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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, 2005

                    Commission File Number 1-3924

                             MAXXAM INC.
       (Exact name of Registrant as specified in its charter)

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

       1330 Post Oak Blvd., Suite 2000
                Houston, Texas                                    77056
   (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 X   No

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

     Number of shares of common stock outstanding at November 4, 2005: 5,967,942

                         TABLE OF CONTENTS

                                                                            Page
PART I. - FINANCIAL INFORMATION

          Item 1.   Financial Statements (unaudited):
                    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.   Controls and Procedures....................................

PART II. - OTHER INFORMATION

          Item 1.   Legal Proceedings..........................................
          Item 2.   Unregistered Sales of Equity Security and Use of Proceeds..
          Item 6.   Exhibits...................................................
          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,
                                                                                             2005             2004
                                                                                         ---------------------------
                                                                                                (Unaudited)

Assets
Current assets:
  Cash and cash equivalents                                                              $      91.6   $      18.3
  Restricted cash, marketable securities and other short-term investments ($29.7
    and $28.2, restricted, respectively)                                                       113.7         134.8
  Trade and other receivables, net of allowance of $0.7 and $0.6, respectively                  14.7          16.5
  Inventories:
    Lumber                                                                                       7.5          17.0
    Logs                                                                                        21.4           7.2
  Real estate and other assets held for sale                                                    17.8          21.1
  Prepaid expenses and other current assets                                                     16.7          16.6
                                                                                         ---------------------------
      Total current assets                                                                     283.4         231.5

Property, plant and equipment, net of accumulated depreciation of $200.5 and
  $183.4, respectively                                                                         364.2         370.2
Timber and timberlands, net of accumulated depletion of $224.3 and $218.6,
  respectively                                                                                 209.8         213.6
Real estate                                                                                     51.2          52.5
Deferred income taxes                                                                           95.1          94.8
Restricted cash, marketable securities and other investments ($5.9 and $15.6,
  restricted, respectively                                                                      11.0          15.6
Intangible assets                                                                                3.1           3.8
Long-term receivables and other assets                                                          26.4          33.2
                                                                                         ---------------------------
                                                                                         $   1,044.2   $   1,015.2
                                                                                         ===========================
Liabilities and Stockholders' Deficit
Current liabilities:
  Accounts payable                                                                       $      14.4  $       14.4
  Accrued interest                                                                              12.7          24.9
  Other accrued liabilities                                                                     58.3          39.9
  Short-term borrowings and current maturities of long-term debt                                84.1          51.4
                                                                                         ---------------------------
       Total current liabilities                                                               169.5         130.6
Long-term debt, less current maturities                                                        925.6         912.0
Accrued pension and other postretirement benefits                                               44.8          41.8
Losses in excess of investment in Kaiser                                                       516.2         516.2
Other noncurrent liabilities                                                                    65.0          71.7
                                                                                         ---------------------------
       Total liabilities                                                                     1,721.1       1,672.3
                                                                                         ---------------------------

Commitments and contingencies (see Note 8)

Stockholders' deficit:
  Preferred stock, $0.50 par value; $0.75 liquidation  preference;  2,500,000
       shares  authorized;   Class  A  $0.05   Non-Cumulative   Participating
       Convertible  Preferred  Stock;  668,964  and  669,019  shares  issued,
       respectively; 668,119 and 668,174 shares outstanding, respectively                        0.3           0.3

   Common  stock,   $0.50  par  value;   13,000,000  shares   authorized;
        10,063,359   shares  issued;   5,967,942  and  5,976,487   shares
        outstanding, respectively                                                                5.0           5.0
   Additional capital                                                                          225.3         225.3
   Accumulated deficit                                                                        (685.9)       (666.4)
   Accumulated other comprehensive loss                                                        (96.7)        (96.6)

   Treasury  stock,  at cost  (shares  held:  preferred  - 845;  common -
        4,095,417 and 4,086,872, respectively)                                                (124.9)       (124.7)
                                                                                         ---------------------------
        Total stockholders' deficit                                                           (676.9)       (657.1)
                                                                                         ---------------------------
                                                                                         $   1,044.2   $    1,015.2
                                                                                         ===========================

