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, ~~2004~~2005 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.)

6400 Highway 66, Klamath Falls, Oregon	97601
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code: 541-884-2240

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ 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~~ the 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 þ 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’ 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. þ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated and larger accelerated filer” in Rule 12b-2 of the exchange Act Large accelerated filer o Accelerated filer o Non-accelerated filer þ Indicate by check mark if the registrant is a a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ Documents incorporated by reference: None

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’ 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: 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	1516
PART II
	Item 5.	Market for Registrant’s Common Units and Related Security Holder Matters	1617
	Item 6.	Selected Financial Data	1617
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	2829
	Item 8.	Financial Statements	2829
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	2829
	Item 9A.	Controls and Procedures	29
	Item 9B.	Other Information	29
PART III
	Item 10.	Directors and Executive Officers of the Registrant	30
	Item 11.	Executive Compensation	31
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	33
	Item 13.	Certain Relationships and Related Transactions	33
	Item 14.	Principal Accounting Fees and Services	3635
PART IV
	Item 15.	Exhibits, Financial Statements, and Reports on Form 8-K	37

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

PART I

Item 1. Business.

General

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~~ the sale of logs and standing timber and the sale of timberland. The Company owns approximately ~~167~~162,000 fee acres of timberland ~~and~~ and cutting rights on approximately 6864,000 acres of timberland (collectively, the "Timberlands") containing total merchantable ~~timber~~ timber volume estimated as of January 1, ~~2005~~2006 to be approximately ~~0.4~~400 ~~billion~~million board feet ("~~BBF~~MMBF") 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 three ~~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.

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~~ ages and are unique in the forests east of the Cascade Range in Oregon in that approximately 8692,000 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 4445 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 Company does not currently own any any conversion facilities nor ~~does~~ 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 19 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 billion board feet ("BBF") and related assets from Weyerhaeuser (the "Weyerhaeuser Acquisition"). In November 1997, the affiliate’'s portion of the Klamath Falls ~~timberlands~~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")

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

(the "Ochoco Acquisition"). At the date of acquisition, over 40% of the merchantable timber on the ~~Ochoco~~ 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 for a discussion of the foregoing transfers and certain litigation initiated by the trustee under the indenture governing the Company's Notes (defined below) regarding, among other things, such transfers." There were no contributions in 2004. or 2005.

Formation of the Company

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 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, 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 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~~ 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~~ Liquidity and Capital Resources." for a discussion of certain litigation initiated by the Trustee under the Indenture governing the Notes against the Company and certain affiliated entities. On February 27, 2006, the Company announced that it had reached a tentative agreement with the trustee for the Notes to resolve the outstanding disputes among the parties. Under the terms of the tentative agreement, the Company or its nominee would purchase all of the outstanding Notes at a price of 69% of the principal amount of the Notes through a pre-negotiated plan of reorganization. The settlement would include the alleged existing defaults, the accrued and unpaid interest, the termination of all pending litigation, and a release of all the parties. Completion of the contemplated settlement is subject to a number of conditions, including the commitment to support a pre-negotiated plan of reorganization to effectuate the settlement by a sufficient number of Noteholders and holders of a sufficient face value of Notes to be acceptable to the Company, and the receipt by the Company of financing sufficient to fund the settlement. The Company has agreements in principle for the financing, which are subject to the negotiation and execution of definitive documentation and due diligence.

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 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

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

Finance Corp., a Delaware corporation, was formed on August 18, 1997, ~~converted~~ and ~~into~~is ~~the~~a ~~right~~wholly-owned tosubsidiary ~~receive~~of $3the Company.00 ~~per~~Finance ~~Common~~Corp ~~Unit,~~serves inas the ~~merger~~co-obligor ~~that~~for ~~was~~the ~~completed~~Notes. onIt ~~June~~has 26nominal assets and does not conduct any operations. Accordingly, ~~2003~~a discussion of operations, liquidity and capital resources of Finance Corp. is not presented.

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

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 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 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 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. Management fees incurred by the Company totaled $1,338 for the four months ended December 31, 2003 and $4,014 for the twelve months ended December 31, 2004. Expenses not covered under the management agreement totaling $108 for the four months ended December 31, 2004, and $290 for the twelve months ended December 31, 2004 were reimbursed to the Manager.

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 three 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 6400 Highway 66, Klamath Falls, Oregon, 97601. The telephone number at such offices is (541) 884-2240.

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

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. Management fees incurred by the Company totaled $1,338 for the four months ended December 31, 2003 and $4,014 and $2,000 for the twelve months ended December 31, 2004 and 2005 respectively. Expenses not covered under the management agreement totaling $108 for the four months ended December 31, 2003, and $290 and $230 for the twelve months ended December 31, 2004 and 2005 respectively, were reimbursed to the Manager.

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 the two 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 6400 Highway 66, Klamath Falls, Oregon, 97601. The telephone number at such offices is (541) 884-2240.

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.

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

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

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

Harvest Plans

The Company ~~deed~~strives ~~sales~~to 61manage ~~million~~all ~~board~~of ~~feet~~its ~~(MMBF)~~Timberlands, including the Plantations, in ~~2004~~an economically prudent and ~~plans~~environmentally sensitive manner in order to ~~harvest,~~maximize ortheir ~~commit~~ 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, ~~approximately~~age, 55and ~~MMBF~~class indistribution ~~2005~~of the Timberlands and the economic maturity of each harvest tract. The factors the Company ~~sold~~considers ~~210~~in ~~MMBF~~determining ~~through~~its ~~property~~long-term harvest ~~sales~~plans ininclude, ~~2004.~~among Ifother things, current and expected market conditions do, ~~not~~competition, ~~improve~~customer requirements, the age, size and species distribution of the Company's ~~will~~timber, beassumptions ~~required~~about totimber ~~harvest~~growth ~~its~~rates ~~current~~(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, ~~more~~availability ~~aggressively~~of ~~over~~contractors, sales contracts and environmental and regulatory constraints. The Company's harvest plans reflect the ~~next~~Company's expectations for each year.'s Ifharvest, ~~market~~including the sites to be harvested, the manner of ~~conditions~~ harvesting ~~improve~~such ~~future~~sites, ~~harvests~~the ~~could~~volume of each species to be harvested, the prices expected to ~~decline~~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 aupdate ~~level~~its ~~which~~harvest plans during the year to take into consideration changes in these factors. The Company ~~considers~~harvested or committed to beharvest ~~more~~from ~~sustainable~~log, ~~over~~stumpage and timber deed sales 42 million board feet (MMBF) in 2005 and plans to harvest, or commit to harvest, approximately 22 MMBF in 2006. The Company sold 0 MMBF through property sales in 2005 and 11 MMBF were sold through property sales in the ~~long~~first ~~term~~quarter of 2006.

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~~2005, the Company was in compliance with the covenants contained in the Notes relating to its harvest plans. 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~~2004. Such harvest plans, land sales and other strategic assumptions do not take into account any acquisition that the Company may consummate during such period. The foregoing timber management plans also will be materially affected by the effectuation of the settlement of the litigation and the financing associated therewith.

The Timberlands are accessible by a system of approximately 4,200 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 arrangements regarding jointly used roads.

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

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

~~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, whereAccess 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.

The ~~Company~~Timberlands ~~currently~~are ~~sells~~accessible by ~~its~~a ~~sawlogs~~system orof ~~stumpage~~approximately ~~principally~~1,480 tomiles ~~unaffiliated~~of ~~wood~~established ~~products~~roadways ~~manufacturers~~or ~~and~~low ~~sells~~maintenance ~~its~~roads ~~chips~~owned toby ~~unaffiliated~~the ~~pulp~~Company ~~mills~~ or ~~hardboard~~its ~~plants~~affiliates. The ~~percentage~~Company ofuses ~~logs which~~third ~~are~~party ~~sold~~road ascrews ~~sawlogs/stumpage~~to orconduct ~~pulp~~construction ~~logs is dependent upon, among other things, the species mix~~ and ~~quality~~maintenance ~~of the inventory harvested and the market dynamics affecting the region. Most of the timber~~ on the Timberlands. isThe ~~softwood,~~Company ~~which,~~regularly ~~due~~enters to into ~~its~~reciprocal ~~long~~road ~~fiber, strength, flexibility and other characteristics, is generally preferred over hardwood for construction lumber and plywood. Once processed, sawlogs are suitable for~~ use asagreements ~~structural~~with ~~grade~~the ~~lumber,~~United ~~appearance~~States ~~grade~~Department ~~boards,~~of ~~plywood and~~Agriculture ~~laminated~~- ~~veneer~~Forest ~~and~~Service ~~can~~("USFS") ~~also be manufactured for such end uses as window trim, molding~~ and ~~door jambs. During 2004, sawlogs, stumpage sales and timber deed sales accounted for approximately 24%, 0%, and 7%, respectively, of~~ the ~~Company's~~United ~~revenue.~~ States ~~Chips,~~Department ~~which~~of ~~can~~Interior beBureau ~~used~~of toLand ~~make~~Management ~~hardboard~~("BLM") ~~or pulp,~~ and ~~seedlings~~cooperates ~~combined~~with ~~accounted~~such ~~for~~agencies ~~5% of the Company's revenues~~ in ~~2004.~~numerous ~~There~~cost ~~were~~sharing ~~property~~arrangements regarding ~~sales~~jointly inused ~~2004 of $28~~roads.~~1 million, compared to 2003 property sales of $10.1 million.~~

Sales and Markets

The Company's ~~customers~~sells ~~include~~its ~~numerous~~timber ~~unaffiliated~~through ~~operators~~log ofsales, stumpage ~~conversion~~sales ~~facilities~~and deed sales. ~~Since~~Under ~~its~~a ~~acquisition~~log ofsale, the ~~Klamath~~Company ~~Falls~~identifies ~~Timberlands~~a inblock ~~August~~of ~~1996,~~timberland ~~the~~that ~~Company~~is ~~has~~ready ~~sold~~to ~~logs~~be harvested and ~~chips~~solicits offers from ~~such~~potential ~~timberlands~~customers tofor ~~over~~delivery ~~25 different~~of ~~customers~~logs. InAfter ~~2004,~~a ~~sales~~price toand ~~Boise~~volume ~~Cascade,~~have BCbeen ~~Timber~~agreed ~~Properties,~~among ~~Murphy~~the ~~Veneer~~parties, the ~~and~~Company ~~Columbia~~contracts ~~Plywood~~a ~~accounted~~third ~~for~~party ~~approximately~~to ~~71%~~harvest ofthe acreage and deliver to a roadside site on the ~~Company's~~Timberlands, ~~revenue~~where ~~from~~a ~~log~~contracted trucking company picks up the logs and ~~timber~~delivers ~~deed~~them ~~sales~~to the customer. NoA ~~other~~stumpage ~~single~~sale ~~non-affiliated~~is ~~customer accounted~~similar ~~for~~to ~~more~~a ~~than~~log 8%sale ofin that the Company's solicits ~~net~~offers ~~revenues~~from its customers for ~~2004.~~timber ~~Although~~on ~~the~~a ~~loss~~block of ~~one~~timberland orthat ~~more~~is ofready ~~such~~to ~~customers~~be orharvested. ~~other~~However, ~~significant~~under ~~customers~~a ~~could~~stumpage contract, ~~have~~the aCompany ~~material~~sells ~~adverse~~the ~~effect~~customer on the ~~Company's~~right ~~results~~to ofharvest ~~operations~~the timber, or stumpage, and the ~~Company~~customer ~~believes~~arranges to harvest ~~that~~ and deliver the ~~capacity~~logs. ~~for~~Under ~~processing~~a ~~wood~~stumpage ~~fiber~~contract, inrevenue ~~the~~recognition ~~Company's~~occurs ~~markets~~as ~~currently~~the timber is inharvested ~~balance~~by ~~with~~the customer, as the Company ~~supply~~retains ~~and~~the ~~that,~~risk ~~therefore,~~of ~~such~~loss ~~customers~~until ~~could~~the betimber ~~replaced~~is ~~with~~harvested. ~~some~~A ~~additional~~timber ~~freight~~deed ~~costs.~~sale ~~There~~is ~~are~~similar ~~currently~~to ~~more~~a ~~than~~stumpage 19sale, ~~primary~~except revenue ~~conversion~~ recognition ~~facilities~~occurs ~~located~~when ~~within~~the acontract ~~150-mile~~is ~~radius~~executed, ofas the Company's ~~Timberlands~~passes the risk of loss to the customer when the contract is executed.

The Company currently sells its sawlogs or stumpage principally ~~Log~~to unaffiliated wood products manufacturers and ~~stumpage~~sells ~~sales~~its ~~volumes~~chips to unaffiliated pulp mills or hardboard plants. The percentage of logs which are ~~generally~~sold atas ~~their~~sawlogs/stumpage ~~lowest~~or ~~levels~~pulp inlogs is dependent upon, among other things, the ~~first~~species mix and ~~second~~quality ~~quarters~~ of ~~each~~the ~~year~~inventory harvested and the market dynamics affecting the region. ~~Heavy~~Most ~~snowfalls~~of inthe ~~higher~~timber ~~elevations~~on ~~prevent~~the ~~access~~Timberlands is softwood, which, due to ~~many~~its ~~areas~~long offiber, ~~the~~strength, ~~Company's~~flexibility ~~timberlands~~and inother ~~the~~characteristics, ~~first~~is generally preferred over hardwood ~~quarter~~ for construction lumber and plywood. ~~This~~Once ~~limited~~processed, ~~access~~sawlogs are suitable for use as structural grade lumber, ~~along~~appearance ~~with~~grade boards, ~~spring~~plywood ~~break-up~~and ~~conditions~~laminated inveneer ~~March~~and orcan ~~April~~also ~~(when~~be ~~warming~~manufactured ~~weather~~for ~~thaws~~such end uses as window trim, molding and ~~softens~~door ~~roadbeds)~~jambs. During 2005, ~~restricts~~sawlogs, ~~logging~~stumpage ~~operations~~sales toand ~~lower~~timber ~~elevations~~deed sales accounted for approximately 92%, 0%, and ~~areas~~5%, ~~with~~respectively, ~~rockier~~of ~~soil~~the Company's ~~types~~revenue. ~~The~~Chips, ~~result~~which can be used to make hardboard or pulp, and seedlings combined accounted for 3% of the Company's ~~these~~ revenues in 2005. There were property sales in 2005 of $0.0 million, compared to 2004 property sales of $28.1 million.

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 2005, sales to Boise Cascade, Columbia Plywood, Murphy Veneer, Freemont Sawmill, and Timber Products accounted for approximately 86% 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

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

for ~~constraints~~2005. isAlthough ~~that~~the ~~log~~loss ~~sales~~of ~~volumes~~one ~~are~~or ~~typically~~more atof ~~their~~such ~~lowest~~customers inor ~~the~~other ~~first~~significant customers could have a material ~~quarter,~~ adverse ~~improving~~effect inon the ~~second~~Company's ~~quarter~~results ~~and~~of atoperations, ~~their~~the ~~high~~Company ~~during~~believes that the ~~third~~capacity ~~and~~for ~~fourth~~processing ~~quarters.~~wood ~~Most~~fiber ~~customers~~ in the Company's ~~region~~markets ~~react to~~currently ~~this~~is ~~seasonality~~in bybalance ~~carrying~~with ~~high~~the ~~log~~supply ~~inventories~~and atthat, ~~the~~therefore, ~~end~~such ofcustomers ~~the~~could ~~calendar~~be ~~year~~replaced atwith asome ~~level~~additional freight ~~that~~costs. ~~provides~~There ~~sufficient~~are ~~inventory to~~currently ~~carry~~more ~~them~~than to19 ~~the~~primary ~~second~~conversion ~~quarter~~facilities located within a 150-mile radius of the ~~following year~~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.

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 slower, but increasing during the spring, summer and fall quarters. Log and stumpage prices generally increase in the spring with this build up of construction activity matching the timing of re-entry to all forested areas and increased logging activity.

Competition

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

The Company competes with numerous private land and timber owners in the northwestern United States and the state agencies of Oregon, as well as of foreign imports, primarily from Canada, Chile, and New Zealand. Until recently, the strength of the U.S. dollar against Pacific Rim and South American currencies made international competition a large factor in competitive pricing. Recent weakness of the U.S. dollar may reopen some export markets and reduce the level of log imports, although it is premature to determine whether this will in fact occur. In addition, the Company competes with the USFS, the BLM and the Bureau of Indian Affairs. Certain of the Company's competitors have significantly greater financial resources than the Company.

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

~~being~~primarily ~~committed~~from toCanada, ~~supply~~Chile, ~~its~~and ~~own~~New ~~facilities~~Zealand. Until recently, ~~and~~the ~~ensures~~strength ~~that~~of the ~~Company~~U.S. ~~will~~dollar ~~not~~against ~~compete~~Pacific ~~with~~Rim ~~its~~and South American currencies made international competition a ~~customers;~~ large factor in competitive pricing. Recent weakness of the U.S. dollar may reopen some export markets and ~~(iii)~~reduce the ~~Company's~~level of ~~access~~log imports, although it is premature to ~~the~~determine ~~Manager’s~~whether ~~computerized~~this ~~geographic~~will ~~information~~in ~~system~~fact ~~("GIS")~~occur. ~~enables~~In addition, the Company to ~~evaluate~~competes with the ~~optimal~~USFS, ~~timing~~the BLM and ~~patterns~~the Bureau of ~~harvest~~Indian ofAffairs. ~~its~~Certain ~~Timberlands~~of ~~and~~the ~~evaluate~~Company's ~~and~~competitors ~~integrate~~have ~~acquisitions~~significantly ofgreater ~~additional~~financial ~~timberlands~~ resources than the Company.

The 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 400 MMBF of merchantable, good quality timber, approximately 92,000 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 being committed to supply its own facilities, and ensures that the Company will not compete with its customers; and (iii) the Company's access to the Manager's computerized geographic information system ("GIS") enables the Company to evaluate the optimal timing and patterns of harvest of its Timberlands and evaluate and integrate acquisitions of additional timberlands.

Resource Management
Timber Resource Management

All of the silvicultural activities on the Timberlands and the harvesting and delivery of logs are conducted by independent contractors. The Company's operations involve intensive timber management and harvesting operations, which include road construction and reforestation, as well as wildlife and watershed management, all of which are carefully monitored using the 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

INLAND FIBER GROUP, LLC AND SUBSIDIARY
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of Particular aforestry ~~given~~practices ~~harvest~~vary ~~site,~~by ~~harvested~~geographic ~~areas~~region ~~may~~and bedepend upon ~~regenerated~~factors ~~naturally,~~such byas ~~leaving~~soil ~~mature~~productivity, ~~trees~~weather, toterrain, ~~reseed~~tree ~~the area~~size, orage ~~replanted~~and ~~with seedlings~~stocking. ~~Natural~~The ~~regeneration~~climate, ~~methods~~site ~~are~~and ~~widely~~soil ~~used~~ conditions on ~~approximately 70% of~~ the ~~Company's harvested~~east ~~land.~~side ~~Approximately 52%~~ of the ~~Timberlands~~Cascade ~~acreage~~Range, ~~currently~~for ~~consists~~example, ofpermit ~~Plantations.~~management ~~The~~to ~~Company~~harvest ~~expects~~on toan ~~convert~~optimal anrotation, ~~average~~or ofharvest 9cycle,~~000~~ ~~acres~~ of 50 ~~natural~~to ~~stands~~60 ~~per year over the next three~~ years ~~to Plantations~~. ~~The~~Forest ~~seed~~stands ~~orchard~~are ~~produces seed~~thinned ~~from~~periodically ~~trees~~to ~~selected~~improve ~~because~~growth ~~they~~and ~~were~~stand ~~the~~quality ~~best~~until ~~genotype in their respective environments~~harvested. ~~During~~The ~~2004, the~~ Company ~~planted~~actively utilizes ~~approximately~~commercial ~~3.0~~thinning ~~million~~as ~~seedlings~~a ~~and~~timber ~~expects~~management ~~to plant 1~~practice.9 ~~million~~Pre-commercial ~~seedlings in 2005~~thinning, ~~plus~~which ~~another~~occurs ~~0.9~~only ~~million seedlings~~in onthe ~~affiliate~~Plantation ~~lands.~~stands, is ~~The~~utilized ~~Company~~when ~~uses~~ the ~~seed~~timber ~~collected~~harvested ~~from~~is ~~its~~not ~~orchard~~merchantable. ~~(representing~~The ~~approximately~~Company ~~90%~~believes ofthat ~~seedlings planted) to grow trees with desirable traits~~ such asthinning ~~superior~~improves ~~growth~~the ~~characteristics,~~overall ~~good form and disease resistance,~~productivity ~~resulting~~ of inthe ~~greater~~Timberlands ~~wood~~by ~~volume~~enhancing ~~over~~the agrowth ~~rotation~~of ~~than~~the ~~that~~remaining ~~generated by naturally regenerated seedlings~~trees. ~~The~~Occasionally, ~~seedlings~~revenues are ~~grown~~generated ~~in the Company's nursery, which uses seeds~~ from ~~the~~pre-merchantable thinning ~~Company's~~due ~~seed~~to ~~orchard,~~strong ~~which~~markets ~~was~~for ~~established~~wood ~~by Weyerhaeuser in 1973~~chips.

The ~~GIS~~Company's policy is ato ~~computer~~ensure ~~software program~~ that ~~was~~every ~~acquired~~acre ~~from~~harvested ~~Weyerhaeuser~~is asreforested in ~~part~~order ofto enhance the ~~Weyerhaeuser~~long-term ~~Acquisition.~~value ~~The~~of ~~GIS~~its ~~data,~~timberlands. ~~which~~Based ~~has~~on ~~been~~the ~~compiled~~geographic ~~over~~and aclimatic ~~period~~conditions of ata ~~least~~given ~~five years~~harvest site, ~~includes detailed~~harvested ~~topographical~~areas ~~field~~may ~~maps~~be ~~for~~regenerated ~~every~~naturally, ~~stand~~by ~~within~~leaving ~~the~~mature ~~Timberlands,~~trees ~~setting~~to ~~forth~~reseed the ~~characteristics~~area, ~~including~~or ~~age,~~replanted ~~species,~~with ~~size~~seedlings. Natural ~~and~~regeneration ~~other~~methods ~~characteristics~~are ~~for~~widely ~~the~~used ~~timber growing~~ on ~~each~~approximately ~~stand.~~70% ~~Using~~of the ~~data in the GIS, the~~ Company's ~~can~~harvested ~~use a~~land. ~~computer~~Approximately ~~model~~57% toof ~~"grow"~~ the Timberlands ~~timber~~acreage ~~over~~currently ~~time,~~consists ~~enabling~~of itPlantations. toThe ~~generate~~Company ~~long-term~~expects ~~harvest plans and~~ to ~~update~~convert ~~its~~an ~~inventory~~average ~~annually.~~of To4,000 ~~maintain~~acres ~~the integrity~~ of ~~the~~natural ~~data~~stands per inyear ~~the~~over ~~GIS,~~ the ~~Company~~next ~~performs~~three ayears ~~detailed~~to ~~ground~~Plantations. ~~survey~~The ofseed ~~the~~orchard ~~remaining timber~~produces ~~inventory~~seed onfrom atrees ~~tract~~selected ~~after~~because ~~each~~they ~~harvest~~were ~~and updates~~ the best ~~data~~genotype in ~~the~~their ~~GIS~~respective ~~for that tract~~environments. ~~With~~During ~~the aid of the GIS~~2005, the Company isplanted ~~able~~approximately to2.2 ~~actively~~million ~~manage~~seedlings ~~the~~and ~~Timberlands,~~expects to ~~track~~plant ~~its~~1.0 ~~inventory~~million ~~and~~seedlings ~~develop~~in ~~site-specific~~2006, ~~harvest~~plus ~~plans~~another on0.5 ~~multiple scales,~~million ~~adding~~seedlings ~~additional~~on ~~layers~~affiliate oflands. ~~detail,~~The ~~such~~Company asuses the ~~location~~seed ofcollected from ~~roadways~~its ororchard ~~wildlife~~(representing ~~nesting~~approximately ~~areas,~~98% asof ~~required.~~seedlings ~~The~~planted) ~~GIS also permits the Company~~ to ~~analyze~~grow ~~the~~trees ~~impact~~with ~~that~~desirable ~~new~~traits ~~legislation~~such ~~may~~as ~~have~~superior growth oncharacteristics, ~~its~~good ~~Timberlands~~form byand ~~inputting~~disease ~~the~~resistance, ~~proposed constraints~~resulting ~~imposed~~in bygreater ~~such~~wood ~~legislation~~volume inover ~~light~~a ofrotation ~~the~~than ~~particular~~that ~~field~~generated by ~~characteristics~~naturally ofregenerated ~~its Timberlands~~seedlings. The ~~Company~~seedlings ~~believes~~are grown in the ~~GIS~~Company's ~~may~~nursery, bewhich ~~used~~uses toseeds from the Company's ~~advantage~~seed orchard, towhich ~~evaluate~~was ~~potential~~established ~~acquisition~~by ~~opportunities.~~Weyerhaeuser in 1973.

~~The~~Geographic ~~Federal~~Information ~~Endangered~~System ~~Species Act and counterpart state legislation protect species threatened with possible extinction. Protection of endangered species may include restrictions on timber~~("GIS") 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

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 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

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

~~harvesting~~legislation may have on ~~approximately~~its ~~27,000~~Timberlands ~~acres~~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 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, which may affect harvesting on approximately 22,000 acres.

The United States Fish and Wildlife Service (the "USFWS") listed the American bald eagle in 1976, the northern spotted owl in 1990, and the bull trout in 1993 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 ~~2004~~2005 survey year, there were approximately 26 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.

In addition, the Company conducts surveys to determine the presence of northern spotted owls. The surveys have been conducted every year in order to (i) meet the regulatory requirements for timber harvest and other management activities, (ii) monitor existing sites and determine the current status of such sites, (iii) determine if areas identified as containing suitable habitat are supporting owls and (iv) investigate other spotted owl or or other species sightings. The most recent of such surveys was completed in August ~~2004~~2005, and identified approximately 2522 northern spotted owl sites affecting the Timberlands, two of which are located, totally, on the Timberlands.

The Company believes that it is managing its harvesting operations in the areas affected by protected species in substantial compliance with applicable federal and state regulations. Based on certain consultants' reports, and on management's knowledge of the Timberlands, the Company does not believe that there are any species protected under the Endangered Species Act or similar state laws that, under current regulations and Court interpretation, would 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.

