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                                      UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C. 20549

                                       FORM 10-Q

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

                     For the quarterly period ended June 30, 2006

                             Commission File Number 1-3924

                                      MAXXAM INC.
                (Exact name of Registrant as Specified in its Charter)

                  Delaware                                        95-2078752
       (State or other jurisdiction                           (I.R.S. Employer
     of incorporation or organization)                     Identification Number)

       1330 Post Oak Blvd., Suite 2000                               77056
              Houston, Texas                                     (Zip Code)
  (Address of Principal Executive Offices)

Registrant's telephone number, including area code: (713) 975-7600

     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 for 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     No X

     Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. (Check one):
Large accelerated filer          Accelerated filer X       Non-accelerated filer

     Indicate  by check mark  whether  the  Registrant  is a shell  company  (as
defined in Rule 12b-2 of the Exchange Act).
 Yes X     No

     Number of shares of common stock outstanding at August 8, 2006: 5,259,657

                                  TABLE OF CONTENTS

                                                                            Page
PART I. - FINANCIAL INFORMATION

          Item 1.   Financial Statements (unaudited):
                    Consolidated Balance Sheets.................................
                    Consolidated Statements of Operations.......................
                    Consolidated Statements of Cash Flows.......................
                    Condensed Notes to Consolidated Financial Statements........

          Item 2.   Management's Discussion and Analysis of Financial Condition and
                        Results of Operations...................................

          Item 3.   Quantitative and Qualitative Disclosures About Market Risk..

          Item 4.   Controls and Procedures.....................................

PART II. - OTHER INFORMATION

          Item 1.   Legal Proceedings...........................................
          Item 1A.  Risk Factors................................................
          Item 2.   Unregistered Sales of Equity Security and Use of Proceeds...
          Item 4.   Submission of Matter to a Vote of Security Holders..........
          Item 6.   Exhibits....................................................
          Signatures............................................................

APPENDIX A - GLOSSARY OF DEFINED TERMS..........................................

                                 MAXXAM INC. AND SUBSIDIARIES

                                  CONSOLIDATED BALANCE SHEETS
                  (In millions of dollars, except share information)
                                                                                           June 30,    December 31,
                                                                                            2006            2005
                                                                                        ---------------------------
                                                                                                (Unaudited)
                                                                                        ---------------------------
Assets
Current assets:
  Cash and cash equivalents                                                             $     36.0    $    72.9
  Marketable securities and other short-term investments                                     132.5        134.6
Receivables:
  Trade net of allowance for doubtful accounts of $0.7 and $0.8, respectively                 13.2         11.1
  Other                                                                                        4.4          5.4
Inventories:
  Lumber                                                                                       8.4          7.6
  Logs                                                                                         8.9         18.9
Real estate and other assets held for sale                                                    17.2         12.6
Prepaid expenses and other current assets                                                     16.6         16.4
Restricted cash and marketable securities                                                     19.5         29.1
                                                                                         ------------ --------------
     Total current assets                                                                    256.7        308.6
Property, plant and equipment, net of accumulated depreciation of $221.7 and
  $207.9, respectively                                                                       343.1        355.0
Timber and timberlands, net of accumulated depletion of $228.5 and $226.3, respectively      203.6        208.7
Real estate                                                                                   39.3         43.2
Deferred income taxes                                                                         95.1         95.1
Intangible assets                                                                              2.4          2.9
Long-term receivables and other assets                                                        27.1         26.9
Restricted cash and marketable securities                                                      7.9          7.9
                                                                                         ------------ --------------
                                                                                         $   975.2     $1,048.3
                                                                                         ============ ==============
Liabilities and Stockholders' Deficit
Current liabilities:
  Accounts payable                                                                       $    14.8    $    11.2
  Accrued interest                                                                            26.0         25.9
  Accrued compensation and related benefits                                                   18.4         20.7
  Other accrued liabilities                                                                   32.9         37.0
  Short-term borrowings and current maturities of long-term debt                              69.2        112.5
                                                                                         ---------------------------
     Total current liabilities                                                               161.3        207.3
Long-term debt, less current maturities                                                      914.0        889.6
Accrued pension and other postretirement benefits                                             33.4         34.1
Losses in excess of investment in Kaiser                                                     516.2        516.2
Other noncurrent liabilities                                                                  55.2         62.4
                                                                                         ---------------------------
     Total liabilities                                                                     1,680.1      1,709.6
                                                                                         ---------------------------
Commitments and contingencies (see Note 7)
Stockholders' deficit:
  Preferred stock, $0.50 par value; $0.75 liquidation preference; 2,500,000 shares
    authorized; Class A $0.05 Non-Cumulative Participating Convertible Preferred
    Stock; 668,964 shares issued and 668,119 shares outstanding                                0.3          0.3
  Common stock, $0.50 par value; 13,000,000 shares authorized; 10,063,359 shares
    issued; 5,260,657 and 5,967,942 shares outstanding                                         5.0          5.0
  Additional capital                                                                         225.3        225.3
  Accumulated deficit                                                                       (691.8)      (670.4)
  Accumulated other comprehensive loss                                                       (96.4)       (96.6)
  Treasury stock, at cost (shares held:  preferred - 845; common - 4,802,702 and
    4,095,417, respectively)                                                                (147.3)      (124.9)
                                                                                         ---------------------------
     Total stockholders' deficit                                                            (704.9)      (661.3)
                                                                                         ---------------------------
                                                                                         $   975.2     $1,048.3
                                                                                         ===========================

     The accompanying notes are an integral part of these financial statements.

                         MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                   (In millions of dollars, except per share information)

                                                                           Three Months               Six
                                                                               Ended            Months Ended
                                                                              June 30,             June 30,
                                                                 ------------------------- -------------------------
                                                                     2006         2005          2006         2005
                                                                 ------------ ------------ -------------------------
                                                                                     (Unaudited)
                                                                  --------------------------------------------------
Net sales:
  Forest products                                                $   33.8     $   46.9     $    71.6    $   94.2
  Real estate                                                        19.2         30.1          48.2        52.9
  Racing                                                             10.5         10.2          23.9        23.1
                                                                 ------------ ------------ ------------ ------------
                                                                     63.5         87.2         143.7       170.2
                                                                 ------------ ------------ ------------ ------------
Costs and expenses:
  Cost of sales and operations:
    Forest products                                                  28.6         36.8          62.2        78.9
    Real estate                                                       8.1          9.6          16.4        16.4
    Racing                                                            9.5          9.0          20.7        19.6
  Selling, general and administrative expenses                       11.9         16.5          24.6        28.3
  Gain on sales of timberlands and other assets                      (5.2)        (0.1)         (5.9)       (0.1)
  Depreciation, depletion and amortization                            8.6          8.9          17.4        17.8
                                                                 ------------ ------------ ------------ ------------
                                                                     61.5         80.7         135.4       160.9
                                                                 ------------ ------------ ------------ ------------
Operating income (loss):
  Forest products                                                     0.1         (3.1)         (5.4)       (5.9)
  Real estate                                                         3.5         11.0          16.4        17.7
  Racing                                                             (1.6)        (0.9)         (1.7)       (1.1)
  Corporate                                                             -         (0.5)         (1.0)       (1.4)
                                                                 ------------ ------------ ------------ ------------
                                                                      2.0          6.5           8.3         9.3
Other income (expense):
  Investment and interest income                                      1.8          4.1           5.9         5.3
  Other income                                                        0.5          0.2           0.8         0.2
  Interest expense                                                  (19.1)       (18.4)        (38.7)      (36.1)
  Amortization of deferred financing costs                           (0.6)        (2.0)         (1.2)       (2.5)
                                                                 ------------ ------------ ------------ ------------
Loss before income taxes and cumulative effect of accounting
 change                                                             (15.4)        (9.6)        (24.9)      (23.8)
Benefit (provision) for income taxes                                  4.2            -           4.2           -
                                                                 ------------ ------------ ------------ ------------
Loss before cumulative effect of accounting change                  (11.2)        (9.6)        (20.7)      (23.8)
Cumulative effect of accounting change, net of tax                      -            -          (0.7)          -
                                                                 ------------ ------------ ------------ ------------
Net los                                                          $  (11.2)    $   (9.6)    $   (21.4)   $  (23.8)
                                                                 ============ ============ ============ ============
Basic and diluted loss per common and common
  equivalent share before cumulative effect of accounting
  change                                                         $  (1.97)    $  (1.60)    $  (3.56)    $ (3.98)
                                                                 ============ ============ ============ ============

Basic and diluted loss per common and common
  equivalent share after cumulative effect of accounting
  change                                                         $  (1.97)    $  (1.60)    $  (3.68)    $ (3.98)
                                                                 ============ ============ ============ ============

  The accompanying notes are an integral part of these financial statements.

                             MAXXAM INC. AND SUBSIDIARIES

                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (In millions of dollars)

                                                                                               Six Months Ended
                                                                                                   June 30,
                                                                                          --------------------------
                                                                                              2006         2005
                                                                                          ------------ -------------
                                                                                                 (Unaudited)
                                                                                          --------------------------
Cash flows from operating activities:
  Net loss                                                                                  $ (21.4)     $  (23.8)
  Adjustments to reconcile net loss to net cash provided by (used for) operating
    activities:
    Depreciation, depletion and amortization                                                   17.4          17.8
    Non-cash stock-based compensation benefit                                                  (3.4)         (3.8)
    Gains on sales of timberlands and other assets                                             (5.9)         (0.1)
    Net losses (gains) from marketable securities                                               0.1          (2.6)
    Amortization of deferred financing costs and discounts on long-term debt                    1.2           2.5
    Equity in loss of unconsolidated affiliates, net of dividends received                      0.3           0.4
    Increase (decrease) in cash resulting from changes in:
      Receivables                                                                              (1.3)          3.3
      Inventories                                                                               9.2          12.2
      Prepaid expenses and other assets                                                        (0.3)          1.3
      Accounts payable                                                                          3.6          (3.6)
      Accrued and deferred income taxes                                                        (4.2)         (0.3)
      Other accrued liabilities                                                                (6.4)         13.9
      Accrued interest                                                                          0.1           0.4
      Long-term assets and long-term liabilities                                                1.6           3.7
      Other                                                                                    (0.6)         (0.1)
                                                                                          ------------ -------------
        Net cash provided by (used for) operating activities                                  (10.0)         21.2
                                                                                          ------------ -------------
Cash flows from investing activities:
  Net proceeds from the disposition of property and investments                                 8.1           0.1
  Sales and maturities of marketable securities and other investments                         280.5         356.4
  Purchases of marketable securities and other investments                                   (278.2)       (356.3)
  Net proceeds from restricted cash                                                             9.5           6.5
  Capital expenditures                                                                         (4.2)         (8.9)
                                                                                          ------------ -------------
        Net cash provided by (used for) investing activities                                   15.7          (2.2)
                                                                                          ------------ -------------
Cash flows from financing activities:
  Proceeds from issuances of long-term debt                                                     0.2          38.0
  Redemptions and repurchases of, and principal payments on, long-term debt                   (15.3)        (16.5)
  Borrowings (repayments) under revolving and short-term credit facilities                     (3.8)          2.5
  Incurrence of deferred financing costs                                                       (1.3)         (3.1)
  Treasury stock purchases                                                                    (22.4)         (0.2)
                                                                                          ------------ -------------
        Net cash provided by (used for) financing activities                                  (42.6)         20.7
                                                                                          ------------ -------------
Net increase (decrease) in cash and cash equivalents                                          (36.9)         39.7
Cash and cash equivalents at beginning of the period                                           72.9          18.5
                                                                                          ------------ -------------
Cash and cash equivalents at end of the period                                              $  36.0      $   58.2
                                                                                          ============ =============

Supplemental disclosure of cash flow information:
  Interest paid, net of capitalized interest                                                $  38.6      $   35.7

  The accompanying notes are an integral part of these financial statements.

                              MAXXAM INC. AND SUBSIDIARIES

              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation

     The  information  contained  in the  following  notes  to the  consolidated
financial  statements  is  condensed  from that which would appear in the annual
consolidated  financial  statements;  accordingly,  the  consolidated  financial
statements  included herein should be read in conjunction  with the consolidated
financial  statements and related notes thereto  contained in the Form 10-K. Any
capitalized  terms used but not defined in these Condensed Notes to Consolidated
Financial Statements are defined in the "Glossary of Defined Terms" contained in
Appendix A. All references to the "Company" include MAXXAM Inc. and its majority
and wholly owned  subsidiaries  (but exclusive of Kaiser and its  subsidiaries),
unless  otherwise noted or the context  indicates  otherwise.  All references to
specific  entities  refer to the  respective  companies and their  subsidiaries,
unless  otherwise  specified  or the  context  indicates  otherwise.  Accounting
measurements at interim dates  inherently  involve greater reliance on estimates
than at year end. The results of operations  for the interim  periods  presented
are not  necessarily  indicative  of the results to be  expected  for the entire
year.

     The  consolidated  financial  statements  included  herein  are  unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary for a fair presentation of the consolidated
financial position of the Company at June 30, 2006, the consolidated  results of
operations for the three months and six months ended June 30, 2006 and 2005, and
the consolidated cash flows for the six months ended June 30, 2006 and 2005.

     Financial Difficulties of Forest Products Entities

     Status of Regulatory Matters
     Regulatory and environmental  matters as well as legal actions have had and
are expected to continue to have a significant  adverse  effect on the Company's
forest products  operations and liquidity.  The ability to harvest ScoPac Timber
depends in large part upon ScoPac's ability to obtain regulatory approval of its
THPs. ScoPac has experienced difficulties and delays in the approval of its THPs
as the  result  of  regulatory  and  litigation  challenges  and  expects  these
challenges to persist.  Moreover,  the Company expects to continue to experience
further  difficulties,  limitations  and  delays  in being  able to  harvest  on
previously-approved  THPs due to, among other things, actions by the North Coast
Water Board (see below).  The  foregoing  matters  have  resulted in declines in
actual and expected harvest levels and cash flows,  significant increases in the
cost of  logging  operations  and  increased  costs  related  to timber  harvest
litigation,  all of which have severely and  negatively  impacted the historical
cash flows of both Palco and  ScoPac.  These  adverse  effects  are  expected to
continue.

     The North Coast Water Board is requiring  Palco and ScoPac to apply various
waste  discharge  reporting,  mitigation  and erosion  control  requirements  in
respect of timber harvesting activities in several watersheds,  and is likely to
impose  additional  measures  in the  future.  The North  Coast  Water  Board in
December 2003 directed its staff to formulate  WWDRs for the  Freshwater and Elk
River  watersheds  on the  Palco  Timberlands.  THPs  in  these  two  watersheds
represent a significant  portion of the harvest planned in 2006 and for the next
several years. As harvesting  activities on the Palco Timberlands cannot readily
be moved  between  watersheds  due to,  among  other  things,  historic  harvest
patterns,  adjacency restrictions,  and the age classes of trees, development of
WWDRs and the other  matters  described  in the  "Regulatory  and  Environmental
Factors"  section of Note 7 have in the past and are  expected  to  continue  to
result in reduced harvest and less  predictability  in the future  regarding the
mix of logs available for sale by ScoPac to Palco, which negatively impacts cash
flow.

     As the WWDRs had not yet been  formulated  for the Freshwater and Elk River
watersheds,  the North  Coast  Water  Board for some time  failed to release for
harvest a number of ScoPac's  THPs that had already  been  approved by the other
governmental  agencies which approve  ScoPac's THPs. The North Coast Water Board
subsequently  allowed harvesting on a portion of the approved THPs; however, the
State Water Board later disallowed  harvesting on a portion of the THPs that had
been  released by the North Coast Water Board.  On May 8, 2006,  the North Coast
Water Board adopted WWDRs for the Freshwater and Elk River watersheds, which has
the effect of allowing harvesting in these two watersheds to begin once THPs are
enrolled,  up to  approximately  50% of the CDF  Harvest  Limit  for  these  two
watersheds.  Additional THPs, bringing the total to approximately 75% of the CDF
Harvest  Limit for these two  watersheds,  may be enrolled  upon approval by the
Executive  Officer of the North Coast Water Board's staff of a monitoring  plan,
which has been  submitted  by Palco.  While  certain  THPs  related to these two
watersheds  have  been  enrolled,  and  harvesting  has  begun,  there can be no
assurance that  additional  THPs related to these two watersheds will ultimately
be enrolled or  harvested  as planned in 2006 or in future years as, among other
things,  Palco's  monitoring  plan has not been approved.  The North Coast Water
Board's  adoption of these WWDRs has been appealed to the State Water Board, but
the appeals are being held in abeyance in order to see how the implementation of
the WWDRs  proceeds.  While ScoPac  continues to project that its annual harvest
level over the ten-year period beginning 2006 will be approximately  100 million
board feet, this projection is  significantly  below  historical  annual harvest
levels,  and actual harvest levels may be even lower,  depending on the ultimate
outcome of various assumptions.

     ScoPac Liquidity Update
     In  the  absence  of  significant  regulatory  relief  and  accommodations,
ScoPac's annual timber harvest levels and cash flows from  operations  will, for
at least the next several years, be substantially  below both historical  levels
and the minimum  levels  necessary  to allow  ScoPac to satisfy its debt service
obligations in respect of the Timber Notes.

     In an effort  to  address  the  expected  future  cash  shortfalls,  ScoPac
initiated  the ScoPac Land Sale  Program  whereby it is seeking to sell  certain
non-timberland  properties such as ranchlands and recreational areas, as well as
certain  timberlands.  During the first half of 2006, $6.9 million of properties
were sold and an additional  $4.6 million of  properties  were sold in July 2006
(of which $3.3 million was received  prior to the July 2006 Timber Notes payment
date).  There can be no assurance  that the marketing  efforts in respect of the
remaining properties will be successful.

     Due to regulatory  constraints  and adverse weather  conditions  during the
first  half of 2006,  harvest  levels  were  lower than  planned,  resulting  in
liquidity  shortfalls at ScoPac.  ScoPac and MGI  consummated  three  timber/log
purchases  that  provided  ScoPac an  aggregate  of $8.1  million of  additional
liquidity  ($4.4  million as of June 30, 2006 and $3.7  million in July 2006) to
pay its expenses,  including  interest due in respect of the Timber Notes on the
Timber Notes payment dates in January 2006 and July 2006 as discussed below.

     On the Timber Notes payment date in January 2006,  ScoPac used its existing
cash  resources,  all of the remaining  funds available under the ScoPac Line of
Credit,  and the additional funds made available from a $2.3 million  timber/log
purchase by MGI, to pay all of the $27.7 million of interest due ($25.8  million
net of interest due in respect of Timber Notes held in the SAR Account).  ScoPac
also repaid $19.3 million of principal on the Timber Notes ($11.9 million net of
principal in respect of Timber Notes held in the SAR  Account),  an amount equal
to Scheduled Amortization, using funds held in the SAR Account.

     As previously  announced,  the estimates of ScoPac  indicated that its cash
flows from  operations,  together with funds  available under the ScoPac Line of
Credit  and other  available  funds,  would be  insufficient,  by a  substantial
amount,  to pay the entire  amount of interest due on the July 20, 2006,  Timber
Notes payment date. As the July 20, 2006,  Timber Notes payment date approached,
it became  apparent  the  ScoPac's  estimates  would prove  correct and that the
remaining  cash   shortfall  as  of  such  Timber  Notes  payment  date,   after
consideration  of the funds made available from the ScoPac Land Sale Program and
the MGI  timber/log  purchases  discussed  above,  would be  approximately  $2.1
million. Based upon review of its existing  alternatives,  ScoPac requested that
Palco make an early payment, equal to the $2.1 million shortfall,  in respect of
certain  logs that had already  been  delivered  to and  purchased by Palco from
ScoPac. Palco approved and delivered the early log payment.

     On the Timber  Notes  payment  date in July 2006,  ScoPac used its existing
cash  resources,  all of the remaining  funds available under the ScoPac Line of
Credit, the additional funds made available from the ScoPac Land Sale Program of
$10.2 million, a $3.7 million  timber/log  purchase by MGI, and the $2.1 million
early log  payment  by Palco to pay all of the $27.1  million  of  interest  due
($25.4  million net of interest  due in respect of Timber  Notes held in the SAR
Account).  ScoPac also repaid  $10.0  million of  principal  on the Timber Notes
($6.2  million  net of  principal  in  respect  of Timber  Notes held in the SAR
Account), an amount equal to Scheduled Amortization, using funds held in the SAR
Account.