      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,
                                                                 ------------------------- -------------------------
                                                                      2005         2004         2005        2004
                                                                 ------------ ------------ ------------- -----------
                                                                                     (Unaudited)
Net sales:
  Forest products                                                $    42.6    $    49.6    $    136.8  $    149.2
  Real estate                                                         52.3         20.3         105.2        55.1
  Racing                                                              10.9         11.6          34.0        38.6
                                                                 ------------ ------------  ---------- ------------
                                                                     105.8         81.5         276.0       242.9
                                                                 ------------ ------------  ---------- ------------
Costs and expenses:
  Cost of sales and operations:
    Forest products                                                   33.0         36.9         111.9       109.7
    Real estate                                                       12.9          8.5          29.3        20.0
    Racing                                                             9.7         10.0          29.3        32.2
  Selling, general and administrative expenses                        22.2         19.1          50.5        53.6
  Gain on sales of timberlands and other assets                          -         (0.2)         (0.1)       (0.2)
  Depreciation, depletion and amortization                             8.3          8.7          26.1        26.6
                                                                 ------------ ------------ ---------- ------------
                                                                      86.1         83.0         247.0       241.9
                                                                 ------------ ------------ ---------- ------------
Operating income (loss):
  Forest products                                                     (2.1)         1.0          (8.0)        3.2
  Real estate                                                         30.7          3.2          48.4        10.3
  Racing                                                              (1.8)        (1.5)         (2.9)       (1.7)
  Corporate                                                           (7.1)        (4.2)         (8.5)      (10.8)
                                                                 ------------ ------------ ---------- ------------
                                                                      19.7         (1.5)         29.0         1.0
Other income (expense):
  Investment and interest income (loss)                                4.3         (0.3)          9.6         5.3
  Other income (expense)                                              (0.2)         0.3             -         3.7
  Interest expense                                                   (18.9)       (18.0)        (55.0)      (54.0)
  Amortization of deferred financing costs                            (0.6)        (0.6)         (3.1)       (1.7)
                                                                 ------------ ------------ ----------- -----------
Income (loss) before income taxes                                      4.3        (20.1)        (19.5)      (45.7)
Income tax expense                                                       -         (0.1)            -        (0.1)
                                                                 ------------ ------------ ----------- -----------
Net income (loss)                                                $     4.3    $   (20.2)   $    (19.5) $    (45.8)
                                                                 ============ ============ =========== ===========
Basic income (loss) per common and common equivalent share       $    0.72    $   (3.37)   $    (3.26) $    (7.66)
                                                                 ============ ============ =========== ===========
Diluted income (loss) per common and common equivalent share     $    0.62    $   (3.37)   $    (3.26) $    (7.66)
                                                                 ============ ============ =========== ===========

      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,
                                                                                          --------------------------
                                                                                              2005         2004
                                                                                          ------------ -------------
                                                                                                 (Unaudited)

Cash flows from operating activities:
  Net loss                                                                             $      (19.5)   $   (45.8)
  Adjustments to reconcile net loss to net cash provided by (used for) operating
    activities:
    Depreciation, depletion and amortization                                                   26.1         26.6
    Non-cash stock-based compensation expense                                                   0.3          2.3
    Net losses (gains) from marketable securities and other investments                        (4.6)         0.7
    Equity in loss (earnings) of unconsolidated affiliates, net of dividends                    0.7         (0.3)
    Amortization of deferred financing costs and discounts on long-term debt                    3.1          1.7
    Increase (decrease) in cash resulting from changes in:
       Reserve for environmental remediation                                                      -          1.9
       Receivables                                                                              3.0          1.1
       Inventories                                                                             (3.3)        (1.8)
       Prepaid expenses and other assets                                                       (0.1)         0.4
       Accounts payable                                                                           -          0.1
       Other accrued liabilities                                                               15.6          4.4
       Accrued interest                                                                       (12.2)       (14.2)
       Long-term assets and long-term liabilities                                               6.4          7.4
       Other, net                                                                              (0.7)         0.9
                                                                                          ------------ -------------
        Net cash provided by (used for) operating activities                                   14.8        (14.6)
                                                                                          ------------ -------------

