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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 SEPTEMBER 30, 2003

                          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)

           5847 SAN FELIPE, SUITE 2600
                 HOUSTON, TEXAS                              77057
    (Address of Principal Executive Offices)              (Zip Code)


       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 |X|   No |_|

         Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes |_|   No |X|

         The aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, as of the last business day of the registrant's most
recently completed second fiscal quarter: $52.8 million.


 Number of shares of common stock outstanding at November 13, 2003: 6,192,371

--------------------------------------------------------------------------------


                                TABLE OF CONTENTS



PART I. - FINANCIAL INFORMATION


      Item 1.   Financial Statements:
                Consolidated Balance Sheet
                Consolidated Statement of Operations
                Consolidated Statement 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.   Disclosure Controls and Procedures

PART II. - OTHER INFORMATION

      Item 1.   Legal Proceedings
      Item 6.   Exhibits and Reports on Form 8-K
      Signatures

APPENDIX A - GLOSSARY OF DEFINED TERMS




                          MAXXAM INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
               (IN MILLIONS OF DOLLARS, EXCEPT SHARE INFORMATION)


                                                                                        SEPTEMBER 30, DECEMBER 31,
                                                                                            2003          2002
                                                                                        ------------  -------------
                                                                                                 (UNAUDITED)
ASSETS
Current assets:
   Cash and cash equivalents..........................................................  $      30.1   $       45.6
   Marketable securities..............................................................        121.5          105.7
   Receivables:
      Trade, net of allowance for doubtful accounts of $2.8 and $2.9, respectively....         12.6           11.4
      Other...........................................................................          3.0            4.6
   Inventories:
      Lumber..........................................................................         20.2           22.2
      Logs............................................................................         10.4           12.4
   Prepaid expenses and other current assets..........................................         41.1           41.8
                                                                                        ------------  -------------
      Total current assets............................................................        238.9          243.7
Property, plant and equipment, net of accumulated depreciation of $158.9 and
   $140.4, respectively...............................................................        365.8          375.2
Timber and timberlands, net of accumulated depletion of $212.0 and $204.5,
   respectively.......................................................................        220.9          227.3
Deferred income taxes.................................................................         83.5           82.4
Restricted cash, marketable securities and other investments..........................         45.3           63.6
Long-term receivables and other assets................................................        109.6          115.1
                                                                                        ------------  -------------
                                                                                        $   1,064.0   $    1,107.3
                                                                                        ============  =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable...................................................................  $      12.2   $       12.2
   Accrued interest...................................................................         12.2           26.0
   Accrued compensation and related benefits..........................................         15.4           14.0
   Other accrued liabilities..........................................................         20.4           27.6
   Short-term borrowings and current maturities of long-term debt, excluding $4.0 and
      $2.6, respectively, of repurchased Timber Notes held in the SAR Account.........         50.9           30.5
                                                                                        ------------  -------------
        Total current liabilities.....................................................        111.1          110.3
Long-term debt, less current maturities and excluding $52.6 and $52.8, respectively,
   of repurchased Timber Notes held in the SAR Account................................        955.1          982.3
Accrued postretirement medical benefits...............................................         10.6           10.3
Losses in excess of investment in Kaiser..............................................        516.2          516.2
Other noncurrent liabilities..........................................................         78.2           70.7
                                                                                        ------------  -------------
        Total liabilities.............................................................      1,671.2        1,689.8
                                                                                        ------------  -------------
Commitments and contingencies (see Note 8)
Stockholders' deficit:
   Preferred stock, $0.50 par value; $0.75 liquidation preference; Class A $0.05
      Non-Cumulative Participating Convertible Preferred Stock; 12,500,000
      shares authorized; 669,235 shares issued; 668,390 shares outstanding............          0.3            0.3
   Common stock, $0.50 par value; 28,000,000 shares authorized;
      10,063,359 shares issued; 6,513,071 and 6,527,671 shares outstanding,
      respectively....................................................................          5.0            5.0
   Additional capital.................................................................        225.3          225.3
   Accumulated deficit................................................................       (633.1)        (608.2)
   Accumulated other comprehensive loss...............................................        (88.8)         (89.2)
   Treasury stock, at cost (shares held:  preferred - 845; common - 3,550,288 and
      3,535,688, respectively) .......................................................       (115.9)        (115.7)
                                                                                        ------------  -------------
        Total stockholders' deficit...................................................       (607.2)        (582.5)
                                                                                        ------------  -------------
                                                                                        $   1,064.0   $    1,107.3
                                                                                        ============  =============


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







                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS
             (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE INFORMATION)


                                                                    THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                       SEPTEMBER 30,             SEPTEMBER 30,
                                                                 ------------------------  ------------------------
                                                                    2003         2002         2003         2002
                                                                 -----------  -----------  ----------- ------------
                                                                                     (UNAUDITED)
Net sales:
   Forest products.............................................  $     56.1   $     51.8   $    156.6  $     154.0
   Real estate.................................................        20.4         13.7         48.7         37.8
   Racing......................................................         7.7          8.1         22.0         23.0
   Aluminum....................................................           -            -            -        167.5
                                                                 -----------  -----------  ----------- ------------
                                                                       84.2         73.6        227.3        382.3
                                                                 -----------  -----------  ----------- ------------
Costs and expenses:
   Cost of sales and operations:
      Forest products..........................................        38.4         32.3        106.2        103.8
      Real estate..............................................         5.8          4.5         18.0         14.7
      Racing...................................................         5.4          5.5         15.3         15.0
      Aluminum.................................................           -            -            -        158.6
   Selling, general and administrative expenses................        15.3         17.7         45.3         69.4
   Impairment of assets........................................         1.4            -          1.4            -
   Depreciation, depletion and amortization....................         9.1          8.8         27.9         36.3
                                                                 -----------  -----------  ----------- ------------
                                                                       75.4         68.8        214.1        397.8
                                                                 -----------  -----------  ----------- ------------
Operating income (loss):
   Forest products.............................................         6.7          5.4         16.0         15.3
   Real estate.................................................         4.9          1.9          4.3          0.7
   Racing......................................................        (0.7)        (0.5)        (1.3)         0.2
   Aluminum....................................................           -            -            -        (23.6)
   Corporate...................................................        (2.1)        (2.0)        (5.8)        (8.1)
                                                                 -----------  -----------  ----------- ------------
                                                                        8.8          4.8         13.2        (15.5)
Other income (expense):
   Investment, interest and other income (expense), net........         3.9          2.9         19.8         10.7
   Interest expense............................................       (18.5)       (18.9)       (56.3)       (70.3)
   Amortization of deferred financing costs....................        (0.5)        (0.8)        (1.6)        (2.6)
                                                                 -----------  -----------  ----------- ------------
Loss before income taxes and minority interests ...............        (6.3)       (12.0)       (24.9)       (77.7)
Income tax benefit.............................................           -          4.6            -          7.4
Minority interests.............................................           -            -            -          0.9
                                                                 -----------  -----------  ----------- ------------
Net loss.......................................................  $     (6.3)  $     (7.4)  $    (24.9) $     (69.4)
                                                                 ===========  ===========  =========== ============

Basic and diluted loss per common and common
   equivalent share ...........................................  $    (0.96)  $    (1.14)  $    (3.81) $    (10.64)
                                                                 ===========  ===========  =========== ============


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






                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (IN MILLIONS OF DOLLARS)

                                                                                              NINE MONTHS ENDED
                                                                                                SEPTEMBER 30,
                                                                                          -------------------------
                                                                                             2003          2002
                                                                                          -----------  ------------
                                                                                                  (UNAUDITED)

Cash flows from operating activities:
   Net loss.............................................................................  $    (24.9)  $     (69.4)
   Adjustments to reconcile net loss to net cash used for operating activities:
      Depreciation, depletion and amortization..........................................        27.9          36.3
      Net gains on asset dispositions...................................................        (0.9)         (4.8)
      Net gains on marketable securities................................................       (13.5)         (1.8)
      Minority interests................................................................           -          (0.9)
      Amortization of deferred financing costs..........................................         1.6           2.6
      Equity in (earnings) loss of unconsolidated affiliates, net of dividends received.        (1.2)          1.3
      Increase (decrease) in cash resulting from changes in:
        Receivables.....................................................................         2.0          21.6
        Inventories.....................................................................         3.4          15.7
        Prepaid expenses and other current assets.......................................         1.2          45.2
        Accounts payable................................................................         0.6           9.8
        Accrued and deferred income taxes...............................................           -         (13.2)
        Payable to affiliates and other accrued liabilities.............................        (2.8)        (44.9)
        Accrued interest................................................................       (13.8)         (7.8)
        Long-term assets and long-term liabilities......................................         4.8         (29.2)
        Other...........................................................................         0.9           0.2
                                                                                          -----------  ------------
        Net cash used for operating activities..........................................       (14.7)        (39.3)
                                                                                          -----------  ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net proceeds from dispositions of property and investments...........................         3.5           6.5
   Net sales of marketable securities and other investments.............................         1.2           7.6
   Capital expenditures.................................................................       (14.5)        (17.5)
   Decrease in cash attributable to deconsolidation of Kaiser...........................           -        (130.4)
   Other................................................................................         0.3           0.3
                                                                                          -----------  ------------
        Net cash used for investing activities..........................................        (9.5)       (133.5)
                                                                                          -----------  ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuances of long-term debt............................................         1.2           6.8
   Redemptions, repurchases of and principal payments on long-term debt.................       (24.4)        (61.1)
   Borrowings (repayments) under revolving and short-term credit facilities.............        20.3         (14.5)
   Restricted cash withdrawals, net.....................................................        11.8          30.4
   Other................................................................................        (0.2)         (1.3)
                                                                                          -----------  ------------
        Net cash provided by (used for) financing activities............................         8.7         (39.7)
                                                                                          -----------  ------------

NET DECREASE IN CASH AND CASH EQUIVALENTS...............................................       (15.5)       (212.5)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................................        45.6         272.2
                                                                                          -----------  ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..............................................  $     30.1   $      59.7
                                                                                          ===========  ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid, net of capitalized interest...........................................  $     70.1   $      78.2


   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 reviewed 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 indicated or the context indicates
otherwise. All references to "Kaiser," "MGHI," "Pacific Lumber," "MPC" and
"SHRP, Ltd." refer to the respective companies and their subsidiaries, unless
otherwise indicated 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 September 30, 2003, the consolidated
results of operations for the three and nine months ended September 30, 2003 and
2002, and the consolidated cash flows for the nine months ended September 30,
2003 and 2002.

      Reclassifications
      The adoption of SFAS No. 145 in January 2003 resulted in the inclusion of
$0.3 million and $3.5 million of gains on repurchases of debt for the three and
nine month periods ended September 30, 2002, respectively, in investment,
interest and other income rather than as extraordinary items in the accompanying
financial statements (see Note 2).

      DECONSOLIDATION OF KAISER
      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. As discussed below, on February 12, 2002,
Kaiser and certain of its subsidiaries filed for reorganization under Chapter 11
of the Code. As a result, the Company discontinued consolidating Kaiser's
financial results beginning February 12, 2002, and the Company began reporting
its investment in Kaiser using the cost method, under which the investment is
reflected as a single amount on the Company's balance sheet of $(516.2) million,
and the recording of earnings or losses from Kaiser was discontinued after
February 11, 2002.

      Through February 11, 2002, under generally accepted principles of
consolidation, the Company had recognized losses in excess of its investment in
Kaiser of $516.2 million. Since Kaiser's results are no longer consolidated and
the Company believes that it is not probable that it will be obligated to fund
losses related to its investment in Kaiser, any adjustments reflected in
Kaiser's financial statements subsequent to February 12, 2002 (relating to the
recoverability and classification of recorded asset amounts and classification
of liabilities or the effects on existing stockholders' deficit as well as
adjustments made to Kaiser's financial information for loss contingencies and
other matters), are not expected to affect the Company's financial results.