The operation of the Timberlands is subject to specialized statutes and regulations in the State of Oregon, which has enacted laws which regulate forestry operations, including the Forest Practices Act, which addresses many growing, harvesting and processing activities on forest lands. Among other requirements, these laws restrict the size and spacing of regeneration harvest units, and impose certain reforestation obligations on the owners of forest lands. The State of Oregon requires a company to provide prior notification before beginning harvesting activity. The Forest Practices Act and other state laws and regulations control timber slash burning, operations during fire hazard periods, logging activities which may affect water courses or in

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

~~proximity~~ material adverse effect on the Company's ability to ~~certain~~harvest ~~ocean~~the ~~and~~Timberlands ~~inland~~in accordance ~~shore~~with ~~lines~~current harvest plans. There can be no assurance, ~~water~~however, ~~protection~~that ~~and~~species ~~enhancement~~within ~~and~~the ~~certain~~Timberlands ~~grading~~may ~~and~~not ~~road~~subsequently receive ~~construction~~protected ~~activities.~~status ~~The~~under ~~Company~~the ~~believes~~Endangered itSpecies isAct or that currently protected species may not be discovered in ~~substantial~~significant numbers ~~compliance~~within ~~with~~the ~~these~~Timberlands. ~~regulations~~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

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.

Environmental laws and regulations have changed substantially and rapidly over the last 20 years, and the Company anticipates there will be continuing changes. The trend in environmental regulations is to place more restrictions and limitations on activities that may affect the environment, such as emissions of pollutants and the generation and disposal of wastes.

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

Access to Timberlands May be Limited by Federal Regulation

A substantial portion of the Timberlands consists ~~Access~~ 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 ~~May~~requires betransportation ~~Limited~~of the logs by ~~Federal~~truck ~~Regulation~~across

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 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

INLAND FIBER GROUP, LLC AND SUBSIDIARY
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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 that require compliance with state and federal environmental laws and regulations. To the extent that the Company acquires new Timberlands that require access through federal lands, the Company may enter into new RROW agreements with the BLM or other federal agencies which would require consultation with the USFWS. In addition, the BLM has published advance notice of its intent to revise regulations governing RROW agreements entered into the future to, among other things, expand the BLM's consideration of environmental and cultural factors in granting, issuing or renewing rights-of-way, provide the BLM with regulatory authority to object to the location of roads because of potential effects on threatened or endangered species and allow for the abandonment of rights-of-way under certain circumstances.

Safety and Health

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

Employees

As of March 1531, ~~2005~~2006, 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 FIBER GROUP, LLC AND SUBSIDIARY
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Item 2. Properties

Timber Inventory

The Company currently owns and manages approximately ~~167~~ 162,000 fee acres of timberland and cutting rights on approximately 6864,000 acres of timberland containing total merchantable timber volume estimated as of January 1, ~~2005~~2006 to be approximately ~~0.4~~400 ~~BBF~~MMBF 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 Timberlands have stands of varying sizes and ages and are unique in the forests east of the Cascade Range in Oregon in that approximately 8692,000 acres of the ~~167~~162,000 acre total consist of actively managed Pine Plantations with stands ranging in age from one to 4445 years. The Plantations are stocked with high quality Ponderosa Pine (approximately 90%) and Lodgepole Pine (approximately 10%). Initial thinning of the Plantation stands, including the thinning of commercial quantities of merchantable timber, is expected to begin within the next 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, ~~2005~~ 2006, the total timber inventory amounted to 0 400 MMBF.~~4 BBF.~~ The Company's combined timber inventory by MMBF and percentage is Ponderosa Pine (~~204~~ 190 (46%)), Lodgepole Pine (46 42 (10%)), White Fir (85 83 (19%)), Douglas Fir (82 72 (19%)) and other species (25 23 (6%)). Other species include Cedar, Sugar Pine, Western Larch and Grand Fir.

Size and Species Distribution of Merchantable Timber

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, ~~2005~~2006, approximately ~~114~~ 103 MMBF, or 2625%, 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, 2005, the Plantations totaled 86,000 acres. Of the total

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(dollar amounts in thousands unless otherwise noted)

~~acreage,~~ ~~56,000~~Acreage ~~acres~~Distribution ~~range~~by ~~from~~Age 1Class toon 15Plantations ~~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.~~

On The ~~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.,~~also ~~the~~maintains ~~Manager,~~data ~~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~~acreage ~~the~~ distribution ~~Company and that the transfers~~ of ~~the~~timber 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~~Plantations ~~transferred~~ by ~~the~~age ~~Company to its affiliates~~class. In ~~January~~As ~~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~~January ~~plaintiff’s motion~~1, ~~the Company agreed that~~2006, ~~through~~ the ~~earlier~~Plantations oftotaled ~~December 31~~92,000 ~~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~~acres. ~~Discovery~~Of ~~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~~ total ~~to dismiss. On May 17~~acreage, ~~2004~~61,000 ~~the~~acres ~~Company~~range ~~received a Notice of Default~~ from ~~the~~1 ~~Trustee covering certain of the allegations in the complaint. The Defendants responded~~ to ~~the~~15 ~~Notice~~years of ~~Default denying the existence of any defaults. On July 29~~age, ~~2004~~12,000 ~~the Court~~acres ofrange ~~Chancery~~from ~~dismissed~~16 ~~the action without prejudice, based on its determination that the Trustee under the Indenture lacked standing under the terms of the Indenture~~ to ~~bring~~25 anyears ~~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~~age, 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~~19,000 ~~2005, the Company received a Notice of Default and Acceleration~~acres ~~from~~ are ~~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,~~years ~~the Court~~ of ~~Chancery~~age 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~~older. ~~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~~

Item 3. Legal Proceedings

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 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. In May 2004, a hearing was held with respect to Defendants' motion to dismiss. On May 17, 2004, the Company 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 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

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

Court of the State of Delaware accepted Defendants' appeal. On April 4, 2005, the Trustee filed its third amended complaint. On April 22, 2005, the Defendants filed a motion to dismiss certain counts of the third amended complaint. On June 6, 2005, the Supreme Court of the State of Delaware decided the Defendants' interlocutory appeal and issued an order vacating the decision of the Court of Chancery granting partial summary judgment to the Trustee and remanding the case to the Court of Chancery for a trial on all of the issues. On July 7, 2005, the Court of Chancery granted in part and denied in part the Defendants' motion to dismiss certain counts of the third amended complaint. On July 28, 2005, the Trustee issued an Affirmation of the Notice of Default referencing among other things the failure to make the semi-annual interest payment on May 15, 2005. The trial was completed in August 2005 and in October 2005, the Trustee filed its post-trial brief. The Defendants filed their reply brief in November 2005. On February 27, 2006 the Company announced that it reached a tentative agreement with the Trustee for the Notes to resolve the outstanding disputes among the parties. Under the terms of the tentative agreement, the Company or its nominee would purchase all of the outstanding Notes at a price of 69% of the principal amount of the Notes through a pre-negotiated plan of reorganization. The settlement would include the alleged existing defaults, the accrued and unpaid interest, the termination of all pending litigation, and a release of all the parties. Completion of the contemplated settlement is subject to a number of conditions, including the commitment to support a pre-negotiated plan of reorganization to effectuate the settlement by a sufficient number of Noteholders and holders of a sufficient face value of Notes to be acceptable to the Company, and the receipt by the Company of financing sufficient to fund the settlement. The Company has agreements in principle for the financing, which are subject to the negotiation and execution of definitive documentation and due diligence. Due to the pending settlement the post-trial hearing has been adjourned. The Company and its legal counsel believe the litigation and both the Notices of Default to be without merit, and ~~intend~~to the extent the proposed settlement is not completed and the litigation were to resume, the Company would continue to vigorously defend the litigation.

On In ~~December~~connection 7with earlier settlement discussions, in ~~2004~~June 2005, the Company, ~~Finance~~entered ~~Corp.~~into ~~and~~confidentiality ~~AFR~~agreements ~~brought~~with, anand ~~action~~provided ~~against~~certain ~~the~~confidential, ~~Trustee~~non-public ~~based~~information to, on the ~~Trustee’s~~members ~~failure~~of toan ~~remit~~ad ~~$4.8~~hoc ~~million~~committee of holders of the ~~funds~~Notes, ~~paid~~comprised byof ~~the~~GoldenTree ~~Company~~Asset onManagement ~~November~~LP, OppenheimerFunds, 12 Inc., ~~2004~~QVT toFinancial, ~~the~~LP, ~~Trustee~~and ~~for~~Turnberry ~~the~~Capital ~~benefit~~Management, ofL.P. ~~the~~The ~~holders~~confidentiality ofagreements ~~the~~provided ~~Notes.~~for ~~Subsequently,~~ the ~~Trustee~~disclosure ~~reduced~~by the ~~its~~Company ~~holdback~~ to ~~$2.8~~the ~~million.~~public Onof ~~January~~all ~~13,~~material ~~2005,~~non-public ~~the~~information ~~Trustee~~that ~~filed~~had ~~its~~been ~~Answer~~provided ~~and~~to ~~Counterclaim,~~the ~~seeking~~members ~~payment~~ of anthe ~~undetermined~~committee ~~amount~~upon ~~from~~ the ~~Company~~termination ~~and~~of ~~Finance~~such ~~Corp~~agreements. ~~for~~The ~~its~~confidentiality ~~expenses~~agreements terminated in July 2005. As the ~~litigation~~Company ~~described~~and ~~above.~~the ~~The~~members ~~Company~~of the ~~believes~~ad ithoc ~~has~~committee awere ~~meritorious~~unable ~~claim~~to ~~against~~reach agreement regarding the ~~Trustee~~information ~~and~~that ~~intends~~was required to ~~pursue~~be ~~its~~disclosed, ~~action~~the ~~and~~members of ~~vigorously~~the ~~defend~~ad ~~against~~hoc ~~the~~committee ~~Trustee’s counterclaim,~~publicly ~~which~~disclosed all of the ~~Company~~information ~~believes~~provided to ~~be without merit~~them.

On ~~Item~~December 7, 2004, the Company, Finance Corp. and AFR brought an action against the Trustee based on the Trustee's failure to remit $4.8 ~~Submission~~million of ~~Matters~~the funds paid by the Company on November 12, 2004 to athe ~~Vote~~Trustee for the benefit of ~~Security~~the ~~Holders~~holders of the Notes. On January 13, 2005, the Trustee assereted a counterclaim alleging that IFG, Finance Corp., and AFR are liable for the attorneys' fees that the Trustee is and will incur the Interest Withholding Action and the action filed by the Trustee described above. No proceedings have occurred in the Interest Withholding Action.

There were no matters submitted to a vote of the Company's Noteholders during the fourth quarter of 2004.

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

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 2005.

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

PART II

Item 5. Market for Registrant's Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities

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

Due to restrictions under the Indenture governing the Company’s Notes, the Company may not pay distributions to the holders of its equity at this time.

Item 6. Selected Financial Data

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
	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

(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.”

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

Reconciliation of modified EBITDDA (in millions)
		Inland FiberGroup, LLC
	2004		2003		2002		2001		2000
		2005			2004			2003		2002		2001
Operating income (loss)	(46.1	)	(25.1	)	(21.9	)	(13.8	)	17.9
CASH FLOWS AND OTHER DATA
Plus: Depreciation, depletion,
(IN MILLIONS):
and road amortization	8.7		15.6		27.5		37.3		28.8
Modified EBITDDA (1)		(6.9	)		1.3			0.5		12.9		23.5
Plus: Cost of timber and
Additions to timber and timberlands		2.7			2.5			2.0		3.1		5.6
property sales	39.0		10.0		7.3		0.0		2.6
Cash flow from operating activities		2.9			1.1			1.3		3.2		9.2
Modified EBITDDA	1.6		0.5		12.9		23.5		49.3
Cash flow (used in) investing
activities		(2.7	)		(2.4	)		(2.0	)	(3.3	)	(4.7	)
Cash flow from (used in) financing
activities		0.0			0.0			1.2		--		(6.6	)
OPERATING STATEMENT DATA
(IN MILLIONS EXCEPT PER
UNIT AMOUNTS):
Revenues (2)		13.3			44.3			37.1		49.5		54.6
Depreciation, depletion and road
amortization		5.8			8.7			15.6		27.5		37.3
Fire loss…………………………………		0.0			0.0			0.0		0.6		-
Cost of timber and property sales		0.0			38.7			10.0		7.3		-
Operating income (loss)		(12.8	)		(46.1	)		(25.1	)	(21.9	)	(13.8	)
Net income (loss) ……………………		(35.1	)		(68.1	)		(47.3	)	(44.1	)	(36.2	)
BALANCE SHEET DATA (AT
PERIOD END, IN MILLIONS):
Working capital (deficiency)		(251.9	)		(228.8	)		(6.5	)	(1.6	)	(1.7	)
Total assets		84.8			96.5			168.7		211.0		255.2
Long-term debt (3)		0.0			0.0			225.0		225.0		225.0
Equity (deficiency)		(168.7	)		(133.6	)		(65.5	)	(19.4	)	25.5
OPERATING DATA (UNAUDITED):
Log and timber deed sales
volumes (MMBF) (2)		42.0			61.0			110.8		204.8		250.7
Property sales volumes (MMBF) (2)		0.0			210.3			53.3		3.5		--

(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.

(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.”

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

Reconciliation of modified EBITDDA (in millions)
	2005		2004		2003		2002		2001
Operating income (loss)	(12.8	)	(46.1	)	(25.1	)	(21.9	)	(13.8	)

Plus: Depreciation, depletion,
and road amortization	5.8		8.7		15.6		27.5		37.3
Plus: Cost of timber and
property sales	0.1		38.7		10.0		7.3		0.0
Modified EBITDDA	(6.9	)	1.3		0.5		12.9		23.5

(2)	Revenues in 2005 consisted of $12.8 million of log and deed sales, $0.0 of timber and property sales and $0.5 million of by-products and other sales. Revenues in 2004 consisted 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 consisted 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 consisted 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 consisted 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.

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

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

Forward-Looking Statements

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

18 19

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

General

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

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

Supply and Demand Factors

Supply The supply of logs available for purchase has been most affected in recent years by significant reductions in timber harvested from public timberlands, principally as a result of efforts to preserve the habitat of certain endangered species, as well as a change in the emphasis of government policy toward habitat preservation, conservation and recreation and away from timber management. Since the early 1970s, environmental and other similar concerns ~~and~~ 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. Until recently, the strength of the U.S. dollar has decreased exports and increased imports, 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~~ positively impacted stumpage and log prices in ~~2004~~2005.

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 the supply of domestically 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.

19 20

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

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. 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~~ increased the competitiveness of imported logs in our domestic markets. United States housing starts for ~~2004~~2005 were ~~down~~up ~~slightly~~ from ~~2003~~2004 levels, and log prices have ~~declined~~increased slightly in ~~2004~~2005 over ~~2003~~2004. 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.

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 during the 1990’'s ~~and~~ and early 2000’'s, 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.

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.

Application of Critical Accounting Policies

The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Certain accounting policies have a significant impact on amounts reported in the financial statements. A summary of those significant accounting policies can be found in Note 1 to the Company's financial statements included herein.

The Company has not adopted any new accounting policies during the 20 year ended December 31, 2005 that significantly impact its financial statements.

Among the significant judgments made by management in the preparation ~~INLAND~~of ~~FIBER~~the ~~GROUP~~Company's financial statements are the determination of the allowance for doubtful accounts, ~~LLC~~timber ~~AND~~volumes ~~SUBSIDIARY~~and ~~(dollar~~growth ~~amounts~~rates, inand the ~~thousands~~rates ~~unless~~of ~~otherwise~~depletion ~~noted)~~applicable to the Company's

The Company has not adopted any new accounting policies during the year ended December 31, 2004 that significantly impact its financial statements.

Among the significant judgments made by management in the 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 ordinary course of accounting.

Log prices in the first quarter of 2004 were down 2% from the fourth quarter of 2003. Log prices began moving upward in the first quarter of 2004. They continued to rise in the second and third quarter of 2004. The fourth quarter of 2004 saw log prices move downward slightly.

The following table sets forth sales volume for each of 2004, 2003, and 2002 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:

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

	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		--

merchantable timber. These determinations are made periodically in the ordinary course of accounting.

Current Market Conditions

~~Year~~ in ~~Ended~~the ~~December~~first ~~31,~~quarter of 2005 were up from the fourth quarter of 2004. Log ~~Compared~~prices tobegan ~~Year~~moving ~~Ended~~upward ~~December~~in 31the first quarter of 2005. Log prices leveled off in the second and third quarters of 2005. The fourth quarter of 2005 saw log prices start to increase again, ~~2003~~as many customers were low on inventories.

Results of Operations

~~Revenues.~~ The ~~Revenues~~following ~~increased~~table ~~$7.2~~sets ~~million,~~forth ~~or 19%, from $37.1 million in 2003 to $44.3 million in 2004. Log~~ sales ~~decreased~~volume byfor ~~$7.3~~each ~~million and deed sales decreased by $3.9 million. These decreases were offset by property sales in 2004~~ of ~~$28.1 million~~2005, ~~compared to $10.1 million in 2003. Chip~~ 2004, and ~~by-product revenues were also higher by $0.4 million in 2004 compared to~~ 2003. ~~To meet~~from ~~its~~the ~~working~~sale ~~capital~~of ~~requirements~~logs, ~~the~~stumpage ~~Company harvested~~ and ~~sold logs and~~ timber deeds inby ~~2004~~thousand atboard ~~rates~~feet in("MBF") ~~excess~~and ofprice ~~the~~per ~~estimated~~thousand ~~current annual~~ board ~~footage~~feet ~~growth~~and the onsales ~~the~~of ~~Timberlands.~~property:

Log sales for 2004 were $10.7 million on volumes of 32,484 MBF, compared to log sales of $18.0 million on volumes of 57,048 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.


	SalesVolume (MBF)					Price Realization (MBF)


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


2005
Year ended 12/31	38,298	–	3,289	$		317	–	$ 174		$	–
4th Quarter	8,345		(309)	$		350		$ 134			–
3rd Quarter	13,393	–	372	$		303	–	$ 97			–
2nd Quarter	9,578	–	2,878	$		341	–	$ 177			–
1st Quarter	6,982	–	348		$	277	–	$ 198			–

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

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

Year inEnded ~~2003~~December 31, a2005 ~~15%~~Compared ~~decrease. The decrease in timber deed sales realization is due~~ to ~~overall~~Year ~~declines~~Ended inDecember ~~market conditions~~31, ~~as well as a change in the timber mix being sold in timber sales.~~ 2004

Revenues. Revenues decreased $31.0 million, or 70%, from $44.3 million in 2004 to $13.3 million in 2005. Log sales increased by $1.5 million and deed sales decreased by $2.5 million. Property sales in 2005 were $0.0 million, compared to $28.1 million in 2004. Chip and by-product revenues were lower by $1.6 million in 2005 compared to 2004. The substantially lower revenues in fiscal 2005 resulted from the lower level of harvesting. During 2005, the non-payment of the $21,656 of annual interest on the Notes decreased the Company’s cash requirements.

Log sales for 2005 were $12.2 million on volumes of 38,298 MBF, compared to log sales of $10.7 million on volumes of 32,484 in 2004. The average log sales price for 2005 was $317 per MBF compared to an average log sales price of $329 per MBF in 2004, a 4% decrease.

Timber deed sales for 2005 were $0.6 million on volumes of 3,289 MBF, compared to timber deed sales of $3.1 million on volumes of 28,561 MBF in 2004. The average timber deed sales price per MBF for 2005 was $174 compared to an average timber deed sales price of $110 in 2004, a 58% increase. The increase in timber deed sales realization is due to overall improvements in market conditions, as well as a change in the timber mix being sold in timber sales.

There were no stumpage sales for 2005 and 2004. 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.

The Company had no revenue from timber and property sales in 2005, compared to $28.1 million in revenue from timber and property sales during 2004. In 2004, the Company sold the 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. There were no similar timber and property sales in 2005.

Gross Loss. Gross loss decreased by $12.3 million from $13.1 million in 2004 to $0.8 million in 2005 and gross margin went from negative 30% in 2004 to negative 6% in 2005. The improvement in gross margin was due primarily to losses on the sale of timberlands of $10.6 million during 2004 as compared to no gain or loss during 2005. The non-cash loss on the sale of timberlands in 2004 was a consequence of the high proportion of young plantation on these assets in comparison to its allocated basis.

Selling, General and Administrative Expenses. Selling, general and administrative expenses excluding the management fee were $2.2 million in 2005, compared to selling, general and administrative expenses of $3.5 million in 2004, a decrease of $1.3 million. These expense decreases occurred primarily in salaries, wages and benefits, down $0.1 million, legal fees, down $0.3 million, accounting, audit, and tax fees, down 0.1 million, professional services, down $0.5 million as the MLP expenses ended in 2004, property taxes, down $0.1 million, and insurance, down $0.1 million from 2004.

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

The management fee decreased by $2.0 million over the 2004 amount due to a decrease in the assets managed. We believe 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.

Equity in Net Income (Loss) of Affiliate. The equity in net loss of affiliate was $8.0 million during 2005 as compared to equity in net loss of affiliate of $25.4 million in 2004. Since October 1999, the Company has owned a redeemable preferred membership interest ("Preferred LLC Interest") in AFR, an affiliate accounted for under the equity method. In 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.

We exclude losses in excess of our basis in the preferred interest from our preferred interest in our affiliate in our condensed consolidated statements of operations. Losses in excess of that amount are not borne by us. Such amounts for the twelve months ended December 31, 2005 were approximately $13,925. Future earnings of our affiliate, otherwise attributable to our preferred interest, will be allocated to us only after future earnings are sufficient to recover the cumulative losses previously not recognized by us (approximately $13.9 million at December 31, 2005).

See "Investment in and Transactions with Affiliates" included in Note 8 of the Financial Statements for an explanation of the preferred equity investment in American Forest Resources, LLC.

Interest Expense. Interest expense was $21.7 million in 2005 and 2004, consisting primarily of interest expense on the Company's $225.0 million of Senior Notes.

Other Income (Expense), net. Other income, net, was $0.1 million in 2005 and $0.3 million in 2004 and consisted of income derived from cattle leases and other mineral and grazing rights

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Revenues increased $7.2 million, or 19%, from $37.1 million in 2003 to $44.3 million in 2004. Log sales decreased by $7.3 million and deed sales decreased by $3.9 million. These decreases were offset by property sales in 2004 of $28.1 million, compared to $10.1 million in 2003. Chip and by-product revenues were also higher by $0.4 million in 2004 compared to 2003. To meet its working capital requirements, the Company harvested and sold logs and timber deeds in 2004 at rates in excess of the estimated current annual board footage growth on the Timberlands.

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

Timber deed sales for 2004 were $3.1 million on volumes of 28,560 MBF, compared to timber deed sales of $7.0 million on volumes of 53,719 MBF in 2003. The average timber deed sales price per MBF for 2004 was $110 compared to an average timber deed sales price of $130 in 2003, a 15% 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.

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.

The Company had revenue from timber and property sales in 2004 of $28.1 million, compared to $10.1 million in revenue from timber and property sales during 2003. The increase in this category was driven by the sale in 2004 of the 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.

Gross Loss. Gross loss increased by $11.5 million from $1.6 million in 2003 to $13.1 million in 2004 and gross margin went from negative 4% in 2003 to negative 30% in 2004. The decrease in gross margin was due primarily to losses on the sale of timberlands of $10.6 million and higher contracted log and haul costs on a per MBF basis during 2004 as compared to 2003. The non-cash loss on the sale of timberlands was a consequence of the high proportion of young plantation on these assets in comparison to its allocated basis.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $7.5 million in 2004, compared to selling, general and administrative expenses of $6.4 million in 2003, an increase of $1.1 million. Within selling, general and administrative, most categories of expenses were down 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, 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.

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.~~

~~The~~ management fee increased by $2.7 million over the 2003 amount because the 2003 amount represented only 4 months of payments under the new fee structure. Professional services increased by $0.9 million. These expense increases were offset by reductions in most other expense items including salaries, wages and benefits, down $1.1 million, MLP related expenses down $0.4 million, and property taxes, down $0.2 million from 2003.25

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

payable monthly, is comparable to other management agreements used in the industry where the manager receives a monthly fee based upon assets managed.

The management fee increased by $2.7 million over the 2003 amount because the 2003 amount represented only 4 months of payments under the new fee structure. Professional services increased by $0.9 million. These expense increases were offset by reductions in most other expense items including salaries, wages and benefits, down $1.1 million, MLP related expenses down $0.4 million, and property taxes, down $0.2 million from 2003.

Equity in Net Income (Loss) of Affiliate. The equity in net loss of affiliate was $25.4 million during 2004 as compared to equity in net loss of affiliate of $17.0 million in 2003. The losses in 2004 and 2003 reflect the Company's 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. 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.

Interest Expense. Interest expense was $21.7 million in 2004 and 2003, consisting primarily of interest expense on the Company's $225.0 million of Senior Notes.

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.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

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 a $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.

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 per MBF compared to an average log sales price of $330 per MBF in 2002, a 4% decrease, reflecting weaker markets for the Company's log sales.

Timber deed sales for 2003 were $7.0 million on volumes of 53,719 MBF, compared to timber deed revenue of $17.6 million on volumes of 130,161 MBF in 2002. The average 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.

There were no stumpage sales for 2003 and 2002. The lack of stumpage sales was a result of the Company's strategic decision to utilize log sales, timber deed sales and timber and property sales as its primary sources of revenue.

The Company had revenue from timber and property sales in 2003 of $10.1 million, compared to $5.8 million in revenue from timber and property sales during 2002.

Gross Loss. Gross loss decreased by $1.7 million from $3.3 million in 2002 to $1.6 million in 2003 and gross margin improved from negative 7% in 2002 to negative 4% in 2003.

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

The improvement in gross margin was due to several factors including lower contracted log and haul costs on a per MBF basis during 2003 as compared to 2002, a fire loss of $0.6 million in 2002, reduction in silviculture spending by $0.4 million in 2003 compared to 2002, and reduction in harvest taxes by $0.2 million during 2003 compared to 2002. Depletion, road amortization, and depreciation were lower by $11.9 million during 2003 compared to 2002 as a result of lower log, timber deed, and timberland sales, but on a per cent basis there was no change between the years and therefore no impact on the gross loss.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $6.4 million in 2003, compared to selling, general and administrative expenses of $7.5 million in 2002, a decrease of $1.1 million. Within selling, general and administrative, many categories of expenses were down as a result of the new management fee agreement described above when it became effective on September 1, 2003.

The lower selling, general and administrative expenses were primarily reflected in salaries, wages and benefits, 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 period September 1, 2003 through December 31, 2003.

Equity in Net Income (Loss) of Affiliate. The equity 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.

