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, ~~2003~~2004 Commission File No.: 1-13573-01 1-13573

INLAND FIBER GROUP, LLC

FIBER FINANCE CORP.

(Exact name of registrant as specified in its charter)

DELAWARE	91-1217136
DELAWARE	91-1851612
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
625 Madison Avenue, Suite 10-B, New York, NY	10022
6400 Highway 66, Klamath Falls, Oregon	97601
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code: ~~212~~541-~~755~~884-~~1100~~2240

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

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

Title of Each Class:	Name of Each Exchange on Which Registered:
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 the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during then preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.

Yes x No o

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

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

Yes o No x

Documents incorporated by reference: ~~See item 15. Exhibit Index~~ None

INLAND FIBER GROUP, LLC
FIBER FINANCE CORP.

TABLE OF CONTENTS

			Page
PART I
	Item 1.	Business	1
	Item 2.	Properties	13
	Item 3.	Legal Proceedings	14
	Item 4.	Submission of Matters to a Vote of Security Holders	1415
PART II
	Item 5.	Market for Registrant’s Common Units and Related Security Holder Matters	1516
	Item 6.	Selected Financial Data	1516
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1618
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	2628
	Item 8.	Financial Statements	2628
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	2628
	Item 9A.	Controls and Procedures	29
	Item 9B.	Other Information	29
PART III
	Item 10.	Directors and Executive Officers of the Registrant	2730
	Item 11.	Executive Compensation	2931
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	3033
	Item 13.	Certain Relationships and Related Transactions	3033
	Item 14.	Principal Accounting Fees and Services	3436
PART IV
	Item 15.	Exhibits, Financial Statements, and Reports on Form 8-K	3537

INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

PART I

Item 1. Business.
General

~~Item~~ The business of Inland Fiber Group, LLC (formerly U.S. Timberlands Klamath Falls, LLC), a Delaware limited liability company formed in 1996 (the "Company"), consists of the growing of trees, the sale of logs and standing timber and the sale of timberland. The Company owns approximately 167,000 fee acres of timberland and cutting rights on approximately 68,000 acres of timberland (collectively, the "Timberlands") containing total merchantable timber volume estimated as of January 1, 2005 to be approximately 0.4 ~~Business~~billion board feet ("BBF") 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. The Company also owns and operates its own seed orchard and produces approximately four million conifer seedlings annually from its nursery, approximately 50% of which are used for its own internal reforestation programs, 20% are sold to affiliates, with the balance sold to other forest products companies.

~~General~~ The Timberlands' merchantable timber consists of Ponderosa Pine (approximately 46%) and Douglas Fir (approximately 19%), 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 86,000 acres are actively managed tree farms (the "Plantations"). The Plantations were first established by Weyerhaeuser Company ("Weyerhaeuser") in the early 1960s and acreage has been planted each year since then. Currently, the Plantations contain age classes ranging generally from one to 44 years old. Initial thinning or harvesting of the Plantation stands is expected to begin within the next two years. The balance of the Timberlands is comprised of natural stands. For a more complete description of the Company's properties, see "Properties."

The ~~business~~ ~~of Inland Fiber Group, LLC (formerly U.S. Timberlands Klamath Falls, L.L.C.), a Delaware limited liability company formed in 1996 (the “~~Company~~”),~~ ~~consists~~does ofnot ~~the~~currently ~~growing~~own ofany ~~trees, the~~conversion ~~sale~~facilities ofnor ~~logs and standing timber and the sale of excess land. The Company owns approximately~~does ~~272,000~~ it ~~fee~~presently ~~acres~~intend ofto ~~timberland~~own ~~and~~any ~~cutting~~such ~~rights~~facilities on ~~approximately~~a ~~70,000~~long-term ~~acres~~basis; ofconsequently ~~timberland (collectively~~ the ~~“Timberlands”)~~Company's ~~containing~~log ~~total~~sales ~~merchantable timber volume estimated as of January 1, 2004 to be approximately 0.7 billion board feet (“BBF”) in Oregon east of the Cascade Range. Logs harvested from the Timberlands~~ are ~~sold~~made to unaffiliated third ~~domestic conversion facilities~~parties. ~~These~~ ~~logs~~There are ~~processed~~currently ~~for~~more ~~sale~~than as19 ~~lumber,~~primary ~~plywood~~conversion ~~and~~facilities ~~other~~located ~~wood~~within ~~products,~~a ~~primarily~~150-mile ~~for~~radius use in new residential home construction, home remodeling and repair and general industrial applications. The Company also owns and operates its own seed orchard and produces approximately four million conifer seedlings annually from its nursery, approximately 80% of ~~which are used for its own internal reforestation programs, with~~ the ~~balance sold to other forest products companies~~Company's Timberlands.

~~The Timberlands’~~ In ~~merchantable~~August ~~timber~~1996, ~~consists~~the ofCompany ~~Ponderosa~~and ~~Pine~~an ~~(approximately~~affiliate ~~45%)~~acquired ~~and Douglas Fir (~~approximately ~~14%)~~ 604,000 ~~species~~fee ~~which~~acres ~~have~~of ~~historically~~timberland ~~commanded premium prices over other softwood species, with~~ (the ~~balance~~"Klamath ~~consisting~~Falls ~~of Lodgepole Pine~~Timberlands"), ~~White~~containing ~~Fir~~an ~~and~~estimated ~~other~~merchantable ~~softwood~~timber ~~species.~~volume ~~The Timberlands have stands~~ of ~~varying~~approximately 1.9 ~~ages~~BBF and ~~are~~related ~~unique~~assets infrom ~~the~~Weyerhaeuser ~~forests east of~~ (the ~~Cascade~~"Weyerhaeuser ~~Range~~Acquisition"). ~~in Oregon~~In inNovember ~~that approximately 104~~1997,~~000~~ ~~acres~~the ~~are~~affiliate’s ~~actively~~portion ~~managed tree farms (~~of the ~~“Plantations”). The~~Klamath ~~Plantations~~Falls timberlands were ~~first~~transferred ~~established~~to bythe ~~Weyerhaeuser~~ Company ~~(“Weyerhaeuser”)~~ in ~~the early~~a ~~1960s~~series ~~and~~of ~~acreage~~transactions. ~~has~~In ~~been~~July ~~planted each year since then. Currently~~1997, the ~~Plantations~~Company ~~contain~~acquired approximately ~~age~~ 42,000 ~~classes~~fee ~~ranging~~acres ~~generally~~of ~~from~~timberland ~~one~~and tocutting 43rights ~~years~~on ~~old.~~approximately ~~Initial~~3,000 ~~thinning~~acres ~~or harvesting~~ of ~~the~~timberland ~~Plantation stands is expected to begin within~~ (the ~~next~~"Ochoco ~~three~~Timberlands"), ~~years.~~containing an ~~The~~estimated ~~balance~~merchantable oftimber ~~the~~volume ~~Timberlands is comprised~~ of ~~natural~~approximately ~~stands.~~280 ~~For~~million aboard ~~more~~feet ~~complete~~("MMBF") ~~description~~from ofOchoco ~~the~~Lumber Company’s ~~properties, see “Properties.”~~ ("Ochoco")

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 the Company’s log sales are made to unaffiliated third parties. There are currently more than 18 primary conversion facilities located within a 150-mile radius of the Company’s Timberlands.

In August 1996, the Company and an affiliate 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 November 1997, the affiliate’s portion of the Klamath Falls timberlands were transferred to the Company in a series of transactions. In July 1997, the Company acquired approximately 42,000 fee acres of timberland and cutting rights on approximately 3,000 acres of timberland (the “Ochoco Timberlands”), containing an estimated merchantable timber volume of approximately 280 million board feet (“MMBF”) from Ochoco Lumber Company (“Ochoco”) (the “Ochoco Acquisition”). At the date of acquisition, over 40% of the merchantable timber on the Ochoco Timberlands was at least 80 years old. As of December 31, 2000, the Company had harvested substantially all of the Old Growth timber on the Ochoco Timberlands. During the 4th quarter of 2002, the Company sold the Ochoco property to an affiliate. During October 1999, the first and second quarters of 2001, the third quarter of 2002 and the first half of 2003, the Company contributed primarily non-income producing, pre-merchantable pine plantation timberlands in exchange for an investment in the affiliate (See Item 13. Certain Relationships and Related Transactions, and Notes 3 and 9 to the Consolidated Financial Statements).

INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

~~Formation~~(the "Ochoco Acquisition"). At the date of acquisition, over 40% of the merchantable timber on the Ochoco Timberlands was at least 80 years old. As of December 31, 2000, the Company had harvested substantially all of the old growth timber on the Ochoco Timberlands. During the fourth quarter of 2002, the Company sold the Ochoco Timberlands to an affiliate. During October 1999, the first and second quarters of 2001, the third quarter of 2002 and the first quarter of 2003, the Company contributed primarily non-income producing, pre-merchantable pine plantation timberlands in exchange for an investment in the affiliate (see Item 13. Certain Relationships and Related Transactions, and Notes 3 and 9 to the Consolidated Financial Statements). There were no contributions in 2004.

Formation of the Company

On On November 19, 1997, U.S. Timberlands Company, LP (now known as Pacific Fiber Company, LP), a limited partnership (the “MLP”), acquired substantially all of the equity interests in the ~~Company~~ Company and completed its initial public offering (the “"MLP Offering”") of common units representing limited partner interests (“"Common Units”"). Upon the closing of the acquisition, U.S. Timberlands Services Company, ~~L.L.C.~~LLC (now known as Timber Resource Services, LLC) became the Company’'s managing member (the “Manager”).

As a result of a series of transactions between the MLP and the Manager, the Company became the operating company for the MLP and the Manager owned an aggregate 2% interest in the MLP and the Company on a combined basis.

~~Concurrent~~ Concurrent with the closing of the MLP Offering, the Company and its wholly owned subsidiary, U.S. Timberlands Finance Corp. (“Finance Corp.,” now known as Fiber Finance Corp).), consummated the public offering (the “"Public Note Offering”") of $225.0 million aggregate principal amount of 9 -5/8% unsecured senior notes due 2007 (the “"Notes”). See Item 7 “"Management’'s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.” "

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

On On October 17, 2002, the MLP announced that it had signed a definitive agreement to be acquired by an acquisition company formed by a group led by senior management (the “Privatization Transaction”). The definitive agreement contemplated a cash tender offer for 100% of the outstanding Common Units not already owned by the acquiring entity or its affiliates for $3.00 per unit in cash, followed by a merger of the acquisition company with and into the MLP, pursuant to which each Common Unit not already owned by the acquiring entity or its affiliates would be converted into the right to receive $3.00 per unit in cash. The tender offer commenced on November 19, 2002 and was completed on March 6, 2003. In connection with the tender offer, approximately 71% of the Company’s Common Units were tendered. The remaining Common Units held by non-affiliates that were not purchased in the tender offer ~~were converted into the right to receive~~ ~~$3.00 per Common Unit, in the merger that was completed on June 26, 2003.~~ were

INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

converted into the right to receive $3.00 per Common Unit, in the merger that was completed on June 26, 2003.

Subsequent to the Privatization Transaction, the interests in the Company originally held by the MLP were transferred in a series of transactions to a newly formed limited liability company, IFG Holdings, LLC. IFG Holdings, LLC is 99% owned by American Forest Resources, LLC (formerly known as U.S. Timberlands Yakima, LLC), in which the Company holds a preferred equity interest. As part of this reorganization of the ownership structure of the Company, a Board of Directors was formed for the Company to supervise its operations and a new management arrangement was established under which the Manager provides comprehensive timber management services to the Company pursuant to a fee-based management agreement.

Company Structure and Management

Company Structure and Management

IFG Holdings, LLC owns a 98.9899% member interest in the Company and the Manager owns a 1.0101% non-voting member interest in the Company.

~~The~~ The Company’'s operations are managed by the Manager. Until September 1, 2003, the Manager did not receive any management fee or other compensation in connection with its management of the Company, ~~but~~ but was 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. Expenses reimbursed to the Manager totaled $2,083 for the eight months ended August 31, 2003.

~~Effective~~ Effective September 1, 2003, the Company entered into a new management agreement with the Manager. The management agreement replaced the prior arrangement under which the Company reimbursed the Manager for expenses incurred on the Company’s behalf, as described in the preceding paragraph. The management agreement provides for an annual fee of 2% of the agreed upon valuation of total timber and timberland assets under management, payable monthly and is comparable to other management agreements used in the industry where the manager receives a monthly fee based upon assets under management. In addition, the Company established its own Board of Directors to supervise the management of the Company. ~~Expenses~~Management fees incurred ~~for~~ ~~management~~by of the Company bytotaled $1,338 for the ~~Manager~~four ~~totaled~~months $3ended December 31,~~529~~ 2003 and $34,~~176,~~014 ~~respectively,~~ for the twelve months ended December 31, ~~2003~~2004. ~~and~~Expenses ~~2002,~~not ~~including~~covered under the management agreement totaling $~~1,338~~108 for the ~~period~~four ~~from~~months ~~September~~ended ~~1 through~~ December 31, ~~2003~~2004, ~~under~~and $290 for the ~~management~~twelve ~~agreement~~months ended December 31, 2004 were reimbursed to the Manager.

~~Conflicts~~ Conflicts of interest may arise between the Company and its affiliates, including conflicts relating to the purchase and sale of timber and/or timber deeds. The Company’s audit committee (the “ "Audit Committee”"), consisting of athree ~~majority of~~ independent members of its Board of Directors, is available at the Board’'s discretion to review matters involving conflicts of interest.

The principal executive offices of the Company are located at ~~625~~6400 ~~Madison~~Highway ~~Avenue~~66, ~~Suite~~ ~~10-B~~Klamath Falls, ~~New York~~Oregon, ~~New York 10022~~97601. The telephone number at such offices is (~~212~~541) ~~755~~884-~~1100~~2240.

INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

The Timberlands Timber Growth

Timber growth rates reflect timberland productivity and the rate of return on a timber investment. Growth rate is an important factor in determining when to harvest timber and the harvest potential of timberlands over the long term. Merchantable timber is economically mature for harvesting when its current growth rate falls below the desired rate of return on the investment in the standing trees. The average growth rate from regeneration to economic maturity measures the capacity of the land for timber production. The Company's older and natural stands on the Timberlands that are expected to provide the near term harvest have a current average growth rate of approximately 150 board feet per acre per annum. The younger plantations, that presently have less merchantable volume, are growing at a rate that is expected to average at least 315 board feet per acre per annum to economic maturity in 50 to 60 years.

~~Timber~~ This growth ~~rates~~rate ~~reflect~~is ~~timberland~~based ~~productivity~~on ~~and~~calculated volumes at the ~~rate~~time of ~~return on a timber investment~~maturity. ~~Growth~~ ~~rate~~ The isCompany anhas ~~important~~achieved ~~factor~~higher ingrowth ~~determining~~rates ~~when~~on ~~to harvest timber and~~ the ~~harvest~~Plantations ~~potential~~by ofplanting ~~timberlands over~~high ~~the~~quality ~~long~~seedlings, ~~term.~~by ~~Merchantable~~eliminating competing non-timber growth isfrom ~~economically~~the ~~mature~~Timberlands ~~for~~and ~~harvesting~~by ~~when~~applying ~~its~~modern ~~current~~forestry ~~growth rate~~practices ~~falls~~to ~~below~~assist the ~~desired~~growth ~~rate~~ of ~~return~~the ontimber. ~~the~~Currently, ~~investment~~nearly inall of the ~~standing~~seedlings ~~trees.~~planted ~~The~~are ~~average growth~~grown ~~rate~~ from ~~regeneration~~superior toseed ~~economic~~produced ~~maturity~~in ~~measures~~ the ~~capacity~~Company's ofseed ~~the land for timber production~~orchard. ~~The~~ ~~Company’s~~Management ~~older~~does ~~and~~take ~~natural~~action ~~stands~~to on enhance the ~~Timberlands~~growth ~~that~~rate ~~are~~in ~~expected to provide~~ the ~~near term~~natural ~~harvest~~stands ~~have~~as awell. ~~current~~For ~~average~~example, ~~growth~~selective ~~rate~~harvesting ofin ~~approximately~~the ~~150~~slower ~~board~~growing ~~feet~~natural ~~per~~stands ~~acre~~opens ~~per~~up ~~annum.~~the ~~The~~ timber ~~younger~~stand ~~plantations,~~allowing ~~that~~for ~~presently~~more ~~have~~vigorous ~~less~~growth ~~merchantable~~of ~~volume,~~the ~~are~~remaining ~~growing~~trees. atWhen ait ~~rate that~~ is ~~expected~~no tolonger ~~average~~possible atto ~~least~~maintain ~~315~~acceptable ~~board~~growth rates ~~feet~~in ~~per~~these ~~acre~~stands ~~per~~they ~~annum~~will tobe ~~economic~~harvested ~~maturity~~entirely inand 50converted to 60faster ~~years.~~growing plantations.

Harvest Plans

~~This~~ The Company strives to manage all of its Timberlands, including the Plantations, in an economically prudent ~~growth~~ and ~~rate~~environmentally issensitive 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 ~~calculated~~analyses ~~volumes~~of at the ~~time~~size, age, and class distribution of the Timberlands and the economic maturity of each harvest tract. The factors the Company ~~has~~considers ~~achieved~~in ~~higher~~determining its long-term ~~growth~~ harvest ~~rates~~plans oninclude, ~~the~~among ~~Plantations~~other bythings, ~~planting~~current ~~high~~and ~~quality~~expected ~~seedlings~~market conditions, bycompetition, ~~eliminating~~customer ~~competing~~requirements, ~~non-timber~~the age, ~~growth~~ size ~~from~~and species distribution of the ~~Timberlands~~Company's timber, assumptions about timber growth rates (which are improving over time as a result of technological and bybiological ~~applying~~advances ~~modern~~that ~~forestry~~improve forest management practices), toexpected ~~assist~~acquisitions ~~the~~and ~~growth~~dispositions, access ofto the ~~timber.~~ ~~Currently~~Timberlands, ~~nearly~~availability ~~all~~ of ~~the~~contractors, ~~seedlings~~sales ~~planted~~contracts ~~are~~and ~~grown~~environmental ~~from~~and ~~superior~~regulatory ~~seed~~constraints. ~~produced~~The inCompany's harvest plans reflect the Company’'s ~~seed~~expectations ~~orchard.~~for ~~Management~~each ~~does~~year's ~~take~~harvest, ~~action~~including the sites to ~~enhance~~be harvested, the ~~growth~~manner ~~rate~~of inharvesting such sites, the ~~natural stands~~volume asof ~~well.~~each ~~For~~species ~~example~~to be harvested, ~~selective~~the ~~harvesting~~prices inexpected ~~the~~to ~~slower~~be ~~growing~~received ~~natural~~for ~~stands~~the ~~opens~~Company's uptimber, the amount ~~timber~~ of ~~stand~~stumpage ~~allowing~~sales, ~~for~~logging ~~more~~and ~~vigorous~~other ~~growth~~costs, ofthinning ~~the~~operations ~~remaining~~and ~~trees.~~other ~~When~~relevant itinformation. isThe noCompany ~~longer~~has ~~possible~~the flexibility to ~~maintain~~update ~~acceptable~~its ~~growth~~harvest ~~rates~~plans during the year to take into consideration changes in these ~~stands~~factors. ~~they~~The ~~will~~Company be harvested ~~entirely~~or ~~and converted~~committed to ~~faster~~harvest ~~growing~~from ~~plantations.~~log, stumpage and timber

Harvest Plans

The Company strives to manage all of its Timberlands, including the Plantations, in an economically prudent and environmentally sensitive manner in order to maximize their value over time. Integral to this management process are the Company’s long-term harvest plans. The Company prepares its harvest plans annually based on analyses of the size, age, and class distribution of the Timberlands and the economic maturity of each harvest tract. The factors the Company considers in determining its long-term harvest plans include, among other things, current and expected market conditions, competition, customer requirements, the age, size and species distribution of the Company’s timber, assumptions about timber growth rates (which are improving over time as a result of technological and biological advances that improve forest management practices), expected acquisitions and dispositions, access to the Timberlands, availability of contractors, sales contracts and environmental and regulatory constraints. The Company’s harvest plans reflect the Company’s expectations for each year’s harvest, including the sites to be harvested, the manner of harvesting such sites, the volume of each species to be harvested, the prices expected to be received for the Company’s timber, the amount of stumpage sales, logging and other costs, thinning operations and other relevant information. The Company has the flexibility to update its harvest plans during the year to take into consideration changes in these factors. The Company harvested or committed to harvest from log, stumpage and timber deed sales 111 million board feet (MMBF) in 2003 and plans to harvest, or commit to harvest, approximately 66 MMBF in 2004. The Company sold 53 MMBF through property sales in 2003. If current market conditions do not improve, the Company will be required to harvest its current Timberlands more aggressively over the next year. If market conditions improve future harvests could be expected to decline to a level which the Company considers to be more sustainable over the long term.

INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

~~Because~~ ~~harvest~~deed ~~plans~~sales ~~are~~61 ~~based~~million onboard ~~certain~~feet ~~assumptions,~~(MMBF) ~~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~~2004 ~~harvest~~and plans. ~~Although~~to ~~the Company’s Notes place certain limitations on the~~ harvest ~~plans which may limit the cash flow available for unrestricted use in the future~~, ~~the~~or ~~Company believes~~commit ~~that it generally has sufficient flexibility~~ to ~~permit~~harvest, ~~modifications~~approximately in55 ~~response~~MMBF ~~to fluctuations~~ in ~~the market for logs and lumber and the other factors described above~~2005. InThe ~~2002, because of accelerated harvesting during the fourth quarter of salvage timber resulting from the Toolbox Fire, the~~ Company ~~exceeded~~ ~~the~~sold ~~allowable~~210 ~~four year harvest levels by 6.9~~ MMBF ~~and,~~through asproperty ~~required~~sales ~~under the indenture governing the Notes (the “Indenture”), had placed $662~~ in ~~a restricted account only to be used in ways prescribed in the Indentures~~2004. AIf ~~balance~~current ofmarket ~~$63 remained in the restricted account~~conditions as do ofnot ~~December 31~~improve, ~~2003. As of December 31, 2003,~~ the Company ~~was~~will inbe ~~compliance~~required ~~with~~to ~~the~~harvest ~~covenants contained~~its ~~in the Notes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” If the Company’s~~ current ~~harvest~~Timberlands ~~plans~~more ~~are~~aggressively ~~pursued~~over ~~unaltered for~~ the next ~~ten~~year. ~~years,~~If ~~if it consummates the land sales contemplated by its strategic plan and if~~market ~~its~~ conditions ~~other~~improve ~~strategic~~future ~~assumptions~~harvests ~~prove~~could to be ~~accurate,~~expected ~~the~~to ~~Company expects that its timber inventory will~~ decline ~~through~~to ~~2010 and Ponderosa Pine volume will increase as~~ a ~~percentage~~level ofwhich ~~its~~the ~~total timber inventory by such date. The~~ Company ~~expects~~considers ~~that~~to ~~its~~be ~~inventory~~more ~~would~~sustainable ~~remain relatively stable thereafter.~~over Long-term harvest plans, growth rates and forest inventory levels were reviewed during 2003. Such harvest plans, land sales and other strategic assumptions do not take into account any acquisition that the ~~Company~~long ~~may consummate during such period~~term.

~~Access~~ Because harvest plans are based on certain assumptions, many of which are beyond the Company's control, there can be no assurance that the Company will be able to harvest the volumes projected in its harvest plans. Although the Company's Notes place certain limitations on the harvest plans which may limit the cash flow available for unrestricted use in the future, the Company believes that it generally has sufficient flexibility to permit modifications in response to fluctuations in the market for logs and lumber and the other factors described above. In 2002, because of accelerated harvesting during the fourth quarter of salvage timber resulting from the Toolbox Fire, the Company exceeded the allowable four year harvest levels by 6.9 MMBF and, as required under the indenture governing the Notes (the “Indenture”), had placed $662 in a restricted account only to be used in ways prescribed in the Indenture. A balance of $0 remained in the restricted account as of December 31, 2004. As of December 31, 2004, the Company was in compliance with the covenants contained in the Notes. See ”Item 3. Legal Proceedings” for a discussion of certain litigation initiated against the Company, among others, with respect to the Notes and the decision of the Delaware Court of Chancery with respect to the Company’s compliance with such covenants and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations." If the Company's current harvest plans are pursued unaltered for the next ten years, if it consummates the land sales contemplated by its strategic plan and if its other strategic assumptions prove to be accurate, the Company expects that its timber inventory will decline through 2010 and Ponderosa Pine volume will increase as a percentage of its total timber inventory by such date. The Company expects that its inventory would remain relatively stable thereafter. Long-term harvest plans, growth rates and forest inventory levels were reviewed during 2003. Such harvest plans, land sales and other strategic assumptions do not take into account any acquisition that the Company may consummate during such period.

Access

~~The~~ The Timberlands are accessible by a system of approximately 54,~~000~~200 miles of established roadways or low maintenance roads owned by the Company or its affiliates. The Company uses third party road crews to conduct construction and maintenance on the Timberlands. The Company regularly enters into reciprocal road use agreements with the United States Department of Agriculture - Forest Service (“"USFS”") and the United States Department of Interior Bureau of Land Management (“"BLM”") and cooperates with such agencies in numerous cost ~~sharing~~sharing arrangements regarding jointly used roads.

Sales and Markets

~~Sales~~ The Company sells its timber through log sales, stumpage sales and ~~Markets~~deed sales. Under a log sale, the Company identifies a block of timberland that is ready to be harvested and solicits

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

INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

~~The~~offers ~~Company~~from ~~currently~~potential ~~sells~~customers ~~its~~for ~~sawlogs~~delivery orof ~~stumpage~~logs. ~~principally~~After toa ~~unaffiliated~~price ~~wood~~and ~~products~~volume ~~manufacturers and~~have ~~sells~~been ~~its~~agreed ~~chips~~among tothe ~~unaffiliated~~parties, ~~pulp~~the ~~mills~~Company orcontracts ~~hardboard~~a ~~plants.~~third ~~The~~party ~~percentage~~to ofharvest ~~logs~~the ~~which are~~acreage ~~sold~~and asdeliver ~~sawlogs/stumpage~~to ora ~~pulp~~roadside ~~logs~~site ison ~~dependent~~the ~~upon~~Timberlands, ~~among~~where a ~~other~~contracted ~~things,~~trucking ~~the~~company ~~species~~picks ~~mix and~~up ~~quality~~the oflogs ~~the~~and ~~inventory~~delivers ~~harvested~~them ~~and~~to the ~~market~~customer. ~~dynamics~~A ~~affecting~~stumpage ~~the~~sale ~~region.~~is ~~Most~~similar ofto ~~the timber~~a onlog ~~the~~sale ~~Timberlands~~in isthat ~~softwood,~~the ~~which,~~Company ~~due~~solicits tooffers from its ~~long~~customers ~~fiber,~~for ~~strength,~~timber ~~flexibility~~on ~~and~~a ~~other characteristics,~~block isof ~~generally~~timberland ~~preferred~~that ~~over~~is ~~hardwood~~ready ~~for~~to ~~construction~~be ~~lumber~~harvested. However, ~~and~~under ~~plywood.~~a ~~Once~~stumpage ~~processed~~contract, ~~sawlogs~~ ~~are~~the ~~suitable~~Company ~~for~~sells ~~use~~the ascustomer ~~structural~~the ~~grade~~right ~~lumber,~~to ~~appearance~~harvest ~~grade~~the ~~boards~~timber, ~~plywood~~or stumpage, and ~~laminated veneer~~the ~~and~~customer ~~can~~arranges ~~also~~to beharvest ~~manufactured~~and ~~for~~deliver ~~such~~the ~~end~~logs. ~~uses~~Under asa ~~window~~stumpage ~~trim~~contract, ~~molding~~revenue ~~and~~recognition ~~door~~occurs ~~jambs.~~as ~~During 2003,~~the ~~sawlogs,~~timber ~~stumpage~~is harvested ~~sales~~by ~~and~~the ~~timber~~customer, ~~deed~~as ~~sales~~the ~~accounted~~Company ~~for~~retains ~~approximately~~the ~~49%,~~risk 0%of ~~and~~loss ~~19%, respectively,~~until of the ~~Company’s~~timber ~~revenue~~is harvested. ~~Chips,~~A ~~which~~timber ~~can~~deed besale ~~used~~is similar to ~~make~~a ~~hardboard~~stumpage ~~or pulp~~sale, ~~and~~ ~~seedlings~~except ~~combined~~revenue ~~accounted~~recognition ~~for~~occurs 5%when of the ~~Company’s~~contract ~~revenues~~is inexecuted, ~~2003.~~as ~~There~~the ~~were~~Company ~~property sales~~passes inthe ~~2003~~risk of loss ~~$10.1 million, compared~~ to ~~2002~~the ~~property~~customer ~~sales~~when ofthe ~~$5.8~~contract ~~million.~~is executed.

The Company’s ~~customers~~currently ~~include~~sells ~~numerous~~its sawlogs or stumpage principally to unaffiliated ~~operators~~wood ofproducts ~~conversion~~manufacturers ~~facilities.~~and ~~Since~~ sells its ~~acquisition~~chips ofto ~~the~~unaffiliated ~~Klamath~~pulp ~~Falls~~mills ~~Timberlands~~or inhardboard ~~August~~plants. ~~1996,~~The ~~the~~percentage ~~Company~~of ~~has~~logs which are sold ~~logs~~as ~~and~~sawlogs/stumpage ~~chips from~~or ~~such~~pulp ~~timberlands~~logs tois ~~over~~dependent 25upon, ~~different~~among ~~customers.~~other ~~In 2003~~things, ~~sales~~the tospecies ~~Boise~~mix ~~Cascade,~~and ~~Murphy~~quality ~~Veneer, Timber~~of ~~Products,~~the ~~Scott~~inventory ~~Timber,~~harvested and ~~Columbia~~the ~~Plywood~~market ~~accounted~~dynamics ~~for~~affecting ~~approximately~~the ~~65%~~region. Most of the ~~Company’s~~timber on the Timberlands is softwood, which, due ~~revenue~~to ~~from~~its ~~log~~long ~~sales.~~fiber, Nostrength, flexibility and other ~~single~~characteristics, ~~non-affiliated~~is ~~customer~~generally ~~accounted~~preferred over hardwood for ~~more~~construction ~~than~~lumber 4%and ofplywood. ~~the Company’s~~Once ~~net~~processed, ~~revenues~~sawlogs are suitable for ~~2003.~~use ~~Although~~as ~~the~~structural ~~loss~~grade oflumber, ~~one~~appearance orgrade ~~more~~boards, ofplywood and ~~such~~laminated ~~customers~~veneer orand ~~other significant~~can ~~customers~~also ~~could~~be ~~have~~manufactured afor ~~material~~such ~~adverse~~end ~~effect~~uses onas ~~the~~window ~~Company’s~~trim, ~~results~~molding ofand ~~operations~~door jambs. During 2004, ~~the~~ ~~Company~~sawlogs, ~~believes~~stumpage ~~that~~sales ~~the~~and ~~capacity~~timber deed sales accounted for ~~processing~~approximately ~~wood~~24%, ~~fiber~~0%, inand 7%, respectively, of the Company’'s revenue. ~~markets~~Chips, ~~currently is~~which incan ~~balance~~be ~~with~~used ~~the~~to ~~supply~~make ~~and~~hardboard ~~that,~~or ~~therefore~~pulp, ~~such~~and ~~customers~~seedlings ~~could~~combined beaccounted ~~replaced~~for ~~with~~5% ~~some~~of ~~additional freight~~the ~~costs~~Company's revenues in 2004. There ~~are~~were ~~currently~~property ~~more~~sales ~~than~~in 182004 ~~primary~~of ~~conversion~~$28.1 ~~facilities~~million, ~~located~~compared ~~within~~to a2003 ~~150-mile radius~~property sales of ~~the Company’s Timberlands~~$10. 1 million.

~~Seasonality~~ The Company's customers include numerous unaffiliated operators of conversion facilities. Since its acquisition of the Klamath Falls Timberlands in August 1996, the Company has sold logs and chips from such timberlands to over 25 different customers. In 2004, sales to Boise Cascade, BC Timber Properties, Murphy Veneer, and Columbia Plywood accounted for approximately 71% of the Company's revenue from log and timber deed sales. No other single non-affiliated customer accounted for more than 8% of the Company's net revenues for 2004. Although the loss of one or more of such customers or other significant customers could have a material adverse effect on the Company's results of operations, the Company believes that the capacity for processing wood fiber in the Company's markets currently is in balance with the supply and that, therefore, such customers could be replaced with some additional freight costs. There are currently more than 19 primary conversion facilities located within a 150-mile radius of the Company's Timberlands.

Seasonality

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

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

INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

~~Competition~~ constraints is that log sales volumes are typically at their lowest in the first quarter, improving in the second quarter and at their high during the third and fourth quarters. Most customers in the region react to this seasonality by carrying high log inventories at the end of the calendar year at a level that provides sufficient inventory to carry them to the second quarter of the following year.

~~Due~~ Contributing to ~~transportation~~this ~~costs,~~seasonality ~~domestic~~of ~~conversion~~log ~~facilities~~volumes inis the ~~Pacific~~market ~~Northwest tend~~demand tofor ~~purchase~~lumber ~~raw~~and ~~materials~~related ~~within~~products ~~relatively~~which ~~confined geographic areas, generally within a 200-mile radius. It~~ is ~~generally~~typically ~~recognized~~lower ~~that~~in ~~log suppliers such as~~ the ~~Company~~first ~~provide~~or ~~their~~winter ~~market~~quarter ~~with~~when aactivity ~~commodity~~in ~~product. The Company and its competitors all benefit from~~ the ~~same~~construction ~~competitive advantages in the~~industry ~~region--namely,~~is ~~close proximity to numerous mills~~slower, ~~and~~but ~~positive~~increasing ~~demographic trends~~during of the ~~Pacific~~spring, ~~Northwest~~summer and ~~the~~fall ~~West Coast~~quarters. ~~Therefore,~~Log ~~the Company~~ and ~~its~~ ~~competitors~~stumpage ~~are~~prices ~~currently~~generally ~~able~~increase toin ~~sell all~~ the ~~logs~~spring ~~they~~with ~~are able to produce at a market clearing price although~~ this ~~price~~build ~~has~~up ~~been~~of ~~adversely~~construction ~~affected~~activity bymatching ~~international competition. Additional competitive factors within a market area generally will include species and grade, quality, ability to supply logs which consistently meet~~ the ~~customers’~~timing ~~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~~re-~~quality logs.~~entry ~~The~~to ~~Company~~all ~~has~~forested noareas ~~conversion facilities~~ and ~~therefore~~increased ~~does not compete~~logging ~~with its customers for logs~~activity. ~~The Company believes that this gives it an advantage over certain of its competitors that also own conversion facilities.~~

Competition

~~The~~ 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 ~~competes~~provide their market with ~~numerous~~a ~~private~~commodity ~~land~~product. The Company and ~~timber~~its ~~owners~~competitors inall benefit from the ~~northwestern~~same ~~United~~competitive ~~States~~advantages ~~and~~ in the ~~state~~region--namely, ~~agencies~~close ofproximity ~~Oregon~~to numerous mills, and aspositive ~~well~~demographic astrends of ~~foreign~~the ~~imports,~~Pacific ~~primarily~~Northwest ~~from~~and ~~Canada,~~the ~~Chile~~West Coast. Therefore, the Company and ~~New Zealand.~~its Incompetitors ~~recent~~are ~~years,~~currently ~~the~~able ~~strength~~to ofsell all the ~~U.S.~~logs ~~dollar~~they ~~combined~~are ~~with~~able ~~the~~to ~~much~~produce ~~lower~~at ~~value~~a ofmarket ~~currencies in~~clearing ~~Canada~~price, ~~the~~although ~~Pacific~~this ~~Rim~~price ~~and~~has ~~South~~been adversely ~~America~~affected ~~have~~by ~~made~~ international competition. Additional competitive factors within a ~~larger~~market ~~factor in~~area ~~competitive~~generally ~~pricing.~~will Ininclude ~~addition~~species and grade, ~~the~~quality, ~~Company~~ability ~~competes~~to ~~with~~supply ~~the~~logs ~~USFS,~~which consistently meet the ~~BLM~~customers' specifications and ~~the~~ability ~~Bureau~~to ofmeet ~~Indian~~delivery ~~Affairs~~requirements. ~~Certain~~The Company believes that it has a reputation as a stable and consistent supplier of ~~the~~well merchandised, high-quality logs. The Company’s ~~competitors~~has ~~have~~no ~~significantly~~conversion ~~greater~~facilities ~~financial~~and ~~resources than~~therefore ~~the~~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~~ The Company ~~believes~~competes ~~that~~with itnumerous isprivate ~~competitive~~land inand ~~the~~ timber ~~business~~owners ~~for~~in the ~~following~~northwestern ~~reasons:~~United ~~(i)~~States and the ~~Company~~ ~~has~~state ~~substantial~~agencies ~~holdings~~ of ~~timber~~Oregon, ~~properties~~as ~~which~~well ~~include~~as ~~approximately~~of ~~0.7~~foreign ~~BBF~~imports, ofprimarily ~~merchantable~~from Canada, ~~good~~ ~~quality timber~~Chile, ~~approximately~~and New ~~104~~Zealand. Until recently,~~000~~ ~~acres~~the strength of ~~plantation~~the ~~timberland~~U.S. ~~and~~dollar aagainst ~~full-scale~~Pacific ~~seed~~Rim ~~orchard~~ and ~~nursery~~South ~~operation~~American ~~located~~currencies inmade ainternational ~~region~~competition ~~with~~ a large ~~number~~factor ofin ~~conversion~~competitive ~~facilities;~~pricing. ~~(ii)~~Recent ~~the Company~~weakness ~~focuses~~of onthe ~~owning~~U.S. ~~timberlands~~dollar ~~rather~~may ~~than~~reopen ~~operating~~some ~~conversion~~export ~~facilities, which minimizes~~markets ~~the Company’s cost structure~~ and ~~capital~~reduce ~~expenditures, allows~~ the ~~Company~~level toof ~~seek~~log ~~the~~imports, ~~most~~although ~~favorable markets~~it ~~for~~is ~~its~~premature ~~timber~~to ~~rather~~determine ~~than~~whether ~~being~~this ~~committed~~will toin ~~supply~~fact ~~its~~occur. ~~own~~In ~~facilities~~addition, ~~and ensures that~~ the Company ~~will~~competes ~~not compete~~ with ~~its~~the ~~customers;~~USFS, ~~and (iii)~~ the ~~Company’s~~BLM ~~access~~and to the ~~Manager’s computerized~~Bureau ~~geographic~~of ~~information~~Indian ~~system~~Affairs. ~~(“GIS”)~~Certain ~~enables~~of the Company's tocompetitors ~~evaluate the~~have ~~optimal~~significantly ~~timing~~greater ~~and~~financial ~~patterns~~resources ofthan the ~~harvest of its Timberlands and evaluate and integrate acquisitions of additional timberlands~~Company.

~~Resource~~ The ~~Management~~Company believes that it is competitive in the timber business for the following reasons: (i) the Company has substantial holdings of timber properties which include approximately 0.4 BBF of merchantable, good quality timber, approximately 86,000 acres of plantation timberland and a full-scale seed orchard and nursery operation located in a region with a large number of conversion facilities; (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

Timber Resource Management

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

INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

~~Harvesting on~~being ~~the~~committed ~~Timberlands~~to issupply ~~conducted~~its ~~using~~own ~~both selective and regeneration harvesting. In selective harvesting~~facilities, a ~~partial harvest provides merchantable timber~~ and ~~opens~~ensures upthat the ~~stand~~Company ~~for~~will ~~supplemental~~not ~~growth~~compete ~~on the~~with ~~remaining stand. Harvest entries are separated by approximately 1 to 15 years and each entry~~its is customers; ~~prescribed for volume to be removed, spacing to be provided,~~ and ~~diameter~~(iii) ~~limits~~the toCompany's beaccess ~~harvested. In regeneration harvesting, which is used~~ to ~~harvest approximately 60% of~~ the ~~Company~~Manager’s ~~timber, all~~computerized ~~merchantable~~geographic ~~volume~~information issystem ~~removed~~("GIS") inenables ~~a single harvest. After an area has been regeneration harvested,~~ the Company ~~employs a reforestation contractor~~ to ~~plant~~evaluate ~~two-year-old~~the ~~seedlings at an~~ optimal ~~density of~~timing ~~approximately 300 trees per acre. The Company also attempts to protect~~ and ~~maintain~~patterns ~~the~~of ~~ecosystem within the Timberlands while providing for a reasonable~~ harvest. ~~For example, the Company typically leaves a mix~~ of ~~green~~its Timberlands and ~~dead~~evaluate ~~trees at the harvest site, including some large trees, snags~~ and ~~downed logs~~integrate toacquisitions ~~provide habitats for a variety~~ of ~~wildlife species while enriching the soil for successive~~additional ~~generations of trees~~ timberlands.

Resource Management
Timber Resource Management

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

Harvesting on the Timberlands is conducted using both selective and regeneration harvesting. In selective harvesting, a partial harvest provides merchantable timber and opens up the stand for supplemental growth on the remaining stand. Harvest entries are separated by approximately 1 to 15 years and each entry is prescribed for volume to be removed, spacing to be provided, and diameter limits to be harvested. In regeneration harvesting, which is used to harvest approximately 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 an optimal density of approximately 300 trees per acre. The Company also attempts to protect and maintain the ecosystem within the Timberlands while providing for a reasonable harvest. For example, the Company typically leaves a mix of green and dead trees at the harvest site, including some large trees, snags and downed logs to provide habitats for a variety of wildlife species while enriching the soil for successive generations of trees.

