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

FORM 10-Q_______________________________

x 
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly periodended June 30, 2006
  OR

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

|Commission File No.: | 1-13573-01
|-------------------- | ----------
|                     | 1-13573   

INLAND
  FIBER GROUP, LLCFIBER
  FINANCE CORP.(Exact name of registrant
  as specified in its charter)

|Delaware                                                                    | 91-1217136                                
|--------------------------------------------------------------------------- | ------------------------------------------
|Delaware                                                                    | 91-1851612                                
|(State or other jurisdiction
      
      of incorporation or organization) | (I.R.S. Employer
      Identification No.)
|                                                                            |                                           
|6400 Highway 66
			Klamath Falls, OR                                        | 97601                                     
|(Address of principal
      executive offices)                              | (Zip code)                                

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

---

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 the preceding 12 months (or such shorter
  period that the registrant was required to file such reports), and (2) has been
  subject to such filing requirements for the past 90 days.

Yes xNo o

Indicate by check mark whether the registrant
  is a large accelerated filer, an accelerated filer or a non-accelerated filer.
  See definition of “accelerated filer” and “large accelerated
  filer” in Rule12b-2 of the Exchange Act.

Large Accelerated
  FileroAccelerated
  FileroNon-Accelerated Filer
     x

Indicate by check mark whether the registrant
  is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YesoNo x

---





FORM 10-QTABLE OF CONTENTSPARTI
      
      FINANCIAL
          INFORMATION (Unaudited)
      PageItem 1.
      
      Condensed Consolidated Statements of Operationsfor the three months ended June 30, 2006 and 2005
      1Item 1.
      
      Condensed Consolidated Statements of Operations
        for the six months ended June 30, 2006 and 2005
      2Item1.
      
      Condensed Consolidated Balance Sheetsat June 30, 2006 and December 31, 2005
      3Item 1.
      
      Condensed Consolidated Statements of Cash Flowsfor the six months ended June 30, 2006 and 2005
      4Item 1.
      
      Notes to Condensed Consolidated Financial Statements
      5Item 2.
      
      Management's Discussion and Analysis of Financial
          Condition and Results of Operations
      10Item 3.
      
      Quantitative
          and Qualitative Disclosure of Market Risk
      17Item4.
      
      Controls and Procedures
      17PART II
      
      OTHER INFORMATIONItem 1.
      
      Legal Proceedings
      18Item 6.
      
      Exhibits
      20




---



PART 1. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL
  STATEMENTS

INLAND FIBER GROUP, LLC AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(IN THOUSANDS)
	(UNAUDITED)



|                                                                                      |  |  |   | Three Months Ended June 30, |  
|------------------------------------------------------------------------------------- |  |  | - | --------------------------- | -
|                                                                                      |  |  |   |                             |  
|                                                                                      |  |  |   | 2006                        |  
|                                                                                      |  |  |   |                             |  
|Revenues (including
      seedling sales of $108 (2006) and $93 (2005) to affiliates) |  |  | $ | 2,651                       |  
|Cost of
      timber harvested                                                        |  |  |   | (1,502                      | )
|Cost of
      timber and property sales                                               |  |  |   | (15                         | )
|Depletion,
      depreciation and road amortization                                   |  |  |   | (783                        | )
|                                                                                      |  |  |   |                             |  
|Gross profit (loss)                                                                   |  |  |   | 351                         |  
|                                                                                     
|Management
      fee                                                                  |  |  |   | (500                        | )
|Selling,
      general and administrative expenses                                    |  |  |   | (861                        | )
|Equity
      in net loss of affiliate                                                 |  |  |   | —                           |  
|                                                                                      |  |  |   |                             |  
|Operating loss                                                                        |  |  |   | (1,010                      | )
|                                                                                     
|Interest
      expense                                                                |  |  |   | (5,400                      | )
|Amortization
      of deferred financing fees                                         |  |  |   | (168                        | )
|Other
      income, net                                                               |  |  |   | 5                           |  
|                                                                                      |  |  |   |                             |  
|                                                                                     
|Net loss                                                                              |  |  | $ | (6,573                      | )
|                                                                                      |  |  |   |                             |  
|                                                                                     
|                                                                                     
|See
        notes to the condensed consolidated financial statements                 



1



---



PART 1. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

INLAND FIBER GROUP, LLC AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(IN THOUSANDS)
	(UNAUDITED)



|                                                                                                                                                          |  |   |  | Six Months Ended June 30, |   | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - |  | ------------------------- | - | 
|                                                                                                                                                          |  |   |  |                           |   | 
|                                                                                                                                                          |  |   |  | 2006                      |   | 
|                                                                                                                                                          |  |   |  |                           |   | 
|Revenues
      (including seedling sales of $108 (2006) and $93 (2005)  
          to affiliates and property sales of $3,430 (2006)
      and $0 (2005)) |  | $ |  | 7,313                     |   | 
|Cost of
      timber harvested                                                                                                                            |  |   |  | (2,198                    | ) | 
|Cost of
      timber and property sales                                                                                                                   |  |   |  | (1,976                    | ) | 
|Depletion,
      depreciation and road amortization                                                                                                       |  |   |  | (1,360                    | ) | 
|                                                                                                                                                          |  |   |  |                           |   | 
|Gross profit (loss)                                                                                                                                       |  |   |  | 1,779                     |   | 
|                                                                                                                                                         
|Management
      fee                                                                                                                                      |  |   |  | (1,000                    | ) | 
|Selling,
      general and administrative expenses                                                                                                        |  |   |  | (1,299                    | ) | 
|Equity
      in net loss of affiliate                                                                                                                     |  |   |  | —                         |   | 
|                                                                                                                                                          |  |   |  |                           |   | 
|Operating loss                                                                                                                                            |  |   |  | (520                      | ) | 
|                                                                                                                                                         
|Interest
      expense                                                                                                                                    |  |   |  | (10,787                   | ) | 
|Amortization
      of deferred financing fees                                                                                                             |  |   |  | (337                      | ) | 
|Other
      income, net                                                                                                                                   |  |   |  | 19                        |   | 
|                                                                                                                                                          |  |   |  |                           |   | 
|                                                                                                                                                         
|Net loss                                                                                                                                                  |  | $ |  | (11,625                   | ) | 
|                                                                                                                                                          |  |   |  |                           |   | 
|                                                                                                                                                         
|                                                                                                                                                         
|See
        notes to the condensed consolidated financial statements                                                                                     