Cash flows from investing activities:
  Net proceeds from the disposition of property and investments                                 0.1          0.2
  Net proceeds from the sale of marketable securities and other investments                    26.9         21.3
  Net proceeds from restricted cash                                                             8.4         13.2
  Capital expenditures                                                                        (16.2)       (27.3)
  Return of investment in joint venture                                                         0.5            -
  Other, net                                                                                    0.1          0.3
                                                                                          ------------ -------------
        Net cash provided by investing activities                                              19.8          7.7
                                                                                          ------------ -------------

Cash flows from financing activities:
  Proceeds from issuances of long-term debt                                                    38.0          3.1
  Redemptions and repurchases of, and principal payments on, long-term debt                   (21.5)       (37.2)
  Borrowings under revolving and short-term credit facilities                                  25.5         42.6
  Debt issuance costs                                                                          (3.1)        (0.8)
  Treasury stock purchases                                                                     (0.2)           -
                                                                                          ------------  ------------
        Net cash provided by financing activities                                              38.7          7.7
                                                                                          ------------  ------------

Net increase in cash and cash equivalents                                                      73.3          0.8
Cash and cash equivalents at beginning of the period                                           18.3          9.8
                                                                                          ------------ -------------
Cash and cash equivalents at end of the period                                            $    91.6    $    10.6
                                                                                          ============ =============

Supplemental disclosure of non-cash investing and financial activities:
  Repurchases of debt using restricted cash                                               $       -    $     4.8

Supplemental disclosure of cash flow information:
  Interest paid, net of capitalized interest                                              $    67.2    $    68.3

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

     The  consolidated  financial  statements  included  herein  are  unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary for a fair presentation of the consolidated
financial  position of the  Company at  September  30,  2005,  the  consolidated
results of operations for the three and nine months ended September 30, 2005 and
2004, and the  consolidated  cash flows for the nine months ended  September 30,
2005 and 2004.

     Financial Difficulties of Certain Forest Products Entities

     Regulatory and  environmental  matters as well as legal actions have played
and are expected to continue to play a significant  role in the Company's forest
products  operations.  Scotia  LLC  has  previously  experienced  delays  in the
approval  of its THPs as the  result of  regulatory  compliance  and  litigation
challenges,  and expects these  difficulties to persist.  Moreover,  the Company
expects  a  recurrence  of  the  additional   delays  that  have  recently  been
experienced  in  harvesting  on  previously-approved   THPs  due  to  regulatory
oversight by the North Coast Water Board (see below). The foregoing matters have
in the past adversely  affected timber harvest levels and timber  harvesting and
other costs; these effects are expected to continue.

     The North  Coast  Water  Board is  requiring  Palco and Scotia LLC to apply
various waste discharge  reporting,  mitigation and erosion control requirements
in respect of timber harvesting activities in several watersheds,  and is likely
to impose  additional  measures  in the  future.  The North Coast Water Board in
December 2003 directed its staff to formulate  WWDRs for the  Freshwater and Elk
River watersheds on the Scotia LLC Timberlands.  As harvesting activities on the
Scotia LLC Timberlands  cannot readily be moved between watersheds due to, among
other things,  historic harvest patterns,  adjacency  restrictions,  and the age
classes of trees,  development  of WWDRs and the other matters  described in the
"Forest  Products  Operations--Water  Quality" section of Note 8 are expected to
result in reduced  harvest in the  future.  The staff of the North  Coast  Water
Board  has  circulated  for  public  review  and  comment  draft  WWDRs  for the
Freshwater and Elk River watersheds.  If these draft WWDRs are approved in their
current form, there would likely be a significant  adverse impact on current and
future harvest levels.