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

The Company’'s policy is to ensure that every acre harvested is reforested in order to enhance the long-term value of its timberlands. Based on the geographic and climatic conditions of a given harvest site, harvested areas may be regenerated naturally, by leaving mature trees to reseed the area, or replanted with seedlings. Natural regeneration methods are widely used on approximately 70% of the Company’s harvested land. Approximately 38% of the Timberlands acreage currently consists of Plantations. The Company expects to convert an average of 7,000 acres of natural stands per year over the next three years to Plantations. The seed orchard produces seed from trees selected because they were the best genotype in their respective environments. During 2003, the Company planted approximately 3.0 million seedlings and expects to plant 1.6 million seedlings in 2004. The Company uses the seed collected from its orchard (representing approximately 90% of seedlings planted) to grow trees with desirable traits such as superior growth characteristics, good form and disease resistance, resulting in greater wood volume over a rotation than that generated by naturally regenerated seedlings. The seedlings are grown in the Company’s nursery, which uses seeds from the Company’s seed orchard, which was established by Weyerhaeuser in 1973.

~~INLAND~~ INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

~~Geographic~~ of ~~Information~~a ~~System~~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 52% of the Timberlands acreage currently consists of Plantations. The Company expects to convert an average of 9,000 acres of natural stands per year over the next three years to Plantations. The seed orchard produces seed from trees selected because they were the best genotype in their respective environments. During 2004, the Company planted approximately 3.0 million seedlings and expects to plant 1.9 million seedlings in 2005, plus another 0.9 million seedlings on affiliate lands. The Company uses the seed collected from its orchard (~~“GIS”~~representing approximately 90% of seedlings planted) to grow trees with desirable traits such as superior growth characteristics, good form and disease resistance, resulting in greater wood volume over a rotation than that generated by naturally regenerated seedlings. The seedlings are grown in the Company's nursery, which uses seeds from the Company's seed orchard, which was established by Weyerhaeuser in 1973.

Geographic Information System ("GIS")

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

Federal and State Regulation

Endangered Species

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

Endangered Species

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

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

Based on the 2003 survey year, there were approximately 73 bald eagle sites on the Timberlands. The Company observes harvesting restrictions around the eagle sites. Due in part to efforts of the Company and its predecessor, the bald eagle was recently removed from the endangered species list; although the Company continues to observe its past operating practices in the affected areas.

~~INLAND~~ INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

~~In addition,~~harvesting ~~the~~on ~~Company~~approximately conducts surveys to determine the presence of northern spotted owls. The surveys have been conducted every year in order to (i) meet the regulatory requirements for timber harvest and other management activities27, ~~(ii)~~000 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 sightingsacres. ~~The most recent of such surveys was completed in~~ ~~August 2003, and identified approximately 24 northern spotted owl sites affecting~~ ~~the Timberlands, three of which are located, totally, on the Timberlands.~~

~~The~~ ~~Company~~ The ~~believes~~United ~~that~~States itFish isand ~~managing~~Wildlife ~~its~~Service ~~harvesting~~(the ~~operations~~"USFWS") inlisted the ~~areas~~American ~~affected~~bald byeagle ~~protected species~~ in ~~substantial~~1976, ~~compliance~~the ~~with~~northern ~~applicable~~spotted ~~federal~~owl ~~and~~in ~~state regulations. Based on certain consultants’ reports~~1990, and ~~on management’s knowledge of~~ the ~~Timberlands,~~bull ~~the~~trout ~~Company~~in ~~does not~~1993 ~~believe~~as ~~that~~threatened ~~there are any~~ species ~~protected~~throughout ~~under the Endangered Species Act or similar state~~its ~~laws~~range ~~that~~in Washington, ~~under~~Oregon ~~current regulations~~ and ~~Court~~California. ~~interpretation,~~The ~~would~~Oregon ~~have~~Forest aPractices ~~material~~Act ~~adverse~~and ~~effect on~~related ~~the~~regulations ~~Company’s~~also ~~ability~~protect toendangered ~~harvest the Timberlands in accordance with current harvest plans. There can be no assurance, however, that~~ species ~~within~~and ~~the~~has ~~Timberlands~~specific ~~may~~provisions ~~not~~governing ~~subsequently~~habitat ~~receive protected~~protection ~~status~~for ~~under~~ the ~~Endangered~~spotted ~~Species~~owl, ~~Act or that currently protected species may not be discovered in significant numbers within~~ the ~~Timberlands.~~bald ~~Additionally,~~eagle ~~there~~and ~~can~~other ~~be no assurance~~threatened ~~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~~.

Based on the 2004 survey year, there were approximately 29 bald eagle sites on the Timberlands. The Company observes harvesting restrictions around the eagle sites. Due in part to efforts of the Company and its predecessor, the bald eagle was recently removed from the endangered species list; although the Company continues to observe its past operating practices in the affected areas.

~~The~~ In ~~operation~~addition, of the ~~Timberlands~~Company isconducts ~~subject~~surveys to ~~specialized~~determine ~~statutes and regulations in~~ the ~~State~~presence of ~~Oregon,~~ ~~which~~northern ~~has~~spotted ~~enacted~~owls. ~~laws~~The ~~which~~surveys ~~regulate~~have ~~forestry~~been ~~operations,~~conducted ~~including~~every ~~the~~year ~~Forest~~in ~~Practices Act,~~order ~~which~~to ~~addresses~~(i) ~~many~~meet ~~growing,~~the ~~harvesting~~regulatory ~~and~~requirements ~~processing~~for ~~activities on forest lands. Among other~~timber ~~requirements,~~harvest ~~these laws restrict the size~~ and ~~spacing~~other ofmanagement ~~regeneration harvest units~~activities, ~~and~~(ii) ~~impose certain~~monitor ~~reforestation~~existing ~~obligations~~sites onand determine the ~~owners~~current status of ~~forest~~such ~~lands.~~sites, ~~The~~(iii) ~~State~~determine ofif ~~Oregon~~areas ~~requires~~identified aas ~~company to~~containing ~~provide~~suitable ~~prior~~habitat ~~notification~~are ~~before~~supporting ~~beginning~~owls ~~harvesting~~and ~~activity.~~(iv) ~~The~~investigate ~~Forest~~other ~~Practices~~spotted ~~Act~~owl ~~and~~or other ~~state~~species ~~laws~~sightings. ~~and~~The ~~regulations~~most ~~control~~recent ~~timber~~of ~~slash~~such ~~burning,~~surveys ~~operations~~was ~~during~~completed ~~fire~~in ~~hazard~~August ~~periods~~2004, ~~logging~~ ~~activities~~and ~~which~~identified ~~may~~approximately ~~affect~~25 ~~water~~northern ~~courses~~spotted orowl insites ~~proximity~~affecting tothe ~~certain ocean and inland shore lines~~Timberlands, ~~water~~two ~~protection~~of ~~and~~which ~~enhancement~~are ~~and~~located, ~~certain~~totally, ~~grading~~on ~~and~~the ~~road construction activities~~Timberlands. ~~The Company believes it is in substantial compliance with these regulations.~~

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

Timberlands

~~The~~ ~~Company’s~~ ~~operations~~The ~~are~~operation ~~subject~~of tothe ~~federal,~~Timberlands ~~state~~is ~~and~~subject ~~local~~to ~~environmental~~specialized ~~laws~~statutes and regulations ~~relating~~ toin the ~~protection~~State of ~~the~~Oregon, ~~environment.~~which ~~Although~~has ~~the~~enacted ~~Company~~laws ~~believes~~which ~~that~~regulate itforestry isoperations, inincluding ~~material compliance~~the ~~with~~Forest ~~these~~Practices ~~requirements~~Act, ~~there~~which ~~can~~addresses bemany growing, noharvesting ~~assurance~~and ~~that~~processing ~~significant~~activities ~~costs~~on forest lands. Among other requirements, ~~civil~~these laws restrict the size and ~~criminal penalties~~spacing of regeneration harvest units, and ~~liabilities~~impose ~~will~~certain ~~not~~reforestation beobligations ~~incurred,~~on ~~including~~the ~~those~~owners ~~relating~~of toforest ~~claims~~lands. ~~for~~The ~~damages~~State toof ~~property~~Oregon orrequires ~~natural~~a ~~resources~~company ~~resulting~~to ~~from~~provide ~~the~~prior ~~Company’s~~notification ~~operations~~before beginning harvesting activity. The Forest Practices Act and other state laws and regulations control timber slash burning, operations during fire hazard periods, logging activities which may affect water courses or in

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.

~~INLAND~~ INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

proximity to certain ocean and inland shore lines, water protection and enhancement and certain grading and road construction activities. The Company believes it is in substantial compliance with these regulations.

Environmental Laws

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.

Increasingly strict environmental restrictions and limitations have resulted in increased operating costs for the Company and it is possible that the costs of compliance with environmental laws and regulations will continue to increase.

Access to Timberlands May be Limited by Federal Regulation

A substantial portion of the Timberlands consists of sections of land that are intermingled with or adjacent to sections of federal land managed by the USFS and the BLM. Removal of trees from those portions of the Timberlands requires transportation of the logs by truck across logging and general purpose roads. The Company has entered into road use agreements with the USFS and the BLM. The majority of the Company’'s timberland management activities include the transportation of timber products across federal land and roads and fall under such agreements, which describe the Company’'s exclusive rights to transport timber products across federal lands and roads without USFWS consultation. In many cases, access is only, or most economically, achieved through a road or roads built across adjacent federal land pursuant to a reciprocal right-of-way (“"RROW”"). Removal of federal timber often requires similar access across the Timberlands. Recent litigation (not involving the Company) before the United States Court of Appeals for the Ninth Circuit held that the BLM was not required to consult with the USFWS, which administers the Endangered Species Act, prior to approving a private landowner’'s proposal to build an access road across federal land pursuant to an existing RROW entered into prior to the enactment of the Endangered Species Act. A reversal on appeal or a rehearing of that case, or future federal law or regulation requiring the BLM to consult with the USFWS in connection with an RROW, could materially adversely affect the Company’'s ability to harvest the affected portion of the Timberlands. Certain of the Company’'s RROW agreements contain ~~provisions~~ 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.

~~INLAND~~ INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

~~Employees~~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

As of The ~~March~~operations ~~15,~~of ~~2004,~~ the ~~Company~~Timberlands ~~had~~are nosubject ~~employees,~~to ~~and~~the ~~relies~~requirements ~~upon~~of the ~~employees of~~Federal ~~the~~Occupational ~~Manager~~Safety toand ~~manage~~Health ~~the~~Act ~~operations~~("OSHA") ofand ~~the~~comparable ~~Company.~~state ~~All~~statutes ofrelating to the ~~silvicultural~~health and safety of ~~activities~~employees. onThe ~~the~~Company ~~Timberlands~~believes ~~and~~that ~~the~~it ~~harvesting~~is ~~and~~in ~~delivery~~compliance ofwith ~~logs~~OSHA ~~are~~regulations, ~~conducted by~~including ~~independent~~general ~~contractors~~industry ~~who~~standards, ~~are~~permissible ~~not~~exposure ~~employees~~levels offor ~~the~~toxic ~~Company~~chemicals orand ~~the~~record-keeping ~~Manager~~requirements.

Employees

As of March 15, 2005, the Company had no employees, and relies upon the employees of the Manager to manage the operations of the Company. 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 or the Manager.

~~INLAND~~ INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

Item 2. Properties

Timber Inventory

~~The~~ The Company currently owns and manages approximately ~~272~~167,000 fee acres of timberland and cutting rights on approximately 7068,000 acres of timberland containing total merchantable timber volume ~~estimated~~ estimated as of January 1, ~~2004~~2005 to be approximately 0.74 BBF in Oregon east of the Cascade Range. A merchantable tree is a tree of sufficient size that will produce a sound log 16 feet in length and at least 4.6 inches in diameter, inside bark, at the small end. The Company’'s merchantable timber inventory consists of a substantial percentage of premium species of softwood, consisting of Ponderosa Pine and Douglas Fir, species which have historically commanded premium prices over other softwood species, as well as Lodgepole Pine, White Fir and other species. The Company believes that the Timberlands are suitable for current operations.

~~The~~ 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 ~~104~~86,000 acres of the ~~272~~167,000 acre total consist of actively managed Pine Plantations with stands ranging in age from one to 4344 years. The Plantations are stocked with high quality Ponderosa Pine (approximately 7890%) and Lodgepole Pine (approximately 2210%). Initial thinning of the Plantation stands, including the thinning of commercial quantities of merchantable timber, is expected to begin within the next ~~three~~two years. See “"Item 1. Business - The Timberlands--Harvest Plans.”"

Merchantable Timber Inventory by Species

The Company maintains data regarding the estimated merchantable timber inventory by species within the Timberlands. All volume estimates are based on information developed by the Manager. As of January 1, ~~2004~~ 2005, the total timber inventory amounted to 0.7 4 BBF. The Company’'s combined timber inventory by MMBF and percentage is Ponderosa Pine (~~319~~ 204 (4546%)), Lodgepole Pine (~~132~~ 46 (1910%)), White Fir (~~123~~ 85 (1819%)), Douglas Fir (99 82 (1419%)) and other species (29 25 (46%)). Other species include Cedar, Sugar Pine, Western Larch and Grand Fir.

Size and Species Distribution of Merchantable Timber

~~The~~ The Timberlands are diversified by species mix and, to a lesser extent, by size distribution. Timber on the Timberlands generally reaches merchantable size between 40 and 50 years in natural stands and between 25 and 35 years in the Plantations. The Company maintains data as to the estimated volume distribution of merchantable timber on the Timberlands by species and by diameter at breast-height (“"DBH”"). As of January 1, ~~2004~~2005, approximately 114 ~~175~~ MMBF, or 2526%, 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, ~~2004~~2005, the Plantations totaled ~~104~~86,000 acres. Of the total ~~acreage, 60,000 acres range from 1 to 15 years of age, 20,000 acres range from 16 to 25 years of age, and 24,000 acres are 26 years of age or older.~~

~~INLAND~~ INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

~~Item~~ 3. acreage, ~~Legal~~56,000 ~~Proceedings~~acres range from 1 to 15 years of age, 13,000 acres range from 16 to 25 years of age, and 17,000 acres are 26 years of age or older.

Item 3. Legal Proceedings

On December 19, 2003, an action was brought in ~~June~~ the 21Court of Chancery of the State of Delaware in and for New Castle County by the Trustee under the Indenture against the Company, Finance ~~2002~~Corp., the Manager, American Forest Resources, LLC, Cascade Resource Holdings Group, LLC, and all of the directors of the Manager as of January 1, 2003 (collectively, the “Defendants”). The complaint alleges that the Company ~~was~~violated ~~notified~~the provisions of the Indenture by transferring certain assets to its affiliates, the directors of the Company violated their fiduciary duty to the Company and that itthe ~~was~~transfers ~~named~~of inthe assets were fraudulent conveyances and subject to rescission. The Trustee seeks a declaration that the Company has violated the terms of the Indenture, an injunction against the transfer of additional assets out of the ordinary course of business, damages and the imposition of a constructive trust on the assets transferred by the Company to its affiliates. In January 2004, the plaintiff’s motion to schedule a preliminary injunction hearing with respect to further transfers to affiliates and for expedited discovery was denied. In connection with the denial of the plaintiff’s motion, the Company agreed that, through the earlier of December 31, 2004 and the resolution of the lawsuit, ~~filed~~it would provide at least thirty days’ notice before entering in into ~~State~~any ~~Court~~transfer of assets to affiliates, other than payment of management fees. Discovery began in ~~Oregon~~January as2004 and is ongoing. On February 6, 2004, the Defendants filed a ~~codefendant~~motion ~~seeking~~to ~~medical~~dismiss. ~~expenses~~In ~~and~~May up2004, a hearing was held with respect to Defendants’ ~~$12~~ motion to dismiss.0 ~~million~~On May 17, 2004, the Company received a Notice of Default from the Trustee covering certain of the allegations in ~~damages~~the ~~for~~complaint. ~~injuries~~The ~~sustained~~Defendants byresponded to the ~~minor~~Notice ~~child~~of Default denying the existence of anany ~~employee~~defaults. On July 29, 2004, the Court of Chancery dismissed the ~~Manager~~action ~~while~~without ~~riding~~prejudice, based on ~~equipment~~its ~~owned~~determination bythat the ~~Manager.~~Trustee Atunder the Indenture lacked standing under the terms of the Indenture to bring an action against the Defendants because the requisite notice of default and opportunity to cure had not been provided to the Company prior to the time the action was commenced. The Trustee was granted 30 days to file an amended complaint and on August 27, 2004, the Trustee filed its second amended complaint. On October 8, 2004, the ~~liability~~ Trustee ~~insurance~~filed ~~was~~a motion for partial summary judgment seeking a declaratory judgment that the Company violated certain provisions of the Indenture by permitting its affiliate to grant security interests in ~~place~~various timberland properties on various dates prior to September 14, ~~however~~2001. On October 15, 2004, the ~~insurance~~Defendants ~~underwriter~~filed ~~has~~a ~~since~~motion to dismiss the second amended complaint. On December 23, ~~gone~~ 2004, ~~bankrupt~~the Court of Chancery issued a memorandum opinion granting the Trustee’s motion for partial summary judgment and ~~coverage~~declaring that isan ~~limited~~Event of Default had occurred under the Indenture. On January 13, 2005, the Company received a Notice of Default and isAcceleration from ~~being~~the ~~administered~~Trustee. byOn January 21, 2005, the Defendants filed a motion for leave to pursue an interlocutory appeal of the Chancery Court Order granting partial summary judgment. On January 26, 2005, the ~~Oregon~~Court ~~Guarantee~~of ~~Insurance~~Chancery ~~Association~~granted Defendants’ motion for leave to appeal. ~~Effective~~ On February 10, 2005, the Supreme Court of the State of Delaware accepted Defendants’ appeal. Defendants’ filed their appeal brief on March 23, 2005. The Trustee’s answering papers are due on or before April 527, ~~2004~~2005. ~~this~~While the interlocutory appeal is heard, the case ~~was~~in ~~dismissed~~the ~~with~~Court ~~prejudice~~of Chancery is proceeding and a trial is expected to take place in June 2005. The Company and its legal counsel believe the litigation

On December 19, 2003, an action was brought in the Court of Chancery of the State of Delaware in and for New Castle County by the trustee under the Indenture against the Company, Finance Corp., the Manager, American Forest Resources, LLC, Cascade Resource Holdings Group, LLC, and all of the directors of the Manager as of January 1, 2003 (collectively, the “Defendants”). The complaint alleges that the Company violated the provisions of the Indenture by transferring certain assets to its affiliates, the directors of the Company violated their fiduciary duty to the Company and that the transfers of the assets were fraudulent conveyances and subject to rescission. The trustee seeks a declaration that the Company has violated the terms of the Indenture, an injunction against the transfer of additional assets out of the ordinary course of business, damages and the imposition of a construction trust on the assets transferred by the Company to its affiliates. In January 2004, the plaintiff’s motion to schedule a preliminary injunction hearing with respect to further transfers to affiliates and for expedited discover was denied. In connection with the denial of the plaintiff’s motion, the Company agreed that, through the earlier of December 31, 2004 and the resolution of the lawsuit, it would provide at least thirty days’ notice before entering into any transfer of assets to affiliates, other than payment of management fees. Discovery began in January 2004 and is ongoing. On February 6, 2004, the Defendants filed a motion to dismiss. A hearing with respect to the Defendants’ motion to dismiss has been scheduled for late May 2004. On March 26, 2004 a motion to stay discovery pending the outcome of the Defendant’s motion to dismiss was denied. The Company and its legal counsel believe the litigation to be without merit and intend to vigorously defend itself in the lawsuit.

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

There were no matters submitted to a vote of the Company’s noteholders during the fourth quarter of 2003.

~~INLAND~~ INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

~~PART~~ and IIboth Notices of Default to be without merit and intend to continue to vigorously defend the litigation.

~~Item~~ 5 On December 7, 2004, the Company, Finance Corp. ~~Market~~and ~~for~~AFR ~~Registrant~~brought an action against the Trustee based on the Trustee’s ~~Common~~failure ~~Equity~~to remit $4.8 million of the funds paid by the Company on November 12, 2004 to the Trustee for the benefit of the holders of the Notes. Subsequently, the Trustee reduced its holdback to $2.8 million. On January 13, 2005, the Trustee filed its Answer and ~~Related~~Counterclaim, ~~Security~~seeking ~~Holder~~payment of an undetermined amount ~~Matters~~from the Company and Finance Corp. for its expenses in the litigation described above. The Company believes it has a meritorious claim against the Trustee and intends to pursue its action and vigorously defend against the Trustee’s counterclaim, which the Company believes to be without merit.

~~The Company’s~~ ~~equity~~Item ~~securities are owned 98~~4.99 %Submission byof ~~Timber~~Matters ~~Resource~~to ~~Holdings~~a ~~Group,~~Vote ~~LLC,~~of ~~indirectly, and~~Security ~~1.01% by the Manager.~~Holders

~~Item~~ 6: There ~~Selected~~were ~~Financial~~no ~~Data~~matters submitted to a vote of the Company's Noteholders during the fourth quarter of 2004.

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

	Inland Fiber Group, LLC
	2003			2002			2001			2000			1999
CASH FLOWS AND OTHER DATA (IN MILLIONS):
Modified EBITDDA (1)		0.4			12.8		$	23.2		$	49.3		$	50.6
Additions to timber and timberlands		2.0			3.1			5.6			2.3			1.0
Cash flow from operating activities		1.3			3.2			9.2			28.9			25.5
Cash flow (used in) investing
activities		(2.0	)		(3.3	)		(4.7	)		(2.3	)		(1.3	)
Cash flow from (used in) financing
activities		1.2			—			(6.6	)		(26.2	)		(26.2	)
OPERATING STATEMENT DATA
(IN MILLIONS EXCEPT PER
UNIT AMOUNTS):
Revenues (2)		37.1			49.5			54.6			75.6			77.0
Depreciation, depletion and road
amortization		15.6			27.5			37.3			28.8			23.3
Fire loss		0.0			0.6			—			—			—
Cost of timber and property sales		10.0			7.3			—			2.6			—
Operating income (loss)		(25.1	)		(21.9	)		(14.6	)		17.9			27.2
Income (loss) before extraordinary
items		(47.3	)		(44.1	)		(37.0	)		(4.1	)		6.4
Net income (loss)		(47.3	)		(44.1	)		(37.0	)		(4.1	)		6.4
BALANCE SHEET DATA (AT
PERIOD END, IN MILLIONS):
Working capital (deficiency)		(6.5	)		(1.6	)		(1.7	)		2.0			2.4
Total assets		168.7			211.0			254.4			300.9			327.7
Long-term debt (3)		225.0			225.0			225.0			225.0			225.0
Equity (deficiency)		(65.5	)		(19.4	)		24.4			67.1			97.2
OPERATING DATA (UNAUDITED):
Log, stumpage and timber deed sales
volumes (MMBF)		110.8			204.8			250.7			243.7			187.3
Property sales volumes (MMBF)		53.3			3.5			—			13.6			—

~~INLAND~~ INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

(1)	Modified EBITDDA is defined as operating income plus depreciation, depletion, and road amortization and cost of timber and property sales. The Company considers Modified EBITDDA to be a relevant and meaningful indicator of earnings performance commonly used by investors, financial analysts and others in evaluating companies in its industry and, as such, has provided this information in addition to the generally accepted accounting principles-based presentation of net income or loss
	In addition, Modified EBITDDA does not necessarily represent funds available for management’s discretionary use as it is calculated prior to debt service obligations and capital expenditures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(2)	Revenues in 2003 consist of $25.0 million of log, stumpage and deed sales, $10.1 of timber and property sales and $2.0 million of by-products and other sales. Revenues in 2002 consist of $42.3 million of log, stumpage and deed sales, $5.8 of timber and property sales and $1.5 million of by-products and other sales. Revenues in 2001 consist of $54.1 million of log, stumpage and deed sales, $0.0 million of timber and property sales and $0.4 million of by-products and other sales. Revenues in 2000 consist of $72.3 million of log, stumpage and deed sales, $2.8 million of timber and property sales and $0.6 million of by-products and other sales. Revenues in 1999 consist of $76.6 million of log and stumpage sales and $0.4 million of by-products and other sales.
(3)	See discussion of long-term debt at Note 7 of the Notes to Consolidated Financial Statements.

PART II

Item 7 5. ~~Management’s~~ ~~Discussion~~Market ~~and~~for ~~Analysis~~Registrant's ofCommon Equity, Related ~~Financial~~ Security ~~Condition~~Holder Matters and ~~Results~~Issuer Purchases of ~~Operations~~Equity Securities

~~Forward-Looking~~ ~~Statements~~The Company’s equity securities are owned 98.99 % by Cascade Resource Holdings Group, LLC, indirectly, and 1.01% by the Manager.

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

Item 6. Selected Financial Data

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

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

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

INLAND FIBER GROUP, LLC AND SUBSIDIARY (formerly U.S. Timberlands Klamath Falls, LLC) (dollar amounts in thousands unless otherwise noted)

	Inland Fiber Group, LLC

	2004		2003		2002		2001		2000

CASH FLOWS AND OTHER DATA
(IN MILLIONS):
Modified EBITDDA (1)	1.6		0.5		12.9		23.5		49.3
Additions to timber and timberlands	2.5		2.0		3.1		5.6		2.3
Cash flow from operating activities	1.1		1.3		3.2		9.2		28.9
Cash flow (used in) investing
activities	(2.4	)	(2.0	)	(3.3	)	(4.7	)	(2.3	)
Cash flow from (used in) financing
activities	0.0		1.2		--		(6.6	)	(26.2	)
OPERATING STATEMENT DATA
(IN MILLIONS EXCEPT PER
UNIT AMOUNTS):
Revenues (2)	44.3		37.1		49.5		54.6		75.6
Depreciation, depletion and road
amortization	8.7		15.6		27.5		37.3		28.8
Fire loss…………………………………	0.0		0.0		0.6		-		-
Cost of timber and property sales	39.0		10.0		7.3		-		2.6
Operating income (loss)	(46.1	)	(25.1	)	(21.9	)	(13.8	)	17.9
Net income (loss) ……………………	(68.1	)	(47.3	)	(44.1	)	(36.2	)	(4.1	)

BALANCE SHEET DATA (AT
PERIOD END, IN MILLIONS):
Working capital (deficiency)	(228.8	)	(6.5	)	(1.6	)	(1.7	)	2.0
Total assets	96.5		168.7		211.0		255.2		300.9
Long-term debt (3)	0.0		225.0		225.0		225.0		225.0
Equity (deficiency)	(133.6	)	(65.5	)	(19.4	)	25.5		67.1
OPERATING DATA (UNAUDITED):
Log and timber deed sales
volumes (MMBF) (2)	61.0		110.8		204.8		250.7		243.7
Property sales volumes (MMBF) (2)	210.3		53.3		3.5		--		13.6

~~Supply~~(1) Modified EBITDDA is defined as operating income plus depreciation, depletion, and ~~Demand~~road ~~Factors~~amortization and cost of timber and property sales. The Company considers Modified EBITDDA to be a relevant and meaningful indicator of earnings performance commonly used by investors, financial analysts and others in evaluating companies in its industry and, as such, has provided this information in addition to the generally accepted accounting principles-based presentation of net income or loss. In addition, Modified EBITDDA does not necessarily represent funds available for management’s discretionary use as it is calculated prior to debt service obligations and capital expenditures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Supply

The supply of logs available for purchase has been most affected in recent years by significant reductions in timber harvested from public timberlands, principally as a result of efforts to preserve the habitat of certain endangered species, as well as a change in the emphasis of government policy toward habitat preservation, conservation and recreation and away from timber management. Since the early 1970s, environmental and other similar concerns and governmental policies have substantially reduced the volume of timber under contract to be harvested from public lands. The pace of regulatory activity accelerated in the late 1980s. The resulting supply decrease caused prices for logs to increase significantly, reaching peak levels during 1993. Prior to 1998, the low supply of timber from public lands, which is expected to continue for the foreseeable future, benefited private timber holders such as the Company through higher stumpage and log prices. Since 1998, the strength of the U.S. dollar has decreased exports and increased imports and has disrupted the equilibrium of the supply and demand equation and contributed to the general downward trend of prices. Certain market conditions for finished products have also negatively impacted stumpage and log prices in 2003.

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

In response to an increase in domestic timber prices in the early 1990s and the strengthening US dollar against Pacific Rim currencies, especially, imports of logs and lumber from abroad (from countries such as Canada and New Zealand) increased. These imports, however, only partially offset the lost volume of timber from public timberlands and did not replace the mature, high-quality timber found in greater quantities on public timberlands. Imports did however tend to dampen upward price movements. Imports are likely to remain a factor over the next few years and could significantly affect the raw material supplies and prices in the domestic lumber and wood products industry.

Demand

Changes in general economic and demographic factors, including the strength of the economy, unemployment rates, 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. Over the last five to ten years, the relative strength of the dollar against the currencies of other wood producing nations has reduced the competitiveness of domestic logs in export markets and increased the competitiveness of imported logs in our domestic markets. United States housing starts for 2003 were up slightly from 2002 levels, however log prices have declined slightly or remained flat in 2003 over 2002 as a consequence of increases in imported logs and lumber. As a result of the growth of the home center distribution business, the repair and remodeling markets have become a significant factor in terms of the demand for lumber and commodity wood products and have tended to dampen the wide fluctuations that occurred when new housing starts were the primary factor.

INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

Prices for Pine species, primarily Ponderosa Pine, reached a peak in the spring of 1993 and as a result attracted imports of Radiata Pine from New Zealand and Chile. Given the strong growth of the housing market during the past several years, domestic markets have been able to absorb the increasing quantities of imported Radiata Pine lumber and logs which has limited the benefit of the strong housing market. With the continuing strength of the dollar, the level of imports has had a negative impact on pricing for Pine lumber. The Company believes that recent declining value of the dollar should allow the price trend to become more positive. The demand for logs in the United States is also affected by the level of lumber imports. In response to increasing lumber imports from Canada, the United States and Canada signed an agreement in 1996 which restricted the availability of Canadian softwood lumber in the United States. The Company believes that this agreement, which expired on March 31, 2001, has not had a material impact on the price or demand for logs in the United States. The United States and Canada are presently negotiating a new softwood lumber agreement even though a 30% tariff has been imposed on Canadian softwood lumber. The long term effect of not having an agreement or having a new agreement is uncertain.

Reconciliation of modified EBITDDA (in millions)
	2004		2003		2002		2001		2000
Operating income (loss)	(46.1	)	(25.1	)	(21.9	)	(13.8	)	17.9
Plus: Depreciation, depletion,
and road amortization	8.7		15.6		27.5		37.3		28.8
Plus: Cost of timber and
property sales	39.0		10.0		7.3		0.0		2.6
Modified EBITDDA	1.6		0.5		12.9		23.5		49.3

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

(2)	Revenues in 2004 consist of $13.8 million of log and deed sales, $28.1 of timber and property sales and $2.4 million of by-products and other sales. Revenues in 2003 consist of $25.0 million of log and deed sales, $10.1 of timber and property sales and $2.0 million of by-products and other sales. Revenues in 2002 consist of $42.3 million of log and deed sales, $5.8 of timber and property sales and $1.5 million of by-products and other sales.

	Revenues in 2001 consist of $54.2 million of log and deed sales, $0.0 million of timber and property sales and $0.4 million of by-products and other sales. Revenues in 2000 consist of $72.2 million of log, stumpage and deed sales, $2.8 million of timber and property sales and $0.6 million of by-products and other sales.

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

~~Application~~Item 7. Management’s Discussion and Analysis of ~~Critical~~Financial ~~Accounting~~Condition ~~Policies~~and Results of Operations

Forward-Looking Statements

~~The~~ ~~Company’s~~ Certain ~~consolidated~~information ~~financial~~contained in this report may constitute forward-looking statements ~~have~~within ~~been~~the ~~prepared~~meaning of the federal securities laws. Although the Company believes that expectations reflected in such ~~accordance~~forward-looking ~~with~~statements ~~accounting~~are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Forward-looking information is subject to certain risks, trends and uncertainties that could cause actual results ~~principles~~to ~~generally~~differ ~~accepted~~materially infrom those projected. Such risks, trends and uncertainties include the ~~United~~highly ~~States~~cyclical nature of ~~America.~~the ~~Certain~~forest ~~accounting~~products ~~policies~~industry, ~~have~~general aeconomic conditions, competition, price conditions or trends for the Company's products, the ~~significant~~possibility ~~impact~~that timber supply could be affected if governmental, environmental or endangered species policies change, limitations on ~~amounts~~the ~~reported~~Company's ability to harvest its timber due to adverse natural conditions or increased governmental restrictions and the outcome of litigation in which the ~~financial~~Company ~~statements~~is engaged. AThe ~~summary~~results of ~~those~~the ~~significant~~Company's operations depend upon a number of factors, many of which are beyond its control. These factors include general economic and industry ~~accounting~~conditions, ~~policies~~domestic ~~can~~and beexport ~~found~~prices, supply and demand for logs, seasonality, government regulations affecting the manner in ~~Note~~which 1timber tomay be harvested, and competition from other supplying regions and substitute products. These and other risks are described in the Company’'s ~~financial~~other reports and registration statements, ~~included~~which ~~herein.~~are available from the United States Securities and Exchange Commission.

~~The~~ ~~Company has not adopted any new accounting policies during the year ended December 31, 2003 that significantly impact its financial statements.~~ 18

~~Among~~ ~~the~~INLAND ~~significant~~FIBER ~~judgments~~GROUP, ~~made~~LLC byAND ~~management~~SUBSIDIARY in(dollar ~~the~~amounts preparation of the Company’s financial statements are the determination of the allowance for doubtful accounts and the rates of depletion applicable to the Company’s merchantable timber. These determinations are made periodically in ~~the~~thousands ~~ordinary~~unless ~~course~~otherwise ~~of accounting.~~ noted)

General

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

~~INLAND FIBER~~ The ~~GROUP~~Company's results of operations are affected by various factors, ~~LLC~~many ~~AND~~of ~~SUBSIDIARY (formerly~~which ~~U.S.~~are ~~Timberlands~~beyond ~~Klamath~~its ~~Falls~~control, ~~LLC) (dollar~~including ~~amounts~~general inindustry ~~thousands~~conditions, ~~unless~~domestic ~~otherwise~~and ~~noted)~~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.

~~Current~~Supply ~~Market~~and ~~Conditions~~ Demand Factors

~~Log~~ ~~prices~~Supply The insupply ~~the~~of ~~first~~logs ~~quarter~~available offor ~~2003~~purchase ~~were~~has ~~down~~been most affected in recent years by ~~3.4%~~significant reductions in timber harvested from ~~the~~public ~~fourth~~timberlands, ~~quarter~~principally as a result of ~~2002.~~efforts ~~During~~to ~~the~~preserve ~~second~~ the ~~quarter~~habitat ~~prices~~of ~~improved~~certain ~~slightly~~endangered ~~and~~species, ~~after~~as awell ~~slight~~as ~~decline~~a change in the ~~third~~emphasis ~~quarter,~~of ~~improved~~government policy toward habitat preservation, ~~again~~ conservation inand ~~the~~recreation ~~fourth~~and ~~quarter~~away offrom ~~2003~~timber management. ~~Log~~Since ~~prices~~the inearly ~~the~~1970s, ~~fourth~~environmental ~~quarter~~and ofother ~~2003~~similar concerns and governmental ~~2002~~policies ~~were~~have ~~virtually equal~~substantially reduced the volume of timber under contract to be harvested from public lands. The ~~average~~pace of ~~log~~regulatory ~~price~~activity accelerated in ~~2003~~the ~~was~~late ~~$316/MBF~~1980s. ~~compared~~The resulting supply decrease caused prices for logs to ~~$330/MBF~~increase insignificantly, reaching ~~2002~~peak levels during 1993. ~~Even~~Prior ~~with~~to 1998, the ~~lower average~~low ~~price~~supply onof atimber ~~year~~from public lands, which is expected to ~~year~~continue ~~basis~~for the foreseeable future, benefited private timber holders such as the ~~downward~~Company ~~trend~~through inhigher stumpage and log prices. ~~that~~Until recently, the strength of the U.S. dollar has ~~been~~decreased inexports ~~effect~~and ~~for the~~increased ~~past~~imports, ~~several~~has ~~years~~disrupted ~~appears~~the toequilibrium ~~have~~of ~~stopped~~the supply and demand equation and contributed to the ~~Company~~general ~~expects~~downward ~~prices~~trend of ~~logs~~prices. toCertain ~~trend~~market ~~slowly~~conditions for finished products have also negatively ~~upwards~~ impacted stumpage and log prices in 2004.

In ~~June~~ Industry ~~2003,~~participants ado ~~major~~not ~~customer~~expect ~~and~~environmental ~~competitor~~restrictions ofto ~~the~~ease ~~Company,~~materially ~~Crown~~within ~~Pacific,~~any ~~filed~~reasonable ~~for~~planning ~~relief~~horizon. ~~under Chapter~~Consequently, 11many producers of lumber and wood products are attempting to adapt to the ~~Bankruptcy~~new ~~Code.~~supply ~~There~~environment ~~was~~by noincreasing ~~direct~~their ~~financial~~emphasis ~~impact~~on toraw ~~the~~material ~~Company.~~yields, Itentering isinto ~~not known~~long-term attimber ~~this~~supply ~~time~~arrangements ~~how~~and ~~this~~value ~~bankruptcy~~added ~~will~~manufacturing, ~~impact~~and ~~the~~accessing ~~forest~~previously ~~products~~untapped ~~industry~~supplies in(such ~~which~~as ~~the~~private ~~Company~~wood lot owners, ~~operates~~timber with difficult access, ~~although~~alternative itspecies ~~may~~and ~~lead~~imports). These factors have tended to ~~increased~~maintain ~~timber~~the supply inof ~~the~~domestically ~~market~~produced logs and have kept prices from increasing.

~~Results~~ In response to an increase in domestic timber prices in the early 1990s and the strengthening US dollar against Pacific Rim currencies, especially, imports of ~~Operations~~logs and lumber from abroad (from countries such as Canada and New Zealand) increased. These imports, however, only partially offset the lost volume of timber from public timberlands and did not replace the mature, high-quality timber found in greater quantities on public timberlands. Imports did however tend to dampen upward price movements. Imports are likely to remain a factor over the next few years and could significantly affect the raw material supplies and prices in the domestic lumber and wood products industry.

~~The~~ following table sets forth sales volume for each of 2003, 2002 and 2001 from the sale of logs, stumpage and timber deeds by thousand board feet (“MBF”) and price per thousand board feet and the sales of property: 19

	Sales Volume (MBF)			Price Realization (MBF)
Period	Logs	Stumpage	Timber Deeds	Logs		Stumpage	Timber Deeds		TimberlandSales ($000)
2003
Year ended 12/31	57,048	—	53,719	$	316	—	$	130	$	10,129
4th Quarter	12,803	—	38,860	$	325	—	$	120	$	1,185
3rd Quarter	12,833	—	1,104	$	306	—	$	135		10
2nd Quarter	14,314	—	10,869	$	320	—	$	136		8,334
1st Quarter	17,098	—	2,886	$	313	—	$	236		600
2002
Year ended 12/31	74,612	—	130,161	$	330	—	$	135	$	5,763
4th Quarter	31,015	—	19,159	$	324	—	$	174	$	4,700
3rd Quarter	23,998	—	20,189	$	329	—	$	186		1,063
2nd Quarter	14,575	—	88,480	$	341	—	$	114		—
1st Quarter	5,024	—	2,333	$	349	—	$	169		—
2001
Year ended 12/31	74,640	—	176,105	$	349	—	$	160
4th Quarter	15,827	—	48,838	$	361	—	$	158
3rd Quarter	27,984	—	83,899	$	347	—	$	173
2nd Quarter	9,890	—	28,624	$	313	—	$	138
1st Quarter	20,939	—	14,744	$	357	—	$	133

INLAND FIBER GROUP, LLC AND SUBSIDIARY
(dollar amounts in thousands unless otherwise noted)

Demand

19 Changes in general economic and demographic factors, including the strength of the economy, unemployment rates, 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. Until recently, the relative strength of the dollar against the currencies of other wood producing nations has reduced the competitiveness of domestic logs in export markets and increased the competitiveness of imported logs in our domestic markets. United States housing starts for 2004 were down slightly from 2003 levels, and log prices have declined slightly in 2004 over 2003. As a result of the growth of the home center distribution business, the repair and remodeling markets have become a significant factor in the demand for lumber and commodity wood products and have tended to dampen the wide fluctuations that occurred when new housing starts were the primary factor.

~~INLAND~~ ~~FIBER~~Prices ~~GROUP~~for Pine species, ~~LLC~~primarily Ponderosa Pine, reached a peak in the spring of 1993 and as a result attracted imports of Radiata Pine from New Zealand and Chile. Given the strong growth of the housing market during the past ~~AND~~several ~~SUBSIDIARY~~years, domestic markets have been able to absorb the increasing quantities of imported Radiata Pine lumber and logs which has limited the benefit of the strong housing market. With the continuing strength of the dollar during the 1990’s ~~(formerly~~and Uearly 2000’s, the level of imports has had a negative impact on pricing for Pine lumber.S The Company believes that recent declining value of the dollar should allow the price trend to become more positive. ~~Timberlands~~The ~~Klamath~~demand ~~Falls~~for logs in the United States is also affected by the level of lumber imports. In response to increasing lumber imports from Canada, ~~LLC)~~the United States and Canada signed an agreement in 1996 which restricted the availability of Canadian softwood lumber in the United ~~(dollar~~States. ~~amounts~~The Company believes that this agreement, which expired on March 31, 2001, has not had a material impact on the price or demand for logs in ~~thousands~~the ~~unless~~United ~~otherwise~~States. ~~noted)~~The United States and Canada are presently negotiating a new softwood lumber agreement even though a 30% tariff has been imposed on Canadian softwood lumber. The long term effect of not having an agreement or having a new agreement is uncertain.