     ScoPac also expects to incur substantial  interest shortfalls over at least
the next several years.  The failure of ScoPac to pay all of the interest on the
Timber  Notes when due would  constitute  an event of  default  under the Timber
Notes Indenture.  There can be no assurance that ScoPac will be able to generate
sufficient additional liquidity to fund the expected future cash shortfalls.  To
the extent  that  ScoPac is unable to  generate  sufficient  liquidity  from the
ScoPac Land Sale Program or other sources,  the Company expects that ScoPac will
be  forced  to  take  extraordinary  actions,  which  may  include:  laying  off
employees,  shutting down various  operations,  and seeking protection by filing
under the Bankruptcy Code.

     Palco Liquidity Update
     As of December 31, 2005, and June 30, 2006, Palco and Britt were in default
under the Old Palco Term Loan and the Old Palco Revolving Credit Facility due to
financial covenant breaches. In the first half of 2006, additional liquidity was
needed at Palco and Palco  borrowed an  aggregate  of $20.0  million from MGI to
meet its cash shortfalls.  Palco's liquidity shortfalls during the first half of
2006  resulted  primarily  from  reduced log supply from ScoPac and  operational
inefficiencies  related to the large log  processing  line at Palco's new Scotia
sawmill.

     On July 18, 2006,  Palco and Britt,  as Borrowers,  closed on the New Palco
Term Loan, a new five-year  $85.0 million  secured term loan,  and the New Palco
Revolving  Credit  Facility,  a new five-year $60.0 million secured  asset-based
revolving credit facility.  The New Palco Term Loan was fully funded at closing.
The New Palco Term Loan and the New Palco Revolving Credit Facility required MGI
to provide a $10.0 million  subordinated  loan to the Borrowers,  which was also
funded at closing. The Borrowers used approximately (i) $34.0 million of the New
Palco Term Loan to pay off the Old Palco Term  Loan;  (ii) $22.5  million of the
New Palco Term Loan to pay off the Old Palco Revolving  Credit Facility and cash
collateralize  previously  existing letters of credit; and (iii) $6.0 million to
pay transaction  costs.  The remaining funds at closing of $32.5 million will be
used for general  corporate  purposes.  The Borrowers  terminated  the Old Palco
Revolving  Credit  Facility and the Old Palco Term Loan.  The Borrowers have not
made any  borrowings  under the New Palco  Revolving  Credit  Facility  to date,
although they currently have availability in excess of $20.0 million.

     The amount  available for borrowings  under the New Palco Revolving  Credit
Facility  is  normally  the  sum  of 85% of  the  Borrowers'  eligible  accounts
receivable  plus the lesser of (i) 80% of the book value of Borrowers'  eligible
inventory or (ii) 85% of the net orderly  liquidation  value of such  inventory.
However,  during  each  period  from  October 15 through  January 15, the amount
available for borrowing under the New Palco Revolving Credit Facility is the sum
of 95% of Borrowers'  eligible accounts receivable plus the lesser of (i) 90% of
the book value of Borrowers'  eligible  inventory or (ii) 95% of the net orderly
liquidation  value of such inventory.  The amount  available under the New Palco
Revolving  Credit Facility may not exceed $60.0 million,  subject to limitations
such as the ability of the lender to establish reasonable reserves.

     The New Palco Term Loan  bears  interest  at the rate of LIBOR plus  8.75%.
Loans under the New Palco Revolving Credit Facility bear interest at the rate of
LIBOR  plus  2.75% or prime  plus  0.75%,  at the  Borrowers'  option;  however,
incremental  borrowings  made during the period from October 15 through  January
15,  bear  interest  at the rate of LIBOR  plus 4.50% or prime  plus  2.50%,  as
applicable. The New Palco Revolving Credit Facility matures on July 18, 2011.

     Both the New Palco Term Loan and the New Palco  Revolving  Credit  Facility
contain substantially  identical restrictive covenants that limit the Borrowers'
ability to incur debt,  grant  liens,  make  investments,  pay  dividends,  make
capital  expenditures  or merge or  consolidate,  and require the  Borrowers' to
maintain a minimum level of EBITDA,  along with a minimum fixed charge  coverage
ratio and maximum leverage ratio throughout the life of the loans. The operating
cash flow  estimates  used to  establish  the EBITDA  maintenance  covenant  are
subject to a number of assumptions  about future operating cash flows and actual
results could differ  materially from these  estimates.  The New Palco Term Loan
also requires the Borrowers to repay a  substantial  portion of the  outstanding
principal of the New Palco Term Loan with the net proceeds  from the Palco Asset
Sale Program, including the real property associated with Palco's former Fortuna
and Carlotta sawmills, and Palco-owned homes to be sold after certain milestones
have been met. Any remaining principal balance of the New Palco Term Loan is due
on July  18,  2011.  Accordingly,  continued  compliance  with  these  new  debt
facilities is dependent on Palco's  ability to meet its EBITDA  projections  and
timely complete  required asset sales. The New Palco Term Loan and the New Palco
Revolving  Credit  Facility  contain  customary  events of default and customary
remedies with respect to the occurrence of an event of default.

     The New Palco  Term  Loan and New  Palco  Revolving  Credit  Facility  each
include prepayment  premiums of 3%, 2% and 1% that will be payable in connection
with any  prepayment of the New Palco Term Loan or reduction or  termination  of
the New Palco  Revolving  Credit  Facility  during the  first,  second and third
years,  respectively.  Under  the New Palco  Term  Loan and New Palco  Revolving
Credit Facility,  Palco is permitted to invest up to $5.0 million in ScoPac.  No
such investment had been made or committed to be made by Palco, and there can be
no  assurance  that Palco would in the future  determine  or be able to make any
such investment in whole or part.

     Potential Impact on Registrant and Certain Related Entities
     The  liquidity  issues  being  experienced  by ScoPac,  and those  recently
experienced by Palco should they recur, could result in claims against and could
have adverse  impacts on MAXXAM  Parent,  MGHI and/or MGI.  For  example,  under
ERISA,  were Palco to terminate its pension  plan,  MAXXAM Parent and its wholly
owned  subsidiaries  would be jointly  and  severally  liable  for any  unfunded
pension plan obligations.  The unfunded termination  obligation  attributable to
Palco's  pension  plan as of  December  31,  2005,  is  estimated  to have  been
approximately   $31.0  million  based  upon  annuity  placement   interest  rate
assumptions  as of December 31, 2005.  In addition,  it is possible that certain
transactions could be completed in connection with a potential  restructuring or
reorganization  of Palco or  ScoPac,  such as a sale of all or a portion  of the
equity  ownership in Palco and/or  ScoPac,  a sale of a  substantial  portion of
Palco's and/or  ScoPac's  assets and/or a cancellation of some or all of Palco's
and/or  ScoPac's  indebtedness,  which could require the utilization of all or a
substantial  portion of, or the loss of a significant  portion of, the Company's
net operating  losses or other tax  attributes  for federal and state income tax
purposes and could require tax payments.

     Under generally accepted accounting principles,  consolidation is generally
required for investments of more than 50% of the outstanding  voting stock of an
investee,  except when  control is not held by the majority  owner.  Under these
rules,  legal  reorganization  or  bankruptcy  represent  conditions  which  can
preclude  consolidation  in instances  where control  rests with the  bankruptcy
court,  rather  than  the  majority  owner.  One of the  actions  that  could be
considered  by  ScoPac  and/or  Palco  is  seeking   protection  by  filing  for
bankruptcy.  Were this to occur, the financial results of the subsidiaries which
file for bankruptcy would be deconsolidated on the date of such filing,  and the
Company would begin reporting its investment in such subsidiaries using the cost
method.  If Palco  and/or  ScoPac  were among the  subsidiaries  which filed for
bankruptcy,  the resulting impact on the Company's financial statements would be
significant.

     The following  condensed pro forma  financial  information  reflects  MGI's
results on a  deconsolidated  basis,  and the impact of reporting  the Company's
investment  in MGI on the  cost  method  (in  millions).  This  information  is,
however, on a pro forma basis only and the actual impact of a deconsolidation at
some point in the future would differ.  Furthermore,  this pro forma information
assumes that MGI and all of its  subsidiaries  file for bankruptcy,  rather than
the impact of only one or more subsidiaries filing.

                                                                                       Three Months    Six Months
                                                                                           Ended          Ended
                                                                                       June 30, 2006  June 30, 2006
                                                                                       -------------- --------------
Revenues                                                                              $    29.7       $     72.1
Costs and expenses                                                                        (27.8)           (58.4)
                                                                                      ------------------------------
Operating income                                                                            1.9             13.7
MAXXAM's equity in MGI's losses                                                           (14.9)           (35.9)
Other expenses, net                                                                        (2.4)            (2.7)
Cumulative effect of accounting change                                                        -             (0.7)
Income tax benefit                                                                          4.2              4.2
                                                                                      ------------------------------
Net loss                                                                              $   (11.2)       $   (21.4)
                                                                                      ==============================

                                                                                                         As of
                                                                                                     June 30, 2006
                                                                                                   -----------------

Current assets                                                                                     $         221.6
Property, plant and equipment (net)                                                                          236.2
Other assets                                                                                                 149.5
                                                                                                   -----------------
      Total assets                                                                                 $         607.3
                                                                                                   =================
Current liabilities                                                                                           45.9
Long-term debt, less current maturities                                                                      218.2
Other liabilities                                                                                             56.2
Losses recognized in excess of investment in MGI and certain intercompany items                              475.7
Losses recognized in excess of investment in Kaiser                                                          516.2
                                                                                                   -----------------
       Total liabilities                                                                                   1,312.2
Stockholders' deficit                                                                                       (704.9)
                                                                                                  -----------------
       Total liabilities and stockholders' deficit                                                 $         607.3
                                                                                                   =================

     In the event that MGI and/or any of it  subsidiaries  file for  bankruptcy,
the Company  believes that it is not probable that it would be obligated to fund
losses related to its investment in such  subsidiaries,  except as it relates to
certain pension funding obligations and potential future tax payments,  as noted
above.

     Kaiser Update

     On February  12,  2002,  Kaiser and certain of its  subsidiaries  filed for
reorganization  under  Chapter  11 of the  Bankruptcy  Code.  Kaiser's  plan  of
reorganization,  which provides for the cancellation of the Company's 50,000,000
Kaiser common shares without  consideration or obligation,  was confirmed by the
Kaiser  Bankruptcy  Court in February  2006.  On July 6, 2006,  Kaiser's plan of
reorganization  became  effective  and Kaiser  emerged  from  bankruptcy.  These
consolidated  financial  statements do not reflect any adjustment related to the
deconsolidation  of Kaiser other than  presenting  the  Company's  investment in
Kaiser using the cost method.  The Company expects to reverse the $516.2 million
of losses in  excess of its  investment  in  Kaiser,  net of  accumulated  other
comprehensive  losses  of $85.3  million  related  to  Kaiser,  and  expects  to
recognize  the net  amount,  including  the related  tax  effects,  in the third
quarter of 2006, the period in which the Company's Kaiser Shares were cancelled.
As a result of the  cancellation  of the Company's  Kaiser  Shares in 2006,  the
Company   expects  it  will  take  a  worthless  stock  deduction  on  its  2006
consolidated federal income tax return.  However, due to uncertainties regarding
whether  the  Company  will  ultimately  realize  the  resulting  tax  asset  of
approximately  $135.8  million,  the  Company  expects  it will be  required  to
establish a full valuation allowance when the effects of the cancellation of the
Company's Kaiser Shares are recognized in the Company's  consolidated  financial
statements.

     The following condensed pro forma financial information reflects the impact
of the  cancellation of the Company's Kaiser shares as if the event had occurred
on January 1, 2006 (in millions):
                                                                                                      Six Months
                                                                                                         Ended
                                                                                                    June 30, 2006
                                                                                                    ----------------
Revenues                                                                                           $         143.7
Costs and expenses                                                                                          (135.4)
                                                                                                   -----------------
Operating income                                                                                               8.3
MAXXAM's equity in Kaiser losses                                                                             430.9
Other expenses, net                                                                                          (33.2)
Cumulative effect of accounting change                                                                        (0.7)
Income tax benefit                                                                                             4.2
                                                                                                   -----------------
Net income                                                                                         $         409.5
                                                                                                   =================

                                                                                                         As of
                                                                                                     June 30, 2006
                                                                                                   -----------------

Current assets                                                                                     $         256.7
Property, plant and equipment (net)                                                                          343.1
Other assets                                                                                                 375.4
                                                                                                   -----------------
      Total assets                                                                                 $         975.2
                                                                                                   =================
Current liabilities                                                                                          161.3
Long-term debt, less current maturities                                                                      914.0
Other liabilities                                                                                             88.6
                                                                                                   -----------------
      Total liabilities                                                                                    1,163.9
Stockholders' deficit                                                                                       (188.7)
                                                                                                   -----------------
      Total liabilities and stockholders' deficit                                                  $         975.2
                                                                                                   =================

     Reclassifications

     Certain  reclassifications  have  been  made to prior  years'  consolidated
financial statements to be consistent with the current year's presentation. Cash
held in brokerage  accounts has been reclassified from marketable  securities to
cash  and  cash  equivalents  in  the  Consolidated  Balance  Sheets  and in the
Consolidated Statements of Cash Flows.

     Use of Estimates and Assumptions

     The  preparation  of financial  statements  in accordance  with  accounting
principles  generally  accepted in the United States of America requires the use
of estimates and assumptions  that affect (i) the reported amounts of assets and
liabilities  (ii) the disclosure of contingent  assets and liabilities  known to
exist as of the date the  financial  statements  are  published  and  (iii)  the
reported  amount  of  revenues  and  expenses   recognized  during  each  period
presented.   The  Company  reviews  all  significant   estimates  affecting  its
consolidated financial statements on a recurring basis and records the effect of
any necessary adjustments prior to filing the consolidated  financial statements
with the Securities and Exchange Commission. Adjustments made to estimates often
relate to improved  information  not  previously  available.  Uncertainties  are
inherent in such estimates and related assumptions;  accordingly, actual results
could differ from these estimates.

     Risks and  uncertainties  are inherent with respect to the ultimate outcome
of the  matters  discussed  in Note  7.  The  results  of a  resolution  of such
uncertainties  could  have  a  material  effect  on the  Company's  consolidated
financial   position,   results  of  operations   or  liquidity.   In  addition,
uncertainties  related to the  projection of future  taxable income could affect
the  realization  of the  Company's  deferred  tax assets.  Estimates  of future
benefit payments used to measure the Company's pension and other  postretirement
benefit  obligations  are  subject  to a  number  of  assumptions  about  future
experience,  as are the estimated  future cash flows projected in the evaluation
of long-lived assets for possible  impairment.  To the extent there are material
differences between these estimates and actual results,  the Company's financial
statements or liquidity could be affected.

2.   New Accounting Standards

     Accounting for Stock Options
     The Company  adopted SFAS No. 123(r)  effective  January 1, 2006.  SFAS No.
123(r)  requires  compensation  costs  related  to  share-based  payments  to be
determined  by the fair value of the equity or liability  instruments  issued on
the grant date.  Compensation  cost is required to be recognized over the period
that an employee provides service in exchange for the award and these awards are
required to be remeasured each reporting  period.  The adoption of this standard
resulted in an expense of $0.7 million in the first quarter of 2006 representing
the cumulative impact of awards exercisable on January 1, 2006.

     Exchanges of Nonmonetary Assets
     In December  2004,  the FASB issued SFAS No. 153.  SFAS No. 153 is based on
the principle that  exchanges of nonmonetary  assets should be measured based on
the fair value of the assets exchanged.  The adoption of SFAS No. 153 on January
1, 2006, did not have an impact on the Company's financial statements.

     Accounting Changes and Error Corrections
     In May 2005, the FASB issued SFAS No. 154,  which changes the  requirements
applicable to accounting for and reporting of a change in accounting  principle.
SFAS No.  154  requires  retrospective  application  of a change  in  accounting
principle to prior periods' financial statements,  unless it is impracticable to
determine  either the  period-specific  effects or the cumulative  effect of the
change.  SFAS No. 154 is effective for  accounting  changes and  corrections  of
errors made in fiscal years  beginning  after December 15, 2005. The adoption of
SFAS No.  154 on  January  1,  2006,  did not have an  impact  on the  Company's
financial statements.

     Accounting for Uncertainty in Income Taxes
     In June 2006,  the FASB issued FIN No. 48, which  defines the threshold for
recognizing  the benefits of  uncertain  tax return  positions in the  financial
statements. FIN No.48 is effective for fiscal years beginning after December 15,
2006.  The Company is in the process of evaluating  the effects of FIN No. 48 on
its financial statements.

3.   Segment Information and Other Items

     Net sales and  operating  income  (loss) for each  reportable  segment  are
presented in the  Consolidated  Statements  of  Operations.  Operating  loss for
"Corporate"   represents  general  and  administrative   expenses  not  directly
attributable  to  the  reportable   segments.   The  amounts  reflected  in  the
"Corporate" column also serve to reconcile the total of the reportable segments'
amounts to totals in the Company's consolidated financial statements.

     The following table presents certain other unaudited financial  information
by reportable segment (in millions).

                                                                    Reportable Segments
                                                                Forest     Real                     Consolidated
                                                              Products   Estate   Racing  Corporate   Total
                                                             ---------- -------- -------- ---------- ------------

                                                             ---------- -------- -------- ----------- -----------
Depreciation, depletion and amortization for the three
  months ended:
  June 30, 2006                                              $   4.6     $   3.6 $   0.4   $      -    $    8.6
  June 30, 2005                                                  4.9         3.5     0.4        0.1         8.9

Depreciation, depletion and amortization for the six
  months ended:
  June 30, 2006                                              $   9.4     $   7.2 $   0.7   $    0.1    $   17.4
  June 30, 2005                                                  9.8         7.1     0.8        0.1        17.8

Total assets as of:
  June 30, 2006                                              $ 395.0     $ 353.8 $  37.5   $  188.9    $  975.2
  December 31, 2005                                            421.4       345.3    36.4      245.2     1,048.3

4.   Debt

     Palco Credit Agreements

     At December  31, 2005,  and June 30, 2006,  Palco and Britt were in default
under the Old Palco Term Loan and the Old Palco Revolving Credit Facility due to
financial covenant breaches. The existence of the defaults required Palco to pay
interest on amounts  borrowed  under the Old Palco Term Loan at a per annum rate
2% higher than the rate at which interest  would be owed if no default  existed.
As of June 30, 2006, $33.4 million was outstanding under the Old Palco Term Loan
and $19.5  million,  consisting of  borrowings  of $9.3 million and  outstanding
letters  of  credit  of $10.2  million,  was  outstanding  under  the Old  Palco
Revolving Credit Facility.

     On July 18, 2006,  Palco and Britt,  as Borrowers,  closed on the New Palco
Term Loan and the New Palco Revolving  Credit  Facility.  See Note 1, "Financial
Difficulties  of Forest  Products  Entities  - Palco  Liquidity  Update",  for a
description of these two new facilities.

     ScoPac Line of Credit
     The ScoPac Line of Credit allows ScoPac to borrow up to one year's interest
on the aggregate  outstanding  principal balance of the Timber Notes. On May 18,
2006,  the ScoPac Line of Credit was  extended  to July 6, 2007.  At or near the
completion of such extension,  ScoPac intends to request that the ScoPac Line of
Credit be extended for an  additional  period of not less than 364 days.  If not
extended,  ScoPac may draw upon the full  amount  available.  The  amount  drawn
would,  to  the  extent  of  available  funds,  be  repayable  in 12  semiannual
installments  on each Timber  Notes  payment  date (after the payment of certain
other items,  including the Aggregate Minimum Principal  Amortization Amount, as
defined,  then due),  commencing  approximately two and one-half years following
the date of the draw.  At June 30,  2006,  the  maximum  availability  under the
ScoPac Line of Credit was $54.1 million,  and outstanding  borrowings were $42.2
million.

