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UNITED STATES
  SECURITIES AND EXCHANGE COMMISSIONWashington,
  D.C. 20549

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FORM
  10-K


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

|For the
      fiscal year ended December 31, 2003 | Commission
      File No.: 1-13573-01
|------------------------------------------------- | -------------------------------------
|                                                  |                                      

INLAND
  FIBER GROUP, LLC

FIBER FINANCE
  CORP.

(Exact name
  of registrant as specified in its charter)

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

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

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

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



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

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

Yes xNo o

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

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

YesoNo x

Documents
incorporated by reference:  See item 15.  Exhibit Index

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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                                   | 14  
|         |          |                                                                                             |     
|PART II  |          |                                                                                            
|         | Item 5.  | Market
      for Registrants Common Units and Related Security Holder Matters              | 15  
|         | Item 6.  | Selected
      Financial Data                                                               | 15  
|         | Item 7.  | Managements
      Discussion and Analysis of Financial Condition and Results of Operations | 16  
|         | Item 7A. | Quantitative
      and Qualitative Disclosures About Market Risk                            | 26  
|         | Item 8.  | Financial
      Statements                                                                  | 26  
|         | Item 9.  | Changes
      in and Disagreements with Accountants on Accounting and Financial Disclosure  | 26  
|         |          |                                                                                             |     
|PART III |          |                                                                                            
|         | Item 10. | Directors
      and Executive Officers of the Registrant                                    | 27  
|         | Item 11. | Executive
      Compensation                                                                | 29  
|         | Item 12. | Security
      Ownership of Certain Beneficial Owners and Management                        | 30  
|         | Item 13. | Certain
      Relationships and Related Transactions                                        | 30  
|         | Item 14. | Principal
      Accounting Fees  and Services                                               | 34  
|         |          |                                                                                             |     
|PART IV  |          |                                                                                            
|         | Item 15. | Exhibits,
      Financial Statements, and Reports on Form 8-K                               | 35  

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

PART I

Item
  1. Business.

General

The
business of Inland Fiber Group, LLC (formerly U.S. Timberlands Klamath Falls, L.L.C.), a Delaware
limited liability company formed in 1996 (the Company), consists of the growing of trees,
the sale of logs and standing timber and the sale of excess land. The Company owns approximately
272,000 fee acres of timberland and cutting rights on approximately 70,000 acres of timberland (collectively
the Timberlands) containing total merchantable timber volume estimated as of January
1, 2004 to be approximately 0.7 billion board feet (BBF) in Oregon east of the Cascade
Range. Logs harvested from the Timberlands are sold to unaffiliated domestic conversion facilities.
These logs are processed for sale as lumber, plywood and other wood products, primarily for use in
new residential home construction, home remodeling and repair and general industrial applications.
The Company also owns and operates its own seed orchard and produces approximately four million conifer
seedlings annually from its nursery, approximately 80% of which are used for its own internal reforestation
programs, with the balance sold to other forest products companies.

The
Timberlands merchantable timber consists of Ponderosa Pine (approximately 45%) and Douglas
Fir (approximately 14%), species which have historically commanded premium prices over other softwood
species, with the balance consisting of Lodgepole Pine, White Fir and other softwood species. The
Timberlands have stands of varying ages and are unique in the forests east of the Cascade Range in
Oregon in that approximately 104,000 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 43 years old. Initial thinning or harvesting of the Plantation
stands is expected to begin within the next three 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 conversion facilities nor does it presently intend to own any
such facilities on a long-term basis; consequently the Companys log sales are made to unaffiliated
third parties. There are currently more than 18 primary conversion facilities located within a 150-mile radius of the Companys Timberlands.

In
  August 1996, the Company and an affiliate acquired approximately 604,000 fee
  acres of timberland (the Klamath Falls Timberlands), containing
  an estimated merchantable timber volume of approximately 1.9 BBF and related
  assets from Weyerhaeuser (the Weyerhaeuser Acquisition). In November
  1997, the affiliates portion of the Klamath Falls timberlands were transferred
  to the Company in a series of transactions. In July 1997, the Company acquired
  approximately 42,000 fee acres of timberland and cutting rights on approximately
  3,000 acres of timberland (the Ochoco Timberlands), containing an
  estimated merchantable timber volume of approximately 280 million board feet
  (MMBF) from Ochoco Lumber Company (Ochoco) (the Ochoco
  Acquisition). At the date of acquisition, over 40% of the merchantable
  timber on the Ochoco Timberlands was at least 80 years old. As of December 31,
  2000, the Company had harvested substantially all of the Old Growth timber on
  the Ochoco Timberlands. During the 4th quarter of 2002, the Company sold the
  Ochoco property to an affiliate. During October 1999, the first and second quarters
  of 2001, the third quarter of 2002 and the first half of 2003, the Company contributed
  primarily non-income producing, pre-merchantable pine plantation timberlands
  in exchange for an investment in the affiliate (See Item 13. Certain Relationships
  and Related Transactions, and Notes 3 and 9 to the Consolidated Financial Statements).

1

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

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, L.L.C. (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 public
offering (the Public Note Offering) of $225.0 million aggregate principal amount of 9
5/8% unsecured senior notes due 2007 (the Notes). See Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.

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

2

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

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.

Effective
September 1, 2003, the Company entered into a new management agreement with the Manager. The management
agreement replaced the prior arrangement under which the Company reimbursed the Manager for expenses
incurred on the Companys behalf, as described in the preceding paragraph. The management agreement
provides for an annual fee of 2% of the agreed upon valuation of total timber and timberland assets
under management, payable monthly and is comparable to other management agreements used in the industry
where the manager receives a monthly fee based upon assets under management. In addition, the Company
established its own Board of Directors to supervise the management of the Company. Expenses incurred
for management of the Company by the Manager totaled $3,529 and $3,176, respectively, for the twelve
months ended December 31, 2003 and 2002, including $1,338 for the period from September 1 through
December 31, 2003 under the management agreement.

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 a majority
  of independent members of its Board of Directors, is available at the Boards
  discretion to review matters involving conflicts of interest.

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

3

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

The Timberlands

Timber Growth

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

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.

Harvest Plans

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

4

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

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 Indentures. A balance of $63 remained in the restricted account
as of December 31, 2003. As of December 31, 2003, the Company was in compliance with the covenants
contained in the Notes. See Managements Discussion and Analysis of Financial Condition
and Results of Operations. If the Companys current harvest plans are pursued unaltered
for the next ten years, if it consummates the land sales contemplated by its strategic plan and if
its other strategic assumptions prove to be accurate, the Company expects that its timber inventory
will decline through 2010 and Ponderosa Pine volume will increase as a percentage of its total timber
inventory by such date. The Company expects that its inventory would remain relatively stable thereafter.
Long-term harvest plans, growth rates and forest inventory levels were reviewed during 2003. Such
harvest plans, land sales and other strategic assumptions do not take into account any acquisition
that the Company may consummate during such period.

Access

The
Timberlands are accessible by a system of approximately 5,000 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.