~~Year~~ Due ~~Ended~~to ~~December~~transportation 31costs, ~~2003~~domestic ~~Compared~~conversion facilities in the Pacific Northwest tend to ~~Year~~purchase ~~Ended~~raw ~~December~~materials 31within relatively confined geographic areas, ~~2002~~generally within a 200-mile radius. The conversion facilities in the vicinity of the Timberlands need more wood supply to run at capacity than can be produced by nearby timberlands. As a result, the demand from this region is relatively steady, although prices have generally declined with market conditions and increased imports.

Application of Critical Accounting Policies

~~Revenues. Revenues~~ The ~~decreased~~Company's ~~$12.4~~consolidated ~~million,~~financial orstatements ~~25%,~~have ~~from~~been ~~$49.5~~prepared ~~million~~ in ~~2002~~accordance towith ~~$37.1~~accounting ~~million~~principles ingenerally ~~2003.~~accepted ~~The decrease is primarily attributable to a decrease~~ in ~~log~~the ~~sales~~United States of $6America.7 ~~million~~Certain ~~and~~accounting apolicies ~~$10.6~~have ~~million~~a ~~decrease~~significant inimpact ~~stumpage~~on ~~sales~~amounts ~~and~~reported ~~deed sales. These decreases were offset by property sales~~ in ~~2003 of~~the ~~$10.1~~financial ~~million, compared to $5~~statements.8 ~~million~~A insummary ~~2002.~~of ~~Chip~~those ~~and~~significant ~~by-product~~accounting ~~revenues~~policies ~~were~~can ~~also~~be ~~higher by~~found ~~$0.5 million~~ in ~~2003~~Note ~~compared~~1 to ~~2002. To meet its working capital requirements,~~ the Company's ~~harvested and~~financial ~~sold~~statements ~~logs~~included ~~and timber deeds in 2003 at rates in excess of the estimated current annual board footage growth on the Timberlands~~herein.

~~Log~~ sales for 2003 were $18.0 million on volumes of 57,048 MBF, compared to log sales of $24.7 million on volumes of 74,612 in 2002. The average log sales price for 2003 was $316 compared to an average log sales price of $330 in 2002, a 4% decrease, reflecting weaker markets for the Company’s log sales20

~~Timber~~ ~~deed~~INLAND ~~sales~~FIBER ~~for 2003 were $7.0 million on volumes of 53~~GROUP,~~719~~ ~~MBF,~~LLC ~~compared~~AND toSUBSIDIARY ~~timber~~(dollar ~~deed~~amounts ~~revenue of $17.6 million on volumes of 130,161 MBF~~ in ~~2002.~~thousands ~~The~~unless ~~average~~otherwise timber deed sales price per MBF for 2003 was $130 compared to an average timber deed sales price of $135 in 2002, a 4% decrease. The decrease in timber deed sales realization is due to overall declines in market conditions, as well as a change in the timber mix being sold in timber sales. noted)

~~There~~ ~~were no stumpage sales for 2003 and 2002.~~ The ~~reduction~~Company inhas ~~stumpage~~not ~~volumes~~adopted isany anew ~~result~~accounting ofpolicies during the ~~Company’s strategic~~year ~~decision~~ended toDecember ~~utilize~~31, ~~log~~2004 ~~sales~~that ~~and~~significantly ~~timber~~impact ~~deed sales as~~ its ~~primary~~financial ~~source of revenue~~statements.

~~The~~ ~~Company~~ Among ~~had~~the ~~revenue~~significant ~~from~~judgments ~~timber~~made ~~and~~by ~~property~~management ~~sales~~ in ~~2003~~the preparation of ~~$10.1~~the ~~million,~~Company's ~~compared~~financial tostatements ~~$5.8~~are ~~million~~the determination of the allowance for doubtful accounts and the rates of depletion inapplicable ~~revenue~~to ~~from~~the Company's merchantable timber. ~~and~~These ~~property~~determinations ~~sales~~are ~~during~~made ~~2002~~periodically in the ordinary course of accounting.

Current Market Conditions

~~Gross~~ Log ~~Loss. Gross~~prices ~~loss decreased by $1.7 million from $3.3 million~~ in ~~2002~~the tofirst ~~$1.6~~quarter ~~million~~of in2004 ~~2003~~were ~~and~~down ~~gross~~2% ~~margin improved~~ from ~~negative~~the 7%fourth inquarter ~~2002~~of ~~to negative 4% in~~ 2003. ~~The~~Log ~~improvement~~prices inbegan ~~gross~~moving ~~margin~~upward ~~was~~in ~~due to~~the ~~several~~first ~~factors~~quarter ~~including lower contracted log and haul costs on a per MBF basis during 2003 as compared to 2002, a fire loss~~ of $02004.6 ~~million~~They incontinued ~~2002,~~to ~~reduction~~rise in ~~silviculture~~the ~~spending~~second ~~by $0.4 million in 2003 compared to 2002,~~ and ~~reduction in harvest taxes by $0.2 million during 2003 compared~~third toquarter ~~2002.~~of ~~Depletion, road amortization, and depreciation were lower by $11~~2004.9 ~~million~~The ~~during~~fourth ~~2003~~quarter ~~compared to 2002 as a result~~ of ~~lower~~2004 saw log, ~~timber~~prices ~~deed,~~move ~~and~~downward ~~timberland sales, but on a per cent basis there was no change between the years and therefore no impact on the gross loss~~slightly.

Results of Operations

~~Selling,~~ ~~General~~ The ~~and~~following ~~Administrative~~table ~~Expenses. Selling,~~sets ~~general~~forth ~~and~~sales ~~administrative expenses~~volume ~~were~~for ~~$6.4~~each ~~million~~of in2004, 2003, ~~compared to selling, general~~ and ~~administrative expenses of $7.5 million in~~ 2002, afrom decrease of $1.1 million. Within selling, general and administrative, many categories of expenses were down as a result of a new management fee agreement and a change in allocation of expenses between the ~~Company~~sale ~~and its affiliates. Until September 1, 2003, the Manager did not receive any management fee or other compensation in connection with its management~~ of ~~the Company~~logs, ~~but~~stumpage ~~was reimbursed for all direct~~ and ~~indirect~~timber ~~expenses~~deeds ~~incurred on~~by ~~behalf~~thousand ofboard ~~the~~feet ~~Company~~ (~~including~~"MBF") ~~wages~~ and ~~salaries~~price ofper ~~employees,~~thousand ~~officers and~~board ~~directors~~feet ~~of the Manager)~~ and ~~all other necessary or appropriate expenses allocable to~~ the ~~Company or otherwise reasonably incurred by the Manager in~~ ~~connection~~sales ~~with the operation~~ of ~~the~~property: ~~Company’s business.~~

20 21

INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

Effective September 1, 2003, the Company entered into a management agreement with the Manager. The management agreement replaced the prior arrangement under which the Company reimbursed the Manager for expenses incurred on the Company’s behalf, as described in the preceding paragraph. The management agreement, which provides for an annual fee of 2% of the agreed upon valuation of total timber and timberland assets under management, payable monthly, is comparable to other management agreements used in the industry where the manager receives a monthly fee based upon assets managed.

	Sales Volume (MBF)				Price Realization (MBF)


			Timber				Timber			Timberland
Period	Logs	Stumpage	Deeds		Logs	Stumpage	Deeds			Sales ($000)


2004
Year ended 12/31	32,484	-	28,561	$	329	-	$	110	$	28,120
4th Quarter	9,408		-	$	349		$	-		18,192
3rd Quarter	7,369	-	872	$	332	-	$	215		70
2nd Quarter	8,775	-	26,440	$	318	-	$	102		9,828
1st Quarter	6,932	-	1,249	$	317	-	$	158		30

2003
Year ended 12/31	57,048	-	53,719	$	316	-	$	130	$	10,129
4th Quarter	12,803	-	38,860	$	325	-	$	120		1,185
3rd Quarter	12,833	-	1,104	$	306	-	$	135		10
2nd Quarter	14,314	-	10,869	$	320	-	$	136		8,334
1st Quarter	17,098	-	2,886	$	313	-	$	236		600

2002
Year ended 12/31	74,612	-	130,161	$	330	-	$	135	$	5,763
4th Quarter	31,015	-	19,159	$	324	-	$	174		4,700
3rd Quarter	23,998	-	20,189	$	329	-	$	186		1,063
2nd Quarter	14,575	-	88,480	$	341	-	$	114		--
1st Quarter	5,024	-	2,333	$	349	-	$	169		--

~~The lower~~Year ~~selling,~~Ended ~~general~~December ~~and administrative expenses were primarily reflected in salaries~~31, ~~wages~~2004 ~~and benefits,~~Compared down $0.7 million, professional services were down $0.4 million, property taxes were down $0.1 million, and MLP related expenses were down $0.8 million. These expense reductions were offset by the management fee of $1.3 million of the Company paid with respect to ~~the~~Year ~~period~~Ended ~~September 1, 2003 through~~ December 31, 2003.

~~Equity~~ Revenues. inRevenues ~~Net~~increased ~~Income~~$7.2 ~~(Loss)~~million, ofor ~~Affiliate~~19%, from $37. ~~The~~1 ~~equity~~million in ~~net~~2003 ~~loss~~to of$44.3 ~~affiliate~~million ~~was~~in 2004. Log sales decreased by $177.03 million ~~during~~and ~~2003~~deed sales asdecreased ~~compared~~by to$3.9 ~~equity~~million. inThese ~~net~~decreases ~~loss of~~were ~~affiliate~~offset by property sales in 2004 of $1128.01 million, incompared ~~2002~~to $10.1 ~~The~~million ~~losses~~ in 2003. Chip and ~~2002~~by-product ~~reflect~~revenues ~~the~~were ~~Company’s~~also ~~share of~~higher ~~losses~~by ~~absorbed~~$0.4 ~~from~~million ~~its~~in ~~preferred~~2004 ~~equity~~compared ~~investment~~to in2003. ~~American~~To meet ~~Forest~~its ~~Resources~~working capital requirements, ~~LLC.~~the ~~See~~Company ~~“Investment in~~harvested ~~Affiliate”~~and ~~included~~sold inlogs ~~Note~~and 9timber ofdeeds ~~the~~in ~~Financial~~2004 ~~Statements~~at ~~for~~rates anin ~~explanation~~excess of the ~~preferred equity~~estimated ~~investment~~current inannual ~~American~~board ~~Forest~~footage ~~Resources,~~growth ~~LLC.~~on the Timberlands.

~~Interest~~ Log ~~Expense. Interest~~sales ~~expense~~for ~~was~~2004 were $2110.7 million inon ~~2003~~volumes ~~and~~of ~~2002~~32,484 ~~consisting~~MBF, ~~primarily~~compared ofto ~~interest~~log ~~expense~~sales onof ~~the Company’s~~ $~~225~~18.0 million on volumes of ~~Senior~~57,048 ~~Notes~~in 2003. The average log sales price for 2004 was $329 per MBF compared to an average log sales price of $316 per MBF in 2003, a 4% increase, reflecting stronger markets for the Company's log sales.

~~Other~~ Timber ~~Income~~deed ~~(Expense),~~sales ~~net~~for 2004 were $3. ~~Other~~1 ~~income~~million on volumes of 28,560 ~~net~~MBF, ~~was~~compared to timber deed sales of $07.20 million on volumes of 53,719 MBF in 2003. ~~and~~The ~~2002~~average ~~and~~timber ~~consisted~~deed ofsales ~~income~~price ~~derived~~per MBF ~~from~~for ~~the~~2004 ~~cattle leases,~~was ~~and~~$110 ~~other~~compared ~~mineral~~to ~~and~~an ~~grazing~~average ~~rights~~timber ~~granted.~~deed sales price of $130

~~Year Ended December 31, 2002 Compared to Year Ended December 31, 2001~~ 22

~~Revenues. Revenues~~ ~~decreased~~INLAND ~~$5.1~~FIBER ~~million~~GROUP, orLLC ~~9%,~~AND ~~from~~SUBSIDIARY ~~$54.6 million in 2001 to $49.5 million in 2002. The decrease~~ ~~was~~ (dollar ~~primarily~~amounts ~~attributable to a decrease~~ in ~~log~~thousands ~~sales~~unless ofotherwise $1.4 million and a $10.5 million decrease in stumpage sales and deed sales. These decreases were offset by property sales in 2002 of $5.8 million, compared to $0.0 million in 2001. Chip and by-product revenues were also higher by $1.0 million in 2002 compared to 2001. To meet its working capital requirements, the Company harvested and sold logs and timber deeds in 2002 at rates in excess of the estimated current annual board footage growth on the Timberlands. noted)

~~Log sales~~ ~~for~~in ~~2002 were $24.7 million on volumes of 74~~2003,~~612~~ ~~MBF,~~a ~~compared~~15% ~~to log sales of $26~~decrease.0 ~~million~~The ondecrease ~~volumes of 74,640~~ in ~~2001.~~timber ~~The~~deed ~~average log~~ sales ~~price for~~realization ~~2002~~is ~~was~~due ~~$330 compared~~ to anoverall ~~average~~declines ~~log~~in ~~sales~~market conditions, ~~price~~as ofwell ~~$349~~as ~~in 2001,~~ a 5% ~~decrease,~~change ~~reflecting~~in ~~weaker~~the ~~markets~~timber ~~for~~mix ~~the~~being ~~Company’s~~sold ~~log~~in timber sales.

21 There were no stumpage sales for 2004 and 2003. The lack of stumpage sales is a result of the Company's strategic decision to utilize log sales, timber deed sales and timber property sales as its primary sources of revenue.

~~INLAND~~ The ~~FIBER~~Company ~~GROUP,~~had ~~LLC AND~~revenue ~~SUBSIDIARY~~from timber and property sales in 2004 of ~~(formerly~~ $28.1 Umillion, compared to $10.S1 million in revenue from timber and property sales during 2003. ~~Timberlands~~The ~~Klamath~~increase ~~Falls,~~in ~~LLC)~~this category ~~(dollar~~ was ~~amounts~~driven by the sale in ~~thousands~~2004 ~~unless~~of ~~otherwise~~the ~~noted)~~Longbell Tree Farm located in central Oregon which was considered surplus to the Company’s operations. This property was sold in a “sealed bid” auction for $22,000,000, of which $18,300,000 was allocated to the portion of the property owned by the Company.

~~Timber deed~~ Gross ~~sales~~Loss. ~~for~~Gross ~~2002~~loss ~~were~~increased by $1711.65 million onfrom ~~volumes~~$1.6 ofmillion ~~130,162~~in ~~MBF,~~2003 ~~compared~~ to ~~timber deed revenue of~~ $2813.1 million onin ~~volumes~~2004 ofand ~~176,105~~gross ~~MBF~~margin went from negative 4% in ~~2001.~~2003 ~~The~~to negative ~~average~~30% ~~timber~~in ~~deed~~2004. ~~sales~~The ~~price~~decrease ~~per~~in ~~MBF~~gross ~~for 2002~~margin was ~~$135~~due ~~compared~~primarily to anlosses ~~average~~on ~~timber~~the ~~deed~~sale ~~sales~~of ~~price~~timberlands of $~~160~~10.6 inmillion ~~2001,~~and higher acontracted ~~16%~~log ~~decrease.~~and ~~The significant~~haul ~~decrease~~costs inon ~~timber~~a ~~deed~~per ~~sales~~MBF ~~realization~~basis isduring ~~due~~2004 as compared to ~~overall~~2003. ~~declines~~The innon-cash ~~market~~loss ~~conditions, as~~on ~~well~~the assale of timberlands was a ~~change~~consequence inof the ~~timber~~high ~~mix~~proportion ~~being~~of ~~sold~~young plantation on these assets in ~~timber~~comparison ~~sales.~~to its allocated basis.

~~There~~ Selling, General and Administrative Expenses. Selling, general and administrative expenses were no$7.5 ~~stumpage~~million ~~sales~~in ~~for~~2004, ~~2002~~compared to selling, general and ~~2001.~~administrative ~~The~~expenses ~~reduction~~of $6.4 million in ~~stumpage~~2003, ~~volumes~~an increase of $1.1 million. Within selling, general and administrative, most categories of expenses were down is significantly as a result of a new management fee agreement and a change in allocation of expenses between the Company and its affiliates. Until September 1, 2003, the Manager did not receive any management fee or other compensation in connection with its management of the Company’s, ~~strategic~~but ~~decision~~was toreimbursed ~~utilize~~for ~~log~~all ~~sales~~direct and ~~timber~~indirect ~~deed~~expenses ~~sales~~incurred on behalf of the Company (including wages and salaries as of ~~its~~employees, ~~primary~~officers ~~source~~and directors of ~~revenue.~~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.

~~The~~ Effective September 1, 2003, the Company entered into a management agreement with the Manager. The management agreement replaced the prior arrangement under which the Company ~~had~~reimbursed ~~revenue~~the ~~from~~Manager for ~~two~~expenses ~~property~~incurred ~~sales~~on the Company’s behalf, as described in ~~2002~~the ofpreceding $5paragraph.8 ~~million~~The management agreement, ~~compared~~which toprovides for ~~$0.0~~an ~~million~~annual ~~in revenue~~fee ~~from~~of 2% of the agreed upon valuation of total timber and ~~property~~timberland ~~sales~~assets ~~during~~under ~~2001.~~management, payable monthly, is comparable to other management agreements used in the industry where the manager receives a monthly fee based upon assets managed.

~~Gross~~ The ~~Profit. Gross~~management ~~profit~~fee ~~decreased~~increased ~~along with revenues~~ by $32.97 million ~~from~~over ~~$0.6~~the ~~million~~2003 ~~in 2001 to negative $3.3~~amount ~~million~~ because inthe ~~2002~~2003 ~~and~~amount ~~gross~~represented ~~margin~~only ~~decreased~~4 ~~from~~months ~~1.0%~~of inpayments ~~2001~~under tothe ~~negative~~new ~~7.0%~~fee ~~in 2002~~structure. ~~The~~Professional ~~decrease in~~services ~~gross~~increased ~~margin~~by ~~was primarily from four factors~~$0.9 million. ~~First,~~These ~~contracted~~expense ~~log~~increases ~~and haul costs on a per MBF basis~~ were ~~higher~~offset ~~during~~by ~~2002~~reductions asin ~~compared~~most toother ~~2001~~expense ~~due~~items toincluding ~~longer~~salaries, ~~hauls~~wages ~~for~~and ~~delivered logs. Second~~benefits, ~~the~~ ~~Company’s timber deed sales were composed of a different value grade mix as compared to~~down ~~2001~~ $1.1 ~~Third~~million, inMLP ~~2002~~related ~~the~~expenses ~~Company~~down ~~incurred a fire loss of~~ $0.64 million~~. Finally~~, ~~continued declines in the timber markets resulted in lower realizations on delivered log~~ and ~~stumpage~~property ~~values. Depletion~~taxes, ~~depreciation~~ ~~and~~down ~~road amortization decreased from~~ $370.32 million infrom ~~2001 to $27~~2003.~~5 million in 2002 due primarily to decreased volume of timber sales.~~

~~Selling,~~ General and Administrative Expenses. Selling, general and administrative expenses were $7.5 million in 2002, compared to selling, general and administrative expenses of $8.3 million in 2001. Within selling, general and administrative, most categories of expenses were down. Salaries, wages and benefits were down $0.3 million due to positions that were vacant for a portion of the year and professional services were down $0.2 million compared to 2001. Those decreases were partly offset by increases in insurance expense of $0.1 million. 23

~~Equity~~INLAND inFIBER Net Income (Loss) of Affiliate. The equity in net loss of affiliate was $11.0 million during 2002 as compared to equity in net loss of affiliate of $6.9 million in 2001. The losses in 2002 and 2001 reflect the Company’s share of losses absorbed from its preferred equity investment in American Forest ResourcesGROUP, LLC. ~~See~~AND ~~“Investment in~~SUBSIDIARY ~~Affiliate” included in Note 9 of the Financial Statements for an explanation of the preferred~~ ~~equity~~ (dollar ~~investment~~amounts in ~~American~~thousands ~~Forest~~unless ~~Resources,~~otherwise ~~LLC.~~noted)

~~Interest~~ Equity ~~Expense~~in Net Income (Loss) of Affiliate. ~~Interest~~ ~~expense~~The equity in net loss of affiliate was $2125.74 million during 2004 as compared to equity in ~~2002~~net ~~and~~loss of affiliate of $2217.0 million in ~~2001~~2003. ~~consisting~~The ~~primarily~~losses ofin ~~interest expense~~2004 onand 2003 reflect the Company’'s ~~$225~~share of losses absorbed from its preferred equity investment in American Forest Resources, LLC as well as charges arising from our consolidation into the affiliate.0 ~~million~~See "Investment in Affiliate" included in Note 9 of ~~Senior~~the ~~Notes.~~Financial Statements for an explanation of the preferred equity investment in American Forest Resources, LLC.

~~Other Income~~ Interest (Expense~~), net~~. ~~Other~~ ~~income,~~Interest ~~net,~~ expense was $021.27 million ~~for~~ ~~2002,~~in ~~compared~~2004 toand ~~$0.1~~2003, ~~million~~consisting ~~for~~primarily ~~2001,~~of ~~representing~~interest anexpense ~~increase~~on inthe ~~income of~~Company's $0225.10 million. of Senior Notes.

22 Other Income (Expense), net. Other income, net, was $0.3 million in 2004 and $0.2 million in 2003 and consisted of income derived from cattle leases and other mineral and grazing rights.

~~INLAND~~ ~~FIBER~~Year ~~GROUP,~~Ended ~~LLC AND~~December ~~SUBSIDIARY (formerly U.S. Timberlands Klamath Falls~~31, ~~LLC) (dollar~~2003 ~~amounts~~Compared into ~~thousands~~Year ~~unless~~Ended ~~otherwise~~December ~~noted)~~31, 2002

~~Liquidity~~ Revenues. Revenues decreased $12.4 million, or 25%, from $49.5 million in 2002 to $37.1 million in 2003. The decrease was primarily attributable to a decrease in log sales of $6.7 million and ~~Capital~~a ~~Resources~~$10.6 million decrease in deed sales. These decreases were offset by property sales in 2003 of $10.1 million, compared to $5.8 million in 2002. Chip and by-product revenues were also higher by $0.5 million in 2003 compared to 2002. To meet its working capital requirements, the Company harvested and sold logs and timber deeds in 2003 at rates in excess of the estimated current annual board footage growth on the Timberlands.

~~The Company’s~~ Log ~~primary~~sales ~~sources~~for of2003 ~~liquidity~~were ~~have~~$18.0 ~~been~~million ~~cash~~on ~~provided~~volumes byof ~~operating~~57,048 ~~activities as well~~MBF, as compared ~~debt~~to ~~and~~log ~~equity~~sales ~~financings~~of $24.7 Asmillion ofon ~~December~~volumes ~~31,~~of ~~2003~~74,612 ~~the~~in ~~Company~~2002. ~~had~~The aaverage ~~cash~~log ~~balance~~sales ofprice ~~$1.4~~for ~~million and~~2003 awas $~~6.5~~316 ~~million~~per ~~working~~MBF compared ~~capital~~to ~~deficit~~an ~~that~~average ~~included~~log ~~$5.0~~sales price of ~~deferred~~$330 ~~revenue~~per ~~relating~~MBF toin ~~the prepayment~~2002, of a ~~log~~4% ~~sale~~decrease, ~~contract~~reflecting ~~entered~~weaker ~~into~~markets infor ~~December~~the ~~2003~~Company's log sales.

~~Operating~~ Timber ~~Activities~~deed sales for 2003 were $7. ~~Cash~~0 ~~flows~~million ~~provided~~on byvolumes ~~operating~~of ~~activities~~53,719 MBF, incompared ~~2003~~to ~~were~~timber deed revenue of $117.36 million on volumes of 130,161 MBF in 2002. The average timber deed sales price per MBF for 2003 was $130 compared to ~~cash~~an ~~flows~~average ~~provided by~~timber ~~operating~~deed ~~activities~~sales price of $~~3.2~~135 ~~million~~ in 2002, a 4% decrease. The decrease in timber deed sales realization is due to overall declines in market conditions, as well as a change in the timber mix being sold in timber sales.

~~Investing~~ There ~~Activities. Cash~~were ~~flows~~no ~~used~~stumpage insales ~~investing~~for ~~activities~~2003 ~~were~~and $22002.0 ~~million~~The inlack ~~2003,~~of asstumpage sales ~~compared~~was toa ~~cash~~result ~~flows~~of ~~used~~the ~~in investing~~Company's ~~activities~~strategic ofdecision ~~$3.3~~to ~~million~~utilize ~~during~~log ~~2002~~sales, ~~principally~~timber ~~for~~deed ~~reforestation,~~sales and timber ~~acquisitions~~ and ~~road~~property ~~additions~~sales inas its ~~each~~primary ~~year.~~sources of revenue.

~~Financing~~ The ~~Activities. Cash~~Company ~~flows~~had ~~provided~~revenue byfrom ~~financing~~timber ~~activities were $1.2~~ and ~~$0.0~~property ~~million~~sales in 2003 ~~and 2002, respectively.~~of ~~In May 2003, U~~ $10.S.1 ~~Timberlands Acquisition Co.~~million, ~~LLC~~compared ~~reimbursed~~to ~~the Company for certain expenses aggregating~~ $~~1,238~~5.8 ~~incurred~~million in ~~connection~~revenue ~~with~~from ~~the~~timber ~~Privatization Transaction. These expenses consisted principally of legal expenses of the Company~~ and ~~the~~property ~~Special~~sales Committee and a fairness opinion fee to an investment banking firm retained by the Special Committee. The reimbursement has been recorded as a contribution to the capital of the Company. Beginning in the second quarter of 2001, the Company ceased making distributions to its equityholders. Accordingly, during ~~2003 and~~ 2002~~, the Company paid no distributions to members~~.

~~Notes~~ Gross Loss. On ~~November~~Gross ~~14,~~loss ~~1997,~~decreased by ~~the Company issued~~ $~~225~~1.07 million ~~aggregate principal~~from ~~amount of Notes representing unsecured general obligations of the Company which bear interest at 9 5/8% per annum, payable semiannually in arrears on May 15 and November 15~~$3.3 ~~The~~million Notes mature on November 15, 2007 unless previously redeemed. The Notes do not require any mandatory redemption or sinking fund payments prior to maturity and are redeemable at the option of the Company in ~~whole~~ ~~or in part, on or after November 15,~~ 2002, ~~at predetermined redemption prices plus accrued interest~~ to ~~the redemption date~~$1.6 ~~Upon~~million ~~the~~in ~~occurrence~~2003 ~~of certain~~and ~~events~~gross ~~constituting~~margin aimproved ~~“change~~from ofnegative ~~control”~~7% ~~(as defined~~ in ~~the~~2002 ~~Indenture), the Company must offer~~ to ~~purchase~~negative ~~the Notes, at a purchase price equal to 101~~4% ~~of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. There can be no assurance that the Company will have access to sufficient funds to repurchase the Notes~~ in ~~the event of a change in control~~2003.

~~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 members, 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 members, 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. 24

23 INLAND FIBER GROUP, LLC AND SUBSIDIARY (dollar amounts in thousands unless otherwise noted)

~~INLAND~~ ~~FIBER~~The ~~GROUP,~~improvement ~~LLC~~in gross margin was due to several factors including lower contracted log and haul costs ~~AND~~ on ~~SUBSIDIARY~~a per MBF basis during 2003 as compared to 2002, a fire loss of $0.6 million in 2002, reduction in silviculture spending ~~(formerly~~ by U$0.S4 million in 2003 compared to 2002, and reduction in harvest taxes by $0.2 ~~Timberlands~~million ~~Klamath~~during ~~Falls~~2003 compared to 2002. Depletion, road ~~LLC)~~amortization, and depreciation were lower by $11.9 million during 2003 compared to 2002 as a result of lower log, timber ~~(dollar~~ deed, ~~amounts~~and intimberland ~~thousands~~sales, ~~unless~~but ~~otherwise~~on ~~noted)~~a per cent basis there was no change between the years and therefore no impact on the gross loss.

~~The Indenture~~ Selling, ~~also~~General ~~contains~~and ~~restrictions~~Administrative onExpenses. ~~the amount of timber that may be harvested based on a limit~~Selling, of general ~~150%, 140%, 130%~~ and ~~120%~~administrative ofexpenses ~~125~~were ~~MMBF,~~$6.4 ~~adjusted~~million ~~for~~in ~~various acquisitions~~2003, ~~dispositions~~compared ~~and~~to ~~adjustments~~selling, ~~averaged~~ ~~over~~general ~~a one, two, three~~ and ~~four~~administrative ~~year~~expenses ~~period,~~of ~~respectively~~$7.5 million Inin 2002, ~~because~~a ofdecrease ~~the accelerated harvesting during the fourth quarter 2002~~ of ~~salvage~~$1.1 ~~timber~~million. ~~resulting~~Within ~~from the Toolbox Fire~~selling, ~~the Company~~general ~~exceeded the allowable four year harvest by 6.9 MMBF~~ and, ~~as required under the Indenture~~administrative, ~~placed~~ ~~$662~~many incategories ~~a restricted account only to be used in ways prescribed in the Indenture. A balance~~ of ~~$63~~expenses ~~remains~~were ~~in the restricted account~~ down as ofa ~~December~~result ~~31, 2003. As~~ of ~~December 31, 2003,~~ the ~~Company was~~new inmanagement ~~compliance~~fee ~~with~~agreement ~~the~~described ~~covenants~~above ~~contained~~when init ~~the~~became ~~Notes.~~effective ~~(See~~on ~~Item~~September 3:1, ~~Legal Proceedings for a discussion of certain litigation initiated against the Company among others relating to the Notes~~2003.).

The ~~Company~~ ~~made~~lower ~~its~~selling, ~~required~~general ~~interest~~and ~~payment,~~administrative ~~due~~expenses onwere ~~November~~primarily reflected 17in salaries, ~~2003~~wages and benefits, ondown ~~its~~$0.7 ~~Notes~~million, ~~within~~professional ~~the~~services ~~30 day~~were ~~grace~~down ~~period~~$0.4 ~~provided~~million, ~~therefore~~property taxes were down $0.1 ~~(See~~million, ~~Item~~and 3MLP related expenses were down $0.8 ~~Legal~~million. ~~Proceedings~~These ~~for~~expense areductions ~~discussion~~were ofoffset ~~certain~~by ~~litigation~~the management ~~initiated~~ fee ~~against~~of $1.3 million of the Company ~~among~~paid ~~others~~with ~~relating~~respect to the ~~Notes.).~~period September 1, 2003 through December 31, 2003.

Equity in Net Income (Loss) of Affiliate. ~~Credit~~The equity ~~Facility~~in net loss of affiliate was $17.0 million during 2003 as compared to equity in net loss of affiliate of $11.0 million in 2002. The losses in 2003 and 2002 reflect the Company's share of losses absorbed from its preferred equity investment in American Forest Resources, LLC as well as charges arising in 2003 from our consolidation into the affiliate. See "Investment in Affiliate" included in Note 9 of the Financial Statements for an explanation of the preferred equity investment in American Forest Resources, LLC.

~~The Company~~ Interest ~~had~~Expense. aInterest ~~credit facility with an affiliate of the Manager (the “Affiliate Credit Facility”)~~expense ~~consisting~~ was ~~of a revolving line of credit of up to~~ $1221.07 million. ~~Borrowings under the Affiliate Credit Facility bore interest at the prime lending rate as published~~ in ~~the~~2003 ~~Wall~~and ~~Street Journal plus applicable margin~~2002, ~~which~~consisting ~~was~~primarily ~~based on the Company’s leverage ratio. The Affiliate Credit Facility expired, by its terms, at the end~~ of ~~April~~interest ~~2002.~~expense The Company sought to replace the Affiliate Credit Facility with a working capital facility from an unaffiliated third party but has been unable to obtain a working capital credit facility in amounts sufficient to fund its working capital needs from a traditional commercial lender. While the Company continues to seek a credit facility from an unaffiliated source, affiliated lenders have made short term advances to the Company, payable on ~~demand, at an annual interest rate of 10%. The affiliate has made no commitment to continue lending funds to~~ the Company~~, and~~'s ~~each request is reviewed on a case by case basis~~$225.0 ~~During~~million ~~2003, the maximum amount outstanding under such loans was $424 all~~ of ~~which~~Senior ~~had been repaid as of December 31, 2003~~Notes.

~~Capital~~ Other ~~Expenditures/Cash~~Income ~~Distributions~~(Expense), net. Other income, net, was $0.2 million in 2003 and 2002 and consisted of income derived from the cattle leases, and other mineral and grazing rights granted.

~~Capital expenditures~~Liquidity inand 2003 totaled $2.0 million. The Company purchased timber cutting rights from its affiliate for approximately 5.1 MMBF of timber for $0.8 million. The remaining $1.2 million in capital expenditures were mainly in the nature of land management/silviculture costs. Capital expenditures were financed through cash flow generated by operations. As the Company does not currently own and does not plan to own manufacturing facilities, and all logging is subcontracted to third parties, it is anticipated that capital expenditures in the future will not be significant and will consist mainly of land management/silviculture expenditures. It is currently anticipated that the Company will not maintain significant log inventories, although small log inventories may be maintained for a short period of time, or incur material capital expenditures for machinery and equipment. The Company anticipates that capital expenditures will be approximately $0.5 million in 2004 consisting primarily of capitalized silviculture costs and miscellaneous equipment purchases. Resources

24 The Company's primary sources of liquidity have been cash provided by operating activities as well as debt and equity financings. As of December 31, 2004, the Company had a cash balance of $0.2 million and a $3.8 million working capital deficit that included $1.0 of deferred revenue relating to the prepayment of a log sale contract entered into in December 2003.

~~INLAND~~ Operating ~~FIBER~~Activities. ~~GROUP,~~Cash ~~LLC~~flows ~~AND~~ provided ~~SUBSIDIARY (formerly~~by ~~U.S.~~operating ~~Timberlands~~activities ~~Klamath~~in ~~Falls~~2004 were $1.1 million, ~~LLC) (dollar~~compared ~~amounts~~to incash ~~thousands~~flows ~~unless~~provided ~~otherwise~~by ~~noted)~~operating activities of $1.3 million in 2003.

~~Cash required~~ toInvesting ~~meet the Company’s debt service will be significant~~Activities. ToCash ~~meet~~flows ~~its~~used ~~working capital requirements, the Company has been selling logs and making timber sales at a rate~~ in ~~excess of the~~investing ~~Manager’s~~ activities ~~estimate~~were ~~of the current annual board footage growth on the Company’s timberlands~~$2. ~~Although~~4 ~~the~~million ~~Company~~in ~~has been approached recently regarding certain debt restructuring scenarios~~2004, ~~discussions~~ have been very preliminary and it is premature to assess the likelihood of pursuing any such scenario or other material transaction. (See Item 3. Legal Proceedings for a discussion of certain litigation initiated against the Company among others relating to the Notes.). as

~~Effects~~ ~~of Inflation~~ 25

~~Prices for~~INLAND ~~the~~FIBER ~~Company’s stumpage and logs may be subject to sharp cyclical fluctuations due to market or other economic conditions~~GROUP, ~~including~~LLC ~~the~~AND ~~level~~SUBSIDIARY ~~of construction activity, but generally do not~~ ~~directly~~ (dollar ~~follow~~amounts ~~inflationary~~in ~~trends.~~thousands ~~Costs~~unless ofotherwise ~~forest~~noted) ~~operations and general and administrative expenses generally reflect inflationary trends.~~

~~Recent~~ ~~Accounting~~compared ~~Standards~~to cash flows used in investing activities of $2.0 million during 2003 principally for reforestation, timber acquisitions and road additions in each year.

~~In December~~ Financing ~~2002, the FASB issued SFAS No~~Activities. ~~148,~~Cash ~~“Accounting~~flows provided ~~for~~by ~~Stock-Based~~financing ~~Compensation~~activities ~~– Transition~~were $0.0 and ~~Disclosure”~~$1.2 asmillion anin ~~amendment~~2004 toand ~~SFAS~~2003, Norespectively. ~~123~~In byMay ~~introducing~~2003, ~~two~~U.S. ~~additional conversion~~Timberlands ~~methods~~ Acquisition ~~when~~Co., ~~converting~~LLC toreimbursed the ~~fair~~Company ~~value~~for ~~based~~certain ~~method~~expenses ~~from~~aggregating ~~the~~$1.2 ~~intrinsic~~million ~~value~~incurred ~~method~~in ofconnection ~~accounting for~~with ~~stock-based~~the ~~employee compensation~~Privatization Transaction. ItThese ~~also~~expenses ~~amends~~consisted ~~the~~principally ~~disclosure provisions~~ of ~~SFAS~~legal ~~No.~~expenses ~~123~~of ~~to require~~the ~~prominent~~Company ~~disclosure~~and ~~about~~ the ~~effects~~Special onCommittee ~~reported~~and ~~net~~a ~~income~~fairness ~~(loss)~~opinion fee ofto an ~~entity’s accounting~~investment ~~policy~~banking ~~decisions~~firm ~~with~~retained ~~respect~~by tothe ~~stock~~Special ~~based~~Committee. ~~employee~~The ~~compensation~~reimbursement ~~and~~has ~~amends~~been ~~APB~~recorded ~~Opinion No.~~as 28a contribution to ~~require~~the capital ~~disclosure~~of ~~about~~the ~~those~~Company. ~~effects~~Beginning in ~~interim~~the ~~financial~~second ~~information.~~quarter ~~The~~of ~~disclosure provisions~~2001, ~~are~~the ~~effective~~Company ~~for~~ceased ~~fiscal~~making ~~years ending after~~distributions ~~December~~to 15its equityholders. Accordingly, during ~~2002~~2004 and ~~for~~ ~~interim~~2003, ~~periods~~the ~~beginning~~Company ~~after~~paid ~~December~~no ~~15,~~distributions ~~2002~~to members.

~~Prior~~ Notes. On November 14, 1997, the to Company issued $225.0 million aggregate principal amount of Notes representing unsecured general obligations of the ~~Privatization~~Company which ~~Transaction~~bear interest at 9-5/8% per annum, ~~when~~payable semiannually in arrears on May 15 and November 15. The Notes mature on November 15, 2007 unless previously redeemed. The Notes do not require any mandatory redemption or sinking fund payments prior to maturity and are redeemable at the option of the Company ~~was~~in ~~deemed~~whole toor ~~have~~in ~~provided~~part, ~~stock-based~~on ~~compensation~~or after November 15, 2002, at predetermined redemption in prices ~~connection~~plus ~~with~~accrued interest to the ~~MLP’s~~redemption ~~Unit~~date. ~~Option~~Upon ~~Plan~~the occurrence of certain events constituting a "change of control" (as defined in the Indenture), the Company ~~had~~must ~~elected~~offer to ~~follow~~purchase the ~~intrinsic~~Notes, at a purchase price equal to 101% of the principal amount ~~value~~ thereof, ~~method~~plus accrued and unpaid interest to the date of ~~accounting~~purchase. ~~for~~There ~~stock-based~~can ~~employee~~be ~~compensation~~no assurance that the Company will have access to sufficient funds to repurchase the Notes in the event of a change in control.

In The Indenture contains various affirmative and restrictive covenants ~~January~~ applicable ~~2003,~~to the ~~FASB~~Company ~~issued~~and ~~Interpretation~~its ~~No.~~subsidiaries, 46including ~~(FIN~~limitations ~~46)~~on ~~“Consolidation of~~the ~~Variable~~ability ~~Interest~~of ~~Entities”~~the ~~which~~Company isand anits ~~interpretation~~subsidiaries ofto, ~~Accounting~~among ~~Research~~ other ~~Bulletin~~things, ~~No.~~(i) 51incur ~~“Consolidated~~additional ~~Financial~~indebtedness ~~Statements”.~~(other Inthan ~~December 2003~~certain permitted indebtedness) unless the ~~FASB~~Company's ~~modified~~Consolidated ~~FIN~~Fixed Charge 46Coverage toRatio ~~make~~(as ~~certain~~defined ~~technical~~in ~~corrections~~the ~~and~~Indenture) ~~address certain~~is ~~administration~~greater ~~issues~~than ~~that~~2.25 ~~had~~to ~~arisen~~1. ~~FIN~~00, 46and ~~requires~~(ii) ~~the~~make ~~consolidation of~~distributions ~~entities~~to inmembers, ~~which~~make aninvestments (other ~~enterprise~~than ~~absorbs~~permitted ainvestments) ~~majority~~in ofany ~~the~~person, ~~entity’s~~create ~~expected losses~~liens, ~~receives~~engage ain ~~majority~~transactions ofwith ~~the~~affiliates, ~~entity’s~~suffer ~~expected~~to ~~residual~~exist ~~returns,~~any restrictions or on ~~both,~~the asability of a ~~result~~subsidiary ofto ~~ownership,~~make ~~contractual~~distributions or ~~other~~repay ~~financial~~indebtedness ~~interests~~ to members, engage in ~~the~~sale ~~entity.~~and ~~Previously~~leaseback transactions, enter ~~entities~~into ~~were~~a ~~generally~~merger, ~~consolidated~~consolidation byor ansale ~~enterprise when~~of itall ~~had~~or asubstantially ~~controlling~~all ~~financial~~of ~~interest~~its ~~through~~assets, ~~ownership~~sell ofassets aor ~~majority~~harvest timber in excess of ~~voting~~ certain ~~interest~~limitations or engage in ~~the~~a ~~entity~~different line of business.

