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

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

For the fiscal year ended December 31, 1997    Commission file nos.:  1-13573-01
                                                                      1-13573

                     U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.
                         U.S. TIMBERLANDS FINANCE CORP.
         (Exact names of co-registrants as specified in their charters)


         DELAWARE                                                 93-1217136
         DELAWARE                                                 91-1851612
(State or other jurisdiction                                  (I.R.S. Employer
 of incorporation or organization)                          Identification Nos.)

1301 Fifth Avenue, Suite 3725, Seattle, Washington                 98101-2636
(Address of principal executive offices)                            (Zip code)

       Co-Registrants' telephone number, including area code: 206-652-5000
                               ------------------

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

 Title of Each Class:               Name of Each Exchange on Which Registered:
 9 5/8% Senior Notes                        New York Stock Exchange

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

         Indicate  by check  mark  whether  each  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   co-registrants   have  not  issued  any  common  equity  held  by
non-affiliates of the co-registrants.

         Documents incorporated by reference: None

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                        U.S. TIMBERLANDS COMPANY, L.P.

                               TABLE OF CONTENTS


<TABLE>
<S>      <C>                                                                                  <C>


                                                                                               Page
                                                                                                No.
                                                                                               ----
PART I
Item 1.   Business............................................................................   1
Item 2.   Properties..........................................................................  17
Item 3.   Legal Proceedings...................................................................  18
Item 4.   Submission of Matters to a Vote of Security Holders.................................  18

PART II
Item 5.   Market for Registrant's Common Equity  and Related Security Holder Matters..........  18
Item 6.   Selected Financial Data.............................................................  19
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of
          Operations..........................................................................  20
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......  28
Item 11.  Executive Compensation..............................................................  30
Item 12.  Security Ownership of Certain Beneficial Owners and Management......................  36
Item 13.  Certain Relationships and Related Transactions......................................  36

PART IV
Item 14.  Exhibits, Financial Statements, and Reports on Form 8-K.............................  37

</TABLE>

                                       i
<PAGE>

                                     PART I

Item 1.    Business

General

         The business of U.S.  Timberlands  Klamath  Falls,  L.L.C.,  a Delaware
limited  liability  company  formed in 1996  (the  "Company"),  consists  of the
growing of trees and the sale of logs and  standing  timber.  The  Company  owns
approximately   633,000  fee  acres  of   timberland   and  cutting   rights  on
approximately  3,000 acres of timberland  containing total  merchantable  timber
volume  estimated as of January 1, 1998 to be  approximately  2.1 billion  board
feet  ("BBF") in Oregon  east of the  Cascade  Range (the  "Timberlands").  Logs
harvested from the  Timberlands  are sold to  unaffiliated  domestic  conversion
facilities.  These logs are processed for sale as lumber, plywood and other wood
products,  primarily  for  use  in  new  residential  home  construction,   home
remodeling and repair and general industrial applications. The Company also owns
and  operates  its own seed  orchard and  produces  approximately  five  million
conifer  seedlings  annually from its nursery,  approximately  half of which are
used for its own internal reforestation programs, with the balance sold to other
forest products companies. Except as the context otherwise requires,  references
herein to, or descriptions  of, assets and operations of the Company include the
assets  and  operations  of  U.S.   Timberlands   Company,   L.P.  (the  "Master
Partnership") and the predecessors of the Company and the Master Partnership.

         The  Timberlands'   merchantable  timber  consists  of  Ponderosa  Pine
(approximately  44%) and Douglas fir  (approximately  13%),  species  which have
historically  commanded  premium  prices over other softwood  species,  with the
balance consisting of Lodgepole Pine, White Fir and other softwood species.  The
Timberlands  have stands of varying  ages and are unique in the forests  east of
the Cascade  Range in Oregon in that  approximately  180,000  acres are actively
managed tree farms (the  "Plantations").  The Plantations were first established
by Weyerhaeuser Company ("Weyerhaeuser") in the early 1960s and acreage has been
planted each year since then.  Currently,  the  Plantations  contain age classes
ranging  generally from two to 36 years old.  Initial thinning of the Plantation
stands is  expected to begin  within the next five years.  Because the timber on
the Plantations is generally not yet considered merchantable,  volumes of timber
on the  Plantations  are not included in the  Company's  estimated  merchantable
timber volume.  The balance of the  Timberlands  are composed of natural stands.
For a more complete description of the Company's properties, see "Properties."

           In August 1996, the Company 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, the Company (which is now the Master Partnership's
subsidiary  operating  company)  acquired  approximately  42,000  fee  acres  of
timberland and cutting rights on  approximately  3,000 acres of timberland  (the
"Ochoco  Timberlands"),  containing an estimated  merchantable  timber volume of
approximately  280  million  board feet  ("MMBF")  from  Ochoco  Lumber  Company
("Ochoco") (the "Ochoco  Acquisition").  Over 45% of the merchantable  timber on
the Ochoco  Timberlands is at least 80 years old. The Company  believes that the
age classes and species mix of the Ochoco  Timberlands fit well with the Klamath
Falls Timberlands and provide the Company  flexibility in developing its harvest
plans.  In October 1997,  the Company sold  approximately  13,000 acres from the
Klamath Falls Timberlands.

         During the period from January 1, 1994 through the  acquisition  of the
Klamath  Falls  Timberlands  by the  Company,  approximately  58%  of  the  logs
harvested  from the Klamath Falls  Timberlands  were delivered to a plywood mill
owned by Weyerhaeuser at Klamath Falls,  Oregon. In recent years,  substantially
all of the  timber  harvested  from the  Ochoco  Timberlands  was  delivered  to
Ochoco's mills. The Company does not currently own any conversion facilities nor
does it  presently  intend  to own any such  facilities  on a  long-term  basis;
consequently all of the Company's sales are made to unaffiliated  third parties.
Concurrent with the Company's acquisition of the Klamath Falls Timberlands,  the
Company arranged for Collins Products LLC ("Collins"),  a privately owned forest
products company located within the Klamath Falls  Timberlands area, to purchase
Weyerhaeuser's  Klamath  Falls mill  facilities.  The Company has entered into a
10-year log supply  agreement  with Collins  (the  "Collins  Supply  Agreement")
providing

                                       1
<PAGE>

for the purchase by the plywood mill and delivery by the Company of a minimum of
34 MMBF of logs  each year  (approximately  20-25%  of the  Company's  estimated
annual  harvest in the next three years) at market  prices.  The Collins  Supply
Agreement  is  extendable  by Collins for two  additional  five-year  terms.  In
addition to its sales under the Collins Supply Agreement, the Company sells logs
to conversion facilities located in the area surrounding the Timberlands.  There
are currently more than 50 primary  conversion  facilities  located within a 150
mile radius of the Company's base of operations in Klamath Falls, Oregon.

Formation of the Company

         On November 19, 1997, the Master Partnership acquired substantially all
of the  equity  interests  in the  Company  and the  business  and assets of Old
Services (the "Acquisition") and completed its initial public offering (the "MLP
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  manager (the "Manager" or "New Services"),  in exchange for interests
therein.  Immediately thereafter,  the Company assumed certain indebtedness (the
"Holdings  Debt") of U.S.  Timberlands  Holdings,  L.L.C.,  an  affiliate of the
Company  ("Holdings"),  and the Manager contributed its timber operations to the
Company in  exchange  for a member  interest  in the  Company.  Then the Manager
contributed  all  but  a 1%  member  interest  in  the  Company  to  the  Master
Partnership  in  exchange  for  a  general   partner   interest  in  the  Master
Partnership,  the right to receive  Incentive  Distributions  (as defined in the
Glossary of Certain Terms) and 1,387,963 subordinated units representing limited
partner interests in the Master Partnership ("Subordinated Units"), and Holdings
contributed  all of its  interest  in the Company to the Master  Partnership  in
exchange for 2,894,157  Subordinated  Units.  The Manager 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 Manager (the  "Founding  Directors").  As a result of
such transactions, the Company became the operating company and the Manager owns
an aggregate 2% interest in the Master Partnership and the 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 Master  Partnership.  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 Master  Partnership's  MLP Offering,
the Company and its  wholly-owned  subsidiary,  U.S.  Timberlands  Finance Corp.
("Finance Corp."),  consummated the public offering (the "Public Note Offering")
of $225.0  million  aggregate  principal  amount of unsecured  senior notes (the
"Notes") and obtained a $25.0 million  revolving  credit facility to be used for
working capital  purposes (the "Working  Capital  Facility") and a $75.0 million
revolving credit facility to be used for  acquisitions and capital  improvements
(the "Acquisition Facility" and, together with the Working Capital Facility, the
"Bank Credit Facility"). As of March 15, 1998, no amounts were outstanding under
the Bank Credit Facility.

        Finance Corp., a Delaware corporation, was formed on August 18, 1997,
and is a wholly-owned subsidiary of the Company. Finance Corp. serves or co-
obligor for the Notes. It has nominal assets and does not conduct any
operations. Accordingly, a discussion of the results of operations, liquidity
and capital resources of Finance Corp. is not presented.

Company Structure and Management

         The operations of the Master Partnership are conducted through, and the
operating  assets  are  owned  by,  the  Company,  as the  Master  Partnership's
operating subsidiary.  The Master Partnership owns a 98.9899% member interest in
the  Company and the Manager  owns a 1% general  partner  interest in the Master
Partnership and a 1.0101%  managing member interest in the Company.  The Manager
therefore  owns an  aggregate  2%  interest  in the Master  Partnership  and the
Company on a combined basis.

                                       2
<PAGE>

         The  Company's  business  is managed by the  senior  executives  of the
Manager.  The Manager 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 Manager) and all other
necessary  or  appropriate  expenses  allocable  to  the  Company  or  otherwise
reasonably  incurred  by the Manager in  connection  with the  operation  of the
Company's business.

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

         The principal  executive  offices of the Company and Finance Corp.  are
located at 1301 Fifth Avenue, Suite 3725, Seattle,  Washington  98101-2636.  The
telephone  number at such offices is (206)  652-5000.  The  principal  executive
offices of the Manager are located at 625 Madison Avenue,  Suite 10-B, New York,
New York 10022. The telephone number at such offices is (212) 755-1100.

         The  following  chart  depicts the  organization  and  ownership of the
Master  Partnership  and the  Company  as of March  15,  1998.  The  percentages
reflected  represent the  approximate  ownership  interest in each of the Master
Partnership and the Company  individually and not on an aggregate basis.  Except
in the following  chart,  the ownership  percentages  referred to in this Annual
Report reflect the approximate  effective  ownership interest of the Unitholders
in the Master  Partnership and the Company on a combined basis. The 2% ownership
percentage  of the  Manager  referred  to in this  Annual  Report  reflects  the
approximate   effective   ownership  interest  of  the  Manager  in  the  Master
Partnership and the Company on a combined basis.