     ScoPac Timber Notes
     On the Timber Notes payment date in January 2006,  ScoPac used its existing
cash  resources,  all of the remaining  funds available under the ScoPac Line of
Credit,  and the additional funds made available from a $2.3 million  timber/log
purchase by MGI, to pay all of the $27.7 million of interest due ($25.8  million
net of interest due in respect of Timber Notes held in the SAR Account).  ScoPac
also repaid $19.3 million of principal on the Timber Notes ($11.9 million net of
principal in respect of Timber Notes held in the SAR  Account),  an amount equal
to Scheduled Amortization, using funds held in the SAR Account.

     On the Timber  Notes  payment  date in July 2006,  ScoPac used its existing
cash  resources,  all of the remaining  funds available under the ScoPac Line of
Credit, the additional funds made available from the ScoPac Land Sale Program of
$10.2  million,  a $3.7 million  timber/log  purchase by MGI, and a $2.1 million
early log  payment  by Palco to pay all of the $27.1  million  of  interest  due
($25.4  million net of interest  due in respect of Timber  Notes held in the SAR
Account).  ScoPac also repaid  $10.0  million of  principal  on the Timber Notes
($6.2  million  net of  principal  in  respect  of Timber  Notes held in the SAR
Account), an amount equal to Scheduled Amortization, using funds held in the SAR
Account.

     As  discussed   further  in  Note  1,  ScoPac  is  experiencing   financial
difficulties due to regulatory  restrictions on harvesting and other factors. As
a result,  ScoPac expects to incur substantial interest shortfalls over at least
the next several years. Such an event would constitute an event of default under
the  Timber  Notes  Indenture.  In the event of a  failure  to pay  interest  or
principal on the Timber Notes in full when due, the Trustee or the holders of at
least 25% of the aggregate  outstanding principal amount of the Timber Notes may
cause all principal,  interest and other amounts  related to the Timber Notes to
become immediately due and payable.  Also, in the event of a failure by Palco or
ScoPac to  perform  its  respective  covenants  or  agreements  under the Master
Purchase  Agreement or by Palco to perform its covenants or agreements under the
Services Agreement, which failure in the case of certain covenants or agreements
continues  for 30 days after  notice  from the  Trustee or the holders of 25% or
more of the outstanding  principal  amount of the Timber Notes, the holders of a
majority of the aggregate  outstanding  principal amount of the Timber Notes may
cause all principal,  interest and other amounts  related to the Timber Notes to
become immediately due and payable.  In the event of any such acceleration,  the
Agent  under the ScoPac Line of Credit may also  accelerate  the  advances  then
outstanding.  If such  accelerations  of Timber Notes and/or  advances under the
ScoPac  Line of Credit  occur,  the Trustee may  exercise  all rights  under the
Indenture  and  related  security  documents,  including  applying  funds to pay
accelerated amounts, and selling the ScoPac Timberlands and ScoPac Timber Rights
and other assets and using the proceeds thereof to pay accelerated  amounts.  In
the event that ScoPac were to seek  protection  by filing  under the  Bankruptcy
Code, all amounts  related to the Timber Notes would become  immediately due and
payable  under the  Indenture  and all advances  under the ScoPac Line of Credit
could be accelerated.  The foregoing rights of the Trustee and holders of Timber
Notes would be subject to the rights of ScoPac under the  Bankruptcy  Code if it
sought protection by filing under the Bankruptcy Code.

     U.S. Bank, the Trustee under the Timber Notes Indenture, resigned effective
May 1, 2006. ScoPac appointed  Deutsche Bank National Trust Company as successor
Trustee under the Indenture, which appointment was accepted and became effective
May 1, 2006.

     At June 30, 2006, the SAR Account balance was $58.9 million  (consisting of
$45.8  million of Timber Notes held in the SAR Account and $13.1 million in cash
and  marketable  securities),  all of which is restricted  for future  principal
payments on the Timber Notes.  Such cash and marketable  securities  will not be
sufficient to cover the Scheduled  Amortization on the January 20, 2007,  Timber
Notes payment date and beyond.  Accordingly,  ScoPac's ability to make Scheduled
Amortization  payments  on the  Timber  Notes  in 2007 and  beyond  from the SAR
Account  is  dependent  upon  ScoPac's  ability  to sell all or a portion of the
Timber Notes held in the SAR Account. No assurance can be given that ScoPac will
be  successful  in its efforts to sell the Timber  Notes held in the SAR Account
before the January 20,  2007,  Timber  Notes  payment date or as to the proceeds
that might result from any such sale.

     Letters of Credit
     As a result of  S&P  credit  rating  actions  related to Palco in 2005,
Palco was  required  to post a $9.9  million  letter of credit with the State of
California  to secure its workers  compensation  liabilities.  On July 18, 2006,
following  the  termination  of the Old Palco  Revolving  Credit  Facility,  the
letters of credit outstanding under the Old Palco Revolving Credit Facility were
collateralized using proceeds from the New Palco Term Loan.

     The Company's real estate segment has letters of credit  outstanding in the
amount  of  $9.0  million  to  satisfy  certain   liability   insurance   policy
requirements.

5.   Income Taxes

     The Company  generated a loss before income taxes and cumulative  effect of
accounting  change of $15.4 million and $24.9 million for the second quarter and
first six months of 2006,  respectively;  however,  the Company has not recorded
any tax  provision or benefit  related to current  period  income or loss as the
Company  anticipates  an effective tax rate of zero for the year ended  December
31, 2006. Each period, the Company evaluates  appropriate factors in determining
the realizability of the deferred tax assets  attributable to losses and credits
generated  in that  period  and  those  being  carried  forward.  Based  on this
evaluation,  the  Company  provided  valuation  allowances  with  respect to the
deferred tax assets  attributable to the losses and credits generated during the
six months ended June 30, 2006.  These valuation  allowances were in addition to
the valuation allowances which were provided in prior years.

     Texas  House Bill 3, signed  into law in May 2006,  eliminates  the taxable
capital and earned surplus  components of the existing  Texas  franchise tax and
replaces these  components  with a margin-based  franchise tax. There will be no
impact on the Company's  2006 Texas current state income taxes as the new law is
effective  for  reports  due on or after  January  1, 2008  (based  on  business
activity during 2007).  The Company is required to include the impact of the tax
law change on its  deferred  state  income  taxes in income for the period  that
includes the date of enactment.  This tax law change  resulted in a reduction in
the Company's deferred state income taxes in the amount of $4.1 million,  net of
federal benefit, and the net tax benefit was recognized in the second quarter of
2006.

6.   Employee Benefit Plans

     The components of pension and other postretirement  benefits expense are as
follows (in millions):

                                           Pension          Medical/Life      Pension               Medical/Life
                                           Benefits           Benefits        Benefits                Benefits
                                       ----------------- ------------------- ------------------  -------------------
                                            Three Months Ended June 30,             Six Months Ended June 30,
                                       ------------------------------------- ---------------------------------------
                                         2006    2005      2006      2005     2006      2005       2006      2005
                                       ------- --------- --------- --------- ------- ----------  -------- ----------
Components of net periodic benefit
  costs:
  Service cost                         $    -  $  1.0    $  0.1    $   0.1   $   -   $  1.9      $   0.2   $   0.2
  Interest cost                           1.4     1.5       0.1        0.2     2.7      2.9          0.2       0.4
  Expected return on assets              (1.4)   (1.3)        -          -    (2.8)    (2.6)           -         -
  Amortization of prior service costs       -       -         -       (0.1)      -        -            -      (0.2)
  Recognized net actuarial (gain)loss     0.1     0.2         -          -     0.2      0.4            -         -
                                       ------- --------- --------- --------- ------- ----------  -------- ---------
  Net periodic benefit costs           $  0.1  $  1.4    $  0.2    $   0.2   $ 0.1   $  2.6      $   0.4  $    0.4
                                       ======= ========= ========= ========= ======= =========== ======== =========

7.   Regulatory and Environmental Factors and Contingencies

     Regulatory and Environmental Factors

     Regulatory and environmental  matters and litigation have had a significant
adverse effect on the Company's forest products  segment,  which is subject to a
variety of  California  and federal  laws and  regulations,  as well as the HCP,
dealing with timber harvesting practices,  threatened and endangered species and
habitat for such species,  air and water quality and other  matters.  Compliance
with such laws and  regulations  also plays a significant  role in the Company's
Forest Products business.

     Environmental  Plans From March 1999 until  October 2002,  ScoPac  prepared
THPs in accordance with the SYP. The SYP was intended to comply with regulations
of the CDF requiring timber companies to demonstrate  sustained yield, i.e. that
their projected average annual harvest for any decade within a 100-year planning
period  would not  exceed  the  average  annual  growth  level at the end of the
100-year planning period.  These regulations allow companies which do not have a
sustained  yield plan to follow  alternative  procedures to document  compliance
with   the   sustained   yield    requirements.    As   discussed   below   (see
"-Contingencies-Timber Harvest Litigation"), on October 31, 2003, the California
trial court hearing the EPIC-SYP/Permits lawsuit entered a judgment invalidating
the SYP and the California  Permits,  although an appellate  court reversed that
decision in  December  2005.  The  plaintiffs  appealed  the  appellate  court's
decision to the California Supreme Court, which has indicated it will review the
matter.  As a result of an earlier  stay order and the trial  court's  judgment,
ScoPac from  October 2002 until March 2005  obtained  review and approval of its
THPs under an  alternative  procedure in the  California  forest  practice rules
known as Option C. Option C is available  to  landowners  who have  submitted an
"Option A" plan to the CDF for review (as was done by Palco). An approved Option
A plan is an  alternative  to  obtaining  approval  of a  sustained  yield plan.
Palco's Option A plan was approved by the CDF in March 2005. ScoPac is currently
relying upon the Option A Plan to obtain THP approvals, and will likely continue
to do so in the future.

     The Federal Permits allow  incidental  "take" of certain  federally  listed
species  located on the Palco  Timberlands  so long as there is no "jeopardy" to
the continued  existence of such species.  The HCP identifies the measures to be
instituted  in order to minimize and mitigate the  anticipated  level of take to
the greatest  extent  practicable.  The HCP and Federal Permits have terms of 50
years.  Since the consummation of the Headwaters  Agreement in March 1999, there
has  been a  significant  amount  of  work  and  additional  costs  required  in
connection with the implementation of the Environmental Plans, and this work and
the additional costs are expected to continue for the foreseeable future.

     Water Quality
     Laws and  regulations  dealing with water  quality are  impacting the Palco
Companies primarily in four areas:  efforts by the EPA and the North Coast Water
Board to establish  TMDLs in  watercourses  that have been  declared to be water
quality  impaired;  actions  by the North  Coast  Water  Board to  impose  waste
discharge  reporting   requirements  in  respect  of  watersheds  on  the  Palco
Timberlands and in some cases,  clean-up or preventive measures;  actions by the
North Coast Water Board during the THP  approval  process  which impose  certain
operational requirements on individual THPs; and the development of WWDRs by the
North  Coast  Water  Board  and its  staff  for  the  Freshwater  and Elk  River
watersheds.

     Under the CWA, the EPA is required to establish TMDLs in watercourses  that
have been declared to be "water  quality  impaired." The EPA and the North Coast
Water  Board  are in  the  process  of  establishing  TMDLs  for  many  northern
California rivers and certain of their tributaries,  including nine watercourses
that flow within the Palco Timberlands.  On the Palco Timberlands,  the relevant
contaminant  is simple  sediment - dust,  dirt and gravel - that is  abundant in
watercourses  largely as a function of the area's  normally  heavy  rainfall and
soil that erodes easily.  The Company expects the process of establishing  TMDLs
to continue until at least 2010.  The EPA has issued reports  dealing with TMDLs
on three of the nine  watercourses.  The agency  indicated that the requirements
under the HCP would  significantly  address the sediment issues that resulted in
TMDL requirements for these watercourses. Presently, the North Coast Water Board
is in the process of establishing the TMDL requirements  applicable to two other
watercourses,  Freshwater  and  Elk  River,  on the  Palco  Timberlands,  with a
targeted completion of 2007 for these two watercourses.  ScoPac's scientists are
actively  working  with North Coast Water Board staff to ensure that these TMDLs
recognize and incorporate the environmental  protection measures of the HCP. The
final TMDL requirements  applicable to the Palco Timberlands may require aquatic
protection  measures that are different  from or in addition to those in the HCP
or that result from the prescriptions to be developed  pursuant to the watershed
analysis process  provided for in the HCP and could further restrict  harvesting
on the Palco Timberlands.

     For each of the winter  periods  since  2002,  Palco and  ScoPac  have been
required to submit reports on sediment  discharges and erosion control practices
to the North Coast Water Board in order to conduct winter harvesting  operations
in the  Freshwater  and Elk  River  watersheds.  After  consideration  of  these
reports, the North Coast Water Board imposed requirements on the Palco Companies
to  implement  additional  mitigation  and erosion  control  practices  in these
watersheds  for each of these winter  operating  periods.  The North Coast Water
Board has also  extended the  requirements  for certain  mitigation  and erosion
control practices to three additional watersheds (Bear, Jordan and Stitz Creek).
The Palco Companies and the North Coast Water Board are currently in discussions
to determine  what these measures will be. The  requirements  imposed to date by
the North  Coast  Water  Board have  significantly  increased  operating  costs;
additional  requirements  imposed in the future could further increase costs and
cause additional delays in THP approvals.

     The North Coast Water Board has also issued the Elk River Orders, which are
aimed at addressing existing sediment production sites through clean up actions.
The North Coast Water Board has also  initiated the process that could result in
similar  orders  for  the  Freshwater   and  Bear  Creek   watersheds,   and  is
contemplating similar actions for the Jordan and Stitz Creek watersheds. The Elk
River Orders have resulted in increased  costs to Palco that could extend over a
number of years.  Additional orders for other watersheds (should they be issued)
may also result in further cost increases.

     The  North  Coast  Water  Board in  December  2003  directed  its  staff to
formulate  WWDRs  for the  Freshwater  and Elk  River  watersheds  on the  Palco
Timberlands. As harvesting activities on the Palco Timberlands cannot readily be
moved between watersheds due to, among other things,  historic harvest patterns,
adjacency restrictions,  and the age classes of trees,  development of WWDRs and
the various  other  matters  described  herein are expected to result in reduced
harvest levels in 2006 and beyond.

     As WWDRs  had not yet been  formulated  for the  Freshwater  and Elk  River
watersheds,  the North  Coast  Water  Board for some time  failed to release for
harvest a number of ScoPac's  THPs that had already  been  approved by the other
governmental agencies which approve ScoPac's THPs. In January and February 2005,
the  Executive  Officer of the staff of the North  Coast  Water  Board  enrolled
sufficient  THPs to allow the harvest of up to 50% of the CDF Harvest  Limit for
these two watersheds. On March 16, 2005, the North Coast Water Board ordered the
enrollment of  additional  THPs that would allow the harvest of up to 75% of the
CDF Harvest Limit for these two watersheds. Following third party appeal of this
decision,  the State Water Board issued the State Water Board  Order,  which had
the effect of  disallowing  further  harvesting on the additional 25% of the CDF
Harvest  Limit  approved by the North Coast Water Board on March 16,  2005.  The
State  Water  Board's  decision  also  had the  effect  of  disallowing  further
harvesting in the Freshwater and Elk River  watersheds until WWDRs for these two
watersheds were adopted by the North Coast Water Board. On July 14, 2005,  Palco
and ScoPac  filed the State Water  Board  action  requesting  both a stay of the
State Water Board  Order and a writ of mandate  reversing  the State Water Board
Order. The Court subsequently  denied the request for a stay, but granted a writ
of mandate,  thus requiring the State Water Board to set aside its June 16, 2005
order. The Court also remanded the matter to the State Water Board to reconsider
whether the North Coast Water Board's  enrollment of additional THPs was proper.
Further proceedings before the State Board have yet to be scheduled.

     While the Court ordered that the State Water Board must take further action
before August 1, 2006, it has not done so. In the meantime,  on May 8, 2006, the
North  Coast  Water  Board  adopted  WWDRs  for the  Freshwater  and  Elk  River
watersheds,  which has the effect of allowing harvesting in these two watersheds
to begin once THPs are  enrolled,  up to  approximately  50% of the CDF  Harvest
Limit  for  these  two  watersheds.  Additional  THPs,  bringing  the  total  to
approximately  75% of the CDF  Harvest  Limit for these two  watersheds,  may be
enrolled upon approval by the Executive Officer of the North Coast Water Board's
staff of a monitoring  plan,  which has been  submitted by Palco.  While certain
THPs related to these two  watersheds  have been  enrolled,  and  harvesting has
begun,  there can be no  assurance  that  additional  THPs  related to these two
watersheds  will  ultimately  be enrolled or  harvested as planned in 2006 or in
future  years as,  among  other  things,  Palco's  monitoring  plan has not been
approved.  The  North  Coast  Water  Board's  adoption  of these  WWDRs has been
appealed to the State Water Board, but the appeals are being held in abeyance in
order  to see  how  the  implementation  of the  WWDRs  proceeds.  While  ScoPac
continues to project  that its annual  harvest  level over the  ten-year  period
beginning 2006 will be approximately  100 million board feet, this projection is
significantly  below historical annual harvest levels, and actual harvest levels
may be even lower, depending on the ultimate outcome of various assumptions.

     Effective  January 1, 2004,  California  Senate Bill 810 provides  regional
water quality control boards with additional  authority  related to the approval
of THPs on land within  impaired  watersheds.  The Company is  uncertain  of the
operational and financial  effects which will ultimately result from Senate Bill
810;  however,  because  substantially  all rivers and  waterbodies on the Palco
Timberlands  are  classified as  sediment-impaired,  implementation  of this law
could result in additional delays in obtaining  approvals of THPs, lower harvest
levels and  increased  costs and  additional  protection  measures  beyond those
contained in the HCP.

     Contingencies

     Certain  present  and former  directors  and  officers  of the  Company are
defendants  in certain of the actions  described  below.  The  Company's  bylaws
provide for  indemnification of its officers and directors to the fullest extent
permitted by Delaware law. The Company is obligated to advance  defense costs to
its officers and directors, subject to the individual's obligation to repay such
amount if it is ultimately  determined  that the  individual was not entitled to
indemnification.  In addition,  the Company's  indemnity  obligation  can, under
certain  circumstances,  include  amounts  other than defense  costs,  including
judgments and settlements.

     Timber Harvest Litigation
     Various  pending  judicial  and  administrative  proceedings,  as described
below, could affect Palco's and ScoPac's ability to implement the HCP, implement
certain approved THPs, or carry out other operations.

     In March 1999, the EPIC-SYP/Permits lawsuit was filed. This action alleged,
among other things,  various violations of the California Endangered Species Act
and the  California  Environmental  Quality  Act,  and  challenged,  among other
things,  the  validity and  legality of the SYP and the  California  Permits and
sought,  among  other  things,  to prevent  implementation  of THPs  approved in
reliance upon these documents.  A similar action, the USWA lawsuit, was filed on
the same day, and the two actions were consolidated for trial.

     Following  the  trial,  the  Court  in  October  2003  entered  a  judgment
invalidating the SYP and the California  Permits,  and in September 2004 granted
the  plaintiffs'  request for  reimbursement  of an aggregate of $5.8 million in
attorneys'  fees and  other  expenses.  The  Palco  Companies  and the  State of
California  appealed both  decisions.  On December 12, 2005, an appellate  court
reversed the trial  court's  decision  invalidating  the SYP and the  California
Permits.  The  plaintiffs  have appealed the appellate  court's  decision to the
California  Supreme  Court,  which has indicated it will review the matter.  The
defendants' appeal of the trial court's award of attorneys' fees and expenses is
still pending at the appellate court. There can be no assurance that this appeal
will be successful.