     As WWDRs had not been formulated, the North Coast Water Board for some time
failed to release  for  harvest a number of Scotia  LLC's THPs that had  already
been approved by the other  governmental  agencies  which  approve  Scotia LLC's
THPs. In February  2005,  the Executive  Officer of the staff of the North Coast
Water Board  released  sufficient  THPs to allow the harvest of up to 50% of the
CDF Harvest Limit for these two  watersheds.  On March 16, 2005, the North Coast
Water  Board  ordered the  enrollment  of  additional  THPs that would allow the
harvest of up to 75% of the CDF Harvest  Limit for these two  watersheds.  Third
parties  subsequently  appealed this decision to the State Water Board.  On June
16, 2005, the State Water Board heard this appeal and rendered a decision, which
had the effect of  disallowing  further  harvesting on the additional 25% of the
CDF Harvest Limit approved by the North Coast Water Board on March 16, 2005. The
State  Water  Board's  decision  also  has the  effect  of  disallowing  further
harvesting  in the  Freshwater  and Elk River  watersheds  until WWDRs for these
watersheds  are adopted by the North Coast Water  Board.  Palco has appealed the
State Water  Board's June 16,  2005,  decision in a  California  state court.  A
hearing on the appeal has not yet been scheduled.

     On September 2, 2005, the North Coast Water Board set hearings on the draft
WWDRs for September 14 and 15, 2005. On September 9, 2005,  Palco and Scotia LLC
filed a petition in California  state court seeking an order  mandating that the
North Coast Water Board not take any further action on the proposed  WWDRs.  The
petition alleges defects in the proposed WWDRs and the North Coast Water Board's
hearing procedures.  Palco and Scotia LLC also requested a temporary restraining
order and  preliminary  injunction  to prevent  the North Coast Water Board from
taking  any  further  action  until  their  petition  is  heard.  The  temporary
restraining  order  was  granted  and  the  preliminary  injunction  hearing  is
scheduled for November 9, 2005.

     The  unreleased  and  disallowed  THPs  in the  Freshwater  and  Elk  River
watersheds  represented  a  significant  portion  of the  harvest  that had been
planned for the first nine months of 2005. The ongoing regulatory, environmental
and  litigation  matters  faced by Palco  and  Scotia  LLC,  exacerbated  by the
developments  described in the previous  paragraph,  have  materially  adversely
impacted the cash flows of both Palco and Scotia LLC. Furthermore,  it is likely
that additional  delays in the development of the Freshwater and Elk River WWDRs
will occur. Should the Freshwater-Elk River WWDRs not be approved during 2005 or
in the first few months of 2006, or be approved with additional  restrictions on
harvest,  there could be a material  adverse  impact on Palco's and Scotia LLC's
future cash flows from operations.

     As previously  announced,  the  estimates of Scotia LLC indicated  that its
cash  flows  from  operations,  together  with the Scotia LLC Line of Credit and
other available funds, would likely be inadequate to pay all of the interest due
on the July 20, 2005,  payment date for the Timber Notes.  As the July 20, 2005,
payment date  approached,  it became  apparent that Scotia LLC's estimates would
prove  correct  and that the cash  shortfall  as of the  payment  date  would be
approximately  $2.2 million.  Based upon a review of its alternatives  under the
circumstances,  consultation  with its own legal  and  financial  advisors,  and
consideration  of the status of discussions with the advisors of the Noteholders
Committee,  Scotia LLC requested that Palco make an early payment,  equal to the
shortfall,  in respect of certain  logs that had already  been  delivered to and
purchased by Palco from Scotia LLC.  Palco  approved and delivered the early log
payment,  which allowed Scotia LLC to fund the July 20, 2005, cash shortfall and
pay all of the $27.9 million of interest due ($25.9  million net of interest due
in respect of Timber Notes held by Scotia LLC).

     Scotia LLC's ability to pay all of the $27.7 million of interest due ($25.8
million  net of interest  due in respect of Timber  Notes held by Scotia LLC) on
the January 20,  2006,  payment  date will depend upon many  factors,  including
Scotia  LLC's  harvest  levels  for the  remainder  of  2005,  cash  flows  from
operations  through the January 20, 2006,  payment date  together with access to
the Scotia LLC Line of Credit.  At September 30, 2005, the maximum  availability
under  the  Scotia  LLC  Line  of  Credit  was  $55.4  million,  and  borrowings
outstanding  were $49.5 million.  There can be no assurance that Scotia LLC will
have sufficient liquidity to make this interest payment.