The ~~provisions~~ orIndenture ~~FIN~~also 46contains asrestrictions ~~revised~~on ~~are~~the ~~required~~amount toof timber that may be ~~applied~~harvested bybased ~~the~~on ~~Company~~a ~~no later~~limit ~~than~~of ~~March~~150%, 31140%, ~~2004.~~130% ~~The~~and ~~Company~~120% ~~has~~of ~~considered~~125 ~~the~~MMBF, ~~applicability~~adjusted offor ~~FIN 46~~various toacquisitions, ~~its~~dispositions ~~investment~~and adjustments, inaveraged ~~its~~over ~~parent~~a ~~company~~one, ~~American~~two, ~~Forest~~three ~~Resources~~and four year period, ~~LLC~~respectively. In 2002, because of the accelerated harvesting ~~and~~ during ~~has~~the ~~concluded~~fourth ~~that~~quarter ~~American~~2002 ~~Forest~~of ~~Resources~~salvage timber resulting from the Toolbox Fire, ~~LLC~~the isCompany ~~not~~exceeded athe ~~variable~~allowable ~~interest~~four year harvest ~~entity~~ by 6.9 MMBF and, ~~therefore~~as ~~its~~required ~~financial~~under ~~statements~~the ~~are~~Indenture, ~~not~~placed ~~required~~$662 in a restricted account only to be ~~consolidated~~used in ways prescribed in ~~with~~ the ~~those~~Indenture. A balance of $0 remains in the restricted account as of December 31, 2004. As of December 31, 2004, the Company believes ~~pursuant~~it towas in compliance with the ~~provisions~~covenants ofcontained ~~FIN~~in 46the Notes. (See “Item 3. Legal Proceedings” for a discussion of certain litigation initiated against the Company, among others, relating to the Notes

25 26

INLAND FIBER GROUP, LLC AND SUBSIDIARY ~~(formerly~~ ~~U.S. Timberlands Klamath Falls, LLC)~~ (dollar amounts in thousands unless otherwise noted)

~~Item 7A.~~ ~~Quantitative~~ and ~~Qualitative~~the ~~Disclosures~~decision ~~About~~of ~~Market~~the ~~Risk~~Delaware Court of Chancery with respect to the Company’s compliance with such covenants).

~~Not~~ On ~~applicable~~November 13, 2004, the Company transferred to the Indenture Trustee the $10.8 million interest payment on the Notes due on November 17th. On November 27, 2004, the Trustee notified the Company and the Noteholders that it had held back $4.8 million of such payment to cover its past and future expenses with regard to its litigation against the Company. The Company has filed suit against the Trustee, seeking, among other things, to have it refund to the Noteholders the funds that it withheld. Subsequently, the Trustee reduced its holdback to $2.8 million.

~~Item 8.~~Affiliate ~~Financial~~Credit ~~Statements~~ Facility

The Company had a credit facility with an affiliate of the Manager ~~information~~ (the ~~required~~"Affiliate ~~hereunder~~Credit isFacility") ~~included~~consisting inof ~~this~~a ~~report~~revolving line of credit of up to $12.0 million. Borrowings under the Affiliate Credit Facility bore interest at the prime lending rate as ~~set~~published ~~forth~~in the Wall Street Journal plus applicable margin, which was based on the Company's leverage ratio. The Affiliate Credit Facility expired, by its terms, at the end of April 2002. The Company sought to replace the Affiliate Credit Facility with a working capital facility from an unaffiliated third party but has been unable to obtain a working capital credit facility in amounts sufficient to fund its working capital needs from a traditional commercial lender. While the ~~“Index~~Company continues to ~~Financial~~seek a credit facility from an unaffiliated source, affiliated lenders have made short term ~~Statements”~~ advances to the Company, payable on ~~Page~~demand, ~~F-l~~at an annual interest rate of 10%. The affiliate has made no commitment to continue lending funds to the Company, and each request is reviewed on a case by case basis. During 2004, there were no borrowings from affiliated lenders.

~~Item 9. Changes~~Capital inExpenditures/Cash ~~and Disagreements with Accountants on Accounting and Financial Disclosure~~Distributions

~~Not~~ Capital ~~applicable~~expenditures in 2004 totaled $2.5 million. The Company purchased timber cutting rights for approximately 17.1 MMBF of timber for $1.6 million. The remaining $0.9 million in capital expenditures were mainly in the nature of land management/silviculture costs. Capital expenditures were financed through cash flow generated by operations. As the Company does not currently own and does not plan to own manufacturing facilities, and all logging is subcontracted to third parties, it is anticipated that capital expenditures in the future will not be significant and will consist mainly of land management/silviculture expenditures. It is currently anticipated that the Company will not maintain significant log inventories, although small log inventories may be maintained for a short period of time, or incur material capital expenditures for machinery and equipment. The Company anticipates that capital expenditures will be approximately $1.0 million in 2005 consisting primarily of capitalized silviculture costs and miscellaneous equipment purchases.

~~Item~~ Cash 9Arequired to meet the Company's debt service will be significant. ~~Disclosure~~ To ~~Controls~~meet its working capital requirements, the Company has been selling logs and ~~Procedures~~making timber sales at a rate in excess of the Manager's estimate of the current annual board footage growth on the Company's timberlands. Although the Company had been approached regarding certain debt

~~The~~ Company’s management maintains an adequate system of disclosure controls and procedures to promote the timely identification and reporting of material, relevant information. The Company’s President and Chief Executive Officer and its Vice President and Chief Financial Officer meet regularly with members of senior management of the Manager to discuss significant transactions and events affecting the Company’s operations and consider whether topics discussed represent information that should be disclosed under the rules of the SEC. The Company established a Board of Directors in July 2003 and it includes an Audit Committee. The Audit Committee reviews all reports on Form 10-Q and 10-K prior to their filing. The Audit Committee is responsible for hiring the Company’s external auditors and meets with those auditors. 27

~~The Company’s~~INLAND ~~President~~FIBER ~~and~~GROUP, ~~Chief~~LLC ~~Executive~~AND ~~Officer and its Vice President and Chief Financial Officer~~SUBSIDIARY ~~are~~ (dollar ~~responsible~~amounts ~~for~~in ~~establishing~~thousands ~~and~~unless ~~maintaining~~otherwise ~~disclosure~~noted) ~~controls and procedures. They have designed such controls to ensure that others make all material information known to them within the organization.~~

~~As of~~ restructuring scenarios, the ~~end~~ongoing oflitigation with the ~~period~~holders ~~covered~~of bythe ~~this~~Notes ~~annual~~has ~~report,~~materially interfered with the Company’s ~~executive officers~~ability ~~competed~~to anpursue ~~evaluation~~a number of such scenarios. While the ~~disclosure~~Company ~~controls~~is ~~and~~still ~~procedures~~pursuing ~~and has~~certain ~~determined~~debt ~~them~~restructuring initiatives, todiscussions behave ~~functioning~~been ~~properly~~very preliminary and ~~effectively.~~it ~~They~~is ~~did~~premature ~~not discover~~to assess the likelihood of pursuing any ~~significant~~such ~~deficiencies~~scenario or other material ~~weaknesses~~transaction. ~~within~~(See ~~the~~Item ~~controls~~3. “Legal Proceedings” for a discussion of certain litigation initiated against ~~and~~ the ~~procedures~~Company ~~that~~among ~~required~~others ~~modifications~~relating to the Notes). ~~Since~~The next semi-annual interest payment on the ~~completion~~Notes ofis ~~that~~due ~~evaluation~~May 15, 2005, subject ~~there~~ to ~~have~~a ~~been~~30 noday ~~significant~~grace ~~changes~~period. inThe ~~internal~~Company ~~control~~is ~~over~~considering ~~financial~~its ~~reporting~~options regarding such payment given the pendency of the litigation and or the inacceleration ~~other~~of ~~factors~~the Notes. There is substantial risk that ~~could~~the ~~significantly~~Company ~~affect~~may ~~internal~~not ~~control~~make ~~over~~this ~~financial reporting~~interest payment.

Effects of Inflation

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

Recent Accounting Standards

~~INLAND~~ In ~~FIBER~~January ~~GROUP~~2003, ~~LLC AND~~the ~~SUBSIDIARY~~ FASB issued Interpretation No. 46 (~~formerly~~FIN U46) “Consolidation of Variable Interest Entities” which is an interpretation of Accounting Research Bulletin No.S 51 “Consolidated Financial Statements”. In ~~Timberlands~~December ~~Klamath~~2003 ~~Falls,~~the ~~LLC)~~FASB modified FIN 46 to make certain technical corrections and address certain administration issues that had ~~(dollar~~ arisen. ~~amounts~~FIN 46 requires the consolidation of entities in ~~thousands~~which ~~unless~~an ~~otherwise~~enterprise ~~noted)~~absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Previously, entities were generally consolidated by an enterprise when it had a controlling financial interest through ownership of a majority voting interest in the entity.

~~PART~~ The ~~III~~provisions of FIN 46 as revised were applicable to the Company as of March 31, 2004. The Company had considered the applicability of FIN 46 to its investment in its indirect parent company, American Forest Resources, LLC, and had concluded that American Forest Resources, LLC is not a variable interest entity and therefore its financial statements are not required to be consolidated with those of the Company pursuant to the provisions of FIN 46.

Item 10 7A. ~~Directors~~ Quantitative and ~~Executive~~Qualitative ~~Officers~~Disclosures ofAbout ~~the~~Market ~~Registrant~~ Risk

~~Directors~~Not ~~and Executive Officers of the Company~~ applicable.

Item 8. Financial Statements

The ~~following~~ ~~table~~information ~~sets~~required ~~forth~~hereunder ~~certain~~is ~~information~~included ~~with~~in ~~respect~~this toreport ~~the~~as ~~members of~~set ~~the~~ forth ~~Board~~in ~~of Directors of~~ the ~~Company~~"Index ~~and~~to ~~its~~Financial ~~executive~~Statements" ~~officers.~~on ~~Executive officers~~Page ~~and directors are elected for one~~F-~~year terms~~l.

Name	Age	Position with Manager
John M. Rudey	60	Chairman, Chief Executive Officer, President and Director
Laurie G. Rudey	56	Director
George R. Hornig	49	Director (1)
John D. Layton	42	Director (1)
Mel A. Sachs	58	Director (1)
Suzanne M. Hay	32	Director (2)
Carrie L. Tillman	32	Director (2)
Thomas C. Ludlow	57	Vice President, Secretary and Treasurer

	(1)	Member of the Audit Committee.
	(2)	These directors are “Independent Directors” under the Company’s operating agreement and have the powers and duties of directors of the Company only with respect to the Company’s entering into certain significant transactions, including, but not limited to, a merger, sale of substantially all of the assets or the institution of bankruptcy proceedings with respect to the Company and in other limited circumstances.

INLAND FIBER GROUP, LLC AND SUBSIDIARY
(dollar amounts in thousands unless otherwise noted)

~~John M.~~ ~~Rudey~~Item ~~has~~9. Changes ~~served~~in ~~as Chairman~~ and ~~President~~Disagreements ofwith ~~the~~Accountants ~~Company~~on ~~since~~Accounting ~~its reorganization in July 2003. He also serves as Chairman, Chief Executive Officer~~ and ~~President~~ of Financial ~~the Manager, having been elected to the Board of Directors of the Manager in September 1996.~~ Disclosure

~~Laurie G.~~Not ~~Rudey has served as a director of the Company since its reorganization in July 2003~~applicable. ~~She also served as a director of the Manager. Mrs. Rudey has been a Psychotherapist since 1998. John M. Rudey, Chairman and President of the Company, is Mrs. Rudey’s husband~~

~~George R.~~Item ~~Hornig has served as a Director of the Company since its reorganization in July 2003~~9A. HeControls ~~also serves a Director of the Manager, having been elected to the Board of Directors of the Manager in September 1996. Since 1999, Mr. Hornig has been Managing Director~~ and Chief Operating Officer of Credit Suisse First Boston’s Private Equity Division. From 1993 to 1999, Mr. Hornig was an Executive Vice President of Deutsche Bank Americas Holdings, Inc. (the United States arm of Deutsche Bank, a German banking concern) and affiliated predecessor entities.. Mr. Hornig is also a director of Unity Mutual Life Insurance Company and Forrester Research, Inc. Procedures

27 The Company’s management maintains an adequate system of disclosure controls and procedures to promote the timely identification and reporting of material, relevant information. The Company’s President and Chief Executive Officer and its Vice President and Chief Financial Officer meet regularly with members of senior management of the Manager to discuss significant transactions and events affecting the Company’s operations and consider whether topics discussed represent information that should be disclosed under the rules of the SEC. The Company established a Board of Directors in July 2003 and it includes an Audit Committee. The Audit Committee reviews all reports on Form 10-Q and 10-K prior to their filing. The Audit Committee is responsible for hiring the Company’s external auditors and meets with those auditors.

~~INLAND~~ The ~~FIBER~~Company’s ~~GROUP,~~President ~~LLC AND~~and ~~SUBSIDIARY~~Chief Executive Officer and its Vice ~~(formerly~~ President ~~U.S.~~and ~~Timberlands~~Chief ~~Klamath~~Financial ~~Falls,~~Officer ~~LLC)~~are responsible for establishing and maintaining disclosure controls and procedures. They ~~(dollar~~ have ~~amounts~~designed insuch ~~thousands~~controls ~~unless~~to ~~otherwise~~ensure ~~noted)~~that others make all material information known to them within the organization.

~~John D.~~ As ~~Layton~~of ~~has~~the ~~served~~end ~~as a director~~ of the ~~Company~~period ~~since~~covered ~~its~~by ~~reorganization~~this inannual ~~July~~report, ~~2003.~~the ~~He also~~Company’s ~~serves~~ executive asofficers acompleted ~~director~~an evaluation of the ~~Manager,~~Company’s ~~having~~controls ~~been~~and ~~elected~~procedures toand ~~the~~has ~~Board~~determined ofthem ~~Directors~~to ofbe effective. During the ~~Manager in~~fourth ~~June~~quarter ~~2003.~~of ~~For~~fiscal ~~the~~2004, ~~past~~there ~~five~~have ~~years,~~been ~~Mr.~~no ~~Layton~~significant ~~has~~changes ~~been~~in ainternal ~~Manager~~control ~~with~~over ~~HRH~~financial ~~Construction,~~reporting ~~LLC,~~or in ~~New~~other ~~York~~factors ~~City~~that could significantly affect internal control over financial reporting.

~~Mel A.~~Item ~~Sachs has served as a director of the Company since its reorganization in July 2003~~9B. HeOther also serves as a director of the Manager, having been elected to the Board of Directors of the Manager in June 2003. For the past five years Mr. Sachs has been a trial lawyer. Mr. Sachs has lectured practicing lawyers at the National College of Criminal Defense and has taught at Cornell University Law School, Emory University Law School, University of Colorado Law School and Hofstra University School of Law. Information

~~Suzanne M.~~Not ~~Hay has served as a director of the Company since its reorganization in July 2003~~applicable. Since 1995, Ms. Hay has served in various positions with Entity Services Group, LLC, which provides independent directors and other services to companies, and currently serves as Vice President, Client Development.

~~Carrie L.~~ Tillman has served as a director of the Company since its reorganization in July 2003. Since 1998, Ms. Tillman has served as an administrative manager with Entity Services Group, LLC. Prior to 1998, Ms. Tillman was Assistant to the Coordinator of Special Services for Corporation Service Company, a leading corporate services company that provides incorporation, registered agent, filing, merger and other corporate governance services.29

~~Thomas C.~~INLAND ~~Ludlow~~FIBER ~~became Vice President~~GROUP, Chief Financial Officer, Secretary and Treasurer of the Company in July 2003. He has served as Vice President and Chief Financial Officer of the Manager since July 2000. From 1998 to 2000, Mr. Ludlow was Chief Financial Officer of Forest Systems, LLC, aAND ~~Boston based~~SUBSIDIARY ~~timber investment management company. From 1995 to 1998, Mr. Ludlow was Director and head of~~ ~~North~~ (dollar ~~American~~amounts ~~Forest~~in ~~Products~~thousands ~~for~~unless ~~Deutsche~~otherwise ~~Morgan~~noted) ~~Grenfell, an international investment bank.~~

~~The Board~~ ofPART ~~Directors of the Company has determined that George R. Hornig is an “audit committee~~III ~~financial expert” as defined in Item 401(h) of Regulation S-K.~~

~~The Company~~ ~~does~~Item ~~not have a code of ethics as it does not have any employees~~10. ~~The Company’s~~Directors ~~principal executive officer~~ and ~~principal~~Executive ~~financial~~Officers ~~officer provide services to the Company primarily in their capacities as the executive officers~~ of the ~~Manager, and are bound by the provisions of the Manager’s employee handbook and other regulations established by the Manager.~~ Registrant

28 Directors and Executive Officers of the Company

~~INLAND~~ The ~~FIBER~~following ~~GROUP,~~table ~~LLC AND~~sets ~~SUBSIDIARY (formerly~~forth ~~U.S.~~certain ~~Timberlands~~information ~~Klamath~~with ~~Falls,~~respect ~~LLC)~~to ~~(dollar~~ the ~~amounts~~members inof ~~thousands~~the ~~unless~~Board ~~otherwise~~of ~~noted)~~Directors of the Company and its executive officers. Executive officers and directors are elected for one-year terms.

Item 11. Executive Compensation

Name	Age		Position
John M. Rudey	61	Chairman, Chief Executive Officer, President and Director
George R. Hornig	50	Director	(1	)
John D. Layton	43	Director	(1	)
Mel A. Sachs	59	Director	(1	)
Suzanne M. Hay	33	Director	(2	)
Carrie L. Tillman	33	Director	(2	)
Thomas C. Ludlow	58	Vice President, Secretary and Treasurer

Under the terms of the Company’s previous management arrangement, the Company was 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. Accordingly, the Company reimbursed the Manager for the salaries and bonuses paid to its executive officers and other employees. Under the management agreement entered into with the Manager, the Company pays the Manager an annual fee of 2% of the agreed upon valuation of total timber and timberland assets under management for its management services. The compensation of the Manager’s executive officers is subject to separate arrangements between the Manager and the executive officers. The Company’s executive officers are not paid by the Company for their services as executives officers of the Company. The table below sets forth annual salary, bonus and all other compensation awards and payouts earned by the Manager’s chief executive officer and chief financial officer for services rendered through August 31, 2003 which were reimbursed by the Company:

(1)	Member of the Audit Committee.

(2)	These directors are “Independent Directors” under the Company’s operating agreement and have the powers and duties of directors of the Company only with respect to the Company’s entering into certain significant transactions, including, but not limited to, a merger, sale of substantially all of the assets or the institution of bankruptcy proceedings with respect to the Company and in other limited circumstances.

~~SUMMARY~~ John ~~COMPENSATION~~M. ~~TABLE~~Rudey has served as Chairman and President of the Company since its reorganization in July 2003. He also serves as Chairman, Chief Executive Officer and President of the Manager, having been elected to the Board of Directors of the Manager in September 1996.

Name and Principal Position	Fiscal Year	AnnualCompensation			Long-TermCompensationAwards	All Other Compensation
		Salary ($)		Bonus ($)	Securities Underlying Options/SARs(#)
John M. Rudey	2003	309,000	(1)	—	—	—
Chairman and	2002	463,500		—	—	—
Chief Executive Officer	2001	463,500		—	—	—
Thomas C. Ludlow	2003	150,000	(1)
Vice President and	2002	225,000		—
Chief Financial Officer	2001	225,000		—	—	—

George R. Hornig has served as a director of the Company since its reorganization in July 2003. He also serves as a director of the Manager, having been elected to the Board of Directors of the Manager in September 1996. Since 1999, Mr. Hornig has been Managing Director and Chief Operating Officer of Credit Suisse First Boston's Private Equity Division. From 1993 to 1999, Mr. Hornig was an Executive Vice President of Deutsche Bank Americas Holdings, Inc. (the United States arm of Deutsche Bank, a German banking concern) and affiliated predecessor entities. Mr. Hornig is also a director of Unity Mutual Life Insurance Company and Forrester Research, Inc.

~~(1)~~ John ~~reflects~~D. ~~salary~~Layton ~~payments~~has upserved toas ~~August~~a 31director of the Company since its reorganization in July 2003. He also serves as a director of the Manager, having been elected to the Board of Directors of the Manager in June 2003. For the past five years, Mr. Layton has been a Manager with HRH Construction, LLC, in New York City.

~~Compensation~~ ~~of Directors~~ 30

~~Directors of~~ ~~the~~INLAND ~~Company,~~FIBER ~~other than Ms. Hay and Ms. Tillman~~GROUP, ~~currently receive annual compensation of $25,000 for their service on the Board of Directors of the Company. The Company pays $1,100 annually to the Entity Services Group,~~ LLC ~~for~~AND ~~the~~SUBSIDIARY ~~services~~ of each of Ms. Hay and Ms. Tillman. The independent directors of the Company’s Manager received $50,000 to $100,000 on an annual basis through June 2003. For their remuneration, the independent directors (~~other~~dollar ~~than~~amounts ~~Ms. Hay and Ms. Tillman) each agreed to participate~~ in ~~four~~thousands ~~regular~~unless ~~meetings~~otherwise of the Board of Directors and four Audit Committee meeting and the non-employee director agrees 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 or she participates. In addition, each non-employee director will be reimbursed for his or her 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 or her actions associated with being a director to the extent permitted under Delaware law. noted)

29 Mel A. Sachs has served as a director of the Company since its reorganization in July 2003. He also serves as a director of the Manager, having been elected to the Board of Directors of the Manager in June 2003. For the past five years Mr. Sachs has been a trial lawyer. Mr. Sachs has lectured practicing lawyers at the National College of Criminal Defense and has taught at Cornell University Law School, Emory University Law School, University of Colorado Law School and Hofstra University School of Law.

~~INLAND~~ Suzanne ~~FIBER~~M. ~~GROUP,~~Hay ~~LLC AND~~has ~~SUBSIDIARY~~served as a director of the Company since its reorganization ~~(formerly~~ in UJuly 2003.S Since 1995, Ms. ~~Timberlands~~Hay ~~Klamath~~has ~~Falls~~served in various positions with Entity Services Group, LLC), which provides independent directors ~~(dollar~~ and ~~amounts~~other inservices ~~thousands~~to ~~unless~~companies, ~~otherwise~~and ~~noted)~~currently serves as Vice President, Client Development of such company.

~~Through June~~ Carrie ~~2003,~~L. ~~the~~Tillman ~~Manager~~has ~~and~~served ~~Aubrey~~as ~~Cole Associates (~~a ~~consulting firm affiliated with Aubrey Cole, a~~ director of the Company ~~through~~since ~~June~~its reorganization ~~2003),~~in ~~Robert~~July F2003. ~~Wright~~Since ~~Associates~~1998, ~~Inc~~Ms. (aTillman ~~consulting~~has ~~firm affiliated~~served ~~with~~as ~~Robert~~an F.administrative ~~Wright,~~manager awith ~~director~~Entity ofServices ~~the~~Group, ~~Company through June 2003) and Mr~~LLC. ~~Hornig were~~Prior ~~parties~~ to ~~consulting~~1998, ~~agreements~~Ms. ~~pursuant~~Tillman towas ~~which~~Assistant ~~each such person or firm provided consulting services~~ to the ~~Manager.~~Coordinator ~~Each~~of ~~such~~Special ~~agreement~~Services ~~provided~~ for anCorporation ~~annual~~Service ~~retainer of $25~~Company,~~000,~~ ~~plus $150 per hour (with~~ a ~~maximum~~leading ~~per~~corporate ~~diem of $1,200) for~~ services ~~rendered at the request of the Manager. In addition,~~ ~~for~~ company ~~the first half of 2002, the Manager entered into a consulting agreement with Mr. Wyman~~ that ~~provided for~~provides ~~an annual retainer of $50~~incorporation,~~000~~ ~~for~~registered ~~services rendered at the request of the Manager. As of July 1~~agent, ~~2002~~filing, ~~Mr.~~merger ~~Wyman’s consulting fees were reduced to zero~~ and ~~were~~other ~~offset~~corporate bygovernance increased director fees. Pursuant to the management arrangement in effect at the time, the Company reimbursed the Manager for the payment of approximately $56,000, $112,000, and $98,000 to the Directors of the Manager for consulting services ~~during 2003, 2002 and 2001, respectively~~. ~~The consulting agreements were discontinued in July 2003.~~

~~Committee~~ Thomas ~~Interlocks~~C. Ludlow became Vice President, Chief Financial Officer, Secretary and ~~Insider~~Treasurer ~~Participation~~of the Company in ~~Compensation~~July ~~Decisions~~2003. He has served as Vice President and Chief Financial Officer of the Manager since July 2000. From 1998 to 2000, Mr. Ludlow was Chief Financial Officer of Forest Systems, LLC, a Boston based timber investment management company. From 1995 to 1998, Mr. Ludlow was Director and head of North American Forest Products for Deutsche Morgan Grenfell, an international investment bank.

~~As the~~ The ~~Company~~Board ~~does~~of ~~not~~Directors ~~have~~of ~~any employees,~~ the Company ~~does~~has ~~not~~determined ~~have~~that aGeorge ~~compensation committee~~R. ~~Under~~ the prior management arrangement, pursuant to which the Manager was reimbursed by the Company for compensation paid to the employees of the Manager, the Compensation Committee of the Manager was composed of Messrs. Rudey, Abramson, Wyman, Hornig ~~and~~is ~~Cole.~~an ~~Mr.~~“audit ~~Rudey~~committee ~~also~~financial ~~served~~expert” as ~~Chairman~~defined ~~of the~~in ~~Manager.~~Item ~~Other~~401(h) ~~than Mr. Rudey and Mr. Hornig, none~~ of ~~the~~Regulation ~~members of the Company’s Board of Directors are officers or employees of the Company or the Manager~~S-K. ~~The Manager currently does not have a compensation committee.~~

~~Item~~ The Company does not have a code of ethics as it does not have any 12 employees. ~~Security~~The ~~Ownership~~Company’s principal executive officer and principal financial officer provide services to the Company primarily in their capacities as the executive officers of ~~Certain~~the ~~Beneficial~~Manager, ~~Owners~~and are bound by the provisions of the Manager’s employee guidebook and ~~Management~~other regulations established by the Manager.

Item 11. Executive Compensation

~~None~~ Under the terms of the Company’s previous management arrangement, the Company was 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. Accordingly, the Company reimbursed the Manager for the salaries and bonuses paid to its executive officers and other employees. Under the management agreement entered into with the Manager, the Company pays the Manager an annual fee of 2% of the agreed upon valuation of total timber and timberland assets under management for its

~~Item 13.~~ ~~Certain Relationships and Related Party Transactions~~ 31

~~The Company~~INLAND isFIBER ~~managed by the Manager pursuant to a management agreement between the Company and the Manager. Under the management agreement~~GROUP, ~~the~~LLC ~~Manager~~AND ~~is entitled~~SUBSIDIARY ~~to an annual fee of 2% of the agreed upon valuation of total timber~~ ~~and~~ (dollar ~~timberland~~amounts ~~assets under management. Substantially all of the ownership interests~~ in ~~the~~thousands ~~Manager~~unless ~~are~~otherwise ~~owned~~noted) by John M. Rudey and entities affiliated with Mr. Rudey. Mr. Rudey is the Chairman and President of the Company. In 2003, $1,338 in fees were paid by the Company pursuant to the management agreement.

30 management services. The compensation of the Manager’s executive officers is subject to separate arrangements between the Manager and the executive officers. The Company’s executive officers are not paid by the Company for their services as executive officers of the Company. The table below sets forth annual salary, bonus and all other compensation awards and payouts earned by the Manager’s chief executive officer and chief financial officer for services rendered through August 31, 2003 which were reimbursed by the Company:

INLAND FIBER GROUP, LLC AND SUBSIDIARY (formerly U.S. Timberlands Klamath Falls, LLC) (dollar amounts in thousands unless otherwise noted)

	SUMMARY COMPENSATION TABLE

						Long-Term
		Annual				Compensation
		Compensation				Awards

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

John M. Rudey	2004		0		-	--	--
Chairman and	2003		309,000	(1)	-	--	--
Chief Executive Officer	2002		463,500		-	--	--

Thomas C. Ludlow	2004		0		-	--	--
Vice President and	2003		150,000	(1)	-	--	--
Chief Financial Officer	2002		225,000		-	--	--

(1) reflects salary payments up to August 31, 2003.

Compensation of Directors

~~Consulting~~ ~~Agreements~~ Directors of the Company, other than Mr. Rudey, Ms. Hay and Ms. Tillman, currently receive annual compensation of $25 for their service on the Board of Directors of the Company. The Company pays $1.1 annually to the Entity Services Group, LLC for the services of each of Ms. Hay and Ms. Tillman. The independent directors of the Company’s Manager received $50 to $100 on an annual basis through June 2003. For their remuneration, the independent directors (other than Ms. Hay and Ms. Tillman) each agreed to participate in four regular meetings of the Board of Directors and four Audit Committee meetings and the non-employee director agrees to participate in four regular meetings of the Board of Directors. Each non-employee director will receive $1.25 for each additional meeting in which he or she participates. In addition, each non-employee director will be reimbursed for his or her 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 or her actions associated with being a director to the extent permitted under Delaware law.

~~Through~~ Through June 2003, the Manager and ~~each of~~ Aubrey Cole Associates (a consulting firm affiliated with ~~Mr.~~Aubrey Cole, a director of the Company through June 2003), Robert F. Wright Associates, Inc. (a consulting ~~firm~~ firm affiliated with ~~Mr.~~Robert ~~Wright) and Mr~~F. ~~Hornig were parties to consulting agreements pursuant to which each such person or firm provided consulting services to the Manager. Each such agreement provided for an annual retainer of $25~~Wright,~~000,~~ ~~plus $150 per hour (with~~ a ~~maximum~~director ~~per diem~~ of ~~$1,200) for services rendered at~~ the ~~request~~ ofCompany ~~the~~through ~~Manager.~~June In2003) ~~addition,~~and ~~for the first half of 2002, the Manager entered into a consulting agreement with~~ Mr. ~~Wyman~~Hornig ~~that provided for an annual retainer of $50,000 for services rendered at the request of the Manager. Such fees~~ were ~~reimbursed~~parties to ~~the~~consulting ~~Manager~~agreements bypursuant ~~the~~to ~~Company. See also Compensation of Directors included in Item 11.~~ which

~~Investments~~ ~~in and Transactions with Affiliate~~32

~~Since~~ ~~October~~INLAND ~~1999,~~FIBER ~~the Company has owned a redeemable preferred membership interest (“Preferred LLC Interest”) in American Forest Resources~~GROUP, LLC ~~(formerly U.S.~~AND ~~Timberlands~~SUBSIDIARY ~~Yakima, LLC)~~ (~~“AFR”),~~dollar anamounts ~~affiliate, accounted for under the equity method. As described~~ in ~~Note~~thousands 1unless tootherwise the Financial Statements, in July 2003 the Company became an indirect subsidiary of AFR as a result of a series of transactions culminating in the contribution to a subsidiary of AFR of the 99% non-managing member’s interest in the Company previously owned by the MLP.noted)

In ~~October~~each ~~1999,~~such ~~the~~person ~~Company~~or ~~made~~firm anprovided ~~investment~~consulting inservices ~~AFR. AFR, a then newly formed entity organized~~ to ~~acquire timber properties located in Central Washington and Central Oregon, is engaged in~~ the ~~growing of trees and sale of logs and standing timber to third party wood processors~~Manager. Each ~~The~~such ~~MLP~~agreement ~~contributed~~provided tofor ~~AFR~~an ~~$294 of~~annual ~~cash~~retainer ~~for 49%~~ of ~~AFR’s~~$25, ~~common~~plus ~~interests (the “Common LLC Interests”). The remaining Common LLC Interests were acquired for~~ $~~306~~150 inper ~~cash~~hour ~~by Cascade Resource Holdings Group, LLC~~ (~~formerly~~with ~~U.S. Timberlands Holding Group, L.L.C.,~~ a ~~Delaware~~maximum ~~limited~~per ~~liability~~diem ~~company~~of ~~(“Holdings Group”~~$1.2) infor ~~which~~services ~~John Rudey,~~rendered ~~the~~at ~~Chairman of~~ the request ~~Board~~ of the ~~Company holds a controlling interest~~Manager. ~~The~~ ~~Company~~In ~~also~~addition, ~~acquired~~for ~~all of~~ the ~~senior~~first ~~preferred~~half ~~membership~~of ~~interests~~2002, ~~in AFR (~~the ~~“Senior~~Manager orentered ~~Preferred~~into ~~LLC~~a ~~Interests”)~~consulting ~~for~~agreement ~~its~~with ~~contribution to~~Mr. ~~AFR~~Wyman ofthat ~~timberlands~~provided ~~consisting~~for ~~primarily of non-income producing, pre-merchantable pine plantations having~~ an ~~agreed~~annual ~~upon~~retainer ~~value~~ of $~~22,000.~~50 ~~The~~for ~~Company~~services ~~recorded its~~rendered ~~investment~~at in the ~~Senior~~request ~~LLC~~of ~~interest at its $18,850 cost basis for~~ the ~~contributed~~ ~~timberlands~~Manager. ~~Terms~~As of ~~the~~July ~~Preferred~~1, ~~LLC Interests include a cumulative~~2002, ~~annual~~Mr. ~~guaranteed~~Wyman's ~~return~~consulting offees 5%were ~~until~~reduced ~~December~~to ~~31,~~zero ~~2001~~ and 6%were ~~thereafter~~offset ~~of the~~by ~~$22,000~~increased ~~agreed~~director ~~upon value of the contributed timberlands~~fees. ~~The~~Pursuant ~~Preferred LLC Interests are redeemable at AFR’s option for a redemption price equal~~ to the ~~agreed~~management ~~upon~~arrangement ~~value of the Preferred LLC Interests, either~~ in ~~cash~~effect orat ~~timberlands, plus any portion of~~ the ~~guaranteed~~time, ~~return not received by~~ the Company ~~prior to~~reimbursed the ~~redemption~~Manager ~~date.~~for ~~Generally, AFR’s net income or losses are allocated to~~ the ~~Common~~payment ~~LLC~~of ~~Interests.~~approximately ~~However~~$56, ~~net~~$112, ~~losses~~and $98 ~~exceeding~~to the ~~account~~Directors ~~balances~~ of the ~~Common~~Manager ~~LLC~~for ~~Interests~~consulting ~~are~~services ~~allocated~~during to2003, ~~the~~2002 ~~Preferred~~and ~~LLC~~2001, ~~Interest~~respectively. The ~~Company~~ ~~accounts~~consulting ~~for~~agreements ~~the~~were ~~Preferred~~discontinued ~~LLC Interest at cost plus accrued dividends to the extent earned, reduced by losses, if any,~~ in ~~excess~~July ~~of the Common LLC Interests~~2003.

31 Committee Interlocks and Insider Participation in Compensation Decisions

~~INLAND~~ As ~~FIBER~~the ~~GROUP~~Company does not have any employees, ~~LLC~~the ~~AND~~Company ~~SUBSIDIARY~~does ~~(formerly~~not Uhave a compensation committee.S Under the prior management arrangement, pursuant to which the Manager was reimbursed by the Company for compensation paid to the employees of the Manager, the Compensation Committee of the Manager was composed of Messrs. ~~Timberlands~~Rudey, ~~Klamath~~Abramson, ~~Falls~~Wyman, ~~LLC)~~Hornig ~~(dollar~~and ~~amounts~~Cole. Mr. inRudey ~~thousands~~also ~~unless~~served ~~otherwise~~as ~~noted)~~Chairman of the Manager. Other than Mr. Rudey and Mr. Hornig, none of the members of the Company’s Board of Directors are officers or employees of the Company or the Manager. The Manager currently does not have a compensation committee.

~~On September~~ ~~14,~~Item ~~2001, management of AFR was taken over by American Forest Services, LLC (“American Forest Services,” formerly U~~12.S. ~~Timberlands~~Security ~~Services Yakima,~~Ownership ~~LLC), a wholly owned subsidiary~~ of ~~the~~Certain ~~Manager~~Beneficial ofOwners the Company. American Forest Services is paid a fee equal to 2% of the agreed upon valuation of the assets under management. Prior thereto, the Manager provided management services for a fee equal to 2% of AFR’s earnings before interest, taxes, depletion, depreciation and ~~amortization. Such fees charged to operations by AFR amounted~~Management ~~to $3,033 in 2003, $2,555 in 2002, and $1,137 in 2001.~~

In ~~June~~ John ~~2000~~M. Rudey, ~~the~~Chairman ~~Company~~and ~~purchased~~Chief ~~timber~~Executive ~~cutting~~Officer ~~rights~~of ~~for~~the ~~approximately~~Company, ~~4.2 million~~indirectly ~~board~~beneficially ~~feet from~~owns ~~AFR~~all ~~for~~of ~~$1,300.~~the ~~These~~equity ~~timber~~interests ~~cutting rights expired~~ in ~~June~~the ~~2003~~Company.

~~In December~~ ~~2000,~~Item ~~the~~13. ~~Company~~Certain ~~sold~~Relationships ~~approximately~~and ~~8,000~~Related ~~acres~~Party ofTransactions ~~timberland located in Central Oregon to AFR for $2,900.~~

~~During~~ ~~2001,~~ The ~~the~~ Company ~~contributed~~is ~~cutting~~managed ~~rights~~by ~~and~~the ~~timberland~~Manager ~~located~~pursuant ~~in Central Oregon~~ to ~~AFR.~~a ~~The~~management ~~contributions~~agreement ~~have~~between anthe ~~aggregate~~Company ~~agreed~~and ~~upon~~the ~~value of $18~~Manager.~~5 million~~ ~~and~~Under ~~were~~the ~~added~~management toagreement, the ~~Company’s~~Manager ~~Preferred~~is ~~LLC~~entitled ~~Interest~~to inan ~~AFR. Terms~~annual fee of ~~the~~2% ~~additional~~of ~~senior~~the agreed ~~Preferred~~upon ~~LLC~~valuation ~~Interest~~of ~~acquired~~total ~~are~~timber ~~the~~and ~~same terms~~timberland asassets ~~the~~under ~~senior~~management. ~~Preferred~~Substantially ~~LLC~~all ~~Interest~~of ~~previously issued to~~ the ~~Company. The~~ownership ~~Company~~interests ~~recorded~~in ~~its~~the ~~additional~~Manager ~~Preferred~~are ~~LLC~~owned ~~Interest~~by atJohn ~~its~~M. ~~cost~~Rudey ~~for~~and ~~the cutting~~entities ~~rights~~affiliated ~~and~~with ~~timberland~~Mr. ofRudey. ~~approximately $16,300~~Mr. ~~All~~Rudey ~~property~~is ~~that~~the ~~has been~~Chairman ~~contributed~~and ~~for~~President of the Company’s . ~~Preferred~~In ~~LLC~~2004, ~~Interest~~$4,014 in ~~AFR~~fees ~~has~~were ~~been~~paid ~~pledged as collateral~~ by ~~AFR~~the ~~under~~Company ~~its credit~~pursuant ~~facility~~to ~~with~~the ~~its~~management ~~lender~~agreement.

In ~~March~~Investments ~~2001, the Company purchased timber cutting rights for approximately 17.2 million board feet from AFR for $4,500. These timber cutting rights expired~~ in ~~March~~and ~~2004.~~Transactions with Affiliate

In ~~September~~ Since ~~2001~~October 1999, the Company ~~sold~~has ~~timber~~owned ~~cutting~~a ~~rights~~redeemable ~~for~~preferred ~~approximately~~membership 80interest (“Preferred LLC Interest”) in American Forest Resources, LLC (formerly U.6S. Timberlands Yakima, LLC) ~~million~~(“AFR”), ~~board~~an ~~feet~~affiliate, accounted for under the equity method. As described in Note 1 to ~~AFR~~the ~~for~~Financial ~~$12~~Statements,~~000.~~ ~~These~~in ~~timber~~July ~~cutting~~2003 ~~rights~~the ~~expire~~Company became an indirect subsidiary of AFR as a result of a series of transactions culminating in the ~~August~~contribution ~~2004.~~to a

In ~~November 2001, the Company sold timber cutting rights for approximately 44.8 million board feet to AFR for $7,000. These timber cutting rights expire in October 2004.~~ 33

~~In June~~INLAND ~~2002~~FIBER sGROUP, ~~the~~LLC ~~Company~~AND ~~sold~~SUBSIDIARY ~~timber cutting rights for approximately 87.3 million~~ ~~board~~ (dollar ~~feet~~amounts toin ~~AFR~~thousands ~~for~~unless ~~$9,900.~~otherwise ~~These~~noted) ~~timber cutting rights expire in May 2005.~~

As asubsidiary ~~result~~of AFR of the ~~Toolbox~~99% ~~Fire~~non-managing inmember’s ~~August~~interest ~~2002,~~in the Company ~~purchased~~previously ~~salvage~~owned ~~timber cutting~~by ~~rights for approximately 12.0 million board feet from AFR for $1,300 to gain certain operating efficiencies. All of~~ the ~~timber was harvested before these timber cutting rights expired in August 2003~~MLP.