Sales and Markets

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

5

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

The Company currently sells its sawlogs or stumpage principally to unaffiliated wood products manufacturers
and sells its chips to unaffiliated pulp mills or hardboard plants. The percentage of logs which
are sold as sawlogs/stumpage or pulp logs is dependent upon, among other things, the species mix
and quality of the inventory harvested and the market dynamics affecting the region. Most of the
timber on the Timberlands is softwood, which, due to its long fiber, strength, flexibility and other
characteristics, is generally preferred over hardwood for construction lumber and plywood. Once processed,
sawlogs are suitable for use as structural grade lumber, appearance grade boards, plywood and laminated
veneer and can also be manufactured for such end uses as window trim, molding and door jambs. During
2003, sawlogs, stumpage sales and timber deed sales accounted for approximately 49%, 0% and 19%,
respectively, of the Companys revenue. Chips, which can be used to make hardboard or pulp,
and seedlings combined accounted for 5% of the Companys revenues in 2003. There were property
sales in 2003 of $10.1 million, compared to 2002 property sales of $5.8 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 2003, sales to Boise Cascade, Murphy Veneer,
Timber Products, Scott Timber, and Columbia Plywood accounted for approximately 65% of the Companys
revenue from log sales. No other single non-affiliated customer accounted for more than 4% of the
Companys net revenues for 2003. Although the loss of one or more of such customers or other
significant customers could have a material adverse effect on the Companys results of operations,
the Company believes that the capacity for processing wood fiber in the Companys markets currently
is in balance with the supply and that, therefore, such customers could be replaced with some additional
freight costs. There are currently more than 18 primary conversion facilities located within a 150-mile
radius of the Companys Timberlands.

Seasonality

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

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

6

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

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 clearingprice
  although this price has been adversely affected by international competition.
  Additionalcompetitive
  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. In recent years, the strength of the U.S. dollar combined with the much lower value of currencies
in Canada, the Pacific Rim and South America have made international competition a larger factor
in competitive pricing. In addition, the Company competes with the USFS, the BLM and the Bureau of
Indian Affairs. Certain of the Companys competitors have significantly greater financial resources
than the Company.

The
Company believes that it is competitive in the timber business for the following reasons: (i) the
Company has substantial holdings of timber properties which include approximately 0.7 BBF of merchantable,
good quality timber, approximately 104,000 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 the harvest of its Timberlands and evaluate and integrate acquisitions
of additional timberlands.

Resource Management

Timber Resource Management

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

7

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

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 60% of the Companys timber,
all merchantable volume is removed in a single harvest. After an area has been regeneration harvested,
the Company employs a reforestation contractor to plant two-year-old seedlings at an optimal density
of approximately 300 trees per acre. The Company also attempts to protect and maintain the ecosystem
within the Timberlands while providing for a reasonable harvest. For example, the Company typically
leaves a mix of green and dead trees at the harvest site, including some large trees, snags and downed
logs to provide habitats for a variety of wildlife species while enriching the soil for successive
generations of trees.

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

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

8

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

Geographic Information System (GIS)

The
  GIS is a computer software program that was acquired from Weyerhaeuseras
  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 legislation may have on its Timberlands
  by inputting the proposed constraints imposed by such legislation in light of
  the particular field characteristics of its Timberlands. The Company believes
  the GIS may be used to the Companys advantage to evaluate potential acquisition
  opportunities.

Federal and State Regulation

Endangered Species

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

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

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

9

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

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 anddetermine
  the current status of such sites, (iii) determine if areas identified as containing
  suitable habitat are supporting owls and (iv) investigate other spotted owl
  or other species sightings. The most recent of such surveys was completed in
  August 2003, and identified approximately 24 northern spotted owl sites affecting
  the Timberlands, three 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.

Timberlands

The operation of the Timberlands is subject to specialized statutes and regulations in the State of
Oregon, which has enacted laws which regulate forestry operations, including the Forest Practices
Act, which addresses many growing, harvesting and processing activities on forest lands. Among other
requirements, these laws restrict the size and spacing of 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 proximity to certain ocean and inland shore
lines, water protection and enhancement and certain grading and road construction activities. The
Company believes it is in substantial compliance with these regulations.

Environmental Laws

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

Environmental
  laws and regulations have changed substantially and rapidly over the last20
  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.

10

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

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

Access to Timberlands May be Limited by Federal Regulation

A substantial portion of the Timberlands consists of sections of land that are intermingled with or
adjacent to sections of federal land managed by the USFS and the BLM. Removal of trees from those
portions of the Timberlands requires transportation of the logs by truck across logging and general
purpose roads. The Company has entered into road use agreements with the USFS and the BLM. The majority
of the Companys timberland management activities include the transportation of timber products
across federal land and roads 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 thehealth
  and safety of employees. The Company believes that it is in compliance with
  OSHAregulations, including
  general industry standards, permissible exposure levels for toxic chemicals
  and record-keeping requirements.

11

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

Employees

As
  of March 15, 2004, 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.

12

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

Item
  2. Properties

Timber Inventory

The
Company currently owns and manages approximately 272,000 fee acres of timberland and cutting rights
on approximately 70,000 acres of timberland containing total merchantable timber volume estimated
as of January 1, 2004 to be approximately 0.7 BBF in Oregon east of the Cascade Range. A merchantable
tree is a tree of sufficient size that will produce a sound log 16 feet in length and at least 4.6
inches in diameter, inside bark, at the small end. The Companys merchantable timber inventory
consists of a substantial percentage of premium species of softwood, consisting of Ponderosa Pine
and Douglas Fir, species which have historically commanded premium prices over other softwood species,
as well as Lodgepole Pine, White Fir and other species. The Company believes that the Timberlands
are suitable for current operations.

The
Timberlands have stands of varying sizes and ages and are unique in the forests east of the Cascade
Range in Oregon in that approximately 104,000 acres of the 272,000 acre total consist of actively
managed Pine Plantations with stands ranging in age from one to 43 years. The Plantations are stocked
with high quality Ponderosa Pine (approximately 78%) and Lodgepole Pine (approximately 22%). Initial
thinning of the Plantation stands, including the thinning of commercial quantities of merchantable
timber, is expected to begin within the next three years. SeeItem 1. Business - The Timberlands--Harvest Plans.

Merchantable Timber Inventory by Species

The
Company maintains data regarding the estimated merchantable timber inventory by species within the
Timberlands. All volume estimates are based on information developed by the Manager. As of January
1, 2004, the total timber inventory amounted to 0.7 BBF. The Companys combined timber inventory
by MMBF and percentage is Ponderosa Pine (319 (45%)), Lodgepole Pine (132 (19%)), White Fir
(123 (18%)), Douglas Fir (99 (14%)) and other species (29 (4%)). 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, 2004, approximately 175 MMBF, or 25%, of the merchantable timber,
had a DBH of 16 or more inches.

Acreage Distribution by Age Class on Plantations

The Company also
  maintains data as to the acreage distribution of timber on the Plantations by
  age class. As of January 1, 2004, the Plantations totaled 104,000 acres. Of
  the total acreage, 60,000 acres range from 1 to 15 years of age, 20,000 acres
  range from 16 to 25 years of age, and 24,000 acres are 26 years of age or older.

13

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

Item 3. Legal Proceedings

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

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

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

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

14

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

PART II

Item
  5. Market for Registrants Common Equity and Related Security Holder
  Matters

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

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 | 
|------------------------------------------------------- | ----------------------------- | 
|
|
|
|CASH
      FLOWS AND OTHER DATA 
        (IN MILLIONS): |                               | 
|Modified
      EBITDDA (1)                              |                               | 
|Additions
      to timber and timberlands               |                               | 
|Cash
      flow from operating activities               |                               | 
|Cash
      flow (used in) investing                     |                               | 
|activities                                              |                               | 
|Cash
      flow from (used in) financing                |                               | 
|activities                                              |                               | 
|                                                        |                               | 
|OPERATING
      STATEMENT DATA                          |                               | 
|(IN
      MILLIONS EXCEPT PER                           |                               | 
|UNIT
      AMOUNTS):                                    |                               | 
|Revenues(2)                                             |                               | 
|Depreciation,
      depletion and road                  |                               | 
|amortization                                            |                               | 
|Fire
      loss                                         |                               | 
|Cost
      of timber and property sales                 |                               | 
|Operating
      income (loss)                           |                               | 
|Income
      (loss) before extraordinary                |                               | 
|items                                                   |                               | 
|Net
      income (loss)                                 |                               | 
|                                                        |                               | 
|BALANCE
      SHEET DATA (AT                            |                               | 
|PERIOD
      END, IN MILLIONS):                         |                               | 
|Working
      capital (deficiency)                      |                               | 
|Total
      assets                                      |                               | 
|Long-term
      debt (3)                                |                               | 
|Equity
      (deficiency)                               |                               | 
|OPERATING
      DATA (UNAUDITED):                       |                               | 
|Log,
      stumpage and timber deed sales               |                               | 
|volumes
      (MMBF)                                    |                               | 
|Property
      sales volumes (MMBF)                     |                               | 