     In July 2001, the Bear Creek lawsuit was filed and later amended to add the
EPA as a defendant.  The lawsuit  alleges  that  harvesting  and other  forestry
activities  under  certain  of  ScoPac's  THPs  will  result  in  discharges  of
pollutants in violation of the CWA. The plaintiff  asserts that the CWA requires
the  defendants  to obtain a permit  from the North  Coast  Water  Board  before
beginning timber harvesting and road  construction  activities and is seeking to
enjoin these activities until such permit has been obtained.  The plaintiff also
seeks  civil  penalties  of up to  $27,500  per day for  the  alleged  continued
violation of the CWA. In October  2003,  the Court upheld the validity of an EPA
regulation  that exempts  harvesting and other forestry  activities from certain
discharge  requirements.  Both state and federal agencies,  along with Palco and
other timber companies, have relied upon this regulation for more than 25 years.
However,  the Court  interpreted  the  regulation in such a way as to narrow the
forestry  operations  that  are  exempted,  thereby  limiting  the  regulation's
applicability and subjecting culverts and ditches to permit  requirements.  This
ruling has widespread implications for the timber industry in the United States.
The case is not yet final as the trial has not yet been held, and there are many
unresolved  issues  involving  interpretation  of the Court's  decision  and its
application  to actual  operations.  The  Company has filed a motion for summary
judgment  on the  grounds  that it has met the  requirements  for a storm  water
pollution  prevention  permit  under a  general  permit,  issued by the State of
California.  The plaintiff has also filed a motion for summary  judgment seeking
to establish  Palco's  liability for discharging storm water without a permit. A
hearing on the two summary  judgment motions was held on March 6, 2006. On April
28, 2006, the Court denied both motions. Discovery was completed in May 2006. On
June 30,  2006,  EPIC filed a motion for  partial  summary  judgment  seeking to
establish  Palco's  liability,  and Palco  filed a motion for  summary  judgment
asserting  that EPIC lacks  standing to maintain the  lawsuit.  A hearing on the
parties' motions is scheduled for August 21, 2006.

     Should the Court's  October 2003  decision  ultimately  become final and be
held to apply to all of the timber  operations of Palco and ScoPac,  it may have
some  or  all  of  the  following  effects:   imposing   additional   permitting
requirements,  delaying  approvals of THPs,  increasing  harvesting  costs,  and
adding water protection  measures beyond those contained in the HCP. The Company
believes that civil penalties should not be awarded for operations that occurred
prior to the Court's decision due to the historical reliance by timber companies
on the  regulation and Palco's  belief that the  requirements  under the HCP are
adequate to ensure that sediment and pollutants  from  harvesting  activities on
the Palco  Timberlands will not reach levels harmful to the  environment.  While
the impact of a conclusion to this case that upholds the October 2003 ruling may
be adverse,  the Company  does not  believe  that such an outcome  should have a
material  adverse  impact on the  Company's  consolidated  financial  condition,
results of operations or  liquidity.  Nevertheless,  due to the numerous ways in
which the Court's  interpretation  of the regulation  could be applied to actual
operations,  there can be no assurance  that this will be the case.

     On November 20, 2002, the Cook action and the Cave action were filed, which
name Palco and certain affiliates as defendants.  The Cook action alleges, among
other things, that defendants' logging practices have contributed to an increase
in flooding along Freshwater  Creek (which runs through the Palco  Timberlands),
resulting  in  personal  injury  and  damage  to  the  plaintiffs'   properties.
Plaintiffs  further  allege that in order to have THPs  approved in the affected
areas,  the  defendants  engaged  in  certain  unfair  business  practices.  The
plaintiffs  seek,  among  other  things,  compensatory  and  exemplary  damages,
injunctive relief, and appointment of a receiver to ensure that the watershed is
restored.  The Cave action contains  similar  allegations  and requests  similar
relief with respect to the Elk River  watershed (a portion of which is contained
on the Palco Timberlands). On October 13, 2005, the Johnson action was filed and
contains  allegations similar to the Cave and Cook actions. The Company does not
believe the  resolution  of these actions  should  result in a material  adverse
effect  on its  consolidated  financial  condition,  results  of  operations  or
liquidity.

     On February 25, 2003,  the District  Attorney of Humboldt  County filed the
Humboldt DA action. The suit was filed under California's unfair competition law
and alleges that the Palco Companies used certain unfair  business  practices in
connection with completion of the Headwaters  Agreement,  and that this resulted
in the harvest of  significantly  more trees than would have  otherwise been the
case. The suit sought a variety of remedies  including a civil penalty of $2,500
for each  additional tree that has been or will be harvested due to this alleged
increase in harvest,  as well as restitution and an injunction in respect of the
additional  timber harvesting  allegedly being conducted.  On June 14, 2005, the
Court dismissed this matter in its entirety. On September 19, 2005, the District
Attorney  appealed  this  decision,  however,  the  Company  believes  that  the
dismissal and prior rulings of the Court  substantially  diminished the exposure
of the Palco Companies with respect to this matter.

     In December 2005, Palco and ScoPac filed the California  Headwaters action.
The California  Headwaters action alleges that the defendants have substantially
impaired  the  contractual  and  legal  rights  of Palco  and  ScoPac  under the
Headwaters Agreement and the related permits,  authorizations and approvals. The
California  Headwaters  action also alleges  that the actions of the  defendants
have caused the companies  substantial  damages, but does not specify an amount.
While the Claims Board has indicated  that it is  investigating  the matter,  it
failed to approve or deny the claim by the statutory deadline.  As a result, the
California  Headwaters  action is by  operation  of law  treated as having  been
denied,  and Palco and  ScoPac may now file a claim for  damages  in  California
state court.  Palco and ScoPac are  considering how best to proceed with respect
to this matter.

     OTS Contingency and Related Matters
     On December 26, 1995,  the OTS initiated the OTS action against the Company
and others  alleging,  among other  things,  misconduct by the  Respondents  and
others with respect to the failure of USAT. The OTS sought damages  ranging from
$326.6 million to $821.3 million under various  theories.  Following 110 days of
proceedings  before an administrative  law judge during 1997-1999,  and over two
years of post-trial  briefing,  on September 12, 2001,  the  administrative  law
judge issued a recommended  decision in favor of the  Respondents  on each claim
made by the OTS.  On October  17,  2002,  the OTS action  was  settled  for $0.2
million with no admission of wrongdoing on the part of the Respondents.

     As a result of the dismissal of the OTS action, a related civil action, the
FDIC  action,  alleging  damages  in excess of $250  million,  was  subsequently
dismissed.  The FDIC  action  was  originally  filed by the FDIC in August  1995
against Mr.  Charles E. Hurwitz  (Chairman  and Chief  Executive  Officer of the
Company).

     On May 31, 2000, the  Respondents  filed a counterclaim to the FDIC action.
On November 8, 2002, the Respondents filed the Sanctions  Motion.  The Sanctions
Motion  states  that the FDIC  illegally  paid the OTS to bring  the OTS  action
against the Respondents and that the FDIC illegally sued for an improper purpose
(i.e. in order to acquire timberlands held by a subsidiary of the Company).  The
Respondents  are seeking as a sanction to be made whole for the attorneys'  fees
they have paid (plus interest) in connection  with the OTS and FDIC actions.  As
of December 31, 2005,  such fees were in excess of $40.6 million.  On August 23,
2005, a U.S. District Court ruled on the Sanctions Motion,  ordering the FDIC to
pay the  Respondents  $72.3  million.  The FDIC has appealed the District  Court
decision to the Fifth Circuit Court of Appeals.  The U.S.  District  Court award
has not been accrued as of December  31, 2005 or June 30, 2006.  There can be no
assurance that the Company will ultimately collect this award.

     On January 16, 2001, the Kahn lawsuit was filed. The plaintiff  purports to
bring this action as a stockholder of the Company  derivatively on behalf of the
Company.  The  lawsuit  concerns  the OTS and FDIC  actions,  and the  Company's
advancement  of fees and  expenses  on behalf of  Federated  and  certain of the
Company's  directors  in  connection  with these  actions.  It alleges  that the
defendants have breached their fiduciary duties to the Company,  and have wasted
corporate  assets, by allowing the Company to bear all of the costs and expenses
of Federated and certain of the Company's  directors related to the OTS and FDIC
actions.  The plaintiff seeks to require  Federated and certain of the Company's
directors  to reimburse  the Company for all costs and expenses  incurred by the
Company in connection  with the OTS and FDIC actions,  and to enjoin the Company
from  advancing to Federated or certain of the  Company's  directors any further
funds for costs or expenses  associated  with these actions.  The parties to the
Kahn  lawsuit  have  agreed  to  an  indefinite  extension  of  the  defendants'
obligations to respond to the plaintiffs'  claims.  Although it is impossible to
assess the ultimate  outcome of the Kahn lawsuit,  the Company believes that the
resolution of this matter should not result in a material  adverse effect on its
consolidated financial condition, results of operations or liquidity.

     Other Matters
     On September 2, 2004,  the Company was advised that the NJDEP  alleged that
one of its former  subsidiaries  is a successor to a company  that  manufactured
munitions  for the U.S.  Navy during  World War II. The owner of the  underlying
property,  which is located in Cranbury,  New Jersey,  was seeking the Company's
participation  in efforts to address  contamination  of the site which  resulted
from such operations. In January 2005, MGI and the owner of the property entered
into an  Administrative  Consent Order with the NJDEP providing for, among other
things,  cleanup of the facility.  In April 2005, MGI filed a Complaint  against
the United States of America, the U.S. Navy, and the U.S. Army for cost recovery
and contribution; the defendants subsequently denied all of the claims. In early
2006,  the property was sold to a new owner and MGI entered into an amendment to
the  Administrative  Consent Order  substituting  the new owner for the original
property  owner.  MGI  also  reached  an  agreement  with  several   potentially
responsible  parties  regarding  cleanup  at the  site,  the  terms of which the
Company  believes will not result in a material  adverse effect on the Company's
consolidated  financial  position,  results of operations or liquidity and under
which MGI  retained its cause of action  against the  government  parties  noted
above.

     The Company is involved in other claims,  lawsuits and  proceedings.  While
uncertainties  are  inherent  in the final  outcome  of such  matters  and it is
presently  impossible  to  determine  the actual  costs that  ultimately  may be
incurred or their effect on the Company, management believes that the resolution
of such  uncertainties  and the  incurrence of such costs should not result in a
material  adverse  effect on the  Company's  consolidated  financial  condition,
results of operations or liquidity.

8.   Stock-Based Compensation Plans

     Under the  Company's  share-based  compensation  plans,  stock  options and
similar instruments may be granted to employees and outside directors at no less
than the fair market value of the  Company's  Common Stock on the date of grant.
Grants  generally  vest ratably over a five-year  period for grants to employees
and over a four-year period for grants to outside directors and expire ten years
after the grant date. Grants have generally been settled in cash upon exercise.

     Grants issued to employees and outside directors were previously  accounted
for under the intrinsic value method of accounting as defined by APB Opinion No.
25  and  related  interpretations.   Effective  January  1,  2006,  the  Company
prospectively  adopted the fair value based method of accounting for stock-based
employee  compensation  as prescribed  by SFAS No. 123(r) and  recognized a $0.7
million  charge in  January  2006,  representing  the  cumulative  effect of the
accounting change.

     The fair value of grants is determined using a Black-Scholes option-pricing
model.  The  following  assumptions  apply to the  options  granted  through the
periods presented.

                                          Six Months Ended
                                              June 30,
                                     ----------------------------
                                         2006          2005
                                     -------------- -------------
Expected volatility                        34%           40%
Expected dividends                          -             -
Expected term (in years)                 6.34          6.63
Risk-free rate                           5.10%         3.72%

     Expected  volatilities are based on historical  volatility of the Company's
Common Stock.  The dividend yield on the Company's Common Stock is assumed to be
zero since the Company has not paid  dividends in the past five years and has no
current  plans to do so in the future.  The Company uses  historical  experience
regarding  exercises  of grants to  determine  the grants'  expected  term.  The
expected  term  represents  the  period of time  that the  options  granted  are
expected to remain outstanding. The risk-free interest rate is based on the U.S.
Treasury  yield  curve in  effect  for the  expected  term of the  option at the
reporting date.

     A summary of  activity  under the  Company's  plans as of June 30,  2006 is
presented below:
                                                                         Weighted
                                                          Weighted        Average
                                                          Average        Remaining      Aggregate
                                                          Exercise      Contractual     Intrinsic
                                           Options         Price          Term (in        Value
                                                                           years)
                                         ------------- --------------- ---------------  ----------
Balance at January 1, 2006                1,114,306    $   25.06
Granted                                      22,400        32.50
Exercised                                         -            -
Forfeited or expired                        (49,693)       23.79
                                        --------------
Balance at June 30, 2006                  1,087,013    $   25.28           5.81        $     8.2
                                        ============================================== ===========
Exercisable at June 30, 2006                699,054    $   26.01           4.69        $     5.7
                                        ============================================== ===========

     Total  compensation cost for share-based  payment  arrangements for the six
months  ended June 30, 2006,  was a benefit of $3.4  million due  primarily to a
reduction in the per share market price of the  Company's  Common  Stock.  As of
June 30, 2006, total estimated compensation related to non-vested grants not yet
recognized  is $5.0  million and the  weighted  average  period over which it is
expected to be recognized is 1.8 years,  although the Company may not ultimately
be required to pay such amount.

     The following  table  illustrates the pro forma effect on net loss and loss
per share for the three months and six months ended June 30, 2005, respectively,
had the  Company  accounted  for its  grants  under  the fair  value  method  of
accounting (in millions, except per share information).

                                                                          Three months Ended     Six months Ended
                                                                             June 30, 2005         June 30, 2005
                                                                          --------------------  --------------------
Net loss, as reported                                                     $         (9.6)      $         (23.8)
 Add: Non-cash stock-based employee compensation benefit included
   in reported net loss, net of related tax effects                                 (2.2)                 (3.8)
 Deduct: Total stock-based employee compensation benefit determined
   under the fair value method for all awards, net of related tax effects            2.4                   4.1
                                                                           -------------------  --------------------
Pro forma net loss                                                        $         (9.4)      $         (23.5)
                                                                           ===================  ====================

Basic and diluted loss per share:
  As reported                                                             $         (1.60)     $         (3.98)
  Pro forma                                                                         (1.59)               (3.94)

9.   Per Share Information

     The weighted  average number of shares used to determine  basic and diluted
earnings per share was:

                                                                 Three Months Ended June     Six Months Ended June
                                                                           30,                        30,
                                                                --------------------------- ------------------------
                                                                    2006           2005        2006        2005
                                                                --------------  ----------- ----------- ------------
Weighted average shares outstanding:
 Common Stock                                                    5,665,846       5,976,447   5,816,059   5,976,488
 Effect of dilution:
    Class A Preferred Stock (1)                                          -               -           -           -
                                                                --------------  ----------  ----------- ------------
Weighted average number of common and common equivalent
 shares - Basic                                                  5,665,846       5,976,447   5,816,059   5,976,488
 Effect of dilution:
     Stock options (1)                                                   -                -          -           -
                                                                --------------  ----------  ----------- ------------
Weighted average number of common and common equivalent
 shares - Diluted                                                5,665,846       5,976,447   5,816,059   5,976,488
                                                                ==============  ==========  =========== ============
__________________

(1)  The  Class  A  Preferred  Stock  and  options  were  not  included  in  the
     computation of basic or diluted  earnings per share because the Company had
     a loss for the six months ended June 30, 2006 and 2005, respectively.

10.  Comprehensive Loss

     The following table sets forth comprehensive loss (in millions).

                                                                        Three Months Ended      Six Months Ended
                                                                             June 30,               June 30,
                                                                       ---------------------  ----------------------
                                                                         2006        2005       2006        2005
                                                                       ----------  ---------  ----------  ----------
Net loss:                                                              $   (11.2)  $   (9.6)  $  (21.4)   $   (23.8)
  Other comprehensive loss:
    Unrealized losses on available-for-sale investments                        -           -       0.2         (0.1)
                                                                       ----------  ---------  ----------  ----------
Total comprehensive loss                                               $   (11.2)  $   (9.6)  $  (21.2)   $   (23.9)
                                                                       ==========  =========  ==========  ==========

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

     The following should be read in conjunction  with the financial  statements
in Part I,  Item 1 of this  Report  and  Item 7.  "Management's  Discussion  and
Analysis  of  Financial  Condition  and  Results  of  Operations"  and  Item  8.
"Financial  Statements and Supplementary Data" of the Form 10-K. Any capitalized
terms used but not defined in this Item are defined in the  "Glossary of Defined
Terms"  contained in Appendix A. Except as otherwise  noted,  all  references to
Notes  represent  the  Condensed  Notes  to  Consolidated  Financial  Statements
included herein.

     This Quarterly  Report on Form 10-Q contains  statements  which  constitute
"forward-looking  statements"  within the meaning of the PSLRA. These statements
appear  in a number  of places  in this  section  and in Part II,  Item 1 "Legal
Proceedings."  Such  statements can be identified by the use of  forward-looking
terminology such as "believes," "expects," "may," "estimates," "will," "should,"
"could,"  "plans,"  "intends,"  "projects,"  "seeks,"  or  "anticipates"  or the
negative thereof or other variations  thereon or comparable  terminology,  or by
discussions  of strategy.  Readers are cautioned  that any such  forward-looking
statements  are not  guarantees of future  performance  and involve  significant
risks and  uncertainties,  and that actual results may vary  materially from the
forward-looking statements as a result of various factors. These factors include
the effectiveness of management's strategies and decisions, general economic and
business  conditions,  developments  in technology,  new or modified  statutory,
environmental or regulatory requirements,  litigation developments, and changing
prices and market  conditions.  This Form 10-Q and the Form 10-K identify  other
factors which could cause differences  between such  forward-looking  statements
and actual results.  No assurance can be given that these are all of the factors
that could cause  actual  results to vary  materially  from the  forward-looking
statements.

Results of Operations

     This  section  contains   statements   which  constitute   "forward-looking
statements" within the meaning of the PSLRA. See the second paragraph of Item 2.
for cautionary information with respect to such forward-looking statements.

     The Company operates in three industries:  forest products, through MGI and
its wholly owned subsidiaries,  principally Palco, ScoPac and Britt; real estate
investment and development, through various subsidiaries and joint ventures; and
racing operations through SHRP, Ltd. MGHI owns 100% of MGI and is a wholly owned
subsidiary of the Company. In addition,  the Company previously owned 63% of the
common stock of Kaiser, a producer of fabricated  aluminum  products  undergoing
reorganization  under  Chapter  11  of  the  Bankruptcy  Code.  See  Note  1 for
information  regarding the  deconsolidation of Kaiser's  financial results,  the
status of Kaiser's Chapter 11 proceedings,  and the accounting  treatment of the
Company's  investment in Kaiser.  Any reference herein to a company includes the
subsidiaries  of that company unless  otherwise  noted or the context  indicates
otherwise.

     Consolidated Operations

     Selected Operational Data

     The following table presents selected financial information for the periods
indicated for the Company's consolidated operations.

                                                                        Three Months Ended      Six Months Ended
                                                                             June 30,               June 30,
                                                                       ---------------------  ----------------------
                                                                         2006        2005       2006        2005
                                                                       ----------  ---------  ---------- -----------

Net sales                                                               $63.5      $ 87.2     $ 143.7    $  170.2
Costs and expenses                                                      (66.7)      (80.8)     (141.3)     (161.0)
Gains on sales of timberlands and other assets                            5.2         0.1         5.9         0.1
                                                                       ----------  ---------  ---------- -----------
Operating income                                                          2.0         6.5         8.3         9.3
Other income, net                                                         2.3         4.3         6.7         5.5
Interest expense, including amortization of deferred loan costs         (19.7)      (20.4)      (39.9)      (38.6)
                                                                       ----------  ---------  ---------- -----------
Loss before income taxes and cumulative effect of accounting change     (15.4)       (9.6)      (24.9)      (23.8)
Benefit (provision) for income taxes                                      4.2           -         4.2           -
                                                                      ----------- ---------- ----------- -----------
Loss before cumulative effect of accounting change                      (11.2)       (9.6)      (20.7)      (23.8)
Cumulative effect of accounting change, net of tax                          -           -        (0.7)          -
                                                                      ----------- ---------- ----------- -----------
Net Loss                                                              $ (11.2)    $  (9.6)   $  (21.4)   $  (23.8)
                                                                      =========== ========== =========== ===========

Overview of Consolidated Results of Operations

     Net Sales
     Consolidated  net sales for the three months ended June 30, 2006,  declined
$23.7 million,  as compared to the prior year period. Real estate sales declined
$10.9  million  during the quarter due to a reduction in the number of lots sold
at Fountain Hills,  partially offset by increased lot sales at Mirada.  Sales at
the Company's  forest  products  segment  declined  $13.1 million due to a 26.6%
decline in lumber shipments as a result of a lower log supply from ScoPac and an
increase  in the volume of lumber  placed into  Palco's  redwood  lumber  drying
program.