      The Company expects it will consider reversal of its losses in excess of
its investment in Kaiser when either: (1) Kaiser's bankruptcy is resolved and
the amount of the Company's remaining investment in Kaiser is determined or (2)
the Company disposes of its shares of Kaiser common stock. Accordingly, these
consolidated financial statements do not reflect any adjustments related to the
deconsolidation of Kaiser other than presenting the Company's investment in
Kaiser using the cost method. When either of the events described above occurs,
the Company will re-evaluate the appropriate accounting treatment of its
investment in Kaiser based upon the facts and circumstances at such time. It is
likely that the Company's ownership interest in Kaiser will be cancelled. See
Note 5 for further discussion of the Company's investment in Kaiser.

      The following financial information is presented for comparison purposes.
The financial information for the nine months ended September 30, 2002, is
condensed pro forma financial information which reflects the results of
operations of the Company excluding Kaiser (in millions, except share data).


                                                                       THREE MONTHS ENDED       NINE MONTHS ENDED
                                                                          SEPTEMBER 30,           SEPTEMBER 30,
                                                                      ---------------------  ----------------------
                                                                         2003       2002        2003        2002
                                                                      ----------  ---------  ----------  ----------

Net sales...........................................................  $    84.2   $   73.6   $   227.3   $   214.8
Costs and expenses..................................................      (75.4)     (68.8)     (214.1)     (206.7)
                                                                      ----------  ---------  ----------  ----------
Operating income....................................................        8.8        4.8        13.2         8.1
Other income (expenses), net........................................        3.9        2.9        19.8        18.8
Interest expense and amortization of deferred financing costs.......      (19.0)     (19.7)      (57.9)      (60.2)
                                                                      ----------  ---------  ----------  ----------
Loss before income taxes............................................       (6.3)     (12.0)      (24.9)      (33.3)
Income tax benefit..................................................          -        4.6           -        12.1
Minority interests..................................................          -          -           -         0.2
                                                                      ----------  ---------  ----------  ----------
Net loss............................................................  $    (6.3)  $   (7.4)  $   (24.9)  $   (21.0)
                                                                      ==========  =========  ==========  ==========
Basic and diluted loss per share                                      $   (0.96)  $  (1.14)  $   (3.81)  $   (3.22)
                                                                      ==========  =========  ==========  ==========

2.    NEW ACCOUNTING STANDARDS

      Accounting for Asset Retirement Obligations
      In January 2003, the Company adopted SFAS No. 143, which addresses
accounting and reporting standards for obligations associated with the
retirement of tangible long-lived assets and the related asset retirement costs.
In general, SFAS No. 143 requires the recognition of a liability resulting from
anticipated asset retirement obligations, offset by an increase in the value of
the associated productive asset for such anticipated costs. Over the life of the
asset, depreciation expense is to include the ratable expensing of the
retirement cost included with the asset value. The statement applies to all
legal obligations associated with the retirement of a tangible long-lived asset
that result from the acquisition, construction, or development and/or the normal
operation of a long-lived asset, except for certain lease obligations. Excluded
from this Statement are obligations arising solely from a plan to dispose of a
long-lived asset and obligations that result from the improper operation of an
asset (i.e. certain types of environmental obligations). The adoption of SFAS
No. 143 did not have a material impact on the Company's financial position or
results of operations.

      Classification of Gains and Losses from Extinguishment of Debt
      In January 2003, the Company adopted SFAS No. 145, which, among other
things, rescinds the previous guidance for debt extinguishments. SFAS No. 145
eliminates the requirement that gains and losses from extinguishment of debt be
aggregated and, if material, classified as an extraordinary item, net of related
income tax effect. However, transactions would not be prohibited from
extraordinary item classification if they meet the criteria in APB Opinion No.
30. Applying the provisions of APB Opinion No. 30 will distinguish transactions
that are part of an entity's recurring operations from those that are unusual or
infrequent or that meet the criteria for classification as an extraordinary
item. The adoption of SFAS No. 145 resulted in the inclusion of gains on
repurchases of debt for the three and nine months ended September 30, 2003 and
2002, in investment, interest and other income rather than as an extraordinary
item in the financial statements.

      Accounting for Costs Associated with Exit and Disposal Activities
      In January 2003, the Company adopted SFAS No. 146. This standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Costs covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. This statement is
applicable to exit or disposal activities initiated after December 31, 2002.

      Accounting for and Disclosure of Guarantees
      In January 2003, the Company adopted FIN 45, which elaborates on the
disclosures required to be made by a guarantor in its financial statements about
its obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The recognition and initial measurement provisions of FIN 45 were
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 were effective for
periods ending after December 15, 2002. The adoption of FIN 45 did not have a
material impact on the Company's financial position or results of operations.

      Consolidation of Variable Interest Entities
      In January 2003, the FASB issued FIN 46, which establishes criteria to
identify and assess a company's interest in variable interest entities and for
consolidating those entities. FIN 46 is currently effective for variable
interest entities created or obtained after January 2003, and will be effective
for all variable interest entities for interim periods beginning after December
15, 2003. The Company believes that the adoption of FIN 46 may require the
consolidation of a 50% interest in a joint venture (FireRock, LLC) which
develops real estate in Arizona.

3.    SEGMENT INFORMATION AND OTHER ITEMS

      Net sales and operating income (loss) for each reportable segment is
presented in the Consolidated Statement of Operations. Operating income (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
                               ---------------------------
                                                                          CONSOLIDATED
                                 FOREST     REAL                         TOTAL EXCLUDING              CONSOLIDATED
                                PRODUCTS   ESTATE   RACING   CORPORATE      ALUMINUM     ALUMINUM         TOTAL
                               ---------  -------  -------  ------------ --------------  -----------  -------------
Depreciation, depletion and
   amortization for the
   three months ended:
      September 30, 2003.....  $    5.1   $  3.6   $  0.4   $       -    $         9.1   $      -      $       9.1
      September 30, 2002.....       5.8      2.5      0.4         0.1              8.8          -              8.8

Depreciation, depletion and
   amortization for the
   nine months ended:
      September 30, 2003.....      15.8     10.8      1.2         0.1             27.9          -             27.9
      September 30, 2002.....      17.6      7.5      1.2         0.3             26.6        9.7 (1)         36.3

Total assets as of:
      September 30, 2003.....     488.4    361.2     34.7       179.7          1,064.0          -          1,064.0
      December 31, 2002......     525.3    377.1     36.4       168.5          1,107.3          - (2)      1,107.3


--------------------
(1)   Amounts attributable to the aluminum segment are for the period from
      January 1, 2002, through February 11, 2002.
(2)   As a result of the deconsolidation of Kaiser as of February 11, 2002, the
      aluminum segment's balance sheet amounts are not included in the
      consolidated totals.

      OTHER ITEMS

      Real Estate
      The real estate segment's investment, interest and other income (expense)
includes the following (in millions):


                                                                   THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                      SEPTEMBER 30,              SEPTEMBER 30,
                                                                -------------------------  ------------------------
                                                                    2003         2002         2003         2002
                                                                ------------ ------------  -----------  -----------
Equity in earnings (loss) from real estate joint ventures...... $       0.2  $      (0.4)  $      1.2   $      2.4
                                                                ============ ============  ===========  ===========

      In March 2003, the Company's casino facility at its Palmas del Mar
operation in Puerto Rico ceased operations due to the closure of a hotel which
was owned and operated by a third party from whom the casino leased adjacent
space. The hotel was sold during the three months ended September 30, 2003, and
the Company expects that the new owner will not lease space for the casino to
the Company. In connection with such determination, the Company recorded a
charge to operating costs of $1.4 million to write-down casino-related assets to
estimated fair value.

      Corporate
      Corporate investment, interest and other income (expense) for the nine
months ended September 30, 2003, includes $8.0 million of insurance recoveries
related to the OTS and FDIC actions discussed in Note 8.

4.    RESTRICTED CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES AND OTHER INVESTMENTS

      The following amounts are restricted (in millions):

                                                                                     September 30,   DECEMBER 31,
                                                                                         2003            2002
                                                                                    --------------- ---------------
Current assets:
   Restricted cash and cash equivalents............................................ $          4.5  $          9.9
                                                                                    --------------- ---------------
   Marketable securities, restricted:
      Amounts held in SAR Account..................................................           22.2            19.3
                                                                                    --------------- ---------------

Long-term restricted cash, marketable securities and other investments:
   Amounts held in SAR Account.....................................................           85.5           101.6
   Other amounts restricted under the Timber Notes Indenture.......................            2.6             2.6
   Other long-term restricted cash.................................................            8.7            10.7
   Less: Amounts attributable to repurchased Timber Notes held in SAR Account......          (51.5)          (51.3)
                                                                                    --------------- ---------------
                                                                                              45.3            63.6
                                                                                    --------------- ---------------

Total restricted cash, cash equivalents, marketable securities and
   other investments............................................................... $         72.0  $         92.8
                                                                                    =============== ===============

5.    INVESTMENT IN KAISER

      Kaiser, its principal operating subsidiary, KACC, and 24 of KACC's wholly
owned subsidiaries have filed separate voluntary petitions in the Bankruptcy
Court for reorganization under Chapter 11 of the Code. The Original Debtors
filed petitions on February 12, 2002. Additional subsidiaries of KACC filed
petitions in the first quarter of 2003. The Cases are being jointly administered
with the Debtors managing their businesses in the ordinary course as
debtors-in-possession subject to the control and administration of the
Bankruptcy Court.

      The necessity for filing the Cases by the Original Debtors was
attributable to the liquidity and cash flow problems of Kaiser arising in late
2001 and early 2002. Kaiser was facing significant near-term debt maturities at
a time of unusually weak aluminum industry business conditions, depressed
aluminum prices and a broad economic slowdown that was further exacerbated by
the events of September 11, 2001. In addition, Kaiser had become increasingly
burdened by asbestos litigation and growing legacy obligations for retiree
medical and pension costs. The confluence of these factors created the prospect
of continuing operating losses and negative cash flows, resulting in lower
credit ratings and an inability to access the capital markets.

      Kaiser has indicated that its objective in the Cases is to achieve the
highest possible recoveries for all stakeholders consistent with the Debtors'
abilities to pay, and to continue the operation of their businesses. However,
there can be no assurance that the Debtors will be able to attain these
objectives or achieve a successful reorganization. While valuation of the
Debtors' assets and estimation of pre-Filing Date claims at this stage of the
Cases are subject to inherent uncertainties, Kaiser has indicated that the
Debtors believe that it is likely that their liabilities will be found to exceed
the fair value of their assets. The Debtors therefore believe that it is likely
that substantially all pre-Filing Date claims will be settled at less than 100%
of their face value and the equity of Kaiser's stockholders, including the
Company, will be cancelled without consideration.

      As provided by the Code, the Original Debtors had the exclusive right to
propose a plan of reorganization for 120 days following the initial Filing Date.
The Bankruptcy Court has subsequently approved several extensions of the
exclusivity period for all Debtors. A motion to extend the exclusivity period
through February 29, 2004, was filed by the Debtors in late October 2003, and
the Debtors expect the motion to be approved by the Bankruptcy Court. Kaiser has
related that additional extensions are likely to be sought. However, no
assurance can be given that any future extension requests will be granted by the
Bankruptcy Court. If the Debtors fail to file a plan of reorganization during
the exclusivity period, or if such plan is not accepted by the requisite number
of creditors and equity holders entitled to vote on the plan, other parties in
interest in the Cases may be permitted to propose their own plan(s) of
reorganization for the Debtors.