Interest Expense. Interest expense was $21.7 million in 2003 and 2002, consisting primarily of interest expense on the Company's $225.0 million of Senior Notes.

Other Income (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.

Liquidity and Capital Resources

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~~2005, the Company had a cash balance of $0.2 3 million and a $3250.8 2 million working capital deficit that included $1225.0 ofmillion ~~deferred revenue relating to the prepayment~~ of a ~~log~~long-term ~~sale~~debt ~~contract~~declared ~~entered~~in ~~into~~default inby ~~December~~the ~~2003~~Trustee.

Operating Activities. Cash flows provided by operating activities in ~~2004~~2005 were $12.19 million, compared to cash flows provided by operating activities of $1.3 1 million in ~~2003~~2004.

Investing Activities. Cash flows used in investing activities were $2.47 million in ~~2004~~2005, as compared to cash flows used in investing activities of $2.4 million during 2004 principally for reforestation, timber acquisitions and road additions in each year.

Financing 25Activities. There were no cash flows provided by financing activities in 2005 or 2004. In May 2003, U.S. Timberlands Acquisition Co., LLC reimbursed the Company for certain expenses aggregating $1.2 million incurred in connection with the Privatization Transaction. These expenses consisted principally of legal expenses of the Company and the Special 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

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

~~compared~~ to ~~cash~~its ~~flows~~equity ~~used in investing activities of $2~~holders.0 ~~million~~Accordingly, during ~~2003~~2005 ~~principally~~and ~~for reforestation~~2004, ~~timber~~ ~~acquisitions~~the ~~and~~Company ~~road~~paid ~~additions~~no indistributions ~~each~~to ~~year~~members.

Financing Activities. Cash flows provided by financing activities were $0.0 and $1.2 million in 2004 and 2003, respectively. In May 2003, U.S. Timberlands Acquisition Co., LLC reimbursed the Company for certain expenses aggregating $1.2 million incurred in connection with the Privatization Transaction. These expenses consisted principally of legal expenses of the Company and the Special 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 2004 and 2003, the Company paid no distributions to members.

Notes. On November 14, 1997, the Company issued $225.0 million aggregate principal 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. 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 in whole or in part, on or after November 15, 2002, at predetermined redemption prices plus accrued interest to the redemption date. Upon the occurrence of certain events constituting a "change of control" (as defined in the Indenture), the Company must offer to purchase the Notes, at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. 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.

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.

The Indenture also contains restrictions on the amount of timber that may be harvested based on a limit of 150%, 140%, 130% and 120% of 125 MMBF, adjusted for various acquisitions, dispositions and adjustments, averaged over a one, two, three and four year period, respectively. InAs ~~2002~~of December 31, ~~because~~2005, ofthe Company believes it was in compliance with the ~~accelerated~~covenants ~~harvesting during~~contained in the ~~fourth~~Notes, ~~quarter~~except ~~2002~~that the Company did not pay the interest due on the Notes in 2005. (See "Item 3. Legal Proceedings" for a discussion of ~~salvage~~certain ~~timber~~litigation ~~resulting~~initiated ~~from~~against the ~~Toolbox~~Company, ~~Fire~~among others, relating to the ~~Company~~Notes ~~exceeded~~and the ~~allowable~~decision ~~four~~of ~~year~~the ~~harvest by~~Delaware ~~6.9~~Court ~~MMBF~~of ~~and,~~Chancery aswith ~~required~~respect ~~under~~to the ~~Indenture~~Company's compliance with such covenants). On February 27, ~~placed~~2006, ~~$662~~the inCompany announced that it reached a ~~restricted~~tentative ~~account~~agreement ~~only~~with the Trustee for the Notes to beresolve ~~used~~the inoutstanding ~~ways~~disputes ~~prescribed~~among in the ~~Indenture~~parties. AUnder ~~balance~~the terms of $0the ~~remains~~tentative inagreement, the ~~restricted~~Company ~~account~~or its asnominee would purchase all of ~~December~~the ~~31,~~outstanding ~~2004.~~Notes Asat a price of ~~December~~69% ~~31,~~of ~~2004~~the principal amount of the Notes through a pre-negotiated plan of reorganization. The settlement would include the alleged existing defaults, the ~~Company~~accrued and unpaid ~~believes~~interest, itthe ~~was~~termination inof ~~compliance~~all ~~with~~pending ~~the~~litigation, ~~covenants~~and ~~contained~~a inrelease of all the ~~Notes~~parties. Completion ~~(See~~of ~~“Item~~the 3.contemplated ~~Legal~~settlement ~~Proceedings”~~is ~~for~~subject to a ~~discussion~~number of conditions, including the commitment to support a pre-negotiated plan of reorganization to effectuate the settlement by a sufficient number of ~~certain~~Noteholders ~~litigation~~and ~~initiated~~holders ~~against~~of a sufficient face value of Notes to be acceptable to the Company, ~~among~~and ~~others~~the receipt by the Company of financing sufficient to fund the settlement. The Company has agreements in principle for the financing, ~~relating~~which are subject to the ~~Notes~~negotiation and execution of definitive documentation and due diligence.

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

and the decision of the Delaware Court of Chancery with respect to the Company’s compliance with such covenants).

On 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.

Affiliate Credit Facility

The Company had a credit facility with an affiliate of the Manager (the "Affiliate Credit Facility") consisting of a revolving line of credit of 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 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 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 each request is reviewed on a case by case basis. During 2004, there were no borrowings from affiliated lenders.

Capital Expenditures/Cash Distributions

Capital 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.

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

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

~~restructuring scenarios, the ongoing litigation with the holders of the Notes has materially interfered~~ ~~with~~Capital ~~the~~Expenditures/Cash Company’s ability to pursue a number of such scenarios. While the Company is still pursuing certain debt restructuring initiatives, 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). The next semi-annual interest payment on the Notes is due May 15, 2005, subject to a 30 day 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. Distributions

Capital expenditures in 2005 totaled $2.7 million. The Company purchased timber cutting rights for approximately 15.8 MMBF of timber for $2.0 million. The remaining $0.7 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 $0.3 million in 2006 consisting primarily of capitalized silviculture costs.

The non-payment of interest on the Notes in 2005 substantially reduced the Company's cash requirements. Prior thereto, cash required to meet the Company's debt service was significant. To meet its working capital requirements, the Company had been selling logs and 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. The next semi-annual interest payment on the Notes is due May 15, 2006, subject to a 30 day grace period. Due to the pending settlement discussed above, the Company does not expect that it will make the next scheduled interest payment.

Effects of Inflation

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

~~In January 2003, the FASB issued Interpretation No. 46 (FIN 46) “Consolidation of~~ Variable Interest Entities” which is an interpretation of Accounting Research Bulletin No. 51 “Consolidated Financial Statements”. In December 2003 the FASB modified FIN 46 to make certain technical corrections and address certain administration issues that had arisen. FIN 46 requires the consolidation of entities in which an enterprise 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.

~~The~~ In ~~provisions~~January of2003, the FASB issued Interpretation No. 46 (FIN 46) as"Consolidation ~~revised~~of ~~were~~Variable ~~applicable~~Interest toEntities" ~~the~~which ~~Company~~is asan interpretation of ~~March~~Accounting ~~31,~~Research ~~2004~~Bulletin No. ~~The~~51 ~~Company had~~"Consolidated ~~considered~~Financial Statements". In December 2003 the ~~applicability~~FASB ofmodified FIN 46 to ~~its~~make ~~investment~~certain technical corrections and address certain administration issues that had arisen. FIN 46 requires the consolidation of entities in ~~its~~which ~~indirect~~an ~~parent~~enterprise ~~company,~~absorbs ~~American~~a ~~Forest~~majority ~~Resources,~~of ~~LLC,~~the ~~and~~entity's expected losses, ~~had~~receives ~~concluded~~a ~~that~~majority ~~American~~of ~~Forest~~the ~~Resources~~entity's expected residual returns, ~~LLC~~or isboth, ~~not~~as a ~~variable~~result ~~interest~~of ~~entity~~ownership, ~~and~~contractual ~~therefore~~or ~~its~~other financial ~~statements~~interests ~~are~~in ~~not required~~the toentity. Previously, beentities were generally consolidated ~~with~~by ~~those~~an ofenterprise ~~the~~when ~~Company~~it ~~pursuant~~had toa ~~the~~controlling financial ~~provisions~~interest through ownership of ~~FIN~~a 46majority voting interest in the entity.

The ~~Item~~provisions 7Aof FIN 46 as revised were applicable to the Company as of March 31, 2004. ~~Quantitative~~The ~~and~~Company ~~Qualitative~~had ~~Disclosures~~considered ~~About~~the ~~Market~~applicability ~~Risk~~of FIN 46 to its investment in its indirect

Not applicable.

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

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

parent ~~Item~~company, ~~9. Changes~~American inForest Resources, LLC, and ~~Disagreements~~had ~~with~~concluded ~~Accountants~~that onAmerican ~~Accounting~~Forest Resources, LLC is not a variable interest entity and therefore its financial statements are not required to be consolidated with those of the ~~Financial~~Company ~~Disclosure~~pursuant to the provisions of FIN 46.

~~Not~~Item ~~applicable~~7A. Quantitative and Qualitative Disclosures About Market Risk

~~Item~~ Not 9Aapplicable. ~~Controls and Procedures~~

~~The~~Item ~~Company’s management maintains an adequate system of disclosure controls and procedures to promote the timely identification and reporting of material, relevant information~~8. ~~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.Statements

The ~~Company’s~~information ~~President~~required ~~and~~hereunder ~~Chief~~is ~~Executive~~included ~~Officer~~in ~~and~~this ~~its~~report ~~Vice President~~as ~~and~~set ~~Chief~~forth ~~Financial~~in ~~Officer~~the ~~are~~"Index ~~responsible for establishing and maintaining disclosure controls and procedures. They have designed such controls~~ to ~~ensure~~Financial ~~that~~Statements" ~~others~~on ~~make~~Page ~~all material information known to them within the organization~~F-l.

AsItem ~~of the end of the period covered by this annual report, the Company’s executive officers completed an evaluation of the Company’s controls and procedures and has determined them to be effective~~9. ~~During~~ ~~the~~Changes ~~fourth quarter of fiscal 2004, there have been no significant changes~~ in ~~internal~~and ~~control~~Disagreements ~~over~~with ~~financial~~Accountants ~~reporting~~on ~~or in~~Accounting ~~other~~and ~~factors~~Financial ~~that could significantly affect internal control over financial reporting.~~ Disclosure

~~Item~~ Not 9Bapplicable. ~~Other Information~~

~~Not~~Item ~~applicable~~9A. Controls and Procedures

The 29Company'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~~Chief ~~SUBSIDIARY~~Executive Officer and its Vice President and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures. They have designed such controls to ~~(dollar~~ensure ~~amounts~~that inothers ~~thousands~~make ~~unless~~all ~~otherwise~~material ~~noted)~~information known to them within the organization.

As ~~PART~~of ~~III~~the end of the period covered by this annual report, the Company's executive officers completed an evaluation of the Company's disclosure controls and procedures and has determined them to be effective. During the fourth quarter of fiscal 2005, there have been no significant changes in internal control over financial reporting or in other factors that could significantly affect internal control over financial reporting.

Item 109B. ~~Directors~~Other ~~and Executive Officers of the Registrant~~Information

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

~~The~~ following table sets forth certain information with respect to the members of the Board of Directors of the Company and its executive officers. Executive officers and directors are elected for one-year terms.29

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

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

(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.

PART III

~~John~~ MItem 10. ~~Rudey~~Directors ~~has served as Chairman~~ and ~~President of the Company since its reorganization in July 2003. He also serves as Chairman, Chief~~ Executive ~~Officer~~Officers ~~and President~~ of the ~~Manager, having been elected to the Board of Directors of the Manager in September 1996.~~Registrant

~~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~~Officers ~~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.~~

~~John~~The D.following ~~Layton~~table ~~has~~sets ~~served~~forth ascertain ainformation with ~~director~~respect ofto the ~~Company~~members ~~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~~Company inand ~~June 2003.~~its ~~For~~executive ~~the past five years, Mr~~officers. ~~Layton~~Executive ~~has~~officers ~~been~~and adirectors are ~~Manager~~elected ~~with~~for ~~HRH~~one-year ~~Construction, LLC, in New York City~~terms.

Name	Age	Position
John M. Rudey	62	Chairman, Chief Executive Officer, President and Director
John D. Layton	44	Director (1)
Mel A. Sachs	60	Director (1)
Suzanne M. Hay	34	Director (2)
Carrie L. Tillman	34	Director (2)
Thomas C. Ludlow	59	Vice President, Secretary and Treasurer

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

(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.

~~Mel~~John AM. ~~Sachs~~Rudey has served as aChairman ~~director~~and President of the Company since its reorganization in July 2003. He also serves as aChairman, ~~director~~Chief Executive Officer and President of the Manager, having been elected to the Board of Directors of the Manager in ~~June~~September ~~2003~~1996. 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.

~~Suzanne~~ John MD. ~~Hay~~Layton has served as a director of the Company since its reorganization in July 2003. ~~Since~~He ~~1995,~~also ~~Ms.~~serves ~~Hay~~as ~~has~~a ~~served~~director inof ~~various~~the ~~positions~~Manager, ~~with~~having ~~Entity~~been ~~Services~~elected ~~Group,~~to ~~LLC,~~the ~~which~~Board ~~provides~~of ~~independent directors~~Directors ~~and~~ of ~~other~~the ~~services~~Manager toin ~~companies~~June 2003. For the past six years, ~~and~~Mr. ~~currently~~Layton ~~serves~~has asbeen ~~Vice~~a ~~President~~Manager with HRH Construction, ~~Client~~LLC, ~~Development~~in ofNew ~~such~~York ~~company~~City.

~~Carrie L~~ Mel A. ~~Tillman~~Sachs has served as a director of the Company since its reorganization in July 2003. ~~Since~~He ~~1998~~also serves as a director of the Manager, ~~Ms.~~having ~~Tillman~~been ~~has~~elected ~~served~~to asthe anBoard ~~administrative~~of ~~manager~~Directors ~~with~~of ~~Entity~~the ~~Services~~Manager ~~Group,~~in ~~LLC~~June 2003. ~~Prior~~For the past six years Mr. Sachs has been to a ~~1998,~~trial Mslawyer. ~~Tillman~~Mr. ~~was~~Sachs ~~Assistant~~has tolectured practicing lawyers at the ~~Coordinator~~National College of ~~Special~~Criminal ~~Services~~Defense ~~for~~and ~~Corporation~~has ~~Service~~taught ~~Company,~~at aCornell University ~~leading~~Law ~~corporate~~School, ~~services company~~Emory ~~that~~University ~~provides~~Law ~~incorporation~~School, ~~registered~~University ~~agent,~~of ~~filing,~~Colorado ~~merger~~Law School and ~~other~~Hofstra ~~corporate~~University ~~governance~~School ~~services~~of Law.

~~Thomas~~ C. Ludlow became Vice President, 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, 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. 30

~~The~~ ~~Board~~INLAND ofFIBER ~~Directors~~GROUP, ofLLC ~~the~~AND ~~Company~~SUBSIDIARY ~~has determined that George R.~~ ~~Hornig~~ (dollar isamounts ~~an “audit committee financial expert” as defined~~ in ~~Item~~thousands ~~401(h)~~unless ofotherwise ~~Regulation S-K.~~noted)

~~The~~ Suzanne ~~Company~~M. ~~does~~Hay ~~not~~has ~~have~~served as a ~~code~~director of the ~~ethics~~Company assince itits ~~does~~reorganization ~~not~~in ~~have~~July ~~any employees~~2003. ~~The~~Since ~~Company’s~~1995, ~~principal~~Ms. ~~executive~~Hay ~~officer~~has ~~and~~served ~~principal~~in ~~financial~~various ~~officer~~positions ~~provide~~with ~~services~~Entity ~~to the Company primarily~~Services in Group, ~~their~~LLC, ~~capacities~~which asprovides ~~the~~independent ~~executive~~directors ~~officers~~and ofother ~~the~~services ~~Manager~~to companies, and ~~are~~currently ~~bound~~serves byas ~~the~~Vice ~~provisions~~President, ~~of the Manager’s employee guidebook~~Client ~~and~~ Development ~~other~~of ~~regulations~~such ~~established by the Manager~~company.

~~Under~~Carrie ~~the~~L. ~~terms~~Tillman ofhas ~~the~~served ~~Company’s~~as ~~previous~~a ~~management~~director ~~arrangement, the Company was required to reimburse the Manager for expenses relating to the operation~~ of the Company, ~~including~~since ~~salaries~~its ~~and bonuses~~reorganization ofin ~~employees~~July ~~employed~~2003. onSince ~~behalf~~1998, ofMs. ~~the~~Tillman ~~Company,~~has asserved ~~well~~ as ~~the~~an ~~costs~~administrative ofmanager ~~providing~~with ~~benefits~~Entity ~~to such persons under employee~~Services ~~benefit~~ Group, ~~plans~~LLC. ~~and~~Prior ~~for~~to ~~the~~1998, ~~costs of health and life insurance~~Ms. ~~Accordingly,~~Tillman ~~the~~was ~~Company~~Assistant ~~reimbursed the Manager for the salaries and bonuses paid~~ to ~~its executive officers and other employees. Under~~ the ~~management~~Coordinator ~~agreement~~of ~~entered~~Special ~~into~~Services ~~with~~for ~~the~~Corporation ~~Manager,~~Service ~~the~~ Company, ~~pays~~ a ~~the~~leading ~~Manager~~corporate anservices ~~annual~~company ~~fee~~that ofprovides 2%incorporation, ofregistered ~~the~~agent, ~~agreed~~filing, ~~upon~~merger ~~valuation of total timber~~ and ~~timberland~~other ~~assets~~corporate ~~under management for its~~governance services.

Thomas 31C. Ludlow became Vice President, Chief Financial Officer, 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, 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.

~~INLAND~~ The ~~FIBER~~Company ~~GROUP,~~does ~~LLC~~not ~~AND~~have ~~SUBSIDIARY~~an audit committee financial ~~(dollar~~ expert. ~~amounts~~The director that had previously served as audit committee financial expert resigned from the Board of Directors in 2005 ~~thousands~~and ~~unless~~the ~~otherwise~~Company ~~noted)~~has not been able to retain a replacement director.

~~management services.~~ The ~~compensation~~Company ofdoes ~~the~~not ~~Manager’s~~have ~~executive~~a ~~officers~~code isof ~~subject~~ethics toas ~~separate~~it ~~arrangements~~ does ~~between~~not ~~the~~have ~~Manager~~any ~~and the executive officers~~employees. The Company’s principal executive ~~officers~~officer ~~are~~and ~~not~~principal ~~paid~~financial byofficer provide services to the Company ~~for~~ primarily in their ~~services~~capacities as the executive officers of the ~~Company. The table below sets forth annual salary~~Manager, ~~bonus~~ and ~~all~~are ~~other~~bound ~~compensation awards~~by ~~and~~the ~~payouts~~provisions ~~earned~~of by the Manager’s ~~chief~~employee ~~executive~~guidebook ~~officer~~ and ~~chief~~other ~~financial~~regulations ~~officer~~established ~~for services rendered through August 31, 2003 which were reimbursed~~ by the ~~Company:~~Manager.

Item 11. Executive Compensation

	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.

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 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:

~~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.31

~~Through~~INLAND ~~June~~FIBER ~~2003~~GROUP, ~~the~~LLC ~~Manager~~AND ~~and~~SUBSIDIARY ~~Aubrey Cole Associates~~ (adollar ~~consulting~~amounts ~~firm~~in ~~affiliated~~thousands ~~with~~unless ~~Aubrey~~otherwise ~~Cole, a director of the Company through June 2003~~noted), Robert F. Wright Associates, Inc. (a consulting firm affiliated with Robert F. Wright, a director of the Company through June 2003) and Mr. Hornig were parties to consulting agreements pursuant to which

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	2005		0		–	–	–
Chairman and	2004		0		–	–	–
Chief Executive Officer	2003		309,000	(1)	–	–	–

Thomas C. Ludlow	2005		0		–	–	–
Vice President and	2004		0		–	–	–
Chief Financial Officer	2003		150,000	(1)	–	–	–

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

Compensation of Directors

Directors of the Company, other than Mr. Rudey, ~~INLAND~~ Ms. ~~FIBER~~Hay ~~GROUP~~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 ~~AND~~for ~~SUBSIDIARY~~the services of each of Ms. Hay and Ms. Tillman. For their remuneration, the independent directors (~~dollar~~other ~~amounts~~than inMs. ~~thousands~~Hay ~~unless~~and ~~otherwise~~Ms. ~~noted~~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.

~~each~~ ~~such~~Committee ~~person~~Interlocks or firm provided consulting services to the Manager. Each such agreement provided for an annual retainer of $25, plus $150 per hour (with a maximum per diem of $1.2) for services rendered at the request of the Manager. In addition, for the first half of 2002, the Manager entered into a consulting agreement with Mr. Wyman that provided for an annual retainer of $50 for services rendered at the request of the Manager. As of July 1, 2002, Mr. Wyman's consulting fees were reduced to zero and ~~were~~Insider ~~offset~~Participation ~~by increased director fees. Pursuant to the management arrangement~~ in ~~effect~~Compensation atDecisions the time, the Company reimbursed the Manager for the payment of approximately $56, $112, and $98 to the Directors of the Manager for consulting services during 2003, 2002 and 2001, respectively. The consulting agreements were discontinued in July 2003.

~~Committee~~ As ~~Interlocks~~the ~~and~~Company ~~Insider~~does ~~Participation~~not inhave ~~Compensation~~any ~~Decisions~~employees, the Company does not have a compensation committee.

As the Company does not have any employees, the Company does not have a compensation committee. 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 Cole. Mr. Rudey also served as 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.32

~~Item~~INLAND ~~12.~~FIBER ~~Security~~GROUP, ~~Ownership~~LLC ofAND ~~Certain~~SUBSIDIARY ~~Beneficial~~ (dollar ~~Owners~~amounts ~~and~~in ~~Management~~ thousands unless otherwise noted)

~~John~~ MItem 12. ~~Rudey,~~Security ~~Chairman~~Ownership ~~and Chief Executive Officer~~ of ~~the~~Certain ~~Company,~~Beneficial ~~indirectly~~Owners and ~~beneficially~~Management ~~owns all of the equity interests in the Company.~~

John ~~Item 13~~M. ~~Certain~~Rudey, ~~Relationships~~Chairman and ~~Related~~Chief ~~Party~~Executive ~~Transactions~~Officer of the Company, indirectly beneficially owns all of the equity interests in the Company.

~~The~~ ~~Company~~Item ~~is managed by the Manager pursuant to a management agreement between the Company and the Manager~~13. ~~Under~~Certain ~~the~~Relationships ~~management agreement, the Manager is entitled to an annual fee of 2% of the agreed upon valuation of total timber~~ and ~~timberland~~Related ~~assets~~Party ~~under management. Substantially all of the ownership interests in the Manager are owned by John M. Rudey and entities affiliated with Mr. Rudey. Mr. Rudey is the Chairman and President of~~Transactions ~~the Company. In 2004, $4,014 in fees were paid by the Company pursuant to the management agreement.~~

The Company is managed by the Manager pursuant to ~~Investments~~ a management agreement between the Company and the Manager. Under the management agreement, the Manager is entitled to an annual fee of 2% of the agreed upon valuation of total timber and timberland assets under management. Substantially all of the ownership interests in the Manager are owned by John M. Rudey and ~~Transactions~~entities affiliated with ~~Affiliate~~Mr. Rudey. Mr. Rudey is the Chairman and President of the Company. In 2005, $2,000 in fees was paid by the Company pursuant to the management agreement.

~~Since~~ ~~October~~Investments ~~1999, the Company has owned a redeemable preferred membership interest (“Preferred LLC Interest”)~~ in ~~American~~and ~~Forest~~Transactions ~~Resources,~~with LLC (formerly U.S. Timberlands Yakima, LLC) (“AFR”), an affiliate, accounted for under the equity method. As described in Note 1 to 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 aAffiliate

Since October 1999, the Company has owned a redeemable 33 preferred membership interest (“Preferred LLC Interest”) in American Forest Resources, LLC (formerly U.S. Timberlands Yakima, LLC) (“AFR”), an affiliate, accounted for under the equity method. As described in Note 1 to 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.

~~INLAND~~ In ~~FIBER~~October ~~sGROUP~~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 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 ~~AND~~Interests"). ~~SUBSIDIARY~~The remaining Common LLC Interests were acquired for $306 in cash by Cascade Resource Holdings Group, LLC (~~dollar~~formerly ~~amounts~~U.S. Timberlands Holding Group, LLC, a Delaware limited liability company (“Holdings Group”) in ~~thousands~~which ~~unless~~John ~~otherwise~~Rudey, ~~noted~~the Chairman of the Board of the Company holds 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 $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 timberlands, plus

~~subsidiary~~ ~~of AFR of the 99% non-managing member’s interest in the Company previously owned by the MLP.~~ 33

InINLAND ~~October~~FIBER ~~1999~~GROUP, 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 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").~~AND ~~The~~SUBSIDIARY ~~remaining Common LLC Interests were acquired for~~ ~~$306 in cash by Cascade Resource Holdings Group, LLC~~ (~~formerly~~dollar ~~U.S.~~amounts ~~Timberlands Holding Group, LLC, a Delaware limited liability company (“Holdings Group”)~~ in ~~which~~thousands ~~John~~unless ~~Rudey,~~otherwise ~~the Chairman of the Board of the Company holds a controlling interest. The Company also acquired all of the senior preferred membership interests in AFR (the "Senior or Preferred LLC Interests"~~noted) 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 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.

On any ~~September~~portion ~~14, 2001, management~~ of ~~AFR~~the ~~was~~guaranteed ~~taken~~return ~~over~~not received by ~~American~~the ~~Forest~~Company ~~Services,~~prior ~~LLC~~to ~~("American~~the redemption ~~Forest~~date. ~~Services~~Generally,” ~~formerly~~AFR's ~~U.S.~~net ~~Timberlands~~income ~~Services~~or ~~Yakima,~~losses ~~LLC),~~are aallocated ~~wholly~~to ~~owned subsidiary of~~ the ~~Manager~~Common ofLLC ~~the Company~~Interests. ~~American~~However, ~~Forest~~net ~~Services~~losses isexceeding the ~~paid~~account abalances ~~fee equal to 2%~~ of the ~~agreed~~Common ~~upon~~LLC ~~valuation~~Interests ofare allocated to the ~~assets~~Preferred ~~under~~LLC ~~management~~Interest. ~~Prior~~The ~~thereto,~~Company ~~the~~accounts ~~Manager provided management services~~ for athe ~~fee equal to 2% of AFR's earnings before~~Preferred ~~interest,~~ LLC ~~taxes,~~Interest ~~depletion,~~at ~~depreciation~~cost ~~and~~plus ~~amortization.~~accrued ~~Such~~dividends ~~fees charged~~ to ~~operations~~the byextent ~~AFR~~earned, ~~amounted~~reduced toby $3losses,~~133~~ inif ~~2004~~any, ~~$3,033~~ in ~~2003~~excess ~~and~~of ~~$2,555~~the inCommon ~~2002~~LLC Interests.

