings debt - prior to the Transactions:

      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.

NOTE F - PARTNERS' CAPITAL

[1]   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 Units. Proceeds from the exercise of the overallotment option were
      $21,940, net of $1,555 of underwriters' fees. As of December 31, 1998 and
      1997, the Company has 8,577,487 Common Units and 4,282,120 Subordinated
      Units outstanding.

[2]   Partnership income (loss):

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

[3]   Cash distributions:

      The Company is required to make quarterly cash distributions from
      Available Cash, as defined in the MLP Agreement. Generally, cash
      distributions are paid in order of preferences: first, the minimum
      quarterly distribution of $.50 per unit (the "MQD") to Common Unitholders
      and the General Partner, and second, to the extent cash remains available,
      to Subordinated Unitholders.


                                                                            F-15
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE F - PARTNERS' CAPITAL (CONTINUED)

[3]   Cash distributions: (continued)

      The MLP Agreement sets forth certain cash distribution target rates for
      the Company to meet in order for the General Partner's share of Available
      Cash to increase (such increases referred to as "Incentive
      Distributions"). To the extent that the quarterly distributions exceed
      $.550 per Common and Subordinated Unit, the General Partner receives 15%
      of the excess Available Cash rather than the base amount of 2%. To the
      extent that the quarterly distributions exceed $.633 per Common and
      Subordinated Unit, the General Partner receives 25% of the excess
      Available Cash and to the extent that the quarterly distributions exceed
      $.822 per Common and Subordinated Unit, the General Partner receives 50%
      of the excess Available Cash. Since the quarterly distributions did not
      exceed the minimum quarterly distributions for 1998, the General Partner
      did not receive any such Incentive Distributions for 1998.

[4]   Subordinated units:

      The Subordinated Units are subordinated in right of distributions to the
      right of Common Unitholders to receive the MQD. Provided that the MQD has
      been paid to Common and Subordinated Unitholders for three consecutive
      four-quarter periods and that such distributions are equal to or less than
      the Company's Adjusted Operating Surplus, as that term is defined in the
      MLP Agreement, for two consecutive four-quarter periods, 25% of the
      Subordinated Units will convert to Common Units as early as 2001, 25% as
      early as 2002 and the remaining 50% may convert to Common Units as early
      as 2003.

[5]   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.

NOTE G - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

[1]   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 Agreement, as amended ("MLP 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
      Agreement provides that the General Partner will determine the expenses
      that are allocable to the Company in any reasonable manner determined by
      the General Partner in its sole discretion. Related noninterest bearing
      receivables and payables between the General Partner and the Company are
      settled in the ordinary course of business. As of December 31, 1998 and
      1997, the Company had a payable to the General Partner of $914 and $252,
      respectively. During 1998 and 1997, expenses allocated to and reimbursed
      by the Company totaled $9,058 and $310, respectively.

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


                                                                            F-16
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE G - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS (CONTINUED)

[2]   Consulting agreements:

      As of December 31, 1998, the General Partner has consulting agreements
      with certain affiliated parties pursuant to which each such person or firm
      has provided and/or will provide consulting services to the General
      Partner. 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 1998
      and 1997 were not significant.

[3]   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 was paid 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.

[4]   Management and advisory fees:

      In connection with the Weyerhaeuser Acquisition, the Company paid a fee of
      $4,135 to Timberlands Management Group (the "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 statements of operations.

[5]   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.

NOTE H - MANAGEMENT INCENTIVE PLANS

[1]   Unit option plan:

      The Company has a Unit Option Plan which permits the grant of options (the
      "Unit Options") covering 857,749 Common Units. Unit Options granted under
      the Company's Unit Option Plan are determined by the Long-Term Incentive
      Plan Committee of the Board of Directors (the "LTIP Committee") and are
      granted at fair market value at the date of the grant. Concurrent with the
      consummation of the Transactions, 604,153 Unit Options were granted to key
      employees and directors of the General Partner. An additional 90,622 Unit
      Options were granted to key employees and directors on December 12, 1997,
      in connection with the closing of the sale of 1,118,803 Common Units
      pursuant to the exercise by the underwriters of their overallotment option
      and, in 1998, 100,000 Unit Options were granted to directors and 240,170
      options were granted to employees. The Unit Options granted expire ten
      years from the date of grant and become exercisable automatically upon and
      in the same proportion as the conversion of Subordinated Units to Common
      Units. See further explanation of subordinated units and related
      performance criteria at Note F[4]. Once the performance criteria are
      achieved, the Company will record compensation expense for the difference
      between the exercise price and fair value of the Common Units, with a
      corresponding increase to partnership capital. As of December 31, 1997,
      none of the performance criteria had been achieved. Although the
      performance criteria were met for the year ended December 31, 1998, no
      compensation expense was recorded during such year as the market price of
      the units was less than the exercise price during the year.


                                                                            F-17
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE H - MANAGEMENT INCENTIVE PLANS (CONTINUED)

[1]   Unit option plan: (continued)

<TABLE>
<CAPTION>
                                                    1998                   1997
                                            -------------------    --------------------
                                                       Weighted               Weighted
                                                        Average                Average
                                              Number   Exercise      Number   Exercise
                                            of Shares  Price(a)    of Shares  Price a)
                                            ---------  --------    ---------  ---------
<S>                                          <C>        <C>         <C>        <C>     
         Unit options outstanding at                               
         beginning of year                   694,775    $  14.75         --          --
         Unit options granted                340,170       14.75    694,775    $  14.75
         Unit options exercised                   --          --         --          --
         Unit options cancelled             (584,628)      14.75         --          --
                                            --------                -------
                                                                   
         Unit options outstanding at end                           
         of year                             450,317       14.75    694,775       14.75
                                            ========                =======
</TABLE>

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

      There were no unit options exercisable at either December 31, 1998 or
      1997.