                                       3
<PAGE>

--------------------------------------------------------------------------------
                Effective Aggregate Ownership
                    of the Company and the
                      Master Partnership

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

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

                    [ORGANIZATIONAL CHART DEPICTING COMPANY
                     STRUCTURE AND OWNERSHIP APPEARS HERE]

                                       4
<PAGE>

THE TIMBERLANDS

         Timber Growth

         Timber growth rates  reflect  timberland  productivity  and the rate of
return on a timber investment. Growth rate is an important factor in determining
when to harvest timber and the harvest  potential of  timberlands  over the long
term. Merchantable timber is economically mature for harvesting when its current
growth  rate falls  below the desired  rate of return on the  investment  in the
standing trees. The average growth rate from  regeneration to economic  maturity
measures the capacity of the land for timber production. The Company's older and
natural  stands on the  Timberlands  that are  expected to provide the near term
harvest have a current average growth rate of  approximately  160 board feet per
acre per annum.  The younger  Plantations are growing at a rate that is expected
to average at least 315 board feet per acre per annum to economic maturity in 50
to 60 years.  This  growth  rate is based on  calculated  volumes at the time of
maturity.  The Company has achieved  higher growth rates on the  Plantations  by
planting  seedlings  which are able to begin growing  immediately as compared to
the slower natural  regeneration  process, by eliminating  competing  non-timber
growth from the Timberlands and by applying modern forestry  practices to assist
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.  A tract  is
considered  ready to be harvested  when the expected value of future tree growth
on such tract  falls  below a target  rate of return.  The  factors  the Company
considers in  determining  its  long-term  harvest  plans  include,  among other
things,   current  and  expected  market   conditions,   competition,   customer
requirements,  the age, size and species  distribution of the Company's  timber,
assumptions  about timber growth rates which are improving over time as a result
of technological, biological and genetic advances that improve forest management
practices,  expected  acquisitions and dispositions,  access to the Timberlands,
availability of contractors,  sales contracts and  environmental  and regulatory
constraints.  The Company's harvest plans reflect the Company's expectations for
each  year's  harvest,  including  the  sites to be  harvested,  the  manner  of
harvesting  such sites,  the volume of each species to be harvested,  the prices
expected to be received for the Company's timber,  the amount of stumpage sales,
logging and other costs, thinning operations and other relevant information. The
Company has the  flexibility to update its harvest plans during the year to take
into consideration  changes in these factors.  The Company harvested 139 MMBF in
1997 and plans to  harvest  approximately  146 MMBF in 1998.  Under the  current
harvest plans, the Company intends to harvest  aggressively  over  approximately
the next eleven years after which time the harvest  level is expected to decline
to a level  which the Company  considers  to be more  sustainable  over the long
term. The Company believes these harvest plans can be achieved;  however,  since
harvest  plans are based on  certain  assumptions,  many of which are beyond the
Company's  control,  there can be no assurance  that the Company will be able to
harvest the volumes  projected in its harvest  plans.  While the Company's  debt
obligations place certain limitations on the harvest plans, the Company believes
that it has  sufficient  flexibility  to permit  modifications  in  response  to
fluctuations  in the market for logs and lumber and the other factors  described
above.  See  "Management's  Discussion  and Analysis of Financial  Condition and
Results of  Operations."  If the  Company's  current  harvest  plans are pursued
unaltered for the next 12 years, if it consummates  the land sales  contemplated
by its  strategic  plan  and if its  other  strategic  assumptions  prove  to be
accurate, the Company expects that its timber inventory would decline by the end
of 2009  and that its  more  valuable  species  of  timber  would  decline  as a
percentage of its total timber  inventory by such date. The Company expects that
its  inventory  would remain  relatively  stable  thereafter.  Long term harvest
plans, growth rates and forest inventory levels will be reviewed during 1998 and
1999. Such harvest plans, land sales and other strategic assumptions do not take
into account any acquisition that the Company may consummate during such period.

                                       5
<PAGE>

         Access

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

         Sales and Markets

         Once a block  of  timberland  is  ready to be  harvested,  the  Company
solicits  offers from its  customers  for  delivery  of logs.  After a price and
volume have been agreed to among the parties, the Company either (i) contracts a
third  party to harvest  the  acreage  and  deliver  to a  roadside  site on the
Timberlands,  where a contracted trucking company picks up the logs and delivers
them to the  customer,  or (ii) sells the timber on a stumpage  basis  where the
customer arranges to harvest and deliver the logs. When the Company sells timber
on a stumpage  basis,  depending  on the length of the  contract,  it may either
receive  payment in full upon the  execution of the  contract,  or may receive a
portion of the payment upon execution of the contract and the balance of payment
when the timber is cut. In a stumpage  sale, the Company  generally  retains the
risk of loss on the  timber  until  such  time as it has been  harvested  by the
buyer. The Company may also  occasionally  sell timber to customers  pursuant to
timber  deeds.  In a timber deed sale,  the Company may receive a portion of the
payment for the timber at the time of  execution of the contract and the balance
of payment at various intervals throughout the duration of the contract, and the
risk of loss on the timber  covered by the contract  passes  immediately  to the
buyer,  regardless of when the buyer harvests the timber.  The Company currently
sells  its  sawlogs  or  stumpage   directly  to   unaffiliated   wood  products
manufacturers  and sells  its  chips to  unaffiliated  pulp  mills or  hardboard
plants. The percentage of logs which are sold as  sawlogs/stumpage  or pulp logs
is  dependent  upon,  among  other  things,  the  species mix and quality of the
inventory  harvested and the market dynamics  affecting the region.  Sawlogs and
stumpage  sales  accounted for  approximately  78% of the Company's  revenues in
1997.  Timber deeds and timber and timberland sales accounted for  approximately
19.8% of the Company's revenues for 1997.

         Most of the timber on the  Timberlands  is softwood  which,  due to its
long  fiber,  strength,  flexibility  and other  characteristics,  is  generally
preferred over hardwood for  construction  lumber and plywood.  Once  processed,
sawlogs are  suitable  for use as  structural  grade  lumber,  appearance  grade
boards,  plywood and laminated  veneer and can also be manufactured for such end
uses as window trim,  molding and door jambs.  Chips,  which can be used to make
hardboard or pulp, accounted for approximately 1.9% of the Company's revenues in
1997.  The market  price of chips has  historically  been  volatile,  rising and
falling with the price of pulp.  Sales of seedlings  accounted for the remaining
0.3% of the Company's revenues in 1997.

         The Company's  customers  include  numerous  unaffiliated  operators of
conversion facilities. Since its acquisition of the Klamath Falls Timberlands in
August  1996,  the Company has sold logs and chips from such  timberlands  to 22
different customers.  Concurrent with the Weyerhaeuser Acquisition,  the Company
arranged for Collins,  a privately owned forest products  company located within
the Klamath Falls  Timberlands,  to purchase  Weyerhaeuser's  Klamath Falls mill
facilities. At such time, the Company entered into the Collins Supply Agreement,
a 10-year  log supply  agreement  with  Collins  providing  for  purchase by the
plywood  mill and  delivery  by the Company of a minimum of 34 MMBF of logs each
year at market prices. The Collins Supply Agreement is extendable by Collins for
two additional five-year terms. In 1997, timber sales to Collins,  Crown Pacific
Partners and Boise Cascade Corporation  accounted for approximately 23%, 21% and
15%, respectively, of the Company's revenue. Collins made its purchases pursuant
to the Collins Supply Agreement, while the other purchases were made pursuant to
short-term  arrangements.  Although the loss of one or more of such customers or
other  significant  customers  could  have  a  material  adverse  effect  on the
Company's  results of  operations,  the Company  believes  that the capacity for
processing wood fiber in the Company's  markets currently exceeds the supply and
that,  therefore,  such  customers  could  readily  be  replaced.  Prior  to the
Company's acquisition of the Ochoco Timberlands,  virtually all of the logs sold
from such  timberlands  were sold to Ochoco's own  facilities.  Since the Ochoco
Acquisition in July 1997, all of the sales from the Ochoco

                                       6
<PAGE>

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 base of operations in Klamath Falls, Oregon.

         Seasonality

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

         Competition

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

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

         The  Company  believes  that it  competes  successfully  in the  timber
business for the following reasons:  (i) the Company has substantial holdings of
timber  properties  which  include  over 2.1 BBF of  merchantable,  good quality
timber,  approximately  180,000 acres of plantation  timberland and a full-scale
seed  orchard  and  nursery  operation  located  in a  region  where  conversion
facilities have been  experiencing  shortages in the supply of wood fiber;  (ii)
the  Company  focuses on owning  timberlands  rather than  operating  conversion
facilities,   which   minimizes  the  Company's   cost   structure  and  capital
expenditures,  allows the  Company to seek the most  favorable  markets  for its
timber  rather than being  committed to supply its own  facilities,  and ensures
that the Company will not compete with its customers; (iii) the Company's senior
operating  management team has an average of more than 29 years of experience in
the forest products industry,  including experience in identifying,  evaluating,
completing and integrating acquisitions of timber properties; (iv) the Company's
lean operating  structure allows it to efficiently  manage its Timberlands,  and
should  enable  it  to  acquire  additional   timberlands  without  commensurate
increases in overhead; and (v) the Company's computerized geographic information
system  ("GIS")  enables the Company to evaluate the optimal timing and patterns
of the harvest of its  Timberlands  and evaluate and integrate  acquisitions  of
additional timberlands.

                                       7
<PAGE>

RESOURCE MANAGEMENT

         Timber Resource Management

         All  of  the  silvicultural  activities  on  the  Timberlands  and  the
harvesting and delivery of logs are conducted by independent contractors who are
not employees of the Company.  The Company's operations involve intensive timber
management  and  harvesting  operations,  which  include road  construction  and
reforestation,  as well as wildlife and watershed  management,  all of which are
carefully  monitored  using the  Company's  GIS. See  "--Geographic  Information
System." The Company  employs a number of  traditional  and  recently  developed
harvesting  techniques on its lands based on site-specific  characteristics  and
other considerations.  Due to the topography of the Timberlands, over 95% of the
Timberlands can be harvested using lower-cost  mechanical  methods as opposed to
higher-cost cable systems.

         Harvesting on the  Timberlands  is conducted  using both  selective and
regeneration  harvesting.  In selective  harvesting,  a partial harvest provides
merchantable  timber  and  opens up the  stand  for  supplemental  growth on the
remaining  stand.  Harvest entries are separated by approximately 10 to 15 years
and each entry is prescribed  for volume to be removed,  spacing to be provided,
and diameter limits to be harvested. In regeneration  harvesting,  which is used
to harvest approximately 30% of the Company's timber, all merchantable volume is
removed in a single harvest. After an area has been regeneration harvested,  the
Company employs a reforestation  contractor to plant two-year-old seedlings at a
density of  approximately  350 trees per acre.  The  Company  also  attempts  to
protect and maintain the ecosystem within the Timberlands  while providing for a
reasonable harvest. For example, the Company typically leaves a mix of green and
dead trees at the harvest  site,  including  some large trees,  snags and downed
logs to  provide  habitats  for a variety  of  wildlife  species  and enrich and
protect the soil for successive generations of trees.

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

         The  Company's  policy  is to  ensure  that  every  acre  harvested  is
reforested in order to enhance the long-term value of its timberlands.  Based on
the geographic and climatic conditions of a given harvest site,  harvested areas
may be  regenerated  naturally,  by leaving  mature trees to reseed the area, or
replanted  with  seedlings.  Natural  regeneration  methods  are widely  used on
approximately  70% of the Company's  harvested  land.  Approximately  28% of the
Timberlands  acreage  currently  consist of Plantations.  The Company expects to
convert  approximately  3,000 to 6,000  acres of natural  stands to  Plantations
annually.  During 1997, the Company planted approximately 2.7 million seedlings.
The Company uses genetically improved seedlings (representing  approximately 90%
to 95% of  seedlings  planted)  to grow  trees  with  desirable  traits  such as
superior growth characteristics,  good form and disease resistance, resulting in
greater wood volume over a rotation than that generated by naturally regenerated
seedlings.  The seedlings are grown in the Company's  nursery,  which uses seeds
from the Company's seed orchard,  which was  established in 1973. Such seeds are
generated by trees that are created by grafting  selected superior genetic stock
to mature root stock.

         Geographic Information System

         The GIS is a computer  software  program that the Company acquired from
Weyerhaeuser  as part of the acquisition of the Klamath Falls  Timberlands.  The
GIS data, which has been compiled over a period of at least four years, includes
detailed  topographical  field  maps for  every  stand  within  the  Timberlands
including  data for the  Ochoco  Timberlands  which  was  recently  added by the
Company,  setting forth the  characteristics,  including age, species,  size and
other  characteristics for the timber growing on each such stand. Using the data
in the GIS, the Company can use a computer model to "grow" the timber over time,
enabling it to generate long-term harvest plans and to update its

                                       8
<PAGE>

inventory  annually.  To  maintain  the  integrity  of the data in the GIS,  the
Company performs a detailed ground survey of the remaining timber inventory on a
tract after each  harvest  and updates the data in the GIS for that tract.  With
the aid of the GIS,  the  Company is able to  actively  manage the  Timberlands,
track its inventory and develop  site-specific harvest plans on multiple scales,
adding additional layers of detail, such as the location of roadways or wildlife
nesting  areas,  as  required.  The GIS also  permits the Company to analyze the
impact  that  new  legislation  may have on its  timberlands  by  inputting  the
proposed  constraints  imposed by such  legislation  in light of the  particular
field characteristics of its Timberlands.  For example, the Company has recently
analyzed  the impact on its  Timberlands  of the  potential  listing of the bull
trout as an endangered  species under the  Endangered  Species Act, by using the
GIS to review the particular  characteristics  of the streams and rivers located
on its properties for suitability for bull trout habitat,  and by overlaying the
proposed  regulatory  restraints on harvest at the sites it determined  might be
suitable habitat for bull trout. The GIS will also be used to evaluate potential
acquisition opportunities.