In October 1999, the Company made an investment in AFR. AFR, a then newly formed entity organized to acquire timber properties located in Central Washington and Central Oregon, is engaged in the ~~November~~growing ~~2002~~of trees and sale of logs and standing timber to third party wood processors. The MLP contributed to AFR $294 of cash for 49% of AFR's common interests (the "Common LLC Interests"). The remaining Common LLC Interests were acquired for $306 in cash by Cascade Resource Holdings Group, LLC (formerly U.S. Timberlands Holding Group, LLC, a Delaware limited liability company (“Holdings Group”) in which John Rudey, the Chairman of the Board of the Company ~~sold~~holds ~~timberland~~a controlling interest. The Company also acquired all of the senior preferred membership interests in AFR (the "Senior or Preferred LLC Interests") for its contribution to AFR of timberlands consisting primarily of non-income producing, pre-merchantable pine plantations having an agreed upon value of $22,000. The Company recorded its investment in the Senior LLC interest at its $18,850 cost basis for the contributed timberlands. Terms of the Preferred LLC Interests include a cumulative annual guaranteed return of 5% until December 31, 2001 and 6% thereafter of the $422,~~700~~000 agreed upon value of the contributed timberlands. The Preferred LLC Interests are redeemable at AFR's option for a redemption price equal to the agreed upon value of the Preferred LLC Interests, either in cash or timberlands, plus any portion of the guaranteed return not received by the Company prior to the redemption date. Generally, AFR's net income or losses are allocated to the Common LLC Interests. However, net losses exceeding the account balances of the Common LLC Interests are allocated to the Preferred LLC Interest. The Company accounts for the Preferred LLC Interest at cost plus accrued dividends to the extent earned, reduced by losses, if any, in excess of the Common LLC Interests.

32 On September 14, 2001, management of AFR was taken over by American Forest Services, LLC ("American Forest Services,” formerly U.S. Timberlands Services Yakima, LLC), a wholly owned subsidiary of the Manager of the Company. American Forest Services is paid a fee equal to 2% of the agreed upon valuation of the assets under management. Prior thereto, the Manager provided management services for a fee equal to 2% of AFR's earnings before interest, taxes, depletion, depreciation and amortization. Such fees charged to operations by AFR amounted to $3,133 in 2004, $3,033 in 2003 and $2,555 in 2002.

~~INLAND~~ In ~~FIBER~~June ~~GROUP~~2000, ~~LLC~~the ~~AND~~Company ~~SUBSIDIARY~~purchased ~~(formerly~~timber Ucutting rights for approximately 4.S.2 ~~Timberlands~~million ~~Klamath~~board ~~Falls~~feet from AFR for $1,300. ~~LLC)~~These ~~(dollar~~timber ~~amounts~~cutting inrights ~~thousands~~expired ~~unless~~in ~~otherwise~~June ~~noted)~~2003.

~~During~~ ~~2002~~ In December 2000, the Company ~~contributed~~sold ~~timberland~~approximately ~~located in Central Oregon to AFR. The contributions have an aggregate agreed upon value of $18~~8,~~500~~000 ~~and~~acres ~~were added to the liquidation preference~~ of ~~the~~timberland ~~Company’s~~located ~~Preferred LLC Interest~~ in ~~AFR.~~ ~~Terms~~Central ofOregon ~~the additional Preferred Interest acquired are the same terms as the Preferred Interest previously issued~~ to ~~the~~AFR ~~Company. The Company recorded its additional Preferred Interest at its cost~~ for ~~the timberland of approximately~~ $182,~~300~~900. ~~All property that has been contributed for the Preferred Interest in AFR has been pledged as collateral by AFR under its credit facility with its lender.~~

In ~~addition~~ During to2001, the ~~preceding,~~Company contributed cutting rights and timberland located in ~~July~~Central ~~2002,~~Oregon ~~the~~to ~~Company~~AFR. ~~purchased~~The ~~timber~~contributions ~~cutting rights~~have ~~for~~an ~~approximately~~aggregate 5agreed upon value of $18.15 million ~~board~~and ~~feet~~were ~~from~~added to the Company's Preferred LLC Interest in AFR. ~~Services~~Terms ~~for~~of ~~$500~~the additional senior Preferred LLC Interest acquired are the same terms as the senior Preferred LLC Interest previously issued to the Company. The Company recorded its additional Preferred LLC ~~These~~Interest ~~timber~~at its cost for the cutting rights ~~expire~~and intimberland ~~July~~of ~~2005~~approximately $16,300. All property that has

~~During~~ 2003, the Company contributed timberlands located in Central Oregon to AFR. The contributions have an aggregate agreed upon value of $12,900 and were added to the liquidation preference of the Company’s Preferred LLC Interest in AFR. Terms of the additional Preferred LLC Interest acquired are the same terms as the Preferred LLC Interest previously issued to the Company. The Company recorded its additional Preferred LLC Interests at its aggregate costs for the timberlands of approximately $10.5 million.34

In ~~addition~~INLAND toFIBER ~~the preceding~~GROUP, inLLC ~~May~~AND ofSUBSIDIARY ~~2003,~~(dollar ~~the~~amounts ~~Company~~in ~~sold~~thousands ~~approximately~~unless ~~21,000 acres~~otherwise ~~to American Forest Services, LLC (AFS~~noted) ~~for $8,300.~~

Inbeen ~~December~~contributed offor ~~2003,~~ the Company's ~~sold~~Preferred ~~approximately~~LLC ~~1,000~~Interest ~~acres~~in toAFR ~~AFS~~has ~~for~~been ~~$1,900~~pledged as collateral by AFR under its credit facility with its lender.

In ~~December~~ In ~~2003~~March 2001, the Company ~~sold~~purchased timber cutting rights for approximately ~~34,965~~ 17.2 million board feet tofrom ~~AFS~~AFR for $4,~~756~~500. These timber cutting rights ~~expire~~expired in ~~December~~ March 2004.

~~Also,~~ In ~~December~~September ~~2003~~2001, the Company sold ~~seedlings~~timber cutting rights for approximately 80.6 million board feet to AFR for $~~300~~12,000. These timber cutting rights expired in August 2004.

~~Gross~~ ~~profits~~ In ~~realized~~November on2001, the Company’s ~~sales~~sold of timber cutting rights tofor ~~AFR, to~~approximately ~~the~~44.8 ~~extent~~million ofboard ~~the~~feet ~~Company’s ownership interest in AFR, have been eliminated and are recognized in operations upon AFR’s sale of the timber~~ to ~~third parties with corresponding adjustments to the carrying value of the investment in~~ AFR. Infor ~~addition~~$7,000. ~~the~~These ~~Company’s equity in net income (loss) of affiliate has been adjusted to eliminate its share of gross profits realized by AFR on sales of~~ timber cutting rights toexpired ~~the~~in ~~Company,~~October ~~until the Company sells the timber to third parties~~2004.

~~Affiliate~~ In ~~Credit~~June ~~Facility~~ 2002, the Company sold timber cutting rights for approximately 87.3 million board feet to AFR for $9,900. These timber cutting rights expire in May 2005.

~~See~~ ~~the~~ As ~~description~~a result of the ~~Affiliate~~Toolbox ~~Credit~~Fire ~~Facility~~in ~~included~~August in2002, the ~~Liquidity and~~Company ~~Capital~~purchased ~~Resources section~~salvage oftimber ~~Item~~cutting 7rights for approximately 12.0 million board feet from AFR for $1,300 to gain certain operating efficiencies. All of the timber was harvested before these timber cutting rights expired in August 2003.

33 In November 2002, the Company sold timberland to AFR for $4,700.

~~INLAND~~ During ~~FIBER~~2002, ~~GROUP~~the Company contributed timberland located in Central Oregon to AFR. The contributions have an aggregate agreed upon value of $18,500 and were added to the liquidation preference of the Company's Preferred LLC ~~AND~~Interest ~~SUBSIDIARY~~in ~~(formerly~~AFR. UTerms of the additional Preferred Interest acquired are the same terms as the Preferred Interest previously issued to the Company.S. ~~Timberlands~~The ~~Klamath~~Company ~~Falls~~recorded its additional Preferred Interest at its cost for the timberland of approximately $18,300. ~~LLC)~~All ~~(dollar~~property ~~amounts~~that has been contributed for the Preferred Interest in ~~thousands~~AFR ~~unless~~has ~~otherwise~~been ~~noted)~~pledged as collateral by AFR under its credit facility with its lender.

~~Item~~ 14 In addition to the preceding, in July 2002, the Company purchased timber cutting rights for approximately 5. ~~Principal~~1 ~~Accounting~~million ~~Fees~~board ~~and~~feet from AFR Services for $500. These timber cutting rights expire in July 2005.

~~The~~ ~~Following~~ During ~~chart~~2003, ~~shows~~ the Company contributed timberlands located in Central Oregon to AFR. The contributions have an aggregate ~~fees~~agreed ~~billed~~upon value of $12,900 and were added to the ~~Company~~liquidation bypreference ~~Eisner LLP~~of ~~for~~the ~~professional~~Company’s ~~services~~Preferred LLC Interest in AFR. Terms of the ~~named~~additional ~~categories~~Preferred ~~for~~LLC Interest acquired are the ~~years~~same ~~ended~~terms ~~December~~ as the Preferred LLC Interest previously issued to the Company. ~~31,~~The ~~2003~~Company ~~and~~recorded ~~December~~its ~~31,~~additional ~~2002~~Preferred LLC Interests at its aggregate costs for the timberlands of approximately $10.5 million.

		2003		2002
Audit Fees (1)	$	449	$	281
Audit Related Fees (2)		3		—
Tax Fees(3)		100		70
Other Fees (4)		—		—
Total Fees	$	552	$	351

In addition to the preceding, in May of 2003, the Company sold approximately 21,000 acres to American Forest Services, LLC (“AFS”) for $8,300.

	(1)	Audit fees consists of professional services rendered in connection with the audit of the company’s annual financial statements, reviews of the Company’s annuals reports on Form 10-K, reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q, statutory audits and reviews of documents filed with the SEC.
	(2)	Separately billed annual tax planning and IT audit work.
	(3)	Preparation on annual tax returns
	(4)	Other miscellaneous assignments as assigned by the Board of Directors.

In December of 2003, the Company sold approximately 1,000 acres to AFS for $1,900.

~~Consistent with~~ policies of the Securities and Exchange Commission regarding auditor independence and the Audit Committee charter, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the independent auditor. The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent accountants. The Audit Committee may also pre-approve particular services on a case-by-case basis. 35

34INLAND FIBER GROUP, LLC AND SUBSIDIARY (dollar amounts in thousands unless otherwise noted)

~~INLAND~~ In ~~FIBER~~December ~~GROUP~~2003, ~~LLC~~the ~~AND~~Company ~~SUBSIDIARY~~sold ~~(formerly~~timber ~~U.S.~~cutting ~~Timberlands~~rights ~~Klamath~~for ~~Falls~~approximately 34,965 million ~~LLC)~~board ~~(dollar~~feet ~~amounts~~to inAFS ~~thousands~~for ~~unless~~$4,756. ~~otherwise~~These ~~noted)~~timber cutting rights expire in December 2006.

~~PART~~ Also, IVin December 2003, the Company sold seedlings to AFR for $300.

~~Item~~ Gross ~~15.~~profits ~~Exhibits~~realized on the Company's sales of timber cutting rights to AFR, ~~Financial~~ to ~~Statements~~the extent of the Company's ownership interest in AFR, have been eliminated and ~~Reports~~are recognized in operations upon AFR's sale of the timber to third parties with corresponding adjustments to the carrying value of the investment in AFR. In addition, the Company's equity in net income (loss) of affiliate has been adjusted to eliminate its share of gross profits realized by AFR on ~~Form~~sales ~~8-K~~of timber cutting rights to the Company, until the Company sells the timber to third parties.

Affiliate Credit Facility

~~(a)~~ See ~~(1)~~the ~~and~~description ~~(2)~~of ~~Financial Statements~~the ~~See “Index~~Affiliate toCredit ~~Financial~~Facility ~~Statements”~~included ~~set~~in ~~forth~~the onLiquidity ~~page~~and ~~F-l~~Capital Resources section of Item 7.

~~(a)~~ ~~(3)~~Item ~~Exhibits~~14. Principal Accounting Fees and Services

3.3	–	Third Amended and Restated Operating Agreement of U.S. Timberlands Klamath Falls, LLC (now known as Inland Fiber Group, LLC)
† l0.2	–	Indenture among U.S. Timberlands Klamath Falls, LLC, U.S. Timberlands Finance Corp. and State Street Bank and Trust Company, as trustee
++10.12	–	Amended and Restated Operating Agreement of U.S. Timberlands Yakima, LLC (now known as American Forest Resources, LLC)
# 10.13	–	Management Agreement by and among U.S. Timberlands Klamath Falls, LLC Dated as of July 25, 2003
*21.1	–	List of Subsidiaries
23.1	–	Consent of Eisner LLP dated April 14, 2003
31.1	–	Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Exchange Act
31.2	–	Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Exchange Act
32.1	–	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	–	Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

The following chart shows the aggregate fees billed to the Company by Eisner LLP for professional services in the named categories for the years ended December 31, 2004 and December 31, 2003.

* Incorporated by reference to the same numbered Exhibit to the Registrant’s Registration Statement on Form S-1 filed November 13, 1997. † Incorporated by reference to the same numbered Exhibit to the Registrant’s Current Report on Form 8-K filed January 15, 1998. ++ Incorporated by reference to the same numbered Exhibit to the Registrant’s Form10-Q filed on August 14, 2003 # Incorporated by reference to the same numbered Exhibit to the Registrant’s Form10-Q filed on November 19, 2003

		2004		2003

Audit fees (1)	$	330	$	449
Audit related fees (2)		-		3
Tax fees (3)		50		100
Other fees		-		-


Total fees	$	380	$	552

(b.) Reports on Form 8-K

(1)	Audit fees consists of professional services rendered in connection with the audit of the company’s annual financial statements, reviews of the Company’s annuals reports on Form 10-K, reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q, statutory audits and reviews of documents filed with the SEC.

(2)	Separately billed annual tax planning and IT audit work.

(3)	Preparation of annual tax returns

~~None~~Consistent with policies of the Securities and Exchange Commission regarding auditor independence and the Audit Committee charter, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the independent auditor. The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent accountants. The Audit Committee may also pre-approve particular services on a case-by-case basis.

35 36

INLAND FIBER GROUP, LLC AND SUBSIDIARY (~~formerly U.S. Timberlands Klamath Falls, LLC) (~~dollar amounts in thousands unless otherwise noted)

~~SIGNATURES~~ PART IV

~~Pursuant to~~Item ~~the requirements of Section 13 or~~ 15~~(d)~~. ofExhibits ~~the~~and ~~Securities~~Financial ~~Exchange~~Statement ~~Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 14th day of April, 2004.~~ Schedules

~~INLAND~~(a) ~~FIBER~~(1) ~~GROUP,~~and ~~LLC~~(2) Financial Statements

~~By: /s/ John~~ See M."Index Rudey Johnto M.Financial ~~Rudey,~~Statements" ~~Chairman~~set ~~and~~ forth ~~President~~on page F-l.

~~Pursuant~~ to(3) ~~the~~Exhibits ~~requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.~~

/s/ John M. Rudey	Chairman, President, and	April 14, 2004
John M. Rudey	Director (Principal Executive Officer)
/s/ Thomas C. Ludlow	Vice President, Treasurer	April 14, 2004
Thomas C. Ludlow	(Principal Financial Officer)
/s/ Laurie G. Rudey	Director	April 14, 2004
Laurie G. Rudey
/s/ George R. Hornig	Director	April 14, 2004
George R. Hornig
/s/ John D. Layton	Director	April 14, 2004
John D. Layton
/s/ Mel A. Sachs	Director	April 14, 2004
Mel A. Sachs

+ 3.3 - Third Amended and Restated Operating Agreement of U.S. Timberlands Klamath Falls, LLC (now known as Inland Fiber Group, LLC)

36†10.2 - Indenture among U.S. Timberlands Klamath Falls, LLC, U.S. Timberlands Finance Corp. and State Street Bank and Trust Company, as trustee

~~INLAND~~++10.12 ~~FIBER~~- ~~GROUP,~~Amended ~~LLC~~and ~~AND~~Restated ~~SUBSIDIARY~~Operating ~~(formerly~~Agreement of U.S. Timberlands ~~Klamath Falls~~Yakima, LLC) (~~dollar~~now ~~amounts~~known inas ~~thousands~~American Forest ~~unless~~Resources, ~~otherwise noted~~LLC)

~~EXHIBIT~~ # 10.13 - Management Agreement by and among U.S. Timberlands Klamath Falls, LLC and U.S. Timberlands Services ~~INDEX~~ Company, LLC, dated as of July 25, 2003

3.3	–	Third Amended and Restated Operating Agreement of U.S. Timberlands Klamath Falls, LLC
23.1	–	Consent of Eisner LLP dated March 30, 2004
31.1	–	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under Exchange Act
31.2	–	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under Exchange Act

*21.1 - List of Subsidiaries

3731.1 - Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Exchange Act

~~INLAND~~ ~~FIBER~~31.2 ~~GROUP,~~- ~~LLC~~Certification ~~AND~~of ~~SUBSIDIARY~~CFO pursuant to Rule 13a-14(~~formerly~~a) or Rule 15d-14(a) under the Exchange Act 32.1 - Certification of CEO pursuant to 18 U.S.C. ~~Timberlands~~Section ~~Klamath Falls~~1350, ~~LLC)~~as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~C O N~~ 32.2 - Certification of CFO pursuant to 18 U.S ~~O L I D A T E D F I N A N~~ .C ~~I A L~~ . Section 1350, as adopted pursuant ~~S T A T E M E N T S~~ to Section 906 of the Sarbanes-Oxley Act of 2002.

Contents		Page
Inland Fiber Group, LLC (formerly U.S. Timberlands Klamath Falls, LLC):
Independent auditors’ report		F-2
Consolidated balance sheets as of December 31, 2003 and 2002		F-3
Consolidated statements of operations for the years ended December 31, 2003, 2002 and 2001		F-4
Consolidated statements of changes in members’ equity (deficiency) for the years ended December 31, 2003, 2002, and 2001		F-5
Consolidated statements of cash flows for the years ended December 31, 2003, 2002 and 2001		F-6
Notes to consolidated financial statements		F-7

* Incorporated by reference to the same numbered Exhibit to the Registrant's Registration Statement on Form S-1 filed November 7, 1997.

F† Incorporated by reference to the same numbered Exhibit to the Registrant's Current Report on Form 8-1K filed January 15, 1998.

~~INDEPENDENT~~ ~~AUDITORS’~~++ ~~REPORT~~Incorporated by reference to the same numbered Exhibit to the Registrant's Form 10-Q filed on August 14, 2003

To # Incorporated by reference to the ~~Board~~same ~~of Directors~~numbered ~~and~~Exhibit ~~Members~~to ofthe Registrant's Form 10-Q filed ~~Inland~~ on ~~Fiber~~November ~~Group~~19, ~~LLC~~ 2003

We ~~have~~+ ~~audited the~~Incorporated ~~accompanying~~by ~~consolidated~~reference ~~balance~~to ~~sheets of Inland Fiber Group, LLC (formerly U.S. Timberlands Klamath Falls, LLC) and subsidiary as of December 31, 2003 and 2002, and~~ the ~~related~~same ~~consolidated statements~~numbered ofExhibit ~~operations,~~to ~~changes in members’ equity (deficiency) and cash flows for each of~~ the ~~years~~Registrant's inForm ~~the three~~10-~~year~~K/A ~~period ended December 31, 2003.~~filed ~~These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion~~ on ~~these~~May ~~financial~~18, ~~statements based on our audits.~~2004

(b) Reports on Form 8-K

We On ~~conducted~~April ~~our audits~~11, in2005, ~~accordance with auditing standards generally accepted in~~ the ~~United States~~Company offiled ~~America.~~a ~~Those~~Form ~~standards~~8-K ~~require~~reporting ~~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~~resignation, on aApril ~~test basis~~8, ~~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~~2005, asof ~~well as evaluating the overall financial statement presentation. We believe that our audits provide~~ a ~~reasonable basis for our opinion~~director.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Inland Fiber Group, LLC and subsidiary as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.37

~~The accompanying~~SIGNATURES ~~financial statements have been prepared assuming that the Company will continue~~ ~~as a going concern. As discussed in Note 1 to the financial statements, in December~~ 2003 litigation was instituted against the Company and others by the trustee under the note indenture which alleges, among other matters, that the Company violated certain provisions of the indenture governing the $225,000,000 of Senior Notes due in 2007. As described in Note 14, the Company and its legal counsel believe the litigation to be without merit and have filed a motion to dismiss the complaint. If the trustee were to succeed on its claims, and any potential appeals therefrom, and the Company were unable to cure or obtain waivers with respect to any then outstanding events of default under the indenture, the holders of the requisite percentage of the Notes, and the trustee therefor, would then have the right to accelerate the maturity of the Notes, which raises substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

~~Eisner~~ Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ~~LLP~~the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 14th day of April, 2005.

~~New York, New~~ ~~York January~~INLAND ~~30,~~FIBER ~~2004With respect to Note 14April 5~~GROUP, ~~2004~~LLC

~~F-2~~ By: /s/ John M. Rudey John M. Rudey, Chairman and President

~~INLAND~~ Pursuant ~~FIBER~~to ~~GROUP,~~the ~~LLC~~requirements ~~AND~~of ~~SUBSIDIARY~~the ~~(formerly~~Securities ~~U.S.~~Exchange ~~Timberlands~~Act ~~Klamath~~of ~~Falls~~1934, ~~LLC)~~this report has been signed below by the following persons in the capacities and on the dates indicated.

	December 31,
/s/		John M. Rudey		Chairman, President, and	April 14, 2005
	2003			2002
				Director (Principal Executive Officer)
ASSETS
		John M. Rudey
Current assets:
/s/		Thomas C. Ludlow		Vice President, Treasurer	April 14, 2005
Cash and cash equivalents		1,447			965
				(Principal Financial Officer)
Accounts receivable		530			1,028
		Thomas C. Ludlow
Due from general partner		—			6
/s/		George R. Hornig		Director	April 14, 2005
Other receivables		332			211
		George R. Hornig
Notes receivable		103			1,344
/s/		John D. Layton		Director	April 14, 2005
Prepaid expenses and other current assets		220			331
		John D. Layton
Total current assets		2,632			3,885
/s/		Mel A. Sachs		Director	April 14, 2005
Timber and timberlands, net		129,002			163,980
		Mel A. Sachs
Investment in affiliate		33,414			38,881
Property, plant and equipment, net		833			905
Notes receivable, less current portion		10			10
Restricted cash		154			82
Deferred financing fees, net		2,623			3,298
Total assets	$	168,668		$	211,041
LIABILITIES AND MEMBER’S DEFICIENCY
Current liabilities:
Accounts payable		525			1,454
Accrued liabilities		749			1,238
Accrued bond interest		2,830			2,752
Customer Deposit		5,000			—
Payable to managing member and affiliates		46			—
Total current liabilities		9,150			5,444
Long-term debt		225,000			225,000
Members’ deficiency:
Managing member’s interest		(674	)		(196	)
Nonmanaging member’s interest		(64,808	)		(19,207	)
		(65,482	)		(19,403	)
Total liabilities and members’ deficiency	$	168,668		$	211,041

~~See notes to consolidated financial statements~~ 38

F-3


I N L A N D F I B E R G R O U P , L L C A N D S U B S I D I A R Y
( f o r m e r l y U . S . T i m b e r l a n d s K l a m a t h F a l l s , L L C )

C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Contents		Page

Inland Fiber Group, LLC
Report of Independent Registered Public Accounting Firm		F-2
Consolidated balance sheets as of December 31, 2004 and 2003		F-3
Consolidated statements of operations for the years ended December 31, 2004, 2003 and 2002		F-4
Consolidated statements of changes in members' equity (deficiency) for the years ended		F-5
December 31, 2004, 2003 and 2002
Consolidated statements of cash flows for the years ended December 31, 2004, 2003 and 2002		F-6
Notes to consolidated financial statements		F-7


American Forest Resources, LLC

Report of Independent Registered Public Accounting Firm		F-22
Consolidated balance sheets as of December 31, 2004 and 2003		F-23
Statements of operations for the years ended December 31, 2004, 2003 and 2002		F-24
Statements of redeemable preferred member interest and common member's deficiency for
the years ended December 31, 2004, 2003 and 2002		F-25
Statements of cash flows for the years ended December 31, 2004, 2003 and 2002		F-26
Notes to financial statements		F-27

~~INLAND~~ ~~FIBER GROUP, LLC AND SUBSIDIARY (formerly U.S. Timberlands Klamath Falls, LLC) In thousands~~F-1

~~Consolidated Statements~~Report of ~~Operations~~Independent Registered Public Accounting Firm

To the Board of Directors and Members of
Inland Fiber Group, LLC

	Year Ended December 31,
	2003			2002			2001
Revenues:
Log, timber deed and stumpage sales,
including $4,200 (2003), $9,900 (2002), and $19,015 (2001) to an affiliate	$	25,000		$	42,256		$	54,128
Timber and property sales
including $9,519 in 2003 and $4,700 in 2002 to an affiliate		10,129			5,763			—
By-products and other		2,001			1,455			436
		37,130			49,474			54,564
Cost of products sold:
Cost of timber harvested		(13,252	)		(17,477	)		(16,652	)
Cost of timber and property sales		(9,952	)		(7,273	)		—
Fire loss		—			(591	)		—
Depletion, depreciation and road amortization		(15,557	)		(27,476	)		(37,287	)
		(38,761	)		(52,817	)		(53,939	)
Gross profit (loss)		(1,631	)		(3,343	)		625
Selling, general and administrative expenses		(6,438	)		(7,518	)		(8,340	)
Equity in net loss of affiliate		(17,039	)		(11,046	)		(6,885	)
Operating loss		(25,108	)		(21,907	)		(14,600	)
Interest expense		(21,736	)		(21,657	)		(21,993	)
Amortization of deferred financing fees		(675	)		(675	)		(675	)
Interest income		12			13			101
Other income, net		190			158			131
Net loss	$	(47,317	)	$	(44,068	)	$	(37,036	)

We have audited the accompanying consolidated balance sheets of Inland Fiber Group, LLC, and subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in members’ equity (deficiency) and cash flows for each of the years in the three-year period ended December 31, 2004. 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.

~~See~~ ~~notes~~We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to ~~consolidated~~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.

F In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Inland Fiber Group, LLC and subsidiary as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-4year period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

~~INLAND~~ ~~FIBER~~The ~~GROUP~~accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, ~~LLC~~in ~~AND~~January ~~SUBSIDIARY~~2005, ~~(formerly~~the UCompany received a Notice of Default and Acceleration of maturity of the Notes from the Trustee under the Indenture governing the $225,000,000 of Senior Notes due in 2007, after the Trustee’s motion for summary judgment seeking a determination that an Event of Default had occurred under the Indenture was granted by the Delaware Court of Chancery.S These events raise substantial doubt about the Company’s ability to continue as a going concern. ~~Timberlands~~As ~~Klamath~~further ~~Falls~~described in Note 1, ~~LLC)~~the InCompany ~~thousands~~continues to deny the existence of an Event of Default and in March 2005, filed an appeal of the Court’s order with the Supreme Court of the State of Delaware. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Eisner, LLP
New York, New York
April 11, 2005

	Managing Member’s Interest			Nonmanaging Member Interest			Total Members’ Equity (Deficiency)
Balance, December 31, 2000	$	683		$	67,579		$	68,262
Distributions to members		(65	)		(6,496	)		(6,561	)
Net loss		(371	)		(36,665	)		(37,036	)
Balance, December 31, 2001		247			24,418			24,665
Net loss		(443	)		(43,625	)		(44,068	)
Balance, December 31, 2002		(196	)		(19,207	)		(19,403	)
Capital contribution		0			1,238			1,238
Net loss		(478	)		(46,839	)		(47,317	)
Balance, December 31, 2003	$	(674	)	$	(64,808	)	$	(65,482	)

F-2

~~See~~INLAND ~~notes~~FIBER toGROUP, ~~consolidated~~LLC ~~financial~~AND ~~statements~~SUBSIDIARY

F-5

Consolidated Balance Sheets
(in thousands)

		December 31,
		2004			2003

ASSETS
Current assets:
Cash and cash equivalents		180			1,447
Accounts receivable		207			530
Other receivables		592			332
Notes receivable		139			103
Prepaid expenses and other current assets		134			220

Total current assets		1,252			2,632

Timber and timberlands, net		84,247			129,002
Investment in affiliate		7,975			33,414
Property, plant and equipment, net		799			833
Notes receivable, less current portion		10			10
Other assets		150			-
Restricted cash		104			154
Deferred financing fees, net		1,948			2,623


Total assets	$	96,485		$	168,668



LIABILITIES AND MEMBERS' DEFICIENCY
Current liabilities:
Accounts payable		760			525
Accrued liabilities		451			749
Accrued bond interest		2,752			2,830
Deferred revenue		1,041			5,000
Payable to managing member and affiliates		58			46
Long-term debt declared in default by trustee		225,000			-

Total current liabilities		230,062			9,150


Long-term debt		-			225,000


Litigation (Note 13)

Members' deficiency:
Managing member's interest		(1,362	)		(674	)
Nonmanaging member's interest		(132,215	)		(64,808	)


		(133,577	)		(65,482	)


Total liabilities and members' deficiency	$	96,485		$	168,668


See notes to consolidated financial statements

~~INLAND FIBER GROUP, LLC AND SUBSIDIARY (formerly U.S. Timberlands Klamath Falls, LLC) In thousands~~F-3

~~Consolidated Statements~~INLAND ofFIBER ~~Cash~~GROUP, ~~Flows~~ LLC AND SUBSIDIARY

	Year Ended December 31,
Consolidated Statements of Operations
	2003			2002			2001
(in thousands)
Cash flows from operating activities:
				Year Ended December 31,
Net loss	$	(47,317	)	$	(44,068	)	$	(37,036	)
				2004			2003					2002
Adjustments to reconcile net (loss) to net cash
Revenues:
provided by operating activities:
Log and timber deed sales,
Depreciation, depletion, amortization and cost of
including $0 (2004), $4,200 (2003), and $9,900 (2002) to an affiliate		$		13,821			$		25,000		$	42,256
timber and property sold		25,509			34,749			37,287
Timber and property sales
Fire loss		—			574			—
including $0 (2004), $9,519 (2003) and $4,700 (2002) to an affiliate				28,120					10,129			5,763
Gain on disposal of assets		(19	)		—			(2	)
By-products and other				2,379					2,001			1,455
Amortization of deferred financing fees		675			675			675
				44,320					37,130			49,474
Equity in net loss of affiliate		17,039			11,046			6,885
Cost of products sold:
Other non-cash items		—			173			233
Cost of timber harvested				(9,965	)				(13,252	)		(17,477	)
Changes in assets and liabilities:
Cost of timber and property sales				(38,714	)				(9,952	)		(7,273	)
Accounts receivable		498			(717	)		4,119
Fire loss				-					-			(591	)
Other receivables		(121	)		69			(120	)
Depletion, depreciation and road amortization				(8,732	)				(15,557	)		(27,476	)
Notes receivable		1,241			227			704
				(57,411	)				(38,761	)		(52,817	)
Prepaid expenses and other current assets		111			(106	)		(190	)
Gross loss				(13,091	)				(1,631	)		(3,343	)
Accounts payable		(929	)		120			112
Management fee				(4,014	)				(1,338	)		-
Accrued liabilities		(410	)		659			5
Selling, general and administrative expenses				(3,529	)				(5,100	)		(7,518	)
Customer deposit		5,000			—			(1,474	)
Equity in net loss of affiliate				(25,439	)				(17,039	)		(11,046	)
Payable to general partner and affiliate		(3	)		(168	)		(2,024	)
Operating loss				(46,073	)				(25,108	)		(21,907	)
Net cash provided by operating activities		1,274			3,233			9,174
Interest expense				(21,658	)				(21,736	)		(21,657	)
Cash flows from investing activities:
Amortization of deferred financing fees				(675	)				(675	)		(675	)
Purchase of property, plant and equipment - net		—			(160	)		—
Interest income				30					12			13
Proceeds from sale of assets		26			—			904
Other income, net				281					190			158
Timber, timberlands and road additions		(1,984	)		(3,096	)		(5,615	)
Net loss		$		(68,095	)		$		(47,317	)	$	(44,068	)
Restricted cash		(72	)		(82	)		—
See notes to consolidated financial statements
Net cash used in investing activities		(2,030	)		(3,338	)		(4,711	)
Cash flows from financing activities:
Distributions to members		—			—			(6,561	)
Capital contributions		1,238
Net cash provided by (used in) financing activities		1,238			—			(6,561	)
Net increase (decrease) in cash and cash equivalents		482			(105	)		(2,098	)
Cash and cash equivalents, beginning of period		965			1,070			3,168
Cash and cash equivalents, end of period	$	1,447		$	965		$	1,070
Supplemental cash flow information:
Cash paid for interest expense	$	21,658		$	21,657		$	22,033
Noncash activities:
Contribution of timberlands for investment in affiliate	$	11,572		$	18,317		$	16,289

~~See notes to consolidated financial statements~~F-4

~~F-6~~INLAND FIBER GROUP, LLC AND SUBSIDIARY

Notes to Consolidated Financial Statements INLAND FIBER GROUP, LLC AND SUBSIDIARY (formerly U.S. Timberlands Klamath Falls, LLC)

Consolidated Statements of Changes in Members' Equity (Deficiency)
(in thousands)

		Managing		Nonmanaging			Total
		Member's		Members'			Members'
		Interest		Interest			Equity
							(Deficiency)

Balance, December 31, 2001	$	247	$	24,418		$	24,665
Net loss		(443)		(43,625	)		(44,068	)


Balance, December 31, 2002		(196)		(19,207	)		(19,403	)
Capital contribution		0		1,238			1,238
Net loss		(478		(46,839	)		(47,317	)


Balance, December 31, 2003		(674)		(64,808	)		(65,482	)
Net loss		(688)		(67,407	)		(68,095	)


Balance, December 31, 2004	$	(1,362)	$	(132,215	)	$	(133,577	)



See notes to consolidated financial statements

~~(dollar amounts in thousands, except per unit amounts or otherwise noted)~~ F-5

1.INLAND ~~Business~~FIBER ~~and~~GROUP, ~~Significant~~LLC ~~Accounting~~AND ~~Policies:~~SUBSIDIARY

Business

Consolidated Statements of Cash Flows
(in thousands)
			Year Ended December 31,
			2004			2003			2002

Cash flows from operating activities:
Net (loss)	$	(68,095		)	$	(47,317	)	$	(44,068	)
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation, depletion, amortization and cost of
timber and property sold		47,177				25,509			34,749
Fire loss			-			-			574
Gain on disposal of assets			-			(19	)		-
Amortization of deferred financing fees			675			675			675
Equity in net loss of affiliate		25,439				17,039			11,046
Other non-cash items			(93	)		-			173
Changes in assets and liabilities:
Accounts receivable			323			498			(717	)
Other receivables			(260	)		(121	)		69
Notes receivable			(36	)		1,241			227
Prepaid expenses and other current assets			86			111			(106	)
Accounts payable			235			(929	)		120
Accrued liabilities			(139	)		(410	)		659
Deferred revenue		(3,959		)		5,000			-
Payable to general partner and affiliate			(226	)		(3	)		(168	)


Net cash provided by operating activities		1,127				1,274			3,233


Cash flows from investing activities:
Purchase of property, plant and equipment - net			(6	)		-			(160	)
Proceeds from sale of assets			-			26			-
Timber, timberlands and road additions		(2,438		)		(1,984	)		(3,096	)
Restricted cash			50			(72	)		(82	)


Net cash used in investing activities		(2,394		)		(2,030	)		(3,338	)


Cash flows from financing activities:
Capital contributions			-			1,238			-

Net cash provided by financing activities			-			1,238			-


Net increase (decrease) in cash and cash equivalents		(1,267		)		482			(105	)
Cash and cash equivalents, beginning of period		1,447				965			1,070


Cash and cash equivalents, end of period		$	180		$	1,447		$	965


Supplemental cash flow information:
Cash paid for interest expense		$	21,734		$	21,658		$	21,657


Noncash activities:
Contribution of timberlands for investment in affiliate		$	-		$	11,572		$	18,317
Assets transferred in repayment of debt		$	14		$	-		$	-

See notes to consolidated financial statements

The accompanying consolidated financial statements include the accounts of Inland Fiber Group, LLC (the “Company”) (formerly, U.S. Timberlands Klamath Falls, LLC), a Delaware limited liability company, and its wholly owned subsidiary, Fiber Finance Corp. (“Finance Corp.”)(formerly, U.S. Timberlands Finance Corp.), collectively referred to hereafter as the Company. The Company changed names in December 2003. Finance Corp. serves as the coF-obligor for the Company’s Notes (defined below). It has nominal assets and does not conduct operations. All intercompany transactions have been eliminated in consolidation. An investment in an affiliate is carried at cost, plus accrued dividends to the extent earned, reduced by losses in excess of the common members’ interest in the investee. 6

~~The~~ ~~primary~~ INLAND ~~activities~~FIBER ~~of the Company are the growing of trees and the sale of logs and standing timber to third party wood processors and the sale of excess land. The Company’s timber is located principally in Oregon~~GROUP, ~~east~~LLC ofAND ~~the~~SUBSIDIARY ~~Cascade Range.~~Notes ~~Logs harvested from the timberlands are sold~~ to ~~unaffiliated~~Consolidated ~~domestic conversion~~Financial ~~facilities.~~Statements ~~These~~December ~~logs are processed for sale as lumber~~31, ~~plywood~~ 2004 and ~~other~~2003 ~~wood~~(dollar ~~products,~~amounts ~~primarily for use~~ in ~~new~~thousands, ~~residential~~except ~~home~~per ~~construction,~~unit ~~home~~amounts ~~remodeling~~or ~~and~~otherwise ~~repair and general industrial applications.~~noted)

~~Prior to July 2003, Pacific Fiber Company, LP, a master limited partnership (the “MLP”) (formerly U~~1.~~S. Timberlands Company, L.P.), owned a 99% non-managing member interest in~~ ~~the Company. The MLP was formed on June 27, 1997 to acquire and own substantially~~ ~~all of the equity interests in the Company. U.S. Timberlands Management Company,~~Business ~~LLC (now known as Timber Resource Services, LLC~~ and ~~formerly known as U.S. Timberlands~~ ~~Services Company, LLC, the “Manager”) manages the business of the~~Significant ~~Company and owns a 1% non-voting membership interest in the Company~~Accounting Policies:

~~Basis of Presentation~~Business

The accompanying consolidated financial statements ~~have been prepared assuming that~~ include the ~~Company~~ ~~will continue as a going concern. As more fully described In Note 14, in December~~accounts ~~2003~~of Inland Fiber Group, LLC (the ~~trustee under the indenture governing the~~ “Company~~’s $225~~”),~~000~~ ofa ~~Senior Notes~~Delaware limited liability company, ~~which mature in 2007. commenced litigation against the Company~~ and ~~others alleging~~ its wholly owned subsidiary, ~~among other matters~~ Fiber Finance Corp. (“Finance Corp.”), ~~that~~ collectively referred to hereafter as the Company ~~has violated certain~~. ~~covenants contained in the Indenture~~Finance Corp. ~~The Company has denied all of~~ serves as the ~~allegations~~ ~~and made a motion to dismiss~~ co-obligor for the ~~complaint~~ Company’s Notes (defined below). ~~In the event the trustee prevails~~ ~~In the litigation~~It has nominal assets and does not conduct operations. ~~the Trustee will~~ All intercompany transactions have ~~the right to demand repayment and accelerate~~ ~~the maturity of the notes~~been eliminated in consolidation. ~~If such event occurs, and the Company~~ An investment in an affiliate is ~~unable~~ carried at cost, plus accrued dividends to ~~effect an amendment or a restructuring of~~ the ~~notes~~ extent earned, reduced by losses in excess of the ~~Company~~ common members’~~s ability~~ ~~to continue as a going concern would be~~ interest in ~~substantial doubt. The consolidated~~ ~~financial statements do not include any adjustments that might result from~~ the ~~outcome of this uncertainty~~investee.