15

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



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

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

Forward-Looking Statements

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

General

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

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

16

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

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 governmental policies have substantially reduced the
volume of timber under contract to be harvested from public lands. The pace of regulatory activity
accelerated in the late 1980s. The resulting supply decrease caused prices for logs to increase significantly,
reaching peak levels during 1993. Prior to 1998, the low supply of timber from public lands, which
is expected to continue for the foreseeable future, benefited private timber holders such as the
Company  through higher stumpage and log prices. Since 1998, the strength of the U.S. dollar
has decreased exports and increased imports and has disrupted the equilibrium of the supply and demand
equation and contributed to the general downward trend of prices. Certain market conditions for finished
products have also negatively impacted stumpage and log prices in 2003.

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

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

Demand

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

17

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

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

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 year ended December 31, 2003 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.

18

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

Current Market Conditions

Log prices in the first quarter of 2003 were down by 3.4% from the fourth quarter of 2002. During the
second quarter prices improved slightly and after a slight decline in the third quarter, improved
again in the fourth quarter of 2003. Log prices in the fourth quarter of 2003 and 2002 were virtually
equal. The average log price in 2003 was $316/MBF compared to $330/MBF in 2002. Even with the lower
average price on a year to year basis, the downward trend in log prices that has been in effect for
the past several years appears to have stopped and the Company expects prices of logs to trend slowly
upwards in 2004.

In
June 2003, a major customer and competitor of the Company, Crown Pacific, filed for relief under
Chapter 11 of the Bankruptcy Code. There was no direct financial impact to the Company. It is not
known at this time how this bankruptcy will impact the forest products industry in which the Company
operates, although it may lead to increased timber supply in the market.

Results of Operations

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

|                       |  |  |  | Sales Volume
      (MBF) |  | Price Realization
      (MBF) |   |  |  |        
|---------------------- |  |  |  | ------------------------ |  | ----------------------------- | - |  |  | -------
|
|
|
|                       |  |  |  |                          |  |                               |   |  |  |        
|2003                   |  |  |  |                          |  |                               |   |  |  |        
|Year
      ended 12/31 |  |  |  | 57,048                   |  |                               |  |  |  | 53,719 
|                       |  |  |  |                          |  |                               |  
|4th
      Quarter      |  |  |  | 12,803                   |  |                               |  |  |  | 38,860 
|                       |  |  |  |                          |  |                               |  
|3rd
      Quarter      |  |  |  | 12,833                   |  |                               |  |  |  | 1,104  
|                       |  |  |  |                          |  |                               |  
|2nd
      Quarter      |  |  |  | 14,314                   |  |                               |  |  |  | 10,869 
|                       |  |  |  |                          |  |                               |  
|1st
      Quarter      |  |  |  | 17,098                   |  |                               |  |  |  | 2,886  
|                       |  |  |  |                          | 
|2002                   |  |  |  |                          | 
|                       |  |  |  |                          |  |                               |  
|Year
      ended 12/31 |  |  |  | 74,612                   |  |                               |  |  |  | 130,161
|                       |  |  |  |                          |  |                               |  
|4th
      Quarter      |  |  |  | 31,015                   |  |                               |  |  |  | 19,159 
|                       |  |  |  |                          |  |                               |  
|3rd
      Quarter      |  |  |  | 23,998                   |  |                               |  |  |  | 20,189 
|                       |  |  |  |                          |  |                               |  
|2nd
      Quarter      |  |  |  | 14,575                   |  |                               |  |  |  | 88,480 
|                       |  |  |  |                          |  |                               |  
|1st
      Quarter      |  |  |  | 5,024                    |  |                               |  |  |  | 2,333  
|                       |  |  |  |                          | 
|2001                   |  |  |  |                          | 
|                       |  |  |  |                          |  |                               |  
|Year
      ended 12/31 |  |  |  | 74,640                   |  |                               |  |  |  | 176,105
|                       |  |  |  |                          |  |                               |  
|4th
      Quarter      |  |  |  | 15,827                   |  |                               |  |  |  | 48,838 
|                       |  |  |  |                          |  |                               |  
|3rd
      Quarter      |  |  |  | 27,984                   |  |                               |  |  |  | 83,899 
|                       |  |  |  |                          |  |                               |  
|2nd
      Quarter      |  |  |  | 9,890                    |  |                               |  |  |  | 28,624 
|                       |  |  |  |                          |  |                               |  
|1st
      Quarter      |  |  |  | 20,939                   |  |                               |  |  |  | 14,744 

19

---



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

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 is primarily attributable to a decrease in log sales of $6.7 million and a $10.6 million
decrease in stumpage sales and 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 compared to an average
log sales price of $330 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 reduction in stumpage volumes is a result of the Companys
strategic decision to utilize log sales and timber deed sales as its primary source 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. 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 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.

20

---



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

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

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. 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.

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

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

Log
  sales for 2002 were $24.7 million on volumes of 74,612 MBF, compared to log
  sales of $26.0 million on volumes of 74,640 in 2001. The average log sales price
  for 2002 was $330 compared to an average log sales price of $349 in 2001, a
  5% decrease, reflecting weaker markets for the Companys log sales.

21

---



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

Timber
deed sales for 2002 were $17.6 million on volumes of 130,162 MBF, compared to timber deed revenue
of $28.1 million on volumes of 176,105 MBF in 2001. The average timber deed sales price per MBF for
2002 was $135 compared to an average timber deed sales price of $160 in 2001, a 16% decrease. The
significant 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 2002 and 2001. The reduction in stumpage volumes
  isa result of the
  Companys strategic decision to utilize log sales and timber deed sales
  as its primary source of revenue.

The
Company had revenue from two property sales in 2002 of $5.8 million, compared to $0.0 million in
revenue from timber and property sales during 2001.

Gross Profit. Gross profit decreased along with revenues by $3.9 million from $0.6 million in 2001 to negative $3.3
million in 2002 and gross margin decreased from 1.0% in 2001 to negative 7.0% in 2002. The decrease
in gross margin was primarily from four factors. First, contracted log and haul costs on a per MBF
basis were higher during 2002 as compared to 2001 due to longer hauls for delivered logs. Second,
the Companys timber deed sales were composed of a different value grade mix as compared to
2001. Third, in 2002 the Company incurred a fire loss of $0.6 million. Finally, continued declines
in the timber markets resulted in lower realizations on delivered log and stumpage values. Depletion,
depreciation and road amortization decreased from $37.3 million in 2001 to $27.5 million in 2002
due primarily to decreased volume of timber sales.

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

Equity in Net Income (Loss) of Affiliate. The equity in net loss of affiliate was $11.0 million during 2002 as compared to equity in net loss
of affiliate of $6.9 million in 2001. The losses in 2002 and 2001 reflect the Companys share
of losses absorbed from its preferred equity investment in American Forest Resources, LLC. 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 2002 and $22.0 million in 2001 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
  for 2002, compared to $0.1 million for 2001, representing an increase in income
  of $0.1 million.