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

         Land Sales

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

FEDERAL AND STATE REGULATION

         Endangered Species

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

         In 1990,  the United  States Fish and Wildlife  Service  (the  "USFWS")
listed the northern spotted owl as a threatened  species throughout its range in
Washington,  Oregon and California. At the time of the listing, the USFWS issued
suggested  guidelines  ("Guidelines")  to be followed by  landowners in order to
comply  with  the  Endangered  Species  Act's  prohibition  against  harming  or
harassing  owls.  The  Guidelines  recommend  several  measures,  including  the
restriction of harvest  activities in areas within a certain  proximity of known
owl activity centers. The USFWS also proposed a rule for the conservation of the
owl on non-federal  land.  Such proposed rule was  subsequently  withdrawn.  The
Oregon Forest  Practices  Act and related  regulations  also protect  endangered
species and has specific provisions governing habitat protection for the spotted
owl, the bald eagle and other threatened species.

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

                                       9
<PAGE>

harvest  and  other  management  activities,  (ii)  monitor  existing  sites and
determine the current status of such sites,  (iii) determine if areas identified
as containing  suitable habitat are supporting owls and (iv)  investigate  other
spotted owl or other  species  sightings.  The most  recent of such  surveys was
completed in July 1997, and  identified  approximately  27 northern  spotted owl
sites affecting the Klamath Falls Timberlands, three of which are located on the
Klamath Falls  Timberlands.  The Company has continued  these  practices for the
Klamath  Falls  Timberlands  and is  implementing  such  practices on the Ochoco
Timberlands.

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

         Timberlands

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

         Environmental Laws and Superfund

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

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

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

                                       10
<PAGE>

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

         Access to Timberlands May be Limited by Federal Regulation

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

         Safety and Health

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

Employees

         As of  January  12,  1998,  the  Company  had  32  salaried  employees,
including employees of the Manager that manage the business of the Company.  The
employees of the  Timberlands are not unionized,  and the Company  believes that
its  employee  relations  are good.  The  Company's  wage scale and benefits are
generally  competitive  with  other  forest  products  companies.   All  of  the
silvicultural  activities on the  Timberlands and the harvesting and delivery of
logs are  conducted  by  independent  contractors  who are not  employees of the
Company.

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

                                       11
<PAGE>

FORWARD-LOOKING STATEMENTS

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

RISK FACTORS

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

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

         Timber Supply May Increase in the Future

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

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

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

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

                                       12
<PAGE>

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

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

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

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

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

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

         The Company Experiences Significant Competition

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

                                       13
<PAGE>

         Risks of Acquisition Strategy

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

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

         The Company Will Be Dependent Upon Key Personnel

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

         Dependence on Certain Key Customers

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

         The Company's Indebtedness May Affect its Operations

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

         The Company Has a Limited Operating History

         The Klamath  Falls  Timberlands  and the Ochoco  Timberlands,  prior to
their  acquisition  by the Company,  had been part of  Weyerhaeuser  and Ochoco,
respectively,  and had not been operated as separate businesses or divisions. In
addition, prior to the Company's acquisition of the Timberlands,  sales from the
Timberlands were generally made to affiliated  conversion  facilities and not to
unaffiliated  customers.  Although the Company has  operated  the Klamath  Falls
Timberlands  since  September  1996, and sales during such period have been made
exclusively to unaffiliated

                                       14
<PAGE>

customers,  there can be no  assurance  that the Company  will be able to manage
successfully the Timberlands as a separate business on a profitable basis.

         Change of Management Provisions

         The  ownership  of  Subordinated  Units by  certain  affiliates  of the
Manager  effectively  precludes the removal of the Manager as managing member of
the Company or as general partner of the Master Partnership without its consent.
In addition,  the Amended and Restated  Agreement of Limited  Partnership of the
Master Partnership (the "MLP Partnership Agreement") contains certain provisions
that may have the effect of  discouraging  a person or group from  attempting to
remove the  Manager as managing  member of the Company or as general  partner of
the Master Partnership or otherwise change the management of the Company.

         Inability to Fund a Change of Control Offer

         The Company  must offer to purchase  the Notes upon the  occurrence  of
certain events. The Indenture provides that in the event of a Change of Control,
the Issuers are required,  subject to certain  conditions,  to offer to purchase
all outstanding  Notes at a price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest thereon to the date of purchase. On a pro forma
basis,  the Issuers will not have sufficient  funds available to purchase all of
the outstanding Notes were they to be tendered in response to an offer made as a
result of a change of control.  See  "Management's  Discussion  and  Analysis of
Financial Condition and Results of Operation."

THE OPERATING COMPANY AGREEMENT

         The following  paragraphs  are a summary of the material  provisions of
the  Second  Amended  and  Restated  Operating  Agreement  of the  Company  (the
"Operating Company Agreement").  The discussions presented below of the material
provisions of the Operating Company Agreement are qualified in their entirety by
reference to the Operating  Company  Agreement,  which is filed as an exhibit to
this Annual Report.

         Organization and Duration

         The  Company  was  organized  in  1996 to  acquire  the  Klamath  Falls
Timberlands. The Master Partnership owns a 98.9899% non-managing member interest
in the  Company  and the  Manager  owns a 1.0101%  interest  in the  Company and
manages and operates the Company's  business as the managing member. The Manager
also  serves  as the  general  partner  of the  Master  Partnership,  owning  an
aggregate  2% interest in the Company and the Master  Partnership  on a combined
basis.  The Company will continue in existence  until December 31, 2087 or until
the earlier  dissolution  of the Company  pursuant to the terms of the Operating
Company Agreement.

         Cash Distribution Policy

         The Company will distribute to the Manager and the Master  Partnership,
on a quarterly  basis,  all of its Available  Cash.  Distributions  will be made
1.0101% to the Manager and 98.9899% to the Master Partnership.

         Indemnification

         The  Operating  Company  Agreement   provides  that  the  Company  will
indemnify the Manager,  any Departing Manager (as defined in the Glossary),  any
person who is or was an affiliate  of a Manager or any  Departing  Manager,  any
person who is or was a member, partner,  officer,  director,  employee, agent or
trustee of a Manager or any  Departing  Manager or any affiliate of a Manager or
any Departing  Manager,  or any person who is or was serving at the request of a
Manager  or any  Departing  Manager or any  affiliate  of any such  person,  any
affiliate  of a  Manager  or any  Departing  Manager  as an  officer,  director,
employee,  ember,  partner,  agent,  fiduciary  or  trustee  of  another  person
("Indemnities"),  to the fullest  extent  permitted by law, from and against any
and all losses,  claims,  damages,  liabilities  (joint and  several),  expenses
(including,  without  limitation,  legal fees and expenses),  judgments,  fines,
penalties, interest, settlements and

                                       15
<PAGE>

other  amounts  arising  from any and all  claims,  demands,  actions,  suits or
proceedings, whether civil, criminal,  administrative or investigative, in which
any Indemnitee may be involved,  or is threatened to be involved,  as a party or
otherwise, by reason of its status as an Indemnitee;  provided that in each case
the  Indemnitee  acted  in good  faith  and in a  manner  that  such  Indemnitee
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal proceeding, had no reasonable cause to believe
its conduct was unlawful.  Any  indemnification  under these  provisions will be
only out of the assets of the Company,  and the Manager  shall not be personally
liable for, or have any  obligation to contribute or loan funds or assets to the
Company  to  enable it to  effectuate,  such  indemnification.  The  Company  is
authorized  to purchase (or to reimburse the Manager or its  affiliates  for the
cost of) insurance against liabilities asserted against and expenses incurred by
such persons in connection with the Company's activities,  regardless of whether
the  Company  would  have the  power  to  indemnify  such  person  against  such
liabilities under the provisions described above.

         Termination and Dissolution

         The Company  will  continue  until  December 31,  2087,  unless  sooner
terminated  pursuant to the  Operating  Company  Agreement.  The Company will be
dissolved  upon (i) the  election of the Manager to dissolve the Company and the
approval of all members, (ii) the sale of all or substantially all of the assets
and  properties  of the  Company,  (iii)  the  entry  of a  decree  of  judicial
dissolution of the Company,  (iv) the dissolution of the Master Partnership,  or
(v) the  withdrawal or removal of the Manager or any other event that results in
its ceasing to be the general partner of the Master  Partnership or the managing
member of the Company,  as the case may be,  (other than by reason of a transfer
of its general partner interest in accordance with the MLP Partnership Agreement
or its  managing  member  interest  in  accordance  with the  Operating  Company
Agreement,  as the case may be, or withdrawal or removal following  approval and
admission of a successor).  Upon a dissolution pursuant to clause (v) the Master
Partnership  may,  prior  to the  effective  date  of such  withdrawal,  elect a
successor  Manager;  provided,  however,  that such successor  shall be the same
person,  if  any,  that  is  elected  by the  limited  partners  of  the  Master
Partnership  as the  successor  to the  Manager in its  capacity  as the general
partner of the  Master  Partnership,  subject  to  receipt by the  Company of an
opinion of counsel to the effect  that (x) such  action  would not result in the
loss of limited liability of any limited partner of the Master Partnership or of
a  member  of  the  Company  and  (y)  neither  the  Master   Partnership,   the
reconstituted  limited  partnership  nor the  Company  would  be  treated  as an
association  taxable as a  corporation  or otherwise be taxable as an entity for
federal income tax purposes upon the exercise of such right to continue.

         Liquidation and Distribution of Proceeds

         Upon  dissolution of the Company,  unless the Company is  reconstituted
and continued as a new limited liability company,  the person authorized to wind
up the affairs of the Company (the  "Liquidator")  will,  acting with all of the
powers of the Manager that such  Liquidator  deems necessary or desirable in its
good faith judgment in connection therewith,  liquidate the Company's assets and
apply the proceeds of the liquidation as follows:  (i) first towards the payment
of creditors of the Company in the order or priority  provided in the  Operating
Company  Agreement  and by law and (ii) then to the Master  Partnership  and the
Manager in  accordance  with their  respective  capital  account  balances as so
adjusted.  Under certain  circumstances and subject to certain limitations,  the
Liquidator may defer  liquidation or distribution of the Company's  assets for a
reasonable  period  of time  or  distribute  assets  to  partners  in kind if it
determines  that a sale would be  impractical  or would  cause undue loss to the
members.

         Removal and Withdrawal of the Manager

         The Manager shall be removed as manager of the Company if it has been
removed as the general partner of the Master Partnership pursuant to the MLP
Partnership Agreement. The Manager may not be removed as general partner of the
Master Partnership unless such removal is approved by the vote of the holders of
not less than 66 2/3% of the outstanding Units (including Units held by the
Manager and its affiliates) and the Company receives an Opinion of Counsel (as
defined in the Glossary). The ownership of the Subordinated Units by certain
affiliates of the Manager effectively gives the Manager the ability to prevent
its removal. The Manager has agreed not to voluntarily withdraw as managing
member of the Company and general partner of the Master Partnership prior to
December 31, 2007, subject

                                       16
<PAGE>

to limited exceptions, without obtaining the approval of (i) at least a majority
of the outstanding Common Units,  voting as a class; (ii) at least a majority of
the outstanding Subordinated Units, voting as a class, and, thereafter; (iii) at
least a majority of the  outstanding  Units.  The Manager has also agreed not to
voluntarily  withdraw  as  described  above  without  furnishing  an  Opinion of
Counsel.

ITEM 2.  PROPERTIES

TIMBER INVENTORY

         The Company currently owns and manages  approximately 633,000 fee acres
of  timberland  and cutting  rights on  approximately  3,000 acres of timberland
containing total  merchantable  timber volume estimated as of January 1, 1998 to
be  approximately  2.1 BBF in Oregon east of the Cascade Range.  The Timberlands
include   substantial   holdings  of   merchantable,   good-quality   timber.  A
merchantable  tree is a tree of sufficient size that will produce a sound log 16
feet in length and at least five inches in diameter,  inside bark,  at the small
end. The Company's  merchantable timber inventory consists of premium species of
softwood,  consisting  of  Ponderosa  Pine and Douglas fir,  species  which have
historically  commanded premium prices over other softwood  species,  as well as
Lodgepole  Pine,  White Fir and other  species.  The Company  believes  that the
Timberlands are suitable and adequate for current operations.

         The Timberlands have stands of varying sizes and ages and are unique in
the forests east of the Cascade  Range in Oregon in that  approximately  180,000
acres of the 633,000 acre total  consist of actively  managed  pine  Plantations
with stands  ranging in age from two to 36 years.  The  Plantations  are stocked
with  high  quality  Ponderosa  Pine  (approximately  77%)  and  Lodgepole  Pine
(approximately  23%). Because the timber on the Plantations is generally not yet
considered  merchantable,  volumes of timber on the Plantations are not included
in the Company's estimated merchantable timber volume. However, initial thinning
of the  Plantation  stands,  including the thinning of commercial  quantities of
merchantable  timber,  is expected to begin within the next five years. See "The
Timberlands--Harvest Plans."