      In April 2002, Kaiser filed a motion seeking an order of the Bankruptcy
Court prohibiting the Company (or MGHI), without first seeking Bankruptcy Court
relief, from making any disposition of the Kaiser Shares, including any sale,
transfer, or exchange of such stock or treating any of the Kaiser Shares as
worthless for federal income tax purposes. Kaiser indicated in its Bankruptcy
Court filing that it was concerned that such a transaction could have the effect
of depriving Kaiser of the ability to utilize the full value of its net
operating losses, foreign tax credits and minimum tax credits. In July 2002, the
Company and MGHI agreed with Kaiser that they would not dispose of any of their
Kaiser Shares prior to a hearing on the April 2002 motion. The parties also
agreed that the Company (or MGHI) may upon 10 days written notice to Kaiser (a)
request the Bankruptcy Court to hear the matter at a special hearing or (b) have
the matter heard at one of Kaiser's scheduled monthly bankruptcy hearings.

      Kaiser's common stock is publicly traded on the OTC Bulletin Board under
the trading symbol "KLUCQ." The market value for the 50,000,000 Kaiser Shares,
based on the price per share quoted at the close of business on November 7,
2003, was $4.5 million. There can be no assurance that such value would be
realized should the Kaiser Shares be sold.

      The financial information of Kaiser contained herein has been prepared in
accordance with SOP 90-7, and on a going concern basis, which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business. However, as a result of the Cases, such realization of assets and
liquidation of liabilities are subject to a significant number of uncertainties.
Since Kaiser's results are no longer consolidated with the Company's results,
and the Company believes it is not probable that it will be obligated to fund
losses related to its investment in Kaiser under principles of consolidation,
any material uncertainties related to Kaiser are not expected to impact the
Company's financial results.

      The following tables contain summarized financial information of Kaiser
(in millions).


                                                                                     SEPTEMBER 30,   DECEMBER 31,
                                                                                         2003            2002
                                                                                    --------------- ---------------

Current assets..................................................................... $        465.1  $        516.6
Investments in and advances to unconsolidated affiliates...........................           75.9            69.7
Property, plant and equipment, net.................................................          970.8         1,009.9
Other assets.......................................................................          534.6           629.2
                                                                                    --------------- ---------------
                                                                                    $      2,046.4  $      2,225.4
                                                                                    =============== ===============

Current liabilities................................................................ $        343.5  $        333.6
Other long-term liabilities........................................................           85.3            86.9
Long-term debt.....................................................................           42.3            42.7
Liabilities subject to compromise..................................................        2,755.6         2,726.0
Minority interests.................................................................          123.0           121.8
Stockholders' deficit..............................................................       (1,303.3)       (1,085.6)
                                                                                    --------------- ---------------
                                                                                    $      2,046.4  $      2,225.4
                                                                                    =============== ===============


                                                                  THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                     SEPTEMBER 30,              SEPTEMBER 30,
                                                               -------------------------  -------------------------
                                                                   2003         2002          2003         2002
                                                               ------------ ------------  -----------  ------------

Net sales....................................................  $     327.1  $     348.0   $  1,024.9   $   1,104.9
Costs and expenses...........................................       (402.1)      (412.6)    (1,212.0)     (1,239.9)
Other income (expenses), net.................................        (15.0)       (12.2)       (36.8)        (41.8)
                                                               ------------ ------------  -----------  ------------
Loss before income taxes, minority interests and discontinued
   operations................................................        (90.0)       (76.8)      (223.9)       (176.8)
Provision for income taxes...................................         (0.5)        (7.0)        (4.9)        (21.4)
Minority interests...........................................          1.9          1.4          5.8           4.3
                                                               ------------ ------------  -----------  ------------
Loss from continuing operations..............................        (88.6)       (82.4)      (223.0)       (193.9)
Discontinued operations......................................            -         (1.0)         7.9          (4.0)
                                                               ------------ ------------  -----------  ------------
Net loss.....................................................  $     (88.6) $     (83.4)  $   (215.1)  $    (197.9)
                                                               ============ ============  ===========  ============

6.    SHORT-TERM BORROWINGS

      The Pacific Lumber Credit Agreement provides for a two-year revolving line
of credit expiring on August 13, 2004, with an aggregate commitment of up to
$45.0 million (based on the amount of inventories and receivables held by
Pacific Lumber). At September 30, 2003, $0.3 million of letters of credit and no
borrowings were outstanding under this facility, and unused availability was
limited to $24.4 million.

      The Scotia LLC Line of Credit allows Scotia LLC to borrow up to one year's
interest on the Timber Notes. On June 20, 2003, the Scotia LLC Line of Credit
was extended to July 7, 2006. At or near the completion of such extension,
Scotia LLC will request that the Scotia LLC Line of Credit be extended for a
further period of not less than 364 days. If not extended, Scotia LLC may draw
upon the full amount available. The amount drawn would be repayable in 12
semiannual installments on each note 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 September 30, 2003, Scotia LLC could have borrowed a
maximum of $58.5 million under the Scotia LLC Line of Credit, and there was
$20.3 million outstanding under the Scotia LLC Line of Credit.

7.    LONG-TERM DEBT

      Long-term debt consists of the following (in millions):

                                                                                       SEPTEMBER 30,  DECEMBER 31,
                                                                                           2003           2002
                                                                                      -------------- --------------

6.55% Scotia LLC Timber Notes due July 20, 2028.....................................  $        83.9  $       103.2
7.11% Scotia LLC Timber Notes due July 20, 2028.....................................          243.2          243.2
7.71% Scotia LLC Timber Notes due July 20, 2028.....................................          463.3          463.3
7.56% Lakepointe Notes due June 8, 2021.............................................          117.8          119.5
7.03% Motel Notes due May 1, 2018...................................................           48.8           49.4
6.08% Beltway Notes due November 9, 2024............................................           30.5           30.9
7.12% Palmas Notes due December 20, 2030............................................           30.0           30.0
Other notes and contracts, primarily secured by receivables, buildings, real estate
   and equipment....................................................................           24.8           28.7
                                                                                      -------------- --------------
                                                                                            1,042.3        1,068.2
Less: current maturities............................................................          (30.6)         (30.5)
      Timber Notes held in SAR Account..............................................          (56.6)         (55.4)
                                                                                      -------------- --------------
                                                                                      $       955.1  $       982.3
                                                                                      ============== ==============

      The amount attributable to the Timber Notes held in the SAR Account of
$51.5 million as of September 30, 2003, reflected in Note 4 above represents the
amortized amount paid to acquire $56.6 million of principal amount of Timber
Notes.

      In April 2003, $3.4 million of funds from the SAR Account were used to
repurchase $4.0 million principal amount of Timber Notes, as permitted under the
Indenture, resulting in a gain of $0.4 million (net of unamortized deferred
financing costs) on extinguishment of debt, which is included in investment,
interest and other income in the accompanying financial statements.

8.    CONTINGENCIES

      Forest Products Operations
      Regulatory and environmental matters play a significant role in the
Company's forest products business, 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, and air and water quality.

      From March 1999 until October 2002, the Company prepared THPs in
accordance with the SYP. The SYP was intended to comply with regulations of the
California Board of Forestry and Fire Protection requiring timber companies to
project timber growth and harvest on their timberlands over a 100-year planning
period and to demonstrate that their projected average annual harvest for any
decade within a 100-year planning period will not exceed the average annual
growth level during the last decade of the 100-year planning period. The forest
practice rules allow companies which do not have a sustained yield plan to
follow an alternative procedure. As discussed below, on October 31, 2003, the
Court hearing the EPIC-SYP/Permits and USWA lawsuits entered a judgment
invalidating the SYP and the California Permits. As a result of this case,
Pacific Lumber has since October 2002 been obtaining review and approval of
prepared THPs under this alternative procedure and expects to follow this
procedure for the foreseeable future.

      The HCP and related Federal Permits allow incidental "take" of certain
species located on the Company's timberlands which species have been listed by
the federal government under the ESA 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 a term of 50
years. Since the consummation of the Headwaters Agreement in March 1999, there
has been a significant amount of work required in connection with the
implementation of the Environmental Plans, and this work could continue for
several more years.

      Under the CWA, the EPA is required to establish TMDLs in water courses
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 water courses
that flow within the Company's timberlands. The Company expects this process to
continue into 2010. In December 1999, the EPA issued a report dealing with TMDLs
on two of the nine water courses. The agency indicated that the requirements
under the HCP would significantly address the sediment issues that resulted in
TMDL requirements for these two water courses. The North Coast Water Board has
begun the process of establishing the TMDL requirements applicable to two other
water courses on the Company's timberlands, with a targeted completion of fall
2004 for these two water courses. The final TMDL requirements applicable to the
Company's 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.

      Effective January 1, 2003, a California statute eliminated a waiver
previously granted to, among others, timber companies. This waiver had been in
effect for a number of years and waived the requirement under California water
quality regulations for timber companies to follow certain waste discharge
requirements in connection with their timber harvesting and related operations.
The new statute provides, however, that regional water boards such as the North
Coast Water Board are authorized to renew the waiver. The North Coast Water
Board has renewed the waiver for timber companies through December 31, 2003.
Should the North Coast Water Board decide not to extend this or another waiver
beyond December 31, 2003, it may thereafter notify a company to follow certain
waste discharge requirements in order to conduct harvesting operations on a THP.
The waste discharge requirements may include aquatic protection measures that
are different from or in addition to those provided for in the THP approved by
the CDF. Accordingly, harvesting activities could be delayed and/or adversely
affected as these waste discharge requirements are developed and implemented and
costs could increase.

      In October 2003, California enacted Senate Bill 810, which provides
regional water quality control boards with additional authority related to the
approval of THPs. Under this law, which will become effective on January 1,
2004, a THP "may not be approved if the appropriate regional water quality
control board finds, based on substantial evidence, that the timber operations
proposed in the plan will result in a discharge into a watercourse that has been
classified as impaired due to sediment...that causes or contributes to a
violation of the regional water quality control plan." 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 Company's timberlands are classified as impaired, implementation of this law
could result in delays in obtaining approvals of THPs, increased costs and
additional protection measures beyond those contained in the HCP.

      The North Coast Water Board has issued orders for the Elk River and
Freshwater watersheds requiring Pacific Lumber to submit "Reports of Waste
Discharge" to the North Coast Water Board in order to conduct winter harvesting
activities in these watersheds. After consideration of these reports, the North
Coast Water Board imposed requirements on Pacific Lumber to implement additional
mitigation and erosion control practices in these watersheds for the 2002- 2003
winter operating period. These additional requirements have somewhat increased
operating costs. Reports of Waste Discharge for the 2003-2004 winter operating
period have been submitted and the North Coast Water Board imposed requirements
similar to those imposed for the 2002-2003 winter operating period. In addition,
the North Coast Water Board has issued the Elk River Order for the Elk River
watershed which is aimed at addressing existing sediment production sites
through clean up actions. The North Coast Water Board has also initiated the
process which could result in similar orders for the Freshwater and Bear Creek
watersheds, and are contemplating similar actions for the Jordon and Stitz Creek
watersheds. The Elk River Order, as well as additional orders in the other
watersheds (should they be issued), could result in significant costs to Pacific
Lumber beginning in 2004 and extending over a number of years. Pacific Lumber
has appealed the Elk River Order to the State Water Board, but the appeal is
being held in abeyance while the matter is discussed by Pacific Lumber with the
North Coast Water Board and its staff.

      Lawsuits are pending which seek to prevent the Company from implementing
the SYP, implementing certain of the Company's approved THPs, or carrying out
certain other operations.