     Consolidated  net sales for the six months  ended June 30,  2006,  declined
$26.5 million,  as compared to the prior year period. Real estate sales declined
$4.7  million due to a reduction  in the number of lots sold at Fountain  Hills,
partially offset by increased lot sales at Mirada and deferred profit recognized
at Palmas.  Sales for the  Company's  forest  products  segment  declined  $22.6
million due to the factors discussed above.

     Operating Income
     Consolidated  operating  income  declined $4.5 million for the three months
ended June 30, 2006, as compared to the prior year period.  Operating income for
the real  estate  segment  declined  $7.5  million,  primarily  as a result of a
decline in real estate  sales,  as  discussed  above.  Operating  income for the
forest products  segment  increased $3.2 million due to a $5.2 million gain from
the sale of certain  properties  and a significant  reduction in legal and other
professional  fees.  The second quarter of 2005 included  substantial  legal and
other  professional  fees  relating to ScoPac's  efforts to pursue a  negotiated
restructuring of the Timber Notes.  Absent the gain from asset sales in 2006 and
the effect of the impact of the legal and other  professional  fees  incurred in
2005, operating results for the forest products segment declined  significantly,
as compared to the prior year, due to a decline in lumber  shipments as a result
of lower log supply from  ScoPac and an increase in the volume of lumber  placed
into Palco's redwood drying program.

     Consolidated  operating  income for the six months ended June 30, 2006, was
relatively  flat as compared to the six months ended June 30,  2005,  due to the
$5.9 million gain from the sale of certain  properties  in 2006.  The six months
ended June 30,  2005  included  substantial  legal and other  professional  fees
relating to ScoPac's efforts to pursue a negotiated  restructuring of the Timber
Notes  and  a one  time  benefit  of  $3.1  million  relating  to  an  insurance
settlement.  Absent  the gain  from  asset  sales in 2006 and the  effect of the
impact of the legal and other  professional  fees  incurred  in 2005,  operating
results for the forest products  segment  declined  significantly as compared to
the prior year due the factors discussed above.

     Other Income, net
     Consolidated  other  income,  net  decreased to $2.3 million for the second
quarter of 2006, as compared to $4.3 million for the second quarter of 2005, due
to lower  investment  levels and a decrease in equity  income from  investments.
Consolidated other income, net for the six months of 2006 was impacted favorably
by higher returns on marketable securities and other short-term investments.

     Net Loss
     A tax benefit of $4.1 million was  recognized  during the second quarter of
2006 due to the reversal of deferred tax  liabilities  established  based on the
current  Texas  franchise  tax.  During  the second  quarter of 2006,  the Texas
Legislature  passed  House  Bill 3  changing,  among  other  things,  the  Texas
franchise  tax base from a tax on the  greater of capital or net income to a tax
on gross  margin.  As a result of this tax law change,  the  deferred  state tax
liabilities referred to above are no longer required.

     Forest Products Operations

     Industry Overview and Selected Financial and Operating Data

     The Company's forest products  operations are conducted through MGI and its
wholly owned  subsidiaries,  principally Palco,  ScoPac and Britt. The segment's
operations have become  increasingly  unpredictable due to continued  regulatory
constraints,  ongoing litigation challenges and other factors. Additionally, the
segment's   operations  are  somewhat  seasonal,   with  its  net  sales  having
historically  been higher in the months of April  through  November  than in the
months of December through March. Management expects that the segment's revenues
and  cash  flows  will  continue  to be  unpredictable  and  somewhat  seasonal.
Accordingly,  the  segment's  results for any one  quarter  are not  necessarily
indicative of results to be expected for the full year.

     Regulatory and environmental  matters as well as legal actions have had and
are  expected to continue to  adversely  affect the  Company's  forest  products
operations.  See Item 1.  "Business-Forest  Products  Operations-Regulatory  and
Environmental  Factors" and Item 1A. "Risk Factors" of the Form 10-K and in this
Form  10-Q  and  Note 7 for  information  regarding  these  matters.  Regulatory
compliance  and related  litigation  have caused and are expected to continue to
cause delays in approval of THPs and delays in  harvesting on THPs once they are
approved.  This  has  resulted  and is  expected  to  continue  to  result  in a
significant decline in harvest and increased costs.

     The cash flows of Palco and ScoPac have both been adversely impacted by the
failure  of the North  Coast  Water  Board to  release  for  harvest a number of
already approved THPs. ScoPac's management has concluded that, in the absence of
significant regulatory relief and accommodations, ScoPac's annual timber harvest
levels  and cash  flows  from  operations  will for at  least  several  years be
substantially  below both historical  levels and the minimum levels necessary to
allow  ScoPac to satisfy its debt service  obligations  in respect of the Timber
Notes. To the extent that ScoPac is unable to generate sufficient liquidity from
the ScoPac Land Sale  Program  (see  "-Financial  Condition  and  Investing  and
Financing  Activities-Forest Products Operations") or other sources, the Company
expects  that ScoPac  will be forced to take  extraordinary  actions,  which may
include:  laying off employees,  shutting down various  operations,  and seeking
protection by filing under the Bankruptcy Code.

     On July 18, 2006, Palco and Britt closed on the New Palco Term Loan and New
Palco  Revolving  Credit Facility and terminated the Old Palco Term Loan and Old
Palco  Revolving  Credit  Facility.  For further  information,  see  "-Financial
Condition and Investing and Financing Activities-Forest Products Operations."

     In addition to the matters described above,  there can be no assurance that
certain other pending  legal,  regulatory  and  environmental  matters or future
governmental  regulations,   additional  litigation,  legislation,  judicial  or
administrative  decisions,  adverse  weather  conditions,  or low  lumber or log
prices, will not also have material adverse effects on the financial  condition,
results of operations or liquidity of the Company's forest products  operations.
See Item 1. "Business-Forest  Products  Operations-Regulatory  and Environmental
Factors,"  Item  1A.  "Risk  Factors,"  and  Item 3.  "Legal  Proceedings-Forest
Products Operations" of the Form 10-K, Item 1A. "Risk Factors" in this Form 10-Q
and Note 7 (under  "Regulatory  and  Environmental  Factors" and  "Contingencies
Timber Harvest  Litigation") for further  information  regarding  regulatory and
legislative  matters  and legal  proceedings  relating to the  Company's  forest
products operations.

     Since 2001, comprehensive external and internal reviews have been conducted
of Palco's  business  operations.  Those reviews were  conducted in an effort to
identify   ways  in  which  Palco  could   operate  on  a  more   efficient  and
cost-effective  basis.  Palco has  implemented  a number of changes,  including:
consolidating  its  sawmill  operations;  eliminating  certain of its  operating
activities,  including  its  company-staffed  logging  operations  (now  relying
exclusively  on  contract  loggers),  its  soil  amendment  and  concrete  block
activities,  and its Scotia  finishing and  remanufacturing  plant; and adopting
various cost saving  measures.  Palco  continues to examine ways to achieve cost
savings. In April 2004, Palco commenced a mill improvement project,  including a
new sawmill  located in Scotia,  California.  The new sawmill was constructed in
two phases.  The first phase of the project,  the processing of smaller diameter
second growth logs (up to 24" in diameter) is a high-speed  processing line that
includes  advanced  scanning and  optimization  technology  intended to maximize
lumber  recovery.  The second phase,  the  relocation of the large log equipment
from Palco's  former  Carlotta  mill,  came on line in October 2005.  This phase
allows for processing of larger logs up to 60" in diameter.  Although there were
more difficulties than Palco expected,  since commencing  production,  Palco has
made  substantial  progress in refining the production  process in the new mill,
particularly the high-speed small log processing line. There have been delays in
the  completion of the large log  processing  line,  however,  and it is not yet
operating at planned production rates. Palco also completed a new planer project
in Scotia in January 2004.  This high speed system  processes  rough sawn boards
into  finished  lumber at rates up to four times  faster  than older  planers at
Palco's former Carlotta and Fortuna mills. Palco has spent $28.6 million through
June 30,  2006,  on the new sawmill and planer  project in Scotia and  estimates
additional expenditures of $3.6 million related to the project in 2006.

     The following table presents selected operational and financial information
for the periods indicated, for the Company's forest products operations.

                                                                    Three Months Ended       Six Months Ended
                                                                         June 30,                 June 30,
                                                           ---------------------------- ----------------------------
                                                                2006          2005          2006           2005
                                                           -------------- ------------- ------------- --------------
                                                             (In millions of dollars, except shipments and prices)
                                                            --------------------------------------------------------
Timber harvest(1)                                               21.1          32.4           35.3          65.5
                                                           ============== ============= ============= ==============
Shipments:
  Lumber: (2)
    Redwood upper grades                                         1.5           2.2            2.1           4.6
    Redwood common grades                                       27.0          43.0           64.0          86.1
    Douglas-fir upper grades                                       -           0.1              -           0.4
    Douglas-fir common grades                                   22.3          24.7           45.4          57.7
    Other                                                        1.2           0.8            1.6           1.6
                                                           -------------- ------------- ------------- --------------
  Total lumber                                                  52.0          70.8          113.1         150.4
                                                           ============== ============= ============= ==============
  Cogeneration power (3)                                        25.6          43.3           53.5          84.0
                                                           ============== ============= ============= ==============
Average sales price:
  Lumber: (4)
    Redwood upper grades                                   $   1,875      $  1,365      $   1,737     $   1,269
    Redwood common grades                                        711           639            666           625
    Douglas-fir upper grades                                       -         1,919              -         1,131
    Douglas-fir common grades                                    365           381            365           373
  Cogeneration power (5)                                          76            66             70            64

Net sales:
  Lumber, net of discount                                  $    30.6      $   39.8      $    63.1     $    81.2
  Logs                                                          (0.4)          2.4            1.6           3.9
  Cogeneration power                                             2.0           2.9            3.9           5.5
  Wood chips                                                     0.8           1.0            1.5           2.1
  Other (6)                                                      0.8           0.8            1.5           1.5
                                                           -------------- ------------- ------------- --------------
    Total net sales                                        $    33.8      $   46.9      $    71.6     $    94.2
                                                           ============== ============= ============= ==============
Operating income (loss)                                    $     0.1      $   (3.1)     $    (5.4)    $    (5.9)
                                                           ============== ============= ============= ==============
Loss before income taxes and cumulative effect of
  accounting change                                        $   (14.9)     $  (18.1)     $   (35.9)    $   (34.4)
                                                           ============== ============= ============= ==============

(1)  Timber harvest is expressed in millions of board feet, net Scribner scale.
(2)  Lumber shipments are expressed in millions of board feet.
(3)  Power deliveries are expressed in thousands of megawatt hours.
(4)  Dollars per thousand board feet.
(5)  Dollars per megawatt hour.
(6)  Includes  a gain of $5.2  million  and $5.9  million on the sale of certain
     properties in the second quarter and six months of 2006, respectively.

      Net Sales
     Total net sales for forest products  operations  declined $13.1 million for
the second  quarter of 2006 and $22.6  million for the six months ended June 30,
2006, as compared to the prior year  periods.  The decrease in net sales was due
to a decline in lumber  shipments  resulting from a lower log supply from ScoPac
and an  increase  in the volume of lumber  placed into  Palco's  redwood  lumber
drying  program  during the second  quarter of 2006.  The lower log supply  from
ScoPac  was  due to  adverse  weather  conditions  in  early  2006  and  harvest
restrictions.

     Operating Income (loss)
     The forest products segment generated  operating income of $0.1 million for
the second  quarter of 2006 and an  operating  loss of $5.4  million for the six
months ended June 30,  2006.  These  results  include a gain of $5.2 million and
$5.9  million,  respectively,  from the sale of certain  properties.  The forest
products  segment has incurred  substantial  operating  losses in 2006 resulting
from harvest restrictions at ScoPac,  adverse weather conditions and operational
inefficiencies  related  to the new  sawmill  in  Scotia.  The  forest  products
segment's operating results for the first half of 2005 include substantial legal
and other  professional fees relating to ScoPac's efforts to pursue a negotiated
restructuring  of the Timber Notes and the first  quarter of 2005 includes a one
time benefit of $3.1 million relating to an insurance settlement.

     Loss Before Income Taxes and Cumulative Effect of Accounting Change
     Forest products  operations' loss before income taxes and cumulative effect
of accounting change improved by $3.2 million for the second quarter of 2006 and
was $1.5 million  higher for the six months ended June 30, 2006,  as compared to
the  prior  year  period,  due to the  factors  discussed  above.  Additionally,
interest  expense  was higher  during the first half of 2006 due to higher  debt
levels and higher  interest rates at Palco.  However,  this increase in interest
expense in the second  quarter of 2006 is  largely  offset by the  write-off  of
deferred  financing costs during the second quarter of 2005. The forest products
segment  also had  excess  cash in 2005  invested  that  generated  earnings  of
approximately $0.8 million in the second quarter of 2005 and $1.2 million in the
first half of 2005.

Real Estate Operations

     Industry Overview and Selected Operational Data
     The Company,  principally  through its wholly owned  subsidiaries and joint
ventures,  invests  in and  develops  residential  and  commercial  real  estate
primarily in Puerto Rico, Arizona,  California, and Texas. Results of operations
between quarterly periods for the Company's real estate operations are generally
not  comparable due to the timing of individual  real estate sales  transactions
and  cash  collections.  Accordingly,  results  for  any  one  quarter  are  not
necessarily  indicative  of  results  to be  expected  for the  full  year.  The
following table presents selected operational and financial  information for the
three and six months ended June 30, 2006 and 2005, for the Company's real estate
operations.

                                                                      Three Months Ended       Six Months Ended
                                                                          June 30,                 June 30,
                                                                   -------------------------------------------------
                                                                      2006         2005        2006         2005
                                                                   ----------- ------------ ----------- ------------
                                                                               (In millions of dollars)
                                                                    ------------------------------------------------
Net sales:
  Real estate:
    Fountain Hills                                                 $    1.1    $   16.2     $    3.2    $   22.9
    Mirada                                                              6.8         1.7         15.9         4.3
    Palmas                                                              1.9         2.5         10.5         7.1
    Other                                                                 -         0.1            -         0.1
                                                                   ----------- ------------ ----------- ------------
      Total                                                             9.8        20.5         29.6        34.4
                                                                   ----------- ------------ ----------- -----------
  Resort, commercial and other:
    Fountain Hills                                                      1.1         1.5          2.1         3.0
    Palmas                                                              3.7         3.5          7.1         6.4
    Commercial lease properties                                         4.6         4.6          9.2         9.1
    Other                                                                 -           -          0.2           -
                                                                   ----------- ------------ ------------ ------------
      Total                                                             9.4         9.6         18.6        18.5
                                                                   ----------- ------------ ----------- ------------
  Total net sales
                                                                   $   19.2    $   30.1     $   48.2    $   52.9
                                                                   =========== ============ =========== ============
Operating income (loss):
  Fountain Hills                                                   $   (0.3)        9.4          0.1        12.0
  Mirada                                                                3.3         0.6          8.1         1.4
  Palmas                                                               (1.2)       (0.9)         4.7         0.9
  Commercial lease properties                                           2.1         1.9          4.2         3.4
  Other                                                                (0.4)          -         (0.7)          -
                                                                   ----------- ------------ ------------ ------------
      Total operating income                                       $    3.5    $   11.0     $   16.4     $  17.7
                                                                   =========== ============ ============ ============

Investment, interest and other income (expense), net:
  Equity in earnings from real estate joint ventures               $   (0.1)   $   (0.2)    $   (0.3)    $  (0.4)
  Other                                                                 1.6         0.9          2.8         1.5
                                                                   ----------- ------------ ----------- ------------
                                                                        1.5         0.7          2.5         1.1
                                                                   =========== ============ =========== ============
Income before income taxes and cumulative effect of
accounting change                                                  $    0.7    $    7.4     $   10.2     $  10.1
                                                                   =========== ============ =========== ============

     Net Sales
     Total net sales for the real estate  operations  for the second  quarter of
2006 decreased by $10.9 million, as compared to the prior year period, primarily
due to a  reduction  in the  number of lots sold at  Fountain  Hills,  partially
offset by  increased  lot sales at Mirada.  Total net sales for the real  estate
operations for the six months of 2006 decreased by $4.7 million,  as compared to
the prior year period, primarily due to a substantial reduction in the number of
lots sold at Fountain Hills,  partially  offset by increased lot sales at Mirada
and deferred profits recognized at Palmas.

     Operating  Income and Income Before Income Taxes and  Cumulative  Effect of
Accounting Change
     Operating  income decreased by $7.5 million and $1.3 million for the second
quarter  and six months of 2006,  respectively,  as  compared  to the prior year
periods,  primarily  as a result of the  decreased  sales noted.  The  segment's
income before income taxes and cumulative  effect of accounting change decreased
by $6.7  million for the second  quarter of 2006,  as compared to the prior year
period,  primarily  due to the decline in operating  results  noted  above.  The
segment's income before income taxes and cumulative  effect of accounting change
increased  $0.1 million for the six months of 2006  primarily  due to returns on
marketable securities and other short-term  investments offset by the decline in
net sales as noted above.

     Racing Operations

     Industry Overview and Selected Operational Data
     The Company owns SHRP, Ltd., which owns and operates Sam Houston Race Park,
a Class 1 horse  racing  facility in  Houston,  Texas,  and Valley Race Park,  a
greyhound  racing facility  located in Harlingen,  Texas.  Results of operations
between  quarterly periods are generally not comparable for these facilities due
to the  timing,  varying  lengths and types of racing  meets held.  Accordingly,
results  for any one  quarter are not  necessarily  indicative  of results to be
expected for the full year. Historically,  Sam Houston Race Park and Valley Race
Park have derived a significant amount of their annual  pari-mutuel  commissions
from live racing and simulcasting.  Pari-mutuel  commissions have typically been
highest during the first and fourth  quarters of the year, the time during which
Sam Houston  Race Park and Valley  Race Park have  historically  conducted  live
thoroughbred and greyhound racing, respectively.

     The following table presents selected operational and financial information
for the three and six months  ended June 30,  2006 and 2005,  for the  Company's
racing operations.

                                                                   Three Months Ended      Six Months Ended
                                                                          June 30,             June 30,
                                                                   -------------------------------------------------
                                                                      2006         2005        2006         2005
                                                                   ----------- ------------ ------------ ------------
                                                                               (In millions of dollars)
                                                                   ----------- ------------ ------------ ------------
Number of live race days:
  Sam Houston Race Park                                                  11          11          53           53
  Valley Race Park                                                       10           5          72           68

Handle:
  Sam Houston Race Park:
    On-track handle                                                $    34.0   $    32.0    $   67.1    $    63.8
    Off-track handle                                                    12.2        13.3        89.3         86.4
                                                                   ----------- ------------ ----------- ------------
       Total                                                       $    46.2   $    45.3    $  156.4    $   150.2
                                                                   =========== ============ =========== ============
  Valley Race Park:
    On-track handle                                                $     4.4   $     4.8    $   10.3    $    10.4
    Off-track handle                                                     0.4         0.2         2.8          1.7
                                                                   ----------- ------------ ----------- ------------
       Total                                                       $     4.8   $     5.0    $   13.1    $    12.1
                                                                   =========== ============ =========== ============

Net sales:
 Sam Houston Race Park:
   Gross pari-mutuel commissions                                   $     7.8   $     7.4      $ 17.3    $    16.6
   Other revenues                                                        1.6         1.6         3.6          3.5
                                                                   ----------- ------------ ----------- ------------
       Total                                                             9.4         9.0        20.9         20.1
                                                                   ----------- ------------ ----------- ------------
 Valley Race Park:
   Gross pari-mutuel commissions                                         1.0         1.1         2.5          2.5
   Other revenues                                                        0.1         0.1         0.5          0.5
                                                                   ----------- ------------ ----------- ------------
       Total                                                             1.1         1.2         3.0          3.0
                                                                   ----------- ------------ ----------- ------------
Total net sales                                                    $    10.5   $    10.2    $   23.9    $    23.1
                                                                   =========== ============ =========== ============
Operating loss:
  Sam Houston Race Park                                                 (1.4)       (0.9)       (1.4)        (0.9)
  Valley Race Park                                                      (0.2)          -        (0.3)        (0.2)
                                                                   ----------- ------------ ----------- ------------
       Total operating loss                                        $    (1.6)  $    (0.9)   $   (1.7)   $    (1.1)
                                                                   =========== ============ =========== ============
Loss before income taxes and cumulative effect of accounting
  change                                                           $    (1.5)  $    (0.9)   $   (1.6)   $    (1.1)
                                                                   =========== ======================== ============

     Net Sales
     Total net sales for  racing  operations  increased  slightly  in the second
quarter of 2006  compared  to the prior  year  period,  primarily  due to higher
simulcast wagering at Sam Houston Race Park.