2



---

PART 1. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

|                                                                                            |  |   |  |          |   |                     |   |  |          |   |                         | 
|------------------------------------------------------------------------------------------- |  | - |  | -------- | - | ------------------- | - |  | -------- | - | ----------------------- | 
|INLAND
        FIBER GROUP, LLC AND SUBSIDIARYCONDENSED CONSOLIDATED
        BALANCE SHEETS
|(IN THOUSANDS)                                                                             
|                                                                                           
|                                                                                            |  |   |  |          |   | June 30,
      2006 |   |  |          |   | December 31,
      2005 | 
|                                                                                            |  |   |  |          |   |                     |   |  |          |  
|                                                                                            |  |   |  |          |   |                     |   |  |          |   |                         | 
|                                                                                            |  |   |  |          |   | (Unaudited)         |   |  |          |   | *                       | 
|ASSETS                                                                                      |  |   |  |          |   |                     |   |  |          |  
|Current assets:                                                                             |  |   |  |          |   |                     |   |  |          |  
|Cash
      and cash equivalents                                                             |  | $ |  | 884      |   |                     | $ |  | 307      |  
|Accounts
      receivable                                                                   |  |   |  | 494      |   |                     |   |  | 575      |  
|Other
      receivables                                                                     |  |   |  | —        |   |                     |   |  | 485      |  
|Notes
      receivable                                                                      |  |   |  | 1        |   |                     |   |  | 150      |  
|Restricted
      Cash                                                                       |  |   |  | 665      |   |                     |   |  | 124      |  
|Prepaid
      expenses and other current assets                                             |  |   |  | 324      |   |                     |   |  | 72       |  
|                                                                                            |  |   |  |          |   |                     |   |  |          |  
|Total current assets                                                                        |  |   |  | 2,368    |   |                     |   |  | 1,713    |  
|                                                                                           
|Timber and timberlands,
      net                                                           |  |   |  | 77,938   |   |                     |   |  | 80,934   |  
|Property, plant
      and equipment, net                                                    |  |   |  | 783      |   |                     |   |  | 770      |  
|Other
      assets                                                                          |  |   |  | 186      |   |                     |   |  | 85       |  
|Deferred financing
      fees, net                                                          |  |   |  | 936      |   |                     |   |  | 1,273    |  
|                                                                                            |  |   |  |          |   |                     |   |  |          |  
|Total assets                                                                                |  | $ |  | 82,211   |   |                     | $ |  | 84,775   |  
|                                                                                            |  |   |  |          |   |                     |   |  |          |  
|LIABILITIES
      AND MEMBERS’ DEFICIENCY                                                   |  |   |  |          |   |                     |   |  |          |  
|Current liabilities:                                                                        |  |   |  |          |   |                     |   |  |          |  
|Accounts
      payable                                                                      |  | $ |  | 696      |   |                     | $ |  | 1,015    |  
|Accrued
      liabilities                                                                   |  |   |  | 520      |   |                     |   |  | 2,198    |  
|Accrued
      bond interest                                                                 |  |   |  | 35,191   |   |                     |   |  | 24,408   |  
|Payable
      to managing member and affiliates                                             |  |   |  | 1,125    |   |                     |   |  | 850      |  
|Long-term debt declared in default by trustee                                               |  |   |  | 225,000  |   |                     |   |  | 225,000  |  
|                                                                                            |  |   |  |          |   |                     |   |  |          |  
|Total current liabilities                                                                   |  |   |  | 262,532  |   |                     |   |  | 253,471  |  
|                                                                                            |  |   |  |          |   |                     |   |  |          |  
|Members' deficiency                                                                         |  |   |  |          |   |                     |   |  |          |  
|Managing
      member's interest                                                            |  |   |  | (1,821   | ) |                     |   |  | (1,704   | )
|Nonmanaging
      members' interest                                                         |  |   |  | (178,500 | ) |                     |   |  | (166,992 | )
|                                                                                            |  |   |  |          |   |                     |   |  |          |  
|Total members' deficiency                                                                   |  |   |  | (180,321 | ) |                     |   |  | (168,696 | )
|                                                                                            |  |   |  |          |   |                     |   |  |          |  
|Total liabilities and members' deficiency                                                   |  | $ |  | 82,211   |   |                     | $ |  | 94,775   |  
|                                                                                            |  |   |  |          |   |                     |   |  |          |  
|                                                                                            |  |   |  |          |   |                     |   |  |          |  

|*      Derived from
			audited Consolidated Balance Sheet as of December 31, 2005
|---------------------------------------------------------------------------------
|See notes
				to unaudited condensed consolidated financial statements           

3



---

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

|**INLAND
        FIBER GROUP, LLC AND SUBSIDIARY**CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS(IN THOUSANDS) 
        (UNAUDITED)
|--------------------------------------------------------------------------------------------------------------------------------------------



|                                                            |   |                                   |   |   |       |  
|----------------------------------------------------------- | - | --------------------------------- | - | - | ----- | -
|                                                            |   | Six
        Months Ended June 30, |  
|                                                            |   |                                  
|                                                            |   | 2006                              |   |   | 2005  |  
|                                                            |   |                                   |   |   |       |  
|CASH
      FLOWS FROM OPERATING ACTIVITIES:                 |   |                                   |   |   |       |  
|Net
      cash provided by operating activities             | $ | 1,438                             |   | $ | 1,323 |  
|                                                            |   |                                   |   |   |       |  
|                                                            |   |                                   |   |   |       |  
|CASH
      FLOWS FROM INVESTING ACTIVITIES:                 |   |                                   |   |   |       |  
|Timber, timberlands and road additions                      |   | (465                              | ) |   | (846  | )
|Restricted
      cash                                       |   | (541                              | ) |   | (19   | )
|Purchase of property, plant and equipment
      - net       |   | (35                               | ) |   | —     |  
|                                                            |   |                                   |   |   |       |  
|Net
      cash used in investing activities                 |   | (1,041                            | ) |   | (865  | )
|                                                            |   |                                   |   |   |       |  
|                                                            |   |                                   |   |   |       |  
|CASH
      FLOWS FROM FINANCING ACTIVITIES:                 |   |                                   |   |   |       |  
|Advances from affiliates                                    | $ | 180                               |   | $ | —     |  
|                                                            |   |                                   |   |   |       |  
|                                                            |   |                                   |   |   |       |  
|Increase
      (decrease) in cash and cash equivalents      |   | 577                               |   |   | 458   |  
|Cash
      and cash equivalents - beginning of period       |   | 307                               |   |   | 180   |  
|                                                            |   |                                   |   |   |       |  
|                                                            |   |                                   |   |   |       |  
|Cash
      and cash equivalents - end of period             | $ | 884                               |   | $ | 638   |  
|                                                            |   |                                   |   |   |       |  
|                                                            |   |                                   |   |   |      
|Supplemental
      cash flow information:                   |   |                                   |   |   |       |  
|Cash paid for interest expense                              | $ | 4                                 |   | $ | 2     |  
|                                                            |   |                                   |   |   |       |  
|Noncash
      Activities:                                   |   |                                   |   |   |       |  
|Timber volume acquired for accounts
      receivable credit | $ | 59                                |   | $ | —     |  