On September 14, 2001, management of AFR was taken In over ~~June~~by ~~2000~~American Forest Services, LLC ("American Forest Services,” formerly U.S. Timberlands Services Yakima, LLC), a wholly owned subsidiary of the Manager of the Company. ~~purchased~~American ~~timber~~Forest ~~cutting~~Services ~~rights~~is ~~for~~paid ~~approximately~~a 4fee 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% ~~million~~of ~~board~~AFR's ~~feet~~earnings before ~~from~~interest, taxes, depletion, depreciation and amortization. Such fees charged to operations by AFR ~~for~~amounted to $12,~~300.~~980 in ~~These~~2005, ~~timber~~$3,133 ~~cutting~~in ~~rights~~2004, ~~expired~~and $3,133 in ~~June~~2004 and $3,033 in 2003.

In ~~December~~June 2000, the Company ~~sold~~purchased ~~approximately~~timber ~~8,000~~cutting rights ~~acres~~for ofapproximately ~~timberland~~4.2 ~~located~~million inboard ~~Central~~feet ~~Oregon~~from to AFR for $21,~~900~~300. These timber cutting rights expired in June 2003.

~~During~~ In ~~2001~~December 2000, the Company ~~contributed~~sold ~~cutting~~approximately 8,000 ~~rights~~acres ~~and~~of timberland located in Central Oregon to AFR. The contributions have an aggregate agreed upon value of $18.5 million and were added to the Company's Preferred LLC Interest in AFR. Terms of 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 Interest at its cost for ~~the cutting rights and timberland of approximately~~ $162,~~300~~900. ~~All property that has~~

During 2001, the Company contributed cutting rights 34 and timberland located in Central Oregon to AFR. The contributions have an aggregate agreed upon value of $18.5 million and were added to the Company's Preferred LLC Interest in AFR. Terms of 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 Interest at its cost for the cutting rights and timberland of approximately $16,300. 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.

~~INLAND~~ In ~~FIBER~~March ~~GROUP~~2001, ~~LLC~~the ~~AND~~Company ~~SUBSIDIARY~~purchased ~~(dollar~~timber ~~amounts~~cutting rights infor ~~thousands~~approximately ~~unless~~17.2 ~~otherwise~~million ~~noted)~~board feet from AFR for $4,500. These timber cutting rights expired in March 2004.

~~been~~ In ~~contributed~~September ~~for~~2001, the Company's ~~Preferred~~sold ~~LLC~~timber ~~Interest~~cutting rights infor ~~AFR~~approximately ~~has~~80.6 ~~been~~million ~~pledged~~board asfeet ~~collateral~~to by AFR ~~under~~for ~~its~~$12,000. ~~credit~~These ~~facility~~timber ~~with~~cutting ~~its~~rights ~~lender.~~expired in August 2004.

In ~~March~~November 2001, the Company ~~purchased~~sold timber cutting rights for approximately 1744.28 million board feet ~~from~~to AFR for $47,~~500~~000. These timber cutting rights expired in ~~March~~October 2004.

In ~~September~~June ~~2001~~2002, the Company sold timber cutting rights for approximately 8087.63 million board feet to AFR for $129,~~000~~900. These timber cutting rights ~~expired~~expire in ~~August~~May ~~2004~~2005.

In As ~~November~~a ~~2001,~~result of the Toolbox Fire in August 2002, the Company ~~sold~~purchased salvage timber cutting rights for approximately 4412.80 million board feet tofrom AFR for $71,~~000~~300 to gain certain operating efficiencies. ~~These~~All of the timber was harvested before these timber cutting rights expired in ~~October~~August ~~2004~~2003.

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.~~ 34

As aINLAND ~~result~~FIBER ~~of the Toolbox Fire in August 2002~~GROUP, ~~the~~LLC ~~Company~~AND ~~purchased~~SUBSIDIARY ~~salvage timber cutting rights for approximately 12.0 million board feet from AFR for $1,300 to gain certain operating~~ ~~efficiencies.~~ (dollar ~~All~~amounts ofin ~~the~~thousands ~~timber~~unless ~~was~~otherwise ~~harvested before these timber cutting rights expired in August 2003.~~noted)

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

During 2002, 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 Interest in AFR. Terms of the additional Preferred Interest acquired are the same terms as the Preferred Interest previously issued to the Company. The Company recorded its additional Preferred Interest at its cost for the timberland of approximately $18,300. 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 to the preceding, in July 2002, the Company purchased timber cutting rights for approximately 5.1 million board feet from AFR Services for $500. These timber cutting rights ~~expire~~expired in July 2005.

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.

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.

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

In December 2003, the Company sold timber cutting rights 35 for approximately 34,965 million board feet to AFS for $4,200. These timber cutting rights expire in December 2006.

~~INLAND FIBER GROUP~~ Also, ~~LLC~~in ~~AND~~December ~~SUBSIDIARY~~2003, ~~(dollar~~the ~~amounts~~Company insold ~~thousands~~seedlings ~~unless~~to AFR ~~otherwise~~for ~~noted)~~ $300.

InGross ~~December~~profits ~~2003,~~realized on the Company's ~~sold~~sales ~~timber~~of timber cutting rights ~~for~~to ~~approximately~~AFR, 34to the extent of the Company's ownership interest in AFR,~~965~~ have been eliminated and are recognized in ~~million~~ operations ~~board~~upon ~~feet~~AFR's sale of the timber to ~~AFS~~third ~~for~~parties ~~$4,756~~with corresponding adjustments to the carrying value of the investment in AFR. ~~These~~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 ~~expire~~to inthe ~~December~~Company, ~~2006~~until the Company sells the timber to third parties.

~~Also,~~Item in14. ~~December~~Principal ~~2003,~~Accounting ~~the~~Fees ~~Company~~and ~~sold~~Services ~~seedlings to AFR for $300.~~

~~Gross~~The ~~profits~~following ~~realized~~chart onshows the ~~Company's~~aggregate ~~sales~~fees ~~of timber cutting rights to AFR,~~billed to the ~~extent of the~~ Company's ~~ownership~~by ~~interest~~Eisner inLLP ~~AFR,~~for ~~have~~professional ~~been~~services ~~eliminated and are recognized~~ in ~~operations upon AFR's sale of~~ the ~~timber~~named tocategories ~~third~~for ~~parties with corresponding adjustments to~~ the ~~carrying~~years ~~value~~ended ofDecember ~~the investment in AFR. In addition~~31, ~~the~~2005 ~~Company's equity~~and ~~in net income (loss) of affiliate has been adjusted to eliminate its share of gross profits realized by AFR on sales of timber~~December ~~cutting rights to the Company~~ 31, ~~until the Company sells the timber to third parties~~2004.

~~See~~ ~~the description of the Affiliate Credit Facility included in the Liquidity and Capital Resources section of Item 7.~~ 35

INLAND ~~Item~~FIBER ~~14.~~GROUP, ~~Principal~~LLC ~~Accounting~~AND ~~Fees~~SUBSIDIARY ~~and~~ (dollar ~~Services~~amounts in thousands unless otherwise noted)

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.

		2005		2004

Audit fees (1)	$	214	$	330
Audit related fees (2)		–		–
Tax fees (3)		30		50
Other fees		15		–


Total fees	$	259	$	380

			2004		2003
(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.
Audit fees (1)		$	330	$	449
(2)	Separately billed annual tax planning and IT audit work.
Audit related fees (2)			-		3
(3)	Preparation of annual tax returns
Tax fees (3)			50		100
Other fees			-		-
Total fees		$	380	$	552

(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

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 approved these services. The Audit Committee may also pre-approve particular services on a case-by-case basis.

~~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. 36

36INLAND FIBER GROUP, LLC AND SUBSIDIARY (dollar amounts in thousands unless otherwise noted)

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

~~PART~~ IV Item 15. Exhibits and Financial Statement Schedules

~~Item~~ ~~15.~~(a) ~~Exhibits~~(1) and (2) Financial ~~Statement~~Statements ~~Schedules~~

~~(a)~~ See ~~(1)~~"Index ~~and~~to ~~(2)~~ Financial Statements" set forth on page F-l.

~~See~~ ~~"Index~~(3) toExhibits ~~Financial Statements" set forth on page F-l.~~

+ 3.3 - Third Amended and Restated Operating Agreement of U.S. Timberlands Klamath Falls, LLC (3)now ~~Exhibits~~known as Inland Fiber Group, LLC)

~~+ 3~~†10.32 - ~~Third~~Indenture ~~Amended~~among ~~and~~U.S. ~~Restated~~Timberlands ~~Operating~~Klamath ~~Agreement~~Falls, ofLLC, U.S. Timberlands ~~Klamath~~ Finance ~~Falls,~~Corp. ~~LLC~~and ~~(now~~State ~~known~~Street asBank ~~Inland~~and ~~Fiber~~Trust ~~Group~~Company, ~~LLC)~~as trustee

†++10.212 - ~~Indenture~~Amended ~~among~~and ~~U.S.~~Restated ~~Timberlands~~Operating ~~Klamath~~Agreement ~~Falls,~~of ~~LLC,~~ U.S. Timberlands Yakima, ~~Finance~~ LLC ~~Corp.~~(now ~~and~~known ~~State~~as ~~Street~~American ~~Bank~~Forest ~~and Trust Company~~Resources, ~~as trustee~~LLC)

++ # 10.1213 - ~~Amended~~Management Agreement by and ~~Restated~~among ~~Operating~~U.S. ~~Agreement~~Timberlands ofKlamath Falls, LLC and U.S. Timberlands ~~Yakima~~Services Company, LLC, ~~(now~~dated ~~known~~ as ~~American Forest~~of ~~Resources~~July 25, ~~LLC)~~2003

~~# 10~~*21.131 - ~~Management~~List ~~Agreement by and among U.S. Timberlands Klamath Falls, LLC and U.S. Timberlands Services Company, LLC, dated as~~ of ~~July~~Subsidiaries ~~25, 2003~~

*2131.1 - ~~List~~Certification of ~~Subsidiaries~~CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Exchange Act

31.12 - Certification of ~~CEO~~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.

3132.2 - 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~~* Incorporated -by ~~Certification~~reference ~~of CFO pursuant~~ to 18the ~~U.S.C.~~same ~~Section~~numbered ~~1350,~~Exhibit asto ~~adopted pursuant~~the to Registrant's ~~Section~~Registration ~~906~~Statement ofon ~~the~~Form ~~Sarbanes~~S-~~Oxley~~1 ~~Act~~filed ofNovember ~~2002~~7, 1997.

*† Incorporated by reference to the same numbered Exhibit to the Registrant's ~~Registration Statement~~Current Report on Form S8-1K filed ~~November~~January 715, ~~1997~~1998.

† ++ Incorporated by reference to the same numbered Exhibit to the Registrant's ~~Current Report on~~ Form 810-KQ filed ~~January~~on 15August 14, ~~1998.~~ 2003

++ # Incorporated by reference to the same numbered Exhibit to the Registrant's Form 10-Q filed on ~~August~~November 1419, 2003

#+ Incorporated by reference to the same numbered Exhibit to the Registrant's Form 10-QK/A filed on ~~November~~May 1918, ~~2003~~2004

~~+ Incorporated by reference to the same numbered Exhibit to the Registrant's Form 10-K/A filed on May 18, 2004~~37

~~On April 11, 2005, the Company filed a Form 8-K reporting the resignation,~~SIGNATURES ~~on April 8, 2005, of a director.~~

Pursuant 37to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

~~SIGNATURES~~ INLAND FIBER GROUP, LLC

~~Pursuant~~ toBy: ~~the~~/s/ ~~requirements~~John ofM. ~~Section~~Rudey 13John orM. ~~15(d) of the Securities Exchange Act of 1934~~Rudey, ~~the~~Chairman ~~registrant~~and ~~has duly caused this report to be signed on its behalf by the undersigned, thereunto duly~~President ~~authorized on this 14th day of~~ April 14, ~~2005.~~2006

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

By: /s/ John M. Rudey John M. Rudey, Chairman and President

/s/	John M. Rudey	Chairman, President, and	April 14, 2006
		Director (Principal Executive Officer)
	John M. Rudey


/s/	Thomas C. Ludlow	Vice President, Treasurer	April 14, 2006
		(Principal Financial Officer)
	Thomas C. Ludlow

/s/	John D. Layton	Director	April 14, 2006

	John D. Layton

/s/	Mel A. Sachs	Director	April 14, 2006

	Mel A. Sachs

~~Pursuant~~ ~~to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.~~ 38

/s/	John M. Rudey	Chairman, President, and	April 14, 2005
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
		Director (Principal Executive Officer)
( 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 )
	John M. Rudey
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
/s/	Thomas C. Ludlow	Vice President, Treasurer	April 14, 2005
Contents	Page
		(Principal Financial Officer)
Inland Fiber Group, LLC
	Thomas C. Ludlow
Report of Independent Registered Public Accounting Firm	F-2
/s/	George R. Hornig	Director	April 14, 2005
Consolidated balance sheets as of December 31, 2005 and 2004	F-3
	George R. Hornig
Consolidated statements of operations for the years ended December 31, 2005, 2004 and 2003	F-4
/s/	John D. Layton	Director	April 14, 2005
Consolidated statements of changes in members' deficiency for the years ended	F-5
	John D. Layton
December 31, 2005, 2004 and 2003
/s/	Mel A. Sachs	Director	April 14, 2005
Consolidated statements of cash flows for the years ended December 31, 2005, 2004 and 2003	F-6
	Mel A. Sachs
Notes to consolidated financial statements	F-7
American Forest Resources, LLC
Report of Independent Registered Public Accounting Firm	F-21
Consolidated balance sheets as of December 31, 2005 and 2004	F-22
Consolidated Statements of operations for the years ended December 31, 2005, 2004 and 2003	F-23
Consolidated Statements of redeemable preferred member interest and common member's deficiency for
the years ended December 31, 2005, 2004 and 2003	F-24
Consolidated Statements of cash flows for the years ended December 31, 2005, 2004 and 2003	F-25
Notes to financial statements	F-26

38 F-1

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

Report of Independent Registered Public Accounting Firm

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

FWe have audited the accompanying consolidated balance sheets of Inland Fiber Group, LLC, and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in members’ deficiency and cash flows for each of the yers in the three-1year period ended December 31, 2005. 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.

~~Report~~ ofWe ~~Independent~~conducted ~~Registered~~our audits in accordance with the standards of the Public Company Accounting ~~Firm~~Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

WeIn ~~have~~our ~~audited~~opinion, the ~~accompanying~~ consolidated ~~balance~~financial ~~sheets~~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~~2005 and ~~2003~~ 2004, and the ~~related~~results ~~consolidated statements~~ of their operations, ~~changes in members’ equity (deficiency)~~ and their cash flows for each of the years in the three-year period ended December 31, ~~2004.~~2005, ~~These~~in ~~financial~~conformity ~~statements are~~with ~~the~~accounting ~~responsibility~~principles ofgenerally ~~the~~accepted ~~Company's~~in ~~management.~~the ~~Our~~United ~~responsibility~~States isof ~~to express an opinion on these financial statements based on our audits~~America.

WeThe ~~conducted~~accompanying ~~our~~financial ~~audits~~statements inhave ~~accordance~~been ~~with~~prepared ~~the~~assuming ~~standards~~that of the ~~Public~~ Company ~~Accounting~~ will ~~Oversight~~continue ~~Board~~as ~~(United~~a ~~States)~~going concern. ~~Those~~As ~~standards~~discussed ~~require~~in ~~that~~Note we1 ~~plan~~to ~~and~~the ~~perform~~financial statements, the ~~audit~~Company tohas ~~obtain~~received ~~reasonable~~Notices ~~assurance~~of Default ~~about~~ and ~~whether~~Acceleration of maturity of the ~~financial~~Notes ~~statements~~from ~~are~~the ~~free~~Trustee ofunder ~~material~~the ~~misstatement.~~Indenture Angoverning ~~audit~~the ~~includes~~$225,000,000 ~~examining~~of Senior Notes due in 2007, onwhich raises substantial doubt about the Company’s ability to continue as a ~~test~~going ~~basis,~~concern. ~~evidence~~As further discussed ~~supporting~~ in ~~the~~Note ~~amounts~~1, ~~and~~after ~~disclosures~~completion of a trial in the ~~financial~~Delaware ~~statements.~~Court Anof ~~audit~~Chancery ~~also~~as ~~includes~~to ~~assessing~~whether ~~the~~an ~~accounting~~event ~~principles~~of ~~used~~default had occurred under the Indenture and ~~significant~~prior ~~estimates~~to ~~made~~post-trial byhearings ~~management~~and a decision being rendered, asthe ~~well~~Company, asin ~~evaluating~~February 2006, reached a tentative agreement with the ~~overall~~Trustee ~~financial~~to ~~statement~~resolve ~~presentation~~the outstanding disputes among the parties, subject to certain conditions. WeThe ~~believe~~financial statements do not include any adjustments that ~~our~~ ~~audits~~might ~~provide~~result afrom ~~reasonable~~the ~~basis~~outcome ~~for~~of ~~our~~this ~~opinion~~uncertainty.

Eisner, LLP

New York, New York
March 10, 2006

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 threeF-~~year period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.~~ 2

INLAND ~~The~~FIBER ~~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~~GROUP, inLLC ~~January~~AND 2005, the Company 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. These events raise substantial doubt about the Company’s ability to continue as a going concern. As further described in Note 1, the Company 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. SUBSIDIARY

~~F-2~~Consolidated Balance Sheets

~~INLAND~~ ~~FIBER~~(in ~~GROUP, LLC AND SUBSIDIARY~~thousands)

Consolidated Balance Sheets
(in thousands)
		December 31,
		2004			2003
		2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	~~180~~307		$	~~1,447~~180
Accounts receivable		~~207~~575			~~530~~207
Other receivables		~~592~~485			~~332~~592
Notes receivable		~~139~~150			~~103~~139
Prepaid expenses and other current assets		134			220
Restricted cash		124			104
Total current assets		1,252			2,632
Prepaid expenses and other current assets		72			134
Timber and timberlands, net		84,247			129,002
Total current assets		1,713			1,356
Investment in affiliate		7,975			33,414
Timber and timberlands, net		80,934			84,247
Property, plant and equipment, net		799			833
Investment in affiliate		–			7,975
Notes receivable, less current portion		10			10
Property, plant and equipment, net		770			799
Other assets		150			-
Notes receivable, less current portion		–			10
Restricted cash		104			154
Other assets		85			150
Deferred financing fees, net		1,~~948~~273			21,~~623~~948
Total assets	$	9684,~~485~~775		$	~~168~~96,~~668~~485
LIABILITIES AND MEMBERS' DEFICIENCY
Current liabilities:
Accounts payable	$	~~760~~1,015		$	~~525~~561
Accrued liabilities		~~451~~2,198			~~749~~451
Accrued bond interest		224,~~752~~408			2,~~830~~752
Deferred revenue		~~1,041~~–			51,~~000~~041
Payable to managing member and affiliates		58850			46257
Long-term debt declared in default by trustee		225,000			-
Long–term debt declared in default by trustee		225,000			225,000
Total current liabilities		~~230~~253,~~062~~471			9230,~~150~~062
Long-term debt		-			225,000
Litigation (Note 13)
Members' deficiency:
Managing member's interest		(1,~~362~~704	)		(~~674~~1,362	)
Nonmanaging member's interest		(~~132~~166,~~215~~992	)		(64132,~~808~~215	)
		(133,577	)		(65,482	)
		(168,696	)		(133,577	)
Total liabilities and members' deficiency	$	9684,~~485~~775		$	~~168~~96,~~668~~485
See notes to consolidated financial statements

F-3

INLAND FIBER GROUP, LLC AND SUBSIDIARY

Consolidated Statements of Operations
(in thousands)
	Year Ended December 31,	~~Year Ended December 31,~~
		2004			2003				2002
	2005	2004		2003
Revenues:
Log and timber deed sales,
including $0 (2004), $4,200 (2003), and $9,900 (2002) to an affiliate	$	13,821			$	25,000		$	42,256
including $4,200 to an affiliate in 2003	$ 12,808	$ 13,821		$ 25,000
Timber and property sales
including $0 (2004), $9,519 (2003) and $4,700 (2002) to an affiliate		28,120				10,129			5,763
including $9,519 to an affiliate in 2003	–	28,120		10,129
By-products and other		2,379				2,001			1,455
By–products and other	497	2,379		2,001
		44,320				37,130			49,474
	13,305	44,320		37,130
Cost of products sold:
Cost of timber harvested	(8,191)	(9,965)	)	(13,252)		~~(13,252~~	)		~~(17,477~~	)
Cost of timber and property sales	–	(38,714)	)	(9,952)		~~(9,952~~	)		~~(7,273~~	)
Fire loss		-				-			(591	)
Depletion, depreciation and road amortization	(5,809)	(8,732)		(15,557)
Depletion, depreciation and road amortization		(8,732	)			(15,557	)		(27,476	)
	(14,000)	(57,411)		(38,761)
		(57,411	)			(38,761	)		(52,817	)
Gross loss	(695)	(13,091)		(1,631)
Gross loss		(13,091	)			(1,631	)		(3,343	)
Management fee to affiliate	(2,000)	(4,014)		(1,338)
Management fee		(4,014	)			(1,338	)		-
Selling, general and administrative expenses	(2,178)	(3,529)		(5,100)
Selling, general and administrative expenses		(3,529	)			(5,100	)		(7,518	)
Equity in net loss of affiliate	(7,975)	(25,439)		(17,039)
Equity in net loss of affiliate		(25,439	)			(17,039	)		(11,046	)
Operating loss	(12,848)	(46,073)		(25,108)
Operating loss		(46,073	)			(25,108	)		(21,907	)
Interest expense	(21,660)	(21,658)		(21,736)
Interest expense		(21,658	)			(21,736	)		(21,657	)
Amortization of deferred financing fees	(675)	(675)		(675)
Amortization of deferred financing fees		(675	)			(675	)		(675	)
Interest income	10	30		12
Interest income		30				12			13
Other income, net	54	281		190
Other income, net		281				190			158
Net loss	$ (35,119)	$ (68,095)		$ (47,317)
Net loss	$	(68,095	)		$	(47,317	)	$	(44,068	)
See notes to consolidated financial statements
See notes to consolidated financial statements

F-4

INLAND FIBER GROUP, LLC AND SUBSIDIARY

Consolidated Statements of Changes in Members' Equity (Deficiency)
Consolidated Statements of Changes in Members' Deficiency
(in thousands)
	Managing	~~Managing~~Nonmanaging	Total		~~Nonmanaging~~			~~Total~~
	Member's	~~Member~~Members's	Members'		~~Members'~~			~~Members'~~
	Interest	Interest	Deficiency		~~Interest~~			~~Equity~~
								(Deficiency)
Balance, December 31, 2002	$ (196)	$ (19,207)	$ (19,403)
Balance, December 31, 2001	$	247		$	24,418		$	24,665
Capital contribution	0	1,238	1,238
Net loss	(478)	(~~443~~46,839)	(47,317)		~~(43,625~~	)		~~(44,068~~	)
Balance, December 31, 2002		(196)			(19,207	)		(19,403	)
Balance, December 31, 2003	(674)	(64,808)	(65,482)
Capital contribution		0			1,238			1,238
Net loss	(688)	(67,407)	(68,095)
Net loss		(478			(46,839	)		(47,317	)
Balance, December 31, 2004	(1,362)	(132,215)	(133,577)
Balance, December 31, 2003		(674)			(64,808	)		(65,482	)
Net loss	(342)	(34,777)	(35,119)
Net loss		(688)			(67,407	)		(68,095	)
Balance, December 31, 2005	$ (1,704)	$ (166,992)	$ (168,696)
Balance, December 31, 2004	$	(1,362)		$	(132,215	)	$	(133,577	)
See notes to consolidated financial statements
See notes to consolidated financial statements

F-5

INLAND FIBER GROUP, LLC AND SUBSIDIARY

Consolidated Statements of Cash Flows
(in thousands)
			Year Ended December 31,	~~Year Ended December 31,~~
				2004			2003			2002
			2005		2004	2003
Cash flows from operating activities:
Net (loss)	$	$	(6835,~~095~~119)	$	(68,095)	$(47,317)	~~(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	6,047		~~47,177~~		47,177	25,509	~~25,509~~			~~34,749~~
Fire loss				-			-			574
Loss (Gain) on disposal of assets			10		-	(19)
Gain on disposal of assets				-			(19	)		-
Amortization of deferred financing fees			675		675	675
Amortization of deferred financing fees				675			675			675
Equity in net loss of affiliate	7,975				25,439	17,039
Equity in net loss of affiliate			25,439				17,039			11,046
Other non-cash items			–		(93)	–
Other non-cash items				(93	)		-			173
Changes in assets and liabilities:
Changes in assets and liabilities:
Accounts receivable			(368)		323	498
Accounts receivable				323			498			(717	)
Other receivables			107		(260)	(121)
Other receivables				(260	)		(121	)		69
Notes receivable			(11)		(36)	1,241
Notes receivable				(36	)		1,241			227
Prepaid expenses and other current assets			137		86	111
Prepaid expenses and other current assets				86			111			(106	)
Accounts payable			255		235	(929)
Accounts payable				235			(929	)		120
Accrued bond interest and other liabilities	24,253				(139)	(410)
Accrued liabilities				(139	)		(410	)		659
Deferred revenue	(1,041)				(3,959)	5,000
Deferred revenue			(3,959		)		5,000			-
Payable to general partner and affiliate			(58)		(226)	(3)
Payable to general partner and affiliate				(226	)		(3	)		(168	)
Net cash provided by operating activities			2,862		1,127	1,274
Net cash provided by operating activities			1,127				1,274			3,233
Cash flows from investing activities:
Cash flows from investing activities:
Purchase of property, plant and equipment - net			(19)		(6)	–
Purchase of property, plant and equipment - net				(6	)		-			(160	)
Proceeds from sale of assets			–		–	26
Proceeds from sale of assets				-			26			-
Timber, timberlands and road additions	(2,696)				(2,438)	(1,984)
Timber, timberlands and road additions			(2,438		)		(1,984	)		(3,096	)
Restricted cash			(20)		50	(72)
Restricted cash				50			(72	)		(82	)
Net cash used in investing activities	(2,735)				(2,394)	(2,030)
Net cash used in investing activities			(2,394		)		(2,030	)		(3,338	)
Cash flows from financing activities:
Cash flows from financing activities:
Capital contributions			–		–	1,238
Capital contributions				-			1,238			-
Net cash provided by financing activities			–		–	1,238
Net cash provided by financing activities				-			1,238			-
Net increase (decrease) in cash and cash equivalents			127		(1,267)	482
Net increase (decrease) in cash and cash equivalents			(1,267		)		482			(105	)
Cash and cash equivalents, beginning of period			180		1,447	965
Cash and cash equivalents, beginning of period			1,447				965			1,070
Cash and cash equivalents, end of period		$	307		180	1,447
Cash and cash equivalents, end of period			$	180		$	1,447		$	965
Supplemental cash flow information:
Supplemental cash flow information:
Cash paid for interest expense		$	4		21,734	21,658
Cash paid for interest expense			$	21,734		$	21,658		$	21,657
Noncash activities:
Noncash activities:
Contribution of timberlands for investment in affiliate		$	–		–	11,572
Contribution of timberlands for investment in affiliate			$	-		$	11,572		$	18,317
Assets transferred in repayment of debt		$	–		14	–
Assets transferred in repayment of debt			$	14		$	-		$	-
See notes to consolidated financial statements
See notes to consolidated financial statements

F-6

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)

1. Business and Significant Accounting Policies:

Business

The accompanying consolidated financial statements include the accounts of Inland Fiber Group, LLC (the “ "Company”"), a Delaware limited liability company, and its wholly owned subsidiary, Fiber Finance Corp. (“"Finance Corp.”"), collectively referred to hereafter as the Company. Finance Corp. serves as the co-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. (See note 8)

The primary activities of the Company are the growing of trees and the sale of logs and standing timber to third ~~party~~ party 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.