         Merchantable Timber Inventory by Species

         The Company maintains data regarding the estimated  merchantable timber
inventory  by  species  within  the  Timberlands.   All  volumes  are  based  on
information  developed by Company  personnel.  As of January 1, 1998,  the total
timber  inventory  amounted  to 2,106.9  MMBF.  The  Company's  combined  timber
inventory by MMBF and percentage is Ponderosa  Pine 918.4 (44%),  Lodgepole Pine
395.2 (19%),  White Fir 408.8 (19%),  Douglas fir 285.7 (13%) and other  species
98.8 (5%). Other species include Cedar, Sugar Pine, Western Larch and Grand Fir.

         Size and Species Distribution of Merchantable Timber

         The Company's Timberlands are well diversified, not only by species mix
but also by size  distribution.  Timber  on the  Timberlands  generally  reaches
merchantable  size between 40 and 50 years in natural  stands and between 25 and
35 years in the  Plantations.  The Company  maintains  data as to the  estimated
volume  distribution of merchantable timber on the Timberlands by species and by
diameter at  breast-height  ("DBH").  As of January 1, 1998,  approximately  814
MMBF, or 39%, of the merchantable timber had a DBH of 16 or more inches.

         Acreage Distribution by Age Class on Plantations

         The  Company  also  maintains  data as to the acreage  distribution  of
timber on the  Plantations by age class.  As of January 1, 1998, the Plantations
totaled  180,020 acres.  Of the total  acreage,  65,400 acres range from 1 to 15
years of age,  111,700  acres range from 16 to 25 years of age,  and 2,900 acres
are 26 years of age or older.

                                       17
<PAGE>

ITEM 3.    LEGAL PROCEEDINGS

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

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None

                                    PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY  AND RELATED SECURITY
           HOLDER MATTERS

         In connection  with the  consummation of the  Transactions,  a 98.9899%
member  interest  in the  Company  was  issued to the Master  Partnership  and a
1.0101%  member  interest  was issued to the  Manager.  There is no  established
public  trading  market  for  the  Company's  equity  securities.   The  Company
distributes  all of its Available Cash on a quarterly  basis.  No  distributions
have been made prior to the date of this Annual Report.

                                       18
<PAGE>

Item 6.    Selected Financial Data




<TABLE>
<CAPTION>


                                             U.S. TIMBERLANDS                    PREDECESSOR(1)
                                          ---------------------  -------------------------------------------
                                                     August 30,  January 1,
                                                    1996 through  through
                                                    December 31,  August 29,
                                            1997       1996        1996       1995       1994       1993
                                          -------     -------     -------    -------    -------    -------
                                                                                                  (unaudited)
<S>                                      <C>         <C>         <C>        <C>        <C>        <C>
  CASH FLOWS AND OTHER DATA
   (IN MILLIONS):
  EBITDDA (6) ........................      53.3        (1.4)        3.6       12.5       11.5       16.6
  Additions to timber, timberlands and
   logging roads (3) .................     111.4       283.5         0.0        0.2        0.0        0.1
  Cash flow from (used in) operating
   activities ........................      26.3        (3.0)        5.5       11.8       13.2       15.1

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

  BALANCE SHEET DATA (AT
   PERIOD END, IN MILLIONS):
  Working capital ....................       1.8        21.5         0.5        1.3        0.2        2.1
  Total assets (3) ...................     385.2       310.2        27.8       30.9       29.8       32.3
  Long-term debt (7) .................     225.0       305.0         --         --         --         --
  Equity (deficit) (8) ...............     147.1        (2.9)       27.8       29.2       27.7       29.6

  OPERATING DATA (UNAUDITED):
  Log, stumpage and timber deed sales
   volumes (MMBF) (2) (3) ............     138.9        30.2        32.8       63.8       68.3       66.3
  Property sales volumes (MMBF) (2) ..      41.5         --          --         --         --         9.4

</TABLE>

--------------------------------
(1)  Due to the  Weyerhaeuser  Acquisition on August 30, 1996, the financial and
     operating  data after August 30, 1996 are not  comparable  to financial and
     operating  data of the  Predecessor.  See discussion of the Company and the
     Predecessor's  basis  of  presentation  in  Note  1 of  the  Notes  to  the
     Consolidated Financial Statements.  Also, see "Management's  Discussion and
     Analysis of Financial Condition and Results of Operations."
(2)  Revenues in 1997 consist of $60.4 million of log and stumpage sales, $15.2
     million of timber and property sales and $1.7 million of by-products and
     other sales. Revenues prior to 1997 consist primarily of log sales. Timber
     and property sales were $4.2 million in 1993. See "Management's Discussion
     and Analysis of Financial Condition and Results of Operations."
(3)  See August 1996 acquisition of the Klamath Falls Timberlands and July 1997
     acquisition of the Ochoco Timberlands in Note 3 of the Notes to the
     Consolidated Financial Statements.
(4)  See effect of interest expense and amortization of deferred financing fees
     and debt guarantee fees in "Management's Discussion and Analysis of
     Financial Condition and Results of Operations."
(5)  See effect of debt extinguishment in Note 5 of the Notes to the
     Consolidated Financial Statements.
(6)  EBITDDA is defined as operating income plus depreciation, depletion and
     road amortization and cost of timber and property sales. EBITDDA should not
     be considered as an alternative to net income, operating income, cash flows
     from operating activities or any other measure of financial performance
     presented in accordance with generally accepted accounting principles.
     EBITDDA is not intended to represent cash flow and does not represent the
     measure of cash available for distribution, but provides additional
     information for evaluating the Company's ability to make the Minimum
     Quarterly Distribution. In addition, EBITDDA does not necessarily represent

                                       19
<PAGE>

     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."
(7)  See discussion of long-term debt at Note 5 of the Notes to the Consolidated
     Financial Statements .
(8)  See discussion of the Company and the Predecessor's equity (deficit) in
     Note 1 of the Notes to the Consolidated Financial Statements.

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

         General

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

SUPPLY AND DEMAND FACTORS

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

         Supply

         The supply of logs  available  for purchase  has been most  affected in
recent  years  by  significant   reductions  in  timber  harvested  from  public
timberlands,  principally  as a result of efforts  to  preserve  the  habitat of
certain  endangered  species,  as well as a change in the emphasis of government
policy toward habitat  preservation,  conservation  and recreation and away from
timber  management.  Since  the early  1970s,  environmental  and other  similar
concerns and  governmental  policies  have  substantially  reduced the volume of
timber under contract to be harvested from public lands.  The pace of regulatory
activity  accelerated  in the late 1980s.  From  January  1988 to January  1998,
federal timber under contract in Washington and Oregon  decreased  approximately
88%.  The  resulting   supply  decrease  caused  prices  for  logs  to  increase
significantly,  reaching peak levels during 1993.  Although prices have declined
from these record levels,  current prices still exceed pre-1993 levels.  The low
supply of timber from  public  lands,  which is  expected  to  continue  for the
foreseeable  future,  has benefited  private  timber holders such as the Company
through higher stumpage and log prices.

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

                                       20
<PAGE>

         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.

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

RESULTS OF OPERATIONS

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

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

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

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

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

                                       21
<PAGE>

         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  deed  sales with a combined  cost basis of $8.7
million. No sales of tracts of timber or timberland were made during 1996.

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

         Selling, general and administrative expenses were $6.2 million in 1997,
a decrease  of 48% from  comparable  expenses  of $12.0  million  in 1996.  This
decrease in selling,  general and  administrative  expenses  was  primarily  the
result of $4.9  million in  one-time  payments  for  advisory  services  paid to
affiliates of the Company in connection  with the  Weyerhaeuser  Acquisition and
$2.8 million of one-time management fees paid to an affiliate of the Company for
management  services in 1996. The advisory fees were incurred in connection with
the  Weyerhaeuser  Acquisition  and its initial  financing.  The  management fee
generally  relates to services rendered in connection with the initial formation
of the  Company  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 MLP Offering and
cash flows from  operating  activities.  The Company  incurred  $7.3  million in
interest  expense  during the last four  months of 1996.  There was no  interest
expense and no debt  outstanding  during the first eight months of 1996,  as the
Predecessor participated in Weyerhaeuser's centralized cash management system.

         Amortization  of Deferred  Financing Fees and Debt Guarantee  Fees. The
Company  deferred $4.1 million of fees incurred in connection with the financing
of the  Weyerhaeuser  Acquisition.  The Company deferred $6.0 million of fees in
connection  with the financing of the Ochoco  Acquisition  and related term debt
refinancing.  These costs were being  amortized  over the life of the debt.  The
Company deferred $6.7 million of fees incurred in connection with the

                                       22
<PAGE>

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

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

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

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

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

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

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

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

                                       23
<PAGE>

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

         Prior to the transactions discussed below, the Company's primary source
of  liquidity  has been  cash and cash  equivalents  from  borrowings  under its
revolving   credit  facility  drawn  on  at  the  closing  of  the  Weyerhaeuser
Acquisition.  On July 14, 1997, the Company  refinanced  its original  revolving
credit facility and certain term debt and incurred an additional  $110.0 million
of term debt in connection with the Ochoco  Acquisition.  Effective November 19,
1997,  the Master  Partnership  completed  its MLP 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 MLP
Offering were $163.2 million. In addition,  the Company issued $225.0 million of
Notes in the Public Note  Offering.  The proceeds  from the MLP Offering and the
Public  Note  Offering  were  primarily   utilized  to  retire  all  outstanding
borrowings  under the revolving credit facility and $330.0 million of term debt.
For purposes of this discussion, these transactions are hereafter referred to as
the  "Transactions."  As of December 31, 1997, the Company has a cash balance of
$10.6  million,  $1.8 million of working  capital and $100.0 million of internal
borrowing capacity under the Bank Credit Facility.

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

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

         Investing  Activities.  Cash flows used by  investing  activities  were
$101.6  million in 1997, as compared to cash flows used by investing  activities
of $291.9  million  during  1996.  During 1997,  $110.9  million was used in the
Ochoco  Acquisition and a $10.0 million receivable from an affiliate was repaid.
During 1996, $283.5 million was used in the

                                       24
<PAGE>

Weyerhaeuser Acquisition and $10.0 million was paid to an affiliate. The results
for  1996  also  include  $2.4  million  in  proceeds  from  logging   equipment
dispositions  as a result of the Company's  discontinuance  of its logging crews
upon consummation of the Weyerhaeuser Acquisition.

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

         Notes

         The  following  summary of the terms of the Notes is  qualified  in its
entirety by the terms of the  Indenture  which is included as an exhibit to this
Report and is hereby  incorporated  by  reference  herein.  The  $225.0  million
aggregate  principal amount of Notes represent  unsecured general obligations of
the  Company  and bear  interest at 9 5/8% per annum,  payable  semiannually  in
arrears on May 15 and  November 15. The Notes mature on November 15, 2007 unless
previously  redeemed.  The Notes will not require any  mandatory  redemption  or
sinking fund payments  prior to maturity and are redeemable at the option of the
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  Company,  at its option,  may
redeem the Notes with the net cash proceeds of a Common Units  offering or other
equity interests of the Master Partnership,  at 109.625% of the principal amount
hereof,  plus  accrued  and  unpaid  interest  thereon to the  redemption  date,
provided  that at least 65% of the  principal  amount  of the  Notes  originally
issued  remain  outstanding  immediately  following  such  redemption.  Upon the
occurrence of certain  events  constituting a "change of control" (as defined in
the  Indenture),  the Company  must offer to purchase  the Notes,  at a purchase
price equal to 101% of the  principal  amount  thereof,  plus accrued and unpaid
interest to the date of purchase.

         The Indenture  contains various  affirmative and restrictive  covenants
applicable to the Company and its  subsidiaries,  including  limitations  on the
ability of the Company and its  subsidiaries  to, among other things,  (i) incur
additional  indebtedness (other than certain permitted  indebtedness) unless the
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  Master
Partnership,  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  Master   Partnership,   engage  in  sale  and  leaseback
transactions, enter into a merger, consolidation or sale of all or substantially
all  of its  assets,  sell  assets  or  harvest  timber  in  excess  of  certain
limitations or engage in a different line of business.  Under the Indenture, the
Company will be permitted to make cash  distributions to the Master  Partnership
so long as no default or event of default exists or would exist upon making such
distribution (a) if the 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 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 Common  Units)  received  by the
Master Partnership.