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

On Prior ~~October~~to 17July 2003, ~~2002,~~ ~~the~~Pacific ~~MLP~~Fiber ~~announced~~Company, ~~that~~LP, ~~it had signed~~ a ~~definitive agreement to be acquired~~master by limited anpartnership ~~acquisition company formed by a group led by senior management~~ (the “~~Privatization Transaction~~MLP”). ~~The~~(formerly ~~group~~U.S. ~~beneficially~~Timberlands ~~owned~~Company, 36L.4%P.), ofowned ~~the~~a ~~combined outstanding limited partnership units of the MLP consisting of 16~~99% ofnon-managing ~~the~~member ~~common units and~~interest ~~98%~~ in of the ~~subordinated units~~Company. The ~~definitive~~MLP ~~agreement~~was ~~contemplated~~formed aon ~~cash tender~~June ~~offer~~27, ~~for~~1997 ~~100%~~to ofacquire ~~the~~and ~~outstanding~~own ~~common~~substantially ~~limited~~all ~~partnership~~of ~~units~~the ~~not already~~equity ~~owned~~interests byin the ~~acquiring entity or its affiliates for $3~~Company.00 Timber ~~per~~Resource ~~unit in cash~~Services, ~~followed~~LLC by(formerly aknown ~~merger~~as ofU.S. ~~the~~Timberlands ~~acquisition~~Services ~~company~~Company, ~~with~~LLC), ~~and into~~ the ~~MLP, pursuant~~“Manager”) to which ~~each~~is ~~common~~controlled by ~~limited~~Cascade ~~partnership~~Resource ~~unit~~Holdings, ~~not~~LLC, ~~already~~an entity owned by ~~the~~ ~~acquiring~~senior ~~entity~~management, orwhich ~~its~~also ~~affiliates~~controls ~~would be converted into~~ the ~~right~~common ~~to receive~~memebership ~~$3.00~~interest ~~per unit in cash. The tender offer commenced on November 19~~for AFR, ~~2002 and~~the ~~was~~Company's ~~completed~~indirect ~~on March 6~~parent, ~~2003.~~manages ~~In connection with~~ the ~~tender~~business ~~offer, approximately 71%~~ of the ~~MLP’s~~Company ~~common~~and ~~units~~owns ~~were~~a ~~tendered.~~1% ~~The remaining common units held by~~ non-~~affiliates~~voting ~~not~~membership ~~purchased~~interest in the ~~tender offer were converted into the right to receive $3~~Company.~~00 per common unit, in the merger which was completed on June 26, 2003.~~

~~F-7~~ Basis of Presentation

The accompanying consolidated statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 13, in December 2003, the trustee under the Indenture governing the Company’s $225,000 of Senior Notes, towhich ~~Consolidated~~mature ~~Financial~~in ~~Statements~~2007, ~~INLAND~~commenced ~~FIBER~~litigation ~~GROUP~~against the Company and others alleging, ~~LLC~~among ~~AND~~other ~~SUBSIDIARY~~matters, ~~(formerly~~that Uthe Company has violated certain covenants contained in the Indenture.S The Company has denied all of the allegations. ~~Timberlands~~In ~~Klamath~~May ~~Falls~~2004, ~~LLC)~~the Company received a Notice of Default from the Trustee covering certain of the allegations in the complaint. In December 2004, the Delaware Court of Chancery granted the Trustee’s motion for partial summary judgment and determined that an Event of Default had occurred under the Indenture governing the Company’s Senior Notes. On January 13, 2005, the Company received a Notice of Default and Acceleration from the Trustee pursuant to which the Trustee demanded payment and accelerated the Company’s obligations under the Senior Notes. These events raise substantial doubt about the Company’s ability to continue as a going concern. The Company continues to deny the existence of an Event of Default under the Indenture and in March 2005 appealed the ruling of the Delaware Court of Chancery to the Supreme Court of the State of Delaware. The

~~(dollar amounts in thousands, except per unit amounts or otherwise noted)~~F-7

~~Subsequent to~~ ~~the~~INLAND ~~Privatization~~FIBER ~~Transaction~~GROUP, ~~the~~LLC ~~99%~~AND ~~interest~~SUBSIDIARY ~~in the Company originally~~ ~~held~~ Notes ~~by the MLP was transferred in a series of transactions~~ to aConsolidated ~~newly-formed limited~~Financial ~~liability~~Statements ~~company, IFG Holdings, LLC. IFG Holdings, LLC is wholly owned~~ by December ~~American Forest Resources~~31, ~~LLC~~2004 (“AFR”) (formerly known as US Timberlands Yakima), in which the Company holds a preferred equity interest. As part of this reorganization of the ownership structure of the Company, a Board of Directors was elected for the Company to supervise its operations and a2003 ~~new management~~ ~~arrangement~~ (dollar ~~was~~amounts ~~established under which the Manager, whose interest was converted into a 1% nonvoting interest~~ in ~~the Company~~thousands, ~~provides~~except ~~comprehensive~~per ~~timber~~unit ~~management services~~amounts toor ~~the~~otherwise ~~Company pursuant to a fee-based management agreement.~~noted)

~~As a~~consolidated ~~result~~financial ofstatements ~~the~~do ~~Privatization~~not ~~Transaction~~include ~~described~~any ~~above,~~adjustments ~~the~~that ~~Company~~might isresult ~~an indirect~~from ~~99%~~the ~~owned~~outcome ~~subsidiary~~ of ~~American~~this ~~Forest resources, LLC~~uncertainty.

Going Private Transaction

~~Because~~ of On October 17, 2002, the ~~publicly-~~MLP announced that it had signed a definitive agreement to be acquired by an acquisition company formed by a group led by senior management (the “Privatization Transaction”). The group beneficially owned ~~long-term~~36.4% ~~debt~~of ~~which~~the ~~remains~~combined outstanding, limited partnership units of the ~~Company~~MLP consisting of 16% of the common units and 98% of the subordinated units. The definitive agreement contemplated a cash tender offer for 100% of the outstanding ~~did~~common limited partnership units not ~~elect~~already toowned ~~adopt~~by ~~“push-down”~~the ~~accounting~~acquiring entity or its affiliates for $3.00 per unit in cash, followed by a merger of the ~~Privatization Transaction~~acquisition ~~described~~company ~~above~~with and into the MLP, pursuant to which ~~the~~each ~~purchase~~common ~~price~~limited ~~paid~~partnership unit not already owned by the ~~group~~ ~~for~~acquiring entity or its affiliates would be converted into the 63right to receive $3.00 per unit in cash. The tender offer commenced on November 19, 2002 and was completed on March 6, 2003. In connection with the tender offer, approximately 71% ~~indirect~~of ~~interest~~the MLP’s common units were tendered. The remaining common units held by non-affiliates not purchased in the ~~Company~~tender ~~would~~offer bewere ~~reflected~~converted into the right to receive $3.00 per common unit, in the merger which ~~Company’s~~was ~~financial~~completed ~~statements~~on June 26, 2003.

~~Use~~ Subsequent to the Privatization Transaction, the 99% interest in the Company originally held by the MLP was transferred in a series of ~~Estimates~~ transactions to a newly-formed limited liability company, IFG Holdings, LLC. IFG Holdings, LLC is wholly owned by American Forest Resources, LLC (“AFR”), in which the Company holds a preferred equity interest. As part of this reorganization of the ownership structure of the Company, a Board of Directors was elected for the Company to supervise its operations and a new management arrangement was established under which the Manager, whose interest was converted into a 1% non-voting interest in the Company, provides comprehensive timber management services to the Company pursuant to a fee-based management agreement.

~~The~~ As ~~preparation~~a ofresult ~~financial statements in conformity with accounting principles generally accepted in the United States~~ of ~~America requires management to make estimates and assumptions that affect~~ the ~~reported~~Privatization ~~amounts~~Transaction ofdescribed ~~assets~~above, ~~and liabilities at~~ the ~~date~~Company ofis ~~the~~an ~~financial~~indirect ~~statements~~99% ~~and~~owned ~~the~~subsidiary ~~reported amounts~~ of ~~revenues and~~American ~~expenses~~Forest ~~during~~Resources, ~~the reporting period~~LLC. ~~Actual results could differ from those estimates.~~

~~Revenue~~ Because ~~Recognition~~of the publicly-owned long-term debt which remains outstanding, the Company did not elect to adopt “push-down” accounting for the Privatization Transaction described above, pursuant to which the purchase price paid by the group for the 63.6% indirect interest in the Company would be reflected in the Company’s financial statements.

Use of Estimates

~~Revenue~~ The onpreparation ~~delivered~~of ~~log~~financial ~~sales~~statements isin ~~recognized~~conformity ~~upon~~with ~~delivery~~accounting toprinciples generally accepted in the ~~customer. Revenue~~United onStates ~~timber~~of ~~deeds~~America ~~and~~requires ~~timber~~management ~~and~~to ~~property~~make ~~sales~~estimates isand ~~generally~~assumptions ~~recognized~~that ~~upon~~affect ~~closing.~~the ~~Revenue~~reported ~~from~~amounts ~~timber~~of ~~sold~~assets ~~under~~and ~~stumpage~~liabilities ~~contracts~~at ~~(i.e.,~~the date of the ~~customer arranges~~financial tostatements ~~harvest~~and the reported amounts of revenues and ~~deliver~~expenses during the ~~logs)~~reporting isperiod. ~~recognized~~Actual ~~when~~results ~~the~~could ~~timber~~differ isfrom ~~harvested~~those estimates.

~~Concentration of Credit Risk~~F-8

~~Financial~~ ~~instruments~~INLAND ~~that~~FIBER ~~potentially~~GROUP, ~~subject~~LLC ~~the~~AND ~~Company~~SUBSIDIARY ~~to concentrations~~ of Notes ~~credit risk consist principally of trade accounts and notes receivable. The majority of the Company’s trade accounts and notes receivable are derived from sales~~ to ~~third~~Consolidated ~~party~~Financial ~~wood~~Statements ~~processors. The Company’s five largest,~~ ~~non-affiliated customers accounted for approximately 19%, 13%, 11%, 11%, and 11% of the Company’s aggregate net revenues from log, stumpage and timber deed sales for the year ended~~ December 31, ~~2003.~~2004 ~~In 2002, three customers represented approximately 25%, 10%,~~ and ~~10%~~2003 ~~respectively, of aggregate net revenues from~~ ~~log,~~ (dollar ~~stumpage~~amounts ~~and~~in ~~deed sales. In 2001~~thousands, ~~one~~except ~~customer~~per ~~accounted~~unit ~~for~~amounts approximately 22% of aggregate net revenues from log, stumpage and deed sales. No other single customer accounted for more than 10% of aggregate net revenues from log, stumpage and timber deed sales in those years. Credit risk on trade receivables is mitigated by control procedures to monitor the credit worthiness of customers. The Company mitigates credit risk related to notes receivable by obtaining asset lien rights or ~~performing~~otherwise ~~credit worthiness procedures or both.~~ noted)

~~F-8~~ Revenue Recognition

~~Notes~~ Revenue on delivered log sales is recognized upon delivery to ~~Consolidated~~the ~~Financial~~customer. ~~Statements~~Revenue ~~INLAND~~on ~~FIBER~~timber ~~GROUP,~~deeds ~~LLC~~and ~~AND~~timber ~~SUBSIDIARY~~and property ~~(formerly~~sales Uis generally recognized upon closing.S. ~~Timberlands~~Revenue ~~Klamath~~from ~~Falls~~timber sold under stumpage contracts (i.e., ~~LLC~~the customer arranges to harvest and deliver the logs) is recognized when the timber is harvested.

Concentration ~~(dollar~~of ~~amounts~~Credit ~~in thousands, except per unit amounts or otherwise noted)~~Risk

~~The~~ Financial instruments that potentially subject the Company ~~periodically~~to ~~reviews~~concentrations ~~its~~of ~~allowance~~credit ~~for~~risk ~~doubtful~~consist principally of trade accounts and ~~reserves~~notes receivable. The majority of the Company’s trade accounts and notes receivable are derived from sales an to ~~estimated~~third ~~amount~~party wood processors. The Company’s four largest, non-affiliated customers accounted for ~~such~~approximately ~~accounts~~31%, if14%, 14%, ~~required.~~and As12% of the Company’s aggregate net revenues from log and timber deed sales for the year ended December 31, ~~2003~~2004. In 2003, four customers represented approximately 19%, 13%, 11% and 11% respectively, of aggregate net revenues from log and timber deed sales. In 2002, noone ~~allowance~~customer accounted for ~~doubtful~~approximately ~~accounts~~25% ~~was~~of ~~required~~aggregate net revenues from log and timber deed sales. No other single non-affiliated customer accounted for more than 10% of aggregate net revenues from log and timber deed sales in those years. Credit risk on trade receivables is mitigated by control procedures to monitor the credit worthiness of customers. The Company mitigates credit risk related to notes receivable by obtaining asset lien rights or performing credit worthiness procedures or both.

~~Cash~~ The Company periodically reviews its allowance for doubtful accounts and ~~Cash~~provides an estimated amount for such accounts, ~~Equivalents~~ if required. As of December 31, 2004 and 2003, no allowance for doubtful accounts was required.

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

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

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

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

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

~~Seed~~ Timber, ~~orchard~~timberlands and roads are stated at cost less depletion and road amortization for timber previously harvested. The cost of the timber harvested (including logging roads) is determined based on the volume of timber harvested in relation to the amount of estimated net merchantable volume, primarily utilizing a single composite pool. The Company estimates its timber inventory using statistical information and ~~nursery~~data ~~stock~~obtained from physical measurements, site maps, photo types and other information gathering techniques. These estimates are updated annually and may result in adjustments of timber volumes and depletion rates, which are

The Company operates and maintains a seed orchard and nursery. Cost 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 byF-~~products and other revenues in the accompanying statements of operations.~~9

~~Property~~ INLAND FIBER GROUP, ~~Plant~~LLC AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and ~~Equipment~~ 2003 (dollar amounts in thousands, except per unit amounts or otherwise noted)

~~Property, plant~~recognized ~~and equipment, including significant improvements thereto, are stated at cost less accumulated depreciation and amortization~~prospectively. Changes ~~Cost~~in ~~includes~~these ~~expenditures for~~estimates ~~major~~have ~~improvements~~no ~~and~~effect ~~replacements.~~on ~~Maintenance and repairs are charged to expense as incurred. When assets are sold, retired or otherwise disposed of,~~ the ~~cost~~Company’s ~~and~~cash ~~accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income~~flow.

Seed orchard and nursery stock

F The Company operates and maintains a seed orchard and nursery. Cost 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-9products and other revenues in the accompanying statements of operations.

Property, Plant and Equipment

~~Notes~~ toProperty, ~~Consolidated~~plant ~~Financial~~and ~~Statements~~equipment, ~~INLAND~~including ~~FIBER~~significant ~~GROUP~~improvements thereto, ~~LLC~~are ~~AND~~stated ~~SUBSIDIARY~~at ~~(formerly~~cost Uless accumulated depreciation and amortization.S Cost includes expenditures for major improvements and replacements. ~~Timberlands~~Maintenance ~~Klamath~~and repairs ~~Falls~~are charged to expense as incurred. When assets are sold, ~~LLC)~~retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income.

~~(dollar~~The ~~amount~~cost of property, plant and equipment is depreciated using the straight-line method over the estimated useful lives of the related assets. Buildings and improvements are generally depreciated over 40 years and equipment is depreciated over 3 to 5 years. sLeasehold inimprovements ~~thousands,~~are ~~except~~amortized ~~per~~under ~~unit~~the ~~amounts~~straight-line method based on the shorter of the lease periods or ~~otherwise~~the ~~noted)~~estimated useful lives of the improvements.

Deferred Financing Fees

~~The~~ ~~cost~~Deferred offinancing ~~property,~~fees ~~plant~~consist ~~and~~of ~~equipment~~fees isincurred ~~depreciated~~in ~~using~~connection with obtaining the ~~straight-line method~~related ~~over~~debt ~~the~~financing. ~~estimated~~The ~~useful~~Company ~~lives~~amortizes deferred financing fees over the terms of the related ~~assets~~debt. The Company ~~Buildings~~presents ~~and improvements~~deferred ~~are~~financing ~~generally~~fees ~~depreciated~~net ~~over~~of 40accumulated ~~years~~amortization. The ~~and~~accumulated ~~equipment~~amortization isof ~~depreciated over~~deferred 3financing tofees 5as ~~years.~~of ~~Leasehold~~December ~~improvements~~31, ~~are~~2004 ~~amortized~~and ~~under~~2003 ~~the~~was ~~straight-line method~~$4,802 ~~based~~and on$4,127, ~~the~~respectively. ~~shorter~~In ofthe event the ~~lease~~Company ~~periods~~doesn’t prevail orin the ~~estimated~~litigation ~~useful~~discussed ~~lives~~ in “Note 1 - Basis of Presentation”, the ~~improvements~~unamortized balance will be written off.

Income Taxes

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

Deferred financing fees consist of fees incurred in connection with obtaining the related debt financing. The Company amortizes deferred financing fees over the terms of the related debt. The Company presents deferred financing fees net of accumulated amortization. The accumulated amortization of deferred financing fees as of December 31, 2003 and 2002 was $4,127 and $3,452, respectively.F-10

~~Income~~ INLAND ~~Taxes~~FIBER GROUP, LLC AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003 (dollar amounts in thousands, except per unit amounts or otherwise noted)

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

Prior to the Privatization Transaction, the MLP had a Unit Option Plan which is described more fully in Note 9. As permitted under SFAS No. 123, “Accounting for Stock-Based Compensation”, the ~~Plans~~Company had elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. The following table illustrates the effect on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

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

		Year Ended December 31,
		2004			2003			2002


Net loss as reported	$	(68,095	)	$	(47,317	)	$	(44,068	)
Unit-based employee compensation determined under the
fair value method	$	-		$	-		$	320
Net loss pro forma		(68,095	)		(47,317	)		(44,388	)

	Year Ended December 31,
	2003			2002			2001
Net loss as reported	$	(47,317	)	$	(44,068	)	$	(37,036
Unit-based employee compensation determined under the
fair value method	$	—		$	320			323
Net loss pro forma		(47,317	)		(44,388	)		(37,359	)

For purposes of the pro forma disclosures, the estimated fair value of the unit options is amortized to expense over their estimated exercise period, which corresponds to the assumed conversion period of the then outstanding subordinated limited partnership interests in the MLP.

~~F-10~~ In connection with the Privatization Transaction, each outstanding unit option granted under the Unit Option Plan was converted into an option to receive, upon exercise, including payment of the exercise price, the $3.00 per unit merger consideration. Because the exercise price for each option was greater than the merger consideration, the Company does not expect any options to be exercised in the future.

~~Notes~~No tooptions ~~Consolidated~~were ~~Financial~~granted ~~Statements~~in ~~INLAND~~2004, ~~FIBER GROUP~~2003, ~~LLC~~and ~~AND SUBSIDIARY (formerly U~~2002.~~S. Timberlands Klamath Falls, LLC)~~

Recent ~~(dollar~~Accounting ~~amount s in thousands, except per unit amounts or otherwise noted)~~Standards

~~For~~ In January 2003, the FASB issued Interpretation No. 46 (FIN 46) “Consolidation ~~purposes~~ of Variable Interest Entities” which is an interpretation of ~~the~~Accounting ~~pro~~Research ~~forma~~Bulletin ~~disclosures~~No. 51 “Consolidated Financial Statements.” In December 2003, the ~~estimated~~FASB ~~fair~~modified ~~value~~FIN of46 ~~the~~to ~~unit~~make certain technical corrections and address certain implementation ~~options~~ issues isthat ~~amortized~~had toarisen. ~~expense~~FIN ~~over~~46 ~~their~~requires ~~estimated~~the ~~exercise~~consolidation ~~period,~~of entities in which ~~corresponds~~ toan enterprise absorbs a majority of the ~~assumed~~entity’s expected ~~conversion~~losses, ~~period~~receives a majority of the ~~then~~entity’s ~~outstanding~~expected ~~subordinated~~residual returns, or both, as a result of ownership, contractual ~~limited~~ or ~~partnership~~other financial interests in the ~~MLP~~entity. Previously, entities were generally consolidated by an enterprise when it had a controlling financial interest through ownership of a majority voting interest in the entity.

In ~~connection with~~The ~~the~~provisions ~~Privatization~~of ~~Transaction,~~FIN ~~each~~46 ~~outstanding~~as ~~unit~~revised ~~option~~were ~~granted~~applicable ~~under the Unit Option Plan was converted into an option~~ to ~~receive,~~the ~~upon~~Company ~~exercise, including~~as ~~payment~~ of ~~the exercise price~~March 31, ~~the $3~~2004.00 ~~per~~The ~~unit~~Company ~~merger~~has ~~consideration. Because~~considered the ~~exercise~~applicability ~~price~~of ~~for~~FIN ~~each~~46 ~~option was greater than the merger consideration, the Company does not expect any options~~ to beits ~~exercised~~investment in ~~the~~its ~~future.~~indirect

~~No options were granted in 2003, 2002, or 2001.~~F-11

~~Recent~~ INLAND ~~Accounting~~FIBER GROUP, LLC AND SUBSIDIARY ~~Standards~~ Notes to Consolidated Financial Statements December 31, 2004 and 2003 (dollar amounts in thousands, except per unit amounts or otherwise noted)

~~In January~~parent ~~2003~~company, ~~the~~American ~~FASB~~Forest ~~issued~~Resources, ~~Interpretation~~LLC ~~No. 46~~ (~~FIN~~formerly ~~46) “Consolidation of Variable Interest Entities” which is an interpretation of Accounting Research Bulletin No~~U. ~~51 “Consolidated Financial Statements~~S.” InTimberlands ~~December 2003~~Yakima, ~~the~~LLC) ~~FASB modified FIN 46 to make certain technical corrections~~ and ~~address certain~~has ~~implementation issues~~ concluded that ~~had~~American ~~arisen.~~Forest ~~FIN~~Resources, 46LLC ~~requires~~is ~~the~~not ~~consolidation of entities in which an enterprise absorbs~~ a ~~majority~~variable ofinterest ~~the~~ entity’s ~~expected losses,~~and ~~receives~~therefore aits ~~majority~~financial ofstatements ~~the~~are ~~entity’s~~not ~~expected~~required ~~residual returns,~~to or be ~~both,~~consolidated aswith athose ~~result~~ of ~~ownership,~~the ~~contractual~~Company orpursuant ~~other~~to ~~financial interests in~~ the ~~entity.~~provisions ~~Previously, entities were generally consolidated by an enterprise when it had a controlling financial interest through ownership~~ of aFIN ~~majority voting interest in the entity~~46.

2. Timber and Timberlands:

~~The provisions~~ ofTimber FIN 46 as revised are required to be applied by the Company no later than March 31, 2004. The Company has considered the applicability of FIN 46 to its investment in its indirect parent company, American Forest Resources, LLC (formerly U.S. Timberlands Yakima, LLC) and ~~has~~timberlands ~~concluded~~consisted ~~that American Forest Resources, LLC is not a variable interest entity and therefore its financial statements are not required to be consolidated with those~~ of the ~~Company~~following ~~pursuant to~~at ~~the~~December ~~provisions of FIN 46.~~31:

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

		2004		2003


Timber and logging roads	$	252,701	$	281,367
Timberlands		11,970		19,269
Seed orchard and nursery stock		1,373		1,451


		266,044		302,087
Less accumulated depletion and road amortization		181,797		173,085

	$	84,247	$	129,002

3. Investment in Affiliate:

		2003		2002
Timber and logging roads	$	281,367	$	294,208
Timberlands		19,269		26,043
Seed orchard and nursery stock		1,451		1,375
		302,087		321,626
Less accumulated depletion and road amortization		173,085		157,646
	$	129,002	$	163,980

Since October 1999, the Company has owned a redeemable preferred member interest (“Preferred LLC Interest”) in American Forest Resources, LLC, (“AFR”), an affiliate accounted for under the equity method (see Note 8).

F As described in Note 1, in July 2003 the Company became an indirect subsidiary of AFR, as the result of a contribution to AFR of the 99% non-11managing member’s interest in the Company previously owned by the MLP.

~~Notes~~ The tofollowing ~~Consolidated~~summarized ~~Financial~~financial ~~Statements~~information ~~INLAND~~for ~~FIBER~~AFR ~~GROUP~~is presented without consolidation of the Company’s assets, ~~LLC~~liabilities ~~AND~~and ~~SUBSIDIARY~~results ~~(formerly~~of Uoperations to avoid duplication which would otherwise occur.S AFR’s investment in the Company is accounted for by the equity method. ~~Timberlands~~The ~~Klamath~~carrying ~~Falls,~~amount ~~LLC)~~of the investment reflects the purchase price paid by the investor group for the 63.6% acquired interest in the Privatization Transaction and the investor group’s carryover basis for the 36.4% interest owned prior to the transaction.

~~(dollar amount s in thousands, except per unit amounts or otherwise noted)~~F-12

3.INLAND ~~Investment~~FIBER GROUP, LLC AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003 (dollar amounts in ~~Affiliate:~~thousands, except per unit amounts or otherwise noted)

~~Since October~~Following ~~1999,~~is ~~the~~summarized ~~Company~~financial ~~has~~information ~~owned~~for ~~a redeemable preferred member interest (“Preferred LLC Interest”) in American Forest Resources, LLC (formerly U.S. Timberlands Yakima, LLC), (“~~AFR~~”),~~ anas ~~affiliate~~of ~~accounted~~and for ~~under~~ the ~~equity~~years ~~method~~ ended ~~(see~~December ~~Note 9).~~31:

As described in Note 1, in July 2003 the Company became an indirect subsidiary of AFR, as the result of a contribution to AFR of the 99% non-managing member’s interest in the Company previously owned by the MLP.

		2004			2003			2002


Current assets	$	1,384		$	754		$	2,091
Noncurrent assets, principally timber and timberlands		128,096			136,227			142,884
Investment in Inland Fiber Group, LLC		(63,712	)		(12,272	)		-
Current liabilities, including $124,220 of debt in default in 2004		133,833			5,886			9,811
Noncurrent liabilities - long-term debt		-			121,383			96,053
Redeemable preferred member interest (owned by the
Company)		50,683			50,683	(2)		39,111
Common member deficiency		(118,747	)		(53,243	)		-
Net sales		9,977			27,624			22,018
Gross profit (loss)		129			580			(1,449	)
Loss before equity in the Company's loss		(16,655	)		(9,926	)		(11,225	)

Equity in the Company's loss (1)		(51,440	)		(33,407	)		-

Net loss	$	(68,095	)	$	(43,333	)	$	(11,225	)

~~The following~~(1) ~~summarized~~Reflects ~~financial~~(a) ~~information~~charges ~~for AFR is presented without consolidation~~ of ~~the Company’s asset~~$8,784 ~~liabilities~~in 2004 and ~~results~~$7,152 ofin ~~operations~~2003 related to ~~avoid~~the amortization ~~duplication~~ of ~~which~~$43,287 ~~would~~excess ~~otherwise~~cost ~~occur.~~over ~~AFR’s~~deficiency ~~investment~~ in ~~the~~net ~~Company is~~assets ~~accounted~~attributable ~~for~~to by63.6% ~~the~~acquired ~~equity~~interest ~~method.~~and ~~The~~(b) ~~carrying~~benefit ~~amount~~ of ~~the~~$3,984 ~~investment~~representing ~~reflects~~ share of the ~~purchase~~Company’s ~~price~~net ~~paid~~loss byfor ~~the~~2003 ~~investor~~attributable ~~group~~to ~~for the~~ 63.6% acquired interest in, ~~the Privatization Transaction and the investor group’s carryover basis for the 36.4% interest owned~~ prior to ~~the transaction~~acquisition.

~~Following is~~(2) ~~summarized~~Represents ~~financial~~balance ~~information~~at ~~for~~beginning ~~AFR~~of asyear ofincreased ~~and~~by ~~for~~$11,572 contribution of timberlands by the ~~years~~Company ~~ended~~during ~~December 31:~~2003.

		2003			2002			2001
Current assets	$	754		$	2,091		$	5,779
Noncurrent assets, principally timber and timberlands		136,227			142,884			116,558
Investment in Inland Fiber Group, LLC		(10,309	)
Current liabilities		5,886			9,811			1,883
Noncurrent liabilities - long-term debt		121,383			96,053			88,435
Redeemable preferred member interest (owned by the Company)		33,605			39,111			32,019
Common member deficiency		(34,202	)
Net sales		27,624			22,018			13,574
Gross profit (loss)		580			(1,449	)		3,121
Loss before equity in the Company’s loss		(9,926	)		(11,225	)		(5,329	)
Equity in the Company’s loss(1)		(34,291	)
Net Loss	$	(44,217	)	$	(11,225	)	$	(5,329	)

4. Property, Plant and Equipment:

~~(1) Reflects(a) charges of $7~~ Property,~~142~~ ~~related~~plant ~~to the amortization of $41,141 excess cost over deficiency in net assets attributable to 63.6% acquired interest~~ and ~~(b)~~equipment ~~benefit~~consisted of ~~$3,984 representing share of~~ the ~~Company’s~~following ~~net~~at ~~loss~~December ~~for 2003 attributable to 63.6% acquired interest, prior to acquisition.~~31:

F-12

		2004		2003

Equipment	$	322	$	545
Buildings and improvements		995		995

		1,317		1,540
Less accumulated depreciation and amortization		518		707

	$	799	$	833

~~Notes to Consolidated Financial Statements INLAND FIBER GROUP, LLC AND SUBSIDIARY (formerly U~~5.S. ~~Timberlands~~Affiliate ~~Klamath~~Credit ~~Falls, LLC)~~Facility:

The Company had a credit facility with an affiliate of the Manager (~~dollar~~the ~~amount~~“Affiliate s Credit inFacility”) ~~thousands,~~consisting ~~except~~of ~~per~~a ~~unit~~revolving ~~amounts~~line orof ~~otherwise~~credit ~~noted)~~up to $12.0 million. Borrowings under the Affiliate Credit Facility bore interest at the prime lending rate as published in the Wall Street Journal

~~4. Property, Plant and Equipment:~~F-13

                ~~Property~~      INLAND FIBER GROUP, ~~plant~~ ~~and~~LLC ~~equipment~~AND ~~consisted~~SUBSIDIARY of Notes ~~the~~to ~~following~~Consolidated atFinancial Statements December 31:, 2004 and 2003 (dollar amounts in thousands, except per unit amounts or otherwise noted)

2003 2002
Equipment $ 545 $ 654
Buildings and improvements 995 995
1,540 1,649
Less accumulated depreciation and amortization 707 744
$ 833 $ 905
Journal plus applicable margin, which was based on the Company’s leverage ratio. The Affiliate Credit Facility expired, by its terms, at the end of April 2002. The Company had sought to replace the Affiliate Credit Facility with a working capital facility from an unaffiliated third party, but has been unable to obtain a working capital credit facility in amounts to fund its working capital needs from a traditional commercial lender. While the Company continues to seek a credit facility from an unaffiliated source, affiliated lenders have agreed to make short term advances to the Company, payable on demand to the affiliates, at an annual interest rate of 10%. During 2004, there were no borrowings from affiliated lenders. The affiliate has made no commitment to continue to lend funds to the Company, and each request is considered on a case by case basis.

5      There were no outstanding borrowings from affiliated lenders at December 31, 2004 and 2003. Peak ~~Accrued~~borrowings ~~Liabilities:~~were $0 and $424 from affiliated lenders during 2004 and 2003, respectively. No interest and commitment fees were paid to the affiliate in 2002, 2003 and 2004.

                ~~Accrued liabilities~~6. ~~consisted~~Long-Term ~~of the following at December 31~~Debt:

2003 2002
Legal fees pursuant to settlement — 375
Other 511 863
$ 511 $ 1,238
     The $225,000 of Senior Notes (the “Notes”), which were issued in 1997, were issued jointly and severally by the Company and Finance Corp., a wholly owned subsidiary of the Company (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 at predetermined redemption prices plus accrued interest to the redemption date.

     The Notes contain certain restrictive covenants, including limiting the ability of the Company and its subsidiaries to make cash distributions, incur additional indebtedness, sell assets or harvest timber in excess of certain limitations. Under certain restrictive covenants, during 2004 and 2003, the Company was and presently is prohibited from making distributions to its members. In 2002, because of the accelerated harvesting during the fourth quarter 2002 of salvage timber resulting from the Toolbox Fire, the Company exceeded the allowable four year harvest by 6.9 ~~Affiliate~~MMBF ~~Credit~~and, ~~Facility:~~as required under the Indenture, had placed $662 in a restricted account during the first quarter of 2003 only to be used in ways prescribed in the Indenture. A balance of $0 remained in the restricted account as of December 31, 2004. As of December 31, 2004, the Company believed it was in compliance with the covenants contained in the Notes. However, the Trustee under the Indenture has alleged and the Court of Chancery of the State of Delaware has determined, which determination is being appealed, that the Company has violated certain covenants contained in the Indenture (see Note 13 for a description of this litigation.) Furthermore, in January 2005, the Trustee sent the Company a Notice of Default and Acceleration pursuant to which the Trustee declared the unpaid principal and any accrued interest on the Notes to be immediately due and payable. Accordingly, the Notes have been classified as a current liability in the accompanying balance sheet at December 31, 2004.

                     The Company ~~had~~timely apaid ~~credit~~to ~~facility with an affiliate of~~ the ~~Manager~~Trustee (the ~~“Affiliate Credit~~semi-annual ~~Facility”) consisting of a revolving line of credit up to $12.0 million. Borrowings under the Affiliate Credit Facility bore~~ interest ~~at the~~payment ~~prime lending rate as published in the Wall Street Journal plus applicable margin, which was based~~ on the ~~Company’s~~Notes ~~leverage~~due ~~ratio.~~November ~~The Affiliate Credit Facility expired~~15, ~~by its terms, at the end of April 2002~~2004. The Company ~~had~~subsequently ~~sought~~became toaware ~~replace the~~that Affiliate Credit Facility with a working capital facility from an unaffiliated third party, but has been unable to obtain a working capital credit facility in amounts to fund its working capital needs from a traditional commercial lender. While the ~~Company~~Trustee ~~continues~~withheld toapproximately seek a credit facility from an unaffiliated source, affiliated lenders have agreed to make short term advances to the Company, payable on demand to the affiliates, at an annual interest rate of 10%$4. ~~During 2003,~~8 ~~the maximum amount outstanding was $424~~ million, ~~all of~~ which ~~had~~was ~~been~~reduced ~~repaid~~to asapproximately ~~of December 31, 2003~~$2.8 ~~The affiliate has made no commitment to continue to lend funds to the Company~~million, ~~and~~from ~~each request is considered on a case by case basis.~~such

                There were no outstanding borrowings under the Affiliate Credit Facility at December 31, 2003 and 2002. Peak borrowings were $424 and $1,325 under the Affiliate Credit Facility during 2002 and 2001, respectively. Total interest and commitment fees paid to the affiliate were $0 and $0 respectively in 2002 and 2003, and $330 and $75 in 2001.F-14

~~F-13~~      INLAND FIBER GROUP, LLC AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003 (dollar amounts in thousands, except per unit amounts or otherwise noted)

~~Notes~~payment to ~~Consolidated~~fund ~~Financial~~its ~~Statements~~cost ~~INLAND~~of ~~FIBER~~litigation ~~GROUP,~~and ~~LLC~~paid ~~AND~~the ~~SUBSIDIARY~~Noteholders ~~(formerly~~a Ucorresponding reduced amount of interest.S. ~~Timberlands~~The ~~Klamath~~Company ~~Falls,~~believes ~~LLC~~the Trustee did not have the right to withhold such amount and is responsible to pay such interest to the Noteholders and has commenced litigation against the Trustee (see Note 13).

   The ~~(dollar~~next ~~amount s~~semi-annual ininterest ~~thousands~~payment on the Notes is due May 15, ~~except~~2005, ~~per~~subject ~~unit~~to ~~amounts~~a or30 ~~otherwise~~day ~~noted)~~grace period. The Company is considering its options regarding such payment given the pendency of the litigation and the acceleration of the Notes. There is substantial risk that the Company may not make this interest payment.

7. ~~Long-Term~~Members’ ~~Debt~~Equity:

                ~~The $225,000~~     As ofprovided ~~Senior Notes (the “Notes”), which were issued~~ in ~~1997, were issued jointly and severally by~~ the Company’s ~~and~~Operating ~~Fiber Corp. a wholly owned subsidiary of the Company (collectively~~Agreement, ~~the “Issuers”). The Issuers~~ ~~serve~~ income ~~as co-obligors of the Notes. The Notes represent unsecured general obligations of the Issuers~~ and ~~bear~~losses ~~interest~~are atallocated ~~9-5/8~~99% ~~payable~~to ~~semiannually~~IFG inHoldings, ~~arrears~~LLC ~~on May 15~~ and ~~November~~1% ~~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 at predetermined redemption prices plus accrued interest~~ to the ~~redemption date~~Manager.

The Notes contain certain restrictive covenants, including limiting the ability of the  Company and its subsidiaries to make cash distributions, incur additional indebtedness, sell assets or harvest timber in excess of certain limitations8. ~~Under~~Certain ~~certain restrictive~~Relationships ~~covenants, during 2003~~ and ~~2002,~~Related ~~the~~Party Company was and presently is prohibited from making distributions to its members. In 2002, because of the accelerated harvesting during the fourth quarter 2002 of salvage timber resulting from the Toolbox Fire, the Company exceeded the allowable four year harvest by 6.9 MMBF and, as required under the Indenture, had placed $662 in a restricted account during the first quarter of 2003 only to be used in ways prescribed in the Indenture. A balance of $63 remained in the restricted account as of December 31, 2003. As of December 31, 2003, the Company was in compliance with the covenants contained in the Notes, however, the trustee under the indenture has alleged that the company has violated certain covenants and has commenced litigation as described in Note 14.Transactions:

                ~~The Company~~ ~~made its required interest payment, due on November 17, 2003, on its Notes during the 30 day grace period provided therefore.~~ Manager

8.The ~~Members’~~Manager ~~Equity:~~manages the timber operations of the Company.

~~Allocation~~Until September 1, 2003, the Manager did not receive any management fee or other compensation in connection with its management of ~~Income~~the Company, but was reimbursed for all direct and indirect expenses incurred on behalf of the Company (~~Loss~~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.

                As On September 1, 2003, the Company completed a management agreement with the Manager. ~~provided~~ The innew management agreement replaced the prior arrangement under which the Company reimbursed the Manager for expenses incurred on the Company’s ~~Operating~~behalf. ~~Agreement~~The new management agreement, ~~income~~provides ~~and~~for ~~losses~~an ~~are~~annual ~~allocated 99~~fee of 2% toof the ~~IFG~~agreed ~~Holdings,~~upon ~~LLC~~valuation of total timber and timberland assets under management, payable monthly. For the period September 1% tothrough December 31, 2003, fees of $1,338 were incurred under the ~~Manager~~management agreement and for 2004 the amount incurred was $4,014.

9As of December 31, 2004 and 2003, the Company had accrued management fees of $257 and $46, respectively. ~~Certain~~During ~~Relationships~~2004, 2003, and ~~Related~~2002 ~~Party~~expenses ~~Transactions:~~(included in selling, general and administrative expenses) allocated to and reimbursed by the Company to the Manager totaled $290, $2,191, and $3,323, respectively.

                ~~The Manager manages the timber operations of the Company.~~F-15

                ~~Until September~~      INLAND 1,FIBER ~~2003~~GROUP, ~~the~~LLC ~~Manager~~AND ~~did~~SUBSIDIARY ~~not~~ Notes ~~receive~~to ~~any~~Consolidated ~~management~~Financial ~~fee~~Statements ~~or other compensation~~ in December ~~connection with its management of the Company~~31, ~~but~~2004 ~~was reimbursed for all direct~~ and ~~indirect~~2003 ~~expenses incurred on behalf of the Company~~ (~~including~~dollar ~~wages and~~amounts ~~salaries~~in ~~of employees~~thousands, ~~officers~~except ~~and~~per ~~directors~~unit ofamounts ~~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.~~ noted)

~~F-14~~Consulting Agreements      Through June 2003, the Manager had consulting agreements with affiliates of certain persons who were directors of the Manager during the terms of such consulting agreements, pursuant to which each such person or firm had provided consulting services to the Manager. The agreements provided 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 2004, 2003 and 2002 amounted to $0, $56 and $112, respectively. Such fees were reimbursed to the Manager by the Company. The consulting agreements were discontinued in July 2003.

~~Notes~~ Investments toin ~~Consolidated~~and ~~Financial~~Transactions ~~Statements~~with ~~INLAND~~Affiliates ~~FIBER GROUP, LLC AND SUBSIDIARY (formerly U.S. Timberlands Klamath Falls, LLC)~~

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

                 On      On September 114, ~~2003~~2001, ~~the~~management ~~Company~~of ~~completed~~AFR awas ~~management~~taken ~~agreement~~over ~~with~~by ~~the~~American ~~Manager. The~~Forest ~~new~~Services, ~~management~~LLC ~~agreement~~(“AFS”), ~~replaced~~a ~~the~~wholly ~~prior~~owned ~~arrangement~~subsidiary ~~under~~of ~~which~~ the ~~Company~~ ~~reimbursed the~~ Manager ~~for~~of ~~expenses incurred on~~ the Company~~’s behalf~~. ~~The~~ ~~new~~AFS ~~management~~is ~~agreement,~~paid ~~provides~~a ~~for an annual~~ fee ofequal to 2% of the agreed upon valuation of the total timber and timberland assets under management. Prior thereto, ~~payable~~the Manager provided management services for a fee equal to 2% of AFR’s earnings before interest, taxes, depletion, depreciation and ~~monthly~~amortization. ~~For~~Such ~~the~~fees ~~period~~charged ~~September~~to 1operations ~~through~~by ~~December~~AFR 31amounted to $3,133 ~~2003~~in 2004, ~~fees~~$3,033 ofin 2003 and $12,~~138 were~~555 ~~incurred~~in ~~under~~2002. The MLP and the ~~management~~Company ~~agreement~~granted Holdings Group an irrevocable proxy to vote its Common and Preferred LLC Interests.

                As of     In ~~December~~June 312000, ~~2003 and 2002,~~ the Company ~~had~~purchased atimber ~~payable~~cutting torights ~~the~~for ~~Manager~~approximately ~~of $46 and $0, respectively~~4.2 ~~During~~million ~~2003,~~board ~~2002,~~feet ~~and~~from ~~2001~~AFR ~~expenses~~for ~~allocated~~$1,300. toThese ~~and reimbursed~~timber bycutting ~~the~~rights ~~Company~~expired ~~totaled~~in ~~$2,191,~~June ~~$3,323, and $6,760, respectively~~2003.