      In March 1999, the EPIC-SYP/Permits lawsuit was filed. This action
alleged, among other things, various violations of the CESA and the California
Environmental Quality Act, and challenged, among other things, the validity and
legality of the SYP and the California Permits. The plaintiffs sought, among
other things, to set aside California's approval of the SYP and the California
Permits and injunctive relief to prevent implementation of THPs approved in
reliance upon these documents. In March 1999, the USWA lawsuit was filed
challenging the validity and legality of the SYP. The EPIC-SYP/Permits and USWA
lawsuits were consolidated for trial, which concluded on March 28, 2003. On
October 31, 2003, the Court entered a judgment invalidating the SYP and the
California Permits due to several deficiencies in agency procedures and the
failure of Pacific Lumber to submit a complete and comprehensible SYP. The
Court's decision, however, allows for harvesting on THPs which rely on the SYP
and were approved prior to July 23, 2003. The short-term effect of the ruling
will be to preclude approval, under the SYP, of a small number of THPs which
were under review but had not been approved, and which will result in a minor
reduction in 2003 harvesting that had been expected from these specific THPs. As
a result of this case, Pacific Lumber has since October 2002 been obtaining
review and approval of new THPs under a procedure provided for in the forest
practice rules that does not depend upon the SYP and the California Permits and
expects to follow this procedure for the foreseeable future. In addition,
Pacific Lumber is in the process of considering the options available to it in
light of this development, including appealing the Court's decision and
resubmission of an SYP.

      In July 2001, the Bear Creek lawsuit was filed. The lawsuit alleges that
Pacific Lumber's harvesting and other forestry activities under certain of its
approved 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 defendant's alleged continued violation of the CWA. The
Company believes that the requirements under the HCP are adequate to ensure that
sediment and pollutants from its harvesting activities will not reach levels
harmful to the environment. On October 14, 2003, in connection with certain
motions that had been filed, the Court upheld the validity of an EPA regulation
which exempts harvesting and other forestry activities from certain discharge
requirements. Both state and federal agencies, along with Pacific Lumber 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 which are exempted, thereby limiting the regulation's
applicability. 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. Should the decision
ultimately become final and held to apply to Pacific Lumber's timber operations,
it may have some or all of the following effects: impose additional permitting
requirements, delay approvals of THPs, increase harvesting costs, and add water
protection measures beyond those contained in the HCP. Nonetheless, due to the
historical reliance by timber companies on the regulation, it is not likely that
civil penalties will be awarded for operations that occurred prior to the
Court's decision. While the impact of a conclusion to this case that upholds the
October 14, 2003 ruling may be adverse, the Company does not believe that such
an outcome would have a material adverse impact on the Company's consolidated
financial condition, results of operations and/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 HWC lawsuit was filed seeking to enjoin timber
operations in the Elk and Freshwater watersheds of the Company's timberlands
until and unless the regional and state water boards imposed on those operations
waste discharge requirements that met standards demanded by the plaintiff. In
August 2003, this case was dismissed by the Court at the request of the
plaintiff.

      On February 24, 2003, the recently elected District Attorney of Humboldt
County filed the Humboldt DA action. The suit was filed under the California
unfair competition law and alleges that Pacific Lumber, Scotia LLC and Salmon
Creek used certain unfair business practices in connection with completion of
the Headwaters Agreement, and that this resulted in the ability to harvest
significantly more trees under the Environmental Plans than would have otherwise
been the case. The suit seeks 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. A hearing on the
Company's motions for sanctions and requested dismissal of the case was held on
July 28, 2003, and the Company is awaiting the Court's decision. The Company
believes that this suit is without merit; however, there can be no assurance
that the Company will prevail or that an adverse outcome would not be material
to the Company's consolidated financial position, results of operations and/or
liquidity.

      In November 2001, Pacific Lumber filed the THP No. 520 lawsuit alleging
that the State Water Board had no legal authority to impose mitigation measures
that were requested by the staff of the North Coast Water Board during the THP
review process and rejected by the CDF. When the staff of the North Coast Water
Board attempted to impose these mitigation measures in spite of the CDF's
decision, Pacific Lumber appealed to the State Water Board, which imposed
certain of the requested mitigation measures and rejected others. Pacific Lumber
filed the THP No. 520 lawsuit challenging the State Water Board's decision, and
on January 24, 2003, the Court granted Pacific Lumber's request for an order
invalidating the imposition of these additional measures. Other claims included
in this action have been dismissed by Pacific Lumber without prejudice to its
future rights. On March 25, 2003, the State Water Board appealed this decision.
While the Company believes the Court's decision will be sustained, a reversal
could result in increased demands by the regional and state water boards and
their staffs to impose controls and limitations on timber harvesting on Pacific
Lumber's timberlands beyond those provided for by the Environmental Plans or
could provide additional regulatory powers to the regional and state water
boards and their staffs beyond those provided in Senate Bill 810.

      Pacific Lumber, Scotia LLC and certain of their affiliates are the
defendants in the Cook action and the Cave action. On April 4, 2003, the
plaintiffs in these actions filed amended complaints and served the defendants
with notice of the actions. The Cook action alleges, among other things, that
defendants' logging practices have contributed to an increase in flooding along
Freshwater Creek (which runs through Pacific Lumber's 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 Pacific Lumber's timberlands). The
Company does not believe the resolution of these actions should result in a
material adverse effect on its financial condition, results of operations or
liquidity.

      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. On October 17, 2002,
the OTS action was settled for $0.2 million and with no admission of wrongdoing
on the part of the Respondents.

      On August 2, 1995, the FDIC filed the FDIC action. The original complaint
was against Mr. Charles E. Hurwitz (Chairman and Chief Executive Officer of the
Company) and alleged damages in excess of $250.0 million based on the allegation
that Mr. Hurwitz was a controlling shareholder, de facto senior officer and
director of USAT, and was involved in certain decisions which contributed to the
insolvency of USAT. The FDIC action has been dismissed as a result of the
settlement of the OTS action. This dismissal does not affect the FDIC
counterclaim or motion for sanctions described in the following paragraph.

      On May 31, 2000, the Company, Federated and Mr. Hurwitz filed the FDIC
counterclaim to the FDIC action. The FDIC counterclaim states that the FDIC
illegally paid the OTS to bring claims against the Company, Federated and Mr.
Hurwitz. The plaintiffs are seeking reimbursement of attorneys' fees and damages
from the FDIC. As of September 30, 2003, such fees, which have been recorded in
the Company's Consolidated Statement of Operations as incurred, were in excess
of $40.0 million. On November 8, 2002, the Company, Federated and Mr. Hurwitz
filed an amended counterclaim and amended motion for sanctions. The Company,
Federated and Mr. Hurwitz are vigorously pursuing the FDIC counterclaim.

      In September 1997, the Company filed suit against a group of its insurers
after unsuccessful negotiations with certain of the insurers regarding coverage,
under the terms of certain directors and officers liability policies, of
expenses incurred in connection with the OTS and FDIC actions. The insurers
requested arbitration, and as a result the lawsuit was dismissed in April 1998.
Following binding arbitration with the primary carrier in October 2002, on
February 20, 2003, the arbitration panel determined that the insurer should pay
the Company approximately $6.5 million plus interest. The Company and the
insurer subsequently agreed to settle this matter for $8.0 million, and such
amount is reflected in investment, interest and other income (expense) for the
nine months ended September 30, 2003. As the limits of the primary policy were
not reached by the arbitration panel's award, the Company does not expect to be
able to recover any amounts from the other insurers.

      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.

      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 position, results of operations or liquidity.

      Other Matters
      The Company is involved in various other claims, lawsuits and proceedings
relating to a wide variety of matters. 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, 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
position, results of operations or liquidity.

9.    STOCK-BASED COMPENSATION PLANS

      Stock options issued to employees and outside directors are accounted for
under the intrinsic value method of accounting as defined by APB Opinion No. 25
and related interpretations. The Company has not changed to the fair value based
method of accounting for stock-based employee compensation. The following table
illustrates the effect on net income and earnings per share had the Company
accounted for its stock options under the fair value method of accounting under
SFAS No. 123, as amended by SFAS No. 148 (in millions, except per share
information):


                                                                     THREE MONTHS ENDED       NINE MONTHS ENDED
                                                                        SEPTEMBER 30,           SEPTEMBER 30,
                                                                   ----------------------- ------------------------
                                                                      2003         2002        2003         2002
                                                                   ----------  ----------- -----------  -----------
Net loss, as reported............................................  $    (6.3)  $     (7.4) $    (24.9)  $    (69.4)
   Add: Stock-based employee compensation expenses included in
      reported net loss, net of related tax effects..............          -            -           -            -
   Deduct: Total stock-based employee compensation expense
      determined under the fair value method for all awards, net
      of related tax effects.....................................       (0.4)        (0.4)       (1.3)        (1.0)
                                                                   ----------  ----------- -----------  -----------
Pro forma net loss...............................................  $    (6.7)  $     (7.8) $    (26.2)  $    (70.4)
                                                                   ==========  =========== ===========  ===========

Basic and diluted loss per share:
   As reported...................................................  $   (0.96)  $    (1.14) $    (3.81)  $   (10.64)
   Pro forma.....................................................      (1.03)       (1.19)      (4.02)      (10.79)

      The fair value of stock options granted were estimated at the grant date
using a Black-Scholes option pricing model and the following weighted average
assumptions:


                                                                                  THREE AND NINE MONTHS ENDED
                                                                                         SEPTEMBER 30,
                                                                                  ---------------------------
                                                                                      2003           2002
                                                                                  ------------   ------------

Dividend yield..................................................................          -              -
Expected volatility.............................................................       0.38           0.36
Risk-free interest rate.........................................................       4.92%          5.32%
Expected life (years)...........................................................       6.63           6.59
Weighted average fair value.....................................................  $   10.65      $   13.65

10.   INCOME TAXES

      The Company generated a loss before income taxes of $6.3 million for the
third quarter of 2003 and $24.9 million for the nine months ended September 30,
2003; however, the Company has recorded no tax benefit associated with the
losses for the periods. Each period, the Company evaluates the appropriate
factors in determining the realizability of the deferred tax assets attributable
to losses and credits generated in the current period and those being carried
forward. These factors are discussed further in Note 12 to the Company's
consolidated financial statements included in the Form 10-K. Based on this
evaluation, the Company provided valuation allowances with respect to the
deferred tax assets attributable to losses and credits generated during the
three and nine months ended September 30, 2003. These valuation allowances were
in addition to the valuation allowances which were provided in prior years.


11.   PER SHARE INFORMATION

      Basic earnings per share is calculated by dividing net income (loss) by
the weighted average number of common shares outstanding during the period,
including the weighted average impact of the shares of Common Stock issued and
treasury stock acquired during the period from the date of issuance or
repurchase. For periods in which the Company has net income, basic earnings per
share also includes the dilutive effect of Class A Preferred Stock which is
convertible into Common Stock. Diluted earnings per share calculations also
include the dilutive effect of common and preferred stock options for periods in
which the Company has net income.


                                                                  THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                    SEPTEMBER 30,               SEPTEMBER 30,
                                                              --------------------------  -------------------------
                                                                  2003          2002          2003      2002
                                                              ------------  ------------  -----------  ------------
Weighted average shares outstanding:
   Common Stock..............................................   6,517,691     6,527,671    6,522,435     6,527,671
   Effect of dilution:
      Class A Preferred Stock (1)............................          -              -            -             -
                                                              ------------  ------------  -----------  ------------
Weighted average number of common and common equivalent
   shares - Basic ...........................................   6,517,691     6,527,671    6,522,435     6,527,671
   Effect of dilution:
      Stock options (1)......................................          -              -            -             -
                                                              ------------  ------------  -----------  ------------
Weighted average number of common and common equivalent
   shares - Diluted..........................................   6,517,691     6,527,671    6,522,435     6,527,671
                                                              ============  ============  ===========  ============

---------------------
(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 three and nine months ended September 30, 2003 and
        2002, respectively.