                                       25
<PAGE>

         Bank Credit Facility

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

         The Bank Credit Facility  contains various  affirmative and restrictive
covenants applicable to the Company, including limitations on the ability of the
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 Company maintain at all times the following  financial ratios:
(i) Minimum Pro Forma  EBITDDA (as defined in the Bank Credit  Facility)  to Pro
Forma Interest  Expense (as defined in the Bank Credit  Facility) of 2.10 to 1.0
(calculated on a four quarter  rolling basis) from the closing date through June
30, 1998,  increasing  to 2.25 to 1.0  thereafter  and through June 30, 1999 and
further  increasing  to 2.35 to 1.0  thereafter,  (ii)  Maximum  Funded Debt (as
defined in the Bank  Credit  Facility)  to Pro Forma  EBITDDA (as defined in the
Bank Credit Facility) of not more than 5.25 to 1.0 (calculated on a four quarter
rolling basis) from the closing date through June 30, 1998,  reducing to 4.75 to
1.0 thereafter  and through June 30, 1999,  and further  reducing to 4.50 to 1.0
thereafter  and  (iii)  Minimum  Asset  Value  (as  defined  in the Bank  Credit
Facility) to Funded Debt Ratio (as defined in the Bank Credit  Facility) of 175%
measured on a quarterly basis based on quarter end numbers.

         Under the Bank  Credit  Facility,  so long as no Event of  Default  (as
defined in the Bank Credit Facility) exists or would result, the Company will be
permitted to make quarterly cash  distributions to the Master  Partnership in an
amount not to exceed  Available Cash (as defined in the Bank Credit Facility) in
the preceding quarterly period.  Available Cash shall reflect a reserve equal to
50% of the  interest  projected  to be paid on the Notes in the next  succeeding
quarter,  as well as 100% of the  aggregate  amount of all  accrued  and  unpaid
interest in respect of the Bank Credit Facility on the date of determination. In
addition, in the third, second and first quarters preceding a quarter in which a
scheduled  principal payment is to be made on the Notes,  Available Cash will be
required to reflect a reserve  equal to 25%, 50% and 75%,  respectively,  of the
principal  amount to be repaid  on such  date.  The Bank  Credit  Facility  also
requires Available Cash to reflect a reserve for certain net proceeds from asset
sales and excess harvests pending reinvestment.

         Capital Expenditures/Cash Distributions

         Capital expenditures in 1997 totaled $1.1 million. Capital expenditures
incurred were mainly in the nature of land management/silvicultural expenses and
office  equipment  and vehicle  purchases.  Capital  expenditures  were financed
through cash flow generated by operations. As the Company does not currently own
and  does  not  plan  to  own  manufacturing  facilities,  and  all  logging  is
subcontracted to third parties,  it is anticipated that capital  expenditures in
the   future   will  not  be   material   and  will   consist   mainly  of  land
management/silvicultural  expenditures. It is not currently anticipated that the
Company will either maintain log inventories, although small log inventories may
be maintained for a short period of time, or incur material capital expenditures
for machinery and equipment.  The Company anticipates that capital  expenditures
will be approximately  $1.8 million in 1998.  Capital  expenditures will consist
primarily of capitalized  silvicultural  costs and  miscellaneous  equipment and
computer hardware and software expenditures.

                                       26
<PAGE>

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

         Effects of Inflation

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

         Year 2000 Compliance

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

         Other

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

ITEM 8.  FINANCIAL STATEMENTS

         The  information  required  hereunder is included in this report as set
forth in the "Index to Financial Statements" on page 46.

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

         None

                                       27
<PAGE>

                                   PART III

ITEM 10.         DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
                 OF THE REGISTRANT

         The Manager  manages and operates the  activities  of the Company.  The
Company does not directly employ any of the persons  responsible for managing or
operating the Company.

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE MANAGER

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

<TABLE>
<S>                      <C>   <C>
Name                      Age   Position with Manager
----                      ---   ---------------------
John M. Rudey             54    Chairman and Director(1)
Allen E. Symington        58    President and Chief Financial Officer and Director(2)
Robert E.L. Michie, Jr    50    Vice President - Operations
John C. McDowell          48    Vice President - Finance and Controller
Aubrey L. Cole            74    Director(3)
George R. Hornig          43    Director(4)
Spencer R. Stuart         75    Director(5)
Thomas C. Theobald        60    Director(6)
Robert F. Wright          72    Director(7)
Walter L. Barnes          55    Harvesting Manager
Robert A. Broadhead       46    Marketing Manager
Martin Lugus              57    General Manager
Kurt A. Muller            39    Planning Manager
Christopher J. Sokol      48    Forestry Manager

</TABLE>

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

     John M. Rudey serves as Chairman and a Director of the Manager. Since 1992,
Mr. Rudey has served as Chief Executive Officer of Garrin  Properties  Holdings,
Inc.,  a  private   investment  company  that  manages  and  advises  investment
portfolios principally concentrated in the timber and forest products industries
and in real  estate.  He has  previously  acquired  and  managed  for his family
investment  group a subsidiary  of  Westinghouse  Electric Co. and a division of
Monumental Life Insurance  Company.  Mr. Rudey holds a B.A. from Harvard College
and an M.B.A. from Harvard Business School.

     Allen E. Symington  serves as President and Chief  Financial  Officer and a
Director  of the  Manager.  From 1996- 98,  Mr.  Symington  was Vice  President,
Finance of Simpson Timber Investment Company ("Simpson") (a private

                                       28
<PAGE>

timberlands  owner and forest products  manufacturer) and from 1995-96 he served
as Vice  President - Investments  and  Treasurer.  From 1988-94,  Mr.  Symington
served as Vice President--Investments.  Mr. Symington joined Simpson in 1962 and
served in various  capacities.  Mr.  Symington is currently Vice Chairman of the
Washington  State  Employees  Retirement  Board and a  director  of  Enterprises
International (a company which produces manufacturing equipment for the pulp and
paper  industry).  Mr. Symington holds a B.S. in Forest Products with a minor in
Business and Finance from the University of Washington.

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

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

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

     George R. Hornig  serves as a Director  of the  Manager.  Since  1993,  Mr.
Hornig has been a Managing  Director of Deutsche  Bank North  America  Holdings,
Inc.  (the United  States arm of Deutsche  Bank, a German  banking  concern) and
affiliated  entities.  From 1991 to 1993, Mr. Hornig was the President and Chief
Operating  Officer of Dubin & Swieca  Holdings,  Inc., an investment  management
business. From 1988 to 1991, Mr. Hornig was a co-founder,  Managing Director and
Chief  Operating  Officer of  Wasserstein  Perella & Co.,  Inc.  (a mergers  and
acquisitions  investment  bank). From 1983 to 1988, Mr. Hornig was an investment
banker in the Mergers and  Acquisitions  Group of The First Boston  Corporation.
Prior to 1983, Mr. Hornig was an attorney with Skadden,  Arps, Slate,  Meagher &
Flom.  Mr.  Hornig holds a B.A.  from Harvard  College,  a J.D. from Harvard Law
School and an M.B.A. from Harvard Business School. Mr. Hornig is also a director
of SL Industries, Inc. and Forrester Research, Inc.

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

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

                                       29
<PAGE>

     Robert F. Wright  serves as a Director  of the  Manager.  Since  1988,  Mr.
Wright has served as President and Chief  Executive  Officer of Robert F. Wright
Associates,  Inc., a firm making  strategic  investments and providing  business
consulting  services.  Previously,  Mr.  Wright  spent 40  years,  28 years as a
partner,  at Arthur  Andersen & Co. Mr. Wright holds a B.A. from Michigan  State
University and an M.B.A.  from New York University.  Mr. Wright is a director of
the following  companies:  Hanover  Direct Inc. (a catalog  marketer),  Reliance
Standard Life  Insurance Co. and  affiliates  (life  insurance  companies),  The
Navigators  Group Inc. (a property  insurance  company),  Norweb  North  America
Corporation (an Irish  investment  company),  Rose  Technology  Group Limited (a
Canadian professional  engineering company),  Deotexas Inc. (a development stage
company) and Williams Real Estate Co., Inc. (a real estate company).

     Walter L. Barnes serves as Harvesting  Manager of the Manager,  responsible
for all solid  wood  logging  and fiber  operations.  From  1993-1996,  prior to
joining the Company,  Mr.  Barnes acted as the  Operations  Harvest  Manager for
Weyerhaeuser.  Mr.  Barnes was  employed  by  Weyerhaeuser  for 28 years and has
extensive  experience managing different harvesting systems on both the East and
West  sides of the  Cascade  Range.  Mr.  Barnes  holds a B.S.  degree  from the
University of Wyoming.

     Robert A. Broadhead serves as Marketing Manager of the Manager, responsible
for all log and  stumpage  sales  transactions.  Mr.  Broadhead  was employed by
Weyerhaeuser  for 20 years and gained  additional  experience  in investing  and
planning  while  serving as Planning  Manager from 1981 to 1994.  Mr.  Broadhead
holds a B.S. degree from Humboldt State University.

     Martin Lugus serves as General Manager of the Manager,  responsible for all
land  management  and  operations  on fee  lands.  Mr.  Lugus  was  employed  by
Weyerhaeuser for 28 years,  during which time he served as Forestry Manager from
1981 to 1991 and  Timberlands  Manager from 1991 to 1996. Mr. Lugus holds a B.S.
from  University  of  Connecticut  and a M.F.  from Yale School of Forestry  and
Environmental Studies.

         Kurt A. Muller serves as Planning  Manager of the Manager,  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 and holds a B.S. degree from Oregon
State University.

     Christopher J. Sokol serves as Forestry Manager of the Manager, responsible
for forestry operations,  environmental relationships, harvest prescriptions and
nursery/orchard operations.  Prior to joining the Company in 1996, Mr. Sokol was
employed by Weyerhaeuser for 22 years and gained additional experience in forest
regeneration  and timber sales while  serving as District  Forester from 1982 to
1991 and as Forestry  Manager  thereafter.  Mr.  Sokol holds a B.S.  from Oregon
State University.

ITEM 11.   EXECUTIVE COMPENSATION

         The Master  Partnership  and the Manager were formed in June 1997.  The
Company was formed in June 1996,  but had no officers  or  employees  during the
relevant  period.  Accordingly,  neither the  Company  nor the Manager  paid any
compensation to its directors and officers with respect to 1996 or earlier,  nor
did any  obligations  accrue in respect of  management  incentive or  retirement
benefits for the directors and officers with respect to such year.  Prior to the
closing of the MLP Offering and Public Note  Offering,  all  executive  officers
were  employees  of Old  Services.  Upon the closing of the MLP Offering and the
Public  Note  Offering on November  19,  1997,  the  executive  officers  became
employees of the Manager;  therefore, the following disclosure covers the period
from  November  19,  1997  through  December  31,  1997.  Under the terms of the
Operating  Company  Agreement,  the Company is required to reimburse the Manager
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.

                                       30
<PAGE>

         The  following  table sets  forth  annual  salary,  bonus and all other
compensation  awards and payouts earned by the Manager's Chief Executive Officer
and the named  executive  officers for services  rendered during the fiscal year
ended December 31, 1997:

                                            SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>



                                                                                                                          ALL OTHER
                                              ANNUAL COMPENSATION                       LONG TERM COMPENSATION          COMPENSATION
                                        ----------------------------------------   ------------------------------------ ------------
                                                                                                  SECURITIES
                                                                                                  UNDERLYING
                                                                      OTHER ANNUAL    RESTRICTED   OPTIONS/
NAME AND POSITION                 YEAR         SALARY      BONUS      COMPENSATION   STOCK AWARDS  SARS(#)   LTIP PAYOUTS
-----------------                 ----         ------      -----      ------------   ------------  -------   ------------ ----------
<S>                              <C>          <C>        <C>         <C>            <C>            <C>       <C>           <C>

John J. Stephens, President and
 Chief Executive Officer (1)...   1997       $ 52,500     $    --     $    --        $    --                  $    --      $ --

Michael J. Morgan, Vice
 President and Chief Financial
 Officer (2)..............        1997       $ 14,700    $100,000     $    --        $    --                  $    --      $ --

</TABLE>

(1)  Mr. Stephens  resigned as President and Chief Executive  Officer  effective
     January 2, 1998.