22

---



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

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, 2003, the Company had a cash balance of $1.4 million
and a $6.5 million working capital deficit that included $5.0 of deferred revenue relating to the
prepayment of a log sale contract entered into in December 2003.

Operating Activities. Cash flows provided by operating activities in 2003 were $1.3 million, compared to cash flows provided
by operating activities of $3.2 million in 2002.

Investing Activities. Cash flows used in investing activities were $2.0 million in 2003, as compared to cash flows used in
investing activities of $3.3 million during 2002 principally for reforestation, timber acquisitions
and road additions in each year.

Financing Activities. Cash flows provided by financing activities were $1.2 and $0.0 million in 2003 and 2002, respectively.
In May 2003, U.S. Timberlands Acquisition Co., LLC reimbursed the Company for certain expenses aggregating
$1,238 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 2003 and 2002, 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.

23

---



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

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. 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,
placed $662 in a restricted account only to be used in ways prescribed in the Indenture. A balance
of $63 remains in the restricted account as of December 31, 2003. As of December 31, 2003, the Company
was in compliance with the covenants contained in the Notes. (See Item 3: Legal Proceedings for a
discussion of certain litigation initiated against the Company among others relating to the Notes.).

The
Company made its required interest payment, due on November 17, 2003, on its Notes, within the 30
day grace period provided therefore. (See Item 3. Legal Proceedings for a discussion of certain litigation
initiated against the Company among others relating to the Notes.).

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 2003, the maximum amount outstanding
under such loans was $424 all of which had been repaid as of December 31, 2003.

Capital Expenditures/Cash Distributions

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

24

---



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

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 has been approached recently regarding certain debt restructuring scenarios,
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.).

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.

Recent Accounting Standards

In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure as an amendment to SFAS No. 123 by introducing two additional conversion
methods when converting to the fair value based method from the intrinsic value method of accounting
for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to
require prominent disclosure about the effects on reported net income (loss) of an entitys
accounting policy decisions with respect to stock based employee compensation and amends APB Opinion
No. 28 to require disclosure about those effects in interim financial information. The disclosure
provisions are effective for fiscal years  ending  after December 15, 2002 and
for interim periods beginning after December 15, 2002.

Prior
to the Privatization Transaction, when the Company was deemed to have provided stock-based compensation
in connection with the MLPs Unit Option Plan, the Company had elected to follow the intrinsic
value method of accounting for stock-based employee compensation.

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
  provisions or FIN 46 as revised are required to be applied by the Company no
  later than March 31, 2004. The Company has considered the applicability of FIN
  46 to its investment in its parent company, American Forest Resources, 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.

25

---



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

Item
  7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

Item
  8. Financial Statements

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

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

Not applicable.

Item 9A. Disclosure Controls and Procedures

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

The
Companys President and Chief 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 ensure that others make all material information known to them within the organization.

As
  of the end of the period covered by this annual report, the Companys executive
  officers competed an evaluation of the disclosure controls and procedures and
  has determined them to be functioning properly and effectively. They did not
  discover any significant deficiencies or material weaknesses within the controls
  and procedures that required modifications. Since the completion of that evaluation,
  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.

26

---



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

PART III

Item
  10. Directors and Executive Officers of the Registrant

Directors 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.

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

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

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

Laurie
  G. Rudey has served as a director of the Company since its reorganization in
  July 2003. She also served as a director of the Manager. Mrs. Rudey has been
  a Psychotherapist since 1998. John M. Rudey, Chairman and President of the Company,
  is Mrs. Rudeys husband

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

27

---



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

John
D. Layton has served as a director of the Company since its reorganization in July 2003. He also
serves as a director of the Manager, having been elected to the Board of Directors of the Manager
in June 2003. For the past five years, Mr. Layton has been a Manager with HRH Construction, LLC,
in New York City.

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

Suzanne
M. Hay has served as a director of the Company since its reorganization in July 2003. Since 1995,
Ms. Hay has served in various positions with Entity Services Group, LLC, which provides independent
directors and other services to companies, and currently serves as Vice President, Client Development.

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

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.

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

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

28

---



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

Item
  11. Executive Compensation

Under
  the terms of the Companys  previous management arrangement,
  the Company was required to reimburse the Manager for expenses relating to the
  operation of the Company, including salaries and bonuses of employees employed
  on behalf of the Company, as well as the costs of providing benefits to such
  persons under employee benefit plans and for the costs of health and life insurance.
  Accordingly, the Company reimbursed the Manager for the salaries and bonuses
  paid to its executive officers and other employees. Under the management agreement
  entered into with the Manager, the Company pays the Manager an annual fee of
  2% of the agreed upon valuation of total timber and timberland assets under
  management for its management services. The compensation of the Managers
  executive officers is subject to separate arrangements between the Manager and
  the executive officers. The Companys executive officers are not paid by
  the Company for their services as executives officers of the Company. The table
  below sets forth annual salary, bonus and all other compensation awards and
  payouts earned by the Managers chief executive officer and chief financial
  officer for services rendered through August 31, 2003 which were reimbursed
  by the Company:

| | SUMMARY
      COMPENSATION TABLE
| | --------------------------------
| |                                 

|Name
      and Principal
      Position |  | Fiscal
      Year |  | AnnualCompensation |     | Long-TermCompensationAwards |  | All
      Other
      Compensation | 
|--------------------------------------- |  | ----------------- |  | ------------------ | --- | --------------------------- |  | ---------------------------------- | 
|
|                                        |  |                   |  |                    |     |                             |  |                                    | 
|                                        |  |                   |  |                    |     |                             |  |                                    | 
|John
      M. Rudey                     |  | 2003              |  | 309,000            | (1) |                            |  |                                   | 
|Chairman
      and                      |  | 2002              |  | 463,500            |     |                            |  |                                   | 
|Chief
      Executive
          Officer |  | 2001              |  | 463,500            |     |                            |  |                                   | 
|                                        |  |                   |  |                    |    
|                                        |  |                   |  |                    |     |                             |  |                                    | 
|Thomas
      C. Ludlow                  |  | 2003              |  | 150,000            | (1) |                             |  |                                    | 
|Vice
      President and                |  | 2002              |  | 225,000            |     |                            |  |                                    | 
|Chief
      Financial
          Officer |  | 2001              |  | 225,000            |     |                            |  |                                   | 

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

Compensation of Directors

Directors
  of the Company, other than Ms. Hay and Ms. Tillman, currently receive annual
  compensation of $25,000 for their service on the Board of Directors of the Company.
  The Company pays $1,100 annually to the Entity Services Group, LLC for the services
  of each of Ms. Hay and Ms. Tillman. The independent directors of the Companys
  Manager received $50,000 to $100,000 on an annual basis through June 2003. For
  their remuneration, the independent directors (other than Ms. Hay and Ms. Tillman)
  each agreed to participate in four regular meetings of the Board of Directors
  and four Audit Committee meeting and the non-employee director agrees to participate
  in four regular meetings of the Board of Directors. Each non-employee director
  will receive $1,250 for each additional meeting in which he or she participates.
  In addition, each non-employee director will be reimbursed for his or her out-of-pocket
  expenses in connection with attending meetings of the Board of Directors or
  committees thereof. Each director will be fully indemnified by the Company for
  his or her actions associated with being a director to the extent permitted
  under Delaware law.

29

---



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

Through
June 2003, the Manager and Aubrey Cole Associates (a consulting firm affiliated with Aubrey Cole,
a director of the Company through June 2003), 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 each such person or firm provided consulting services
to the Manager. Each such agreement provided for an annual retainer of $25,000, plus $150 per hour
(with a maximum per diem of $1,200) for services rendered at the request of the Manager. 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 $50,000 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 offset by increased director
fees. Pursuant to the management arrangement in effect at the time, the Company reimbursed the Manager
for the payment of approximately $56,000, $112,000, and $98,000 to the Directors of the Manager for
consulting services during 2003, 2002 and 2001, respectively. The consulting agreements were discontinued in July 2003.