12.   COMPREHENSIVE LOSS

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


                                                                  THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                     SEPTEMBER 30,              SEPTEMBER 30,
                                                               -------------------------  -------------------------
                                                                   2003         2002          2003         2002
                                                                -----------  -----------   ----------   -----------
Net loss:....................................................  $      (6.3) $      (7.4)  $    (24.9)  $     (69.4)
   Other comprehensive income (loss):
      Unrealized gains (losses) on available-for-sale
         investments.........................................         (0.4)         0.4          0.4          (0.2)
      Applicable income tax benefit (expense)................            -         (0.2)           -           0.1
                                                                -----------  -----------   ----------   -----------
Total comprehensive loss.....................................  $      (6.7) $      (7.2)  $    (24.5)  $     (69.5)
                                                                ===========  ===========   ==========   ===========

13.   SUBSEQUENT EVENT

      In November 2003, Pacific Lumber and Scotia LLC sold approximately 681
acres of timberlands within an area known as the Grizzly Creek grove. Pacific
Lumber received $10.0 million in cash, while Scotia LLC received $8.2 million in
cash. The Company expects to recognize a gain of approximately $16.8 million in
the fourth quarter of 2003 related to this sale.

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,"
"plans" 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 or regulatory requirements,
developments in litigation, 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

      The Company operates in three industries: forest products, through MGI and
its wholly owned subsidiaries, principally Pacific Lumber, Scotia LLC and Britt;
real estate investment and development, managed through MPC; and racing
operations through SHRP, Ltd. MGHI owns 100% of MGI and is a wholly owned
subsidiary of the Company. In addition, the Company owns 62% of Kaiser, an
integrated aluminum producer. All references to the "Company" include MAXXAM
Inc. and its majority and wholly owned subsidiaries (but exclusive of Kaiser and
its subsidiaries), unless otherwise indicated or the context indicates
otherwise. All references to "Kaiser," "MGHI," "Pacific Lumber," "MPC" and
"SHRP, Ltd." refer to the respective companies and their subsidiaries, unless
otherwise indicated or the context indicates otherwise.

   DECONSOLIDATION OF KAISER
      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. As a result of Kaiser's filing for
bankruptcy (as discussed in Note 1), Kaiser's financial results were
deconsolidated beginning February 12, 2002, and the Company began reporting its
investment in Kaiser using the cost method, under which the investment is
reflected as a single amount on the Company's balance sheet of $(516.2) million,
and the recording of earnings or losses from Kaiser was discontinued after
February 11, 2002. Since Kaiser's results are no longer consolidated and the
Company believes that it is not probable that it will be obligated to fund
losses related to its investment in Kaiser, any adjustments reflected in
Kaiser's financial statements subsequent to February 12, 2002 (relating to the
recoverability and classification of recorded asset amounts and classification
of liabilities or the effects on existing stockholders' deficit as well as
adjustments made to Kaiser's financial information for loss contingencies and
other matters) are not expected to affect the Company's financial results.

      The following financial information is presented for comparison purposes.
The financial information for the nine months ended September 30, 2002, is
condensed pro forma financial information which reflects the results of
operations of the Company excluding Kaiser (in millions, except share data).



                                                                       THREE MONTHS ENDED       NINE MONTHS ENDED
                                                                          SEPTEMBER 30,           SEPTEMBER 30,
                                                                      ---------------------  ----------------------
                                                                         2003       2002        2003        2002
                                                                      ----------  ---------  ----------  ----------

Net sales...........................................................  $    84.2   $   73.6   $   227.3   $   214.8
Costs and expenses..................................................      (75.4)     (68.8)     (214.1)     (206.7)
                                                                      ----------  ---------  ----------  ----------
Operating income....................................................        8.8        4.8        13.2         8.1
Other income (expenses), net........................................        3.9        2.9        19.8        18.8
Interest expense and amortization of deferred financing costs.......      (19.0)     (19.7)      (57.9)      (60.2)
                                                                      ----------  ---------  ----------  ----------
Loss before income taxes............................................       (6.3)     (12.0)      (24.9)      (33.3)
Income tax benefit..................................................          -        4.6           -        12.1
Minority interests..................................................          -          -           -         0.2
                                                                      ----------  ---------  ----------  ----------
Net loss............................................................  $    (6.3)  $   (7.4)  $   (24.9)  $   (21.0)
                                                                      ==========  =========  ==========  ==========
Basic and diluted loss per share                                      $   (0.96)  $  (1.14)  $   (3.81)  $   (3.22)
                                                                      ==========  =========  ==========  ==========

      See Notes 1 and 5 for further discussion of Kaiser's reorganization
proceedings and other information regarding the Company's investment in Kaiser.

   FOREST PRODUCTS OPERATIONS

      Industry Overview and Selected Operational Data
      This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and above for
cautionary information with respect to such forward-looking statements.

      The Company's forest products operations are conducted by MGI, through
Pacific Lumber, Scotia LLC and Britt. The segment's business is somewhat
seasonal, and its net sales have been historically higher in the months of April
through November than in the months of December through March. Management
expects that MGI's revenues and cash flows will continue to be somewhat
seasonal. Accordingly, MGI's results for any one quarter are not necessarily
indicative of results to be expected for the full year.

      Regulatory and environmental matters play a significant role in the
Company's forest products operations. See Item 1. "Business--Forest Products
Operations--Regulatory and Environmental Factors" of the Form 10-K and Note 8
for a discussion of these matters. Regulatory compliance and litigation have
caused and may continue to cause delays in obtaining approvals of THPs and
delays in harvesting on THPs once they are approved. This could result in a
decline in harvest, an increase in the cost of logging operations, and lower net
sales, as well as increased costs related to timber harvest litigation.

      As discussed in Note 8, the North Coast Water Board is requiring Pacific
Lumber to apply certain waste discharge requirements to approved THPs covering
winter harvesting operations in the Freshwater and Elk River watersheds, and the
North Coast Water Board could require Pacific Lumber to follow waste discharge
requirements before harvesting operations are conducted on THPs in other
watersheds. These requirements could cause increased costs and delays in
harvesting.

      Also discussed in Note 8 is the enactment of Senate Bill 810, which
provides regional water quality control boards with additional authority related
to the approval of THPs. Implementation of this law could result in delays in
obtaining approvals of THPs, increased costs and additional water protection
measures beyond those contained in the HCP.

      Furthermore, there can be no assurance that certain other pending legal,
regulatory and environmental matters or future governmental regulations,
legislation or judicial or administrative decisions, adverse weather conditions,
or low lumber or log prices, will not have a material adverse effect on the
Company's financial position, results of operations or liquidity. See Note 8 for
further information regarding regulatory and legislative matters and legal
proceedings relating to the Company's forest products operations.

      During 2001, comprehensive external and internal reviews were conducted of
Pacific Lumber's business operations. These reviews were conducted in an effort
to identify ways in which Pacific Lumber could operate on a more efficient and
cost effective basis. Based upon the results of these reviews, Pacific Lumber,
among other things, closed two of its four sawmills, eliminated certain of its
operations, including its soil amendment and concrete block activities, began
utilizing more efficient harvesting methods and adopted certain other cost
saving measures. Further actions may be taken during the next year as a result
of Pacific Lumber's continuing evaluation process, and additional writedowns of
certain assets may be required.

      The following table presents selected operational and financial
information for the three and nine months ended September 30, 2003 and 2002, for
the Company's forest products operations.


                                                               THREE MONTHS ENDED            NINE MONTHS ENDED
                                                                  SEPTEMBER 30,                SEPTEMBER 30,
                                                           ---------------------------  ---------------------------
                                                                2003          2002          2003           2002
                                                           -------------  ------------  ------------  -------------
                                                             (IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES)
Shipments:
   Lumber: (1)
      Redwood upper grades................................          7.5           7.4          19.8           20.9
      Redwood common grades...............................         53.3          55.9         162.1          173.5
      Douglas-fir upper grades............................          1.3           1.0           2.9            3.7
      Douglas-fir common grades...........................         12.9           7.3          32.9           12.9
      Other...............................................          3.4             -           6.5              -
                                                           -------------  ------------  ------------  -------------
   Total lumber...........................................         78.4          71.6         224.2          211.0
                                                           =============  ============  ============  =============
   Wood chips (2).........................................         18.1          19.2          59.9           51.7
                                                           =============  ============  ============  =============

Average sales price:
   Lumber: (3)
      Redwood upper grades................................ $      1,215   $     1,291   $     1,263   $      1,327
      Redwood common grades...............................          632           559           602            546
      Douglas-fir upper grades............................        1,078         1,456         1,321          1,330
      Douglas-fir common grades...........................          366           336           348            336
   Wood chips (4).........................................           43            34            45             34

Net sales:
   Lumber, net of discount................................ $       48.6   $      44.5   $     137.8   $      130.6
   Logs...................................................          3.0           3.4           4.9           12.2
   Wood chips.............................................          0.8           0.6           2.7            1.7
   Cogeneration power.....................................          2.8           2.5           8.8            7.2
   Other..................................................          0.9           0.8           2.4            2.3
                                                           -------------  ------------  ------------  -------------
      Total net sales..................................... $       56.1   $      51.8   $     156.6   $      154.0
                                                           =============  ============  ============  =============
Operating income ......................................... $        6.7   $       5.4   $      16.0   $       15.3
                                                           =============  ============  ============  =============
Loss before income taxes and minority interests........... $       (6.1)  $      (8.2)  $     (22.7)  $      (22.8)
                                                           =============  ============  ============  =============

--------------------
(1)   Lumber shipments are expressed in millions of board feet.
(2)   Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds.
(3)   Dollars per thousand board feet.
(4)   Dollars per bone dry unit.

      Net Sales
      Net sales for the forest products segment increased for the three months
ended September 30, 2003, as compared to the same period of 2002. The $4.1
million increase in revenues from lumber sales was primarily due to higher
selling prices for redwood common grade lumber. The improvement in revenues due
to the increase in prices was partially offset by an unfavorable shift in the
mix of lumber from redwood to Douglas-fir. Net sales for the nine months ended
September 30, 2003, increased $2.6 million from the comparable prior year
period. A $7.3 million decrease in log sales to third parties partially offset
increases in net sales for lumber and other products. Lumber sales for the nine
months ended September 30, 2003, increased over the prior year period as a
result of variances in prices and volumes similar to those between the 2003 and
2002 third quarters. Power sales increased for the nine months ended September
30, 2003 due to an increase in both volume and prices.

      Operating Income
      Operating income for the forest products segment increased for the quarter
and nine months periods ended September 30, 2003 compared to the prior year
periods due to increases in net sales of lumber and lower selling, general and
administrative expenses in 2003 due principally to lower litigation costs.
These improvements were offset in part by an increase in harvesting costs.

      Loss Before Income Taxes and Minority Interests
      The forest products segment's loss before income taxes and minority
interests decreased for the third quarter of 2003 as compared to the third
quarter of 2002, primarily due to the increase in operating income discussed
above and lower interest expense. Loss before income taxes and minority
interests decreased slightly for the first nine months of 2003 versus the
comparable prior year period. In addition to the factors which led to the
improvement in operating results discussed above, the segment realized lower
interest expense and a gain on the repurchase of Timber Notes. These
improvements were substantially offset by lower earnings on cash, cash
equivalents and short-term investments.

      REAL ESTATE OPERATIONS

      Industry Overview and Selected Operational Data
      The Company, principally through its wholly owned subsidiaries, invests in
and develops residential and commercial real estate primarily in Arizona,
California, Puerto Rico, and Texas. The following table presents selected
operational and financial information for the three and nine months ended
September 30, 2003 and 2002, for the Company's real estate operations.


