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

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 increase 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. 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.

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.

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 in the Company's 2003 Annual Report on Form 10-K. The Company has not adopted any significant new accounting policies during the three months ended March 31, 2004.

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.

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).

9

INLAND FIBER GROUP, LLC
(formerly U.S. Timberlands Klamath Falls, LLC)

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 Conditions

First quarter 2004 prices for finished wood products (e.g. lumber, plywood and engineered wood products) were higher than the fourth quarter 2003. Prices continued to rise during the quarter for both panels and lumber products.

Delivered log prices for Douglas Fir remained flat during the first quarter 2004 due to a long term delivered log agreement. Prices for veneer logs improved, as did Ponderosa Pine saw log prices. Incense Cedar prices remained flat and did not change from fourth quarter 2003 prices.

     INLAND FIBER GROUP, LLC
(formerly U.S. Timberlands Klamath Falls, LLC)

Quarter Ended March 31, 2004 Compared to Quarter Ended March 31, 2003

Revenues for the quarter ended March 31, 2004 were $2.6 million, a decrease of $4.2 million or 62% from revenues of $6.8 million for the same period in 2003. The decrease in revenues during the first quarter of 2004 was caused by lower log sales volume and lower timber deed sales which were a direct result of weather related slowdowns.

Timber deed sales for the first quarter of 2004 were $0.2 million on volume of 1.2 million board feet ("MMBF"), a decrease of $0.5 million as compared to the same period in 2003, when timber deed sales were $0.7 million on 2.9 MMBF. The average timber deed price was $158 per thousand board feet ("MBF") during the first quarter of 2004, as compared to $236 per MBF for the same period in 2003.

Log sales for the quarter ended March 31, 2004 were $2.2 million on volume of 6.9 MMBF, a decrease of $3.1 million as compared to the same period in 2003 when log sales were $5.3 million on 17.1 MMBF. The average sales price was $317 per MBF for the first quarter of 2004, as compared to an average $313 per MBF for the same period in 2003. The increase in log prices reflects a general increase in the market.

In addition, property sales for the 2004 first quarter were $0.0 million, as compared to $0.6 million for the same period in 2003.

The Company had a gross loss of $0.2 million in the first quarter of 2004 as compared to a gross profit of $0.0 million for the same period in 2003. As a percentage of sales, the gross loss was 7% as compared to a gross profit percentage of 0% in the first quarter of 2003. The gross profit (loss) percentage in 2004 was adversely impacted compared to 2003 by higher contracted log and haul costs on a per MBF basis.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $0.5 million from $1.7 million in the first quarter of 2003 to $2.2 million in the first quarter of 2004. The increase was attributable to increased management company fees offset by overall lower costs.

Equity in Net Loss of Affiliate

Equity in net loss of affiliate was $4.9 million for the first quarter of 2004. This amount reflects the Company's share of the net loss of an affiliate (AFR) accounted for under the equity method. This compares to equity in net loss of affiliate of $2.9 million in the first quarter of 2003.

11

     INLAND FIBER GROUP, LLC
(formerly U.S. Timberlands Klamath Falls, LLC)

Cash flows used in operating activities during the three months ended March 31, 2004 were $1.2 million, as compared to cash provided by operating activities of $1.1 million during the same period in 2003. The $2.3 million decrease is primarily due to the Company's decrease in sales revenue in comparison to the same period in 2003.

Investing Activities

Cash flows used in investing activities were $0.1 million during the first three months of 2004 and 2003.

The Company had a credit agreement with an affiliate of the Managing Member (the "Affiliate Credit Facility"), which allowed the Company to borrow up to $12.0 million. The Credit Facility expired, by its terms, on April 30, 2002. 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 to the affiliates, 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.

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. As of March 31, 2004, the Company was in compliance with the covenants contained in the Notes. As of March 31, 2004, 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 three months of 2004, the Company funded its investing activities and met its cash requirements for debt service from operations and cash on hand.

Cash required to meet the Company's debt service will 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. The debt service and, prior to April 2001, quarterly cash distributions have been funded from operations and borrowings. Given projected volumes for sales of logs and timber, estimated current board footage growth on the timberlands and the harvest restrictions in the Notes, unless prices improve, costs are reduced, new markets are developed or the Company makes accretive acquisitions, the Company's ability in the future to make distributions will be adversely affected. On May 10, 2001 the Company announced an indefinite suspension of distributions. The Company continues to evaluate means to improve cash flows, including the factors mentioned above. There can be no assurance that prices will improve or that the Company will be able to take any of these actions and it is unlikely prices will improve or any of these actions will take effect within a short-term horizon. The Company will continue to look to log and timber deed sales as well as the sale of excess timberlands, and short-term advances from an affiliated lender, to meet its short-term cash needs.

12

     INLAND FIBER GROUP, LLC
(formerly U.S. Timberlands Klamath Falls, LLC)

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. On March 26, 2004 a motion to stay discovery pending the outcome of the Defendant's motion to dismiss was denied. In May 2004, a hearing was held with respect to defendants' motion to dismiss. The defendants expect a decision regarding their motion to dismiss within a few months. On May 17, 2004, the Company received a Notice of Default from the Trustee covering certain of the allegations in the complaint. The Company and its legal counsel believe the litigation, as well as the Notice of Default, to be without merit and the Company intends to vigorously defend itself in the lawsuit.

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.

13

     INLAND FIBER GROUP, LLC
(formerly U.S. Timberlands Klamath Falls, LLC)

     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 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.

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 administered by 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 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. The defendants expect a decision regarding their motion to dismiss within a few months. On March 26, 2004 a motion to stay discovery pending the outcome of the Defendant's motion to dismiss was denied. On May 17, 2004, the Company received a Notice of Default from the Trustee covering certain of the allegations in the complaint. The Company and its legal counsel believe the litigation, as well as the Notice of Default to be without merit and the Company intends to vigorously defend itself in the lawsuit.

14

     INLAND FIBER GROUP, LLC
(formerly U.S. Timberlands Klamath Falls, LLC)

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

As noted above in Part II, Item 1, the trustee under the Indenture has alleged that the Company is in default under the Indenture as a result of its violation of certain provisions of the Notes. The Company denies the allegations and believes it is in compliance with the covenants under the Indenture in all material respects.

15

     INLAND FIBER GROUP, LLC
(formerly U.S. Timberlands Klamath Falls, LLC)

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

16

SIGNATURES

Pursuant to the requirements 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.

17