     Total net sales for racing  increased  slightly  in the first six months of
2006  compared  to the prior  year  period,  primarily  due to higher  simulcast
wagering and increased  average  daily  attendance at both Sam Houston Race Park
and Valley Race Park.

     Operating  Loss and Loss Before Taxes and  Cumulative  Effect of Accounting
Change
     Racing  operations'  operating  loss and loss before  taxes and  cumulative
effect of accounting  change for the second quarter and first six months of 2006
increased from the comparable  periods in 2005,  principally due to expenditures
related to the  Company's  efforts  to obtain an  additional  racing  license in
Laredo, Texas.

     Other Items Not Directly Related to Industry Segments

                                                                     Three Months Ended       Six Months Ended
                                                                          June 30,                June 30,
                                                                   ------------------------ ---------------------
                                                                      2006         2005        2006       2005
                                                                   ------------ ----------- ----------- ---------
                                                                             (In millions of dollars)
                                                                   ------------ ----------- ----------- ---------
Operating loss                                                     $    -       $  (0.5)    $  (1.0)  $  (1.4)
Income before income taxes and cumulative effect of accounting
   change                                                             0.3           2.0         2.4       1.6

     Operating Loss
     Corporate  operating losses represent general and  administrative  expenses
that  are  not  attributable  to  the  Company's  industry  segments,  including
stock-based  compensation  expense.  The Corporate  segment's  operating  losses
improved  $0.5  million for the second  quarter of 2006 as compared to the prior
year period, primarily due to cost cutting initiatives.

     The Corporate  segment's operating losses improved $0.4 million for the six
months ended June 30, 2006 as compared to the prior year period.  The six months
ended June 30, 2005 included a one-time severance charge of $0.5 million.

     Income Before Income Taxes and Cumulative Effect of Accounting Change
     Income  before  income taxes and  cumulative  effect of  accounting  change
decreased  $1.7  million for the second  quarter of 2006,  as compared the prior
year period,  due to lower levels of investments and a decrease in equity income
from investments.

     Income  before  income taxes and  cumulative  effect of  accounting  change
improved by $0.8 million for the six months ended June 30, 2006, as compared the
prior year period, due to higher returns on short term investments.

Financial Condition and Investing and Financing Activities

     This  section  contains   statements   which  constitute   "forward-looking
statements" within the meaning of the PSLRA. See the second paragraph of Item 2.
for cautionary information with respect to such forward-looking statements.

     Overview

     The Company  conducts its operations  primarily  through its  subsidiaries.
Accordingly, creditors of subsidiaries of the Company have priority with respect
to the assets and earnings of such subsidiaries over the claims of the creditors
of the Company.  Certain of the Company's  subsidiaries,  principally  Palco and
ScoPac,  are  restricted by their various debt  instruments  as to the amount of
funds that can be paid in the form of dividends or loaned to affiliates.  ScoPac
is highly leveraged and has significant debt service requirements. Palco is also
highly leveraged, and has significant debt service obligations.

   Cash Flow

     The following table summarizes certain data related to financial  condition
and to investing and financing activities of the Company and its subsidiaries.

                                       Forest Products
                                ------------------------------
                                 Scotia      Palco               Real                           MAXXAM
                                  LLC      and Other    MGI      Estate    Racing      MGHI      Parent     Total
                                ---------  ----------  -------  ---------  --------   -------- ----------- ---------
                                                             (In millions of dollars)
                                ------------------------------------------------------------------------------------
Indebtedness (excluding
  intercompany notes)
Short-term borrowings and
   current maturities of long-
   term debt:
   June 30, 2006                $  64.9(1) $     -     $     -  $  4.2     $   0.1    $     -  $     -     $   69.2
   December 31, 2005               49.4       58.9(2)        -     4.1         0.1          -        -        112.5

Long-term debt, excluding
   current maturities:
   June 30, 2006                 $653.1       42.7(2)  $     -  $218.0     $   0.2    $     -  $     -     $  914.0
   December 31, 2005              669.6    $     -     $     -  $219.7         0.3          -        -        889.6

Cash, cash equivalents,
   marketable securities and
   other investments and
   availability of lender credit
June 30, 2006:
Cash and cash equivalents       $   1.4    $   1.3     $   0.1  $ 24.0       $ 5.2     $    -  $   4.0     $   36.0
Marketable securities and other
   investments                        -          -           -    42.4           -          -     90.1        132.5
Current restricted cash and
   marketable securities            13.1         -         2.0(3)  2.2         2.2          -        -         19.5
Long-term restricted
   amounts                           2.7       2.4           -     2.8           -          -        -          7.9
                               ---------- ----------- -------- ---------- --------- --------------------------------
                                $  17.2    $   3.7    $    2.1  $ 71.4       $ 7.4     $    -  $  94.1      $ 195.9
                               ========== =========== ======== ========== ========= ================================
    Unused and available
      credit                       11.9        3.4           -     0.1           -          -        -         15.4
                               ---------- ----------- -------- ---------- --------- --------------------------------
                               $   29.1(4) $   7.1    $    2.1  $ 71.5       $ 7.4     $    -  $  94.1      $ 211.3
                               ========== =========== ======== ========== ========= ================================
__________________

Table and Notes continued on next page

                                       Forest Products
                                ------------------------------
                                 Scotia     Palco                Real                           MAXXAM
                                  LLC     and Other     MGI      Estate    Racing      MGHI      Parent     Total
                                --------- -----------  -------  ---------  --------   -------- ----------- ---------
                                                             (In millions of dollars)
                                ------------------------------------------------------------------------------------

Capital expenditures:
  June 30, 2006                $    2.2    $   1.1    $     -    $  0.7       $ 0.2     $    -  $     -      $   4.2
  June 30, 2005                     3.1        3.7          -       0.7         1.0          -      0.4          8.9

Net proceeds from dispositions
  of property and investments:
  June 30, 2006                $    6.9    $   1.2    $     -    $    -       $   -     $    -  $     -      $   8.1
  June 30, 2005                       -        0.1          -         -           -          -        -          0.1

Borrowings (repayments) of
  debt and credit facilities,
  net of financing costs:
  June 30, 2006                $   (1.1)   $ (17.2)   $     -    $ (1.8)      $(0.1)    $    -  $     -      $ (20.2)
  June 30, 2005                     5.0       18.7          -      (2.7)       (0.1)         -        -         20.9

Dividends, advances
  including interest paid
  and tax sharing payments
  received (paid):
  June 30, 2006                $      -    $  20.0(5) $   7.6(6) $ (1.6)     $  1.0     $    -  $ (27.0)     $     -
  June 30, 2005                       -          -        2.6     (13.9)        4.5          -      6.8            -

(1)  Includes  borrowings  outstanding  under the ScoPac Line of Credit of $42.2
     million and the current portion of Timber Notes  Scheduled  Amortization of
     $22.7 million.
(2)  At  December  31,  2005,  Palco's  credit  facilities  were  classified  as
     short-term borrowings due to financial covenant breaches. At June 30, 2006,
     as a result of Palco's subsequent refinancing to long-term debt facilities,
     Palco's credit facilities were classified as long-term borrowings.
(3)  MGI's  collateral  was  released in July 2006 in  connection  with  Palco's
     refinancing.
(4)  Excludes  Timber Notes held in the SAR Account that ScoPac  intends to sell
     before the January 20, 2007, Timber Notes payment date.
(5)  Reflects advances to Palco that Palco used to fund its liquidity shortfalls
     during the first half of 2006.
(6)  Advances of $4.6 million were used by MGI to fund timber/log purchases from
     ScoPac during the six months ended June 30, 2006.

     Operating Activities
     Net cash used for operating  activities of $10.0 million for the six months
ended June 30, 2006, resulted primarily from operating  liquidity  shortfalls at
the Company's forest products segment. Net cash provided by operating activities
of $21.2 million for the six months ended June 30, 2005 was primarily the result
of a high volume of lot sales by the Company's real estate segment.

     Investing Activities
     Net cash  provided by  investing  activities  of $15.7  million for the six
months ended June 30, 2006, primarily reflects net proceeds from restricted cash
and net proceeds from property sales. Net cash used for investing  activities of
$2.2  million for the six months  ended June 30,  2005,  primarily  reflects net
proceeds from restricted cash, offset by capital expenditures.

     Financing Activities
     The $42.6  million of net cash used for  financing  activities  for the six
months ended June 30, 2006,  principally  reflects  treasury stock  purchases of
$22.4 million and repayments on short-term  borrowings  and long-term  debt. Net
cash provided by financing  activities of $20.7 million for the six months ended
June 30, 2005,  principally reflects the net proceeds from the Palco refinancing
that occurred in April 2005.

     MAXXAM Parent

     MAXXAM  Parent has in the past  provided,  and may from time to time in the
future,  under  appropriate  circumstances  provide,  various forms of financial
assistance  to  its   subsidiaries,   or  may  enter  into  financing  or  other
transactions  with its  subsidiaries,  including  secured or unsecured loans, or
asset  purchases.  The New Palco  Term Loan and the New Palco  Revolving  Credit
Facility  required  MGI to  provide  a $10.0  million  subordinated  loan to the
Borrowers,  which was funded at closing.  There can be no assurance  that MAXXAM
Parent's  subsidiaries  will have  sufficient  liquidity  in the future to repay
intercompany  loans.  MAXXAM  Parent's  pension funding was $0.8 million for the
first six months of 2006 and is expected to be $2.9 million for the remainder of
2006.  During  the first six months of 2006,  MAXXAM  Parent  purchased  707,285
shares of its Common Stock for an aggregate cost of $22.4 million.

     Although  there  are  no  restrictions  on  the  Company's  ability  to pay
dividends on its capital  stock,  the Company has not paid any  dividends  for a
number of years and has no present intention to do so. Additionally, the Company
may from time to time purchase additional shares of its Common Stock on national
exchanges or in privately negotiated transactions.

     At June 30, 2006, MAXXAM Parent had unrestricted cash, cash equivalents and
marketable  securities and other  investments of $94.1 million and MAXXAM Parent
did not have  any  external  debt.  MAXXAM  Parent  believes  that its  existing
resources will be sufficient to fund its working  capital  requirements  for the
next year. With respect to long-term liquidity,  MAXXAM Parent believes that its
existing cash and cash resources,  together with future  distributions  from the
real estate  segment,  will be sufficient to meet its long-term  working capital
requirements.  See Note 1, "-Potential  Impact on Registrant and Certain Related
Entities"  regarding potential adverse impacts upon MAXXAM Parent as a result of
the liquidity issues being experienced by ScoPac and those recently  experienced
by Palco.

     Forest Products Operations

     Substantially  all of MGI's  consolidated  assets are owned by Palco, and a
substantial  portion of  Palco's  consolidated  assets are owned by ScoPac.  The
holders of the Timber Notes have  priority over the claims of creditors of Palco
with  respect to the assets and cash flows of ScoPac.  Palco's  debt  facilities
contain   certain   restrictive   covenants  which   effectively   preclude  the
distribution of funds from Palco to MGI.

     Regulatory and environmental  matters as well as legal actions have had and
are expected to continue to have a significant  adverse  effect on the Company's
forest products  operations and liquidity.  The ability to harvest ScoPac Timber
depends in large part upon ScoPac's ability to obtain regulatory approval of its
THPs. ScoPac has experienced difficulties and delays in the approval of its THPs
as the  result  of  regulatory  and  litigation  challenges  and  expects  these
challenges to persist.  Moreover,  the Company expects to continue to experience
further  difficulties,  limitations  and  delays  in being  able to  harvest  on
previously-approved  THPs due to, among other things, actions by the North Coast
Water Board (see below).  The  foregoing  matters  have  resulted in declines in
actual and expected harvest levels and cash flows,  significant increases in the
cost of  logging  operations  and  increased  costs  related  to timber  harvest
litigation,  all of which have severely and  negatively  impacted the historical
cash flows of both Palco and  ScoPac.  These  adverse  effects  are  expected to
continue.

     The North Coast Water Board is requiring  Palco and ScoPac to apply various
waste  discharge  reporting,  mitigation  and erosion  control  requirements  in
respect of timber harvesting activities in several watersheds,  and is likely to
impose  additional  measures  in the  future.  The North  Coast  Water  Board in
December 2003 directed its staff to formulate  WWDRs for the  Freshwater and Elk
River  watersheds  on the  Palco  Timberlands.  THPs  in  these  two  watersheds
represent a significant  portion of the harvest planned in 2006 and for the next
several years. As harvesting  activities on the Palco Timberlands cannot readily
be moved  between  watersheds  due to,  among  other  things,  historic  harvest
patterns,  adjacency restrictions,  and the age classes of trees, development of
WWDRs and the other  matters  described  in the  "Regulatory  and  Environmental
Factors"  section of Note 7 have in the past and are  expected  to  continue  to
result in reduced harvest and less  predictability  in the future  regarding the
mix of logs available for sale by ScoPac to Palco, which negatively impacts cash
flow.

     As the WWDRs had not yet been  formulated  for the Freshwater and Elk River
watersheds,  the North  Coast  Water  Board for some time  failed to release for
harvest a number of ScoPac's  THPs that had already  been  approved by the other
governmental  agencies which approve  ScoPac's THPs. The North Coast Water Board
subsequently  allowed harvesting on a portion of the approved THPs; however, the
State Water Board later disallowed  harvesting on a portion of the THPs that had
been  released by the North Coast Water Board.  On May 8, 2006,  the North Coast
Water Board adopted WWDRs for the Freshwater and Elk River watersheds, which has
the effect of allowing harvesting in these two watersheds to begin once THPs are
enrolled,  up to  approximately  50% of the CDF  Harvest  Limit  for  these  two
watersheds.  Additional THPs, bringing the total to approximately 75% of the CDF
Harvest  Limit for these two  watersheds,  may be enrolled  upon approval by the
Executive  Officer of the North Coast Water Board's staff of a monitoring  plan,
which has been  submitted  by Palco.  While  certain  THPs  related to these two
watersheds  have  been  enrolled,  and  harvesting  has  begun,  there can be no
assurance that  additional  THPs related to these two watersheds will ultimately
be enrolled or  harvested  as planned in 2006 or in future years as, among other
things  Palco's  monitoring  plan has not been  approved.  The North Coast Water
Board's  adoption of these WWDRs has been appealed to the State Water Board, but
the appeals are being held in abeyance in order to see how the implementation of
the WWDRs  proceeds.  While ScoPac  continues to project that its annual harvest
level over the ten-year period beginning 2006 will be approximately  100 million
board feet, this projection is  significantly  below  historical  annual harvest
levels,  and actual harvest levels may be even lower,  depending on the ultimate
outcome of various assumptions.

     ScoPac Liquidity Update
     Due to its highly leveraged  condition,  ScoPac is more sensitive than less
leveraged  companies to factors  affecting  its  operations,  including  low log
prices,  governmental  regulation and  litigation  affecting  timber  harvesting
operations on the ScoPac  Timber (see Item 1A. "Risk  Factors," of the Form 10-K
and  Note  7),  and  general  economic  conditions.  ScoPac's  cash  flows  from
operations are  significantly  impacted by harvest  volumes and log prices.  The
Master Purchase Agreement between ScoPac and Palco (see Item 1. "Business-Forest
Products  Operations-Relationships  among the Palco Companies" of the Form 10-K)
contemplates  that all sales of logs by ScoPac to Palco  will be at fair  market
value (based on stumpage  prices) for each  species and category of timber.  The
Master Purchase  Agreement provides that if the purchase price equals or exceeds
the SBE Price and a structuring  price set forth in a schedule to the Indenture,
the purchase  price is deemed to be at fair market value.  If the purchase price
equals or exceeds the SBE Price,  but is less than the structuring  price,  then
ScoPac is required to engage an independent  forestry consultant to confirm that
the purchase price reflects fair market value.  In January 2006, the State Board
of  Equalization  adopted the new Harvest  Value  Schedule for the first half of
2006. The prices published in that schedule reflected a 5.3% increase in the SBE
Price for small redwood logs and a 5.6% decrease for small Douglas-fir logs from
the prices  published for the second half of 2005. In June 2006, the State Board
of  Equalization  issued a draft version of the Harvest  Value  Schedule for the
second  half of 2006.  The prices  published  in that  schedule  reflected  a 4%
increase in the SBE Price for small  redwood  logs and a 6%  decrease  for small
Douglas-fir logs from the prices published for the second half of 2005.

     In  the  absence  of  significant  regulatory  relief  and  accommodations,
ScoPac's annual timber harvest levels and cash flows from  operations  will, for
at least the next several years, be substantially  below both historical  levels
and the minimum  levels  necessary  to allow  ScoPac to satisfy its debt service
obligations in respect of the Timber Notes.

     In an effort  to  address  the  expected  future  cash  shortfalls,  ScoPac
initiated  the ScoPac Land Sale  Program  whereby it is seeking to sell  certain
non-timberland  properties such as ranchlands and recreational areas, as well as
certain  timberlands.  During the first half of 2006, $6.9 million of properties
were sold and an additional  $4.6 million of  properties  were sold in July 2006
(of which $3.3 million was received  prior to the July 2006 Timber Notes payment
date).  There can be no assurance  that the marketing  efforts in respect of the
remaining properties will be successful.

     Due to regulatory  constraints  and adverse weather  conditions  during the
first  half of 2006  harvest  levels  were  lower  than  planned,  resulting  in
liquidity  shortfalls at ScoPac.  ScoPac and MGI  consummated  three  timber/log
purchases  that  provided  ScoPac an  aggregate  of $8.1  million of  additional
liquidity  ($4.4  million as of June 30, 2006 and $3.7  million in July 2006) to
pay its expenses,  including  interest due in respect of the Timber Notes on the
Timber Notes payment dates in January 2006 and July 2006, as discussed below.

     On the Timber Notes payment date in January 2006,  ScoPac used its existing
cash  resources,  all of the remaining  funds available under the ScoPac Line of
Credit,  and the additional funds made available from a $2.3 million  timber/log
purchase by MGI, to pay all of the $27.7 million of interest due ($25.8  million
net of interest due in respect of Timber Notes held in the SAR Account).  ScoPac
also repaid $19.3 million of principal on the Timber Notes ($11.9 million net of
principal in respect of Timber Notes held in the SAR  Account),  an amount equal
to Scheduled Amortization, using funds held in the SAR Account.

     As previously  announced,  the estimates of ScoPac  indicated that its cash
flows from  operations,  together with funds  available under the ScoPac Line of
Credit  and other  available  funds,  would be  insufficient,  by a  substantial
amount,  to pay the entire  amount of interest due on the July 20, 2006,  Timber
Notes payment date. As the July 20, 2006,  Timber Notes payment date approached,
it became  apparent  the  ScoPac's  estimates  would prove  correct and that the
remaining  cash   shortfall  as  of  such  Timber  Notes  payment  date,   after
consideration  of the funds made available from the ScoPac Land Sale Program and
the MGI  timber/log  purchases  discussed  above,  would be  approximately  $2.1
million. Based upon review of its existing  alternatives,  ScoPac requested that
Palco make an early payment, equal to the $2.1 million shortfall,  in respect of
certain  logs that had already  been  delivered  to and  purchased by Palco from
ScoPac. Palco approved and delivered the early log payment.

     On the Timber  Notes  payment  date in July 2006,  ScoPac used its existing
cash  resources,  all of the remaining  funds available under the ScoPac Line of
Credit, the additional funds made available from the ScoPac Land Sale Program of
$10.2 million, a $3.7 million  timber/log  purchase by MGI, and the $2.1 million
early log  payment  by Palco to pay all of the $27.1  million  of  interest  due
($25.4  million net of interest  due in respect of Timber  Notes held in the SAR
Account).  ScoPac also repaid  $10.0  million of  principal  on the Timber Notes
($6.2  million  net of  principal  in  respect  of Timber  Notes held in the SAR
Account), an amount equal to Scheduled Amortization, using funds held in the SAR
Account.