     In March 2005,  UBS agreed to assist  Scotia LLC in seeking to  restructure
its  obligations  with respect to the  outstanding  Timber Notes.  In June 2005,
Scotia LLC agreed to be responsible for certain  payments and other  obligations
of the  Noteholder  Committee  relating  to their legal  counsel  and  financial
advisors.  On September  23, 2005,  Scotia LLC  terminated  its  agreement to be
responsible for further payments, effective immediately in the case of the legal
counsel and effective  October 23, 2005,  in the case of the financial  advisor.
Scotia  LLC  terminated  its  agreement  upon the  recommendation  of a  special
committee of independent managers since it concluded that insufficient  progress
had been made in negotiations with the Noteholder Committee and was advised that
holders of less than 15% of the Timber Notes (measured by principal  amount) had
agreed to  confidentiality  provisions  necessary in order to  participate  in a
process intended to lead to a restructuring  agreement.  Scotia LLC continues to
evaluate its liquidity  alternatives in respect of the January 20, 2006, payment
date and beyond.

     Scotia LLC and UBS have conducted  extensive reviews and analyses of Scotia
LLC's assets,  operations and prospects.  As a result of these extensive reviews
and analyses,  Scotia LLC's  management  has  concluded  that, in the absence of
significant  regulatory  relief and  accommodations,  Scotia LLC's annual timber
harvest  levels  and  cash  flows  from  operations  will  in  future  years  be
substantially  below both historical  levels and the minimum levels necessary in
order to allow Scotia LLC to satisfy its debt service  obligations in respect of
the Timber Notes.  Scotia LLC has announced  that its projected  average  annual
harvest  level  over  the  ten-year  period   beginning  2006  is  estimated  at
approximately  100 million  board feet per year.  This  harvest  level  reflects
Scotia LLC management's most recent estimate of the cumulative impact of ongoing
regulatory  limitations,  prescriptions,  and other  actions and is based upon a
number of  assumptions  which may or may not prove to be accurate.  Scotia LLC's
management also determined that reductions must be made to its cost structure in
line with  these  anticipated  reductions  in  harvest  levels  and cash  flows.
Accordingly,  on August 30, 2005,  Scotia LLC implemented a  restructuring  plan
reducing its workforce by approximately one third. To the extent that Scotia LLC
is  unable  to  restructure  its  Timber  Notes  consistent  with   management's
expectations as to future harvest levels and cash flows, or to secure additional
liquidity from external  sources,  the Company  expects that Scotia LLC, and, as
may be required,  Palco, will be forced to take extraordinary actions, which may
include: further reducing expenditures by laying off employees and shutting down
various  operations;  seeking  other  sources of  liquidity,  such as from asset
sales; and seeking protection by filing under the Bankruptcy Code.

     As of December 31, 2004 and March 31, 2005,  Palco was in default under the
Palco Credit Agreement and obtained limited waivers of the default through April
22, 2005. On April 19, 2005, Palco and Britt, as Borrowers, closed the Revolving
Credit Facility and the Term Loan. The Term Loan was fully funded at closing and
the Borrowers used  approximately  $10.8 million of the funds from the Term Loan
to pay off amounts  previously  borrowed  under the Palco Credit  Agreement  and
terminated  that  facility.   As  of  September  30,  2005,  $34.8  million  was
outstanding  under the Term Loan and $12.1  million  was  outstanding  under the
Revolving  Credit  Facility.  Palco estimates that its cash flow from operations
will not provide  sufficient  liquidity to fund its operations  until the fourth
quarter  of 2006.  Accordingly,  Palco  expects  to be  dependent  on the  funds
available under the Revolving Credit Facility,  and expects additional liquidity
will be needed,  to fund its working capital and other cash requirements in 2005
and 2006.  The  Revolving  Credit  Facility  and Term Loan are each secured by a
security  interest in the stock of Palco and  substantially all of the assets of
the Borrowers  (other than Palco's equity interest in Scotia LLC). Both the Term
Loan and the Revolving  Credit Facility have  provisions  requiring that the net
cash  proceeds of specified  asset sales be used to prepay  amounts  outstanding
under the loans.