      In January 1999, the Company granted 222,000 options to employees and
      directors with an exercise price of $13.38, the fair value of the
      Company's units on such date.

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

                                                  1998         1997
                                                -------      -------
         Risk-free interest rate                  5.50%        6.00%
         Expected dividend yield                  9.52%        9.52%
         Expected life of the Unit Options      5 years      5 years
         Expected volatility                     25.50%       20.32%

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

      If the Company had adopted the expensing provisions of SFAS 123, the
      impact on 1998 and 1997's net loss and net loss per unit would have been
      as follows:

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

         Net loss - as reported                  $(6,319)    $(10,705)
         Net loss - pro forma                     (6,565)     (10,732)
         Diluted loss per unit - as reported        (.49)       (2.04)
         Diluted loss per unit - pro forma          (.51)       (2.05)

      For purposes of the pro forma disclosures, the estimated fair value of the
      unit options is amortized to expense over their estimated exercise period,
      which corresponds to the assumed subordinated units conversion period (see
      Note F[4]).


                                                                            F-18
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE H - MANAGEMENT INCENTIVE PLANS (CONTINUED)

[2]   Restricted unit plan:

      Effective with the closing of the Transactions, the Company authorized the
      establishment of a restricted unit plan (the "Restricted Unit Plan") which
      allows the Company to grant units (the "Restricted Units") to employees at
      the discretion of the LTIP Committee. No consideration will be payable by
      the plan participants upon vesting and issuance of the Restricted Units.
      Restricted Units granted during the subordination period would vest
      automatically upon and in the same proportion as the conversion of
      Subordinated Units to Common Units. Restricted Units granted subsequent to
      the subordination period are the equivalent of Common Units. No Restricted
      Units have been granted as of December 31, 1998.

[3]   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. 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. During the year ended December 31, 1998, in
      connection with the termination of certain officers and directors, an
      accrual to repurchase income interests valued at $385,000 by independent
      appraisal was recorded by the Company and charged to compensation expense.

NOTE I - 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.

NOTE J - QUARTERLY RESULTS FOR 1998 (RESTATED) AND 1997 (UNAUDITED)

<TABLE>
<CAPTION>
                                                     Quarter Ended
                              ----------------------------------------------------------
                              December 31(a)  September 30    June 30(a)     March 31(a)     Total Year
                              --------------  ------------    ----------     -----------     ----------
<S>                             <C>             <C>            <C>            <C>            <C>       
1998 (Restated)
Revenues                        $   20,417      $ 24,528       $ 18,622       $  7,757       $   71,324
Gross profit(b)                      8,409        11,531          4,503          2,343           26,786
Net income (loss)                      642         2,545         (2,857)        (6,649)          (6,319)
Basic net income (loss)
  per unit(c):
    Common                             .05           .20           (.22)          (.51)            (.49)
    Subordinated                       .05           .20           (.22)          (.51)            (.49)
Diluted net income (loss)
  per unit(c)                          .05           .20           (.22)          (.51)            (.49)

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(c):
    Common                             .77            --             --             --             3.05
    Subordinated                       .58          (.25)          (.89)          (.45)           (1.01)
Diluted income (loss)
  before extraordinary
  item per unit(c)                     .67          (.25)          (.89)          (.45)            (.28)
</TABLE>


                                                                            F-19
<PAGE>

U.S. TIMBERLANDS COMPANY, L.P. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and 1997
(dollar amounts in thousands, except per unit amounts)

NOTE J - QUARTERLY RESULTS FOR 1998 (RESTATED) AND 1997 (UNAUDITED) (CONTINUED)

(a)   The quarter ended June 30, 1998 includes revenues of $6,275 and related
      costs of $5,917 from a property sale. 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)   See discussion of per unit information in Note B of the notes to financial
      statements.

Restatement of quarterly results for the three months ended September 30, 1998
and June 30, 1998

During 1999, the Company determined that certain revenues recorded during the
second and third quarters of 1998, respectively, should be deferred until
certain additional criteria are achieved. As a result, the Company has restated
its quarterly results of operations for the affected periods, as follows:

                                                               Quarter Ended
                                                         -----------------------
                                                         September 30,  June 30,
                                                             1998         1998
                                                         ---------      --------
                                                                        
            Net income (loss) - as reported                 $3,397      $  (910)
            Net income (loss) - restated                     2,545       (2,857)
                                                                        
            Diluted income (loss) per unit - as reported    $  .26      $  (.07)
            Diluted income (loss) per unit - restated          .20         (.22)

NOTE K - CONTINGENCIES

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


                                                                            F-20

<PAGE>

                                  EXHIBIT INDEX

                                                                        Page No.
                                                                        --------

23.1  Consent Letter from Richard A. Eisner & Company, LLP dated April
      14, 1999.                                                            45

23.2  Consent Letter from Arthur Andersen LLP dated April 14, 1999.        46

27.1  Financial Data Schedule                                              47


                                       44