                                                                     THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                        SEPTEMBER 30,            SEPTEMBER 30,
                                                                   ----------------------- ------------------------
                                                                      2003         2002        2003         2002
                                                                   ----------  ----------- -----------  -----------
                                                                               (IN MILLIONS OF DOLLARS)

Net sales:
   Real estate:
      Fountain Hills.............................................  $    9.0    $     1.1   $     16.0   $      6.0
      Mirada.....................................................       3.4            -          5.3          0.2
      Palmas del Mar.............................................       0.7          6.2          5.8         12.3
      Other......................................................         -          1.0            -          1.4
                                                                   ----------  ----------- -----------  -----------
        Total....................................................       13.1         8.3         27.1         19.9
                                                                   ----------  ----------- -----------  -----------

   Resort, commercial and other:
      Fountain Hills.............................................        1.2          1.0         3.0          2.8
      Mirada.....................................................        0.2            -         0.2            -
      Palmas del Mar.............................................        1.9          2.1         6.3          8.4
      Commercial lease properties................................        3.9          2.2        11.9          6.5
      Other......................................................        0.1          0.1         0.2          0.2
                                                                   ----------  ----------- -----------  -----------
        Total....................................................        7.3          5.4        21.6         17.9
                                                                   ----------  ----------- -----------  -----------

   Total net sales...............................................  $    20.4   $     13.7  $     48.7   $     37.8
                                                                   ==========  =========== ===========  ===========

Operating income (loss):
   Fountain Hills................................................  $     6.8   $     (0.2) $      9.3   $     (0.2)
   Mirada........................................................        1.8         (0.5)        0.7         (1.6)
   Palmas del Mar................................................       (5.0)         1.1        (9.5)        (0.3)
   Commercial lease properties...................................        1.4          0.8         4.4          2.4
   Other.........................................................       (0.1)         0.7        (0.6)         0.4
                                                                   ----------  ----------- -----------  -----------
      Total operating income.....................................  $     4.9   $      1.9  $      4.3   $      0.7
                                                                   ==========  =========== ===========  ===========

Investment, interest and other income (expense), net:
   Equity in earnings from real estate joint ventures............  $     0.2   $     (0.4) $      1.2   $      2.4
   Other.........................................................        0.5          1.1         1.8          3.5
                                                                   ----------  ----------- -----------  -----------
                                                                   $     0.7   $      0.7  $      3.0   $      5.9
                                                                   ==========  =========== ===========  ===========

Income (loss) before income taxes and minority interests.........  $     0.8   $     (0.5) $     (7.0)  $     (2.9)
                                                                   ==========  =========== ===========  ===========

      Net Sales
      The real estate segment reported increases in net sales for both the third
quarter and first nine months of 2003 as compared to the same periods of 2002.
The increases were driven primarily by higher real estate acreage and commercial
lot sales at Fountain Hills, higher residential lot sales at Mirada, and
increases in lease revenues from the segment's commercial lease properties
(several of which were acquired in the fourth quarter of 2002). These increases
were partially offset by declines in real estate acreage sales at Palmas del
Mar.

      Operating Income and Income (Loss) Before Income Taxes and Minority Interests
      Operating income for the real estate segment improved for the third
quarter and first nine months of 2003, largely due to the increases in net sales
discussed above. Third quarter and year-to-date 2003 operating results included
a $1.4 million charge to recognize the impairment of Palmas del Mar's casino
assets related to the closure of a hotel which was owned and operated by a third
party from whom the casino leased adjacent space. The segment reported income
before income taxes and minority interests for the third quarter of 2003
compared to a loss before income taxes and minority interests for the third
quarter of 2002. The quarter-over-quarter improvement resulted from increased
operating profits in addition to higher income from the segment's FireRock LLC
joint venture. The loss before income taxes and minority interests increased for
the first nine months of 2003 versus the same period of a year ago despite
improvements in operating income primarily due to lower income from the FireRock
LLC joint venture, lower interest income, and higher interest expense associated
with the borrowings used to finance the acquisition of commercial lease
properties in the fourth quarter of 2002.

      RACING OPERATIONS

      Industry Overview and Selected Operational Data
      The Company indirectly owns SHRP, Ltd., a Texas limited partnership, 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 periods are generally not
comparable due to the timing, varying lengths and types of racing meets held.
Historically, Sam Houston Race Park and Valley Race Park have derived a
significant amount of their annual net pari-mutuel commissions from live racing
and simulcasting. Net 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 nine months ended September 30, 2003 and 2002, for
the Company's racing operations.


                                                                     THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                        SEPTEMBER 30,            SEPTEMBER 30,
                                                                   ----------------------- ------------------------
                                                                      2003         2002        2003         2002
                                                                   ----------  ----------- -----------  -----------
                                                                               (IN MILLIONS OF DOLLARS)
Number of live race days:

   Sam Houston Race Park.........................................         43           42          91           94
   Valley Race Park..............................................          -            -          82           84

Handle:
   Sam Houston Race Park:
      On-track handle............................................  $    37.1   $     40.0  $    103.6   $    111.7
      Off-track handle...........................................       19.6         23.4       121.9        128.4
                                                                   ----------  ----------- -----------  -----------
        Total....................................................  $    56.7   $     63.4  $    225.5   $    240.1
                                                                   ==========  =========== ===========  ===========

   Valley Race Park:
      On-track handle............................................  $     4.3   $      5.0  $     15.8   $     17.5
      Off-track handle...........................................          -            -         3.2          2.9
                                                                   ----------  ----------- -----------  -----------
        Total....................................................  $     4.3   $      5.0  $     19.0   $     20.4
                                                                   ==========  =========== ===========  ===========

Net sales:
   Sam Houston Race Park:
      Net pari-mutuel commissions................................  $     4.0   $      4.3  $     12.3   $     13.0
      Other revenues.............................................        3.0          2.9         6.7          6.6
                                                                   ----------  ----------- -----------  -----------
        Total....................................................        7.0          7.2        19.0         19.6
                                                                   ----------  ----------- -----------  -----------
   Valley Race Park:
      Net pari-mutuel commissions................................        0.5          0.6         2.2          2.4
      Other revenues.............................................        0.2          0.3         0.8          1.0
                                                                   ----------  ----------- -----------  -----------
        Total....................................................        0.7          0.9         3.0          3.4
                                                                   ----------  ----------- -----------  -----------
   Total net sales...............................................  $     7.7   $      8.1  $     22.0   $     23.0
                                                                   ==========  =========== ===========  ===========

Operating income (loss):
   Sam Houston Race Park.........................................  $    (0.6)  $     (0.4) $     (0.9)  $      0.3
   Valley Race Park..............................................       (0.1)        (0.1)       (0.4)        (0.1)
                                                                   ----------  ----------- -----------  -----------
      Total operating income (loss)..............................  $    (0.7)  $     (0.5) $     (1.3)  $      0.2
                                                                   ==========  =========== ===========  ===========

Income (loss) before income taxes and minority interests.........  $    (0.4)  $     (0.5) $     (1.1)  $      0.2
                                                                   ==========  =========== ===========  ===========

      Net Sales
      The racing segment reported lower net sales for the quarter and nine
months ended September 30, 2003, from the comparable prior year periods. Both
Sam Houston Race Park and Valley Race Park experienced lower average daily
attendance for simulcast race days which unfavorably impacted net pari-mutuel
commissions and net sales.

      Operating Income (Loss) and Income (Loss) Before Income Taxes and Minority Interests
      Operating results for the racing segment declined for both the quarter and
nine months ended September 30, 2003, primarily due to the decreases in net
sales discussed above. In addition, results for the nine months ended September
30, 2003, reflected an increase in selling, general and administrative expenses
including costs associated with legislative efforts. The segment's loss
before income taxes and minority interests was relatively unchanged for the
third quarter of 2003 versus the same quarter of 2002; however, the decline in
operating results for the first nine months of 2003 led to a loss before income
taxes and minority interests for the 2003 year-to-date period as compared to
income before income taxes and minority interests for the first nine months of
2002.

   OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS

                                                                     THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                        SEPTEMBER 30,            SEPTEMBER 30,
                                                                   -----------------------  -----------------------
                                                                      2003         2002        2003        2002
                                                                   -----------  ----------  ----------  -----------
                                                                               (IN MILLIONS OF DOLLARS)

Operating loss...................................................  $     (2.1)  $    (2.0)  $    (5.8)  $  (8.1)
Income (loss) before income taxes and minority interest..........        (0.6)       (2.8)(1)     5.9      (7.8)(1)

--------------------
(1)   Includes $0.3 million and $3.5 million of gains on repurchases of debt for
      the three and nine month periods, respectively, as required by SFAS. No.
      145 (see Note 2). These gains were previously reported as extraordinary
      items.

      The operating losses in the table above represent corporate general and
administrative expenses that are not allocated to the Company's industry
segments. Results for the third quarter and first nine months of 2002 reflect
certain general and administrative expenses incurred as a result of Kaiser's
Chapter 11 filing, whereas these expenses were significantly less in the
comparable periods of 2003. The income (loss) before income taxes and minority
interests include operating losses, investment, interest and other income
(expense) and interest expense, including amortization of deferred financing
costs, that are not attributable to the Company's industry segments. Included in
the results for the first nine months of 2003 is income related to an $8.0
million reimbursement from an insurer for certain costs incurred in connection
with the OTS and FDIC actions (see Note 8).

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

      This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and above for
cautionary information with respect to such forward-looking statements.

   OVERVIEW

      The Company conducts its operations primarily through its subsidiaries.
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 Pacific Lumber and
Scotia LLC, 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. Scotia
LLC is highly leveraged and has significant debt service requirements. "MAXXAM
PARENT" is used in this section to refer to the Company on a stand-alone basis
without its subsidiaries.

      The following table summarizes certain data related to financial condition
and to investing and financing activities of the Company and its subsidiaries.
As a result of the deconsolidation of Kaiser, the balances at September 30, 2003
and December 31, 2002 exclude amounts attributable to Kaiser. For comparison
purposes, such amounts have also been excluded from the selected information
related to changes in cash and cash equivalents for the nine months ended
September 30, 2002.