Committee Interlocks and Insider Participation in Compensation Decisions

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.

Item
  12. Security Ownership of Certain Beneficial Owners and Management

None.

Item
  13. Certain Relationships and Related Party Transactions

The
  Company is managed by the Manager pursuant to 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 entities affiliated with Mr. Rudey.
  Mr. Rudey is the Chairman and President of the Company. In 2003, $1,338 in fees
  were paid by the Company pursuant to the management agreement.

30

---



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

Consulting
  Agreements

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

Investments
  in and Transactions with Affiliate

Since
  October 1999, the Company has owned a redeemable 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.

In
  October 1999, the Company made an investment in AFR. AFR, a then newly formed
  entity organized to acquire timber properties located in Central Washington
  and Central Oregon, is engaged in the 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 Holding Group, L.L.C.,
  a Delaware limited liability company (Holdings Group) in which John
  Rudey, the Chairman of the Board of the Company holds a controlling interest.
  The Company also acquired all of the senior preferred 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 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.

31

---



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

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

In
  June 2000, the Company purchased timber cutting rights for approximately 4.2
  millionboard feet
  from AFR for $1,300. These timber cutting rights expired in June 2003.

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

During
  2001, the Company contributed cutting rights 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 theCompanys
  Preferred LLC Interest in AFR has been pledged as collateral by AFR under its
  credit facility with its lender.

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

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 expire in
  August 2004.

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

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.

As
  a result of the Toolbox Fire in August 2002, the Company purchased salvage timber
  cutting rights for approximately 12.0 million board feet from AFR for $1,300
  to gain certain operating efficiencies. All of the timber was harvested before
  these timber cutting rights expired in August 2003.

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

32

---



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

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 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 for approximately 34,965
  million board feet to AFS for $4,756. These timber cutting rights expire in
  December 2004.

Also,
  In December 2003, the Company sold seedlings to AFR for $300.

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

Affiliate Credit Facility

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

33

---



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

Item
  14.  Principal Accounting Fees and Services

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, 2003 and December 31, 2002.

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

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

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.

34

---



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

PART IV

Item 15. Exhibits,
  Financial Statements, and Reports on Form 8-K

(a) (1) and (2) Financial
  StatementsSeeIndex to Financial Statements set forth on page F-l.

(a) (3) Exhibits

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

|* Incorporated by
      reference to the same numbered Exhibit to the Registrants Registration
      Statement on Form S-1 filed November13, 1997.
|---------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                   
| Incorporated
      by reference to the same numbered Exhibit to the Registrants Current
      Report on Form 8-K filed January15, 1998.         
|                                                                                                                                                   
|++ Incorporated by
      reference to the same numbered Exhibit to the Registrants Form10-Q
      filed on August 14, 2003                        
|                                                                                                                                                   
|# Incorporated by
      reference to the same numbered Exhibit to the Registrants Form10-Q
      filed on November 19, 2003                       

(b.) Reports on Form 8-K

None.

35

---



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

SIGNATURES

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

INLAND FIBER GROUP, LLC

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

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

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

36

---



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

EXHIBIT
  INDEX

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

37

---



|INLAND
      FIBER GROUP, LLC AND SUBSIDIARY
      (formerly U.S. Timberlands Klamath Falls, LLC)
|-------------------------------------------------------------------------------------------------

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

F-1

---



INDEPENDENT
  AUDITORS REPORT

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

We have audited
  the accompanying consolidated balance sheets of Inland Fiber Group, LLC (formerly U.S. Timberlands Klamath Falls, LLC) and
  subsidiary as of December 31, 2003 and 2002, and the related consolidated
  statements of operations, changes in members equity (deficiency) and cash
  flows for each of the years in the three-year period ended December 31, 2003.
  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 auditing standards generally accepted in the United
  States of America. Those standards require that we plan and perform the audit
  to obtain reasonable assurance about whether the financial statements are free
  of material misstatement. An audit includes examining, on a test basis, evidence
  supporting the amounts and disclosures in the financial statements. An audit
  also includes assessing the accounting principles used and significant estimates
  made by management, as well as evaluating the overall financial statement presentation.
  We believe that our audits provide a reasonable basis for our opinion.

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

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



Eisner, LLP

New York, New
  YorkJanuary 30, 2004With respect to Note 14April 5, 2004

F-2

---



|INLAND
      FIBER GROUP, LLC AND SUBSIDIARY
      (formerly U.S. Timberlands Klamath Falls, LLC)
|-------------------------------------------------------------------------------------------------

|                                                | **December
      31**, |            
|----------------------------------------------- | ---------------------- | -----------
|                                                | **2003**               |            
|                                                |                        |            
|**ASSETS**                                     
|Current
      assets:                          
|Cash
      and cash equivalents                 | ****                   | **1,447**  
|Accounts
      receivable                       | ****                   | **530**    
|Due
      from general partner                  | ****                   | ****      
|Other
      receivables                         | ****                   | **332**    
|Notes
      receivable                          | ****                   | **103**    
|Prepaid
      expenses and other current assets | ****                   | **220**    
|                                                |                        |            
|Total
      current assets                      | ****                   | **2,632**  
|                                                |                        |            
|Timber
      and timberlands, net               | ****                   | **129,002**
|Investment
      in affiliate                   | ****                   | **33,414** 
|Property,
      plant and equipment, net        | ****                   | **833**    
|Notes
      receivable, less current portion    | ****                   | **10**     
|Restricted
      cash                           | ****                   | **154**    
|Deferred
      financing fees, net              | ****                   | **2,623**  
|                                                |                        |            
|Total
      assets                              | **$**                  | **168,668**
|                                                |                        |            
|                                               
|**LIABILITIES
      AND MEMBERS DEFICIENCY**  
|Current
      liabilities:                     
|Accounts
      payable                          | ****                   | **525**    
|Accrued
      liabilities                       | ****                   | **749**    
|Accrued
      bond interest                     | ****                   | **2,830**  
|Customer Deposit                                | ****                   | **5,000**  
|Payable
      to managing member and affiliates | ****                   | **46**     
|                                                |                        |            
|Total
      current liabilities                 | ****                   | **9,150**  
|                                                |                        |            
|Long-term
      debt                            | ****                   | **225,000**
|                                                |                        |            
|Members
      deficiency:                     
|Managing
      members interest                | ****                   | **(674**   
|Nonmanaging
      members interest             | ****                   | **(64,808**
|                                                |                        |            
|                                                |                        |            
|                                                | ****                   | **(65,482**
|                                                |                        |            
|                                                |                        |            
|Total
      liabilities and members deficiency | **$**                  | **168,668**
|                                                |                        |            

|                                                    
|----------------------------------------------------
|See notes to consolidated
      financial statements