     As of September 30, 2005,  borrowings  under the Revolving  Credit Facility
were limited to the sum of 85% of Palco and Britt's eligible accounts  receivable
plus  75% of their  eligible  inventories  (up to a  maximum  of $30.0  million,
subject to limitations such as the ability of the lender to establish reasonable
reserves).  Both the Term Loan and the Revolving  Credit Facility contain EBITDA
maintenance  covenants that, if not met, could trigger a mandatory prepayment of
outstanding borrowings.  The operating cash flow estimates used to establish the
EBITDA maintenance covenants are subject to a number of assumptions about future
operating  cash flow and actual  results  could  differ  from  these  estimates.
Accordingly,  the  availability  of these funds is largely  dependent on Palco's
ability to harvest  adequate  timber from the Scotia LLC  Timberlands and reduce
operating costs. Available resources to fund Palco's and Britt's operating needs
at September 30, 2005, were $8.0 million,  comprised of the maximum availability
under the Revolving  Credit Facility of $7.7 million and  unrestricted  cash and
marketable securities of $0.3 million.

     Subsequent  to September  30, 2005,  Palco  borrowed the maximum  available
under the Revolving  Credit Facility and on October 26, 2005,  Palco,  Britt and
certain of their affiliates  entered into the Omnibus  Amendment,  which amended
the Term  Loan  and the  Revolving  Credit  Facility  to,  among  other  things,
temporarily  increase the amount of the  Revolving  Credit  Facility  from $30.0
million to $35.0 million and temporarily increase the advance rate applicable to
the Borrowers'  inventory from 75% to 80%. The increase in the inventory advance
rate is  subject  to  satisfactory  inventory  appraisals  and the amount of the
increase in such advances is capped at $1.5 million.  The increase in the amount
of the Revolving Credit Facility and the increase in the inventory  advance rate
will be  gradually  phased  out in  January  through  March  2006.  The  Omnibus
Amendment also revises  financial  covenants  applicable to the Revolving Credit
Facility and the Term Loan.  MGI  furnished  cash  collateral of $2.0 million as
additional  security for the Borrowers'  obligations  under the Revolving Credit
Facility and the Term Loan Facility.  This cash  collateral  will be released on
April 1, 2006,  so long as the Borrowers  have  achieved  earnings and borrowing
availability targets to be determined by the Lenders.

     Palco's available cash resources,  including proceeds from and availability
under the Term Loan and Revolving  Credit Facility have been primarily  utilized
during the first nine months of 2005 in the following  areas:  (i) $10.8 million
was  used  to pay  off  amounts  previously  borrowed  under  the  Palco  Credit
Agreement;   (ii)   approximately  $  6.2  million  was  used  to  fund  capital
expenditures  related  to  Palco's  new  state-of-the-art   sawmill  in  Scotia,
California;  (iii) $9.9 million was used as collateral to secure Palco's workers
compensation  liabilities;  (iv) $13.5  million was used to build log  inventory
levels;  and (v) the  remainder was used to pay advisor fees and to fund working
capital shortfalls. Palco's ability to generate sufficient liquidity to fund its
short term  liquidity  needs will depend upon many  factors,  including  Palco's
ability to achieve planned production rates at its new sawmill. While production
levels at the new  sawmill  continue  to  improve,  the new  sawmill  is not yet
operating at planned capacity and is not expected to achieve planned  production
rates for the  remainder  of 2005.  Accordingly,  additional  liquidity  will be
needed at Palco to fund working capital requirements in 2005 and 2006, but there
can be no assurance that Palco will be able to secure additional  liquidity.  In
the event that Palco were unable to secure the necessary liquidity,  it would be
forced to take  extraordinary  actions,  which  may  include:  further  reducing
expenditures  by laying off employees and shutting down various  operations  and
seeking protection by filing under the Bankruptcy Code.