                                             FOREST PRODUCTS
                                        -------------------------

                                                            MGI
                                        SCOTIA   PACIFIC    AND     REAL                        MAXXAM
                                         LLC      LUMBER   OTHER   ESTATE   RACING     MGHI     PARENT       TOTAL
                                      ---------  --------  ------ -------- --------  -------- ----------  ----------
                                                                (IN MILLIONS OF DOLLARS)


Debt and credit facilities (excluding
   intercompany notes)
Short-term borrowings and current
   maturities of long-term debt:
   September 30, 2003................ $   38.6   $   0.2   $   -  $  12.1  $     -   $     -  $       -   $    50.9
   December 31, 2002.................     16.7       0.3       -     13.5        -         -          -        30.5

Long-term debt, excluding current
   maturities:
   September 30, 2003................ $  715.6   $   0.3   $   -  $ 238.6  $   0.6   $     -  $       -   $   955.1
   December 31, 2002.................    737.7       0.4       -    244.0      0.2         -          -       982.3

Revolving credit facilities:
   September 30, 2003:
      Facility commitment amounts.... $   58.5   $  45.0   $ 2.3  $  14.0  $     -   $     -  $       -   $   119.8
      Borrowings.....................     20.3         -       -        -        -         -          -        20.3
      Letters of credit..............        -       0.3       -      2.4        -         -          -         2.7
      Unused and available credit....     38.2      24.4     2.3      0.3        -         -          -        65.2

Cash, cash equivalents, marketable
   securities and other investments
September 30, 2003:
   Current amounts restricted for
      debt service................... $   22.2   $     -   $   -  $   0.2  $     -   $     -  $       -   $    22.4
   Other current amounts.............      3.4      13.2    14.7      6.6      4.5         -       86.8       129.2
                                      ---------  --------  ------ -------- --------  -------- ----------  ----------
                                          25.6      13.2    14.7      6.8      4.5         -       86.8       151.6
                                      ---------  --------  ------ -------- --------  -------- ----------  ----------
   Long-term amounts restricted for
      debt service...................     36.6         -       -      1.4        -         -          -        38.0
   Other long-term restricted amounts       -        0.4     2.3      4.6        -         -          -         7.3
                                      ---------  --------  ------ -------- --------  -------- ----------  ----------
                                          36.6       0.4     2.3      6.0        -         -          -        45.3
                                      ---------  --------  ------ -------- --------  -------- ----------  ----------
                                      $   62.2   $  13.6   $17.0  $  12.8  $   4.5   $     -  $    86.8   $   196.9
                                      =========  ========  ====== ======== ========  ======== ==========  ==========

December 31, 2002:
   Current amounts restricted for
      debt service................... $   24.5   $     -   $   -  $   0.3  $     -   $     -  $       -   $    24.8
   Other current amounts.............      4.9      21.3    13.6      6.4      5.2       0.3       74.8       126.5
                                      ---------  --------  ------ -------- --------  -------- ----------  ----------
                                          29.4      21.3    13.6      6.7      5.2       0.3       74.8       151.3
                                      ---------  --------  ------ -------- --------  -------- ----------  ----------

   Long-term amounts restricted for
      debt service...................     52.9         -       -      1.4        -         -          -        54.3
   Other long-term restricted amounts        -       0.4     2.3      6.6        -         -          -         9.3
                                      ---------  --------  ------ -------- --------  -------- ----------  ----------
                                          52.9       0.4     2.3      8.0        -         -          -        63.6
                                      ---------  --------  ------ -------- --------  -------- ----------  ----------
                                      $   82.3   $  21.7   $15.9  $  14.7  $   5.2   $   0.3  $    74.8   $   214.9
                                      =========  ========  ====== ======== ========  ======== ==========  ==========


----------------------------

Table and Notes continued on next page





                                             FOREST PRODUCTS
                                        -------------------------

                                                            MGI
                                        SCOTIA   PACIFIC    AND     REAL                        MAXXAM
                                         LLC      LUMBER   OTHER   ESTATE   RACING     MGHI     PARENT       TOTAL
                                      ---------  --------  ------ -------- --------  -------- ----------  ----------
                                                                (IN MILLIONS OF DOLLARS)

Changes in cash and cash equivalents
   for the nine month periods
Capital expenditures:
   September 30, 2003................ $    5.9   $   3.9   $ 0.9   $ 2.7   $  1.0   $     -   $     0.1   $    14.5
   September 30, 2002................      4.9       3.8     0.3     3.1      0.5         -          -         12.6

Net proceeds from dispositions of
   property and investments:
      September 30, 2003............. $    3.2   $   0.3   $   -   $   -   $    -   $     -   $      -    $     3.5
      September 30, 2002.............        -       2.0       -       -        -         -          -          2.0

Borrowings (repayments) of debt and
   credit facilities, net of
   financing costs:
      September 30, 2003............. $    3.8   $  (0.1)  $   -   $(6.9)  $ 0.3    $     -   $      -    $   (2.9)
      September 30, 2002.............     (9.4)    (17.8)   (0.5)    0.3        -     (41.4)         -       (68.8)

Dividends and advances received
   (paid):
      September 30, 2003............. $      -   $   4.6   $(4.7)  $ 0.5   $ (0.6)  $     -   $    0.2    $      -
      September 30, 2002.............    (29.4)     29.4    (0.1)   (1.1)    (1.7)        -        2.9           -


   MAXXAM PARENT AND MGHI

      The Company may from time to time purchase shares of its Common Stock on
national exchanges or in privately negotiated transactions. During the third
quarter and first nine months of 2003, the Company purchased an aggregate of
5,000 and 14,600 shares, respectively, of its Common Stock on national
exchanges. Subsequent to September 30, 2003, the Company purchased an additional
320,700 shares.

      MAXXAM Parent and MGHI own the 50,000,000 Kaiser Shares, representing an
approximate 62% interest. As a result of the Cases, the value of Kaiser common
stock has declined substantially, and the market value of the Kaiser Shares,
based on the price per share quoted at the close of business on November 7,
2003, was $4.5 million. There can be no assurance that such value would be
realized should the Kaiser Shares be sold, and it is likely that the Company's
ownership interest in Kaiser will be cancelled as a result of a plan of
reorganization. See also Notes 1 and 5.

      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 distributions from the real estate and racing segments,
should be sufficient to meet its working capital requirements. However, there
can be no assurance that this will be the case.

   FOREST PRODUCTS OPERATIONS

      The Scotia LLC Line of Credit allows Scotia LLC to borrow up to one year's
interest on the Timber Notes. On June 20, 2003, the Scotia LLC Line of Credit
was extended to July 7, 2006. At or near the completion of such extension,
Scotia LLC will request that the Scotia LLC Line of Credit be extended for a
further period of not less than 364 days. If not extended, Scotia LLC may draw
upon the full amount available. The amount drawn would be repayable in 12
semiannual installments on each note 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 September 30, 2003, Scotia LLC could have borrowed a
maximum of $58.5 million under the Scotia LLC Line of Credit, and there was
$20.3 million outstanding under the Scotia LLC Line of Credit.

      On the note payment date in January 2003, Scotia LLC had $5.6 million set
aside in the note payment account to pay the $27.9 million of interest due.
Scotia LLC used $22.3 million (in addition to $1.6 million of interest due in
respect of Timber Notes held by Scotia LLC) of the funds available under the
Scotia LLC Line of Credit to pay the remaining amount of interest due. Scotia
LLC repaid $12.1 million of principal on the Timber Notes (an amount equal to
Scheduled Amortization) using funds held in the SAR Account.

      On the note payment date in July 2003, Scotia LLC used $27.4 million (in
addition to $2.0 million due in respect of Timber Notes held by Scotia LLC) of
the funds available under the Scotia LLC Line of Credit to pay the entire amount
of interest due. Scotia LLC repaid $4.4 million of principal on the Timber Notes
(an amount equal to Scheduled Amortization) using funds held in the SAR Account.

      With respect to the note payment date in January 2004, Scotia LLC expects
to use the funds available under the Scotia LLC Line of Credit to pay a
substantial portion of the $27.3 million of interest due (in addition to $2.0
million due in respect of Timber Notes held by the Company). Scotia LLC expects
to repay $13.1 million of principal on the Timber Notes (an amount equal to
Scheduled Amortization) using funds held in the SAR Account.

      In April 2003, $3.4 million of funds from the SAR Account were used to
repurchase $4.0 million principal amount of Timber Notes, as permitted under the
Timber Notes Indenture, resulting in a gain of $0.4 million (net of unamortized
deferred financing costs) on extinguishment of debt.

      The Pacific Lumber Credit Agreement provides for a two-year revolving line
of credit expiring on August 13, 2004, with an aggregate commitment of up to
$45.0 million (based on the amount of inventories and receivables held by
Pacific Lumber). At September 30, 2003, $0.3 million of letters of credit and no
borrowings were outstanding under the Pacific Lumber Credit Agreement. Unused
availability was limited to $24.4 million at September 30, 2003.

      Pacific Lumber's cash flows from operations may be adversely affected by
diminished availability of logs from Scotia LLC, lower lumber prices, adverse
weather conditions, or pending legal, regulatory and environmental matters. See
"--Results of Operations--Forest Products Operations" above as well as Note 8
for further discussion of the regulatory, environmental and legal matters
affecting harvest levels. Pacific Lumber may require funds available under the
Pacific Lumber Credit Agreement and/or additional prepayments by MGI of an
intercompany loan in order to meet its working capital and capital expenditure
requirements for the next year.

      Due to its highly leveraged condition, Scotia LLC is more sensitive than
less leveraged companies to factors affecting its operations, including low log
prices, governmental regulation and litigation affecting its timber harvesting
practices (see "--Results of Operations--Forest Products Operations--Industry
Overview and Selected Operational Data" above and Note 8), and general economic
conditions. Scotia LLC's cash flows from operations are significantly impacted
by harvest volumes and log prices. The Master Purchase Agreement between Scotia
LLC and Pacific Lumber contemplates that all sales of logs by Scotia LLC to
Pacific Lumber 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 Timber Notes 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 Scotia LLC is required to
engage an independent forestry consultant to confirm that the purchase price
reflects fair market value.

      In January 2003, in accordance with the Master Purchase Agreement, Scotia
LLC engaged an independent forestry consultant with respect to establishing the
purchase prices of logs to be sold to Pacific Lumber in the first half of 2003.
The consultant determined that with respect to certain categories of logs, the
fair market value was higher than the comparable SBE Price. The prices for
redwood logs were on average approximately 20% higher for the first half of 2003
than those for the second half of 2002. There was relatively no price change for
Douglas-fir logs.

      In June 2003, the State Board of Equalization adopted the new Harvest
Value Schedule for the second half of 2003. The prices published in that
schedule reflected a 22% increase in the SBE Price for small redwood logs and an
11% increase for small Douglas-fir logs from the prices published for the first
half of 2003, and a 7% increase from the price in effect for small redwood logs
(i.e., the prices established using the independent forestry consultant) during
the first half of 2003.

      On August 12, 2003, Standard & Poor's Ratings Services announced that it
was lowering its ratings on all classes of the Timber Notes. Ratings on the
Class A-1 Timber Notes were lowered from A to BBB+; ratings on the Class A-2
Timber Notes were lowered from A to BBB; and ratings on the Class A-3 Timber
Notes were lowered from BBB to BB. Standard & Poor's also indicated that the
ratings remain on CreditWatch with negative implications and that the lowered
ratings reflect the negative impact that depressed timber prices, lower harvest
levels, and higher operating costs have had on Scotia LLC's cash flow available
for debt service.

      As discussed in Note 13, Pacific Lumber and Scotia LLC received $10.0
million and $8.2 million, respectively, in November 2003 for the sale of
timberlands in the Grizzly Creek grove. The proceeds received by Scotia LLC will
be used to pay down a portion of the Scotia LLC Line of Credit.

      With respect to short-term liquidity, Scotia LLC believes that existing
cash available for principal payments from the SAR Account, and funds available
under the Scotia LLC Line of Credit, together with cash flows from operations,
should provide sufficient funds to meet its working capital, capital
expenditures and debt service obligations through 2004; however, there can be no
assurance that this will be the case. With respect to long-term liquidity,
although the Company expects that cash flows from operations and funds available
under the SAR Account and the Scotia LLC Line of Credit should be adequate to
meet Scotia LLC's debt service, working capital and capital expenditure
requirements, unless log prices continue to improve, there can be no assurance
that this will be the case. In addition, cash flows from operations will be
adversely affected if harvest levels decline or costs increase as a result of
the various regulatory, environmental and litigation matters discussed in
"--Results of Operations--Forest Products Operations--Industry Overview and
Selected Operational Data" above and Note 8.

      With respect to long-term liquidity, although MGI and its subsidiaries
expect that their existing cash and cash equivalents, lines of credit and
ability to generate cash flows from operations should provide sufficient funds
to meet their debt service, working capital and capital expenditure
requirements, until such time as Pacific Lumber has adequate cash flows from
operations and/or dividends from Scotia LLC, there can be no assurance that this
will be the case. Cash flows from operations in the long-term may continue to be
adversely affected by the same factors discussed above which are affecting
short-term cash flows from operations.

      REAL ESTATE OPERATIONS

      The Arizona Department of Water Resources recently notified the local
utility which supplies water to the Company's Fountain Hills project that the
demand for water in the utility's service area has exceeded certain statutory
requirements. This development could adversely affect, among other things, the
Company's ability to develop its remaining acreage in Fountain Hills; however,
the Company is still in the process of analyzing what the effects could be. The
impacts could include increased costs, delays in development, or the inability
to develop the remaining acreage for an indefinite period of time.