~~Consulting Agreements~~F-16

                ~~Through June~~      INLAND ~~2003,~~FIBER ~~the Manager had consulting agreements with affiliates of certain persons who were directors of the Manager during the terms of such consulting agreements~~GROUP, ~~pursuant~~LLC toAND ~~which~~SUBSIDIARY ~~each such person or firm had provided consulting~~ ~~services~~ Notes to ~~the~~Consolidated ~~Manager.~~Financial ~~The~~Statements ~~agreements provided for an annual retainer of $25,~~ ~~plus~~ December ~~an hourly rate for services rendered at the request of the Manager. Payments by the Manager related to consulting agreements in 2003~~31, ~~2002,~~2004 and ~~2001~~2003 ~~amounted~~ to (dollar ~~$56,~~amounts ~~$112,~~in ~~and $98~~thousands, ~~respectively.~~except ~~Such~~per ~~fees~~unit ~~were~~amounts ~~reimbursed~~or tootherwise ~~the Manager by the Company. The consulting agreements were discontinued in July 2003.~~ noted)

~~Investments~~ In December 2000, the Company sold approximately 8,000 acres of timberland located in ~~and~~Central ~~Transactions~~Oregon ~~with~~to ~~Affiliates~~AFR for $2,900.

                ~~In October~~    During ~~1999~~2001, the Company ~~made~~contributed ancutting ~~investment~~rights ~~in AFR, an unconsolidated affiliate.~~and ~~AFR,~~ timberlands ~~a then newly formed entity organized to acquire timber properties~~ located in Central ~~Washington and Central~~ Oregon, ~~is engaged in the growing of trees and sale of logs and standing timber~~ to ~~third party wood processors. The MLP contributed to~~ AFR ~~$294 of cash for 49% of AFR’s common interests (the “Common LLC Interests”)~~. The ~~remaining~~contributions ~~Common~~have LLC Interests were acquired for $306 in cash by Cascade Resource Holdings Group, LLC (formerly U.S. Timberlands Holdings Group, LLC) (“Holdings Group”), a Delaware limited liability company in which John Rudey the Chairman of the Board of the Company, holds a controlling interest. The Company also acquired all of the senior preferred interests in AFR (the “Senior or Preferred LLC Interests”) for its contribution to AFR of timberlands consisting primarily of non-income producing, pre-merchantable pine plantations having an aggregate agreed upon value of $~~22,000. The Company recorded its investment in the Senior LLC interest at its $~~18,~~850~~500 ~~cost basis~~and ~~for~~were ~~the contributed timberlands. Terms of the Preferred LLC Interests~~added ~~include~~ to ~~a cumulative annual guaranteed return of 5% until December 31, 2001 and  6% thereafter of~~ the ~~$22,000 agreed upon value of the contributed timberlands. The Preferred LLC Interests are redeemable at AFR~~Company’s ~~option for a redemption price equal to the agreed upon value of the~~ Preferred LLC ~~Interests, either~~Interest in ~~cash~~AFR. orTerms ~~by returning the contributed timberlands, plus any portion~~ of the ~~guaranteed~~additional ~~return~~Preferred ~~not~~LLC ~~received~~Interest byacquired ~~the Company prior to the redemption date. Generally, AFR’s net income or losses~~ are ~~allocated to~~ the ~~Common~~same ~~LLC~~ terms ~~Interests.~~as ~~However, net losses exceeding~~ the ~~account~~Preferred ~~balances of the Common~~ LLC ~~Interests~~Interest ~~are~~previously ~~allocated~~issued to the ~~Preferred LLC Interest~~Company. The Company ~~accounts for~~recorded ~~the~~its additional Preferred LLC Interest at its cost ~~plus~~for ~~accrued dividends to~~ the ~~extent earned,~~cutting ~~reduced~~rights byand ~~losses,~~timberland ~~if any, in excess~~ of ~~the~~approximately ~~Common LLC Interests~~$16,300.

~~F-15~~In March of 2001, the Company purchased timber cutting rights for approximately 17.2 million board feet from AFR for $4,500. These timber cutting rights expired in March 2004.

~~Notes~~In toSeptember ~~Consolidated~~2001, ~~Financial~~the ~~Statements~~Company ~~INLAND~~sold ~~FIBER~~timber ~~GROUP,~~cutting ~~LLC~~rights ~~AND~~for ~~SUBSIDIARY~~approximately 80.6 ~~(formerly~~million ~~U.S.~~board ~~Timberlands~~feet ~~Klamath~~to ~~Falls~~AFR for $12,000. ~~LLC)~~These timber cutting rights expired in August 2004.

In ~~(dollar~~November ~~amount~~2001, the Company sold timber cutting rights for approximately s 44.8 inmillion ~~thousands~~board feet to AFR for $7,000. ~~except~~These ~~per~~timber ~~unit~~cutting ~~amounts~~rights orexpired ~~otherwise~~in ~~noted)~~October 2004.

                ~~On September~~   In ~~14,~~June ~~2001~~2002, ~~management of AFR was taken over by American Forest Services, LLC (formerly, U.S. Timberlands Services Yakima, LLC) (“American Forest Services,”) a wholly owned subsidiary of~~ the ~~Manager of the~~ Company. ~~American Forest~~sold ~~Services is paid a fee equal to 2% of the agreed upon valuation of the total~~ timber ~~and~~cutting ~~timberland~~rights ~~assets under management. Prior thereto, the Manager provided management services~~ for ~~a fee equal to 2% of AFR’s earnings before~~approximately ~~interest, taxes, depletion, depreciation and amortization~~ 87.3 ~~Such~~million ~~fees~~board ~~charged~~ feet to ~~operations by~~ AFR ~~amounted~~for to $39,~~033~~900. inThese ~~2003,~~timber ~~$2,555~~cutting inrights ~~2002~~expire ~~and $1,137~~ in ~~2001.~~ ~~The~~May ~~MLP and the Company granted Holdings Group an irrevocable proxy to vote its Common and Preferred LLC Interests~~2005.

                In ~~June~~ ~~2000~~August 2002, the Company purchased timber cutting rights for approximately ~~4.2~~ 12.0 million board feet from AFR for $1,300. These timber cutting rights expired in ~~June~~August 2003.

                In ~~December~~ ~~2000~~November 2002, the Company sold ~~approximately 8,000 acres of~~ timberland ~~located in Central Oregon~~ to AFR for $24,~~900~~700.

                 During ~~2001~~ 2002, the Company contributed ~~cutting~~timberland ~~rights and timberlands~~ located in Central ~~Oregon~~ Oregon to AFR. The contributions have an aggregate agreed upon value of $18,500 and were added to the Company’s Preferred LLC Interest in AFR. Terms of the additional Preferred LLC Interest acquired are the same terms as the Preferred LLC Interest previously issued to the Company. The Company recorded its additional Preferred LLC Interest at its cost for the ~~cutting rights and~~ timberland of of approximately $1618,300.

                In ~~March~~ ofaddition ~~2001~~to the preceding, in July 2002, the Company purchased timber cutting rights for approximately 17 5.21 million board feet from ~~AFR~~AFS for $4,500. These timber cutting rights ~~expired~~ expire in ~~March~~July ~~2004~~2005.

                ~~In September~~During ~~2001~~2003, the Company ~~sold~~contributed ~~timber~~timberlands ~~cutting~~located ~~rights~~in ~~for~~Central ~~approximately~~Oregon to 80AFR.~~6 million~~ ~~board~~The ~~feet~~contributions tohave ~~AFR~~an ~~for~~aggregate agreed upon value of $12,~~000.~~900 ~~These~~and ~~timber~~were ~~cutting~~added ~~rights~~to ~~expire~~the liquidation preference of the Company’s Preferred LLC Interest in AFR. Terms of the additional Preferred LLC Interest acquired are the same terms ~~August~~ as ~~2004~~the Preferred LLC Interest previously issued to the Company. The Company recorded its additional Preferred LLC Interests at its aggregate costs for the timberlands of approximately $11,600.

                 In ~~November~~ ~~2001,~~addition to the ~~Company~~preceding, ~~sold~~in ~~timber~~May ~~cutting~~2003, ~~rights~~the ~~for~~Company ~~approximately~~sold ~~44.8~~approximately ~~million~~ 21,000 ~~board~~acres ~~feet~~ to ~~AFR~~AFS for $78,~~000~~334. ~~These timber cutting rights expire in~~ ~~October 2004.~~

                ~~In June 2002, the Company sold timber cutting rights for approximately 87.3 million board feet to AFR for $9,900. These timber cutting rights expire in May 2005.~~F-17

                ~~In August~~      INLAND ~~2002~~FIBER GROUP, ~~the~~LLC ~~Company~~AND ~~purchased~~SUBSIDIARY ~~timber~~ Notes ~~cutting~~to ~~rights~~Consolidated ~~for~~Financial ~~approximately~~Statements ~~12.0~~ ~~million~~ December ~~board~~31, ~~feet~~2004 ~~from~~and ~~AFR~~2003 ~~for~~ (dollar $1amounts in thousands,~~300.~~ ~~These~~except ~~timber~~per ~~cutting~~unit ~~rights~~amounts ~~expired in~~or ~~August~~otherwise ~~2003.~~noted)

                     In ~~November~~ ~~2002~~December 2003, the Company sold ~~timberland~~approximately 1,000 acres to ~~AFR~~AFS for $41,~~700~~185.

~~F-16~~    In December 2003, the Company sold timber cutting rights for approximately 34,965 million board feet to AFS for $4,200. These timber cutting rights expire in December 2006.

~~Notes~~     Also, toin ~~Consolidated~~December ~~Financial Statements INLAND FIBER GROUP~~2003, ~~LLC~~the ~~AND~~Company ~~SUBSIDIARY~~sold ~~(formerly~~seedlings ~~U.S.~~to AFR ~~Timberlands~~for ~~Klamath Falls, LLC)~~$300.

     Gross ~~(dollar~~profits ~~amount~~realized on the Company’s sales of timber cutting rights to AFR, to the extent of the Company’s ownership interest in ~~thousands~~AFR, ~~except~~have ~~per~~been ~~unit~~eliminated ~~amounts~~and are orrecognized ~~otherwise~~in ~~noted~~operations upon AFR’s sale of the timber to third parties with corresponding adjustments to the carrying value of the investment in AFR. In addition, the Company’s equity in net income (loss) of affiliate has been adjusted to eliminate its share of gross profits realized by AFR on sales of timber cutting rights to the Company, until the Company sells the timber to third parties, with corresponding adjustments to the carrying value of timber and timberlands.

                ~~During 2002,~~ All ~~the~~property ~~Company~~that ~~contributed~~has ~~timberland~~been ~~located~~contributed infor ~~Central Oregon to AFR. The contributions have an aggregate agreed upon value of $18,500 and were added to~~ the Company’s Preferred LLC Interest in AFR. ~~Terms~~has ofbeen ~~the~~pledged ~~additional Preferred LLC Interest acquired are the same terms~~ as ~~the Preferred~~collateral ~~LLC Interest~~by ~~previously~~AFR ~~issued~~under ~~to the Company. The Company recorded~~ its ~~additional Preferred~~credit ~~LLC~~facility ~~Interest~~with at its ~~cost for the timberland of approximately $18,300~~lender.

                In   As of December 31, 2004, AFR was in default under the Credit ~~addition~~ Facility, due to, among other defaults, the ~~preceding~~failure to make principal amortization payments on outstanding Notes amounting to $122,880. inOn ~~July~~February ~~2002~~10, 2005, AFR entered into a Forbearance Agreement pursuant to which the ~~Company~~Insurer ~~purchased~~of ~~timber~~the ~~cutting~~Credit Facility ~~rights~~ has ~~for~~agreed ~~approximately~~to ~~5.1~~forbear, ~~million~~and ~~board~~has ~~feet~~instructed the Trustee to forbear, from exercising remedies from the existence of specified defaults from the effective date of the Agreement through no later than May 10, 2005. Upon expiration of the forbearance period, the Insurer or Trustee may accelerate the maturity of the Notes. As part of the agreement, AFR ~~Services~~has agreed to retain a Chief Restructuring Officer and present to the Insurer a restructuring plan which is acceptable to the Insurer which shall contain a detailed proposal for ~~$500~~curing the specified defaults and a five-year business plan. The ultimate resolution of this matter ~~These~~ will ~~timber~~affect ~~cutting~~the ~~rights~~Company’s ~~expire~~ability into ~~July~~recover ~~2005~~its investment in AFR.

                ~~During 2003, the Company contributed timberlands located in Central Oregon to AFR~~9. ~~The~~ ~~contributions~~Management ~~have~~Incentive an aggregate agreed upon value of $12,900 and were added to the liquidation preference of the Company’s Preferred LLC Interest in AFR. Terms of the additional Preferred LLC Interest acquired are the same terms as the Preferred LLC Interest previously issued to the Company. The Company recorded its additional Preferred LLC Interests at its aggregate costs for the timberlands of approximately $11,600. Plans:

                ~~In addition~~Unit toOption ~~the~~Plans ~~preceding, in May of 2003, the Company sold approximately 21,000 acres to American Forest Services, LLC (AFS) for $8,300.~~

                In     The MLP maintained a Unit Option Plan, which provided ~~December~~ for the granting of ~~2003,~~options (the “Unit Options”) to employees and directors of the Manager who performed services for the Company. ~~sold~~The ~~approximately~~plan 1permitted the grant of Unit Options covering 857,~~000~~749 ~~acres~~of tothe ~~American~~MLP’s ~~Forest~~Common Units. Unit Options ~~Services,~~ granted ~~LLC~~under the MLP’s Unit Option Plan were determined by the Long-Term Incentive Plan Committee of the MLP’s Board of Directors (~~AFS~~the “LTIP Committee”) ~~for~~and $1were granted at fair market value at the date of the grant. There were no Unit Options granted in 2002,~~900~~ 2003 or 2004. The Unit Options granted expire ten years from the date of grant and become exercisable automatically upon and in the same proportion as the conversion of Subordinated Units to Common Units provided that the minimum quarterly distributions (as defined in the MLP Agreement) have been made.

                In December 2003, the Company sold timber cutting rights for approximately 34,965 million board feet to American Forest Services, LLC (AFS) for $4,756. These timber cutting rights expire in December 2004.F-18

                ~~Also~~      INLAND FIBER GROUP, inLLC AND SUBSIDIARY Notes to Consolidated Financial Statements December ~~2003~~31, ~~the~~2004 ~~Company~~and ~~sold~~2003 ~~seedlings~~ (dollar toamounts ~~AFR~~in ~~for~~thousands, ~~$300.~~except per unit amounts or otherwise noted)

                ~~Gross profits~~     The ~~realized~~following ontable ~~the~~summarizes ~~Company’s sales of timber cutting rights to AFR, to~~ the ~~extent~~activity ofrelated ~~the Company’s ownership interest in AFR, have been eliminated and are recognized in operations upon AFR’s sale of the timber~~ to ~~third~~unit ~~parties~~options ~~with~~for ~~corresponding~~three ~~adjustments to~~years ~~the~~ended ~~carrying~~December ~~value of the investment in AFR. In addition~~31, the Company’s equity in net income (loss) of affiliate has been adjusted to eliminate its share of gross profits realized by AFR on sales of timber cutting rights to the Company, until the Company sells the timber to third parties, with corresponding adjustments to the carrying value of timber and timberlands.2004:

                All property that has been contributed for the Company’s Preferred LLC Interest in AFR has been pledged as collateral by AFR under its credit facility with its lender.

Weighted

Average

Number of Exercise

Shares Price

Outstanding, December 31, 2001 687,007 $ 13.78

Unit options cancelled (4,000 ) 12.69

Outstanding, December 31, 2002 683,007 13.77

Unit options cancelled (102,000 ) 13.34

Unit options effectively cancelled with the Privitization Transaction (581,007 ) 13.85

Outstanding, December 31, 2003 and 2004 - -

~~Payments~~     As of December 31, 2004, exercise prices for options outstanding were between $5.84 and $14.75 with a weighted average exercise price of $13.85 per unit. On June 26, 2003, as part of the merger, these options were converted into the right to receive $3.00 per unit which is below even the lowest exercise price. The Company has no expectation ~~Affiliate~~ that any of the options will be exercised and they have effectively been cancelled.

                ~~See Note~~10. Fair 6Value ~~regarding interest and commitment fees paid to an affiliate~~ of ~~the~~Financial ~~Manager under the Affiliate Credit Facility.~~Instruments:

~~F-17~~ A summary of the fair value of the Company’s significant financial instruments and the methods and significant assumptions used to estimate those values is as follows:

~~Notes~~a. toShort-term ~~Consolidated~~financial ~~Financial~~instruments ~~Statements~~– ~~INLAND~~The ~~FIBER~~fair ~~GROUP~~value of short-term financial instruments, ~~LLC~~including ~~AND~~cash ~~SUBSIDIARY~~and ~~(formerly~~cash ~~U.S.~~equivalents, ~~Timberlands~~trade ~~Klamath~~and ~~Falls~~other receivables, ~~LLC)~~notes receivable, trade accounts payable and certain accrued liabilities, approximates the carrying amounts in the financial statements due to the short maturities of such items.

b. ~~(dollar~~Long-term ~~amount~~ debt – The estimated fair value of the Company’s long-term indebt ~~thousands~~was approximately $101,000 ~~except~~and ~~per~~$117,000 ~~unit~~at ~~amounts~~December or31, ~~otherwise~~2004 ~~noted)~~and 2003, respectively, based on published market quotations.

~~10. Management Incentive Plans:~~F-19

~~Unit~~      INLAND ~~Option~~FIBER GROUP, LLC ~~Plans~~ AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003 (dollar amounts in thousands, except per unit amounts or otherwise noted)

~~The MLP maintained a Unit Option Plan, which provided for the granting of options (the “Unit Options”) to employees and directors of the Manager who performed services for the Company~~11. Quarterly ~~The~~Results plan permitted the grant of Unit Options covering 857,749 of the MLP’s Common Units. Unit Options granted under the MLP’s Unit Option Plan were determined by the Long-Term Incentive Plan Committee of the MLP’s Board of Directors (~~the “LTIP Committee”~~Unaudited): and were granted at fair market value at the date of the grant. There were no Unit Options granted in 2001, 2002 and 2003. The Unit Options granted expire ten years from the date of grant and become exercisable automatically upon and in the same proportion as the conversion of Subordinated Units to Common Units provided that the minimum quarterly distributions (as defined in the MLP Agreement) has been made. Although the performance criteria were met for the years ended December 31, 2000 and 1999, and 25% of the outstanding units of subordinated limited partnership interest of the MLP were converted into units of common limited partnership interests in February 2001, no compensation expense was recorded during such years, as the market price of the units was less than the exercise price during the years. As indicated in Note 7, distributions have been suspended and accordingly the performance criteria had not been met for the years ended December 31, 2003, 2002 and 2001.

The following table summarizes the activity related to unit options for three years ended December 31, 2003:

	Quarter Ended

	December 31			September 30				June 30		March 31				Total Year


2004
Revenues	$	21,672		$	3,569		$	16,494		$	2,585		$	44,320
Gross loss		(11,276	)		(429	)		(1,195	)		(192	)		(13,092	)
Net (loss)		(29,588	)		(12,557	)		(13,120	)		(12,830	)		(68,095	)

2003
Revenues	$	10,826		$	4,746		$	14,727		$	6,831		$	37,130
Gross profit (loss)		(629	)		(553	)		(455	)		6			(1,631	)
Net (loss)		(12,587	)		(12,345	)		(12,274	)		(10,111	)		(47,317	)

Number of Units Weighted Average Exercise Price
Outstanding, December 31, 2000 757,627 13.75
Unit options cancelled (70,620 ) 13.22
Outstanding, December 31, 2001 687,007 13.78
Unit options cancelled (4,000 ) 12.69
Outstanding, December 31, 2002 683,007 13.77
Unit options cancelled (102,000 ) 13.34
Unit options effectively cancelled with the Privatization Transaction (581,007 ) 13.85
Outstanding, December 31, 2003 — —
12. 401(K) Defined Contribution Plan:

F     The Manager sponsors a 401(K) defined contribution plan which covers substantially all of its full-18time employees the allocable costs of which were reimbursed by the Company. The amounts which were reimbursed by the Company pursuant to the management arrangement totaled $6 in 2004, $27 in 2003 and $45 in 2002.

~~Notes to Consolidated Financial Statements INLAND FIBER GROUP, LLC AND SUBSIDIARY (formerly U~~13.~~S. Timberlands Klamath Falls, LLC)~~ Litigation and Other:

~~(dollar amounts in thousands, except per unit amounts or otherwise noted)~~Fire Loss Risk

                ~~As of~~    In ~~December~~accordance ~~31, 2003, exercise prices for options outstanding were between $5.84 and $14.75~~ with aindustry ~~weighted average exercise price of $13.85 per unit. The weighted average remaining contractual life of the options was 5 years. There were no options exercisable at December 31~~practice, 2000. Options for 276,741, 170,752 and 171,752 units were exercisable at December 31, 2003, 2002 and 2001 respectively, with a weighted average exercise price of $13.85, $13.76 and $13.78 per unit, respectively. On June 26, 2003, as part of the ~~merger, these options were converted into the right to receive $3.00 per unit which is below even the lowest exercise price. The~~ Company ~~has~~self-insures nofor ~~expectation~~fire ~~that any of the options will be exercised, and they have effectively been cancelled~~loss.

~~11. Fair Value of Financial Instruments:~~Litigation

                A      On December 19, 2003, an action was brought in the Court of ~~summary~~ Chancery of the ~~fair~~State ~~value~~of Delaware in and for New Castle County by the Trustee under the Indenture against the Company, Finance Corp., the Manager, American Forest Resources, LLC, Cascade Resource Holdings Group, LLC, and all of the directors of the Manager as of January 1, 2003 (collectively, the “Defendants”). The complaint alleges that the Company violated the provisions of the Indenture by transferring certain assets to its affiliates, the directors of the Company violated their fiduciary duty to the Company and that the transfers of the assets were fraudulent conveyances and subject to rescission. The Trustee seeks a declaration that the Company has violated the terms of the Indenture, an injunction against the transfer of additional assets out of the ordinary course of business, damages and the imposition of a constructive trust on the assets transferred by the Company to its affiliates. In January 2004, the plaintiff’s ~~significant~~motion ~~financial~~to ~~instruments~~schedule a preliminary injunction hearing with respect to further transfers to affiliates and for expedited discovery was denied. In connection with the ~~methods~~denial of the plaintiff’s motion, the Company agreed that, through the earlier of December 31, 2004 and ~~significant~~the ~~assumptions~~resolution ~~used~~of tothe lawsuit, ~~estimate~~it ~~those~~would ~~values~~provide isat least thirty days’ notice before entering into any transfer of assets to affiliates, other as than ~~follows:~~payment of

a. Short-term financial instruments – The fair value of short-term financial instruments, including cash and cash equivalents, trade and other receivables, notes receivable, trade accounts payable and certain accrued liabilities, approximates the carrying amounts in the financial statements due to the short maturities of such items.
b. Long-term debt – The estimated fair value of the Company’s long-term debt was approximately $117,000 and $139,500 at December 31, 2003 and 2002, respectively, based on published market quotations.
F-20

~~F-19~~      INLAND FIBER GROUP, LLC AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003 (dollar amounts in thousands, except per unit amounts or otherwise noted)

~~Notes~~management fees. Discovery began in January 2004 and is ongoing. On February 6, 2004, the Defendants filed a motion to ~~Consolidated~~dismiss. ~~Financial~~In ~~Statements~~May ~~INLAND~~2004, ~~FIBER~~a ~~GROUP~~hearing was held with respect to Defendants’ motion to dismiss. On May 17, ~~LLC~~2004, ~~AND~~the ~~SUBSIDIARY~~Company ~~(formerly~~received Ua Notice of Default from the Trustee covering certain of the allegations in the complaint.S The Defendants responded to the Notice of Default denying the existence of any defaults. ~~Timberlands~~On ~~Klamath~~July ~~Falls~~29, ~~LLC)~~2004, the Court of Chancery dismissed the action without prejudice, based on its determination that the Trustee under the Indenture lacked standing under the terms of the Indenture to bring an action against the Defendants because the requisite notice of default and opportunity to cure had not been provided to the Company prior to the time the action was commenced. The Trustee was granted 30 days to file an amended complaint and on August 27, 2004, the Trustee filed its second amended complaint. On October 8, 2004, the Trustee filed a motion for partial summary judgment seeking a declaratory judgment that the Company violated certain provisions of the Indenture by permitting its affiliate to grant security interests in various timberland properties on various dates prior to September 14, 2001. On October 15, 2004, the Defendants filed a motion to dismiss the second amended complaint. On December 23, 2004, the Court of Chancery issued a memorandum opinion granting the Trustee’s motion for partial summary judgment and declaring that an Event of Default had occurred under the Indenture. On January 13, 2005, the Company received a Notice of Default and Acceleration from the Trustee. On January 21, 2005, the Defendants filed a motion for leave to pursue an interlocutory appeal of the Chancery Court Order granting partial summary judgment. On January 26, 2005, the Court of Chancery granted Defendants’ motion for leave to appeal. On February 10, 2005, the Supreme Court of the State of Delaware accepted Defendants’ appeal. Defendants’ filed their appeal brief on March 23, 2005. The Trustee’s answering papers are due on or before April 27, 2005. While the interlocutory appeal is heard, the case in the Court of Chancery is proceeding and a trial is expected to take place in June 2005. The Company and its legal counsel believe the litigation and both Notices of Default to be without merit and intend to continue to vigorously defend the litigation.

   On ~~(dollar~~December ~~amount~~7, 2004, the Company, Finance Corp. and AFR brought an action against the Trustee based on the Trustee’s infailure ~~thousands~~to remit $4.825 million of the funds paid by the Company on November 12, ~~except~~2004 ~~per~~to the ~~unit~~Trustee ~~amounts~~for orthe ~~otherwise~~benefit ~~noted~~of the holders of the Notes (see Note 6). On January 13, 2005, the Trustee filed its Answer and Counterclaim, seeking payment from the Company and Finance Corp. for its expenses in the litigation described above. The Company believes it has a meritorious claim against the Trustee and intends to pursue its action and vigorously defend against the Trustee’s counterclaim, which the Company believes to be without merit.

~~12. Quarterly Results (Unaudited):~~F-21

Quarter Ended
December 31 September 30 June 30 March 31 Total Year
2003
Revenues $ 10,826 $ 4,746 $ 14,727 $ 6,831 $ 37,130
Gross profit (loss) (629 ) (553 ) (455 ) 6 (1,631 )
Net (loss) (12,826 ) (12,583 ) (12,512 ) (9,396 ) (47,317 )
2002
Revenues $ 18,536 $ 13,323 $ 15,460 $ 2,155 $ 49,474
Gross profit (loss) (1,868 ) 204 (1,731 ) 52 (3,343 )
Net (loss) (13,071 ) (9,658 ) (12,176 ) (9,163 ) (44,068 )
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

~~13.~~To ~~401(K)~~the ~~Defined~~Board ~~Contribution~~of ~~Plan:~~Directors and Members of American Forest Resources, LLC

                ~~The Manager~~ ~~sponsors~~We ahave ~~401(K)~~audited ~~defined~~the ~~contribution~~accompanying ~~plan~~consolidated ~~which~~balance ~~covers~~sheets ~~substantially~~of American Forest Resources, LLC (the ~~all~~ "Company") as of ~~its~~December ~~full-time~~31, ~~employees~~2004 and 2003, and the ~~allocable~~related ~~costs~~statements of ~~which~~operations, ~~were~~redeemable ~~reimbursed~~preferred member interest by and common members' (deficiency) and cash flows for each of the ~~Company~~years ~~through~~in ~~August~~the 30three-year period ended December 31, ~~2003~~2004. ~~The~~These financial ~~amounts~~statements ~~which~~are ~~were~~the ~~reimbursed~~responsibility by of the Company's ~~pursuant~~management. toOur ~~the~~responsibility ~~management~~is ~~arrangement~~to ~~totaled~~express ~~$27~~an inopinion ~~2003,~~on ~~$45~~these in financial ~~2002~~statements ~~and~~based ~~$56~~on inour ~~2001~~audits.

14 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). ~~Commitments~~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, ~~Contingencies~~on a test basis, evidence supporting the amounts and ~~Other:~~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.

~~Fire~~ ~~Loss~~In ~~Risk~~our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Forest Resources, LLC as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

                 The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, as of December 31, 2004, the Company is in default under its Credit Facility and in February 2005, entered into a Forbearance Agreement pursuant to which the Insurer of the Credit Facility has agreed to forbear, and has instructed the Trustee to forbear, from exercising remedies from the existence of specified defaults through no later than May 10, 2005. Upon expiration of the forbearance period, the Insurer of Trustee may accelerate the maturity of the amount payable under the Credit Facility. In addition, as discussed in Note 1, in January ~~accordance~~ 2005, ~~with~~Inland ~~industry~~Fiber ~~practice~~Group, LLC, the Company’s ~~self-insures~~subsidiary received a notice of default and acceleration of maturity of Notes payable from the Trustee under the indenture governing the $225,000,000 of Senior Notes due in 2007 after the Trustee’s motion for ~~fire~~summary ~~loss~~judgment seeking a determination that an Event of Default had occurred under the Indenture was granted by the Delaware Court of Chancery. These events raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

~~Litigation~~Eisner, LLP New York, New York April 11, 2005

                On June 21, 2002, the Company was notified that it was named in a lawsuit filed in the State Court in Oregon as a codefendant seeking medical expenses and up to $12.0 million in damages for injuries sustained by the minor child of an employee of the Manager while riding on equipment owned by the Manager. At the time, liability insurance was in place, however, the insurance underwriter has since gone bankrupt and the coverage is limited and is being administered by the Oregon Guarantee Insurance Association. Effective April 5, 2004 this case was dismissed with prejudice.F-22

~~F-20~~AMERICAN FOREST RESOURCES, LLC

Notes to Consolidated Financial Statements INLAND FIBER GROUP, LLC AND SUBSIDIARY (formerly U.S. Timberlands Klamath Falls, LLC)

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

December 31,

2004 2003

ASSETS

Current assets:

Cash and cash equivalents (including restricted cash of $19

at December 31, 2004 and $20 at December 31, 2003)
$
342 $ 1,616

Accounts receivable 579 832

Due from managing member and affiliates 54 -

Other receivables 79 427

Notes receivable 774 158

Prepaid expenses and other current assets 271 353

Restricted cash related to debt in default 15,357 -

Total current assets 17,456 3,386

Timber and timberlands, net 197,475 246,319

Equipment, net 873 849

Restricted cash 104 14,146

Deposits - 52

Interest rate cap agreement 302 1,030

Notes receivable, less current portion 10 10

Deferred financing costs, net 708 5,339

Other assets 150 -

Total assets
$
217,078 $ 271,131

LIABILITIES AND MEMBERS' DEFICIENCY

Current liabilities:

Accounts payable
$
795 $ 1,988

Accrued interest 3,185 $ 3,192

Other accrued liabilities 1,589 $ 878

Current portion of long-term debt - 3,370

Long-term debt - in default 124,225

Long-term debt of IFG subsidiary declared in default by Trustee

(net of unamortized discount of $27,533) 197,467

Short-term notes - 588

Due to affiliate 7,523 20

Customer deposits 1,041 5,000

Total current liabilities 335,825 15,036

Long-term debt (net of unamortized discount of $37,045), less

current portion - 309,338

Commitments and contingencies (Note 10)

Common members' deficiency (118,747 ) (53,243 )

$
217,078 $ 271,131

See notes to financial statements

~~(dollar amount~~ ~~s in thousands, except per unit amounts or otherwise noted)~~F-23

                ~~On December~~AMERICAN ~~19,~~FOREST ~~2003~~RESOURCES, an action was brought in the Court of Chancery of the State of Delaware in and for New Castle County by the trustee under the Indenture against the Company, Finance Corp., the Manager, American Forest Resources, LLC, Cascade Resource Holdings Group, LLC, and all of the directors of the Manager as of January 1, 2003 (collectively, the “Defendants”). The complaint alleges that the Company violated the provisions of the Indenture by transferring certain assets to its affiliates, the directors of the Company violated their fiduciary duty to the Company and that the transfers of the assets were fraudulent conveyances and subject to rescission. The trustee seeks a declaration that the Company has violated the terms of the Indenture, an injunction against the transfer of additional assets out of the ordinary course of business, damages and the imposition of a constructive trust on the assets transferred by the Company to its affiliates. In January 2004, the plaintiff’s motion to schedule a preliminary injunction hearing with respect to further transfers to affiliates and for expedited discovery was denied. In connection with the denial of the plaintiff’s motion, the Company agreed that, through the earlier of December 31, 2004 and the resolution of the lawsuit, it would provide at least thirty days’ notice before entering into any transfer of assets to affiliates, other than payment of management fees. Discovery began in January 2004 and is ongoing. On February 6, 2004, the Defendants filed a motion to dismiss. A hearing with respect to the Defendants’ motion to dismiss has been scheduled for late May 2004. On March 26, 2004 a motion to stay discovery pending the outcome of the Defendant’s motion to dismiss was denied. The Company and its legal counsel believe the litigation to be without merit and intends to vigorously defend itself in the lawsuit.

~~F-21~~ STATEMENTS OF OPERATIONS (IN THOUSANDS)

Year Ended December 31,

   2004
2003 2002

Consolidated
Consolidated

Revenues:

Log and timber deed sales, including $605 (2004)

and $4,756 (2003) to an affiliate and $1,261 (2002) to preferred member $ 23,798 $ 38,617 $ 20,215

Timber and property sales, including $10,200 (2003) to an affiliate 28,120 24,729 1,800

By-products and other 2,089 2,203 3

54,007 65,549 22,018

Cost of products sold:

Cost of timber harvested 14,296 20,543 10,654

Cost of timber and property sales 38,876 24,621 1,322

Depletion, depreciation and road amortization 13,602 21,826 10,664

Fire loss - - 827

66,774 66,990 23,467

Gross loss (12,767) (1,441 ) (1,449 )

Operating expenses:

Selling, general and administrative 6,524 7,221 1,882

Management fees 7,147 4,371 2,555

13,671 11,592 4,437

Operating loss (26,438) (13,033 ) (5,886 )

Other income (expense):

Interest expense and commitment fees (27,259) (27,077 ) (5,172 )

Amortization of deferred financing fees (including write-off of $3,970 in 2004)

and debt discount (14,177) (7,763 ) (374 )

Interest income 175 234 160

Preacquisition loss of acquired interest - 3,984 -

Other (expense) income, net (396) 322 47

(41,657) (30,300 ) (5,339 )

Net (loss) $ (68,095) $ (43,333 ) $ (11,225 )

See notes to financial statements

F-24

AMERICAN FOREST RESOURCES, LLC

STATEMENTS OF REDEEMABLE PREFERRED MEMBER INTEREST AND COMMON MEMBERS' DEFICIENCY

(IN THOUSANDS)

Redeemable Common Note Receivable Total Common

Preferred Members' Pacific Fiber Members'

Member Interest Deficiency Company, LP (Deficiency)

Balance, December 31, 2001 $ 32,019 $ - $ - $ -

Timberlands and related cutting rights contributed 18,317 - - -

Net loss (11,225 ) - - -

Balance, December 31, 2002 39,111 - - -

Timberlands and related cutting rights contributed 10,467 - - -

Loan to finance Pacific Fiber Company, LP privatization transaction - - (32,000 ) (32,000 )

Contribution by Pacific Fiber Company, LP of member interest in

   IFG Holdings, LLC (owner of approximately 99% interest in Inland

          Fiber Group, LLC*) after completion of privatization transaction
(49,578 ) 19,898 - 19,898

Cash contribution by Pacific Fiber Company, LP to Inland Fiber Group, LLC - 1,238 - 1,238

Loan repayment Pacific Fiber Company, LP - - 954 954

Net loss - (43,333 ) - (43,333 )

Balance, December 31, 2003 0 (22,197 ) (31,046 ) (53,243 )

Loan repayment Pacific Fiber Company, LP - - 2,591 2,591

Net loss - (68,095 ) - (68,095 )

Balance, December 31, 2004 $ - $ (90,292 ) $ (28,455 ) $ (118,747 )

* Owner of the Company's redeemable preferred member interest

See notes to financial statements

F-25

AMERICAN FOREST RESOURCES, LLC

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

Twelve Months Ended December 31,

2004 2003 2002

Consolidated

Cash Flows from Operating Activities:

Net Loss $ (68,095 )
$
(43,333 ) $ (11,225 )

Adjustments to reconcile net loss to net cash provided

by operating activities:

Depreciation, depletion and amortization and cost of timber

property sold 52,008 46,447 11,955

Fire loss - - 827

(Gain) loss on disposal of assets - (58 ) 3

Amortization of deferred financing fees and debt discount 14,178 7,764 374

Preacquisition loss of contributed interest - (3,984 ) -

Accretion of discount on other long-term debt 68 83 96

Fair value adjustment of interest rate cap agreement 728 112 831

Change in assets and liabilities net of effect of contribution of IFG in 2003:

Accounts receivable 253 322 1,602

Receivable from preferred member - - -

Other receivables (243 ) (135 ) 33

Notes receivable (616 ) 1,267 (81 )

Prepaid expenses and other current assets 82 58 34

Accounts payable and accrued expenses (237 ) 66 (1,088 )

Advance payment from customer (3,959 ) (4,000 ) 9,000

Payable to affiliate 7,503 (241 ) -

Net cash provided by operating activities 1,670 4,368 12,362

Cash flows from investing activities:

Acquisition of timber and timberlands (3,206 ) (2,805 ) (15,280 )

Deposit on seedlings - - (52 )

Purchase of equipment (92 ) - -

Proceeds from sale of assets 14 26 -

Cash acquired in connection with contribution of IFG - 1,460

Loan to U.S.Timberlands Acquisitions Co., LLC - (32,000 ) -

Repayment of principal of loan 2,590 954 -

Net cash used in investing activities (694 ) (32,365 ) (15,332 )

Cash flows from financing activities:

Capital contributions - 1,238

Proceeds from bank credit facility - 32,600 7,900

Payments made on bank credit facility (221 ) (3,900 ) -

Advances from affiliates (304 ) 324

Payments of other long-term debt (375 ) (365 ) (365 )

Deferred financing fees (35 ) (765 ) (652 )

Restricted cash, noncurrent portion (1,315 ) (1,273 ) (5,982 )

Net cash (used in) provided by financing activities (2,250 ) 27,859 901

Net decrease in cash, cash equivalents and restricted cash (1,274 ) (138 ) (2,069 )

Cash, cash equivalents and restricted cash, beginning of year 1,616 1,754 3,824

Cash, cash equivalents and restricted cash, end of year $ 342
$
1,616 $ 1,755

Supplemental Cash Flow Information:

Cash paid during the year for interest $ 26,909
$
26,909 $ 5,334

F-26

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

1. Business and Significant Accounting Policies:

Business:

     The accompanying financial statements include the accounts of American Forest Resources, LLC ("AFR"), a Delaware limited liability company, and commencing in 2003, after approximately 99% of its members' interests were contributed to AFR (see Going Private Transaction below), Inland Fiber Group, LLC ("IFG"), a Delaware limited liability company, and IFG's wholly owned subsidiary, Fiber Finance Corp. ("Finance Corp."), collectively referred to hereafter as the “Company". Each of AFR, IFG and Finance Corp. changed names in December 2003. Finance Corp. serves as the co-obligor for IFG's Notes (defined below). It has nominal assets and does not conduct operations. All intercompany balances and transactions after the contribution have been eliminated in consolidation.

     AFR was formed in 1999 to acquire approximately 56,000 acres of timberland in Central Washington and approximately 54,000 acres of timberland in Central Oregon. The primary business activity of AFR is the growing of trees and the sale of logs and standing timber to third party wood processors and others located primarily in central Washington and central Oregon and the sale of excess land. The primary activities of IFG are the same except that its timber and customers are located principally in Oregon, east of the Cascade Range. Logs harvested from the timberlands are sold to unaffiliated domestic conversion facilities. These logs are processed for sale as lumber, plywood and other wood products, primarily for use in new residential home construction, home remodeling and repair and general industrial applications.

     Prior to July 2003, Pacific Fiber Company, LP, a publicly traded master limited partnership (the "MLP") (formerly U.S. Timberlands Company, LP) owned a 99% non-managing member interest in IFG. The MLP was formed on June 27, 1997 to acquire and own substantially all of the equity interests in IFG. Timber Resource Services, LLC (formerly known as US Timberlands Services Company, LLC) (the "Manager") which is controlled by Cascade Resource Holdings, LLC, an entity owned by senior management, which also controls the common membership interest in AFR, manages the business of IFG and owns a 1% non-voting membership interest in IFG. The Manager also managed the business of AFR prior to September 14, 2001. Thereafter, management of AFR was taken over by American Forest Services, LLC, a wholly-owned subsidiary of the Manager. All management decisions related to the Company are made by the Manager or its subsidiary.

Going Private Transaction:

     On October 17, 2002, the MLP announced that it had signed a definitive agreement to be acquired by an acquisition company formed by a group led by senior management (the "Privatization Transaction"). The group beneficially owned 36.4% of the combined outstanding limited partnership units of the MLP consisting of 16% of the common units and 98% of the subordinated units. The definitive agreement contemplated a cash tender offer for 100% of the outstanding common limited partnership units not already owned by the acquiring entity or its affiliates for $3.00 per unit in cash,

F-27

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted

followed by a merger of the acquisition company with and into the MLP, pursuant to which each common limited partnership unit not already owned by the acquiring entity or its affiliates would be converted into the right to receive $3.00 per unit in cash. The tender offer commenced on November 19, 2002 and was completed on March 6, 2003. In connection with the tender offer, approximately 71% of the MLP's common units were tendered. The remaining common units held by non-affiliates not purchased in the tender offer were converted into the right to receive $3.00 per common unit in the merger, which was completed on June 26, 2003.