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



4





---



INLAND
  FIBER GROUP, LLC AND SUBSIDIARY 
  Notes to Condensed Consolidated Financial Statements(in thousands)

|1. Business and Basis of Presentation
|-------------------------------------

|Business
|--------

The unaudited condensed consolidated financial statements
  include the accounts of Inland Fiber Group, LLC (“IFG”), a Delaware
  limited liability company, and its wholly owned subsidiary, Fiber Finance Corp.
  (“Finance Corp.”), collectively referred to hereafter as the Company.
  Finance Corp. serves as the co-obligor for IFG’s $225 million 9-5/8% Senior
  Notes due 2007 (the “Notes”). Finance Corp. has nominal assets and
  does not conduct operations. All intercompany transactions have been eliminated
  in consolidation.

Timber Resource Services, LLC (the "Manager")
  provides comprehensive timber management services to the Company pursuant to
  a fee-based management agreement and owns a 1% non-voting membership interest
  in the Company.

A 99% interest in the Company is held by a limited
  liability company, IFG Holdings, LLC. IFG Holdings is wholly owned by American
  Forest Resources, LLC ("AFR"). The Company holds a preferred equity
  interest in AFR.

The Company’s principal operations consist of
  growing and harvesting timber and selling logs, standing timber and related
  by-products to third party wood processors and related party purchasers as well
  as the sale of excess timberland. 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.

Basis of Presentation

These unaudited condensed consolidated financial statements
  have been prepared by the Company, pursuant to the rules and regulations of
  the United States Securities and Exchange Commission for reporting on Form 10-Q.
  Accordingly, certain information and footnotes required in financial statements
  prepared in accordance with accounting principles generally accepted in the
  United States of America have been condensed or omitted from these statements.
  These unaudited condensed consolidated financial statements were prepared on
  a consistent basis with and should be read in conjunction with the consolidated
  financial statements included in the Company’s 2005 Annual Report on Form
  10-K. Operating results for the quarter ended June 30, 2006 are not necessarily
  indicative of the results that may be expected for the full year or any other
  period. In the opinion of management, the accompanying unaudited condensed consolidated
  financial statements include all normal recurring adjustments necessary to present
  fairly the information for such periods.

The preparation of condensed consolidated financial
  statements in conformity with accounting principles generally accepted in the
  United States of America requires us to make estimates and assumptions that
  affect the amounts reported in the financial statements and accompanying notes.
  Actual results could differ from these estimates.



5

---



INLAND
  FIBER GROUP, LLC AND SUBSIDIARY 
  (in thousands)

The accompanying financial
  statements have been prepared assuming that the Company will continue as a going
  concern. The Company received Notices of Default and Acceleration from the Trustee
  under the Indenture governing the Notes pursuant to which the Trustee demanded
  payment and accelerated the Company’s obligations under the Notes, which
  raises substantial doubt about the Company’s ability to continue as a
  going concern. After completion of a trial on the related issues in the Delaware
  Court of Chancery as to whether an event of default had occurred under the Indenture
  and prior to post-trial hearings and a decision being rendered, in February
  2006 the Company reached a tentative agreement with the Trustee to resolve the
  outstanding disputes among the parties, subject to certain conditions. The settlement
  would cover the alleged existing defaults and the accrued and unpaid interest,
  and would include the termination of all pending litigation and a release of
  all the parties. The financial statements do not include any adjustments that
  might result from the outcome of this uncertainty.. As described below in Note
  7, on August 18, 2006, the Company and the Trustee entered into a Settlement
  Agreement resolving the outstanding claims with respect to this litigation and
  filed a pre-negotiated plan of reorganization to effectuate the settlement.

---

2.       Timber and
		TimberlandsTimber and Timberlands consisted of the following:



June
          30,
      
      December
          31,2006
      
      2005Timber and logging roads
      $
      254,106
      $
      255,690Timberlands
      
      11,616
      
      11,970Seed orchard and nursery
        stock
      
      1,119
      
      1,243266,841
      
      268,903Less accumulated depletion
        and road amortization
      
      188,903
      
      187,969$
      77,938
      $
      80,934


3.      
  Investment in Affiliate

Since
  October 1999, the Company has owned a redeemable preferred membership interest
  (“Preferred LLC Interest”) in AFR, an affiliate accounted for under
  the equity method. As mentioned in Note 1 to the Financial Statements, the Company
  is an indirect subsidiary of AFR as a result of ownership of a 99% non-managing
  member’s interest in the Company.

We exclude losses from our preferred interest in our
  affiliate in our condensed consolidated statements of operations in excess of
  our basis in the preferred interest. Losses in excess of that amount are not
  borne by us. Such amounts for the six months ended June 30, 2006 were approximately
  $12,164. Future earnings of our affiliate, otherwise attributable to our preferred
  interest, will be allocated to us only after future earnings are sufficient
  to recover the cumulative losses previously not recognized by us (approximately
  $26,000 at June 30, 2006).



6



---



INLAND
  FIBER GROUP, LLC AND SUBSIDIARY 
  (in thousands)

The following summarized
  unaudited financial information for AFR is presented on an AFR standalone basis
  without consolidation of the Company's results of operations to avoid duplication,
  which would otherwise occur.