     ScoPac also expects to incur substantial  interest shortfalls over at least
the next several years.  The failure of ScoPac to pay all of the interest on the
Timber  Notes when due would  constitute  an event of  default  under the Timber
Notes Indenture.  There can be no assurance that ScoPac will be able to generate
sufficient additional liquidity to fund the expected future cash shortfalls.  To
the extent  that  ScoPac is unable to  generate  sufficient  liquidity  from the
ScoPac Land Sale Program or other sources,  the Company expects that ScoPac will
be  forced  to  take  extraordinary  actions,  which  may  include:  laying  off
employees,  shutting down various  operations,  and seeking protection by filing
under the Bankruptcy Code.

     Palco Liquidity Update
     As of December 31, 2005, and June 30, 2006, Palco and Britt were in default
under the Old Palco Term Loan and the Old Palco Revolving Credit Facility due to
financial covenant breaches. In the first half of 2006, additional liquidity was
needed at Palco and Palco  borrowed an  aggregate  of $20.0  million from MGI to
meet its cash shortfalls.  Palco's liquidity shortfalls during the first half of
2006 resulted  primarily  from reduced log supply from ScoPac and  operational
inefficiencies  related to the large log  processing  line at Palco's new Scotia
sawmill.

     On July 18, 2006,  Palco and Britt,  as Borrowers,  closed on the New Palco
Term Loan, a new five-year  $85.0 million  secured term loan,  and the New Palco
Revolving  Credit  Facility,  a new five-year $60.0 million secured  asset-based
revolving credit facility.  The New Palco Term Loan was fully funded at closing.
The New Palco Term Loan and the New Palco Revolving Credit Facility required MGI
to provide a $10.0 million  subordinated  loan to the Borrowers,  which was also
funded at closing. The Borrowers used approximately (i) $34.0 million of the New
Palco Term Loan to pay off the Old Palco Term  Loan;  (ii) $22.5  million of the
New Palco Term Loan to pay off the Old Palco Revolving  Credit Facility and cash
collateralize  previously  existing letters of credit; and (iii) $6.0 million to
pay transaction  costs.  The remaining funds at closing of $32.5 million will be
used for general  corporate  purposes.  The Borrowers  terminated  the Old Palco
Revolving  Credit  Facility and the Old Palco Term Loan.  The Borrowers have not
made any  borrowings  under the New Palco  Revolving  Credit  Facility  to date,
although they currently have availability in excess of $20.0 million.

     The amount  available for borrowings  under the New Palco Revolving  Credit
Facility  is  normally  the  sum  of 85% of  the  Borrowers'  eligible  accounts
receivable  plus the lesser of (i) 80% of the book value of Borrowers'  eligible
inventory or (ii) 85% of the net orderly  liquidation  value of such  inventory.
However,  during  each  period  from  October 15 through  January 15, the amount
available for borrowing under the New Palco Revolving Credit Facility is the sum
of 95% of Borrowers'  eligible accounts receivable plus the lesser of (i) 90% of
the book value of Borrowers'  eligible  inventory or (ii) 95% of the net orderly
liquidation  value of such inventory.  The amount  available under the New Palco
Revolving  Credit Facility may not exceed $60.0 million,  subject to limitations
such as the ability of the lender to establish reasonable reserves.

     The New Palco Term Loan  bears  interest  at the rate of LIBOR plus  8.75%.
Loans under the New Palco Revolving Credit Facility bear interest at the rate of
LIBOR  plus  2.75% or prime  plus  0.75%,  at the  Borrowers'  option;  however,
incremental  borrowings  made during the period from October 15 through  January
15,  bear  interest  at the rate of LIBOR  plus 4.50% or prime  plus  2.50%,  as
applicable. The New Palco Revolving Credit Facility matures on July 18, 2011.

     Both the New Palco Term Loan and the New Palco  Revolving  Credit  Facility
contain substantially  identical restrictive covenants that limit the Borrowers'
ability to incur debt,  grant  liens,  make  investments,  pay  dividends,  make
capital  expenditures  or merge or  consolidate,  and require the  Borrowers' to
maintain a minimum level of EBITDA,  along with a minimum fixed charge  coverage
ratio and maximum leverage ratio throughout the life of the loans. The operating
cash flow  estimates  used to  establish  the EBITDA  maintenance  covenant  are
subject to a number of assumptions  about future operating cash flows and actual
results could differ  materially from these  estimates.  The New Palco Term Loan
also requires the Borrowers to repay a  substantial  portion of the  outstanding
principal of the New Palco Term Loan with the net proceeds  from the Palco Asset
Sale Program, including the real property associated with Palco's former Fortuna
and Carlotta sawmills, and Palco-owned homes to be sold after certain milestones
have been met. Any remaining principal balance of the New Palco Term Loan is due
on July  18,  2011.  Accordingly,  continued  compliance  with  these  new  debt
facilities is dependent on Palco's  ability to meet its EBITDA  projections  and
timely complete  required asset sales. The New Palco Term Loan and the New Palco
Revolving  Credit  Facility  contain  customary  events of default and customary
remedies with respect to the occurrence of an event of default.

     The New Palco  Term  Loan and New  Palco  Revolving  Credit  Facility  each
include prepayment  premiums of 3%, 2% and 1% that will be payable in connection
with any  prepayment of the New Palco Term Loan or reduction or  termination  of
the New Palco  Revolving  Credit  Facility  during the  first,  second and third
years,  respectively.  Under  the New Palco  Term  Loan and New Palco  Revolving
Credit Facility,  Palco is permitted to invest up to $5.0 million in ScoPac.  No
such investment had been made or committed to be made by Palco, and there can be
no  assurance  that Palco would in the future  determine  or be able to make any
such investment in whole or part.

     In addition to the material adverse effects being  experienced by Palco and
ScoPac due to continuing regulatory,  environmental and litigation difficulties,
there can be no assurance  that certain  other  pending  legal,  regulatory  and
environmental matters or future governmental regulations, additional litigation,
legislation,  judicial or administrative decisions,  adverse weather conditions,
or low lumber or log prices,  will not also have material adverse effects on the
financial condition,  results of operations or liquidity of the Company's forest
products  operations.  See Note 7 for further  discussion of the  regulatory and
environmental  matters and legal  proceedings  affecting  the  Company's  forest
products operations.

     Capital  expenditures  for Palco were $1.1 million for the six months ended
June 30, 2006 and are  expected to be between  $3.6 million and $4.1 million for
the remainder of 2006. Capital expenditures for ScoPac were $2.2 million for the
six months  ended June 30, 2006 and are  expected to be between $5.4 million and
$6.0 million for the remainder of 2006. Palco's pension funding was $2.1 million
for the first six  months of 2006 and is  expected  to be $7.2  million  for the
remainder of 2006.

     Real Estate Operations

     Capital  expenditures and real estate  improvements  and development  costs
were  $5.5  million  for the first six  months  of 2006 and are  expected  to be
between  approximately $10.0 million to $15.0 million for the remainder of 2006,
primarily for infrastructure construction at Fountain Hills. The Company expects
that these  expenditures will be funded by cash flows from operations,  existing
cash and available credit facilities.

     Subject to  available  resources,  the  Company's  real estate  segment may
purchase  additional  properties and/or seek other investment ventures from time
to time as appropriate opportunities arise.

     Real  estate  management   believes  that  the  existing  cash  and  credit
facilities  are  sufficient  to fund the segment's  working  capital and capital
expenditure  requirements  for 2006.  With  respect to the  segment's  long-term
liquidity,  real estate  management  believes  that the ability to generate cash
from the sale of existing assets,  together with the ability to obtain financing
and joint venture partners,  should provide sufficient funds to meet the working
capital and capital expenditure requirements.

     Racing Operations

     Capital expenditures were $0.2 million for the first six months of 2006 and
an additional $0.1 million is expected for the remainder of 2006.

     Subject to available  resources,  the Company's racing segment may purchase
additional  properties  and/or  seek to expand  its  operations  as  appropriate
opportunities arise.

     During the first  quarter of 2006,  SHRP,  Ltd.  borrowed $1.0 million from
MAXXAM Parent to improve its working capital  position.  SHRP, Ltd.'s management
expects that SHRP, Ltd. will require  additional  advances from MAXXAM Parent to
fund its  operations  and  capital  expenditures  in the future.  SHRP,  Ltd. is
experiencing   strong  competition  from  Internet  wagering  and  "racinos"  in
surrounding  states.  The Company  expects that these  factors will also have an
adverse impact on the long-term liquidity of SHRP, Ltd.

Off-Balance Sheet Arrangements

     The  Company  does not have any  off-balance  sheet  financing,  other than
operating   leases   entered  into  in  the  normal   course  of  business,   or
unconsolidated  special purpose  entities.  The Company does not use derivatives
for any of its treasury or risk management activities.

Trends

     Forest Products Operations

     Harvest  levels at the Company forest  products  operations are expected to
decline  significantly,  as compared to historical  harvest levels,  in 2006 and
beyond. Consequently, cash flows from ScoPac's operations will not be sufficient
for at least the next several  years to allow ScoPac to satisfy its debt service
obligations  in respect of its Timber  Notes.  In an effort to address  expected
future  cash  shortfalls,  ScoPac is  seeking  to sell  certain  non-timberlands
properties  such as  ranchlands  and  recreational  areas,  as  well as  certain
timberlands.  Although  certain  sales  have  been  completed,  there  can be no
assurance that the marketing efforts in respect of the remaining properties will
be successful.

     Palco has  commenced  the Palco Asset Sale Program  pursuant to which it is
marketing certain assets. The New Palco Term Loan and New Palco Revolving Credit
Facility also require the Borrowers to timely  complete  transactions  under the
Palco Asset Sale Program. There can be no assurance that these marketing efforts
will be successful or that regulatory approvals will be obtained to enable Palco
to timely complete required asset sales.

     Real Estate Operations

     The  Company  is  engaged  in  marketing  and  sales  programs  of  varying
magnitudes  at its real estate  developments.  The  Company  intends to continue
selling undeveloped acreage, semi-developed parcels and fully developed lots.

     In 2005, the Company's real estate operations realized substantial revenues
related  to  sales  at  the  Company's   Fountain   Hills,   Mirada  and  Palmas
developments. As the proceeds from these asset sales have not been redeployed on
other real estate assets,  this level of sales activity is not expected to recur
for the foreseeable future.

     Racing Operations

     The next regular session of the Texas  Legislature will begin in January of
2007.  The Company has in the past and intends to continue to vigorously  pursue
gaming legislation favorable to it. As some legislation may require the approval
of two-thirds of each legislative house and a majority of the state's voters, no
assurance  can be given  that any such  legislation  will be  enacted  or become
effective.  Moreover,  it is impossible to determine  what the provisions of any
such legislation would be or its effect on the Company.

     In  January  2004,  a  subsidiary  of the  Company  applied  to the  Racing
Commission  for an  additional  license to construct and operate a Class 2 horse
racing  facility in Laredo,  Texas.  There can be no assurance  that the Company
will obtain this additional license as, among other things, there is a competing
applicant.  A hearing  before a State  administrative  law judge to review  both
applications concluded in March 2006 and the Company is awaiting a decision.

Contractual Obligations

     The  following  table  presents  information  with respect to the Company's
contractual obligations as of June 30, 2006 (in millions).

                                                                         Payments Due by Period
                                                     ---------------------------------------------------------------
         Contractual Obligations             Total      2006      2007      2008       2009      2010    Thereafter
--------------------------------------------------------------------------------------------------------------------
Debt obligations                           $   983.2   $ 50.7    $ 31.4    $ 30.2      $25.5     $ 71.5  $  773.9
Interest due on long-term debt
  obligations (1)                              704.2     73.5     107.9     104.6       67.1       65.2     285.9
Operating lease obligations                     10.0      1.6       2.9       2.0        0.8        0.8       1.9
Purchase obligations(2)                            -        -         -         -          -          -         -
Pension funding obligations (3)                 20.4     10.1       6.5       3.2        0.6          -         -
Other long-term liabilities reflected on
  the Company's balance sheet(4)(5)(6)(7)        6.0      1.7       0.8       3.5          -          -         -
                                           -------------------------------------------------------------------------
Total                                      $ 1,723.8   $137.6    $149.5    $143.5      $94.0     $137.5  $1,061.7
                                           =========================================================================

(1)  Interest  due on debt  obligations  is net of  additional  interest  due in
     respect of Timber Notes held by ScoPac in the SAR Account.
(2)  Excludes ordinary course of business purchase orders.
(3)  Represents  expected  funding for pension  benefits for 2006 and subsequent
     years.
(4)  Excludes reserves for litigation, environmental remediation, self-insurance
     claims, and other contingent liabilities due to uncertainty as to when cash
     payments will be required.
(5)  Includes  $0.1  million in 2006 and $1.8 million in 2008 under the terms of
     various executive compensation agreements.
(6)  Includes  $0.4  million in 2007 and $1.7  million in 2008 for PDMPI's  cost
     sharing agreement with the Puerto Rico Power Authority for the construction
     of an  electrical  substation  that will  provide  capacity to new projects
     within PDMPI.
(7)  Includes  $1.6  million  in 2006 and 0.4  million  in 2007 for  contractual
     amounts owed under agreements with various  professional firms (principally
     audit and tax compliance fees).

Critical Accounting Policies and Estimates

     See Item 7.  "Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations--Critical  Accounting  Policies and Estimates" of the
Form 10-K for a discussion of the Company's critical accounting policies.  There
have been no material changes to the Company's critical  accounting policies and
estimates provided in the Form 10-K.

New  Accounting Pronouncements

     See Note 2 for a  discussion  of new  accounting  pronouncements  and their
impact on the Company's financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to changes in  interest  rates  primarily  under the
ScoPac Line of Credit and the Old Palco Revolving  Credit Facility and Old Palco
Term Loan, as well as certain other debt  facilities used to finance real estate
development  activities.  As of June 30,  2006,  there  were  $84.9  million  in
borrowings  outstanding under all variable rate facilities.  Based on the amount
of borrowings  outstanding  under these  facilities  during the six months ended
June 30, 2006, a 1.0% change in interest  rates  effective from the beginning of
the year would have resulted in an increase or decrease in interest  expense for
the period of $0.8 million.

ITEM 4. CONTROLS AND PROCEDURES

     The Company maintains  disclosure controls and procedures that are designed
to ensure that  information  required to be disclosed in the  Company's  reports
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported  within the time  periods  specified in the rules and forms of the SEC,
and that such  information  is  accumulated  and  communicated  to the Company's
management,  including its Chief Executive Officer and Chief Financial  Officer,
as appropriate,  to allow timely decisions  regarding  required  disclosure.  In
designing and  evaluating  the disclosure  controls and  procedures,  management
recognized  that any controls and  procedures,  no matter how well  designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives,  and  management  necessarily  was required to apply its judgment in
evaluating the  cost-benefit  relationship of possible  controls and procedures.
Also, the Company has  investments in certain  unconsolidated  entities.  As the
Company does not control or manage these entities,  its disclosure  controls and
procedures  with respect to such  entities are  necessarily  substantially  more
limited than those it maintains with respect to its consolidated subsidiaries.

     As of the end of the period covered by this report,  our management carried
out an  evaluation,  under the  supervision  and with the  participation  of the
Company's management,  including our Chief Executive Officer and Chief Financial
Officer,  of the  effectiveness  of the design and  operation  of the  Company's
disclosure  controls and procedures.  Based on the  evaluation,  our management,
including our Chief  Executive  Officer and Chief Financial  Officer,  concluded
that the Company's  disclosure controls and procedures were effective as of June
30, 2006.

     There have been no significant  changes in the Company's  internal controls
or in other  factors  that  could  significantly  affect the  internal  controls
subsequent to the date the Company completed its evaluation.

                     PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     The information set forth in Note 7 is incorporated herein by reference.

ITEM 1A. RISK FACTORS

     Part I, Item 1A of the Company's Form 10-K contains  important risk factors
that could cause the Company's  actual results to differ  materially  from those
projected in any forward-looking  statement.  Additional risks and uncertainties
not  currently  known or that are currently  deemed  immaterial  may  materially
adversely impact our business, financial condition or operating results.

     The information  presented below updates, and should be read in conjunction
with, the risk factor information  disclosed in the Form 10-K for the year ended
December 31, 2005.

     The Company has amended and  restated  the first item under "Risk  Factors:
Risks related to Forest Products Regulatory Matters" to read as follows:

     Regulatory and legislative actions have the power to limit ScoPac's harvest
levels and  require  ScoPac and Palco to incur  additional  costs and have other
adverse consequences.

     Regulatory and legislative  actions,  among others, are now having, or have
the potential to have material adverse impacts on ScoPac and Palco:

     o    The North  Coast  Water  Board has in the past  failed to release  for
          harvest  a  number  of  ScoPac's  previously-approved  THPs,  reducing
          current and projected harvest levels significantly.  Continued failure
          of the North  Coast  Water  Board to release  THPs for  harvest  would
          worsen the cash flow difficulties of Palco and ScoPac. The North Coast
          Water  Board  has  adopted  WWDRs  for the  Freshwater  and Elk  River
          watersheds,  which  action has the effect of  allowing  harvesting  in
          these two  watersheds to begin once THPs are enrolled by the Executive
          Officer of the North Coast Water Board. There can be no assurance that
          THPs for these two watersheds will ultimately be enrolled or harvested
          as  planned  in 2006 or in future  years.  If there are  delays in the
          enrollment of these THPs, there could be a further significant adverse
          impact on current and future harvest levels and the cash flows of both
          Palco and ScoPac.

     o    The final TMDL  requirements  applicable to the Palco  Timberlands may
          require  aquatic  protection  measures that are  different  from or in
          addition  to  those  in the  HCP or that  result  from  the  watershed
          analysis  process  provided  for in the HCP.  These  requirements  may
          further reduce the harvesting on the Palco  Timberlands and cash flows
          of ScoPac and Palco.

     o    The North Coast Water Board has issued the Elk River  Order,  which is
          aimed at addressing  existing sediment  production sites through clean
          up actions in the Elk River  watershed,  and has initiated the process
          which could  result in similar  orders for other  watersheds.  The Elk
          River Order has resulted in  increased  costs that could extend over a
          number of years, and additional orders for other watersheds could have
          similar effects.

     o    The North  Coast  Water  Board has  imposed  requirements  for certain
          mitigation and erosion control practices in several  watersheds within
          the  Palco  Timberlands.   The  requirements   imposed  to  date  have
          significantly   increased  operating  costs.  Additional  requirements
          imposed in the future could further increase costs and cause delays in
          THP approvals.

     o    The Company is uncertain of the operational and financial effects that
          will ultimately  result from Senate Bill 810.  Implementation  of this
          law could,  however,  result in delays in obtaining approvals of THPs,
          lower harvest  levels and increased  costs and  additional  protection
          measures beyond those contained in the HCP.

     o    The designation of a species as endangered or threatened under the ESA
          or the CESA can  significantly  reduce  harvest levels if that species
          inhabits  the  Palco  Timberlands  or if  the  habitat  of  the  Palco
          Timberlands is deemed  favorable to the species.  While the HCP covers
          17 different species,  it is possible that additional species could be
          designated as endangered or threatened under both the ESA and the CESA

     o    Laws,  regulations and related judicial  decisions and  administrative
          interpretations dealing with forest products operations are subject to
          change  and  new  laws  and  regulations  are  frequently   introduced
          concerning the California  timber  industry.  From time to time, bills
          are  introduced  or  ballot  initiatives  commenced  relating  to  the
          Company's forest products operations.

     The Company has removed,  amended  and/or has added several new items under
"Risk  Factors-Risks  related to Liquidity  and Capital  Resources of Our Forest
Products Subsidiaries", as follows:

     The risk, Palco is currently in default under its debt facilities, has been
removed  as a risk due to the  closing  on the New Palco Term Loan and New Palco
Revolving  Credit  Facility on July 18, 2006.  The risk,  Palco may be adversely
affected by an inability to obtain additional  liquidity,  has been removed as a
risk due to the  closing  on the New Palco  Term  Loan and New  Palco  Revolving
Credit Facility on July 18, 2006.