      In March 2003, the Company's casino facility at its Palmas del Mar
operation in Puerto Rico ceased operations due to the closure of a hotel which
was owned and operated by a third party from whom the casino leased adjacent
space. As discussed further in Note 3, the Company does not expect that it will
be able to lease space for its casino operations from the new hotel owner at
Palmas, and therefore does not expect cash flows from these operations in the
future. Net cash flows from the casino's operations for 2002 were approximately
$0.8 million. Furthermore, the Company expects that the new hotel owner will not
reopen the hotel until some time in 2004. PDMPI benefitted from the revenues
generated as a result of guests of the hotel using PDMPI's golf course and other
resort related assets, and the hotel's closure could adversely affect the
performance of PDMPI in other ways which are not able to be quantified.

      The Company believes that the existing cash and credit facilities of its
real estate subsidiaries, excluding PDMPI, are sufficient to fund the working
capital and capital expenditure requirements of such subsidiaries for the next
year. With respect to the long-term liquidity of such subsidiaries, the Company
believes that their ability to generate cash from the sale of their existing
real estate, together with their ability to obtain financing and joint venture
partners, should provide sufficient funds to meet their working capital and
capital expenditure requirements. However, if the Company experiences long-term
delays in developing its remaining acreage in Fountain Hills as a result of an
inability to obtain adequate water supplies, then the cash flows from
subsidiaries involved in this development may be significantly less. PDMPI and
its subsidiaries, however, have required advances from MAXXAM Parent during 2002
and prior years to fund their operations, and it is expected that PDMPI will
require such advances in the future.

   RACING OPERATIONS

      With respect to short-term and long-term liquidity, SHRP, Ltd.'s
management expects that SHRP, Ltd. will generate cash flows from operations.

   KAISER'S OPERATIONS

      As a result of the filing of the Cases, claims against the Debtors for
principal and accrued interest on secured and unsecured indebtedness existing on
the Filing Date are stayed while the Debtors continue business operations as
debtors- in-possession, subject to the control and supervision of the Bankruptcy
Court. At this time, it is not possible to predict the effect of the Cases on
the businesses of the Debtors. With respect to the Company's interest in Kaiser,
the Debtors believe that it is likely that the equity of Kaiser's stockholders
will be cancelled without consideration. See Note 5 for further information.

TRENDS

      Real Estate Operations

      The Arizona Department of Water Resources recently notified the local
utility which supplies water to the Company's Fountain Hills project that the
demand for water in the utility's service area has exceeded certain statutory
requirements. This development could adversely affect, among other things, the
Company's ability to develop its remaining acreage in Fountain Hills; however,
the Company is still in the process of analyzing what the effects could be. The
impacts could include increased costs, delays in development, or the inability
to develop the remaining acreage for an indefinite period of time.

      Racing Operations

      In July 2003, the Texas Racing Commission approved live race dates for
2004. As a result, Sam Houston Race Park will more than double to 95 the number
of dates for its quarter horse meet in 2004. The additional live race dates
granted for 2004 are not likely to be granted in 2005 and beyond.

      The following table presents the number and type of performance conducted
and scheduled from 2002 through 2004 at Sam Houston Race Park.


                                                                                          YEARS ENDED DECEMBER 31,
                                                                                  ----------------------------------------
                                                                                     2002           2003          2004
                                                                                  ----------     ----------    -----------
Live Thoroughbred Race Days...................................................            84             84             78
Live Quarter Horse Race Days..................................................            42             43             95
Simulcast-only Days...........................................................           238            237            192

      As a result of the additional live race dates granted for 2004, management
expects that revenues will increase somewhat in 2004 as compared to 2003.

      The Texas legislature, which convenes every other year and was in session
from January 14, 2003 until June 2, 2003, considered a variety of alternatives
to address a projected budget shortfall, including enhancing state revenues
through additional forms of gaming such as video lottery terminals at existing
horse and dog racing tracks, gaming on Indian reservations, keno, and full
casinos. The Texas legislature did not enact any of this legislation. While the
Company intends to continue pursuing legislation which would expand the form of
gaming available at horse and dog tracks, no assurance can be given that these
efforts will be successful.

CRITICAL ACCOUNTING POLICIES

      See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Critical Accounting Policies" of the Form 10-K for a
discussion of the Company's critical accounting policies.

NEW ACCOUNTING PRONOUNCEMENTS

      See Note 2 for a discussion of new accounting pronouncements and their
potential impact on the Company.


ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company is exposed to changes in interest rates primarily under the
Scotia LLC Line of Credit and the Pacific Lumber Credit Agreement, as well as
certain other debt facilities used to finance real estate development
activities. These facilities bear interest at either the prime interest rate or
LIBOR plus a specified percentage point spread. The Scotia LLC Line of Credit
was established in conjunction with the offering of the Timber Notes. The
Company's objective in maintaining its other variable rate borrowings is
flexibility in borrowing funds and making repayments without penalties. As of
September 30, 2003, there were $35.9 million in borrowings outstanding under all
variable rate facilities. Based on the amount of borrowings outstanding under
these facilities during the nine months ended September 30, 2003, 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 $0.2 million.

      None of the Company's other debt is exposed to the risk of higher interest
payments due to changes in market interest rates. The Company does not utilize
interest rate swaps or similar hedging arrangements.


ITEM 4.         DISCLOSURE 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
Securities and Exchange Commission, 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, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and the
Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on the
foregoing, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective.

      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 8 is incorporated herein by reference.

ITEM 6.         EXHIBITS AND REPORTS ON FORM 8-K

      A.   EXHIBITS:

           * 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

      B.        REPORTS ON FORM 8-K:

      Since the filing of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003, the Company has filed or furnished on the dates
indicated the following current reports on Form 8-K:

      August 14, 2003 - report under Item 12 related to the Company's 2003
second quarter results.

      September 29, 2003 - report under Item 5 related to supplemental statement
of decision with respect to the EPIC- SYP/Permits and USWA lawsuits.

                                   SIGNATURES


      Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who have signed this report on behalf of
the Registrant and as the principal financial and accounting officers of the
Registrant, respectively.



                                                        MAXXAM INC.





Date: November 14, 2003         By:       /S/         PAUL N. SCHWARTZ
                                    ------------------------------------------------------
                                                     Paul N. Schwartz
                                      President, Chief Financial Officer and Director
                                               (Principal Financial Officer)



Date: November 14, 2003         By:       /S/      ELIZABETH D. BRUMLEY
                                    ------------------------------------------------------
                                                   Elizabeth D. Brumley
                                                        Controller
                                              (Principal Accounting Officer)







                                                                      APPENDIX A


                            GLOSSARY OF DEFINED TERMS


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

APB Opinion No. 30: Accounting Principles Board Opinion 30, "Reporting the
Results of Operations - Reporting Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions"

Bankruptcy Court: The United States Bankruptcy Court for the District of
Delaware

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

Beltway Notes: Beltway Assets LLC's 6.31% notes due in November 2024

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

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

Cases: The Chapter 11 proceedings of the Debtors

Cave action: An action entitled Steve Cave, et al. v. Gary Clark, et al. (No.
DR0220719) pending in the Superior Court of Humboldt County, California

CDF:  California Department of Forestry and Fire Protection

CESA:  California Endangered Species Act

Class A Preferred Stock: Class A $.05 Non-Cumulative Participating Convertible
Preferred Stock of the Company

Code: The United States Bankruptcy Code

Common Stock:  $0.50 par value common stock of the Company

Company: MAXXAM Inc. and its majority and wholly owned subsidiaries, unless
otherwise indicated or the context indicates otherwise

Cook action: An action entitled Alan Cook, et al. v. Gary Clark, et al. (No.
DR020718) pending 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

Elk River Order: Clean up and abatement order issued to Pacific Lumber by the
North Coast Water Board for the Elk River watershed

Environmental Plans:  The HCP and the SYP

EPA:  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. pending in
the Superior Court of Humboldt County, California (No. CV990452)

ESA:  The federal Endangered Species Act

FASB: Financial Accounting Standards Board

FDIC:  Federal Deposit Insurance Corporation

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

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

FDIC counterclaim: A counterclaim to the FDIC action filed on May 31, 2000, by
the Company, Federated and Mr. Hurwitz

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

Filing Date: With respect to any particular Debtor, the date on which such
Debtor filed its Case

FIN 45: FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others"

FIN 46: FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"

Form 10-K: The Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 2002

Harvest Value Schedule: A schedule setting forth SBE Prices which is published
bi-annually 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 September 1996 agreement between Pacific Lumber,
Scotia LLC, Salmon Creek, the United States and California which provided the
framework for the acquisition by the United States and California of the
Headwaters Timberlands

Headwaters Timberlands: Approximately 5,600 acres of Pacific Lumber timberlands
consisting of two forest groves commonly referred to as the Headwaters Forest
and the Elk Head Springs Forest which were sold to the United States and
California in March 1999

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

HWC lawsuit: An action entitled Humboldt County Watershed Council, et al. v.
North Coast Regional Water Quality Control Board, et al. (No. CV03-0438), naming
Pacific Lumber as real party in interest, which had been pending 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) pending in the Delaware Court of
Chancery

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

Kaiser Shares: 50,000,000 shares of the common stock of Kaiser owned by the
Company and MGHI

Lakepointe Notes: Lakepointe Assets Holdings LLC and its subsidiaries' 7.56%
notes due June 8, 2021

LIBOR: London Inter Bank Offering Rate

Master Purchase Agreement: The agreement between Pacific Lumber and Scotia LLC
that governs all purchases of logs by Pacific Lumber from Scotia LLC

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

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

Motel Notes: Motel Assets Holdings LLC and its subsidiaries' 7.03% notes due May
1, 2018

MPC:  MAXXAM Property Company, a wholly-owned subsidiary of the Company

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

Original Debtors: Kaiser, KACC and the 15 subsidiaries of KACC that filed
petitions for reorganization on February 12, 2002

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

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

Pacific Lumber Credit Agreement: The revolving credit agreement between Pacific
Lumber and a bank which provides for borrowings of up to $45.0 million

Palmas Notes: The 7.12% notes due December 20, 2030 of Palmas Country Club Inc.,
an indirect wholly owned subsidiary of the Company

PDMPI:  Palmas del Mar Properties, Inc., a wholly owned subsidiary of the Company

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

PSLRA: Private Securities Litigation Reform Act of 1995

Respondents:  The Company, Federated, Mr. Charles Hurwitz and others

Salmon Creek:  Salmon Creek LLC, a wholly owned subsidiary of Pacific Lumber

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 Scotia LLC must pay
through each Timber Note payment date in order to avoid prepayment or deficiency
premiums

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

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

SFAS No. 123: Statement of Financial Accounting Standards No. 123, "Accounting
and Disclosure of Stock-Based Compensation"

SFAS No. 143: Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations"

SFAS No. 145: Statement of Financial Accounting Standards No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections"

SFAS No. 146: Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities"

SFAS No. 148: Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation"

SFAS No. 150: Statement of Financial Accounting Standards No. 150, "Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity"

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

SOP 90-7: American Institute of Certified Public Accountants Statement of
Position No. 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code"

State Water Board: California State Water Resources Control Board

SYP: The sustained yield plan approved in March 1999, in connection with the
consummation of the Headwaters Agreement

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

THP No. 520 lawsuit: An action entitled The Pacific Lumber Company, et al. v.
California State Water Resources Control Board (No. DR010860) pending in the
Superior Court of Humboldt County, California

Timber Notes: Scotia LLC'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

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. 99CS00626) pending in the Superior Court of Sacramento County, California`