Three Months Ended
        June 30
        2006
      
      
      
      
      Three Months Ended
        June 30
        2005
      
      
      
      
      Six Months Ended
        June 30
        2006
      
      
      
      
      Six Months Ended
        June 30
        2005Net sales
      
      $
      
      4,632
      
      
      $
      
      2,457
      
      
      $
      
      5,202
      
      
      $
      
      4,041Gross profit
        (loss)
      
      
      
      566
      
      
      
      
      648
      
      
      
      
      408
      
      
      
      
      474Loss before equityin the Company's
        Loss
      
      
      
      (3,165
      )
      
      
      
      (4,315
      )
      
      
      
      (7,149
      )
      
      
      
      (7,579
      )Equity in Company's
        Loss (1)
      
      
      
      (9,097
      )
      
      
      
      (8,837
      )
      
      
      
      (7,543
      )
      
      
      
      (17,958
      )Net loss
      
      
      
      (12,262
      )
      
      
      
      (13,152
      )
      
      
      
      (11,527
      )
      
      
      
      (25,537
      ) (1)
      Reflects charges of $2,524, $2,397, $5,015 and $4,764 respectively related
        to the amortization of $43,287 excess of cost over deficiency in net assets
        attributable to 63.6% acquired interest.


4.      
  Litigation

On December 19, 2003, an action was brought
  in the Court of Chancery of the State of Delaware in and for New Castle County
  by the Trustee under the Indenture against the Company, Finance Corp., the Manager,
  American Forest Resources, LLC, Cascade Resource Holdings Group, LLC, and all
  of the directors of the Manager as of January 1, 2003 (collectively, the “Defendants”).
  The complaint alleges that the Company violated the provisions of the Indenture
  by transferring certain assets to its affiliates, the directors of the Company
  violated their fiduciary duty to the Company and that the transfers of the assets
  were fraudulent conveyances and subject to rescission. The Trustee sought 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. On July 28, 2005, the Trustee issued an Affirmation
  of the Notice of Default referencing among other things the failure to make
  the semi-annual interest payment on May 15, 2005. The trial was completed in
  August 2005 and in October 2005, the Trustee filed its post-trial brief. The
  Defendants filed their reply brief in November 2005. On February 27, 2006 the
  Company announced that it reached a tentative agreement with the Trustee for
  the Notes to resolve the outstanding disputes among the parties. As described
  below in Note 7, on August 18, 2006, the Company and the Trustee entered into
  a Settlement Agreement resolving the outstanding claims with respect to this
  litigation and filed a pre-negotiated plan of reorganization to effectuate this
  settlement.





7

---



INLAND
  FIBER GROUP, LLC AND SUBSIDIARY 
  (in thousands)

5.      
  Long Term Debt Declared in Default

The Company’s long
  term debt, which has been declared in default, consists of the Notes, as defined
  in Note 1. IFG and Finance Corp. (collectively, 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 have been declared in default by the Trustee and, accordingly, the
  underlying debt is shown on the Company’s condensed consolidated balance
  sheet under current liabilities.

The Company did not make
  its semi-annual interest payments on the Notes, which were due May 15, 2005,
  November 15, 2005, and May 15, 2006 before the due date or during the grace
  period. The Settlement Agreement and the pre-negotiated plan of reorganization
  do not provide for the Company’s payment of the interest payment due November
  15, 2006.

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, since 2002, the Company has been prohibited from making distributions
  to its members. Although the Company believes that, other than its failure to
  make the payments described above, it was in compliance with the covenants contained
  in the Notes, the Trustee under the indenture has alleged that the Company has
  violated certain covenants and has commenced litigation and also issued notices
  of default, which are described in Note 5.

As required under the indenture
  governing the Notes (the "Indenture"), the Company had placed $3.4
  million from the sale of timberland in a restricted account only to be used
  in ways prescribed in the Indenture. Since that time, funds have been used to
  purchase assets as allowed in the Indenture. A balance of $0.5 million remained
  in the restricted account as of June 30, 2006.

6.      
  Management

The Company’s management
  agreement with the Manager provides for an annual fee of 2% of the agreed upon
  valuation of total timber and timberland assets under management and is payable
  monthly.

8

---



INLAND
  FIBER GROUP, LLC AND SUBSIDIARY 
  (in thousands)

7.      
  Subsequent Events

On August 18, 2006, the
  Company and Finance Corp. (together, the “Companies”) reached a
  final settlement (the “Settlement Agreement”) resolving all outstanding
  claims in the ongoing litigation between the Companies and the other defendants,
  and the Trustee without admission of liability by any of the parties. Pursuant
  to the Settlement Agreement, and with the support of holders of 70.4 % of the
  outstanding principal amount of the Notes for their prenegotiated plan of reorganization
  (the “Plan”), on August 18, 2006, the Companies filed voluntary
  petitions in the United States Bankruptcy Court for the District of Delaware
  (the “Bankruptcy Court”) (Case No. 06-10884 through 06-10885) seeking
  relief under the provisions of Chapter 11 of Title 11 of the United States Code
  (the “Bankruptcy Code”) (the “Chapter 11 Case”). As
  part of their filing with the Bankruptcy Court, the Companies have filed a plan
  of reorganization (the “Plan”) together with a form of disclosure
  statement (the “Disclosure Statement”) for approval by the Bankruptcy
  Court. The Companies will continue to operate their businesses as debtors-in-possession
  under the jurisdiction of the Bankruptcy Court and in accordance with the applicable
  provisions of the Bankruptcy Code. The Plan provides for the payment by the
  Company of $154.3 million in full satisfaction of the Notes and all claims related
  thereto.

The Settlement Agreement
  resolves all of the outstanding disputes between the parties to the previously
  disclosed litigation (the “Action”) which was initially brought
  by the Trustee in December 2003 against the Companies, American Forest Resources
  (“AFR”), Cascade Resource Holdings Group, LLC, Timber Resource Services,
  LLC (“TRS”) and certain current and former directors of TRS, which
  provides timber management services to IFG.

The Companies, John M.
  Rudey, AFR, the Indenture Trustee and the holders of Notes or their respective
  affiliates who collectively own or manage 70.4% of the outstanding principal
  amount of the Notes entered into a support and lock-up agreement (the “Support
  and Lock-Up Agreement”) as of August 18, 2006. Pursuant to the Support
  and Lock-Up Agreement, the Companies agreed to commence the Chapter 11 Case,
  file the necessary documents, including the Plan, and use commercially reasonable
  efforts to have the Disclosure Statement approved and the Plan confirmed and
  consummated. The holders of Notes that are parties to the Support and Lock-Up
  Agreement have agreed to forbear and to instruct the Trustee to forbear from
  exercising rights or remedies from execution of the Support and Lock-Up Agreement
  through the earlier of the effective date of the Plan or the termination of
  the agreement. Such holders of Notes have also agreed not to transfer their
  Notes unless the transferee agrees to be bound by the terms of the Support and
  Lock-Up Agreement. The Indenture Trustee, along with each holder of Notes that
  is a party to the Support and Lock-Up Agreement, has agreed to support the Plan
  by, among other things, voting in favor of the Plan. In addition, the parties
  agreed that the Companies may terminate the Support and Lock-Up Agreement as
  to any or all other parties, and the Trustee and/or any consenting holder may
  terminate the Support and Lock-Up Agreement as to itself only upon the occurrence
  of specified events, such as if the Plan is not confirmed on or before November
  15, 2006, the Companies file a plan of reorganization that is inconsistent with
  the terms of the agreement or the Company withdraws the Plan.