     On April 21,  2005,  Moody's  lowered  its  ratings on the Class A-1 Timber
Notes  from Baa2 to Ba3;  the Class A-2  Timber  Notes  from Baa3 to B1; and the
Class A-3 Timber Notes from Bal to B1. On June 20, 2005, Moody's further lowered
its ratings on all classes of the Timber  Notes to Caal.  S&P  announced  on
April 7, 2005,  that it had lowered  Palco's credit rating to CCC- (which rating
it affirmed on April 28, 2005). As a result of the S&P credit rating actions
related to Palco,  Palco was  required to post a $9.9  million  letter of credit
with the State of  California  to secure its workers  compensation  liabilities,
which reduced  Palco's  availability  under the Revolving  Credit  Facility by a
corresponding  amount.  See Note 4 for further  discussion of availability under
Palco's debt facilities.

     The liquidity issues being experienced by Scotia LLC and Palco could result
in claims against and have adverse  impacts on MAXXAM  Parent,  MGHI and/or MGI.
For example,  under ERISA law, were Palco to terminate its pension plan,  MAXXAM
Parent and its wholly owned  subsidiaries  would be jointly and severally liable
for any unfunded pension plan obligations.  The unfunded obligation attributable
to Palco's  pension plan as of December  31, 2004,  is estimated to have been in
the range of  approximately  $35 million based upon annuity  placement  interest
rate  assumptions  at that  time.  In  addition,  it is  possible  that  certain
transactions could be entered into in connection with a potential  restructuring
or  reorganization  of Palco or Scotia LLC, such as a sale or other  transfer of
all or a portion of the equity  ownership in Palco and/or  Scotia LLC, a sale or
other  transfer of a substantial  portion of Palco's  and/or Scotia LLC's assets
and/or  a   cancellation   of  some  or  all  of  Palco's  and/or  Scotia  LLC's
indebtedness,  which  could  require  the  utilization  of all or a  substantial
portion of, or the loss of a significant portion of, the Company's net operating
losses for federal and state income tax purposes and could  require tax payments
in future periods.

     In the event of a failure to pay  interest on the Timber Notes in full when
due, the Trustee under the Timber Notes Indenture or the holders of at least 25%
of the aggregate  outstanding principal amount of the Timber Notes may cause all
principal,  interest  and other  amounts  related to the Timber  Notes to become
immediately due and payable. Also, in the event of a failure by Palco to perform
its covenants or agreements under the Master Purchase  Agreement or the Services
Agreement,  which failure continues for 30 days after notice from the Trustee or
the  holders of 25% or more of the  outstanding  principal  amount of the Timber
Notes, the holders of a majority of the aggregate  outstanding  principal amount
of the Timber Notes may cause all principal,  interest and other amounts related
to the Timber Notes to become  immediately due and payable.  In the event of any
such  acceleration,  the agent  under  the  Scotia  LLC Line of Credit  may also
accelerate the advances then outstanding  thereunder.  If such  accelerations of
the Timber Notes and/or advances under the Scotia LLC Line of Credit occur,  the
Trustee may exercise all rights  under the Timber  Notes  Indenture  and related
security  documents,  including applying funds to pay accelerated  amounts,  and
selling  the  Scotia LLC  Timberlands  and other  assets and using the  proceeds
thereof to pay  accelerated  amounts.  In the event that Scotia LLC were to seek
protection  by filing  under the  Bankruptcy  Code,  all amounts  related to the
Timber Notes would  become  immediately  due and payable  under the Timber Notes
Indenture  and all  advances  under  the  Scotia  LLC  Line of  Credit  could be
accelerated.  If Palco were to seek  protection  by filing under the  Bankruptcy
Code,  all amounts  related to Palco's Term Loan and Revolving  Credit  Facility
would become  immediately due and payable.  The foregoing rights of the Trustee,
Noteholders,  and Palco's  lenders,  are subject to the rights of Scotia LLC and
Palco, respectively, under the Bankruptcy Code.