The Company is an indirect 99 % owned subsidiary of American Forest Resources, LLC ("AFR"). Prior to July 2003, Pacific Fiber Company, LP, a master limited partnership (the “"MLP”") ~~(formerly U.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. ~~Timber Resource Services, LLC~~ (~~formerly~~see ~~known~~"Going asPrivate UTransaction").S. ~~Timberlands~~Timber ~~Services~~Resource ~~Company~~Services, LLC), (the “"Manager”") which is controlled by Cascade Resource Holdings, LLC, an entity owned by senior management, which also controls the common ~~memebership~~membership interest ~~for~~ in AFR, ~~the Company's indirect parent,~~ manages the business of the Company, and owns a 1% non-voting membership interest in the Company.

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 13, inthe ~~December~~Company ~~2003,~~received Notices of Default and Acceleration from the ~~trustee~~Trustee under the Indenture governing the Company’'s $225,000 of Senior Notes, pursuant to which ~~mature~~the inTrustee ~~2007,~~demanded ~~commenced~~payment ~~litigation~~and ~~against~~accelerated the Company's ~~and~~ obligations ~~others~~under ~~alleging~~the Senior Notes, ~~among~~which ~~other~~raises ~~matters,~~substantial ~~that~~doubt about the Company's ~~has~~ability ~~violated~~to ~~certain~~continue ~~covenants~~as ~~contained~~a ingoing ~~the Indenture~~concern. ~~The Company~~ ~~has~~ After ~~denied~~completion ~~all~~ of ~~the allegations. In May 2004, the Company received~~ a ~~Notice~~trial ofon ~~Default from~~ the ~~Trustee~~related ~~covering~~issues ~~certain of the allegations~~ in the ~~complaint. In December 2004, the~~ Delaware Court of Chancery ~~granted~~as ~~the~~to ~~Trustee’s~~whether ~~motion for partial summary judgment and determined that~~ an ~~Event~~event of ~~Default~~default had occurred under the Indenture ~~governing~~and ~~the~~prior ~~Company’s~~to ~~Senior~~post-trial ~~Notes.~~hearings ~~On January~~and ~~13,~~a ~~2005~~decision being rendered, the Company, ~~received~~in aFebruary ~~Notice~~2006, ofreached ~~Default~~a tentative ~~and~~agreement ~~Acceleration~~with ~~from~~ the Trustee ~~pursuant~~ to ~~which~~resolve the ~~Trustee~~outstanding ~~demanded payment~~disputes ~~and~~among ~~accelerated~~ the ~~Company’s~~parties, ~~obligations~~subject ~~under~~to ~~the~~certain ~~Senior Notes~~conditions. ~~These~~The settlement ~~events~~would ~~raise~~include ~~substantial doubt about~~ the ~~Company’s ability~~alleged toexisting ~~continue~~defaults, asthe aaccrued ~~going~~and ~~concern.~~unpaid ~~The~~interest, ~~Company~~the ~~continues~~termination toof ~~deny~~all ~~the~~pending ~~existence~~litigation, and ofa anrelease ~~Event~~ of ~~Default~~all ~~under~~ the ~~Indenture~~parties. ~~and in~~The ~~March~~financial ~~2005~~statements ~~appealed~~do ~~the~~not ~~ruling~~include ofany ~~the~~adjustments ~~Delaware~~that ~~Court~~might ofresult ~~Chancery~~from to the ~~Supreme Court~~ outcome of ~~the~~this ~~State of Delaware~~uncertainty. ~~The~~

~~F-7~~.

~~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)~~F-7

~~consolidated~~ ~~financial~~INLAND ~~statements~~FIBER doGROUP, ~~not~~LLC ~~include~~AND ~~any~~SUBSIDIARY ~~adjustments~~ Notes ~~that~~to ~~might~~Consolidated ~~result~~Financial ~~from~~Statements ~~the~~ (dollar ~~outcome~~amounts ofin ~~this~~thousands, ~~uncertainty.~~except per unit amounts or otherwise noted)

OnGoing ~~October~~Private ~~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, 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~~ 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~~The ~~99%~~group ~~interest~~beneficially inowned 36.4% of the ~~Company~~combined ~~originally~~outstanding ~~held~~limited bypartnership units of the MLP ~~was~~consisting ~~transferred~~of in16% aof ~~series~~the common units and 98% of ~~transactions~~the tosubordinated units. aThe ~~newly-formed~~definitive ~~limited~~agreement ~~liability~~contemplated ~~company,~~a ~~IFG~~cash ~~Holdings,~~tender ~~LLC. IFG~~offer ~~Holdings, LLC~~for is100% ~~wholly~~of ~~owned~~the byoutstanding ~~American~~common ~~Forest~~limited ~~Resources,~~partnership ~~LLC~~units not ~~(“AFR”),~~already inowned ~~which~~by the ~~Company~~acquiring ~~holds~~entity aor ~~preferred~~its ~~equity~~affiliates ~~interest~~for $3.00 Asper ~~part~~unit ofin ~~this~~cash, ~~reorganization~~followed by a merger of the ~~ownership~~acquisition company ~~structure~~with ofand into the ~~Company~~MLP, apursuant ~~Board~~to ofwhich ~~Directors~~each ~~was~~common ~~elected~~limited ~~for~~partnership unit not already owned by the acquiring entity ~~Company~~ or its affiliates would be converted into the right to ~~supervise~~receive ~~its~~$3.00 ~~operations~~per ~~and~~unit ain ~~new~~cash. ~~management~~The ~~arrangement~~tender offer commenced on November 19, 2002 and was ~~established~~completed ~~under~~on ~~which~~March 6, 2003. In connection with the ~~Manager~~tender offer, ~~whose~~approximately ~~interest~~71% ~~was~~of ~~converted~~the ~~into~~MLP's acommon 1%units were tendered. The remaining common units held by non-~~voting~~affiliates ~~interest~~not purchased in the ~~Company,~~tender ~~provides~~offer ~~comprehensive~~were ~~timber~~converted ~~management~~into ~~services~~the right to receive $3.00 per common unit, in the ~~Company pursuant~~merger towhich awas ~~fee-based~~completed ~~management~~on ~~agreement~~June 26, 2003.

Subsequent to the Privatization Transaction, the 99% interest in the Company originally held by the MLP was transferred As in a ~~result~~series of ~~the~~transactions ~~Privatization~~to ~~Transaction~~a ~~described~~newly-formed ~~above~~limited liability company, IFG Holdings, LLC. IFG Holdings, LLC is wholly owned by AFR, in which the Company isholds ana ~~indirect~~preferred ~~99%~~equity ~~owned~~interest. ~~subsidiary~~As part of ~~American~~this ~~Forest~~reorganization ~~Resources~~of the ownership structure of the Company, ~~LLC~~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.

Because 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.

~~The~~ ~~preparation~~Use of ~~financial~~Estimates 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 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.

~~F-8~~ 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 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..

~~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)~~F-8

~~Revenue~~ ~~Recognition~~INLAND FIBER GROUP, LLC AND SUBSIDIARY Notes to Consolidated Financial Statements (dollar amounts in thousands, except per unit amounts or otherwise noted)

Revenue on delivered log sales is recognized upon delivery to the customer. Revenue on timber deeds and timber and property sales is generally recognized upon closing. Revenue from timber sold under stumpage contracts (i.e., the customer arranges to harvest and deliver the logs) is recognized when the timber is harvested.Recognition

~~Concentration~~ Revenue ofon ~~Credit~~delivered ~~Risk~~log sales is recognized upon delivery to the customer. Revenue on timber deeds and timber and property sales is generally recognized upon closing. Revenue from timber sold under stumpage contracts (i.e., the customer arranges to harvest and deliver the logs) is recognized when the timber is harvested.

~~Financial~~Concentration ~~instruments that potentially subject the Company to concentrations~~ of credit risk consist principally of trade accounts and notes receivable. The majority of the Company’s trade accounts and notes receivable are derived from sales to third party wood processors. The Company’s four largest, non-affiliated customers accounted for approximately 31%, 14%, 14%, and 12% of the Company’s aggregate net revenues from log and timber deed sales for the year ended December 31, 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, one customer accounted for approximately 25% of 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. Risk

~~The~~Financial instruments that potentially subject the Company ~~periodically~~to concentrations ~~reviews~~of ~~its~~credit ~~allowance~~risk ~~for~~consist ~~doubtful~~principally of trade accounts and ~~provides~~notes anreceivable. ~~estimated~~The ~~amount~~majority ~~for~~of ~~such~~the Company’s trade accounts and notes receivable are derived from sales to third party wood processors. The Company’s four largest, if non-affiliated ~~required.~~customers Asaccounted for approximately 33%, 16%, 14%, and 12% of the Company’s aggregate net revenues from log and timber deed sales for the year ended December 31, 2005. In 2004, four non-affiliated customers represented approximately 31%, 14%, 14% and 12% respectively, of aggregate net revenues from log and timber deed sales. In 2003, notwo ~~allowance~~non-affiliated customers accounted for ~~doubtful~~approximately ~~accounts~~25% ~~was~~and ~~required~~13% of 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 ~~Equivalents~~an estimated amount for such accounts, if required. As of December 31, 2005 and 2004, 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~~equivalents ~~Timberlands~~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 and timberlands is comprised of timber, ~~timberland~~timberlands, logging roads, and ~~roads~~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

~~F-9~~ Timber, 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

~~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)~~F-9

~~recognized~~ INLAND ~~prospectively. Changes~~FIBER inGROUP, ~~these~~LLC ~~estimates~~AND ~~have~~SUBSIDIARY no Notes ~~effect~~to onConsolidated ~~the~~Financial ~~Company’s~~Statements ~~cash~~ (dollar ~~flow.~~amounts in thousands, except per unit amounts or otherwise noted)

~~The~~merchantable ~~Company~~volume, ~~operates~~primarily ~~and~~utilizing ~~maintains~~ a ~~seed~~single ~~orchard~~composite ~~and nursery~~pool. ~~Cost~~The ~~incurred~~Company byestimates ~~the~~its ~~orchard~~timber ~~and~~inventory ~~nursery~~using tostatistical ~~produce seed~~ information and ~~seedlings~~data ~~utilized~~obtained infrom ~~the~~physical ~~reforestation~~measurements, ofsite ~~the~~maps, ~~Company’s timberlands~~photo ~~are~~types ~~capitalized to seed orchard~~ and ~~nursery~~other ~~stock~~information ingathering ~~the accompanying balance sheets~~techniques. A ~~certain~~These ~~amount~~estimates are ofupdated ~~seed~~annually and ~~seedling~~may ~~stock~~result isin ~~sold~~adjustments toof ~~unaffiliated~~timber ~~customers~~volumes and isdepletion ~~reflected~~rates, aswhich aare ~~component~~recognized ofprospectively. Changes ~~by-products~~in ~~and~~these ~~other~~estimates ~~revenues~~have inno effect on the ~~accompanying~~ ~~statements~~Company’s ofcash ~~operations~~flow.

Seed orchard and nursery stock

The ~~Property,~~Company ~~plant~~operates and ~~equipment,~~maintains ~~including~~a ~~significant~~seed ~~improvements~~orchard ~~thereto,~~and ~~are~~nursery. ~~stated~~Cost incurred atby ~~cost~~the ~~less~~orchard ~~accumulated~~and ~~depreciation~~nursery ~~and~~to ~~amortization. Cost~~produce ~~includes~~seed ~~expenditures~~and ~~for~~seedlings ~~major~~utilized ~~improvements~~in ~~and~~the ~~replacements.~~reforestation ~~Maintenance~~of ~~and repairs~~the Company’s timberlands are ~~charged~~capitalized to ~~expense~~seed asorchard ~~incurred.~~and ~~When~~nursery ~~assets~~stock ~~are~~in ~~sold,~~the ~~retired~~accompanying orbalance ~~otherwise~~sheets. ~~disposed~~A ~~of,~~certain ~~the~~amount ~~cost~~of seed and ~~accumulated~~seedling stock ~~depreciation~~is ~~are~~sold ~~removed~~to ~~from~~unaffiliated ~~the~~customers ~~accounts~~ and ~~any~~is ~~resulting~~reflected ~~gain~~as ora ~~loss~~component isof ~~reflected~~by-products and other revenues in ~~income.~~the accompanying statements of operations.

Property, Plant and Equipment

Property, plant ~~The~~and ~~cost~~equipment, ofincluding ~~property,~~significant ~~plant~~improvements ~~and~~thereto, ~~equipment~~are isstated ~~depreciated~~at ~~using~~cost ~~the~~less ~~straight-line~~accumulated ~~method~~depreciation ~~over~~and ~~the~~amortization. Cost ~~estimated~~includes ~~useful~~expenditures ~~lives~~for ofmajor ~~the~~improvements ~~related~~and ~~assets~~replacements. ~~Buildings~~Maintenance and ~~improvements~~repairs are ~~generally~~charged ~~depreciated~~to ~~over~~expense 40as ~~years and equipment is~~incurred. ~~depreciated~~ When ~~over~~assets 3are tosold, 5retired ~~years. Leasehold~~or ~~improvements~~otherwise ~~are~~disposed ~~amortized~~of, ~~under~~ the ~~straight-line~~cost ~~method~~and ~~based~~accumulated ondepreciation ~~the~~are ~~shorter~~removed offrom the ~~lease~~accounts and ~~periods~~any orresulting ~~the~~gain ~~estimated~~or ~~useful~~loss ~~lives~~is ofreflected ~~the~~in ~~improvements~~income.

The ~~Deferred~~ cost ~~financing fees consist~~ of ~~fees~~property, ~~incurred~~plant inand ~~connection~~equipment ~~with~~is ~~obtaining~~depreciated using the ~~related~~straight-line ~~debt~~method ~~financing. The Company amortizes deferred financing fees~~ over the ~~terms~~estimated useful lives of the related ~~debt. The~~ ~~Company~~ assets. ~~presents~~Buildings ~~deferred~~and ~~financing~~improvements ~~fees~~are ~~net~~generally ofdepreciated ~~accumulated~~over ~~amortization. The~~40 ~~accumulated~~years ~~amortization~~and ofequipment ~~deferred~~is ~~financing~~depreciated ~~fees~~over as3 ofto ~~December~~5 ~~31,~~years. ~~2004~~Leasehold improvements ~~and~~are ~~2003~~amortized ~~was~~under ~~$4,802~~the ~~and~~straight-line ~~$4,127,~~method ~~respectively.~~based Inon the ~~event~~shorter of the ~~Company~~lease ~~doesn’t prevail~~periods inor the ~~litigation~~estimated ~~discussed~~useful lives ~~in “Note 1 - Basis~~ of ~~Presentation”,~~ the ~~unamortized balance will be written off~~improvements.

Deferred Financing Fees

Deferred financing fees consist of fees incurred in connection with obtaining the related debt financing. The Company isamortizes adeferred financing ~~limited~~fees ~~liability~~over ~~company.~~the ~~Accordingly,~~terms of the related debt. The Company ispresents ~~not~~deferred ~~liable~~financing ~~for~~fees ~~federal~~net orof ~~state~~accumulated ~~income~~amortization. The ~~taxes~~accumulated ~~since~~amortization ~~the~~of ~~Company’s~~deferred ~~income~~financing orfees ~~loss~~as isof ~~reported~~December on31, ~~the~~2005 ~~separate~~and ~~tax~~2004 ~~returns~~was $5,477 and $4,802, respectively. of In the ~~members.~~event ~~Accordingly,~~the noCompany ~~provision~~doesn’t ~~for~~prevail ~~current~~in the litigation or ~~deferred~~reach ~~income~~a ~~taxes~~settlement ~~has~~with ~~been~~the ~~reflected~~Trustee as discussed in “Note 1 - Basis of Presentation”, the ~~accompanying~~unamortized ~~financial~~balance ~~statements~~will be written off.

Income Taxes

~~F-10~~ The 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

~~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)~~F-10

~~Unit-Based~~ INLAND ~~Compensation~~FIBER ~~Plans~~GROUP, LLC AND SUBSIDIARY Notes to Consolidated Financial Statements (dollar amounts in thousands, except per unit amounts or otherwise noted)

~~Prior~~returns of to the ~~Privatization Transaction, the MLP had a Unit Option Plan which is described more fully in Note 9~~members. ~~As permitted under SFAS No. 123~~Accordingly, ~~“Accounting~~no provision for ~~Stock-Based~~current ~~Compensation”, the~~or ~~Company~~deferred ~~had~~income ~~elected~~taxes tohas ~~continue~~been toreflected ~~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~~accompanying ~~on net loss if the Company had applied~~financial ~~the fair value recognition provisions of SFAS No~~ statements. ~~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	)

Variable Interest Entities

~~For~~ In ~~purposes~~January of2003, the ~~pro~~FASB ~~forma~~issued ~~disclosures,~~Interpretation ~~the~~No. ~~estimated~~46 ~~fair~~(FIN ~~value~~46) "Consolidation of ~~the~~Variable ~~unit~~Interest Entities" ~~options~~ which is ~~amortized~~an tointerpretation ~~expense~~of ~~over~~Accounting ~~their~~Research ~~estimated~~Bulletin ~~exercise~~No. ~~period~~51 "Consolidated Financial Statements." In December 2003, ~~which~~the FASB ~~corresponds~~modified FIN 46 to make certain technical corrections and address certain implementation issues that had arisen. FIN 46 requires the ~~assumed~~consolidation ~~conversion~~of ~~period~~entities in which an enterprise absorbs a majority of the entity's expected losses, receives a ~~then~~ majority ~~outstanding~~of ~~subordinated~~the ~~limited~~entity's ~~partnership~~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 ~~MLP~~entity.

The Inprovisions ~~connection~~of ~~with~~FIN 46 as revised were applicable to the ~~Privatization~~Company ~~Transaction,~~as ~~each~~of ~~outstanding~~March ~~unit~~31, ~~option granted~~2004. ~~under~~The Company has considered the ~~Unit~~applicability ~~Option~~of ~~Plan~~FIN ~~was~~46 ~~converted~~to ~~into~~its aninvestment ~~option~~in toits ~~receive,~~indirect ~~upon~~parent ~~exercise~~company, ~~including~~American ~~payment~~Forest ofResources, ~~the~~LLC ~~exercise~~(formerly ~~price,~~U.S. ~~the~~ Timberlands ~~$3.00~~Yakima, ~~per~~LLC) ~~unit~~and ~~merger~~has ~~consideration.~~concluded ~~Because~~that ~~the~~American ~~exercise~~Forest ~~price~~Resources, ~~for~~LLC ~~each~~is ~~option~~not ~~was~~a ~~greater~~variable ~~than~~interest ~~the~~entity ~~merger~~and ~~consideration, the~~therefore ~~Company~~ its ~~does~~financial ~~not~~statements ~~expect~~are ~~any~~not ~~options~~required to be ~~exercised~~consolidated inwith those of the ~~future~~Company pursuant to the provisions of FIN 46.

No2. ~~options~~Timber ~~were granted in 2004, 2003,~~ and ~~2002.~~Timberlands:

~~Recent~~ ~~Accounting~~Timber ~~Standards~~and timberlands consisted of the following at December 31:

2005 2004 Timber Inand ~~January~~logging ~~2003, the FASB issued Interpretation No. 46 (FIN 46) “Consolidation~~roads of $ ~~Variable Interest Entities” which is an interpretation of Accounting Research Bulletin No. 51 “Consolidated Financial~~ ~~Statements.”~~ 255,690 $ ~~In December 2003~~ 252,701 Timberlands 11,970 11,970 Seed ~~the~~orchard ~~FASB modified FIN 46 to make certain technical corrections~~ and ~~address~~nursery ~~certain implementation~~stock ~~issues that had arisen. FIN 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s~~ ~~expected losses~~ 1, ~~receives a majority of the entity’s expected residual returns~~243 1, ~~or both~~373 268, ~~as a result of ownership~~903 266, ~~contractual~~044 or Less ~~other~~accumulated ~~financial~~depletion ~~interests~~and inroad ~~the entity. Previously~~amortization 187,969 181,797 $ ~~entities were generally consolidated by an enterprise when it had a controlling~~ ~~financial~~ 80,934 $ ~~interest through ownership of a majority voting interest in the entity.~~ 84,247

~~The provisions of FIN 46 as revised were applicable to the Company as of March 31, 2004~~3. Investment ~~The Company has considered the applicability of FIN 46 to its investment~~ in ~~its~~Affiliate: ~~indirect~~

~~F-11~~ 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).

~~INLAND~~As ~~FIBER~~described ~~GROUP~~in Note 1, ~~LLC~~in ~~AND~~July ~~SUBSIDIARY~~2003 ~~Notes~~the toCompany ~~Consolidated~~became ~~Financial~~an ~~Statements~~indirect ~~December~~subsidiary 31of AFR, ~~2004~~as ~~and~~the ~~2003~~result ~~(dollar~~of ~~amounts~~a incontribution ~~thousands,~~to ~~except~~AFR ~~per~~of ~~unit~~the ~~amounts~~99% ornon-managing ~~otherwise~~member's ~~noted)~~interest in the Company previously owned by the MLP.

parent company, American Forest Resources, LLC (formerly U.S. Timberlands Yakima, LLC) and has 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. F-11

INLAND ~~Timber~~FIBER ~~and~~GROUP, ~~timberlands~~LLC ~~consisted~~AND ofSUBSIDIARY Notes ~~the~~to ~~following~~Consolidated atFinancial ~~December~~Statements ~~31:~~ (dollar amounts in thousands, except per unit amounts or otherwise noted)

		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

The following summarized financial information for AFR is presented without consolidation of the Company's assets, liabilities and results of operations to avoid duplication which would otherwise occur. AFR's investment in the Company is accounted for by the equity method. The carrying amount 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.

~~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, (“~~AFR~~”),~~ anas ~~affiliate~~of ~~accounted~~and for ~~under~~ the ~~equity~~years ~~method~~ended ~~(see~~December ~~Note 8).~~ 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.

2005

2004

2003

Current assets

4,870

1,384

754

Noncurrent assets, principally timber and timberlands

108,950

128,096

136,227

Investment in Inland Fiber Group, LLC

(100,508

)

(63,712

)

(12,272

)

Current liabilities, including $114,448 and $124,220 of debt

in default in 2005 and 2004, respectively

130,316

133,833

5,886

Noncurrent liabilities - long-term debt

121,383

Redeemable preferred member interest (owned by the

Company)

50,683

(2)

Common member deficiency

(167,790

)

(118,747

)

(53,243

)

Net sales

12,331

9,977

27,624

Gross profit

3,636

129

580

Loss before equity in the Company's loss

(12,248

)

(16,655

)

(9,926

)

Equity in the Company's loss (1)

(36,796

)

(51,440

)

(33,407

)

Net loss

(49,044

)

(68,095

)

(43,333

)

The following summarized financial information for AFR is presented without consolidation of the Company’s assets, liabilities and results of operations to avoid duplication which would otherwise occur. AFR’s investment in the Company is accounted for by the equity method. The carrying amount 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.

(1)	Reflects (a) charges of $9,652 in 2005, $8,784 in 2004, and $7,152 in 2003 related to the amortization of $43,287 excess cost over deficiency in net assets attributable to 63.6% acquired interest and (b) benefit of $3,984 in 2003 representing share of the Company's net loss for 2003 attributable to 63.6% acquired interest prior to acquisition.

(2)	Represents balance at beginning of year increased by $11,572 contribution of timberlands by the Company during 2003.

~~F-12~~4. Property, Plant and Equipment:

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

~~Following is summarized financial information for AFR as of and for the years ended December 31:~~ F-12

		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	)

INLAND FIBER GROUP, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
(dollar amounts in thousands, except per unit amounts or otherwise noted)

(1) Reflects (a) charges of $8,784 in 2004 and $7,152 in 2003 related to the amortization of $43,287 excess cost over deficiency in net assets attributable to 63.6% acquired interest and (b) benefit of $3,984 representing share of the Company’s net loss for 2003 attributable to 63.6% acquired interest, prior to acquisition.


		2005		2004

Equipment	$	325	$	322
Buildings and improvements		997		995

		1,322		1,317
Less accumulated depreciation and amortization		552		518

	$	770	$	799

~~(2)~~5. ~~Represents~~Affiliate ~~balance~~Credit ~~at beginning of year increased by $11,572 contribution of timberlands by the Company during 2003.~~Facility:

4 The Company 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 ~~Property~~million which expired in 2002. The Company had sought to replace the Affiliate Credit Facility with a working capital facility from an unaffiliated third party, ~~Plant~~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 and ~~Equipment:~~2005, 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. During 2003, the maximum borrowings outstanding from the affiliate was $424, all of which had been repaid as of December 31, 2003.