On August 14, 2006, IFG
  and Richard L. Wendt (the “Purchaser”) entered into an Asset Purchase
  Agreement, pursuant to which the Purchaser agreed to acquire all of IFG’s
  assets, including its real estate, timber, and timber-related assets, for a
  purchase price of $83,000,000 (the “Asset Sale”). The Asset Purchase
  Agreement provides that the Asset Sale will close on or after October 4, 2006,
  prevents IFG from soliciting other offers, and (with certain exceptions) and
  limits the amount of timber that may be harvested. The Asset Purchase Agreement
  further provides that the Purchaser is not assuming any liabilities of IFG.
  The consummation of the Asset Sale is conditioned upon the fulfillment, to the
  Purchaser’s satisfaction, of certain conditions, including no material
  adverse effect occurring with respect to IFG’s Assets and entry of the
  order confirming the Plan (the “Confirmation Order”). In addition,
  consummation of the Asset Sale to the Purchaser is contingent upon the acquisition
  by the Purchaser of all of AFR’s Oregon timber assets (as described below).

9

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INLAND FIBER GROUP,
	LLC AND SUBSIDIARY

The Plan is premised on
  the Company’s ability to obtain certain additional funding (the “Additional
  Funding”) under the terms set forth in the Plan. The Plan provides that
  if the consummation of the Additional Funding does not occur on the Effective
  Date, then the Confirmation Order will be deemed vacated and of no further force
  or effect. The Additional Funding includes the $8.3 million to be paid by AIG
  and Gulf pursuant to the Global Claims Release and the contribution by AFR to
  IFG of $63,002,000 (or such other amount as is sufficient to allow the Debtors
  to satisfy all of their obligations under the Plan) pursuant to a Contribution
  Agreement (the “AFR Contribution Agreement”). The Additional Funding
  is contingent upon consummation of the Asset Sale. In order to fund the contribution
  by AFR, one or more affiliates of IFG will contribute additional funds to AFR.

Pursuant to the AFR Contribution Agreement, on the Effective Date, AFR
  will contribute to IFG $63,002,000 (or such other amount as is sufficient to
  allow the Debtors to satisfy all of their obligations under the Plan). In addition,
  under the AFR Contribution Agreement, AFR has agreed, on the Effective Date,
  to pay Golden Tree Asset Management, LP, Turnberry Capital Management, L.P.,
  and QVT Financial an aggregate of $948,000 to reimburse them for fees and expenses
  incurred by them in connection with the Action.

On August 18, 2006, the
  Companies and certain of the other defendants and the Companies’ insurance
  providers, AIG, and Gulf, entered into the Global Claims Release and Insurer
  Settlement Agreement. Under this agreement, AIG committed to fund at least $5.2
  million, and Gulf committed to fund $3.1 million in connection with the Settlement
  Agreement and the Plan, for a total of $8.3 million, in exchange for certain
  releases contained in the Plan.

---

ITEM
        2.
      MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
        AND RESULTS OF OPERATIONS


Forward-Looking
  StatementsCertain
  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 ongoing bankruptcy
  proceedings with respect to the Company, the Company’s ability to consummate
  the settlement of the litigation with the Trustee for its Notes, the Company’s
  ability to consummate the sale of its assets, the highly cyclical nature of
  the forest products industry, general economic conditions, competition, price
  conditions or trends for the Company’s products, the possibility that
  timber supply could increase if governmental, environmental or endangered species
  policies change, the results of ongoing litigation involving the Company, the
  Company’s ability to pay the required interest on its outstanding debt
  and limitations on the Company’s ability to harvest its timber due to
  adverse natural conditions or increased governmental restrictions. 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.

10

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INLAND
  FIBER GROUP, LLC AND SUBSIDIARY 
  (in thousands)

Application
  of Critical Accounting Policies and Critical Accounting Estimates

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
  consolidated financial statements included in the Company’s 2005 Annual
  Report on Form 10-K. The Company has not adopted any significant new accounting
  policies during the six months ended June 30, 2006.

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 business.

Overview

The Company’s principal operations
  consist of growing and harvesting timber and selling logs, standing timber and
  related by-products to third party wood processors and related party purchasers
  as well as the sale of excess timberland. These logs and by-products are processed
  for sale as lumber, molding products, doors, mill work, commodity, specialty
  and overlaid plywood products, laminated veneer lumber, engineered wood I-beams,
  particleboard, hardboard, paper and other wood products. These products are
  used in residential, commercial and industrial construction, home remodeling
  and repair, general industrial applications and a variety of paper products.
  The results of the Company’s operations and its ability to pay distributions
  to its members 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 timber logs, seasonality, government
  regulations affecting the manner in which timber may be harvested, and competition
  from other supplying regions and substitute products. The Company is currently
  not permitted to make any distributions to members (see Financial Condition
  and Liquidity).

On August 18, 2006, the Company
  and Fiber Finance Corp. filed voluntary petitions in the United States Bankruptcy
  Court for the District of Delaware (the “Bankruptcy Court”) (Case
  Nos. 06-10884 through 06-10885) seeking relief under the provisions of Chapter
  11 of Title 11 of the United States Code. As part of their filing with the Bankruptcy
  Court, the Company and Fiber Finance Corp. have filed a plan of reorganization
  together with a form of disclosure statement for approval by the Bankruptcy
  Court. The Companies will continue to operate their businesses as debtors-in-possession
  under the jurisdiction of the Bankruptcy Court and in accordance with the applicable
  provisions of the Bankruptcy Code.

11
INLAND
  FIBER GROUP, LLC AND SUBSIDIARY 
  (in thousands)

Seasonality

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

Current
  Market ConditionsSecond
  quarter 2006 prices for finished wood products (e.g. lumber and engineered wood
  products) decreased slightly from first quarter 2006 prices. Plywood prices
  remained strong. Pine industrial prices fell with shop prices leading the decrease.
  Generally finished goods prices were down about 10% from the same quarter in
  2005.