F-3

---



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

******Consolidated
  Statements of Operations** ****

|                                                                                              | Year
      Ended December 31, |            
|--------------------------------------------------------------------------------------------- | ----------------------------- | -----------
|
|                                                                                              |                               |            
|Revenues:                                                                                     |                               |            
|Log,
      timber deed and stumpage sales,                                                   
|including
      $4,200 (2003), $9,900 (2002), and $19,015 (2001) to 
            an affiliate | **$**                         | **25,000** 
|Timber
      and property sales                                                              
|including
      $9,519 in 2003 and $4,700 in 2002 to an affiliate                             | ****                          | **10,129** 
|By-products
      and other                                                                   | ****                          | **2,001**  
|                                                                                              |                               |            
|                                                                                              |                               |            
|                                                                                              | ****                          | **37,130** 
|                                                                                              |                               |            
|Cost
      of products sold:                                                                  |                               |            
|Cost
      of timber harvested                                                                | ****                          | **(13,252**
|Cost
      of timber and property sales                                                       | ****                          | **(9,952** 
|Fire
      loss                                                                               | ****                          | ****      
|Depletion,
      depreciation and road amortization                                           | ****                          | **(15,557**
|                                                                                              |                               |            
|                                                                                              |                               |            
|                                                                                              | ****                          | **(38,761**
|                                                                                              |                               |            
|                                                                                              |                               |            
|Gross
      profit (loss)                                                                     | ****                          | **(1,631** 
|                                                                                              |                               |            
|Selling,
      general and administrative expenses                                            | ****                          | **(6,438** 
|Equity
      in net loss of affiliate                                                         | ****                          | **(17,039**
|                                                                                              |                               |            
|                                                                                              |                               |            
|Operating
      loss                                                                          | ****                          | **(25,108**
|                                                                                              |                               |            
|Interest
      expense                                                                        | ****                          | **(21,736**
|Amortization
      of deferred financing fees                                                 | ****                          | **(675**   
|Interest
      income                                                                         | ****                          | **12**     
|Other
      income, net                                                                       | ****                          | **190**    
|                                                                                              |                               |            
|                                                                                              |                               |            
|Net
      loss                                                                                | **$**                         | **(47,317**
|                                                                                              |                               |            

|                                                    
|----------------------------------------------------
|See notes to consolidated
      financial statements

F-4

---



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

|                                     | Managing
      Members
      Interest |          | Nonmanaging
      Member
      Interest |       | Total
      Members
      Equity
      (Deficiency) |      
|------------------------------------ | -------------------------------------- | -------- | --------------------------------------- | ----- | ---------------------------------------------------- | -----
|                                     |                                        |          |                                         |       |                                                      |      
|**Balance,
      December 31, 2000** | $                                      | 683      |                                         | $     | 67,579                                               |      
|Distributions
      to members       |                                        | (65      | )                                       |       | (6,496                                               | )    
|Net loss                             |                                        | (371     | )                                       |       | (36,665                                              | )    
|                                     |                                        |          |                                         |       |                                                      |      
|                                     |                                        |          |                                         |       |                                                      |      
|**Balance,
      December 31, 2001** |                                        | 247      |                                         |       | 24,418                                               |      
|Net loss                             |                                        | (443     | )                                       |       | (43,625                                              | )    
|                                     |                                        |          |                                         |       |                                                      |      
|                                     |                                        |          |                                         |       |                                                      |      
|**Balance,
      December 31, 2002** | ****                                   | **(196** | **)**                                   | ****  | **(19,207**                                          | **)**
|Capital contribution                 |                                        | 0        |                                         |       | 1,238                                                |      
|Net loss                             |                                        | (478     | )                                       |       | (46,839                                              | )    
|                                     |                                        |          |                                         |       |                                                      |      
|                                     |                                        |          |                                         |       |                                                      |      
|**Balance,
      December 31, 2003** | **$**                                  | **(674** | **)**                                   | **$** | **(64,808**                                          | **)**
|                                     |                                        |          |                                         |       |                                                      |      
|                                     |                                        |          |                                         |       |                                                      |      

|See notes to consolidated
      financial statements
|----------------------------------------------------

F-5

---



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

**********Consolidated
  Statements of Cash Flows**********

|                                                               | Year Ended
      December 31, |            
|-------------------------------------------------------------- | ----------------------------- | -----------
|
|                                                               |                               |            
|**Cash
      flows from operating activities:**                |                               |            
|Net
      loss                                                 | **$**                         | **(47,317**
|Adjustments
      to reconcile net (loss) to net cash         
|provided
      by operating activities:                       
|Depreciation,
      depletion, amortization and cost of       
|timber
      and property sold                                 | ****                          | **25,509** 
|Fire
      loss                                                | ****                          | ****      
|Gain
      on disposal of assets                               | ****                          | **(19**    
|Amortization
      of deferred financing fees                  | ****                          | **675**    
|Equity
      in net loss of affiliate                          | ****                          | **17,039** 
|Other
      non-cash items                                     | ****                          | ****      
|Changes
      in assets and liabilities:                      
|Accounts
      receivable                                      | ****                          | **498**    
|Other
      receivables                                        | ****                          | **(121**   
|Notes
      receivable                                         | ****                          | **1,241**  
|Prepaid
      expenses and other current assets                | ****                          | **111**    
|Accounts
      payable                                         | ****                          | **(929**   
|Accrued
      liabilities                                      | ****                          | **(410**   
|Customer deposit                                               | ****                          | **5,000**  
|Payable
      to general partner and affiliate                 | ****                          | **(3**     
|                                                               |                               |            
|                                                               |                               |            
|Net
      cash provided by operating activities                | ****                          | **1,274**  
|                                                               |                               |            
|**Cash
      flows from investing activities:**                |                               |            
|Purchase
      of property, plant and equipment - net          | ****                          | ****      
|Proceeds
      from sale of assets                             | ****                          | **26**     
|Timber,
      timberlands and road additions                   | ****                          | **(1,984** 
|Restricted
      cash                                          | ****                          | **(72**    
|                                                               |                               |            
|                                                               |                               |            
|Net
      cash used in investing activities                    | ****                          | **(2,030** 
|                                                               |                               |            
|**Cash
      flows from financing activities:**                |                               |            
|Distributions
      to members                                 | ****                          | ****      
|Capital
      contributions                                    | ****                          | **1,238**  
|                                                               |                               |            
|Net
      cash provided by (used in) financing activities      | ****                          | **1,238**  
|                                                               |                               |            
|                                                               |                               |            
|**Net
      increase (decrease) in cash and cash equivalents** | ****                          | **482**    
|Cash and
      cash equivalents, beginning of period           | ****                          | **965**    
|                                                               |                               |            
|                                                               |                               |            
|**Cash
      and cash equivalents, end of period**             | **$**                         | **1,447**  
|                                                               |                               |            
|**Supplemental
      cash flow information:**                  |                               |            
|Cash
      paid for interest expense                           | **$**                         | **21,658** 
|                                                              
|**Noncash
      activities:**                                 
|Contribution
      of timberlands for investment in affiliate  | **$**                         | **11,572** 

|                                                    
|----------------------------------------------------
|See notes to consolidated
      financial statements

F-6


---



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

(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) (formerly, U.S. Timberlands Klamath
  Falls, LLC), a Delaware limited liability company, and its wholly owned subsidiary,
  Fiber Finance Corp. (Finance Corp.)(formerly, U.S. Timberlands Finance
  Corp.), collectively referred to hereafter as the Company. The Company changed
  names in December 2003. Finance Corp. serves as the 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.

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

Prior
  to July 2003, Pacific Fiber Company, LP, a 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. U.S. Timberlands Management Company,
  LLC (now known as Timber Resource Services, LLC and formerly known as U.S. Timberlands
  Services Company, LLC, the Manager) manages the business of the
  Company and owns a 1% non-voting membership interest in the Company

Basis
of Presentation

The
  accompanying consolidated statements have been prepared assuming that the Company
  will continue as a going concern. As more fully described In Note 14, in December
  2003, the trustee under the indenture governing the Companys $225,000
  of Senior Notes, which mature in 2007. commenced litigation against the Company
  and others alleging, among other matters, that the Company has violated certain
  covenants contained in the Indenture. The Company has denied all of the allegations
  and made a motion to dismiss the complaint. In the event the trustee prevails
  In the litigation. the Trustee will have the right to demand repayment and accelerate
  the maturity of the notes. If such event occurs, and the Company is unable to
  effect an amendment or a restructuring of the notes, the Companys ability
  to continue as a going concern would be in substantial doubt. The consolidated
  financial statements do not include any adjustments that might result from the
  outcome of this uncertainty.