~~Property,~~ No ~~plant~~interest and ~~equipment~~commitment ~~consisted~~fees ofwere paid to the ~~following~~affiliate atin ~~December~~2003, ~~31:~~2004 and 2005.

		2004		2003
Equipment	$	322	$	545
Buildings and improvements		995		995
		1,317		1,540
Less accumulated depreciation and amortization		518		707
	$	799	$	833

6. Long-Term Debt:

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% per annum payable semiannually in arrears on May 15 and November 15, and mature on November 15, 2007 unless previously redeemed. ~~Affiliate~~The ~~Credit~~Notes ~~Facility:~~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 ~~had~~and aits ~~credit~~subsidiaries ~~facility~~to ~~with~~make ancash ~~affiliate~~distributions, incur additional indebtedness, sell assets or harvest timber in excess of ~~the~~certain ~~Manager~~limitations. (Under certain restrictive covenants, during 2005 and 2004, the ~~“Affiliate~~Company was and presently is prohibited ~~Credit~~ from ~~Facility”)~~making ~~consisting~~distributions to its members. In 2002, because of athe ~~revolving~~accelerated ~~line~~harvesting during the fourth quarter 2002 of ~~credit~~salvage timber upresulting tofrom ~~$12.0~~the ~~million~~Toolbox Fire, the Company exceeded the allowable four year harvest by 6.9 ~~Borrowings~~MMBF and, as required under the Indenture, had placed $662 in a restricted account during the ~~Affiliate~~first ~~Credit~~quarter ~~Facility bore~~of ~~interest~~2003 atonly to be used in ways prescribed in the ~~prime~~Indenture. ~~lending~~A ~~rate~~balance asof ~~published~~$0 remained in the ~~Wall~~restricted ~~Street~~account ~~Journal~~as of December 31, 2005.

No interest and commitment fees were paid to the affiliate in 2003, 2004 and 2005.

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)

~~Journal~~     As ~~plus~~of ~~applicable~~December ~~margin~~31, ~~which~~2004, ~~was based on~~ the Company’s ~~leverage~~believed ~~ratio.~~it ~~The~~was ~~Affiliate Credit~~in ~~Facility~~compliance ~~expired,~~with the bycovenants ~~its~~contained ~~terms,~~in at the ~~end~~Notes. ofHowever, ~~April~~the ~~2002.~~Trustee ~~The~~under ~~Company~~the ~~had~~Indenture ~~sought~~has toalleged ~~replace~~and the ~~Affiliate~~Court ~~Credit~~of ~~Facility~~Chancery ~~with~~ of athe ~~working~~State ~~capital~~of ~~facility~~Delaware ~~from~~had andetermined ~~unaffiliated~~that ~~third~~the ~~party,~~Company ~~but~~ has ~~been~~violated ~~unable~~certain tocovenants ~~obtain~~contained ain ~~working~~the ~~capital credit facility~~Indenture. Furthermore, in ~~amounts~~January to2005 ~~fund~~and ~~its~~July ~~working~~2005, ~~capital~~the ~~needs~~Trustee ~~from~~sent ~~a traditional commercial lender. While~~ the Company ~~continues~~Notices toof ~~seek~~Default aand ~~credit~~Acceleration pursuant ~~facility~~ to ~~from~~which anthe ~~unaffiliated~~Trustee ~~source,~~declared ~~affiliated~~the ~~lenders~~unpaid ~~have~~principal ~~agreed~~and toany ~~make~~accrued ~~short~~interest ~~term~~on ~~advances to~~ the ~~Company,~~Notes ~~payable on demand~~ to ~~the~~be ~~affiliates,~~immediately atdue ~~an annual interest rate of 10%~~and payable. ~~During 2004~~Accordingly, ~~there~~the ~~were~~Notes nohave ~~borrowings~~been ~~from~~classified ~~affiliated~~as ~~lenders. The~~a ~~affiliate~~current ~~has~~liability ~~made~~in nothe ~~commitment~~accompanying tobalance ~~continue~~sheet toat ~~lend~~December 31, ~~funds~~2005 toand ~~the~~2004. ~~Company,~~See ~~and~~Note ~~each~~13 ~~request~~for isa ~~considered~~description onof alitigation ~~case~~related ~~by case~~to ~~basis.~~this matter.

     ~~There~~ The ~~were~~Company notimely ~~outstanding~~paid ~~borrowings~~to ~~from~~the ~~affiliated~~Trustee ~~lenders~~the atsemi-annual ~~December~~interest ~~31,~~payment ~~2004~~on ~~and~~the ~~2003~~Notes due November 15, 2004. ~~Peak~~ ~~borrowings~~The ~~were~~Company subsequently became aware that the Trustee withheld approximately $04.8 ~~and~~million, which was reduced to approximately $~~424~~2.8 million, from ~~affiliated~~such ~~lenders~~payment ~~during~~to ~~2004~~fund its cost of litigation against the Company and ~~2003,~~paid ~~respectively.~~the NoNoteholders a corresponding reduced amount of interest. The Company believes the Trustee did not have the right to withhold such amount and ~~commitment~~is ~~fees~~responsible ~~were~~to ~~paid~~pay such interest to the ~~affiliate~~Noteholders and, in ~~2002~~December 2004, ~~2003~~commenced ~~and~~litigation ~~2004.~~against the Trustee (see Note 13).

6      As of December 31, 2005, the Company has not made its semi-annual interest payments on the Notes which were due on May 15 and November 15, 2005, which amounted to $21,656, as a result of the litigation with the Trustee and the acceleration of the Notes. ~~Long~~Such non-~~Term~~payment ~~Debt:~~constitutes an event of default under the Indenture.

     ~~The~~      In ~~$225,000~~February ~~of Senior Notes (the “Notes”)~~2006, ~~which were issued in 1997, were issued jointly and severally by~~ the Company ~~and~~reached ~~Finance~~a ~~Corp.,~~tentative aagreement ~~wholly~~with ~~owned~~the ~~subsidiary~~Trustee to ofresolve the ~~Company~~ outstanding disputes (~~collectively,~~see ~~the~~Note ~~“Issuers”~~13). ~~The~~Due ~~Issuers~~to ~~serve~~the aspending ~~co-obligors~~settlement, of the ~~Notes.~~Company ~~The~~does ~~Notes~~not ~~represent~~expect ~~unsecured~~that ~~general~~ it ~~obligations~~will ofmake the ~~Issuers and bear~~ interest atpayment ~~9-5/8%~~due ~~payable semiannually in arrears on~~ May 15 ~~and November 15~~, ~~and~~ ~~mature on November 15, 2007 unless previously redeemed~~2006. ~~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 limitations7. ~~Under~~Members' ~~certain~~Equity: 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 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 $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~~      As ~~Company~~provided ~~timely~~in ~~paid to~~ the ~~Trustee~~Company's ~~the~~Operating ~~semi-annual interest payment on the Notes due November 15~~Agreement, ~~2004.~~income ~~The~~and ~~Company~~losses ~~subsequently~~are allocated ~~became~~99% ~~aware~~to ~~that~~IFG ~~the Trustee withheld approximately $4.8 million~~Holdings, ~~which~~LLC ~~was~~and ~~reduced~~1% to ~~approximately~~the $2Manager.8 ~~million, from such~~

~~F-14~~ 8. Certain Relationships and Related Party Transactions:

     ~~INLAND~~ Manager ~~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)~~

~~payment~~ toThe ~~fund~~Manager ~~its~~manages ~~cost of litigation and paid~~ the ~~Noteholders~~timber aoperations ~~corresponding reduced amount~~ of ~~interest. The Company 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 13)~~Company.

   ~~The~~      Until ~~next~~September ~~semi-annual~~1, ~~interest~~2003, ~~payment~~the onManager ~~the~~did ~~Notes~~not isreceive ~~due~~any ~~May~~management fee ~~15,~~ or ~~2005,~~other ~~subject~~compensation toin aconnection 30with ~~day~~its ~~grace~~management ~~period.~~of ~~The~~the Company, isbut ~~considering~~was ~~its~~reimbursed ~~options~~for ~~regarding~~all ~~such~~direct ~~payment~~and ~~given~~indirect expenses ~~the~~incurred ~~pendency~~ on behalf of the ~~litigation~~Company (including wages and ~~the~~salaries ~~acceleration~~of employees, officers and directors of the Manager) ~~Notes.~~and ~~There~~all isother ~~substantial~~necessary ~~risk~~or ~~that~~appropriate expenses allocable to the Company ~~may~~or ~~not~~otherwise ~~make~~reasonably ~~this interest~~incurred ~~payment~~ by the Manager in connection with the operation of the Company's business.

~~7. Members’ Equity:~~F-14

     As      INLAND ~~provided~~FIBER inGROUP, ~~the~~LLC ~~Company’s~~AND ~~Operating Agreement,~~SUBSIDIARY ~~income~~ Notes ~~and~~to ~~losses~~Consolidated ~~are~~Financial ~~allocated~~Statements ~~99%~~ (dollar toamounts ~~IFG~~in ~~Holdings~~thousands, ~~LLC~~except ~~and~~per 1%unit toamounts ~~the~~or ~~Manager.~~otherwise noted)

8       On September 1, 2003, the Company completed a management agreement with the Manager. ~~Certain~~The ~~Relationships~~new management agreement replaced the prior arrangement under which the Company reimbursed the Manager for expenses incurred on the Company's behalf. The new management agreement, provides for an annual fee of 2% of the agreed upon valuation of total timber and ~~Related~~timberland ~~Party~~assets ~~Transactions:~~under management, payable monthly. Fees incurred under the management agreement were $2,000, $4,014 and $1,338 for 2005, 2004 and for the period September 1 through December 31, 2003, respectively.

     As of December 31, 2005 and 2004, the Company had accrued management fees of $836 and $0, respectively. During 2005, 2004, and 2003, expenses (included in selling, general and administrative expenses) allocated to and reimbursed by the Company to the Manager totaled $294, $290, and $2,191 respectively. Such expenses for the period since September 1, 2003 represent services not incorporated in the management agreement.

~~The~~ ~~Manager~~Consulting ~~manages~~Agreements ~~the timber operations of the Company.~~

~~Until~~      Through ~~September~~June 1, 2003, the Manager ~~did~~had ~~not~~consulting ~~receive~~agreements ~~any~~with ~~management~~affiliates of ~~fee~~certain orpersons ~~other compensation~~who inwere ~~connection~~directors ~~with~~of ~~its~~the ~~management~~Manager ofduring the ~~Company~~terms of such consulting agreements, ~~but~~pursuant ~~was~~to ~~reimbursed~~which each ~~for~~such ~~all~~person ~~direct~~or ~~and~~firm ~~indirect~~had ~~expenses~~provided ~~incurred on~~consulting ~~behalf~~services ofto the ~~Company~~Manager ~~(including~~The ~~wages~~agreements ~~and~~provided ~~salaries~~for an annual retainer of ~~employees~~$25, ~~officers~~plus ~~and~~an ~~directors~~hourly rate for services rendered at the request of the Manager). ~~and~~The ~~all~~consulting ~~other~~agreements ~~necessary~~were discontinued or in ~~appropriate~~July ~~expenses~~2003. Payments ~~allocable~~by to the ~~Company~~Manager orrelated ~~otherwise~~to ~~reasonably~~consulting ~~incurred~~agreements byamounted ~~the~~to ~~Manager~~$56 in ~~connection~~2003. ~~with~~Such ~~the~~fees ~~operation~~were of reimbursed to the ~~Company's~~Manager ~~business.~~by the Company.

OnInvestments ~~September~~in 1,and ~~2003,~~Transactions ~~the Company completed a management agreement~~ with ~~the~~Affiliates Manager. The new management agreement replaced the prior arrangement under which the Company reimbursed the Manager for expenses incurred on the Company’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. For the period September 1 through December 31, 2003, fees of $1,338 were incurred under the management agreement and for 2004 the amount incurred was $4,014.

As ofIn ~~December~~October 311999, ~~2004~~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 ~~2003~~Central Oregon, is engaged in the ~~Company~~growing ~~had~~of ~~accrued~~trees ~~management~~and ~~fees~~ sale of ~~$257~~logs and ~~$46,~~standing ~~respectively~~timber to third party wood processors. ~~During~~The ~~2004,~~MLP ~~2003,~~contributed ~~and~~to AFR ~~2002~~$294 ~~expenses~~of cash for 49% of AFR's common interests (~~included~~the "Common LLC Interests"). The remaining Common LLC Interests were acquired for $306 in ~~selling,~~cash ~~general~~by ~~and~~Cascade ~~administrative~~Resource ~~expenses~~Holdings Group ("Holdings Group") a Delaware limited liability ~~allocated~~ company toin ~~and~~which ~~reimbursed~~John byRudey, the Chairman of the Board of the Company, toholds a controlling interest. The Company also acquired all of the ~~Manager~~senior ~~totaled~~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 agreed upon value of $~~290~~22,000. The Company recorded its investment in the Senior LLC interest at its $218,~~191~~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 $322,~~323~~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, ~~respectively~~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

F-15

     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)

~~Consulting~~accrued ~~Agreements      Through~~dividends ~~June~~to ~~2003,~~ the ~~Manager~~extent ~~had~~earned, ~~consulting~~reduced ~~agreements~~by ~~with affiliates~~losses ofin ~~certain~~excess ~~persons~~of ~~who~~the ~~were~~Common ~~directors~~LLC ofInterests. As the Company ~~Manager~~has ~~during~~not ~~the~~guaranteed ~~terms~~obligations of ~~such consulting agreements~~AFR, ~~pursuant~~nor ~~to which~~is ~~each~~otherwise ~~such~~committed ~~person~~to orprovide ~~firm~~further ~~had~~financial ~~provided~~support ~~consulting~~for AFR, ~~services to~~ the ~~Manager.~~Company ~~The~~discontinued ~~agreements~~applying ~~provided~~the ~~for~~equity anmethod ~~annual~~in ~~retainer of~~2005 ~~$25,~~when ~~plus~~its aninterest ~~hourly~~in ~~rate~~AFR ~~for~~was ~~services~~reduced ~~rendered~~to atzero. Accordingly, the ~~request~~Company's share of ~~the~~AFR's ~~Manager.~~losses ~~Payments~~during by the ~~Manager~~year ~~related~~ended toDecember ~~consulting agreements in 2004~~31, ~~2003~~2005 ~~and 2002~~ amounted to $07, ~~$56 and $112~~975, ~~respectively.~~representing ~~Such fees were reimbursed to~~ the carrying ~~Manager~~ amount byof ~~the~~its ~~Company.~~investment ~~The~~in ~~consulting~~AFR ~~agreements~~as ~~were~~of ~~discontinued~~December in31, ~~July 2003~~2004.

     On September 14, 2001, management of AFR was taken over by American Forest ~~Investments~~ Services, LLC ("AFS"), a wholly owned subsidiary of the Manager of the Company. AFS is paid a fee equal to 2% of the agreed upon valuation of the total timber and timberland 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. Fees charged to operations by AFR amounted to $2,980 in 2005, $3,133 in 2004 and ~~Transactions~~$3,033 ~~with~~in ~~Affiliates~~2003. The MLP and the Company granted Holdings Group an irrevocable proxy to vote its Common and Preferred LLC Interests.

     In      During ~~October 1999~~2001, ~~the Company made an investment in AFR~~2002, anand ~~unconsolidated affiliate. AFR~~2003, athe ~~then~~Company ~~newly~~contributed ~~formed~~cutting ~~entity~~rights ~~organized~~and timberlands ~~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 Common 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~~contributions ~~also~~had 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 $2249,~~000.~~900 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~~ were ~~price~~added ~~equal~~ to the ~~agreed~~Company's ~~upon value of the~~ Preferred LLC ~~Interests,~~Interest ~~either~~ in ~~cash~~AFR. orTerms ~~by returning the contributed timberlands, plus any portion~~ of the ~~guaranteed~~additional ~~return~~Preferred ~~not~~LLC ~~received~~Interest ~~by the Company prior to the redemption date.~~acquired ~~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~~recorded ~~for~~its ~~the Preferred~~additional Preferred LLC Interest at its cost ~~plus~~for ~~accrued dividends to~~ the ~~extent~~cutting ~~earned,~~rights ~~reduced~~and bytimberland ~~losses in excess~~ of ~~the~~approximately ~~Common LLC Interests~~$46,200.

     On In ~~September~~May 142003, ~~2001, management of AFR was taken over by American Forest Services, LLC (“AFS”), a wholly owned subsidiary of~~ the ~~Manager of the~~ Company. ~~AFS~~sold isapproximately ~~paid~~21,000 aacres ~~fee equal~~ to 2%AFS ~~of the agreed upon valuation of the total timber and timberland 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~~ $38,~~133 in 2004, $3,033 in 2003 and $2,555 in 2002~~334. ~~The MLP and the Company granted Holdings Group an irrevocable proxy to vote its Common and Preferred LLC Interests.~~

      In ~~June~~December ~~2000~~2003, the Company ~~purchased~~sold ~~timber cutting rights for~~ approximately ~~4.2~~1,000 ~~million~~acres ~~board~~to ~~feet~~AFS ~~from AFR~~ for $1,~~300~~185. ~~These timber cutting rights expired in June 2003.~~

~~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.

     ~~INLAND FIBER GROUP~~ Also, ~~LLC~~in ~~AND SUBSIDIARY Notes to Consolidated Financial Statements~~ December 312003, ~~2004~~the ~~and~~Company ~~2003~~sold ~~(dollar~~seedlings ~~amounts~~to inAFR ~~thousands,~~for ~~except~~$300. ~~per unit amounts or otherwise noted)~~

In      Gross ~~December~~profits ~~2000~~realized on the Company's sales of timber cutting rights to AFR, to the extent of the Company's ~~sold~~ownership ~~approximately~~interest 8in AFR,~~000~~ ~~acres~~have been eliminated and are recognized in operations upon AFR's sale of ~~timberland~~the ~~located~~timber to third parties with corresponding adjustments to the carrying value of the investment in ~~Central~~AFR. ~~Oregon~~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 ~~for~~on $2sales of timber cutting rights to the Company,~~900~~ until the Company sells the timber to third parties, with corresponding adjustments to the carrying value of timber and timberlands.

    ~~During~~      All ~~2001,~~property ~~the~~that ~~Company~~has been contributed ~~cutting~~for ~~rights and timberlands located in 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~~collateral ~~Preferred~~by ~~LLC~~AFR ~~Interest~~under ~~previously issued to the Company. The Company recorded~~ its ~~additional~~credit ~~Preferred~~facility ~~LLC~~with ~~Interest at~~ its ~~cost for the cutting rights and timberland of approximately $16,300~~lender.

In      As ~~March~~ of ~~2001~~December 31, ~~the~~2005 ~~Company~~and ~~purchased~~2004, ~~timber~~AFR ~~cutting~~was ~~rights~~in ~~for~~default ~~approximately~~under its credit facility, ~~17.2~~ due ~~million~~to, ~~board~~among ~~feet~~other ~~from~~defaults, ~~AFR~~the ~~for~~failure to make principal amortization payments on outstanding Notes amounting to $4114,~~500~~498 and $122,880, respectively. ~~These~~On ~~timber~~February ~~cutting~~10, ~~rights~~2005, ~~expired~~AFR inentered ~~March~~into ~~2004.~~a Forbearance Agreement pursuant to which the insurer of the credit facility had agreed to forbear,

~~In September 2001, the Company sold timber cutting rights for approximately 80.6 million board feet to AFR for $12,000. These timber cutting rights expired in August 2004.~~F-16

In      INLAND ~~November~~FIBER ~~2001~~GROUP, ~~the~~LLC ~~Company~~AND ~~sold~~SUBSIDIARY Notes ~~timber~~to ~~cutting~~Consolidated ~~rights~~Financial ~~for~~Statements ~~approximately~~ ~~44.8~~ (dollar ~~million~~amounts ~~board~~in ~~feet to AFR for $7~~thousands,~~000.~~ ~~These~~except ~~timber~~per ~~cutting~~unit ~~rights~~amounts ~~expired~~or ~~in October 2004.~~otherwise noted)

   Inand ~~June~~had ~~2002,~~instructed the ~~Company~~trustee ~~sold~~to ~~timber~~forbear, ~~cutting~~from ~~rights~~exercising ~~for~~remedies ~~approximately~~from the existence of specified defaults 87 from the effective date of the Agreement through no later than May 10, 2005.3 ~~million~~Upon ~~board~~expiration ~~feet~~of the forbearance period, the insurer and the trustee have continued to forbear from exercising remedies, however at any time they may accelerate the maturity of the Notes. As part of the agreement, AFR retained a Chief Restructuring Officer and presented to the insurer for ~~$9,900~~its approval a restructuring plan containing a detailed proposal for curing the specified defaults and a five-year business plan. ~~These~~The ~~timber~~ultimate ~~cutting~~resolution ~~rights~~of ~~expire~~this inmatter ~~May~~may ~~2005~~affect the Company's ability to recover its investment in AFR.

In ~~August 2002, the Company purchased timber cutting rights for approximately 12~~9.0 ~~million~~Management ~~board~~Incentive ~~feet~~Plan: ~~from AFR for $1,300. These timber cutting rights expired in August 2003.~~

In The ~~November~~MLP ~~2002~~maintained a Unit Option Plan, which provided for the ~~Company~~granting ~~sold~~of ~~timberland~~options (the "Unit Options") to ~~AFR~~employees and directors of the Manager who performed services for $4the Company. The plan permitted the grant of Unit Options covering 857,~~700~~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 and were granted at fair market value at the date of the grant. 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.

~~During 2002, the Company contributed timberland located in Central Oregon to AFR.~~      The ~~contributions~~following ~~have~~table ansummarizes ~~aggregate~~the ~~agreed~~activity ~~upon~~related ~~value of $18,500 and were added~~ to ~~the~~unit ~~Company’s~~options ~~Preferred LLC~~for ~~Interest in AFR. Terms of~~ the ~~additional~~three ~~Preferred~~years ~~LLC~~ended ~~Interest~~December 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 timberland of approximately $1831,~~300.~~ 2005:

In     The ~~addition~~following totable ~~the~~summarizes ~~preceding, in July 2002,~~ the ~~Company~~activity ~~purchased~~related ~~timber cutting~~to ~~rights~~unit ~~for~~options ~~approximately 5.1 million board feet from AFS~~ for ~~$500.~~three ~~These~~years ended ~~timber~~December ~~cutting~~31, ~~rights expire in July~~ 2005.:

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 $11,600.

Weighted

Average

Number of Exercise

Shares Price

Outstanding, December 31, 2002 683,007 $
13.77

Unit options cancelled (102,000 ) 13.34

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

Outstanding, December 31, 2003, 2004 and 2005 –
–

     (a) InAs ~~addition~~of toDecember ~~the~~31, ~~preceding~~2005, inexercise ~~May~~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, ~~the~~as ~~Company~~part ~~sold~~of ~~approximately~~the 21 merger,~~000~~ ~~acres~~these tooptions ~~AFS~~were ~~for~~converted into the right to receive $~~8,334~~3.00 per unit which is below even the lowest exercise price. Accordingly, the Company has no expectation that any of the options will be exercised and they have effectively been cancelled.

~~F-17~~ 10. Fair Value of Financial Instruments:

     ~~INLAND~~A ~~FIBER~~summary ~~GROUP,~~of ~~LLC~~the ~~AND~~fair ~~SUBSIDIARY~~value ~~Notes~~of tothe ~~Consolidated~~Company's ~~Financial~~significant ~~Statements~~financial instruments ~~December~~ and ~~31,~~the ~~2004~~methods and ~~2003~~significant ~~(dollar~~assumptions ~~amounts~~used into ~~thousands,~~estimate ~~except~~those ~~per~~values ~~unit~~is ~~amounts~~as orfollows: ~~otherwise noted)~~

    ~~In December 2003, the Company sold approximately 1,000 acres to AFS for $1,185.~~F-17

   In      INLAND ~~December~~FIBER ~~2003~~GROUP, ~~the~~LLC ~~Company~~AND ~~sold~~SUBSIDIARY ~~timber~~ Notes ~~cutting~~to ~~rights~~Consolidated ~~for~~Financial Statements ~~approximately~~ December 3431,~~965~~ ~~million~~2005 ~~board~~and ~~feet~~2004 to (dollar ~~AFS~~amounts ~~for~~in $4thousands,~~200.~~ ~~These~~except ~~timber~~per ~~cutting~~unit ~~rights~~amounts ~~expire~~or inotherwise ~~December 2006.~~noted)

    ~~Also~~a. Short-term financial instruments – The fair value of short-term financial instruments, inincluding ~~December~~cash ~~2003~~and cash equivalents, trade and other receivables, notes receivable, trade accounts payable and certain accrued liabilities, approximates the ~~Company~~carrying ~~sold~~amounts ~~seedlings~~in the financial statements due to ~~AFR~~ ~~for~~the ~~$300~~short maturities of such items.

     ~~Gross~~ ~~profits~~b. ~~realized~~Long-term ondebt ~~the~~– ~~Company’s~~The ~~sales~~estimated of fair ~~timber~~value ~~cutting rights to AFR, to the extent~~ of the Company’'s ~~ownership~~long-term ~~interest~~debt inwas ~~AFR~~approximately $117,000 ~~have been eliminated~~ and ~~are~~ ~~recognized~~$101,000 inat ~~operations~~December ~~upon AFR’s sale of the timber to third parties with corresponding adjustments to the carrying value of the investment in AFR. In addition~~31, ~~the Company’s equity in net income (loss) of affiliate has been adjusted~~2005 to and ~~eliminate its share of gross profits realized by AFR on sales of timber cutting rights to the Company~~2004, ~~until the Company sells the timber to third parties~~respectively, ~~with~~based ~~corresponding~~on ~~adjustments~~published tomarket ~~the carrying value of timber and timberlands~~quotations.

~~All~~ ~~property~~11. Quarterly ~~that~~Results ~~has~~(Unaudited): ~~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.~~

As of December 31, 2004, AFR was in default under the Credit Facility, due to, among other defaults, the failure to make principal amortization payments on outstanding Notes amounting to $122,880. On February 10, 2005, AFR 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 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 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 curing the specified defaults and a five-year business plan. The ultimate resolution of this matter will affect the Company’s ability to recover its investment in AFR.


	Quarter Ended

		December 31			September 30			June 30			March 31			Total Year

2005
Revenues	$	2,959		$	4,163		$	4,019		$	2,164		$	13,305
Gross loss		(59	)		(246	)		(102	)		(288	)		(695	)
Net (loss)		(6,692	)		(7,259	)		(8,782	)		(12,386	)		(35,119	)

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	)

912. ~~Management~~401(K) ~~Incentive~~Defined ~~Plans~~Contribution Plan:

~~Unit~~ The ~~Option~~Manager ~~Plans~~sponsors a 401(K) defined contribution plan which covers substantially all of its full-time 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 $5 in 2005, $6 in 2004 and $27 in 2003.