Due to seasonal conditions, delivered
  log prices increased for all species except Cedar which remained constant. Demand
  for veneer logs and saw logs remained strong in part due to poor logging conditions
  encountered during the first quarter and an overall shortage of available logs
  for sale.

Results
  of Operations

Selected operating statistics for the Company:

SalesVolume
        (MBF)
      
      
      
      Price
        Realization (MBF)Timber
      
      
      
      
      
      
      
      
      
      
      
      TimberPeriod
      
      Logs
      
      Stumpage
      
      Deeds
      
      
      
      Logs
      
      Stumpage
      
      
      
      Deeds2006Three Months
        Ended June 30
      
      4,532
      
      —
      
      1,315
      
      $
      
      483
      
      $
      
      —
      
      $
      
      185Three Months
        Ended March 31
      
      3,425
      
      —
      
      861
      
      $
      
      332
      
      $
      
      —
      
      $
      
      822005Three Months
        Ended June 30
      
      9,578
      
      —
      
      2,878
      
      $
      
      341
      
      $
      
      —
      
      $
      
      177Three Months
        Ended March 31
      
      6,982
      
      —
      
      348
      
      $
      
      277
      
      $
      
      —
      
      $
      
      198




12

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INLAND
  FIBER GROUP, LLC AND SUBSIDIARY 
  (in thousands)



Quarter
  Ended June 30, 2006 Compared to Quarter Ended June 30, 2005

Revenues

Revenues for the quarter ended June
  30, 2006 were $2.7 million, a decrease of $1.3 million or 34% from revenues
  of $4.0 million for the same period in 2005. The decrease in revenues during
  the second quarter of 2006 was caused primarily by lower log sales of $1.1 million.




Timber deed sales for the second quarter
  of 2006 were $0.2 million on 1.3 million board feet (“MMBF”), as
  compared to the same period in 2005, when timber deed sales were $0.5 million
  on 2.9 MMBF. The average timber deed price was $185 per thousand board feet
  (“MBF”) during the second quarter of 2006, as compared to $177 per
  MBF for the same period in 2005.

Log sales for the quarter ended June
  30, 2006 were $2.2 million on volume of 4.5 MMBF, a decrease of $1.1 million
  as compared to the same period in 2005 when log sales were $3.3 million on 9.6
  MMBF. The average sales price was $483 per MBF for the second quarter of 2006,
  as compared to an average $341 per MBF for the same period in 2005.

There were no property sales for the
  second quarter of 2006 or 2005.

Gross Profit

The Company had a gross profit of $0.4 million in
  the second quarter of 2006 as compared to a gross loss of $0.1 million for the
  same period in 2005. As a percentage of sales, the gross profit was 13% in the
  2006 quarter and the gross loss was 3% in the 2005 quarter.

Selling, General
  and Administrative Expenses

Selling, general and administrative
  expenses, excluding management fees, were $0.9 million in the first quarter
  of 2006 as compared to $0.3 million in the first quarter of 2005. The $0.6 million
  increase was due to higher legal bills. Management fees remained the same at
  $0.5 million in the second quarters of 2006 and 2005.

Equity in Net Loss
  of Affiliate

There was
  no equity in the net loss of affiliate recognized during the second quarter
  of 2006. This amount would reflect the Company’s share of the net income
  or loss of an affiliate (AFR) accounted for under the equity method including
  the amortization of the excess of cost over deficiency in net assets acquired
  in the Privatization Transaction. Because cumulative losses exceed our investment
  and we are under no obligation to provide additional funding, we did not recognize
  any loss in excess of our basis. This compares to equity in net loss of affiliate
  of $2.3 million in the second quarter of 2005.

13

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INLAND FIBER GROUP, LLC AND SUBSIDIARY 
  (in thousands)

Six Months
  Ended June 30, 2006 Compared to Six Moths Ended June 30, 2005

Revenues


Revenues for the six months
  ended June 30, 2006 were $7.3 million, an increase of $1.1 million or 18% from
  revenues of $6.2 million for the same period in 2005. The increase in revenues
  during the first six months of 2006 was caused by higher property sales of $3.4
  million, offset by lower log sales of $1.9 million, lower timber deed sales
  of $0.3 million, and lower other sales of $0.1 million.

Timber deed sales for the
  first six months of 2006 were $0.3 million on 2.2 million board feet (“MMBF”),
  as compared to the same period in 2005, when timber deed sales were $0.6 million
  on 3.2 MMBF. The average timber deed price was $144 per thousand board feet
  (“MBF”) during the first six months of 2006, as compared to $179
  per MBF for the same period in 2005.

Log sales for the six months
  ended June 30, 2006 were $3.3 million on volume of 8.0 MMBF, a decrease of $1.9
  million as compared to the same period in 2005 when log sales were $5.2 million
  on 16.6 MMBF. The average sales price was $418 per MBF for the first six months
  of 2006, as compared to an average $314 per MBF for the same period in 2005.

Property sales for the first
  six months of 2006 were $3.4 million, as compared to none for the same period
  in 2005.

Gross Profit

The Company had a gross
  profit of $1.8 million in the first six months of 2006 as compared to a gross
  loss of $0.4 million for the same period in 2005. As a percentage of sales,
  the gross profit was 24% in the 2006 first half and the gross loss was 6% in
  the 2005 first half.

Selling, General and Administrative Expenses

Selling, general and administrative
  expenses, excluding management fees, were $1.3 million in the first half of
  2006, compared to $0.7 million in the first half of 2005. An increase in legal
  fees of $0.7 million was offset by a decrease in professional services of $0.1
  million. Management fees remained the same at $1.0 million in the first six
  months of 2006 and 2005.

Equity in Net Loss of Affiliate


There was no equity in the
  net loss of affiliate recognized during the first half of 2006. This amount
  would reflect the Company’s share of the net loss of an affiliate (AFR)
  accounted for under the equity method including the amortization of the excess
  of cost over deficiency in net assets acquired in the Privatization Transaction.
  Because cumulative losses exceed our investment and we are under no obligation
  to provide additional funding, we did not recognize any loss in excess of our
  basis. This compares to equity in net loss of affiliate of $8.0 million in the
  first half of 2005.



14



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INLAND
  FIBER GROUP, LLC AND SUBSIDIARY(in thousands)

Financial
  Condition and Liquidity

Operating
  Activities

Cash flows provided by operating
  activities during the six months ended June 30, 2006 were $1.4 million, as compared
  to cash provided by operating activities of $1.3 million during the same period
  in 2005. The $0.1 million increase is primarily due to the Company’s higher
  property sales and lower harvesting costs.