Going Private
  Transaction

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

F-7

---



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

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

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

As
  a result of the Privatization Transaction described above, the Company is an
  indirect 99% owned subsidiary of American Forest resources, LLC.

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.

Use of Estimates

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

Revenue Recognition

Revenue on delivered log sales 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.

Concentration
  of Credit Risk

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

F-8

---



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

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

The
  Company periodically reviews its allowance for doubtful accounts and reserves
  an estimated amount for such accounts, if required. As of December 31, 2003
  and 2002 no allowance for doubtful accounts was required.

Cash and Cash
  Equivalents

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

Timber and
  Timberlands

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

Timber, timberland
  and roads

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 merchantable volume, primarily utilizing a single
  composite pool. The Company estimates its timber inventory using statistical
  information and data obtained from physical measurements, site maps, photo types
  and other information gathering techniques. These estimates are updated annually
  and may result in adjustments of timber volumes and depletion rates, which are
  recognized prospectively. Changes in these estimates have no effect on the Companys
  cash flow.

Seed orchard
  and nursery stock

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

Property, Plant
  and Equipment

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

F-9

---



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

(dollar amount
  s in thousands, except per unit amounts or otherwise noted)

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

Deferred Financing
  Fees

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

Income Taxes

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 returns of the members. Accordingly,
  no provision for current or deferred income taxes has been reflected in the
  accompanying financial statements.

Unit-Based
  Compensation Plans

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

|                                                           
|-----------------------------------------------------------
|**2003**                                                   
|
|
|Net loss
      as reported                                 
|Unit-based
      employee compensation determined under the
|fair
      value method                                    
|Net loss
      pro forma                                   

F-10

---



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

(dollar amount
  s in thousands, except per unit amounts or otherwise noted)

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

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.

No
  options were granted in 2003, 2002, or 2001.

Recent Accounting
  Standards

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 implementation 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
  provisions of FIN 46 as revised are required to be applied by the Company no
  later than March 31, 2004. The Company has considered the applicability of FIN
  46 to its investment in its indirect parent company, American Forest Resources,
  LLC (formerly U.S. Timberlands Yakima, LLC) and has 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.

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

|
|
|
|
|
|
|
|
|
|
|
|
|
|

F-11

---



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

(dollar amount
  s in thousands, except per unit amounts or otherwise noted)

|3. | Investment
      in Affiliate:
|-- | ------------------------------

Since
  October 1999, the Company has owned a redeemable preferred member interest (Preferred
  LLC Interest) in American Forest Resources, LLC (formerly U.S. Timberlands
  Yakima, LLC), (AFR), an affiliate accounted for under the equity
  method (see Note 9).

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.

The
  following summarized financial information for AFR is presented without consolidation
  of the Companys asset, 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.

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

|                                                                  | 
|----------------------------------------------------------------- | 
|
|Current
      assets                                              | 
|Noncurrent
      assets, principally timber and timberlands       | 
|Investment
      in Inland Fiber Group, LLC                       | 
|Current
      liabilities                                         | 
|Noncurrent
      liabilities - long-term debt                     | 
|Redeemable
      preferred member interest (owned by the Company) | 
|Common
      member deficiency                                    | 
|Net
      sales                                                   | 
|Gross
      profit (loss)                                         | 
|Loss
      before equity in the Companys loss                    | 
|                                                                  | 
|                                                                  | 
|Equity
      in the Companys loss(1)                             | 
|                                                                  | 
|Net
      Loss                                                    | 
|                                                                  | 

(1) Reflects(a)
  charges of $7,142 related to the amortization of $41,141 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.

F-12

---



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

(dollar amount
  s in thousands, except per unit amounts or otherwise noted)

|4. | Property,
      Plant and Equipment:
|-- | ------------------------------------

Property,
  plant and equipment consisted of the following at December 31:

|                                                     |  |  |       |          
|---------------------------------------------------- |  |  | ----- | ---------
|
|                                                     |  |  |       |          
|Equipment                                            |  |  | **$** | **545**  
|Buildings
      and improvements                     |  |  | ****  | **995**  
|                                                     |  |  |       |          
|                                                     |  |  |       |          
|                                                     |  |  | ****  | **1,540**
|Less accumulated
      depreciation and amortization |  |  | ****  | **707**  
|                                                     |  |  |       |          
|                                                     |  |  |       |          
|                                                     |  |  | **$** | **833**  
|                                                     |  |  |       |          

|   |                           
|-- | --------------------------
|5. | Accrued
      Liabilities:

Accrued
  liabilities consisted of the following at December 31:

|                                        |  |  |       |        
|--------------------------------------- |  |  | ----- | -------
|
|                                        |  |  |       |        
|Legal fees
      pursuant to settlement |  |  | ****  | ****  
|Other                                   |  |  | ****  | **511**
|                                        |  |  |       |        
|                                        |  |  |       |        
|                                        |  |  | **$** | **511**
|                                        |  |  |       |        

|6. | 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 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 had sought to replace
  the Affiliate Credit Facility with a working capital facility from an unaffiliated
  third party, but has been unable to obtain a working capital credit facility
  in amounts to fund its working capital needs from a traditional commercial lender.
  While the Company continues to seek a credit facility from an unaffiliated source,
  affiliated lenders have agreed to make short term advances to the Company, payable
  on demand to the affiliates, at an annual interest rate of 10%. During 2003,
  the maximum amount outstanding was $424, all of which had been repaid as of
  December 31, 2003. 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.

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

F-13

---



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

(dollar amount
  s in thousands, except per unit amounts or otherwise noted)

|7. | 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 Fiber Corp. a wholly owned
  subsidiary of the Company (collectively, the Issuers). The Issuers
  serve as co-obligors of the Notes. The Notes represent unsecured general obligations
  of the Issuers and bear interest at 9-5/8% payable semiannually in arrears on
  May 15 and November 15, and mature on November 15, 2007 unless previously redeemed.
  The Notes are redeemable at the option of the Issuers in whole or in part at
  predetermined redemption prices plus accrued interest to the redemption date.

The Notes contain certain
  restrictive covenants, including limiting the ability of the  Company
  and its subsidiaries to make cash distributions, incur additional indebtedness,
  sell assets or harvest timber in excess of certain limitations. Under certain
  restrictive covenants, during 2003 and 2002, 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 $63 remained in the restricted account as of
  December 31, 2003. As of December 31, 2003, the Company was in compliance with
  the covenants contained in the Notes, however, the trustee under the indenture has alleged that the
company has violated certain covenants and has commenced litigation as described in Note 14.

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

|8. | Members
      Equity:
|-- | ----------------------

Allocation
  of Income (Loss)

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

|9.      | Certain
      Relationships and Related Party Transactions:
|------- | -----------------------------------------------------------
|        |                                                            
|Manager

The
  Manager manages the timber operations of the Company.

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.

F-14

---



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

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

On
  September 1, 2003, the Company completed a management agreement with the 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 $1,138
  were incurred under the management agreement.

As
  of December 31, 2003 and 2002, the Company had a payable to the Manager of $46
  and $0, respectively. During 2003, 2002, and 2001 expenses allocated to and
  reimbursed by the Company totaled $2,191, $3,323, and $6,760, respectively.

Consulting
  Agreements

Through
  June 2003, the Manager had consulting agreements with affiliates of certain
   persons who were directors of the Manager during the terms of such consulting
  agreements, pursuant to which each such person or firm had provided consulting
  services to the Manager. The agreements provided for an annual retainer of $25,
  plus an hourly rate for services rendered at the request of the Manager. Payments
  by the Manager related to consulting agreements in 2003, 2002, and 2001 amounted
  to $56, $112, and $98, respectively. Such fees were reimbursed to the Manager
  by the Company. The consulting agreements were discontinued in July 2003.