~~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~~13. ~~The~~Litigation: 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”) and were granted at fair market value at the date of the grant. There were no Unit Options granted in 2002, 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.

~~F-18~~ 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 governing the $225,000 of Senior Notes against the Company, Finance Corp., the Manager, AFR, Holdings Group, 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

~~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)~~F-18

     ~~The~~      INLAND ~~following~~FIBER ~~table~~GROUP, LLC ~~summarizes~~AND ~~the~~SUBSIDIARY ~~activity~~ Notes ~~related~~ to ~~unit~~Consolidated ~~options~~Financial ~~for~~Statements ~~three~~ (dollar ~~years~~amounts ~~ended~~in ~~December 31~~thousands, ~~2004:~~except per unit amounts or otherwise noted)

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 - -
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, the Company 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 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. On April 4, 2005, the Trustee filed its third amended complaint. On April 22, 2005, the Defendants filed a motion to dismiss certain counts of the third amended complaint. On June 6, 2005, the Supreme Court of the State of Delaware decided the Defendants' interlocutory appeal and issued an order vacating the decision of the Court of Chancery granting partial summary judgment to the Trustee and remanding the case to the Court of Chancery for a trial on all of the issues. On July 7, 2005, the Court of Chancery granted in part and denied in part the Defendants' motion to dismiss certain counts of the third amended complaint. On July 28, 2005, the Trustee issued an Affirmation of the Notice of Default referencing among other things the failure to make the semi-annual interest payment on May 15, 2005. The trial was completed in August 2005. In October 2005, the Trustee filed its post-trial brief and the Defendants filed their reply brief in November 2005. The Trustee subsequently issued a supplemental notice of default based upon the Company's failure to make its May and November, 2005 interest payments as specified in the Indenture. On January 18, 2006, the Trustee filed an amended complaint, alleging that the non-payment of interest constituted a breach of the Indenture entitling the Trustee to an award against the Company of the $225 million principal plus interest. The post-trial proceedings are deferred and, the Companys' time to answer this amended complaint is being extended, pending settlement discussions among the parties.

     As      The ofCompany commenced a separate action on December 317, 2004 against the Trustee, ~~exercise~~alleging ~~prices~~that ~~for~~the ~~options~~Trustee ~~outstanding~~breached ~~were~~the ~~between~~Indenture ~~$5.84~~ by withholding and not remitting to the Noteholders $144.758 million ~~with~~from aan ~~weighted~~interest ~~average~~payment ~~exercise~~made ~~price~~by ofthe ~~$13.85~~Company ~~per~~(the ~~unit~~"Interest Withholding Action"). On ~~June~~January 2613, ~~2003~~2005, asthe Trustee ~~part~~asserted ofa counterclaim alleging that the ~~merger~~Company, ~~these~~Finance ~~options~~Corp., ~~were converted~~and ~~into~~AFR ~~the~~are ~~right~~liable tofor ~~receive~~the ~~$3.00~~attorneys' ~~per~~fees that ~~unit~~the ~~which~~Trustee is ~~below~~and ~~even~~will ~~the~~incur ~~lowest~~in ~~exercise~~the ~~price.~~Interest ~~The~~Withholding ~~Company~~Action ~~has~~and nothe ~~expectation that~~action ~~any~~filed ofby the ~~options~~Trustee ~~will~~described above. beNo ~~exercised~~proceedings ~~and~~have ~~they~~occurred ~~have~~in ~~effectively~~the ~~been~~Interest ~~cancelled~~Withholding Action.

~~10. Fair Value of Financial Instruments:~~F-19

A      INLAND ~~summary~~FIBER GROUP, ofLLC ~~the~~AND ~~fair~~SUBSIDIARY ~~value~~ Notes ofto ~~the~~Consolidated ~~Company’s~~Financial ~~significant~~Statements ~~financial instruments~~ ~~and~~ (dollar ~~the~~amounts ~~methods~~in ~~and~~thousands, ~~significant~~except ~~assumptions~~per ~~used~~unit toamounts ~~estimate~~or ~~those~~otherwise ~~values is as follows:~~noted)

     On February 27, 2006, the Company announced that it reached a tentative agreement with the Trustee for the Notes to resolve the outstanding disputes among the parties. Under ~~Short-term~~the ~~financial~~terms ~~instruments~~of –the ~~The~~tentative ~~fair~~agreement, ~~value~~the Company or its nominee would purchase all of ~~short~~the outstanding Notes at a price of 69% of the principal amount of the Notes through a pre-~~term~~negotiated ~~financial~~plan of reorganization. ~~instruments~~ The settlement would include the alleged existing defaults, ~~including~~the ~~cash~~accrued and ~~cash~~unpaid ~~equivalents~~interest, ~~trade~~the ~~and~~termination of ~~other~~all ~~receivables~~pending litigation, ~~notes~~and ~~receivable~~a release of all the parties. Completion of the pending settlement is subject to a number of conditions, ~~trade~~including ~~accounts~~the ~~payable~~commitment to support a pre-negotiated plan of reorganization to effectuate the settlement by a sufficient number of Noteholders and ~~certain~~holders of a sufficient face value of ~~accrued~~ Notes ~~liabilities,~~to ~~approximates~~be acceptable to the ~~carrying~~Company, ~~amounts~~and inthe receipt by the ~~financial~~Company ~~statements~~of ~~due~~financing sufficient to fund the settlement. ~~short~~Due ~~maturities~~to pending settlement, the post-trial hearing has been adjourned. The Company and its legal counsel believe the litigation and both Notices of ~~such~~Default ~~items~~to be without merit, and to the extent the proposed settlement is not completed and the litigation were to resume, the Company would continue to vigorously defend the litigation.

b 14. ~~Long-term~~Fire ~~debt~~Loss –Risk: ~~The estimated fair value of the Company’s long-term debt was approximately $101,000 and $117,000 at December 31, 2004 and 2003, respectively, based on published market quotations.~~

F In accordance with industry practice, the Company self-19insures for fire loss.

     ~~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)~~F-20

~~11. Quarterly~~REPORT ~~Results~~OF ~~(Unaudited):~~INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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 )
To the Board of Directors and Members of
American Forest Resources, LLC

~~12.~~ ~~401(K)~~We ~~Defined~~have audited the accompanying consolidated balance sheets of American Forest Resources, LLC and subsidiary ~~Contribution~~ as of December 31, 2005 and 2004, and the related consolidated statements of operations, redeemable preferred member ~~Plan:~~ interest and common members' deficiency and cash flows for each of the years in the three-year period ended December 31, 2005. 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.

     ~~The~~ ~~Manager~~We ~~sponsors~~conducted aour ~~401~~audits in accordance with the standards of the Public Company Accounting Oversight Board (KUnited States). ~~defined~~Those ~~contribution~~standards require that we plan ~~which~~and ~~covers~~perform ~~substantially~~the ~~all~~audit ofto ~~its~~obtain ~~full-time~~reasonable ~~employees~~assurance about whether the ~~allocable~~financial ~~costs~~statements are free of ~~which~~material ~~were~~misstatement. ~~reimbursed~~An byaudit includes examining, on a test basis, evidence supporting the ~~Company~~amounts and disclosures in the financial statements. ~~The~~An ~~amounts~~audit ~~which~~also ~~were~~includes assessing the accounting ~~reimbursed~~ principles used and significant estimates made by ~~the~~management, ~~Company~~as ~~pursuant~~well toas evaluating the ~~management~~overall ~~arrangement~~financial ~~totaled~~statement presentation. $6We inbelieve ~~2004,~~that ~~$27~~our inaudits ~~2003~~provide ~~and~~a ~~$45~~reasonable inbasis ~~2002~~for our opinion.

~~13.~~ In our opinion, the financial statements referred to above present fairly, in all material respects, ~~Litigation~~ the consolidated financial position of American Forest Resources, LLC and subsidiary as of December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the years in the three year period ~~Other:~~ ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

~~Fire~~ The accompanying financial statements have been prepared assuming that the Company will continue as a ~~Loss~~ going concern. As discussed in Note 1 to the financial statements, as of December 31, 2005, the Company is in default ~~Risk~~ under its Credit Facility and the Insurer of the Credit Facility and the Trustee have continued to forbear from exercising remedies, however, at any time, they may accelerate the maturity of the $114,448 payable thereunder at such date. In addition, as discussed in Note 1, Inland Fiber Group, LLC, the Company's subsidiary, received Notices 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. 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.

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

~~Litigation~~ New York, New York March 10, 2006

     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 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 ofF-21

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

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

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, the Company 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 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.

December 31,

2005 2004

ASSETS

Current assets:

Cash and cash equivalents (including restricted cash of

                 $19 at December 31, 2004)
$
477
$
342

Accounts receivable 761 579

Due from managing member and affiliates – 54

Other receivables 563 79

Notes receivable 683 774

Prepaid expenses and other current assets 138 271

Restricted cash related to debt in default 3,683 15,357

Total current assets 6,305 17,456

Timber and timberlands, net 190,044 197,475

Equipment, net 870 873

Restricted cash – 104

Interest rate cap agreement 102 302

Notes receivable, less current portion – 10

Deferred financing costs, net 463 708

Other assets 85 150

Total assets
$
197,869
$
217,078

LIABILITIES AND MEMBERS' DEFICIENCY

Current liabilities:

Accounts payable
$
1,139
$
596

Accrued interest 25,536 3,185

Other accrued liabilities 3,046 1,589

Long-term debt - in default 114,448 124,225

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

(net of unamortized discount of $17,849 (2005) and $27,533 (2004)) 207,151 197,467

Payable to managing member and affiliates 14,340 7,722

Deferred revenue – 1,041

Total current liabilities 365,660 335,825

Commitments and litigation (Notes 10 and 11)

Common members' deficiency (167,791 ) (118,747 )

$
197,869
$
217,078

See notes to financial statements

   On December 7, 2004, the Company, 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 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.F-22

~~F-21~~AMERICAN FOREST RESOURCES, LLC AND SUBSIDIARIES

CONSOLIDATED ~~REPORT~~STATEMENTS OF ~~INDEPENDENT~~OPERATIONS (IN ~~REGISTERED PUBLIC ACCOUNTING FIRM~~THOUSANDS)



To the Board of Directors and Members of American Forest Resources, LLC

     Year Ended December 31,

2005 2004 2003

Revenues:

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

$4,200 (2003) to an affiliate $ 17,754 $ 23,798 $ 38,617

Timber and property sales, including $615, 2005 and $10,200 (2003) to an affiliate 6,151 28,120 24,729

By-products and other 1,453 2,089 2,203

25,358 54,007 65,549

Cost of products sold:

Cost of timber harvested 11,960 14,296 20,543

Cost of timber and property sales 1,824 38,876 24,621

Depletion, depreciation and road amortization 8,633 13,602 21,826

22,417 66,774 66,990

Gross profit (loss) 2,941 (12,767 ) (1,441 )

Operating expenses:

Selling, general and administrative 7,635 6,524 7,221

Management fees 4,980 7,147 4,371

12,615 13,671 11,592

Operating loss (9,674 ) (26,438 ) (13,033 )

Other income (expense):

Interest expense and commitment fees (29,038 ) (27,259 ) (27,077 )

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

and debt discount (10,327 ) (14,177 ) (7,763 )

Interest income 106 175 234

Preacquisition loss of acquired interest – – 3,984

Other (expense) income, net (111 ) (396 ) 322

(39,370 ) (41,657 ) (30,300 )

Net loss $ ( 49,044 ) ($ 68,095 ) ($ 43,333 )

WeSee ~~have~~notes audited the accompanying consolidated balance sheets of American Forest Resources, LLC (the "Company") as of December 31, 2004 and 2003, and the related statements of operations, redeemable preferred member interest and common members' (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.~~

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 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-23

AMERICAN InFOREST ~~our opinion~~RESOURCES, ~~the financial statements referred to above present fairly, in all material respects,~~ ~~the consolidated financial position of American Forest Resources,~~ LLC asAND 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. SUBSIDIARIES

~~The~~CONSOLIDATED ~~accompanying~~STATEMENTS ~~financial~~OF ~~statements~~REDEEMABLE ~~have~~PREFERRED ~~been prepared assuming that the Company will continue~~MEMBER as INTEREST aAND ~~going concern. As discussed in Note 1 to the financial statements, as of December 31, 2004, the Company is in default~~ ~~under~~ COMMON 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 2005, Inland Fiber Group, LLC, the Company’s 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 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 CompanyMEMBERS's ~~ability to continue as a going~~DEFICIENCY ~~concern.~~ (IN ~~Management’s~~THOUSANDS) ~~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.~~

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

Redeemable Common Note Receivable Total Common

Preferred Members' Pacific Fiber Members'

Member Interest (Deficiency) Company, LP (Deficiency)

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 )

Net loss – (49,044 ) – (49,044 )

Balance, December 31, 2005 $    – $ 139,336 $ (28,455 ) $ (167,791 )

* Owner of the Company's redeemable preferred member interest

See notes to financial statements

F~~-22~~–24

AMERICAN FOREST RESOURCES, LLC AND SUBSIDIARIES

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

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

F-23

Twelve Months Ended December 31,

2005 2003 2003

Cash Flows from Operating Activities:

Net Loss $ (49,044 ) $ (68,095 ) $ (43,333 )

Adjustments to reconcile net loss to net cash provided

by operating activities:

Depreciation, depletion and amortization and cost of timber

property sold 10,479 52,008 46,447

(Gain) loss on disposal of assets 10 – (58 )

Amortization of deferred financing fees and debt discount 10,327 14,178 7,764

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

Accretion of discount on other long–term debt – 68 83

Fair value adjustment of interest rate cap agreement 200 728 112

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

Accounts receivable (182 ) 253 322

Other receivables 107 (243 ) (135 )

Notes receivable (187 ) (616 ) 1,267

Prepaid expenses and other current assets 208 82 58

Accounts payable and accrued expenses 6,512 (230 ) (104 )

Accrued interest 22,351 (7 ) 170

Advance payment from customer (1,041 ) (3,959 ) (4,000 )

Payable to affiliate 308 7,503 (241 )

Net cash provided by operating activities 48 1,670 4,368

Cash flows from investing activities:

Acquisition of timber and timberlands (3,398 ) (3,206 ) (2,805 )

Purchase of equipment (56 ) (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 (3,454 ) (694 ) (32,365 )

Cash flows from financing activities:

Capital contributions – – 1,238

Proceeds from bank credit facility – – 32,600

Payments made on bank credit facility (9,500 ) (221 ) (3,900 )

Advances from affiliates 1,539 (304 ) 324

Payments of other long-term debt (276 ) (375 ) (365 )

Deferred financing fees – (35 ) (765 )

Restricted cash, noncurrent portion 11,778 (1,315 ) (1,273 )

Net cash (used in) provided by financing activities 3,541 (2,250 ) 27,859

Net decrease in cash, cash equivalents and restricted cash 135 (1,274 ) (138 )

Cash, cash equivalents and restricted cash, beginning of year 342 1,616 1,754

Cash, cash equivalents and restricted cash, end of year $ 477 $ 342 $ 1,616

Supplemental Cash Flow Information:

Cash paid during the year for interest $ 1,880 $ 26,909 $ 26,909

Noncash Investing and Financing Activities:

Receipt of timber cutting rights and timberlands from affiliate
$
– $ 10,467 $ 10,467

Interest rate cap agreement acquired for debt
$
– $ – $ –

Contribution by common member of interest in IFG Holdings, LLC, net

of $1,460 cash acquired
$
– $ 18,438 $ 18,438

~~AMERICAN FOREST RESOURCES, LLC~~F-25

AMERICAN FOREST RESOURCES, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollar amounts in thousands)

~~STATEMENTS~~1 OF. ~~OPERATIONS (IN~~Business ~~THOUSANDS)~~ and Significant Accounting Policies:

		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

Business:

The accompanying financial statements include the accounts of American Forest Resources, LLC ("AFR"), F 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". Finance Corp. which serves as the co-24obligor for IFG's Notes (defined below) has nominal assets and does not conduct operations. All intercompany balances and transactions after the contribution have been eliminated in consolidation.

~~AMERICAN~~ AFR ~~FOREST~~was ~~RESOURCES~~formed in 1999 to acquire approximately 56,000 ~~LLC~~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 ~~STATEMENTS~~to OFJuly ~~REDEEMABLE~~2003, ~~PREFERRED~~Pacific ~~MEMBER~~Fiber ~~INTEREST~~Company, ~~AND~~LP, ~~COMMON~~a ~~MEMBERS'~~publicly ~~DEFICIENCY~~traded master limited partnership (the "MLP") 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 (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, ("AFS") a wholly-owned subsidiary of the Manager. All management decisions related to the Company are made by the Manager or its subsidiary.

(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

Going Private Transaction:

~~F-25~~ 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,

~~AMERICAN FOREST RESOURCES, LLC~~F-26

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

AMERICAN FOREST RESOURCES, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollar amounts in thousands)

F 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.

~~AMERICAN~~ Subsequent ~~FOREST~~to ~~RESOURCES~~the Privatization Transaction, ~~LLCNotes~~the tointerest in IFG originally held by the ~~Financial~~MLP ~~Statements(dollar~~was ~~amounts~~transferred in ~~thousands~~a series of transactions to a newly-formed limited liability company, ~~except~~IFG ~~per~~Holdings, LLC. ~~unit~~IFG ~~amounts~~Holdings, ~~and~~LLC ~~unless~~is ~~otherwise~~100% ~~noted~~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 1.of ~~Business and Significant Accounting Policies~~Presentation:

~~Business:~~ The accompanying 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, 2005 and 2004, the Company is in default under its credit facility due to, among other defaults, 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 had agreed to forbear, and instructed the Trustee to forbear, from exercising remedies from the existence of specified defaults from the effective date of the Forbearance Agreement through no later than May 10, 2005. Following the expiration date, the insurer has continued to forbear from exercising remedies available to it, including acceleration of the maturity of the Notes. The insurer or Trustee may, at any time, 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, IFG has received Notices of Defaults and Acceleration of maturity from the Trustee under the Indenture governing the $225,000 of Senior Notes due in 2007. These events raise substantial doubt about the Company's ability to continue as a going concern.

~~The~~ As ~~accompanying~~part ~~financial~~of ~~statements~~the ~~include~~Forbearance Agreement, the ~~accounts~~Company ofretained ~~American~~a Chief Restructuring Officer and presented ~~Forest~~ to ~~Resources,~~the ~~LLC~~insurer ~~("AFR"),~~for its approval a ~~Delaware~~restructuring ~~limited~~plan ~~liability~~containing ~~company,~~a detailed proposal for curing the specified defaults and ~~commencing~~a five-year business plan. The Company is currently in ~~2003,~~discussion ~~after~~with ~~approximately~~the ~~99%~~insurer ofregarding ~~its~~a ~~members'~~new Forbearance ~~interests~~ Agreement ~~were~~to ~~contributed~~become toeffective ~~AFR~~upon ~~(see~~consummation ~~Going~~of ~~Private~~the ~~Transaction~~settlement ~~below),~~of ~~Inland~~the ~~Fiber~~IFG ~~Group,~~litigation ~~LLC~~described ~~("IFG")~~in Note 11. In addition, after completion of a trial in the Delaware ~~limited~~Court ~~liability~~of Chancery as to whether an event of default has occurred under ~~company,~~ the Indenture and ~~IFG's~~prior ~~wholly~~to ~~owned~~a ~~subsidiary,~~decision ~~Fiber~~being ~~Finance~~rendered, ~~Corp.~~IFG, ~~("Finance~~in ~~Corp.")~~February 2006, ~~collectively~~reached ~~referred~~a tentative agreement with the Trustee to ~~hereafter~~resolve asthe outstanding disputes among the ~~“Company"~~parties, subject to certain conditions. The settlement would ~~Each~~ include ofthe ~~AFR~~alleged existing defaults, ~~IFG~~the accrued and ~~Finance~~unpaid ~~Corp.~~interest, ~~changed~~the ~~names~~termination inof ~~December~~all ~~2003.~~pending ~~Finance~~litigation, and ~~Corp.~~a ~~serves~~release asof all the ~~co-obligor~~parties. ~~for~~The ~~IFG's~~ability ~~Notes~~of ~~(defined below).~~the ItCompany ~~has~~to ~~nominal~~continue ~~assets~~as ~~and~~a ~~does~~going ~~not~~concern ~~conduct~~is ~~operations.~~predicated ~~All~~upon ~~intercompany~~a ~~balances~~satisfactory restructuring ~~and~~plan ~~transactions~~being ~~after~~accepted by the ~~contribution have~~insurer ~~been~~and ~~eliminated~~IFG inconsummating ~~consolidation.~~the proposed

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.F-27

~~Prior~~AMERICAN toFOREST ~~July 2003~~RESOURCES, ~~Pacific~~LLC ~~Fiber~~AND ~~Company, LP, a publicly traded master~~SUBSIDIARIES ~~limited~~ Notes ~~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~~Consolidated ~~and~~Financial ~~own~~Statements ~~substantially all of the equity interests in IFG. Timber Resource Services, LLC (formerly~~ ~~known as US Timberlands Services Company, LLC)~~ (~~the~~dollar ~~"Manager")~~amounts ~~which is controlled by Cascade Resource Holdings, LLC, an entity owned by senior management, which also controls the common membership interest~~ in ~~AFR,~~thousands) ~~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~~settlement ~~Transaction:~~or ultimately prevailing in the litigation with the Trustee The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

OnUse 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,Estimates:

~~F-27~~ 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.

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

~~followed~~ Revenues byfrom adelivered ~~merger~~log ofsales ~~the~~are ~~acquisition~~recognized ~~company~~upon ~~with~~delivery ~~and~~to ~~into~~ the ~~MLP,~~customer. ~~pursuant~~Revenues tofrom ~~which~~timber deeds ~~each~~and ~~common~~timberland ~~limited~~sales ~~partnership~~are ~~unit~~generally ~~not~~recognized ~~already~~upon ~~owned~~closing. byRevenue ~~the~~from ~~acquiring~~timber ~~entity~~sold orunder ~~its~~stumpage ~~affiliates would be converted into the right to receive~~contracts $3 (i.~~00 per unit in cash~~e. ~~The tender offer commenced on November 19~~, ~~2002~~where ~~and~~the ~~was~~customer ~~completed~~arranges ~~on March 6, 2003. In connection with~~ the ~~tender~~harvest ~~offer,~~and ~~approximately~~delivery ~~71%~~ of the ~~MLP's~~logs ~~common~~but ~~units~~without ~~were~~being ~~tendered. The~~granted ~~remaining~~a ~~common~~deed) ~~units~~is ~~held by~~recognized ~~non-affiliates~~ at ~~not purchased in~~ the ~~tender~~time ~~offer were converted into~~ the ~~right~~timber tois ~~receive $3~~harvested.00 ~~per common unit in the merger, which was completed on June 26, 2003.~~

~~Subsequent~~Concentration ~~to the Privatization Transaction, the interest in IFG originally held by the MLP was transferred in a series~~ of ~~transactions~~Credit 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. Risk:

~~The~~ Financial ~~accompanying~~instruments ~~consolidated financial statements have been prepared assuming~~ that ~~the~~potentially ~~Company~~subject ~~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~~concentrations ~~failure to make principal amortization payments, not being in compliance with certain financial covenants, and the maturity~~ of ~~the~~credit ~~IFG~~risk ~~Notes being accelerated by~~consist ~~the~~ principally ~~Trustee due to alleged defaults. On February 10, 2005, the Company entered into a Forbearance Agreement pursuant to which the Insurer~~ of ~~the~~trade ~~Credit~~accounts ~~Facility has agreed to forbear,~~ and ~~instructed~~notes ~~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~~receivable. ~~Upon expiration~~The ofmajority ~~the forbearance period, the Insurer or Trustee may declare the unpaid principal~~ of ~~and accrued interest on~~ the ~~Credit~~ ~~Facility~~Company's totrade beaccounts ~~immediately due~~ and ~~payable.~~notes ~~In addition, as discussed in Note 7, in January 2005, IFG received a notice~~receivable of are ~~default~~derived ~~and acceleration of maturity of Notes payable~~ from ~~the~~sales 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~~third asparty awood ~~going concern~~processors.

As Consolidated ~~part~~net ofrevenues ~~the~~from ~~Forbearance~~log ~~Agreement,~~and ~~the~~timber ~~Company~~deed ~~has~~sales ~~agreed to~~accounted ~~retain~~for aby ~~Chief Restructuring Officer and present to~~ the ~~Insurer~~Company's athree ~~restructuring~~largest non-affiliated ~~plan~~customers ~~which~~amounted ~~is acceptable~~ to ~~the~~23%, ~~Insurer which~~18% ~~shall~~and ~~contain~~14% ain ~~detail~~2005, ~~proposal~~22%, ~~for~~17% ~~curing~~and ~~the~~11% ~~specified~~in ~~defaults~~2004, and a30%, ~~five-year~~11% ~~business~~and ~~plan. IFG~~10% ~~continues~~in 2003. to The ~~deny~~loss ~~the existence~~ of anor ~~event~~a ofmaterial ~~default~~decrease ~~under~~in ~~the~~business ~~Note~~from ~~Indenture,~~any ~~and~~of inthese ~~March~~customers ~~2005,~~could ~~filed~~have ana ~~appeal~~material, ofnegative ~~the Chancery~~impact ~~Court’s~~ on ~~order with~~ the ~~Supreme~~Company's ~~Court~~results of ~~the~~operations. ~~State~~Management ofdoes ~~Delaware.~~not, ~~The~~however, ~~ability~~expect ofthese ~~the~~relationships ~~Company~~ to ~~continue~~be asdiscontinued. No aother ~~going~~single ~~concern is~~customer ~~predicated~~accounted ~~upon~~for amore ~~satisfactory~~than ~~restructuring~~10% ~~plan~~of ~~being~~aggregate ~~accepted~~net byrevenues ~~the~~from ~~Insurer~~log and ~~IFG~~timber ~~ultimately~~deed ~~prevailing~~sales in ~~the litigation~~those ~~with the Trustee~~ years. ~~The financial statements do not include any adjustments that might result from the outcome of this uncertainty.~~

~~F-28~~ 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.

~~AMERICAN~~ The ~~FOREST~~Company ~~RESOURCES,~~periodically ~~LLC Notes~~reviews toits ~~the~~allowance ~~Financial~~for ~~Statements (dollar~~doubtful ~~amounts~~accounts inand ~~thousands~~provides an estimated amount for such accounts, ~~except~~if ~~per~~required. ~~unit~~As ~~amounts~~of December 31, 2005 and ~~unless~~2004, ~~otherwise~~no ~~noted)~~allowance for doubtful accounts was required.