Investing Activities

Cash flows used in investing
  activities were $1.0 million during the six months ended June 30, 2006, as compared
  to $0.9 million during the same period in 2005.

Financing Activities


The agreement governing
  the Company’s 9-5/8% Senior Notes due 2007 (the “Notes”) contains
  restrictive covenants, including limitations on harvest levels, land sales,
  cash distributions and the amount of future indebtedness. Under the Notes, the
  Company’s average annual adjusted harvest volume over any period of four
  consecutive years cannot exceed a volume of approximately 147 MMBF as adjusted
  for timberland sales and purchases. The Notes also limit one-year harvest levels
  and average annual harvest levels for consecutive two-and-three year periods.
  See the succeeding paragraphs for a discussion of certain litigation against
  the Company, among others, relating to the Notes. As of June 30, 2006, the Company
  was not permitted to make any distributions, as it had not exceeded the requisite
  Consolidated Fixed Charge Coverage Ratio within the Restricted Payments provisions
  of the Notes.

Through the first six months
  of 2006, the Company funded its investing activities from operations and cash
  on hand.

Cash required to meet the Company’s debt
  service continues to be significant. To meet its working capital requirements,
  the Company for the past several years 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. Prior to the May 15,
  2005 interest payment on the Notes, the debt service and, prior to April 2001,
  quarterly cash distributions had been funded from operations and borrowings.
  Since May 15, 2005, the Company has not made its interest payments on the Notes.
  As noted below, the Settlement Agreement and the Plan provide for a payment
  of an aggregate of $154.3 million in full satisfaction of the Notes, including
  the principal and accrued interest thereon. 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

15



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INLAND
  FIBER GROUP, LLC AND SUBSIDIARY(in thousands)

2004, the plaintiff’s motion to schedule a preliminary injunction
  hearing with respect to further transfers to affiliates and for expedited discovery
  was denied. In connection with the denial of the plaintiff’s motion, the
  Company agreed that, through the earlier of December 31, 2004 and the resolution
  of the lawsuit, it would provide at least thirty days’ notice before entering
  into any transfer of assets to affiliates, other than payment of management
  fees. Discovery began in January 2004 and is ongoing. On February 6, 2004, the
  Defendants filed a motion to dismiss. In May 2004, a hearing was held with respect
  to Defendants’ motion to dismiss. On May 17, 2004, the Company received
  a Notice of Default from the Trustee covering certain of the allegations in
  the complaint. The Defendants responded to the Notice of Default denying the
  existence of any defaults. On July 29, 2004, the Court of Chancery dismissed
  the action without prejudice, based on its determination that the Trustee under
  the Indenture lacked standing under the terms of the Indenture to bring an action
  against the Defendants because the requisite notice of default and opportunity
  to cure had not been provided to the Company prior to the time the action was
  commenced. The Trustee was granted 30 days to file an amended complaint and
  on August 27, 2004, the Trustee filed its second amended complaint. On October
  8, 2004, the Trustee filed a motion for partial summary judgment seeking a declaratory
  judgment that the Company violated certain provisions of the Indenture by permitting
  its affiliate to grant security interests in various timberland properties on
  various dates prior to September 14, 2001. On October 15, 2004, the Defendants
  filed a motion sto dismiss the second amended complaint. On December 23, 2004,
  the Court of Chancery issued a memorandum opinion granting the Trustee’s
  motion for partial summary judgment and declaring that an event of default had
  occurred under the Indenture. On January 13, 2005, the Company received a Notice
  of Default and Acceleration from the Trustee. On January 21, 2005, the Defendants
  filed a motion for leave to pursue an interlocutory appeal of the Chancery Court
  Order granting partial summary judgment. On January 26, 2005, the Court of Chancery
  granted Defendants’ motion for leave to appeal. On February 10, 2005,
  the Supreme Court of the State of Delaware accepted Defendants’ appeal.
  On April 4, 2005, the Trustee filed its third amended complaint. On April 22,
  2005, the Defendants filed a motion to dismiss certain counts of the third amended
  complaint. On June 6, 2005, the Supreme Court of the State of Delaware decided
  the Defendants’ interlocutory appeal and issued an order vacating the
  decision of the Court of Chancery granting partial summary judgment to the Trustee
  and remanding the case to the Court of Chancery for a trial on all of the issues.
  On July 7, 2005, the Court of Chancery granted in part and denied in part the
  Defendants’ motion to dismiss certain counts of the third amended complaint.
  On July 28, 2005, the Trustee issued an Affirmation of the Notice of Default
  referencing among other things the failure to make the semi-annual interest
  payment on May 15, 2005. The trial was completed in August 2005 and in October
  2005, the Trustee filed its post-trial brief. The Defendants filed their reply
  brief in November 2005. On February 27, 2006 the Company announced that it reached
  a tentative agreement with the Trustee for the Notes to resolve the outstanding
  disputes among the parties. Under the terms of the tentative agreement, the
  Company or its nominee would purchase all of the outstanding Notes at a price
  of 69% of the principal amount of the Notes through a pre-negotiated plan of
  reorganization. Due to the pending settlement the post-trial hearing has been
  adjourned. On August 18, 2006, the Company and Fiber Finance Corp. (together,
  the “Companies”) reached a final settlement (the resolving all outstanding
  claims in the ongoing litigation between the Company and the other defendants,
  and the trustee under the indenture governing the Companies’ 9 5/8% Senior
  Notes, due 2007 (the “Notes”) without admission of liability by
  any of the parties. Pursuant to the Settlement Agreement, and with the support
  of holders of 70.4 % of the

16



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INLAND
  FIBER GROUP, LLC AND SUBSIDIARY(in thousands)

outstanding principal amount of the Notes for their prenegotiated
  plan of reorganization (the “Plan”), on August 18, 2006, the Companies
  filed voluntary petitions in the Bankruptcy Court seeking relief under the provisions
  of Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”).
  As part of their filing with the Bankruptcy Court, the Companies have filed
  a plan of reorganization together with a form of disclosure statement for approval
  by the Bankruptcy Court. The Companies will continue to operate their businesses
  as debtors-in-possession under the jurisdiction of the Bankruptcy Court and
  in accordance with the applicable provisions of the Bankruptcy Code.



ITEM
  3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
  ABOUT MARKET
  RISK

Not
  applicable.