Investments
  in and Transactions with Affiliates

In
  October 1999, the Company made an investment in AFR, an unconsolidated affiliate.
  AFR, a then newly formed entity organized to acquire timber properties located
  in Central Washington and Central Oregon, is engaged in the growing of trees
  and sale of logs and standing timber to third party wood processors. The MLP
  contributed to AFR $294 of cash for 49% of AFRs common interests (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 also acquired all of the senior preferred
  interests in AFR (the Senior or Preferred LLC Interests) for its
  contribution to AFR of timberlands consisting primarily of non-income producing,
  pre-merchantable pine plantations having an agreed upon value of $22,000. The
  Company recorded its investment in the Senior LLC interest at its $18,850 cost
  basis for the contributed timberlands. Terms of the Preferred LLC Interests
  include a cumulative annual guaranteed return of 5% until December 31, 2001
  and  6% thereafter of the $22,000 agreed upon value of the contributed
  timberlands. The Preferred LLC Interests are redeemable at AFRs option
  for a redemption price equal to the agreed upon value of the Preferred LLC Interests,
  either in cash or by returning the contributed timberlands, plus any portion
  of the guaranteed return not received by the Company prior to the redemption
  date. Generally, AFRs net income or losses are allocated to the Common
  LLC Interests. However, net losses exceeding the account balances of the Common
  LLC Interests are allocated to the Preferred LLC Interest. The Company accounts
  for the Preferred LLC Interest at cost plus accrued dividends to the extent
  earned, reduced by losses, if any, in excess of the Common LLC Interests.

F-15

---



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

(dollar amount
  s in thousands, except per unit amounts or otherwise noted)

On
  September 14, 2001, management of AFR was taken over by American Forest Services,
  LLC (formerly, U.S. Timberlands Services Yakima, LLC) (American Forest
  Services,) a wholly owned subsidiary of the Manager of the Company. American
  Forest Services 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. Such fees charged
  to operations by AFR amounted to $3,033 in 2003, $2,555 in 2002 and $1,137 in
  2001. The MLP and the Company granted Holdings Group an irrevocable proxy to
  vote its Common and Preferred LLC Interests.

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

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

During
  2001, the Company contributed cutting 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 of
  the additional Preferred LLC Interest acquired are the same terms as the Preferred
  LLC Interest previously issued to the Company. The Company recorded its additional
  Preferred LLC Interest at its cost for the cutting rights and timberland of
  approximately $16,300.

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

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 expire in
  August 2004.

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

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.

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

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

F-16

---



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

(dollar amount
  s in thousands, except per unit amounts or otherwise noted)

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 Companys Preferred LLC Interest in AFR. Terms of the additional
  Preferred LLC Interest acquired are the same terms as the  Preferred LLC
  Interest previously issued to the Company. The Company recorded its additional
  Preferred LLC Interest at its cost for the timberland of approximately $18,300.

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 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.

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 American Forest
  Services, LLC (AFS) for $1,900.

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

Also, in December 2003, the Company sold seedlings to AFR for $300.

Gross
  profits realized on the Companys sales of timber cutting rights to AFR,
  to the extent of the Companys ownership interest in AFR, have been eliminated
  and are recognized inoperations
  upon AFRs sale of the timber to third parties with corresponding adjustments
  to the carrying value of the investment in AFR. In addition, the Companys
  equity in net income (loss) of affiliate has been adjusted to eliminate its
  share of gross profits realized by AFR on sales of timber cutting rights to
  the Company, until the Company sells the timber to third parties, with corresponding
  adjustments to the carrying value of timber and timberlands.

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.

Payments to
  Affiliate

See
  Note 6 regarding interest and commitment fees paid to an affiliate of the Manager
  under the Affiliate Credit Facility.

F-17

---



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

(dollar amount
  s in thousands, except per unit amounts or otherwise noted)

|10. | Management
      Incentive Plans:
|--- | ---------------------------------

Unit Option
  Plans

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. The 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 2001, 2002 and 2003. The Unit Options granted expire ten years from the date
  of grant and become exercisable automatically upon and in the same proportion
  as the conversion of Subordinated Units to Common Units provided that the minimum
  quarterly distributions (as defined in the MLP Agreement) has been made. Although
  the performance criteria were met for the years ended December 31, 2000 and
  1999, and 25% of the outstanding units of subordinated limited partnership interest
  of the MLP were converted into units of common limited partnership interests
  in February 2001, no compensation expense was recorded during such years, as
  the market price of the units was less than the exercise price during the years.
  As indicated in Note 7, distributions have been suspended and accordingly the
  performance criteria had not been met for the years ended December 31, 2003,
  2002 and 2001.

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

|                                                                            |  |      |             |     
|--------------------------------------------------------------------------- |  | ---- | ----------- | ----
|
|                                                                            |  |      |             |     
|**Outstanding,
      December 31, 2000**                                    |  | **** | **757,627** | ****
|Unit options
      cancelled                                                |  |      | (70,620     | )   
|                                                                            |  |      |             |     
|                                                                            |  |      |             |     
|**Outstanding,
      December 31, 2001**                                    |  | **** | **687,007** | ****
|Unit options
      cancelled                                                |  |      | (4,000      | )   
|                                                                            |  |      |             |     
|                                                                            |  |      |             |     
|**Outstanding,
      December 31, 2002**                                    |  | **** | **683,007** | ****
|Unit options
      cancelled                                                |  |      | (102,000    | )   
|Unit options
      effectively cancelled with the Privatization Transaction |  |      | (581,007    | )   
|                                                                            |  |      |             |     
|**Outstanding,
      December 31, 2003**                                    |  | **** | ****       | ****
|                                                                            |  |      |             |     

F-18

---



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

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

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

|11. | Fair
      Value of Financial Instruments:
|--- | ------------------------------------------

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

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

F-19

---



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

(dollar amount
  s in thousands, except per unit amounts or otherwise noted)

|12. | Quarterly
      Results (Unaudited):
|--- | ------------------------------------

|                          |                        |   |         |                   |  
|------------------------- | ---------------------- | - | ------- | ----------------- | -
|
|**December
      31**     | **September
      30** |   |         | **June
      30** |  
|
|**2003**                  |                        |   |         |                   |  
|Revenues                  |                        | $ | 10,826  |                   | $
|Gross profit
      (loss) |                        |   | (629    | )                 |  
|Net (loss)                |                        |   | (12,826 | )                 |  
|                          |                        |   |         |                  
|**2002**                  |                        |   |         |                  
|Revenues                  |                        | $ | 18,536  |                   | $
|Gross profit
      (loss) |                        |   | (1,868  | )                 |  
|Net (loss)                |                        |   | (13,071 | )                 |  

|13. | 401(K)
      Defined Contribution Plan:
|--- | ---------------------------------------

The
  Manager 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 through August 30, 2003. The amounts which were reimbursed by
  the Company pursuant to the management arrangement totaled $27 in 2003, $45
  in 2002 and $56 in 2001.

|14. | Commitments,
      Contingencies and Other:
|--- | -------------------------------------------

Fire Loss Risk

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

Litigation

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

F-20

---



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

(dollar amount
  s in thousands, except per unit amounts or otherwise noted)

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. A hearing
  with respect to the Defendants motion to dismiss has been scheduled for
  late May 2004. On March 26, 2004 a motion to stay discovery pending the outcome
  of the Defendants motion to dismiss was denied. The Company and its legal
  counsel believe the litigation to be without merit and intends to vigorously
  defend itself in the lawsuit.

F-21