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

LONG-TERM INCENTIVE PLAN

         The Manager 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 Manager and its  affiliates.  The summary of the
Long-Term Incentive Plan contained herein does not purport to be complete and is
qualified in its entirety by reference to the Long-Term Incentive Plan, which is
filed as an  exhibit  hereto.  The  Long-Term  Incentive  Plan  consists  of two
components,  a unit option plan (the "Unit Option  Plan") and a restricted  unit
plan (the  "Restricted  Unit Plan").  The  Long-Term  Incentive  Plan  currently
permits the grant of Unit Options and Restricted  Units covering an aggregate of
857,748 Common Units.

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

         Upon exercise of a Unit Option,  the Manager 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 Manager,  or any combination of the foregoing.  The Manager
will be entitled to reimbursement by the Company for the difference  between the
cost  incurred by the Manager in  acquiring  such Common  Units and the proceeds
received by the Manager from an optionee at the time of exercise. Thus, the cost
of the Unit  Options  will be borne by the  Company.  If the Master  Partnership
issues new Common Units upon exercise of the Unit  Options,  the total number of
Units outstanding will increase and the Manager 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.

                                       31
<PAGE>

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

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

<TABLE>
<CAPTION>

                                                       PERFORMANCE OR OTHER
                                                       PERIOD UNTIL MATURATION
      NAME                  NUMBER OF UNIT OPTIONS         OR PAYOUT (3)
      ----                  ----------------------     -----------------------
<S>                        <C>                        <C>

John J. Stephens.....         107,218(1)                 3 years
Michael J. Morgan....          64,332(2)                 3 years

</TABLE>
--------------------------
(1)  Mr.  Stephens  ceased to be a member of the Manager's Board of Directors on
     January 2, 1998. The 107,218 Unit Options granted to Mr.  Stephens  expired
     unexercised  as a result of his  termination.

(2)  The 64,332 Unit Options  granted to Mr.  Morgan  expired  unexercised  as a
     result of his termination.

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

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

                     OPTIONS/SAR GRANTS IN LAST FISCAL YEAR



<TABLE>
<CAPTION>



                                           INDIVIDUAL GRANTS
                                 ---------------------------------------                    POTENTIAL REALIZABLE VALUE AT
                                 NUMBER OF      % OF TOTAL                                  ASSUMED ANNUAL RATES OF STOCK
                                 SECURITIES    OPTIONS/ SARS  EXPIRATION                       PRICE APPRECIATION FOR
                                 UNDERLYING    GRANTED TO     EXERCISE OR                         OPTION TERM(4)
                               OPTIONS/ SARS   EMPLOYEES IN   BASE PRICE    EXPIRATION      -----------------------------
                                  GRANTED       FISCAL YEAR     ($/SH) (3)     DATE             5%             10%
                                 -------       -----------    -----------   ----------      ----------      ----------
<S>                            <C>             <C>           <C>          <C>           <C>            <C>

John J. Stephens..............   107,218(1)         12.5%   $    21.00     11/19/07 (1)  $ 1,416,350    $ 3,588,586
Michael J. Morgan.............    64,332(2)          7.5%   $    21.00     11/19/07 (2)  $   849,826    $ 2,153,192
</TABLE>
-------------------------
(1)  The 107,218 Unit Options granted to Mr. Stephens  expired  unexercised as a
     result of his termination.

(2)  The 64,332 Unit Options  granted to Mr.  Morgan  expired  unexercised  as a
     result of his termination.

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

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

                                       32
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                                   NUMBER OF SECURITIES
                                                                  UNDERLYING UNEXERCISED        VALUE OF UNEXERCISED
                                                                     OPTIONS/SARS AT      IN-THE-MONEY OPTIONS/SARS AT
                                                                     DECEMBER 31,1997           DECEMBER 31,1997
                                  SHARES                          ----------------------  ----------------------------
                                ACQUIRED ON    VALUE
        NAME                   EXERCISE (#)   REALIZED         EXERCISABLE  UNEXERCISABLE  EXERCISABLE  UNEXERCISABLE
-----------------------------  ------------   --------         -----------  -------------  -----------  -------------
<S>                               <C>        <C>                <C>           <C>         <C>          <C>
John J. Stephens.............      None      $    --             --            107,218(1)   $   --       $  N.A. (3)
Michael J. Morgan............      None      $    --             --             64,332(2)   $   --       $  N.A. (3)
</TABLE>
---------------------
(1)  The 107,218 Unit Options granted to Mr. Stephens  expired  unexercised as a
     result of his termination.

(2)  The 64,332 Unit Options  granted to Mr.  Morgan  expired  unexercised  as a
     result of his termination.

(3)  At the close of trading  on  December  31,  1997,  the market  value of the
     Common  Units  was  $20.75  per  share.  Since  the  Units  Options,   once
     exercisable,  would be  exercisable at $21.00 per share,  the  in-the-money
     computation is inapplicable.

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

                                       33
<PAGE>

         The Manager 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
Manager.  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 Manager. Each consulting agreement will be reviewed annually by a
majority of the directors who do not have consulting agreements.

Employment Agreements

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

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

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

         Good Reason is defined in the agreements  generally as: (i) in the case
of Messrs.  Rudey and  Symington,  failure of the Manager's  members to elect or
re-elect the Executive to the Board of Directors, (ii) failure of the Manager to
vest in the Executive the position, duties and responsibilities  contemplated by
his Employment Agreement, (iii) failure of the Manager to pay any portion of the
Executive's  compensation,  (iv)  any  material  breach  by the  Manager  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 MLP 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 Manager or (vi) any fraud,  misappropriation  of
funds,  embezzlement  or other  similar acts of  misconduct  with respect to the
Company.

                                       34
<PAGE>

COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS

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

                                       35
<PAGE>

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         None

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

MANAGEMENT OF THE COMPANY

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

CONSULTING AGREEMENTS

         The Manager 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
Manager.  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 Manager. Each consulting agreement will be reviewed annually by a
majority of the directors who do not have consulting agreements.

RELATED PARTY TRANSACTIONS

         Pursuant  to an  agreement  dated as of July 29, 1997  between  John J.
Stephens,  a Founding  Director  and the former  President  and Chief  Executive
Officer of the Manager, and the Company, Old Services,  Mr, Rudey and certain of
his affiliates,  Mr. Stephen's  interest in Old Services was redeemed for 95,238
Subordinated  Units upon the  consummation of the  Transactions and $1.0 million
paid in January 1998. Pursuant to an agreement dated as of July 29, 1997 between
Mr.  Hornig  and the  Company,  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  Manager  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 Manager,
became entitled to receive approximately $700,000 in severance payments pursuant
to his employment agreement. In addition, pursuant to the terms of the Manager's
operating agreement,  the member interests of each of Mr. Stephens, Mr. Kobacker
and John H. Beuter, a former Director of the Manager, were subject to repurchase
at  an  aggregate  price  of  $385,000  payable  in  three  annual  installments
commencing  February 1, 1998.  The Company will  reimburse  the Manager for such
repurchase payments.

                                       36
<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 46.

(a)(3) EXHIBITS
<TABLE>
<S>   <C>
+3.1  --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
        Klamath Falls, L.L.C. other parties
*10.4  --Form of U.S. Timberlands Company, L.P. 1997 Long-Term Incentive Plan
*10.5  Employment Agreement for Mr. Rudey
 10.6  Employment Agreement for Mr. Symington
 10.7  Employment Agreement for Mr. Michie
 10.8  Employment Agreement for Mr. McDowell
*10.9  --Supply Agreement between U.S. Timberlands Klamath Falls, L.L.C. and Collins
        Products LLC
*21.1  --List of Subsidiaries
 27.1  --Financial Data Schedule
</TABLE>
------------------------------------
*    Incorporated by reference to the same numbered  Exhibit to the Registrant's
     Registration Statement on Form S-1 filed November 13, 1997.
+    Incorporated  by  reference  to the same  numbered  Exhibit  to the  Master
     Partnership's Current Report on Form 8-K filed January 15, 1998.

(b) REPORTS ON FORM 8-K

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

                                       37
<PAGE>

                                                                     APPENDIX A

                           GLOSSARY OF CERTAIN TERMS

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

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

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

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

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

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

     BBF:  One billion board feet.

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

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

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

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

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

                                       38
<PAGE>

        Closing Date:  November 19, 1997.

        Code:  Internal Revenue Code of 1986, as amended.

        Collins:  Collins Products LLC.

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

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

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

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

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

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

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

        DD&A:  Depreciation, depletion and road amortization.

        Departing  Manager:  A former  managing  member of the Company from and
after the effective  date of any  withdrawal or removal of such former  managing
member pursuant to the Operating Company Agreement.

        EBITDDA: Operating income plus depreciation, depletion and amortization
and cost of timber and property  sales.  EBITDDA  should not be considered as an
alternative  to  net  income,   operating  income,  cash  flows  from  operating
activities or any other measure of financial performance presented in accordance
with  generally  accepted  accounting  principles.  EBITDDA is not  intended  to
represent  cash flow and does not  represent  the measure of cash  available for
distribution,  but provides additional  information for evaluating the Company's
ability to make the Minimum Quarterly Distribution.

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

        Finance Corp.: U.S. Timberlands Finance Corp., a wholly-owned subsidiary
of the Company.

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

        GIS:  The Company's computerized geographic information system.

                                       39
<PAGE>

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

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

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

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

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

        Issuers: The Company together with Finance Corp.

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

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

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

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

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

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

        Master Partnership: U.S. Timberlands Company, L.P., and any successors
thereto.

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

         MLP Offering:  The initial public offering by the Master Partnership of
the Common Units.

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

         MMBF:  One million board feet.

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

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

                                       40
<PAGE>

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

         NYSE: The New York Stock Exchange.

         Ochoco:  Ochoco Lumber Company.

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

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

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

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

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

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

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

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

         OSHA:   Federal Occupational Safety and Health Act.

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

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

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


                                       41
<PAGE>

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

        Registration Statement: The Registration Statement on Form S-1 (No. 333-
34389), filed by the Company and Finance Corp. with the United States Securities
and Exchange Commission, relating to the Notes.

        RROW: Reciprocal right-of-way.

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

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

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

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

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

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

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

        Subordination  Period:  The Subordination  Period will generally extend
from the closing of the MLP Offering  until the first to occur of: (a) the first
day of any quarter  beginning  after  December  31, 2002 in respect of which (i)
distributions  of  Available  Cash  from  Operating   Surplus  on  each  of  the
outstanding  Common Units and the Subordinated Units with respect to each of the
three consecutive,  non-overlapping  four-quarter periods immediately  preceding
such date equaled or exceeded the sum of the Minimum  Quarterly  Distribution on
all of the outstanding  Common Units and Subordinated Units during such periods,
(ii)  the  Adjusted  Operating  Surplus  generated  during  each  of  the  three
consecutive,  non-overlapping  four-quarter  periods immediately  preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution on all of
the Common  Units and  Subordinated  Units  that were  outstanding  during  such
periods on a fully-diluted basis (i.e., taking into account for purposes of such
determination all Outstanding Common Units, all Outstanding  Subordinated Units,
all Common  Units and  Subordinated  Units  issuable  upon  exercise of employee
options  that  have,  as of the date of  determination,  already  vested  or are
scheduled  to vest prior to the end of the  quarter  immediately  following  the
quarter with respect to which such  determination  is made, and all Common Units
and Subordinated Units that have as of the date of determination, been earned by
but not yet  issued to  management  of the  Master  Partnership  in  respect  of
incentive  compensation),  plus the related  distribution on the general partner
interest  in the Master  Partnership  and the  managing  member  interest in the
Company, and (iii) there are no outstanding Common Unit Arrearages;  and (b) the
date  on  which  the  Manager  is  removed  as  general  partner  of the  Master
Partnership  upon the  requisite  vote by holders  of  Outstanding  Units  under
circumstances  where  Cause does not exist and Units held by the Manager and its
Affiliates  are not  voted  in favor  of such  removal.  Prior to the end of the
Subordination  Period,  a portion of the  Subordinated  Units will  convert into
Common  Units on a  one-for-one  basis on the first day  after the  record  date
established  by the Manager for any quarter  ending on or after (a) December 31,
2000  with  respect  to  one-quarter  of  the   Subordinated   Units  (1,070,530
Subordinated  Units) and (b)  December  31, 2001 with  respect to an  additional
one-quarter of the  Subordinated  Units  (1,070,530  Subordinated  Units),  on a
cumulative  basis, in respect of which (i)  distributions of Available Cash from
Operating Surplus on the Common Units and the Subordinated Units with respect to
each of the three consecutive,  non-overlapping four-quarter periods immediately
preceding  such  date  equaled  or  exceeded  the sum of the  Minimum  Quarterly
Distribution on all of the Common Units