ITEM
  4. 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 Treasurer 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 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 Treasurer 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 quarterly report, the Company’s principal executive officer
  and principal financial officer completed an evaluation of the disclosure controls
  and procedures and have determined them to be functioning effectively. They
  did not discover any significant deficiencies or material weaknesses within
  the controls and procedures that required modifications. During the period covered
  by this report, there has been no change in internal control over financial
  reporting that has materially affected, or is reasonably likely to materially
  affect the Company’s internal control over financial reporting.





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INLAND
  FIBER GROUP, LLC AND SUBSIDIARY(in thousands)



PART
  II.      OTHER INFORMATION

ITEM
  1.  LEGAL PROCEEDINGSOn
  December 19, 2003, an action was brought in the Court of Chancery of the State
  of Delaware in and for New Castle County by the Trustee under the Indenture
  against the Company, Finance Corp., the Manager, American Forest Resources,
  LLC, Cascade Resource Holdings Group, LLC, and all of the directors of the Manager
  as of January 1, 2003 (collectively, the “Defendants”). The complaint
  alleges that the Company violated the provisions of the Indenture by transferring
  certain assets to its affiliates, the directors of the Company violated their
  fiduciary duty to the Company and that the transfers of the assets were fraudulent
  conveyances and subject to rescission. The Trustee seeks a declaration that
  the Company has violated the terms of the Indenture, an injunction against the
  transfer of additional assets out of the ordinary course of business, damages
  and the imposition of a constructive trust on the assets transferred by the
  Company to its affiliates. In January 2004, the plaintiff’s motion to
  schedule a preliminary injunction hearing with respect to further transfers
  to affiliates and for expedited discovery was denied. In connection with the
  denial of the plaintiff’s motion, the Company agreed that, through the
  earlier of December 31, 2004 and the resolution of the lawsuit, it would provide
  at least thirty days’ notice before entering into any transfer of assets
  to affiliates, other than payment of management fees. Discovery began in January
  2004 and is ongoing. On February 6, 2004, the Defendants filed a motion to dismiss.
  In May 2004, a hearing was held with respect to Defendants’ motion to
  dismiss. On May 17, 2004, the Company received a Notice of Default
  from the Trustee covering certain of the allegations in the complaint. The Defendants
  responded to the Notice of Default denying the existence of any defaults. On
  July 29, 2004, the Court of Chancery dismissed the action without prejudice,
  based on its determination that the Trustee under the Indenture lacked standing
  under the terms of the Indenture to bring an action against the Defendants because
  the requisite notice of default and opportunity to cure had not been provided
  to the Company prior to the time the action was commenced. The Trustee was granted
  30 days to file an amended complaint and on August 27, 2004, the Trustee filed
  its second amended complaint. On October 8, 2004, the Trustee filed a motion
  for partial summary judgment seeking a declaratory judgment that the Company
  violated certain provisions of the Indenture by permitting its affiliate to
  grant security interests in various timberland properties on various dates prior
  to September 14, 2001. On October 15, 2004, the Defendants filed a motion to
  dismiss the second amended complaint. On December 23, 2004, the Court of Chancery
  issued a memorandum opinion granting the Trustee’s motion for partial
  summary judgment and declaring that an event of default had occurred under the
  Indenture. On January 13, 2005, the Company received a Notice of Default and
  Acceleration from the Trustee. On January 21, 2005, theDefendants
  filed a motion for leave to pursue an interlocutory appeal of the Chancery Court
  Order granting partial summary judgment. On January 26, 2005, the Court of Chancery
  granted Defendants’ motion for leave to appeal. On February 10, 2005,
  the Supreme Court of the State of Delaware accepted Defendants’ appeal.
  On April 4, 2005, the Trustee filed its third amended complaint. On April 22,
  2005, the Defendants filed a motion to dismiss certain counts of the third amended
  complaint. On June 6, 2005, the Supreme Court of the State of Delaware decided
  the Defendants’ interlocutory appeal and issued an order vacating the
  decision of the Court of Chancery granting partial summary judgment to the Trustee
  and remanding the case to the Court of Chancery for a trial on all of the issues.
  On July 7, 2005, the Court of Chancery granted in part and denied in part the
  Defendants’ motion to dismiss certain counts of the thirdamended
  complaint. On July 28, 2005, the Trustee issued an Affirmation of the Notice
  of Default referencing among



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INLAND
  FIBER GROUP, LLC AND SUBSIDIARY(in thousands)

other things the failure to make the semi-annual interest payment
  on May 15, 2005. The trial was completed in August 2005 and in October 2005,
  the Trustee filed its post-trial brief. The Defendants filed their reply brief
  in November 2005. On February 27, 2006 the Company announced that it reached
  a tentative agreement with the Trustee for the Notes to resolve the outstanding
  disputes among the parties. Under the terms of the tentative agreement, the
  Company or its nominee would purchase all of the outstanding Notes at a price
  of 69% of the principal amount of the Notes through a pre-negotiated plan of
  reorganization. Due to the pending settlement the post-trial hearing has been
  adjourned. On August 18, 2006, the Company and Finance Corp. reached a final
  settlement (the “Settlement Agreement”) resolving all outstanding
  claims in the litigation without admission of liability by any of the parties.
  Pursuant to the Settlement Agreement, and with the support of holders of 70.4
  % of the outstanding principal amount of the Notes for their prenegotiated plan
  of reorganization, on August 18, 2006, the Companies filed voluntary petitions
  in the Bankruptcy Court seeking relief under the provisions of Chapter 11 of
  Title 11 of the United States Code (the “Bankruptcy Code”). As part
  of their filing with the Bankruptcy Court, the Companies have filed a plan of
  reorganization together with a form of disclosure statement for approval by
  the Bankruptcy Court.

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INLAND FIBER GROUP,
  LLC AND SUBSIDIARY

ITEM 6.
     EXHIBITS

(a)
      Exhibits31.1
      Certification
        of CEO Pursuant to Rule 13a-14(a)/15d-14(a)31.2
      Certification
        of CFO Pursuant to Rule 13a-14(a)/15d-14(a)32.1
      Sarbanes-Oxley
        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
      Sarbanes-Oxley
        Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant
        to Section 906 of the Sarbanes-Oxley Act of 2002.


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|SIGNATURES
|----------



Pursuant to therequirements 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.

Date:
      
      September
        21, 2006
      
      
      
      
      
      INLAND
        FIBER GROUP, LLCBy:
      
      /s/
          Thomas C. LudlowThomas C. LudlowVice President and Treasurer(Principal Financial and Accounting Officer)


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