     Subsequent to the Privatization Transaction, the interest in IFG originally held by the MLP was transferred in a series of transactions to a newly-formed limited liability company, IFG Holdings, LLC. IFG Holdings, LLC is 100% owned by AFR, in which IFG holds a preferred LLC member interest (see Note 2). As part of this reorganization of the ownership structure of IFG, a Board of Directors was established for IFG to supervise its operations and a new management arrangement was established under which the Manager provides comprehensive timber management services to IFG pursuant to a fee-based management agreement.
Basis of Presentation:
   The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 7, as of December 31, 2004, the Company is in default under its Credit Facility due, among other defaults, to the failure to make principal amortization payments, not being in compliance with certain financial covenants, and the maturity of the IFG Notes being accelerated by the Trustee due to alleged defaults. On February 10, 2005, the Company entered into a Forbearance Agreement pursuant to which the Insurer of the Credit Facility has agreed to forbear, and instructed the Trustee to forbear, from exercising remedies from the existence of specified defaults from the effective date of the Agreement through no later than May 10, 2005. Upon expiration of the forbearance period, the Insurer or Trustee may declare the unpaid principal of and accrued interest on the Credit Facility to be immediately due and payable. In addition, as discussed in Note 7, in January 2005, IFG received a notice of default and acceleration of maturity of Notes payable from the Trustee under the Indenture governing the $225,000 of Senior Notes due in 2007 after the Trustee’s motion for summary judgment seeking a determination that an Event of Default had occurred under the Indenture was granted by the Delaware Court of Chancery. These events raise substantial doubt about the Company’s ability to continue as a going concern.

   As part of the Forbearance Agreement, the Company has agreed to retain a Chief Restructuring Officer and present to the Insurer a restructuring plan which is acceptable to the Insurer which shall contain a detail proposal for curing the specified defaults and a five-year business plan. IFG continues to deny the existence of an event of default under the Note Indenture, and in March 2005, filed an appeal of the Chancery Court’s order with the Supreme Court of the State of Delaware. The ability of the Company to continue as a going concern is predicated upon a satisfactory restructuring plan being accepted by the Insurer and IFG ultimately prevailing in the litigation with the Trustee. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

F-28

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

Use of Estimates:

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

Revenue Recognition:

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

Concentration of Credit Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts and notes receivable. The majority of the Company's trade accounts and notes receivable are derived from sales to third party wood processors.

The Company’s three largest non-affiliated customers accounted for 22%, 17% and 11% of consolidated net revenues from log and timber deed sales for the year ended December 31, 2004 and for 30%, 11% and 11% of net revenues from log and timber deed sales for 2003. AFR largest customers accounted for 32%, 14% and 13% of its net revenues from log and timber deed sales in 2002. The loss of or a material decrease in business from any of these customers could have a material, negative impact on the Company's results of operations. Management does not, however, expect these relationships to be discontinued. No other single customer accounted for more than 10% of aggregate net revenues from log and timber deed sales in those years.

Credit risk on trade receivables is mitigated by control procedures to monitor the credit worthiness of customers. The Company mitigates credit risk related to notes receivable by obtaining asset lien rights or performing credit worthiness procedures or both.

The Company periodically reviews its allowance for doubtful accounts and provides an estimated amount for such accounts, if required. As of December 31, 2004 and 2003, no allowance for doubtful accounts was required.

Cash, Cash Equivalents and Restricted Cash:

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

On September 14, 2001, AFR refinanced its then existing bank debt under an agreement with a new lender (see Note 7) which calls for a series of cash or letter of credit reserve accounts. The obligations under these reserve accounts were met with restricted cash totaling $15,387 and $14,011 at

F-29

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

Notes to the Financial Statements

(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

December 31, 2004 and 2003, respectively, of which $19 and $20 of restricted cash was available to meet the Company's short term obligations at December 31, 2004 and 2003, respectively. At December 31, 2004, the restricted cash is classified as a current asset as the related Credit Facility is in default (see Note 7) and classified as a current liability.

Timber and Timberlands:

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

IFG 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 IFG's timberlands are capitalized to seed orchard and nursery stock in the accompanying balance sheet. A certain amount of seed and seedling stock is sold to unaffiliated customers and is reflected as a component of by-products and other revenues in the accompanying statements of operations.

Property, Plant and Equipment:

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

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

Deferred Financing Costs:

Deferred financing costs consist of fees and other costs incurred in connection with obtaining the related debt financing. The Company amortizes the deferred financing costs over the terms of the related debt. Deferred financing costs are presented net of accumulated amortization of $738 and $1,376 at December 31, 2004 and 2003, respectively. In 2004, the Company wrote-off $3,970 of unamortized financing costs related to its Credit Facility which is in default at December 31, 2004 due, among other defaults, to the Company’s failure to make required principal amortization payments (see Note 7). The

F-30

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

remaining balance of unamortized financing costs at December 31, 2004 amounting to $708 relates to debt of IFG which has been declared in default by the Trustee under the Note Indenture. IFG continues to deny the existence of an Event of Default and is involved in litigation with the Trustee under the Note Indenture. In the event IFG does not prevail in the litigation, the unamortized balance will be written off.

Income Taxes:

AFR and IFG are limited liability companies. The companies are not liable for federal or state income taxes as their income or loss is reported on the separate tax returns of the members. Accordingly, no provision for current or deferred income taxes has been reflected in the accompanying financial statements.

Unit-Based Compensation Plans:

Prior to the Privatization Transaction, the MLP had a Unit Option Plan which provided for the granting of options to purchase common limited partnership units in the MLP to employees and directors of the Manager who performed services for IFG. As permitted under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," IFG had elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. There would have been no effect on net loss for 2004 and 2003 if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

In connection with the Privatization Transaction, each outstanding unit option granted under the Unit Option Plan was converted into an option to receive, upon exercise, including payment of the exercise price, the $3.00 per unit merger consideration. Because the exercise price for each option was greater than the merger consideration, the Company does not expect any options to be exercised in the future, and considers outstanding unit options to have been effectively cancelled.

Derivatives:

The Company recognizes its interest rate cap derivative in the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, depending upon the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings (see Note 6).

2. Contribution of Member Interest in Inland Fiber Group, LLC ("IFG"):

Subsequent to the completion of the Privatization Transaction (see Note 1), 100% of the partnership interests in the MLP were held by entities controlled by senior management, as compared with a 36.4% partnership interest held prior to announcement of the transaction. The MLP, which

F-31

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

Notes to the Financial Statements

(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

together with one such entity owns indirectly through holding companies the entire outstanding common membership interest in AFR, contributed its 99% member interest in IFG to AFR. IFG also is the owner of AFR's redeemable preferred member interest. The results of operations of IFG have been included in the consolidated financial statements from January 1, 2003. Losses for the period from January 1, 2003 through March 6, 2003 (the date of completion of the tender offer) attributable to the 63.6% interest acquired by senior management in the Privatization Transaction have been shown separately in the accompanying statement of operations as a reduction in the consolidated loss.

The contribution to AFR of IFG has been recorded at $19,898 which reflects the cost of $26,961 including acquisition expenses, paid by an entity controlled by senior management for the 63.6% acquired interest in the MLP, reduced by $7,063 representing the carryover basis for the 36.4% interest in the deficiency in the net assets of the MLP at December 31, 2002 attributable to an entity controlled by senior management prior to the transaction, which deficiency includes 36.4% of the cumulative losses of AFR charged to the preferred member interest. In accordance with accounting principles applicable to business combinations, the excess ($43,287) of cost over deficiency in net assets attributable to the 63.6% acquired interest in the MLP has been principally recorded as a $44,075 reduction of long-term debt based on the quoted market price of the $225,000 publicly traded notes of IFG. Such discount is being amortized by the effective yield method over the term of the debt (see Note 7). The following summarizes the allocation of the recorded amount of the contribution to the assets and liabilities of IFG.

		($000)

Current assets, including cash of $1,460	$	4,426
Timber and timberlands, net		156,663
Investment in redeemable preferred member interest in AFR		44,723
Property, plant and equipment		898
Restricted cash		87
Deferred financing costs		1,200
Notes receivable, less current portion		10

Total assets		208,007



Current liabilities		7,184
Long-term debt, net of discount of $44,075		180,925

Total liabilities		188,109



Net assets contributed	$	19,898

F-32

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

3. Timber and Timberlands:

Timber and timberlands consisted of the following at December 31:

		2004		2003

		Consolidated Consolidated

Timber and logging roads		263,219		291,311
Timberlands		45,598		52,897
Seed orchard and nursery stock		1,373		1,451
Water rights		119		119

		310,309		345,778

Less accumulated depletion and road amortization		112,834		99,459


	$	197,475	$	246,319

     In November 2002, AFR agreed to sell the Ochoco timberlands, which it had acquired from IFG, to an unrelated buyer for $14,600. In connection with this sale, AFR received a non-refundable deposit of $9,000 from the buyer of the property, which was reflected as a liability at December 31, 2002. The sale closed on November 8, 2003, at which time the $5,600 balance from the buyer was collected.

     Customer deposits of $1,041 and $5,000 at December 31, 2004 and 2003, respectively, represented an advance payment received by IFG from a customer.

4. Certain Timberland Transactions:

AFR Timberlands:

     On October 4, 1999, AFR acquired approximately 56,000 acres of timber and timberlands and approximately 700 acres of timber cutting rights from Boise Cascade Corporation for approximately $55,000 (the "Yakima Timberlands"). Substantially all of the purchase price was allocated to timber, timberlands and logging roads. The acquisition was financed through a Credit Facility obtained by AFR (see Note 7).

Acquisitions for Preferred LLC Member Interests (see Note 8):

     On October 4, 1999, AFR issued a redeemable preferred member interest (the "Preferred LLC Interest") to its affiliate, IFG, for IFG's contribution to AFR of approximately 54,000 acres of timberland located in Central Oregon (the "Antelope Timberlands"). AFR recorded the acquisition of timberlands (and the related Preferred LLC Interest) at IFG's basis for the timberlands of $18,850. This contribution had an agreed upon value of $22,000.

     On February 26, 2001, AFR issued a redeemable preferred member interest to IFG for IFG's contribution of approximately 80,640 thousand board feet (“MBF”) of timber located in Central Oregon. AFR recorded the acquisition of timber (and the related Preferred LLC Interest) at IFG's basis for the

F-33

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

Notes to the Financial Statements

(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

timberlands of $10,886. This contribution had an agreed upon value of $12,000 and was added to IFG's Preferred LLC Interest in AFR.

On June 30, 2001 AFR issued a redeemable preferred member interest to IFG for IFG's contribution of approximately 30,585 MBF of timber located in Central Oregon. AFR recorded the acquisition of timber (and the related Preferred LLC Interest) at IFG's basis for the timberlands of $5,403. This contribution had an agreed upon value of $6,500 and was added to IFG's Preferred LLC Interest in AFR.

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

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

During the period from January 1, 2003 through March 6, 2003 (the date of completion of the tender offer), AFR issued redeemable preferred member interests to IFG for IFG's contributions of timberlands located in Central Oregon. AFR recorded the acquisitions of timberlands (and the related Preferred LLC Interest) at IFG's basis for the timberlands of $10,546. These contributions had an agreed upon value of $12,900.

Timber Deed Purchases from and Sales to Affiliates:

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

     During 2001, AFR purchased 125,400 MBF of timber located in Central Oregon from IFG for $19,000. All of the purchase price was allocated to timber. The timber deeds expired in August and October 2004.

     During June 2000, AFR sold timber cutting rights for approximately 4,200 MBF to IFG for $1,300. Those cutting rights expired in June 2003.

     During March 2001, AFR sold timber cutting rights for approximately 17,200 MBF to IFG for $4,500. These cutting rights expired in March 2004.

     On April 30, 2002, AFR sold timber cutting rights for approximately 5,100 MBF to an affiliate, U.S. Timberlands Services Yakima, LLC (now known as American Forest Services, LLC) for $516. Those cutting rights expired in March 2005.

F-34

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

     On June 12, 2002, AFR purchased approximately 87,300 MBF of timber located in Central Oregon from IFG for $9,900. All of the purchase price was allocated to timber.

     On November 13, 2002, AFR purchased the underlying approximately 45,000 acres of timberland located in Central Oregon (the "Ochoco" Timberlands) from IFG for $4,700. Substantially all of the purchase price was allocated to timberlands and logging roads.

     On August 30, 2002, AFR sold timber cutting rights for 12,000 MBF to IFG for $1,261. Those cutting rights expired in August 2003.

     In May 2003, IFG sold approximately 21,000 acres of timberland to American Forest Services, LLC (“AFS”) for $8,300.

      In December 2003, IFG sold approximately 1,000 acres of timberland to AFS for $1,900.

     In December 2003, IFG sold timber cutting rights for approximately 34,965 MBF to AFS for $4,756. These timber cutting rights expire in December 2006.

      In July 2004 AFR sold timber cutting rights for approximately 5,300 MBF to Cle Elum Resources for $300. These timber cutting rights expire in December 2007.

    In August 2004 AFR sold timber cutting rights for approximately 1,723 MBF to Cle Elum Resources for $305. These cutting rights expire December 2007.

5. Equipment:

      Equipment consisted of the following at December 31:

		2004		2003

Equipment	$	1,053	$	1,206
Less accumulated depreciation		180		357

	$	873	$	849

6. Interest Rate Cap Agreement:

     In September 2001, AFR entered into an interest rate cap agreement, which expires in September 2013, and which will provide AFR with interest rate protection should the interest rate payable on its long-term debt incurred in 2001 (see Note 7) exceed 8% per annum. The agreement was purchased for $2,270, payable in varying monthly amounts through September 2013. The agreement is carried at fair value at the end of each financial reporting period, and changes in its value are recorded currently in operations. Should interest rates on AFR's long term debt exceed 8% per annum, the cap agreement will become effective as a cash flow hedge and periodic changes in its value related to remaining future interest payments will be recorded in other comprehensive income. Interest expense and commitment fees include $659 (2004), $196 (2003) and $940 (2002) related to the interest rate cap.

F-35

AMERICAN FOREST RESOURCES, LLC

Notes to the Financial Statements

(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

7 . Long-Term Debt:

2004 2003

Notes payable under AFR Secured Credit Facility - in default in 2004 $ 122,880 $ 123,100

IFG Senior Notes, 9 5/8%, due November 15, 2007;

principal amount $225,000, less discount of $27,533

and $37,045 - declared in default by Trustee in 2004 197,467 187,955

Other long-term debt - in default in 2004 1,345 1,653

321,692 312,708

less debt in default or declared in default in 2004 and current

maturities in 2003 (321,692 ) (3,370 )

Long-Term Debt $ - $ 309,338

AFR Credit Facility:

     On September 14, 2001, AFR entered into a Credit Facility with BNY Midwest Trust Company as Trustee and MBIA Insurance Corporation as Insurer (the "Refinancing Facility"). The Refinancing Facility provides for borrowings of up to a maximum of $127,000 for a term of 12 years. The Refinancing Facility is collateralized by all of AFR's assets, which had a book value of approximately $134,000 at December 31, 2004. The Refinancing Facility indenture provides for floating rate note interest at the applicable commercial paper funding cost of AFR plus applicable margin (0.60% at December 31, 2004 and 2003). At December 31, 2004 and 2003, the effective rate was 2.44% and 1.79%, respectively. At December 31, 2004 and 2003, $122,880 and $123,100 respectively was outstanding in borrowings under the Refinancing Facility.

     Under the terms of the Refinancing Facility, the borrowing base is equal to 75% of the sum of eligible receivables and total timber and timberland value as determined by AFR and reviewed by an approved independent consultant on a quarterly basis. The borrowing base recalculation triggers a pay down of all borrowings under the Refinancing Facility in excess of the borrowing base. The Refinancing Facility required payment of interest only through October 15, 2004, and then required principal amortization in equal monthly installments for the next 108 months. AFR has not made any of the required amortization payments, which is an Event of Default under the Refinancing Facility.

     The Refinancing Facility contains certain restrictive covenants, including limits on the ability of AFR to make capital expenditures, make cash distributions (including the Preferred LLC Interest guaranteed return), incur liens and incur additional indebtedness and to make loans and investments. In addition, the Refinancing Facility contains certain financial covenants. In addition to failing to make required amortization payments, AFR was not in compliance with some of these covenants at December 31, 2004. In addition to these defaults, an acceleration of the maturity of the IFG Notes which occurred in January 2005 (see IFG Senior Notes below) is an Event of Default under the Refinancing Facility.

F-36

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

The Refinancing Facility also requires the establishment and maintenance of a series of restricted cash accounts controlled by the Indenture Trustee, into which substantially all of AFR's cash collections are required to be deposited. A portion of these funds is then released to AFR to pay debt service and operating expenses as provided for in the indenture governing the Refinancing Facility and a portion is allocated to the various long-term restricted cash accounts required by the indenture. The restricted cash accounts have been used to meet certain operating and debt service requirements. In addition, in conjunction with the Forbearance Agreement referred to below, $9,500 that was held in a restricted cash account was applied to reduce outstanding borrowings in February 2005. AFR expects that absent a modification of the provisions regarding the required amounts of the restricted cash accounts, it will not be able to fund these accounts to their required levels.

     In February 2005, AFR entered into a Forbearance Agreement with the Trustee, the Insurer, the Administrative Agent and the Noteholders, covering the failure to make amortization payments and other matters noted above. Under the terms of the agreement, the Insurer has agreed to forbear, and instructed the Trustee to forbear from exercising remedies from the existence of specified defaults during the period from the effective date of the Agreement through no later than May 10, 2005. In connection therewith, the Company has agreed to retain a Chief Restructuring Officer and present to the Insurer and the Administrative Agent a restructuring plan which is acceptable to the Insurer. The plan shall contain a detailed proposal for curing the specified defaults and a comprehensive five-year business plan. In addition, American Forest Services, LLC, the Manager of the Company, has agreed to continue to pay all operating expenses of the Company. American Forest Services, LLC, has further agreed that any of the amounts due from the Company for reimbursement for operating expenses paid on behalf of the Company prior to January 9, 2005, and remaining unreimbursed as of the effective date of the Agreement, shall not be payable until the Refinancing Facility is fully repaid. The Forbearance Agreement expires on May 10, 2005. The Company anticipates negotiating an extension of the Forbearance Agreement at that time.

     As of December 31, 2004, amounts payable to the Manager amounted to $7,523, all of which remained outstanding at the effective date of the Agreement. Such amount is classified as a current liability in the 2004 balance sheet.

     Upon expiration of the forbearance period, the Insurer or Trustee may declare the unpaid principal of, and any accrued interest on, the Refinancing Facility to be immediately due and payable. Accordingly, the Refinancing Facility has been classified as a current liability in the 2004 balance sheet.

IFG Senior Notes:

      In 1997, IFG and Finance Corp., a wholly owned subsidiary of IFG (collectively, the "Issuers"), jointly and severally issued $225,000 of 9-5/8% Senior Notes due 2007 (the "Notes"). 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 at predetermined redemption prices plus accrued interest to the redemption date.

     The Notes contain certain restrictive covenants, including limiting the ability of IFG and its subsidiaries to make cash distributions, incur additional indebtedness, sell assets or harvest timber in

F-37

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

excess of certain limitations. Under certain restrictive covenants, during 2004 and 2003, IFG was and presently is prohibited from making distributions to its members. In 2002, because of the accelerated harvesting during the fourth quarter 2002 of salvage timber resulting from the Toolbox Fire, IFG exceeded the allowable four year harvest by 6.9 MMBF and, as required under the Indenture, had placed $662 in a restricted account during the first quarter of 2003 only to be used in ways prescribed in the Indenture. There were no funds in the restricted account as of December 31, 2004.

     As of December 31, 2004, IFG believed it was in compliance with the covenants contained in the Notes. However, the Trustee under the Indenture has alleged and the Court of Chancery of the State of Delaware has determined, which determination is being appealed, that the Company has violated certain covenants contained in the Indenture (see Note 10 for a description of this litigation). Furthermore, in January 2005, the Trustee sent IFG a Notice of Default and Acceleration pursuant to which the Trustee declared the unpaid principal of, and any accrued interest on, the Notes to be immediately due and payable. Accordingly, the Notes have been classified as a current liability in the accompanying balance sheet at December 31, 2004.

     IFG timely paid to the Trustee the semi-annual interest payment on the Notes due November 15, 2004. IFG subsequently became aware that the Trustee withheld approximately $4.8 million, which was reduced to approximately $2.8 million, from such payment to fund its cost of litigation and paid the Noteholders a corresponding reduced amount of interest. IFG believes the Trustee did not have the right to withhold such amount and is responsible to pay such interest to the Noteholders and has commenced litigation against the Trustee (see Note 10).

    The next semi-annual interest payment on the Notes is due May 15, 2005, subject to a 30 day grace period. IFG is considering its options regarding such payment given the pendency of the litigation and the acceleration of the Notes. There is substantial risk that IFG may not make this interest payment.

     As a result of purchase accounting adjustments resulting from the Privatization Transaction more fully described in Note 2, the $225,000 principal amount of the IFG Notes outstanding has been reduced for financial reporting purposes by $44,075, which amount is being accreted over the remaining term of the Notes by charges to operations. Through December 31, 2004, accretion totaled $16,542. In the event that IFG doesn’t prevail in the litigation with the Trustee, the unamortized discount, which amounted to $27,533 at December 31, 2004, will be written off to expense.

Other Long-Term Debt:

     Other long-term debt consists of amounts payable to a financial institution for the purchase in September, 2001, of an interest rate cap agreement (see Note 6). Payments are due monthly at the rate of $30 per month for 36 months, and thereafter at varying monthly amounts through September 2013. Each payment includes interest imputed at an effective rate of 4.7% per annum. The aggregate amount of payments due under this agreement at December 31, 2004 and 2003 was $1,523 and $1,915 respectively, before the discounts for imputed interest of $176 and $262, respectively. The Company’s default under its secured Credit Facility has resulted in a default under the interest rate cap obligation which, accordingly, has been classified as a current liability in the accompanying 2004 balance sheet.

F-38

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

8. Common Member’s Interest and Redeemable Preferred LLC Interest:

Common Interests:

     Concurrent with the acquisition of the ”Yakima Timberlands” (see Note 4), Cascade Resource Holdings Group, LLC and the MLP contributed $306 and $294, respectively, for common member interests of 51% and 49%, respectively, (the "Common Interests") in AFR.

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

     As provided in IFG's Operating Agreement, income and losses are allocated 99% to IFG Holdings, LLC and 1% to the Manager.

Preferred LLC Interest:

     Concurrent with the acquisition of the ”Yakima Timberlands”, IFG contributed the Antelope Timberlands having an agreed upon value of $22.0 million for Preferred LLC Interests in AFR.

     At December 31, 2004 and 2003, as a result of contributions of timber cutting rights and additional timberlands by IFG to AFR, the agreed upon value of the Preferred LLC Interest aggregated $72,900 and $72,900 respectively (see Note 4). Terms of the Preferred LLC Interest include a cumulative annual guaranteed return of 5% of the agreed upon value through December 31, 2001 and 6% thereafter. Subject to the applicable law and the terms of any loan agreement then in effect, the Preferred LLC Interest is redeemable in whole or in part at AFR's option while its long-term debt is outstanding and for one year and one day thereafter, and at the preferred member's option thereafter, in each case, for a redemption price equal to the agreed upon value of the Preferred LLC Interest, payable either in cash or in timberlands, plus any portion of the guaranteed return not yet paid by the Company prior to the redemption date. As of December 31, 2004, the unpaid cumulative guaranteed return amounted to $13,754. The guaranteed return for 2004, 2003, 2002 and 2001 has not been recorded by AFR due to the absence of allocable net income for such years. No payments of the return have been made.

     The 2004 and 2003 financial statements reflect the consolidation of the accounts of AFR with IFG and the resultant elimination of the Preferred LLC Interest in consolidation.

Allocation of Income (Loss):

     As provided by AFR's operating agreement, income attributable to the Common Interests is generally allocated according to the percentage ownership of the outstanding Common Interests. However, through December 31, 2002, net losses exceeding the account balances of the Common Interest were allocated to the Preferred LLC Interest.

F-39

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

Notes to the Financial Statements

(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

Note Receivable from Pacific Fiber Company, LP:

During 2003, AFR increased its outstanding loans under its Refinancing Facility by $32,000, and loaned such amount to the MLP (successor to US Timberlands Acquisition Co., LLC) to finance the Privatization Transaction. The loan receivable from the MLP bears interest at LIBOR plus 1 ½% per annum, and is due September 14, 2004 or such later date that AFR and the MLP may agree. Because the MLP’s principal asset is its indirect investment through holding companies in the common member's interest in AFR, and has no source of funds other than AFR with which to repay this loan, AFR has reflected the loan receivable as an increase in members' deficiency, and is not accruing interest receivable on this loan. Payments of principal and interest, if any, which are received by AFR, will be credited to members' deficiency as received. Payments of $954 and $2,590 were received in December 2003 and May 2004, respectively and were reflected as reductions of the note receivable.

9. Fair Value of Financial Instruments:

A summary of the fair value of the Company's financial instruments and the methods and significant assumptions used to estimate these values is presented below. The estimates require subjective judgments and are approximate. Changes in methodologies and assumptions could significantly affect estimates.

Short-term financial instruments:

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

Long-term debt:

The estimated fair value of AFR’s Notes payable under its secured Credit Facility is not practicable to be estimated at December 31, 2004, due to the debt being in default. The estimated fair value of the Notes approximates the carrying value of $123,100 at December 31, 2003, given the nature of the debt and because it is tied to major interest rate indexes.

The estimated fair value of IFG's long-term debt was approximately $101,000 and $117,000 at December 31, 2004 and 2003, respectively, based on published market quotations.

     The fair value of AFR’s obligation to a financial institution in connection with the purchase of an interest rate cap is not practicable to be estimated at December 31, 2004, due to the obligation being in default. The estimated fair value of the obligation was approximately $1,696 at December 31, 2003, based on quotations from such institution.

F-40

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

10. Commitments and Contingencies:

Lease Agreement:

     IFG and AFR lease office facilities under non-cancelable operating leases expiring in October, 2007. Other office facilities are leased from a related party under a non-cancelable lease expiring in 2024. Rent expense was $47, $31, and $35 for the years ended December 31, 2004, 2003, and 2002, respectively.

Future minimum payments required under the lease agreements are:

2005		47
2006		49
2007		48
2008		24
2009		24
Thereafter		475


Total minimum lease commitments	$	667

Log Supply Agreement:

     Concurrently with the acquisition of the ”Yakima Timberlands”, AFR entered into a log supply agreement with Boise Cascade Corporation ("Boise") to supply a volume of approximately 11 million board feet ("MMBF"), 25 MMBF, 25 MMBF, 9 MMBF, and 9 MMBF in 1999, 2000, 2001, 2002, and 2003, respectively, of merchantable timber to Boise at market prices. The term of the agreement was through November 2003 and it was not renewed.

Fire Loss:

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

Affiliate Credit Facility:

     IFG had a Credit Facility with an affiliate of the Manager (the "Affiliate Credit Facility") consisting of a revolving line of credit up to $12.0 million. Borrowings under the Affiliate Credit Facility bore interest at the prime lending rate as published in the Wall Street Journal plus applicable margin, which was based on IFG's leverage ratio. The Affiliate Credit Facility expired, by its terms, at the end of April 2002. IFG had sought to replace the Affiliate Credit Facility with a working capital facility from an unaffiliated third party, but has been unable to obtain a working capital Credit Facility in amounts sufficient to fund its working capital needs from a traditional commercial lender. While IFG continues to seek a Credit Facility from an unaffiliated source, affiliated lenders have agreed to make

F-41

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

short term advances to IFG, payable on demand to the affiliates, at an annual interest rate of 10%. During 2003, the maximum amount outstanding was $424, all of which had been repaid as of December 31, 2003. During 2004, there were no outstanding borrowings from affiliated lenders. There were no interest or commitment fees paid to the affiliate in 2003. The affiliate has made no commitment to continue to lend funds to IFG, and each request is considered on a case by case basis.

Litigation:

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

     On December 19, 2003, an action was brought in the Court of Chancery of the State of Delaware in and for New Castle County by the Trustee under the Indenture against IFG, Finance Corp., the Manager, AFR, Cascade Resource Holdings Group, LLC, and all of the directors of the Manager as of January 1, 2003 (collectively, the “Defendants”). The complaint alleges that IFG violated the provisions of the Indenture by transferring certain assets to its affiliates, the directors of IFG violated their fiduciary duty to IFG and that the transfers of the assets were fraudulent conveyances and subject to rescission. The Trustee seeks a declaration that IFG has violated the terms of the Indenture, an injunction against the transfer of additional assets out of the ordinary course of business, damages and the imposition of a constructive trust on the assets transferred by IFG to its affiliates. In January 2004, the plaintiff’s motion to schedule a preliminary injunction hearing with respect to further transfers to affiliates and for expedited discovery was denied. In connection with the denial of the plaintiff’s motion, IFG agreed that, through the earlier of December 31, 2004 and the resolution of the lawsuit, it would provide at least thirty days’ notice before entering into any transfer of assets to affiliates, other than payment of management fees. Discovery began in January 2004 and is ongoing. On February 6, 2004, the Defendants filed a motion to dismiss. In May 2004, a hearing was held with respect to Defendants’ motion to dismiss. On May 17, 2004, IFG received a Notice of Default from the Trustee covering certain of the allegations in the complaint. The Defendants responded to the Notice of Default denying the existence of any defaults. On July 29, 2004, the Court of Chancery dismissed the action without prejudice, based on its determination that the Trustee under the Indenture lacked standing under the terms of the Indenture to bring an action against the Defendants because the requisite notice of default and opportunity to cure had not been provided to IFG prior to the time the action was commenced. The Trustee was granted 30 days to file an amended complaint and on August 27, 2004, the Trustee filed its second amended complaint. On October 8, 2004, the Trustee filed a motion for partial summary judgment seeking a declaratory judgment that IFG violated certain provisions of the Indenture by permitting its affiliate to grant security interests in various timberland properties on various dates prior to September 14, 2001. On October 15, 2004, the Defendants filed a motion to dismiss the second amended complaint. On December 23, 2004, the Court of Chancery issued a memorandum opinion granting the Trustee’s motion for partial summary judgment and declaring that an Event of Default had occurred under the Indenture. On January 13, 2005, IFG received a Notice of Default and Acceleration from the Trustee. On January 21, 2005, the Defendants filed a motion for leave to pursue an interlocutory appeal of the Chancery Court Order granting partial summary judgment. On January 26, 2005, the Court of Chancery granted Defendants’ motion for leave to appeal. On February 10, 2005, the Supreme Court of the State of Delaware accepted Defendants’ appeal. Defendants’ filed their appeal brief on March 23, 2005. The Trustee’s answering papers are due on or before April 27, 2005. While the interlocutory appeal is heard, the case in the Court of Chancery is proceeding and a trial is expected

F-42

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

to take place in June 2005. The Company and its legal counsel believe the litigation and both Notices of Default to be without merit and intend to continue to vigorously defend the litigation.

     On December 7, 2004, IFG, Finance Corp. and AFR brought an action against the Trustee based on the Trustee’s failure to remit $4.825 million of the funds paid by the Company on November 12, 2004 to the Trustee for the benefit of the holders of the Notes (see Note 7). On January 13, 2005, the Trustee filed its Answer and Counterclaim, seeking payment from IFG and Finance Corp. for its expenses in the litigation described above. The Company believes it has a meritorious claim against the Trustee and intends to pursue its action and vigorously defend against the Trustee’s counterclaim, which the Company believes to be without merit.

11. Related Party Transactions:

AFR Transactions:

     On September 14, 2001, management of AFR was taken over by American Forest Services, LLC ("AF Services"), a wholly owned subsidiary of the Manager, which is paid a flat fee for management services equal to 2% of the agreed upon total timber and timberland asset valuation annually. Management fee expense charged to operations for the years ended December 31, 2004, 2003 and 2002 amounted to $3,133, $3,033 and $2,555. Reimbursed expenses (included in selling, general and administrative expenses) totaled $292 in 2004, $192 in 2003 and $205 in 2002.

     In July 2000, AFR entered into a Road Upgrade Agreement with Cascade Resource Holdings Group, LLC, which controls the common membership interest in AFR, whereby Cascade Resource Holdings Group, LLC is responsible for paying the costs of all road construction, reconstruction, improvements, upgrades, new or repaired bridges, culverts, fords and other stream-crossing structures on the AFR Timberlands. Cascade Resource Holdings Group, LLC charges a quarterly fee to the Company for use of the roads that have been built or upgraded per the agreement. There were no road use fees for 2004, 2003, or 2002.

      See Note 4 for timber deed purchases from and sales to, and other timberlands transactions with IFG.

IFG Transactions:

     Until September 1, 2003, the Manager did not receive any management fee or other compensation in connection with its management of IFG, but was reimbursed for all direct and indirect expenses incurred on behalf of IFG (including wages and salaries of employees, officers and directors of the Manager) and all other necessary or appropriate expenses allocable to IFG or otherwise reasonably incurred by the Manager in connection with the operation of IFG's business.

     On September 1, 2003, IFG entered into a management agreement with the Manager. The new management agreement replaced the prior arrangement under which IFG reimbursed the Manager for expenses incurred on IFG's behalf. The new management agreement provides for an annual fee of 2% of the agreed upon valuation of total timber and timberland assets under management, payable monthly.

F-43

AMERICAN FOREST RESOURCES, LLC
Notes to the Financial Statements
(dollar amounts in thousands, except per unit amounts and unless otherwise noted)

       For the period September 1 through December 31, 2003, fees of $1,138 were incurred under the management agreement and for 2004 the amount incurred was $4,014.

     As of December 31, 2004 and 2003, IFG had a payable to the Manager for management fees of $284 and $46, respectively. During 2004 and 2003, expenses (included in selling, general and administrative expenses) allocated to and reimbursed by IFG totaled $290 and $2,191, respectively.

      See Note 4 for timber deed and other timberland transactions with AFS.

Consulting Agreements:

     Through June 2003, the Manager had consulting agreements with affiliates of certain persons who were directors of the Manager during the terms of such consulting agreements, pursuant to which each such person or firm had provided consulting services to the Manager. The agreements provided 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 2003 amounted to $56. Such fees were reimbursed to the Manager by IFG. The consulting agreements were discontinued in July 2003.

F-44

		2003		2002
Legal fees pursuant to settlement		—		375
Other		511		863
	$	511	$	1,238

				Weighted
				Average
	Number of			Exercise
	Shares			Price


Outstanding, December 31, 2001	687,007		$	13.78
Unit options cancelled	(4,000	)		12.69


Outstanding, December 31, 2002	683,007			13.77
Unit options cancelled	(102,000	)		13.34
Unit options effectively cancelled with the Privitization Transaction	(581,007	)		13.85


Outstanding, December 31, 2003 and 2004	-			-

	Number of Units		Weighted Average Exercise Price
Outstanding, December 31, 2000	757,627		13.75
Unit options cancelled	(70,620	)	13.22
Outstanding, December 31, 2001	687,007		13.78
Unit options cancelled	(4,000	)	12.69
Outstanding, December 31, 2002	683,007		13.77
Unit options cancelled	(102,000	)	13.34
Unit options effectively cancelled with the Privatization Transaction	(581,007	)	13.85
Outstanding, December 31, 2003	—		—

	a.	Short-term financial instruments – The fair value of short-term financial instruments, including cash and cash equivalents, trade and other receivables, notes receivable, trade accounts payable and certain accrued liabilities, approximates the carrying amounts in the financial statements due to the short maturities of such items.
	b.	Long-term debt – The estimated fair value of the Company’s long-term debt was approximately $117,000 and $139,500 at December 31, 2003 and 2002, respectively, based on published market quotations.

		Quarter Ended
		December 31			September 30			June 30			March 31			Total Year
2003
Revenues	$	10,826		$	4,746		$	14,727		$	6,831		$	37,130
Gross profit (loss)		(629	)		(553	)		(455	)		6			(1,631	)
Net (loss)		(12,826	)		(12,583	)		(12,512	)		(9,396	)		(47,317	)
2002
Revenues	$	18,536		$	13,323		$	15,460		$	2,155		$	49,474
Gross profit (loss)		(1,868	)		204			(1,731	)		52			(3,343	)
Net (loss)		(13,071	)		(9,658	)		(12,176	)		(9,163	)		(44,068	)

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
		December 31,

		2004			2003


ASSETS
Current assets:
Cash and cash equivalents (including restricted cash of $19
at December 31, 2004 and $20 at December 31, 2003)	$	342		$	1,616
Accounts receivable		579			832
Due from managing member and affiliates		54			-
Other receivables		79			427
Notes receivable		774			158
Prepaid expenses and other current assets		271			353
Restricted cash related to debt in default		15,357			-

Total current assets		17,456			3,386

Timber and timberlands, net		197,475			246,319
Equipment, net		873			849
Restricted cash		104			14,146
Deposits		-			52
Interest rate cap agreement		302			1,030
Notes receivable, less current portion		10			10
Deferred financing costs, net		708			5,339
Other assets		150			-

Total assets	$	217,078		$	271,131


LIABILITIES AND MEMBERS' DEFICIENCY
Current liabilities:
Accounts payable	$	795		$	1,988
Accrued interest		3,185		$	3,192
Other accrued liabilities		1,589		$	878
Current portion of long-term debt		-			3,370
Long-term debt - in default		124,225
Long-term debt of IFG subsidiary declared in default by Trustee
(net of unamortized discount of $27,533)		197,467
Short-term notes		-			588
Due to affiliate		7,523			20
Customer deposits		1,041			5,000

Total current liabilities		335,825			15,036

Long-term debt (net of unamortized discount of $37,045), less
current portion		-			309,338

Commitments and contingencies (Note 10)

Common members' deficiency		(118,747	)		(53,243	)


	$	217,078		$	271,131


See notes to financial statements

(IN THOUSANDS)		Redeemable			Common			Note Receivable			Total Common
		Preferred			Members'			Pacific Fiber			Members'
		Member Interest			Deficiency			Company, LP			(Deficiency)

Balance, December 31, 2001	$	32,019		$	-		$	-		$	-
Timberlands and related cutting rights contributed		18,317			-			-			-
Net loss		(11,225	)		-			-			-


Balance, December 31, 2002		39,111			-			-			-
Timberlands and related cutting rights contributed		10,467			-			-			-
Loan to finance Pacific Fiber Company, LP privatization transaction		-			-			(32,000	)		(32,000	)
Contribution by Pacific Fiber Company, LP of member interest in
IFG Holdings, LLC (owner of approximately 99% interest in Inland
Fiber Group, LLC*) after completion of privatization transaction		(49,578	)		19,898			-			19,898
Cash contribution by Pacific Fiber Company, LP to Inland Fiber Group, LLC		-			1,238			-			1,238
Loan repayment Pacific Fiber Company, LP		-			-			954			954
Net loss		-			(43,333	)		-			(43,333	)



Balance, December 31, 2003		0			(22,197	)		(31,046	)		(53,243	)
Loan repayment Pacific Fiber Company, LP		-			-			2,591			2,591
Net loss		-			(68,095	)		-			(68,095	)


Balance, December 31, 2004	$	-		$	(90,292	)	$	(28,455	)	$	(118,747	)


* Owner of the Company's redeemable preferred member interest

See notes to financial statements

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
		Twelve Months Ended December 31,

		2004			2003			2002

		Consolidated
Cash Flows from Operating Activities:
Net Loss	$	(68,095	)	$	(43,333	)	$	(11,225	)

Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation, depletion and amortization and cost of timber
property sold		52,008			46,447			11,955
Fire loss		-			-			827
(Gain) loss on disposal of assets		-			(58	)		3
Amortization of deferred financing fees and debt discount		14,178			7,764			374
Preacquisition loss of contributed interest		-			(3,984	)		-
Accretion of discount on other long-term debt		68			83			96
Fair value adjustment of interest rate cap agreement		728			112			831
Change in assets and liabilities net of effect of contribution of IFG in 2003:
Accounts receivable		253			322			1,602
Receivable from preferred member		-			-			-
Other receivables		(243	)		(135	)		33
Notes receivable		(616	)		1,267			(81	)
Prepaid expenses and other current assets		82			58			34
Accounts payable and accrued expenses		(237	)		66			(1,088	)
Advance payment from customer		(3,959	)		(4,000	)		9,000
Payable to affiliate		7,503			(241	)		-

Net cash provided by operating activities		1,670			4,368			12,362

Cash flows from investing activities:
Acquisition of timber and timberlands		(3,206	)		(2,805	)		(15,280	)
Deposit on seedlings		-			-			(52	)
Purchase of equipment		(92	)		-			-
Proceeds from sale of assets		14			26			-
Cash acquired in connection with contribution of IFG		-			1,460
Loan to U.S.Timberlands Acquisitions Co., LLC		-			(32,000	)		-
Repayment of principal of loan		2,590			954			-

Net cash used in investing activities		(694	)		(32,365	)		(15,332	)

Cash flows from financing activities:
Capital contributions		-			1,238
Proceeds from bank credit facility		-			32,600			7,900
Payments made on bank credit facility		(221	)		(3,900	)		-
Advances from affiliates		(304	)		324
Payments of other long-term debt		(375	)		(365	)		(365	)
Deferred financing fees		(35	)		(765	)		(652	)
Restricted cash, noncurrent portion		(1,315	)		(1,273	)		(5,982	)

Net cash (used in) provided by financing activities		(2,250	)		27,859			901

Net decrease in cash, cash equivalents and restricted cash		(1,274	)		(138	)		(2,069	)
Cash, cash equivalents and restricted cash, beginning of year		1,616			1,754			3,824

Cash, cash equivalents and restricted cash, end of year	$	342		$	1,616		$	1,755

Supplemental Cash Flow Information:
Cash paid during the year for interest	$	26,909		$	26,909		$	5,334

Filing Compare · INLAND FIBER GROUP LLC