                                       42
<PAGE>

and Subordinated Units during such periods,  (ii) the Adjusted Operating Surplus
generated  during  each of the  two  consecutive,  non-overlapping  four-quarter
periods  immediately  preceding  such date  equaled or  exceeded  the sum of the
Minimum Quarterly Distribution on all of the Common Units and Subordinated Units
that were outstanding during such periods on a fully diluted basis (i.e., taking
into account for purposes of such  determination  all Outstanding  Common Units,
all Outstanding  Subordinated  Units,  all Common Units and  Subordinated  Units
issuable  upon  exercise  of  employee  options  that  have,  as of the  date of
determination,  already  vested or are scheduled to vest prior to the end of the
quarter   immediately   following   the  quarter  with  respect  to  which  such
determination is made, and all Common Units and Subordinated  Units that have as
of the date of determination, been earned by but not yet issued to management of
the Master Partnership in respect of incentive  compensation),  plus the related
distribution on the general partner  interest in the Master  Partnership and the
managing  member  interest in the  Company,  and (iii) there are no  outstanding
Common Unit  Arrearages;  provided,  however,  that the early  conversion of the
second  quarter  of  Subordinated  Units may not  occur  until at least one year
following the early  conversion of the first quarter of  Subordinated  Units. In
addition, if the Manager is removed as general partner of the Master Partnership
under circumstances where Cause does not exist and Units held by the Manager and
its  affiliates  are not voted in favor of such  removal  (i) the  Subordination
Period will end and all  outstanding  Subordinated  Units will  immediately  and
automatically  convert  into  Common  Units  on a  one-for-one  basis,  (ii) any
existing Common Unit Arrearages will be extinguished  and (iii) the Manager will
have the right to convert its combined 2% interest in the Master Partnership and
the Company (and all the rights to the Incentive Distribution) into Common Units
or to receive cash in exchange for such interests.

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

         Timber:  Standing trees not yet harvested.

         Timberlands:  The timber properties of the Company.

         Transactions:  The transactions related to the formation of the Company
and the Master  Partnership,  the issuance of the Common Units,  the issuance of
the  Notes,  the  entering  into of the  Bank  Credit  Facility  and  the  other
transactions  that  occurred in  connection  with the Note  Offering and the MLP
Offering.

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

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

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

         USFWS:  United States Fish and Wildlife Service.

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

         Weyerhaeuser:  Weyerhaeuser Company.

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

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

                                       43
<PAGE>

                     U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized on this 30th day of
March, 1998.

                             U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.

                             By:      U.S. Timberlands Services Company, L.L.C.
                                      Manager

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



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

<TABLE>


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

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

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

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

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

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

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

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

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


</TABLE>

                                       44
<PAGE>

                         U.S. TIMBERLANDS FINANCE CORP.

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized on this 30th day of
March, 1998.

                                    U.S. TIMBERLANDS FINANCE CORP.

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

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


<TABLE>


<S>                                                    <C>                                             <C>


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

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

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


</TABLE>

                                       45
<PAGE>

                     U.S. TIMBERLANDS KLAMATH FALLS, L.L.C.

                         INDEX TO FINANCIAL STATEMENTS


Report of Independent Public Accountants......................................47

Consolidated Balance Sheets -- December 31, 1997 and 1996.....................48

Consolidated Statements of Operations.........................................49

Consolidated Statements of Cash Flows.........................................50

Consolidated Statements of Changes in Members' Equity (Deficit) and
     Weyerhaueser Investment and Advances.....................................52

Notes to Consolidated Financial Statements....................................53

                                       46
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors of
U.S. Timberlands Klamath Falls, L.L.C.

         We have audited the  accompanying  consolidated  balance sheets of U.S.
Timberlands,  as described in Note 1, as of December 31, 1997 and 1996,  and the
related  consolidated  statements  of  operations,  changes in  members'  equity
(deficit),  and cash flows for the year ended  December  31, 1997 and the period
from inception (August 30, 1996) through December 31, 1996. We have also audited
the statements of operations,  changes in  Weyerhaeuser  investment and advances
and cash flows of the  Predecessor  for the year ended December 31, 1995 and the
period from January 1, 1996 through August 29, 1996. These financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

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

         In our opinion,  the  financial  statements  referred to above  present
fairly, in all material respects,  the financial position of U.S. Timberlands as
of December 31, 1997 and 1996,  and the results of its  operations  and its cash
flows for the year ended December 31, 1997 and the period from inception (August
30,  1996)  through  December  31,  1996,  and the results of the  Predecessor's
operations  and cash flows for the year ended  December  31, 1995 and the period
from  January 1, 1996  through  August 29,  1996 in  conformity  with  generally
accepted accounting principles.


                                                     ARTHUR ANDERSEN LLP
Portland, Oregon,
  January 23, 1998

                                       47
<PAGE>

                                U.S. TIMBERLANDS

                          CONSOLIDATED BALANCE SHEETS

                                 (in thousands)


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

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

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

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

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

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

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

BORROWINGS UNDER REVOLVING CREDIT FACILITY                                                       --          90,000
LONG-TERM DEBT                                                                             225,000         215,000
MEMBERS' EQUITY (DEFICIT):
  Members' deficit prior to the transactions
    Old Services.....................................................................           --          (1,127)
    USTK ............................................................................           --          (1,809)
Members' equity
    Managing member's interest.......................................................        1,471              --
    Nonmanaging member's interest....................................................      145,646              --
                                                                                      ------------    ------------
                                                                                           147,117          (2,936)
                                                                                      ------------    ------------
      Total liabilities and members' equity (deficit)................................ $    385,214    $    310,191
                                                                                       ===========     ===========
</TABLE>

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

                                       48
<PAGE>

                                U.S. TIMBERLANDS

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                 (in thousands)


<TABLE>



                                                     U.S. Timberlands                       Predecessor
                                                 ----------------------------------  -----------------------------------

                                                                      August 30,       January 1,
                                                                     1996 Through     1996 Through
                                                                     December 31,      August 29,
                                                         1997             1996              1996             1995
                                                 ----------------------------------  -----------------------------------
<S>                                              <C>               <C>               <C>                <C>
                                                        (a)               (a)
REVENUES:
    Log and stumpage sales...................... $      60,445     $      13,590    $      14,077     $      29,110
    Timber and property sales...................        15,244                --               --                --
    By-products and other.......................         1,656               429            1,501             2,623
                                                 -------------     -------------    -------------     -------------
      Total revenues............................        77,345            14,019           15,578            31,733

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

INTEREST EXPENSE................................        25,321             7,316               --                --
AMORTIZATION OF DEFERRED FINANCING
FEES AND DEBT GUARANTEE FEES....................         4,193             1,326               --                --
INTEREST INCOME.................................        (1,452)             (409)              --                --
OTHER (INCOME) EXPENSE, net.....................           574                36                1              (555)
                                                  -------------     -------------    -------------     -------------
INCOME (LOSS) BEFORE  EXTRAORDINARY
ITEMS...........................................        (1,368)          (13,036)           2,695            11,616
EXTRAORDINARY ITEMS, losses on
extinguishment of debt..........................         9,337                --               --                --
                                                  -------------     -------------    -------------     -------------
NET INCOME (LOSS)                                $     (10,705)    $     (13,036)   $       2,695     $      11,616
                                                  ============      ============     ============      ============

</TABLE>

         (a)      Due to the  Weyerhaeuser  Acquisition  on August 30, 1996, the
                  consolidated statement of operations for 1997 and the combined
                  statement  of  operations  for the period from August 30, 1996
                  through December 31, 1996 are not comparable to the statements
                  of operations of the Predecessor.  See the accompanying  notes
                  for additional information.























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

                                       49
<PAGE>

                                U.S. TIMBERLANDS

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)


<TABLE>
<CAPTION>

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

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

CASH FLOWS FROM FINANCING ACTIVITIES:
  Weyerhaeuser investment and advances,  net..            --                --           (5,054)           (9,951)
  Members' contributions......................       163,206            10,100               --                --
  Member's distribution.......................        (1,191)               --               --                --
  Deferred financing fees.....................       (12,720)           (4,053)              --                --
  Long-term borrowings........................       510,000           305,000               --                --
  Repayment of long-term borrowings...........      (590,000)               --               --                --
                                               -------------     -------------    -------------     -------------
    Net cash provided by (used in) financing
     activities...............................        69,295           311,047           (5,054)           (9,951)

NET (DECREASE) INCREASE IN CASH AND
 CASH EQUIVALENTS.............................        (5,988)           16,613               (1)               --
CASH AND CASH EQUIVALENTS, beginning
 of period....................................        16,613                --                1                 1
                                               -------------     -------------    -------------     -------------
CASH AND CASH EQUIVALENTS, end
 of period.................................... $      10,625     $      16,613    $          --     $           1
                                                ============      ============     ============      ============

SUPPLEMENTAL CASH FLOW INFORMATION:
  Cash paid for interest.....................  $      28,083     $       2,062    $          --     $          --

NONCASH ACTIVITIES:

</TABLE>

                                       50
<PAGE>

<TABLE>
<CAPTION>

                                                     U.S. Timberlands                       Predecessor
                                                 ---------------------------------  ------------------------------------
                                                                      August 30,       January 1,
                                                                     1996 Through     1996 Through
                                                                     December 31,      August 29,
                                                       1997              1996            1996              1995
                                                 ----------------------------------  -----------------------------------
<S>                                                <C>               <C>             <C>                <C>
                                                        (a)               (a)
  Net asset transfers (to) from Weyerhaeuser
   Company, principally property, plant and
   equipment.................................   $          --     $          --    $       1,043     $        (255)
  Redemption of member's interest in Old
   Service...................................   $       1,000     $          --    $          --     $          --
</TABLE>

         (a)      Due to the  Weyerhaeuser  Acquisition  on August 30, 1996, the
                  consolidated statement of cash flows for 1997 and the combined
                  statement  of cash flows for the period  from  August 30, 1996
                  through  December 31, 1996 are not comparable to statements of
                  cash flows of the Predecessor.  See the accompanying notes for
                  additional information.


















































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

                                       51
<PAGE>

                                U.S. TIMBERLANDS

                     CONSOLIDATED STATEMENTS OF CHANGES IN
                   MEMBERS' EQUITY (DEFICIT) AND WEYERHAEUSER
                            INVESTMENT AND ADVANCES

                                 (in thousands)

<TABLE>
<CAPTION>

                                                  U.S.
                                              Timberlands
                                               Management
                                                Company
                               Predecessor       L.L.C.                 U.S. Timberlands Klamath Falls, L.L.C.
                               ------------   -------------   ----------------------------------------------------------
                                                 (a)               (a)           (a)           (a)            (a)

                                                                              Member's         Member's
                                                Members'         Member's      Equity           Equity
                                                 Equity           Equity     (Deficit)-       (Deficit)-     Total
                                Weyerhaeuser    (Deficit)-      (Deficit)-    Managing        Nonmanaging   Members'
                               Investment and  Prior to the    Prior to the   Member's         Member's      Equity
                                Advances       Transactions    Transactions   Interest         Interest     (Deficit)
                               --------------  ------------    ------------   ---------       -----------   ---------
<S>                            <C>             <C>             <C>            <C>             <C>           <C>
  BALANCE, December 31, 1994.. $     27,745    $         --   $         --  $         --   $         --   $         --
    Net income................       11,616              --             --            --             --             --
    Net distributions to
     Weyerhaeuser Company.....        9,951              --             --            --             --             --
    Net asset transfers to
     Weyerhaeuser Company.....         (255)             --             --          --               --             --
                               -------------   ------------   ------------  -----------    ------------     ----------

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

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

  BALANCE, December 31, 1996..                       (1,127)        (1,809)           --             --         (2,936)
    Members' distribution.....                       (1,191)            --            --             --         (1,191)
    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'
     net liabilities..........                        5,327         (5,584)           --             --           (257)
    Allocation of managing and
     nonmanaging members'
     interests in members'
     deficit..................                           --         14,817          (148)       (14,669)            --
    Member's contributions....                           --             --         1,632        161,574        163,206
    Net loss- November 19, 1997
     through December 31, 1997.                          --             --           (13)        (1,259)        (1,272)
                                                ------------   ------------  ------------  ------------  -------------
  BALANCE, December 31, 1997..                 $         --   $         --  $      1,471   $    145,646   $    147,117
                                                ===========    ===========   ===========    ===========    ===========

</TABLE>

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

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

                                       52
<PAGE>

                                U.S. TIMBERLANDS

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              (All dollar amounts in thousands except unit amounts)

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

Organization

     The accompanying  consolidated financial statements include the accounts of
U.S.  Timberlands Klamath Falls, L.L.C.  (USTK), a Delaware limited liability
company, and its wholly owned subsidiary U.S. Timberlands Finance Corp. (Finance
Corp.), collectively referred to hereafter as the Company. Finance Corp. serves
as co-obligor for USTK's Notes (defined below). It has nominal assets and does
not conduct any operations. All intercompany transactions have been eliminated
in consolidation.