     The risk, Palco is highly leveraged and debt covenant restrictions increase
the difficulty of operating its business, has been added and amended as follows:

     Palco's  high level of debt and covenant  restrictions  under the New Palco
Term  Loan and New Palco  Revolving  Credit  Facility  could  have a variety  of
important negative consequences, including:

     o    limiting its ability to borrow additional amounts for working capital,
          capital  expenditures,  debt  service  requirements,  execution of its
          operating strategies or other purposes;
     o    increasing its  vulnerability to general adverse economic and industry
          conditions;
     o    limiting its ability to capitalize on business opportunities,  such as
          purchasing additional log inventories from third parties, and to react
          to  competitive   pressures  and  adverse  government  regulation  and
          litigation developments; and
     o    limiting its  ability,  or  increasing  the costs,  to  refinance  its
          indebtedness.

     Palco may not be able to timely complete required asset sales.

     o    Palco may not be able to complete  the Palco  Asset Sale  Program in a
          timely manner.  Regulatory  approvals required to complete the program
          could delay receipt of liquidity.

     The risk,  ScoPac's and Palco's liquidity issues could result in claims and
potential liabilities for certain affiliates, has been amended as follows:

     The  liquidity  issues  being  experienced  by ScoPac,  and those  recently
experienced by Palco should they recur, could result in claims against and could
have adverse impacts on MAXXAM Parent, MGHI and/or MGI. For example,  were Palco
to terminate its pension plan,  MAXXAM Parent and its wholly owned  subsidiaries
would be jointly and severally  liable for any unfunded pension plan obligations
(estimated to be approximately $31.0 million at December 31, 2005). In addition,
it is possible that  transactions  which could be completed in connection with a
potential  restructuring or reorganization of Palco or ScoPac, could require the
utilization  of all or a  substantial  portion of, or the loss of a  significant
portion of, the  Company's  net  operating  losses or other tax  attributes  for
federal and state income tax purposes and could require tax payments.

     These risk factors and those set forth in the Form 10-K do not  represent a
comprehensive  list of factors that could cause our results to differ from those
that are currently anticipated and should be read together with the risk factors
and other  information  set forth in the Form  10-K and in the  Company's  other
filings with the Securities and Exchange Commission.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     In June 2006,  the Company  acquired  704,100 shares of its Common Stock at
$31.70 per share, for a total of $22.3 million,  through a privately  negotiated
transaction. Additionally, in June 2006 the Company acquired 3,185 shares of its
Common  Stock at an  average  price of  $28.02  per  share,  for a total of $0.1
million,  on national  exchanges.  The  Company  may from time to time  purchase
additional  shares of its Common  Stock on national  exchanges  or in  privately
negotiated transactions.

ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

     The annual meeting of stockholders of the Company was held on May 24, 2006,
at which  meeting the  stockholders  reelected  Messrs.  Cruikshank,  Rosenberg,
Rosenthal,  Friedman and Levin as  directors of the Company.  The results of the
matters voted upon at the meeting are shown below.

Nominees for Director

     The nominees  for  election as  directors of the Company are listed  below,
together with voting information for each nominee.  Messrs.  Charles Hurwitz and
Shawn Hurwitz continued as directors of the Company.

     Nominees for Election by Holders of Common Stock

     Robert J. Cruikshank - 4,681,897 votes for,  761,410 votes withheld and -0-
          broker non-votes.
     Stanley D. Rosenberg - 4,681,940 votes for,  761,367 votes withheld and -0-
          broker non-votes.
     Michael J. Rosenthal - 4,654,644 votes for,  788,663 votes withheld and -0-
          broker non-votes.

     Nominees for  Election  by  Holders of Common  Stock and Class A  Preferred
          Stock

     J.   Kent Friedman - 11,332,894  votes for,  787,783 votes withheld and -0-
          broker non-votes.
     Ezra G. Levin - 11,319,499 votes for, 801,178 votes withheld and -0- broker
          non-votes.

ITEM 6. EXHIBITS

     a. Exhibits:

          10.1 Fourth Amendment to Credit  Agreement,  dated May 18, 2006, among
               Registrant,  Bank of  America,  N.A.,  The  Bank of Nova  Scotia,
               Keybank National Association,  and U.S. Bank National Association
               (incorporated   herein  by  reference  to  Exhibit  10.1  to  the
               Company's Current Report on Form 8-K filed on May 23, 2006)

          10.2 Stock  Purchase   Agreement,   dated  May  25,  2006,  among  the
               Registrant,  Scion  Qualified  Value  Fund and Scion  Value  Fund
               (incorporated   herein  by  reference  to  Exhibit  10.1  to  the
               Company's Current Report on Form 8-K filed on May 26, 2006)

          10.3 Revolving  Credit  Agreement dated as of July 18, 2006, among The
               Pacific Lumber Company,  Britt Lumber Co., Inc., the lenders from
               time to time party thereto and Marathon  Structured  Finance Fund
               L.P., as administrative  agent (incorporated  herein by reference
               to Exhibit 10.1 to the Company's Current Report on Form 8-K filed
               on July 21, 2006)

          10.4 Term Loan Agreement, dated as of July 18, 2006, among The Pacific
               Lumber Company,  Britt Lumber Co., Inc., the lenders from time to
               time party thereto and Marathon  Structured Finance Fund L.P., as
               administrative agent (incorporated herein by reference to Exhibit
               10.2 to the  Company's  Current  Report on Form 8-K filed on July
               21, 2006)

          10.5 Guarantee  and  Collateral  Agreement  dated as of July 18, 2006,
               made by The Pacific  Lumber  Company,  Britt  Lumber  Co.,  Inc.,
               MAXXAM Group Inc.,  Salmon Creek LLC and Scotia Inn Inc. in favor
               of Marathon Structured Finance Fund L.P., as administrative agent
               for  the  Revolving  Credit  Agreement  (incorporated  herein  by
               reference to Exhibit 10.3 to the Company's Current Report on Form
               8-K filed on July 21, 2006)

          10.6 Guarantee  and  Collateral  Agreement  dated as of July 18, 2006,
               made by The Pacific  Lumber  Company,  Britt  Lumber  Co.,  Inc.,
               MAXXAM Group Inc.,  Salmon Creek LLC and Scotia Inn Inc. in favor
               of Marathon Structured Finance Fund L.P., as administrative agent
               for the Term Loan Agreement  (incorporated herein by reference to
               Exhibit 10.4 to the Company's Current Report on Form 8-K filed on
               July 21, 2006)

          10.7 Deed of Trust, Security Agreement, Assignment of Rents And Leases
               And Fixture  Filing,  dated as of July 18, 2006,  by and from The
               Pacific  Lumber Company to Fidelity  National Title Company,  for
               the  benefit  of  Marathon   Structured  Finance  Fund  L.P.,  as
               administrative   agent  for  the   Revolving   Credit   Agreement
               (incorporated   herein  by  reference  to  Exhibit  10.5  to  the
               Company's Current Report on Form 8-K filed on July 21, 2006)

          10.8 Deed of Trust, Security Agreement, Assignment of Rents And Leases
               And Fixture  Filing,  dated as of July 18, 2006,  by and from The
               Pacific  Lumber Company to Fidelity  National Title Company,  for
               the  benefit  of  Marathon   Structured  Finance  Fund  L.P.,  as
               administrative  agent for the Term Loan  Agreement  (incorporated
               herein by  reference  to Exhibit  10.6 to the  Company's  Current
               Report on Form 8-K filed on July 21, 2006)

          *    31.1 Section 302 Certification of Chief Executive Officer

          *    31.2 Section 302 Certification of Chief Financial Officer

          *    32.1 Section 906 Certification of Chief Executive Officer

          *    32.2 Section 906 Certification of Chief Financial Officer

          *    Included with this filing

                                      SIGNATURE

     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,  who has signed this report on behalf of
the  Registrant  and as the principal  financial and  accounting  officer of the
Registrant.

                                                     MAXXAM INC.

Date: August 9, 2006             By:     /S/         M. EMILY MADISON
                                                     M. Emily Madison
                                                     Vice President, Finance and
                                                 Interim Chief Financial Officer
                                               (Principal Accounting Officer and
                                            Interim Principal Financial Officer)

                                                                     APPENDIX A

                      Glossary of Defined Terms

Set forth below is a list of all terms used in this Report

APB Opinion No. 25:  Accounting  Principles  Board Opinion 25,  "Accounting  for
Stock Issued to Employees"

APB Opinion No. 29:  Accounting  Principles  Board Opinion 29,  "Accounting  for
Nonmonetary Transactions"

Bankruptcy Code: The United States Bankruptcy Code

Bear Creek lawsuit:  An action  entitled  Environmental  Protection  Information
Association v. Pacific Lumber,  Scotia Pacific Company LLC (No.  C01-2821) filed
in the U.S. District Court for the Northern District of California

Borrowers:  Palco and Britt,  as Borrowers under the New Palco Term Loan and the
New Palco Revolving Credit Facility

Britt: Britt Lumber Co., Inc., a wholly owned subsidiary of Palco

California  Permits:  The Permits issued by the State of California  pursuant to
the HCP

California  Headwaters  action:  The claim  filed by Palco and  ScoPac  with the
Claims Board against the North Coast Water Board,  the State Water Board and the
State of  California  (Claim No.  G558159)  alleging  that the  defendants  have
substantially  impaired their  contractual and legal rights under the Headwaters
Agreement

California  Senate  Bill 810:  Bill  which  became  effective  January  1, 2004,
providing  regional  water  quality  control  boards with  additional  authority
related to the approval of THPs on land within impaired watersheds

Cases: The Chapter 11 proceedings of the Debtors

Cave action:  An action  entitled Steve Cave, et al. v. Gary Clark,  et al. (No.
DR020719) filed in the Superior Court of Humboldt County, California

CDF: California Department of Forestry and Fire Protection

CDF Harvest Limit: Annual harvest limit established by the CDF

Claims Board: The California Victim Compensation and Government Claims Board

Class A Preferred Stock: The Company's Class A $.05 Non-Cumulative Participating
Convertible Preferred Stock

Common Stock: The Company's $0.50 par value common stock

Company: MAXXAM Inc., including its subsidiaries

Cook action:  An action  entitled Alan Cook,  et al. v. Gary Clark,  et al. (No.
DR020718) filed in the Superior Court of Humboldt County, California

CWA: Federal Clean Water Act

Debtors:  Kaiser,  KACC and the  subsidiaries of KACC which have filed petitions
for reorganization

EBITDA:  As  defined  in  Section  1.01 of the New Palco Term Loan and New Palco
Revolving Credit Agreement  which,  among other things,  excludes the results of
ScoPac

Elk River Order: Clean up and abatement order issued to Palco by the North Coast
Water Board for the Elk River watershed Environmental Plans: The HCP and the SYP

EPA: Federal Environmental Protection Agency

EPIC-SYP/Permits   lawsuit:   An  action   entitled   Environmental   Protection
Information  Association,  Sierra Club v. California  Department of Forestry and
Fire  Protection,  California  Department of Fish and Game,  The Pacific  Lumber
Company,  Scotia Pacific Company LLC, Salmon Creek Corporation,  et al. filed in
the Superior Court of Humboldt County, California (No. CV990445)

ERISA: The Employee Retirement Income Security Act of 1974, as amended from time
to time

FASB: Financial Accounting Standards Board

FDIC: Federal Deposit Insurance Corporation

FDIC action:  An action  entitled  Federal  Deposit  Insurance  Corporation,  as
manager of the FSLIC Resolution Fund v. Charles E. Hurwitz (No. H-95-3956) filed
by the FDIC on  August  2,  1995 in the U.S.  District  Court  for the  Southern
District of Texas

Federal Permits:  The Permits issued by the federal  government  pursuant to the
HCP

Federated: Federated Development Company, a principal stockholder of the Company
now known as Giddeon Holdings, Inc.

FIN: Financial Accounting Standards Board Interpretation

FIN No. 48: FASB FIN No. 48 , "Accounting  for  Uncertainty in Income Taxes,  an
Interpretation of FASB Statement 109"

Form 10-K:  Annual  Report on Form 10-K of the Company for the fiscal year ended
December 31, 2005

Fountain Hills:  Fountain Hills, a master-planned  residential community located
in Fountain Hills, Arizona

Harvest Value Schedule:  A schedule setting forth SBE Prices, which is published
biannually  by the  California  State  Board of  Equalization  for  purposes  of
computing yield taxes on timber sales

HCP: The habitat  conservation  plan covering multiple species approved in March
1999 in connection with the consummation of the Headwaters Agreement

Headwaters  Agreement:  The agreement  among Palco,  ScoPac,  Salmon Creek,  the
United States and California  pursuant to which the Palco Companies  transferred
to the United States  government 5,600 acres of timberlands in exchange for $300
million,  approximately  7,700  acres of  timberlands,  and  federal  and  state
government-approved habitat conservation and sustained yield plans

Humboldt DA action:  A civil suit entitled The People of the State of California
v. Pacific Lumber,  Scotia Pacific Holding Company and Salmon Creek  Corporation
(No.  DR030070) filed in the Superior Court of Humboldt County,  California,  by
the District Attorney of Humboldt County

Johnson action: An action entitled Edyth Johnson,  et al. v. Charles E. Hurwitz,
an individual, MAXXAM Inc., et al. (No. DR040720) filed in the Superior Court of
Humboldt County, California

KACC:  Kaiser  Aluminum & Chemical  Corporation,  Kaiser's  principal  operating
subsidiary

Kahn lawsuit: An action entitled Alan Russell Kahn v. Federated Development Co.,
MAXXAM Inc.,  et. al.  (Civil  Action  18623NC)  filed in the Delaware  Court of
Chancery

Kaiser: Kaiser Aluminum Corporation,  a former subsidiary of the Company engaged
in aluminum operations

Kaiser  Bankruptcy  Court:  The United States District Court for the District of
Delaware  supervising the Cases Kaiser Shares:  50,000,000  shares of the common
stock of Kaiser, formerly owned by the Company and MGHI

Master Purchase  Agreement:  The agreement between Palco and ScoPac that governs
all purchases of logs by Palco from ScoPac

MAXXAM: MAXXAM Inc., including its subsidiaries

MAXXAM Parent: MAXXAM Inc., excluding its subsidiaries

MGHI: MAXXAM Group Holdings Inc., a wholly owned subsidiary of the Company

MGI: MAXXAM Group Inc., a wholly owned subsidiary of MGHI

Mirada:  The  Company's  luxury  resort-residential  project  located  in Rancho
Mirage, California

New Palco  Revolving  Credit  Facility:  The new five-year $60.0 million secured
asset-based   revolving  credit  facility  evidenced  by  the  Revolving  Credit
Agreement dated as of July 18, 2006,  among Palco and Britt,  as borrowers,  and
Marathon Structured Finance Fund L.P., as Administrative Agent

New Palco Term Loan: The new five-year $85.0 million secured term loan evidenced
by the Term Loan Agreement dated as of July 18, 2006,  among Palco and Britt, as
borrowers, and Marathon Structured Finance Fund L.P., as Administrative Agent

NJDEP: New Jersey Department of Environmental Protection

North Coast Water Board:  California  North Coast Regional Water Quality Control
Board

Old Palco Revolving Credit Facility:  Revolving credit facility evidenced by the
Revolving  Credit Agreement dated as of April 19, 2005 among Palco and Britt, as
borrowers, and Credit Suisse First Boston

Old  Palco  Term  Loan:  $35.0  million  term  loan  evidenced  by the Term Loan
Agreement  dated as of April 19, 2005 among Palco and Britt,  as borrowers,  and
The CIT Group/Business Credit, Inc.

Option  A  Plan:   Plan  for  complying  with   California's   sustained   yield
requirements, which has been approved by the CDF, and is being used by the Palco
Companies

OTS: The United States Department of Treasury's Office of Thrift Supervision

OTS action: A formal administrative  proceeding initiated by the OTS against the
Company and others on December 26, 1995

Palco: The Pacific Lumber Company, a wholly owned subsidiary of MGI

Palco Asset Sale Program: Palco's process for marketing certain of its assets

Palco Companies: Palco, ScoPac and Salmon Creek, collectively

Palco Timberlands: The ScoPac Timber Property and the timberlands owned by Palco
and Salmon Creek

Palmas:  Palmas  del Mar,  a  master-planned  residential  community  and resort
located on the southeastern coast of Puerto Rico near Humacao

Permits:  The incidental take permits issued by the United States and California
pursuant to the HCP

PSLRA: Private Securities Litigation Reform Act of 1995

Racing Commission: Texas Racing Commission

Respondents:   The  Company,  Federated,  Mr.  Charles  Hurwitz  and  the  other
respondents in the OTS action S&P: Standard & Poor's Rating Service

Salmon Creek: Salmon Creek LLC, a wholly owned subsidiary of Palco

Sam Houston Race Park: Texas Class 1 horse racing facility in Houston, Texas and
operated by SHRP, Ltd.

Sanctions Motion: An amended  counterclaim and motion for sanctions filed by the
Respondents on November 8, 2002, in connection with the FDIC action

SAR Account:  Funds held in a reserve account titled the Scheduled  Amortization
Reserve Account and used to support principal payments on the Timber Notes

SBE Price:  The applicable  stumpage price for a particular  species and size of
log, as set forth in the most recent Harvest Value Schedule

Scheduled  Amortization:  The amount of principal  which ScoPac must pay through
each  Timber  Note  payment  date in  order to avoid  prepayment  or  deficiency
premiums

ScoPac:  Scotia Pacific Company LLC, a limited liability company wholly owned by
Palco

ScoPac Land Sale Program:  ScoPac's  program  pursuant to which it is seeking to
sell certain timberland and non-timberland properties

ScoPac  Line of Credit:  The  agreement  between a group of  lenders  and ScoPac
pursuant to which ScoPac may borrow in order to pay up to one year's interest on
the Timber Notes

ScoPac  Timber:  The timber in respect of the  ScoPac  Timber  Property  and the
ScoPac Timber Rights

ScoPac Timber  Property:  Approximately  204,000 acres of  timberlands  owned by
ScoPac

ScoPac  Timber  Rights:  ScoPac's  exclusive  right to harvest on  approximately
12,200 acres of timberlands owned by Palco and Salmon Creek

SEC: The Securities and Exchange Commission

second growth: Trees that have been growing for less than 200 years

Services  Agreement:  Agreement  between  ScoPac  and Palco  under  which  Palco
provides  certain  operational,  management and related  services to ScoPac with
respect to the ScoPac Timber

SFAS: Statement of Financial Accounting Standards

SFAS No. 123(r): SFAS No. 123 (revised 2004), "Share-Based Payments"

SFAS No. 153: SFAS No. 153,  "Exchange of  Nonmonetary  Assets," an amendment of
APB Opinion No. 29

SFAS No. 154: SFAS No. 154, "Accounting Changes and Error Correction"

SHRP,  Ltd.:  Sam Houston  Race Park,  Ltd., a wholly  owned  subsidiary  of the
Company

State Water Board: California State Water Resources Control Board

State Water Board  action:  An action  entitled The Pacific  Lumber  Company and
Scotia Pacific Company LLC v. State Water  Resources  Control Board, at al. (No.
CV050516) in Humboldt  County  Superior  Court  appealing  the State Water Board
Order

State Water Board Order: Order issued by the State Water Board on June 16, 2005

SYP: The sustained  yield plan approved in March 1999 as part of the  Headwaters
Agreement, and later invalidated by a California state court

take:  Adverse  impacts on species  which have been  designated as endangered or
threatened

THP:  Timber  harvesting  plan required to be filed with and approved by the CDF
prior to the harvesting of timber

Timber Notes:  ScoPac's  6.55% Series B Class A-1 Timber  Collateralized  Notes,
7.11%  Series B Class A-2 Timber  Collateralized  Notes and 7.71% Series B Class
A-3 Timber Collateralized Notes due July 20, 2028

Timber Notes Indenture: The indenture governing the Timber Notes

Trustee: The trustee under the Indenture

TMDLs: Total maximum daily load limits

USAT: United Savings Association of Texas

USWA lawsuit: An action entitled United Steelworkers of America,  AFL-CIO,  CLC,
and Donald Kegley v. California Department of Forestry and Fire Protection,  The
Pacific Lumber Company,  Scotia Pacific Company LLC and Salmon Creek Corporation
(No. CV990452) filed in the Superior Court of Humboldt County, California

Valley Race Park: The Company's  greyhound racing facility located in Harlingen,
Texas

WWDRs: Watershed-wide discharge requirements
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