~~Use~~Cash, ofCash ~~Estimates~~Equivalents and Restricted Cash:

~~The~~ Cash ~~preparation~~equivalents ofconsist ~~financial~~primarily ~~statements in conformity with accounting principles generally accepted in the United States~~ of ~~America~~highly ~~requires~~liquid ~~management~~investments towith ~~make~~maturities ~~estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities~~ at ~~the~~ date of ~~the financial statements~~purchase ~~and the reported amounts~~ of ~~revenues~~90 ~~and~~days ~~expenses~~or ~~during the reporting period~~less. ~~Actual results could differ from those estimates.~~

~~Revenue Recognition:~~F-28

~~Revenues~~ ~~from~~AMERICAN ~~delivered~~FOREST ~~log~~RESOURCES, ~~sales~~LLC ~~are~~AND ~~recognized~~SUBSIDIARIES ~~upon~~ Notes ~~delivery~~ to ~~the~~Consolidated ~~customer.~~Financial ~~Revenues~~Statements ~~from timber deeds and timberland sales are generally recognized upon closing. Revenue~~ ~~from timber sold under stumpage contracts~~ (~~i.e.,~~dollar ~~where~~amounts ~~the~~in ~~customer arranges the harvest and delivery of the logs but without being granted a deed~~thousands) ~~is recognized at the time the timber is harvested.~~

~~Financial~~ On ~~instruments~~September ~~that~~14, ~~potentially~~2001, ~~subject~~AFR refinanced its then existing bank debt under an agreement with a lender (see ~~the~~ Note ~~Company~~7) towhich ~~concentrations~~calls for a series of cash or letter of credit ~~risk~~reserve ~~consist~~accounts. ~~principally~~The ofobligations ~~trade~~under these reserve accounts were met with restricted cash totaling $3,559 and ~~notes~~$15,376 ~~receivable.~~at ~~The~~December ~~majority~~31, 2005 and 2004, respectively, of which none and $19 of restricted cash was available to meet the Company's ~~trade~~short ~~accounts~~term obligations at December 31, 2005 and ~~notes~~2004, ~~receivable~~respectively. ~~are~~At ~~derived~~December ~~from~~31, ~~sales~~2005 toand ~~third~~2004, ~~party~~the ~~wood~~restricted ~~processors~~cash is classified as a current asset as the related credit facility is in default (see Note 7) and classified as a current liability. An additional $124 is classified as restricted at December 31, 2005 in connection with IFG's Senior Notes.

~~The~~Timber ~~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.Timberlands:

~~Credit~~ Timber ~~risk~~and ontimberlands ~~trade~~are ~~receivables~~stated at cost less depletion and road amortization for timber previously harvested. The cost of the timber harvested (including amortization of logging roads) is ~~mitigated~~determined bybased on the volume ~~control~~ of ~~procedures~~timber harvested in relation to ~~monitor~~the estimated net merchantable inventory volume on the ~~credit~~timberlands, ~~worthiness~~primarily ofusing separate ~~customers~~pools for timberlands in Oregon and in Washington. The Company ~~mitigates~~estimates ~~credit~~net ~~risk~~merchantable ~~related~~inventory tousing statistical ~~notes~~information ~~receivable~~and data obtained from physical measurements, site maps, photo-types and other information by gathering ~~obtaining~~techniques. ~~asset~~These ~~lien~~estimates ~~rights~~are orupdated ~~performing~~periodically ~~credit~~and ~~worthiness~~may ~~procedures~~result orin ~~both~~adjustments of timber volumes and depletion rates, which are recognized prospectively. Changes in these estimates have no effect on the Company's cash flow.

~~The~~ IFG ~~Company~~operates ~~periodically~~and ~~reviews~~maintains ~~its~~a ~~allowance~~seed ~~for~~orchard ~~doubtful~~and nursery. Costs incurred by the orchard and nursery to ~~accounts~~ produce seed and ~~provides~~seedlings anutilized ~~estimated~~in ~~amount~~the ~~for~~reforestation ~~such~~of ~~accounts,~~IFG's iftimberlands ~~required~~are capitalized to seed orchard and nursery stock in the accompanying balance sheet. AsA ofcertain ~~December~~amount ~~31,~~of ~~2004~~seed and ~~2003,~~seedling nostock ~~allowance~~is ~~for~~sold ~~doubtful~~to unaffiliated ~~accounts~~ customers ~~was~~and ~~required~~is reflected as a component of by-products and other revenues in the accompanying statements of operations.

~~Cash~~Property, ~~Cash~~Plant ~~Equivalents~~ and ~~Restricted Cash~~Equipment:

~~Cash~~ Property, ~~equivalents~~plant ~~consist~~and ~~primarily of~~equipment, ~~highly~~including ~~liquid~~significant ~~investments~~improvements ~~with~~thereto, ~~maturities~~are stated at ~~date~~cost ofless ~~purchase~~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, 90the ~~days~~cost and accumulated depreciation are removed from the accounts and any resulting gain or ~~less~~loss is reflected in income.

On The ~~September~~cost ~~14,~~of ~~2001~~property, ~~AFR~~plant ~~refinanced~~and ~~its~~equipment ~~then existing~~is ~~bank~~depreciated ~~debt~~using ~~under~~the anstraight-line ~~agreement~~method ~~with~~over athe ~~new~~estimated useful ~~lender~~lives ~~(see~~of ~~Note~~the 7)related ~~which~~assets. ~~calls~~Buildings ~~for~~and aimprovements ~~series~~are ofgenerally ~~cash~~depreciated orover ~~letter~~40 ofyears ~~credit~~and equipment ~~reserve~~ is ~~accounts~~depreciated over 3 to 5 years. ~~The~~Leasehold ~~obligations~~improvements are amortized under ~~these~~the ~~reserve~~straight-line ~~accounts~~method ~~were~~based ~~met~~on ~~with~~the shorter ~~restricted~~of ~~cash~~the ~~totaling~~lease ~~$15,387~~periods ~~and~~or ~~$14,011 at~~the estimated useful lives of the improvements.

F-29

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

~~Notes~~Deferred toFinancing ~~the Financial Statements~~ Costs:

~~(dollar~~ Deferred ~~amounts~~financing costs consist of fees and other costs incurred in ~~thousands~~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 $6,287 ~~except~~and ~~per~~$6,042 ~~unit~~at ~~amounts~~December 31, 2005 and ~~unless~~2004, ~~otherwise~~respectively. In ~~noted~~2004, the Company wrote-off $3,970 of unamortized financing costs related to its credit facility which was 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 remaining balance of unamortized financing costs at December 31, 2005 and 2004 amounting to $463 and $708 relates to debt of IFG which has been declared in default by the Trustee under the Note Indenture. In the event IFG does not prevail in the related litigation or consummate a settlement with the Trustee, the unamortized balance will be written off.

~~December~~ ~~31,~~Income ~~2004~~Taxes: 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~~ AFR and ~~Timberlands:~~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.

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, photoUnit-~~types~~Based ~~and~~Compensation 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. Plan:

Prior ~~IFG~~to ~~operates~~the ~~and~~Privatization ~~maintains~~Transaction, the MLP had a ~~seed~~Unit ~~orchard~~Option ~~and~~Plan ~~nursery. Costs~~which ~~incurred~~provided byfor the ~~orchard~~granting of ~~and~~options ~~nursery~~ to ~~produce~~purchase ~~seed~~common ~~and~~limited ~~seedlings~~partnership ~~utilized~~units in the ~~reforestation~~MLP to employees and directors of ~~IFG's~~the ~~timberlands~~Manager ~~are~~who ~~capitalized~~performed services tofor ~~seed~~IFG. ~~orchard~~As ~~and~~permitted ~~nursery~~under ~~stock in~~Statement ~~the~~of ~~accompanying~~Financial ~~balance~~Accounting ~~sheet. A~~Standards ~~certain~~("SFAS") ~~amount~~No. of123, ~~seed~~"Accounting ~~and~~for Stock-Based ~~seedling~~Compensation," ~~stock~~IFG ishad ~~sold~~elected to ~~unaffiliated~~continue ~~customers~~to ~~and~~follow isthe ~~reflected~~intrinsic asvalue amethod ~~component~~in ofaccounting byfor its stock-~~products~~based ~~and~~employee ~~other~~compensation ~~revenues~~arrangements inas ~~the~~defined ~~accompanying~~by ~~statements~~Accounting ofPrinciples ~~operations~~Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations.

~~Property~~ In connection with the Privatization Transaction, ~~Plant~~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 ~~Equipment:~~considers outstanding unit options to have been effectively cancelled.

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. Derivatives:

The ~~cost~~Company ofrecognizes ~~property,~~its ~~plant~~interest ~~and~~rate ~~equipment~~cap isderivative ~~depreciated~~in ~~using~~ the ~~straight-line~~balance ~~method~~sheet ~~over~~at ~~the~~fair ~~estimated~~value. ~~useful~~Derivatives that ~~lives~~are ofnot ~~the~~hedges ~~related~~must ~~assets.~~be ~~Buildings~~adjusted ~~and~~to ~~improvements~~fair ~~are~~value ~~generally~~through ~~depreciated~~earnings. ~~over~~If 40the ~~years~~derivative ~~and~~is ~~equipment~~a ishedge, depending upon ~~depreciated~~ the ~~over~~nature 3of tothe 5hedge, ~~years.~~changes ~~Leasehold~~in ~~improvements~~the ~~are~~fair ~~amortized~~value ~~under~~of the ~~straight-line~~derivative ~~method~~will ~~based~~either onbe offset against the ~~shorter~~change in fair value of the ~~lease~~hedged ~~periods~~assets, liabilities or ~~the~~firm ~~estimated~~commitments ~~useful~~through ~~lives~~earnings ofor recognized in other comprehensive income until the ~~improvements~~hedged item is recognized in earnings.

~~Deferred Financing Costs:~~F-30

~~Deferred~~ ~~financing~~AMERICAN ~~costs~~FOREST 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 $1RESOURCES,~~376~~ atLLC ~~December~~AND ~~31,~~SUBSIDIARIES ~~2004 and 2003, respectively.~~ In Notes ~~2004, the Company wrote-off $3,970 of unamortized financing costs related~~ to ~~its~~Consolidated ~~Credit~~Financial ~~Facility~~Statements ~~which is in default~~ ~~at December 31, 2004 due, among other defaults, to the Company’s failure to make required principal amortization payments~~ (~~see~~dollar ~~Note~~amounts 7in thousands). ~~The~~

~~F-30~~The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings (see Note 6).

~~AMERICAN~~ ~~FOREST~~Contribution ~~RESOURCES,~~of ~~LLC Notes~~Member toInterest ~~the~~in ~~Financial~~Inland ~~Statements (dollar~~Fiber ~~amounts in thousands~~Group, ~~except per unit amounts and unless otherwise noted)~~LLC:

Subsequent ~~remaining~~to ~~balance~~the completion of ~~unamortized~~the ~~financing~~Privatization ~~costs~~Transaction at(see ~~December~~Note 311), ~~2004~~100% ~~amounting~~of tothe partnership ~~$708~~ interests ~~relates~~in the MLP were held by entities controlled by senior management, as compared with a 36.4% partnership interest held prior to ~~debt~~announcement of ~~IFG~~the transaction. The MLP, which ~~has~~together ~~been~~with ~~declared~~one insuch ~~default~~entity byowns ~~the~~indirectly ~~Trustee~~through holding ~~under~~companies the ~~Note~~entire ~~Indenture.~~outstanding ~~IFG~~common ~~continues~~membership interest in AFR, contributed its 99% member interest in IFG to ~~deny~~AFR. IFG also is the ~~existence~~owner of anAFR's ~~Event~~redeemable preferred member interest. The results of ~~Default~~operations ~~and~~of isIFG have ~~involved~~been included in ~~litigation~~the ~~with~~consolidated ~~the~~financial ~~Trustee~~statements ~~under~~from ~~the~~January ~~Note~~1, ~~Indenture~~2003. InLosses for the period from January ~~event~~ 1, ~~IFG~~2003 ~~does~~through ~~not~~March ~~prevail~~6, 2003 (the date of completion of the tender offer) attributable to the 63.6% interest acquired by senior management in the ~~litigation,~~Privatization Transaction have been shown separately in the ~~unamortized~~accompanying ~~balance~~statement ~~will~~of operations beas ~~written~~a ~~off~~reduction in the consolidated loss.

~~Income~~ The ~~Taxes:~~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).

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.F-31

~~Unit-Based~~ ~~Compensation~~AMERICAN ~~Plans:~~FOREST RESOURCES, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements (dollar amounts in thousands)

~~Prior~~The tofollowing ~~the~~summarizes ~~Privatization Transaction,~~ the ~~MLP had~~allocation ~~a Unit Option Plan which provided for the granting~~ of ~~options to purchase common limited partnership units in~~ the ~~MLP to~~recorded ~~employees~~amount ~~and directors~~ of the ~~Manager who performed services for IFG. As permitted under Statement of Financial Accounting~~ ~~Standards~~ contribution ~~("SFAS") No. 123, "Accounting for Stock-Based Compensation," IFG had elected~~ to ~~continue to follow~~ the ~~intrinsic value~~assets ~~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~~liabilities ~~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~~IFG. ~~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.

		($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

3. Timber and Timberlands:

~~Derivatives:~~ Timber and timberlands consisted of the following at December 31:

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).


		2005		2004

		Consolidated		Consolidated

Timber and logging roads		262,495		263,219
Timberlands		44,730		45,598
Seed orchard and nursery stock		1,243		1,373
Water rights		119		119

		308,587		310,309

Less accumulated depletion and road amortization		118,543		112,834


	$	190,044	$	197,475

     Deferred 2.revenue of ~~Contribution~~$1,041 ofat ~~Member~~December ~~Interest~~31, in2004, ~~Inland~~represented ~~Fiber~~an ~~Group,~~advance ~~LLC~~payment ("received by IFG~~"):~~ from a customer.

     ~~Subsequent~~F-32 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

AMERICAN ~~F-31~~FOREST RESOURCES, LLC AND SUBSIDIARIES Notes to Consolidated Financial Statements (dollar amounts in thousands)

~~AMERICAN~~4. ~~FOREST~~Certain ~~RESOURCES,~~Timberland ~~LLC Notes~~Transactions: toAFR ~~the Financial Statements (dollar amounts in thousands, except per unit amounts and unless otherwise noted)~~Timberlands:

~~Notes~~          On toOctober 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 ~~Financial~~"Yakima ~~Statements~~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).

~~(dollar~~ ~~amounts~~Acquisitions infor ~~thousands,~~Preferred ~~except~~LLC ~~per~~Member ~~unit amounts and unless otherwise noted)~~ Interests:

    ~~together~~      On October ~~with~~4, ~~one~~1999, ~~such~~AFR ~~entity~~issued ~~owns~~a ~~indirectly~~redeemable ~~through~~preferred ~~holding~~member ~~companies~~interest (the ~~entire~~"Preferred ~~outstanding~~LLC ~~common~~Interest") ~~membership~~to ~~interest in AFR~~its affiliate, ~~contributed its 99% member interest in~~ IFG, tofor ~~AFR.~~ IFG ~~also is the owner of AFR~~'s ~~redeemable preferred~~contribution ~~member~~to ~~interest.~~AFR ~~The~~of ~~results~~approximately of54,000 ~~operations~~acres of ~~IFG~~timberland ~~have~~located ~~been included~~ in Central Oregon (the ~~consolidated~~"Antelope ~~financial statements from January 1, 2003~~Timberlands"). ~~Losses~~AFR ~~for~~recorded the ~~period~~contributions ~~from~~and ~~January 1, 2003 through March 6, 2003 (~~the ~~date~~related ofPreferred ~~completion~~LLC ~~of the tender~~Interest ~~offer)~~ at ~~attributable~~IFG's tobasis ~~the~~for ~~63.6% interest acquired by senior management in~~ the ~~Privatization~~timberlands ~~Transaction~~of ~~have~~$18,850. ~~been~~This ~~shown~~contribution ~~separately~~had inan ~~the~~agreed ~~accompanying~~upon ~~statement~~value of ~~operations as a reduction in the consolidated loss~~$22,000.

    ~~The~~      During 2001, ~~contribution to AFR of IFG has been recorded at $19~~2002,~~898~~ ~~which~~and ~~reflects~~for the ~~cost~~period offrom ~~$26,961~~January ~~including acquisition expenses~~1, ~~paid~~2003 bythrough anMarch ~~entity controlled by senior management for the 63.~~6~~% acquired interest in the MLP~~, ~~reduced~~ by2003 ~~$7,063 representing~~ (the ~~carryover~~date ~~basis~~of ~~for~~completion ~~the 36.4% interest in the deficiency in the net assets~~ of the tender ~~MLP at December 31~~offer), ~~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~~issued toredeemable ~~the~~ preferred member ~~interest. In~~interests ~~accordance with accounting principles applicable~~ to ~~business~~IFG ~~combinations,~~for ~~the~~IFG's ~~excess~~contributions ~~($43,287)~~ of ~~cost~~timberlands located ~~over deficiency~~ in ~~net~~Central ~~assets attributable to the 63~~Oregon.6% ~~acquired~~AFR ~~interest~~recorded in the ~~MLP~~acquisitions ~~has been principally recorded as a $44,075 reduction~~ of ~~long-term~~cutting ~~debt~~rights ~~based~~and ontimberlands ~~the~~(and ~~quoted market price of~~ the ~~$225,000~~related Preferred ~~publicly~~LLC ~~traded~~Interest) ~~notes~~at of IFG.'s ~~Such~~basis ~~discount~~for ~~is being amortized by~~ the ~~effective yield~~cutting ~~method~~rights ~~over~~and ~~the~~timberlands ~~term~~ of ~~the debt (see Note 7)~~$46,200. ~~The~~These ~~following~~contributions had ~~summarizes~~an ~~the~~agreed ~~allocation~~upon ofvalue ~~the recorded amount~~ of ~~the contribution to the assets and liabilities of IFG~~$49,900.

($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

Sales to Affiliates:

~~F-32~~      In May 2003, IFG sold approximately 21,000 acres of timberland to AFS for $8,300.

      ~~Timber~~      In ~~and~~December ~~timberlands~~2003, ~~consisted~~IFG sold approximately 1,000 acres of ~~the~~timberland ~~following~~to atAFS ~~December 31:~~for $1,900.

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 December 2003, IFG sold timber cutting rights for approximately 34,965 thousand board feet ("MBF") to AFS for $4,200. These timber cutting rights expire in December 2006.

           In ~~November~~July ~~2002,~~2004 AFR ~~agreed~~sold totimber ~~sell~~cutting ~~the~~rights ~~Ochoco~~for approximately ~~timberlands~~ 5,300 ~~which~~MBF ~~it had acquired from IFG,~~ to anCle ~~unrelated~~Elum ~~buyer~~Resources for $~~14,600~~300. In ~~connection~~These ~~with~~timber ~~this~~cutting ~~sale,~~rights ~~AFR~~expire ~~received~~in ~~a non-refundable deposit of $9,000 from the buyer of the property, which was reflected as a liability at~~ December ~~31, 2002~~2007. ~~The sale closed on November 8, 2003, at which time the $5,600 balance from the buyer was collected.~~

     ~~Customer~~In ~~deposits~~August of2004 ~~$1,041~~AFR ~~and~~sold ~~$5,000 at~~timber ~~December~~cutting 31rights for approximately 1,723 ~~2004~~MBF ~~and~~to ~~2003,~~Cle ~~respectively,~~Elum ~~represented~~Resources anfor ~~advance~~$305. ~~payment~~These ~~received~~cutting byrights ~~IFG~~expire ~~from~~in aDecember ~~customer~~2007.

     In 4.August ~~Certain~~2005, ~~Timberland~~AFR ~~Transactions:~~sold approximately 240 acres of Timberlandto Cle Elum Resources for $615.

~~AFR Timberlands:~~F-33

     On ~~October~~AMERICAN 4,FOREST ~~1999~~RESOURCES, ~~AFR~~LLC ~~acquired~~AND ~~approximately 56,000~~SUBSIDIARIES ~~acres of timber and timberlands and approximately 700 acres of timber cutting rights from Boise Cascade Corporation~~ ~~for~~ Notes ~~approximately $55,000 (the "Yakima Timberlands"). Substantially all of the purchase price was allocated~~ to ~~timber, timberlands~~Consolidated ~~and~~Financial ~~logging~~Statements ~~roads. The acquisition was financed through a Credit Facility obtained by AFR~~ (~~see~~dollar ~~Note~~amounts 7in thousands).

~~Acquisitions for Preferred LLC Member Interests (see Note 8)~~5. Equipment:

     On       Equipment ~~October 4, 1999, AFR issued a redeemable preferred~~


				Weighted
				Average
	Number of			Exercise
	Shares			Price

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

Outstanding, December 31, 2003, 2004 and 2005	–			–

				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	-			-

	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	)


	December 31,

			2005			2004


ASSETS
Current assets:
Cash and cash equivalents (including restricted cash of
$19 at December 31, 2004)		$	477		$	342
Accounts receivable			761			579
Due from managing member and affiliates			–			54
Other receivables			563			79
Notes receivable			683			774
Prepaid expenses and other current assets			138			271
Restricted cash related to debt in default			3,683			15,357

Total current assets			6,305			17,456

Timber and timberlands, net			190,044			197,475
Equipment, net			870			873
Restricted cash			–			104
Interest rate cap agreement			102			302
Notes receivable, less current portion			–			10
Deferred financing costs, net			463			708
Other assets			85			150

Total assets		$	197,869		$	217,078


LIABILITIES AND MEMBERS' DEFICIENCY
Current liabilities:
Accounts payable		$	1,139		$	596
Accrued interest			25,536			3,185
Other accrued liabilities			3,046			1,589
Long-term debt - in default			114,448			124,225
Long-term debt of IFG subsidiary declared in default by Trustee
(net of unamortized discount of $17,849 (2005) and $27,533 (2004))			207,151			197,467
Payable to managing member and affiliates			14,340			7,722
Deferred revenue			–			1,041

Total current liabilities			365,660			335,825

Commitments and litigation (Notes 10 and 11)

Common members' deficiency			(167,791	)		(118,747	)


		$	197,869		$	217,078


See notes to financial statements


		Year Ended December 31,
		2005			2004			2003
Revenues:
Log and timber deed sales, including $605 (2004) and
$4,200 (2003) to an affiliate	$	17,754		$	23,798		$	38,617
Timber and property sales, including $615, 2005 and $10,200 (2003) to an affiliate		6,151			28,120			24,729
By-products and other		1,453			2,089			2,203


		25,358			54,007			65,549

Cost of products sold:
Cost of timber harvested		11,960			14,296			20,543
Cost of timber and property sales		1,824			38,876			24,621
Depletion, depreciation and road amortization		8,633			13,602			21,826


		22,417			66,774			66,990


Gross profit (loss)		2,941			(12,767	)		(1,441	)


Operating expenses:
Selling, general and administrative		7,635			6,524			7,221
Management fees		4,980			7,147			4,371

		12,615			13,671			11,592


Operating loss		(9,674	)		(26,438	)		(13,033	)


Other income (expense):
Interest expense and commitment fees		(29,038	)		(27,259	)		(27,077	)
Amortization of deferred financing fees (including write-off of $3,970 in 2004)
and debt discount		(10,327	)		(14,177	)		(7,763	)
Interest income		106			175			234
Preacquisition loss of acquired interest		–			–			3,984
Other (expense) income, net		(111	)		(396	)		322


		(39,370	)		(41,657	)		(30,300	)


Net loss	$	( 49,044	)	($	68,095	)	($	43,333	)

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

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	)
Net loss		–			(49,044	)		–			(49,044	)



Balance, December 31, 2005	$	–		$	139,336		$	(28,455	)	$	(167,791	)


* Owner of the Company's redeemable preferred member interest


See notes to financial statements


		Twelve Months Ended December 31,
		2005			2003			2003
Cash Flows from Operating Activities:
Net Loss	$	(49,044	)	$	(68,095	)	$	(43,333	)

Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation, depletion and amortization and cost of timber
property sold		10,479			52,008			46,447
(Gain) loss on disposal of assets		10			–			(58	)
Amortization of deferred financing fees and debt discount		10,327			14,178			7,764
Preacquisition loss of contributed interest		–			–			(3,984	)
Accretion of discount on other long–term debt		–			68			83
Fair value adjustment of interest rate cap agreement		200			728			112
Change in assets and liabilities net of effect of contribution of IFG in 2003:
Accounts receivable		(182	)		253			322
Other receivables		107			(243	)		(135	)
Notes receivable		(187	)		(616	)		1,267
Prepaid expenses and other current assets		208			82			58
Accounts payable and accrued expenses		6,512			(230	)		(104	)
Accrued interest		22,351			(7	)		170

Advance payment from customer		(1,041	)		(3,959	)		(4,000	)
Payable to affiliate		308			7,503			(241	)


Net cash provided by operating activities		48			1,670			4,368


Cash flows from investing activities:
Acquisition of timber and timberlands		(3,398	)		(3,206	)		(2,805	)
Purchase of equipment		(56	)		(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		(3,454	)		(694	)		(32,365	)


Cash flows from financing activities:
Capital contributions		–			–			1,238
Proceeds from bank credit facility		–			–			32,600
Payments made on bank credit facility		(9,500	)		(221	)		(3,900	)
Advances from affiliates		1,539			(304	)		324
Payments of other long-term debt		(276	)		(375	)		(365	)
Deferred financing fees		–			(35	)		(765	)
Restricted cash, noncurrent portion		11,778			(1,315	)		(1,273	)


Net cash (used in) provided by financing activities		3,541			(2,250	)		27,859


Net decrease in cash, cash equivalents and restricted cash		135			(1,274	)		(138	)
Cash, cash equivalents and restricted cash, beginning of year		342			1,616			1,754


Cash, cash equivalents and restricted cash, end of year	$	477		$	342		$	1,616


Supplemental Cash Flow Information:
Cash paid during the year for interest	$	1,880		$	26,909		$	26,909

Noncash Investing and Financing Activities:
Receipt of timber cutting rights and timberlands from affiliate	$	–		$	10,467		$	10,467
Interest rate cap agreement acquired for debt	$	–		$	–		$	–
Contribution by common member of interest in IFG Holdings, LLC, net
of $1,460 cash acquired	$	–		$	18,438		$	18,438

		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

Filing Compare · INLAND FIBER GROUP LLC