     U.S. Timberlands Company, L.P. (the MLP) owns a 99% nonmanaging member
interest in USTK. The MLP was formed on June 27, 1997 to acquire and own
substantially all of the equity interests in USTK and to acquire and own the
business and assets of U.S. Timberlands Management Company, L.L.C., formerly
known as U.S. Timberlands Services Company, L.L.C. (Old Services). U.S.
Timberlands Services Company, L.L.C. (the Manager) manages the businesses of the
Company and owns a 1% managing member interest in USTK.

Nature of Operations

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

Initial Public Offering and Related Transactions

         On November 19, 1997, the MLP completed an initial public offering (the
Common Units Offering) of 8,577,487 common units (including the 1,118,803 common
units issued upon exercise of the underwriters' overallotment option in December
1997) representing limited partner interests (Common Units). In addition, the
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 Manager 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 Manager contributed its timber
operations to USTK in exchange for a member's interest in USTK. The Manager 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 Manager 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 MLP 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 Manager, the Transactions were recorded as a reorganization under
common control and therefore remain at their historical cost.

                                       53
<PAGE>

BASIS OF PRESENTATION - PRIOR TO THE TRANSACTIONS

         During 1996, USTK and Old Services were formed and subsequently entered
into an  agreement  with  Weyerhaeuser  Company on August 30,  1996 to  purchase
approximately  601,000 acres of timber and  timberlands and certain other assets
(the  Weyerhaeuser  Acquisition)  as  discussed  further  in Note  3.  As  legal
entities,  USTK and Old Services were not consolidated.  However,  due to common
ownership  and  management,  the  financial  statements of USTK and Old Services
prior  to  the  Transactions  have  been  presented  on a  combined  basis.  All
intercompany transactions between the above entities have been eliminated in the
accompanying financial statements.

BASIS OF PRESENTATION - PREDECESSOR

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

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


                                          January 1, 1996
                                             Through
       Source of Revenues                 August 39, 1996              1995
 --------------------------------------- -----------------     -----------------
    Weyerhaeuser Company................ $         10,157       $         20,065
    Unaffiliated wood processors........            5,421                 11,668
                                         ----------------       ----------------
      Total............................. $         15,578       $         31,733
                                          ===============        ===============


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

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

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

                                       54
<PAGE>

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

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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

USE OF ESTIMATES

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

REVENUE RECOGNITION

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

CONCENTRATION OF CREDIT RISK

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

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

<TABLE>
<CAPTION>

                                      U.S. Timberlands                                     Predecessor
                                  ---------------------------------           -----------------------------------
                                                                               January 1, 1996
                                            August 30, 1996 Through           Through August 29,
                                  1997         December 31, 1996                    1996              1995
                                  ----      -----------------------           ------------------      ----
<S>                               <C>                 <C>                            <C>              <C>
    Weyerhaeuser Company......... --                  --                             65%               63%
    Unaffiliated customer........ 23%                 54%                            14%               14%
    Unaffiliated customer........ 21%                 14%                            10%               --
    Unaffiliated customer........ 15%                 11%                            --                --
    Unaffiliated customer........ 11%                 --                             --                --
</TABLE>


CASH AND CASH EQUIVALENTS

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

                                       55
<PAGE>

LOGGING EQUIPMENT HELD FOR RESALE

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

TIMBER, TIMBERLANDS AND LOGGING ROADS

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

SEED ORCHARD AND NURSERY STOCK

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

PROPERTY, PLANT AND EQUIPMENT

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

DEFERRED FINANCING FEES

         Deferred  financing  fees consist of fees incurred in  connection  with
obtaining the related debt financing.  The Company amortizes  deferred financing
fees  over the  terms of the  related  debt  which  approximates  the  effective
interest method.

INCOME TAXES

         USTK and Old Services are both limited liability  companies  (L.L.C.s).
Accordingly,  USTK and Old  Services  are not liable for federal or state income
taxes since the respective  L.L.C.s'  income or loss is reported on the separate
tax returns of the individual members.  Accordingly, no provision for current or
deferred  income  taxes  has  been  reflected  in  the  accompanying   financial
statements.

FINANCIAL INSTRUMENTS

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

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

                                       56
<PAGE>

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

3.       ACQUISITIONS:

WEYERHAEUSER

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

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


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

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

OCHOCO

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

                                       57
<PAGE>

4.       ACCRUED LIABILITIES:

         The Company's accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                        December 31,              December 31,
                                           1997                      1996
                                  --------------------      ---------------------
<S>                                <C>                      <C>
    Interest......................  $        2,492             $       5,254
    Debt guarantee fee............              --                     1,100
    Severance and harvest tax.....             269                       230
    Employee compensation.........             703                        81
    MLP equity issuance costs.....             617                        --
    Other.........................             868                       573
                                    --------------            --------------
                                    $        4,949            $        7,238
                                    ==============            ==============
</TABLE>

5.       DEBT:

         Debt consists of the following:

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

USTK DEBT - PRIOR TO THE TRANSACTIONS

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

         On July 14, 1997, USTK entered into a long-term  financing  arrangement
with certain banks to finance the Ochoco Acquisition  discussed in Note 3 and to
refinance borrowings under the USTK revolving credit facility and the Company
term loan (the Long-Term Financing Arrangement). The retirement of debt under
credit facilities existing as of July 14, 1997, resulted in an extraordinary
loss on extinguishment of debt of $3,571 due principally to the write-off of
unamortized deferred financing fees. This write-off is recorded as an
extraordinary item in the accompanying statement of operations.

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

                                       58
<PAGE>

HOLDINGS DEBT - PRIOR TO THE TRANSACTION

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

NOTES

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

         In addition, at any time on or prior to November 15, 2000, the Issuers,
at their  option,  may redeem the Notes with the net cash  proceeds  of a common
units offering or other equity  interests of the Company or the MLP, at 109.625%
of the principal amount hereof,  plus accrued and unpaid interest thereon to the
redemption date, provided that at least 65% of the principal amount of the Notes
originally issued remain outstanding immediately following such redemption.  The
Notes contain certain restrictive  covenants,  including limiting the ability of
the Company to make cash  distributions,  incur  additional  indebtedness,  sell
assets or harvest timber in excess of certain limitations.

         In conjunction with the Notes issuance,  USTK retired all existing debt
under the Long-Term  Financing  Arrangement.  This resulted in an  extraordinary
loss on  extinguishment  of debt of $5,766 due  principally  to the write-off of
existing  unamortized deferred financing fees. This write-off is recorded in the
accompanying statement of operations.

BANK CREDIT FACILITY

         Concurrent with the Transactions,  USTK 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).
USTK's  obligations under the Bank Credit Facility  represent  unsecured general
obligations. Average borrowings on the Bank Credit Facility were $14,512,000. As
of December 31, 1997,  there were no  outstanding  borrowings on the Bank Credit
Facility.

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

         The  Bank  Credit  Facility  contains  certain  restrictive  covenants,
including limiting the ability of the 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 Company maintain certain  financial ratios. As of December 31,
1997,  the  Company  was in  compliance  with all  covenants  of the Bank Credit
Facility.

                                       59
<PAGE>

6.       MEMBERS' EQUITY (DEFICIT):

COMMON UNITS OFFERING

         On November 19, 1997, the MLP 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
MLP 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. Net
proceeds of $163,205 from the Common Units Offering were contributed by the MLP
to USTK upon closing of the Transactions.

ALLOCATION OF INCOME (LOSS)

         As  provided  in USTK's  Operating  Agreement,  income  and  losses are
allocated 99% to the MLP and 1% to New Services.

CASH DISTRIBUTIONS

         The MLP is required to make quarterly cash distributions from Available
Cash, as defined in the MLP's Partnership Agreement. The Company will distribute
cash to the MLP to the  extent  necessary  for  the  MLP to  meet  its  required
quarterly cash  distributions,  in accordance with USTK's  Operating  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  Manager,  and  second,  to  the  extent  cash  remains  available,  to
Subordinated Unitholders.

         The MLP's  Partnership  Agreement sets forth certain cash  distribution
target rates for the MLP to meet in order for the  Manager's  share of Available
Cash to increase.  To the extent that the quarterly  distributions  exceed $.550
per  Common  and  Subordinated  Unit,  the  Manager  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
Manager  receives  25% of the excess  Available  Cash and to the extent that the
quarterly  distributions  exceed  $.822 per Common and  Subordinated  Unit,  the
Manager receives 50% of the excess Available Cash.

7.       CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS:

RELATIONSHIP WITH THE MANAGER

         The Manager has the  ability to control  management  of the Company and
the MLP and has all voting  rights of the Company and the MLP except for certain
matters set forth in USTK's  Operating  Agreement  and in the MLP's  Partnership
Agreement.  The ownership of the Subordinated Units by certain affiliates of the
Manager effectively gives the Manager the ability to prevent its removal.

         The Manager does not receive any management  fee or other  compensation
in connection with its management of the Company. The Manager 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.
USTK's Operating Agreement provides that the Manager will determine the expenses
that are  allocable to the Company in any  reasonable  manner  determined by the
Manager in its sole  discretion.  Related  noninterest  bearing  receivables and
payables  between the Manager and the Company are settled in the ordinary course
of business.  As of December 31, 1997,  the Company had a payable to the Manager
of $253.  During  1997,  expenses  allocated  to and  reimbursed  by the Company
totaled $310.

                                       60
<PAGE>

CONSULTING AGREEMENTS

         As of December 31, 1997,  the Manager has  consulting  agreements  with
certain  affiliated  parties  pursuant  to which  each such  person or firm will
provide  consulting  services to the  Manager.  Each  agreement  provides for an
annual retainer of $25, plus an hourly rate for services rendered at the request
of the Manager. Payments by the Manager related to consulting agreements in 1997
were not significant.

PAYABLE TO AFFILIATE

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

MANAGEMENT AND ADVISORY FEES

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

RECEIVABLE FROM AFFILIATE

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

8.       MANAGEMENT INCENTIVE PLANS:

         The MLP has certain equity related  management  incentive plans.  Under
certain  circumstances,  compensation  expense  related  to these  plans  may be
recorded by the MLP. Accordingly,  the compensation charge will then be recorded
as  compensation   expense  in  the  Company's   financial   statements  with  a
corresponding decrease to contributed capital.

9.       COMMITMENTS:

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

                                       61
<PAGE>

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

         (thousands of dollars)

<TABLE>
<CAPTION>


                                                      Quarter Ended
                              --------------------------------------------------------------------
                               December 31(a)     September 30       June 30         March 31(a)       Total Year
                              ---------------     ------------       -------         -----------       ----------
<S>                           <C>                 <C>                <C>             <C>               <C>
1997
Revenues...................   $      36,288     $      17,261     $      11,462      $      12,334     $      77,345
Gross profit (b).............        16,511             7,608             4,141              5,258            33,518
Income (loss) before
  extraordinary item.........         5,457            (1,051)           (3,827)            (1,947)           (1,368)

1996 (c)
Revenues.....................        12,103
Gross Profit (b).............         4,245
Net Loss.....................        (3,023)

</TABLE>
--------------------------
     (a) The quarter ended  December 31, 1997  includes  revenues of $11,750 and
related costs of $7,555 from a property sale. The quarter ended March 31, 1997
includes revenues of $3,494 and related costs of $1,191 from a timber deed sale.

     (b) Gross profit is calculated as revenues less cost of products sold, cost
of timber and property sales and depreciation, depletion and road amortization.

     (c) Due to a  separate  basis of  presentation  prior  to the  Weyerhaeuser
Acquisition  on August  30,  1996 and a  different  ownership  structure  by the
Predecessor,  no information for the quarters ended September 30, 1996 and prior
is  presented.  See  discussion  of the Company and the  Predecessor's  basis of
presentation in Note 1 of the Notes to the Consolidated Financial Statements.

                                       62