     In addition,  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
financial condition,  results of operations or liquidity of the Company's forest
products operations.  See Note 8 for further discussion regarding regulatory and
legislative  matters  and legal  proceedings  relating to the  Company's  forest
products operations.

     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  above,  Palco and Scotia
LLC's cash flows have been  adversely  impacted  by  difficulties  in  obtaining
approval of Scotia  LLC's THPs.  If Scotia LLC is unable to make its future debt
payments or were  Palco's  liquidity  problems  worsen,  one of the actions that
would be considered is seeking protection by filing for bankruptcy. Were this to
occur, the financial results of the subsidiaries which file for bankruptcy would
likely be  deconsolidated  on the date of such  filing,  and the  Company  would
likely begin  reporting  its  investments  in such  subsidiaries  using the cost
method.  If Palco and/or Scotia LLC were among the  subsidiaries  that filed for
bankruptcy,  the resulting impact on the Company's financial statements would be
significant.

     The  following  condensed  pro forma  financial  information  reflects  the
Company's results as if MGI and its subsidiaries were not consolidated,  and the
impact of reporting the Company's  investment in MGI and its subsidiaries on the
cost method (in millions). This information is on a pro forma basis only and the
actual impact of any future deconsolidation would differ. Furthermore,  this pro
forma  information  assumes  that  MGI  and  all of its  subsidiaries  file  for
bankruptcy, rather than the impact of only one or more subsidiaries filing.

                                                                               Three Months         Nine Months
                                                                                    Ended             Ended
                                                                            September 30, 2005   September 30, 2005
                                                                            ------------------- -------------------
Revenues                                                                   $         63.1       $        139.2
Costs and expenses                                                                  (41.3)              (102.1)
                                                                           -------------------- -------------------
Operating income                                                                     21.8                 37.1
MAXXAM's equity in MGI's losses                                                     (16.0)               (50.4)
Other expenses - net                                                                 (1.5)                (6.2)
Income tax benefit                                                                      -                    -
                                                                           -------------------- -------------------
Net income (loss)                                                          $          4.3        $       (19.5)
                                                                           ==================== ===================

                                                                                                          As of
                                                                                                        September
                                                                                                         30, 2005
                                                                                                     ---------------
Current assets                                                                                              199.0
Property, plant and equipment (net)                                                                         246.6
Other assets                                                                                                166.5
                                                                                                     ---------------
      Total assets                                                                                   $      612.1
                                                                                                     ===============
Current liabilities                                                                                          59.4
Long-term debt, less current maturities                                                                     221.5
Other liabilities                                                                                            68.8
Losses recognized in excess of investment in MGI and certain intercompany items                             423.1
Losses recognized in excess of investment in Kaiser                                                         516.2
                                                                                                     ---------------
      Total liabilities                                                                                   1,289.0
Stockholders' deficit                                                                                      (676.9)
                                                                                                     ---------------
      Total liabilities and stockholders' deficit                                                    $      612.1
                                                                                                     ===============

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

     Deconsolidation of Kaiser
     On February  12,  2002,  Kaiser and certain of its  subsidiaries  filed for
reorganization under Chapter 11 of the Bankruptcy Code. As a result, the Company
discontinued  consolidating  Kaiser's  financial results beginning  February 12,
2002, and 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: (i) Kaiser's bankruptcy is resolved (which
is  expected  to occur in the  first  quarter  of 2006)  and the  amount  of the
Company's  remaining  investment  in Kaiser is  determined,  or (ii) 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.  In
this regard,  see Note 7 for  information  regarding the filing by Kaiser of its
plan of  reorganization,  which provides for the cancellation of Kaiser's equity
interests without consideration.  In the event of such cancellation, the Company
expects  that it will  reverse  the  $516.2  million  of losses in excess of its
investment in Kaiser, net of accumulated other  comprehensive  losses related to
Kaiser, and recognize the entire amount,  including the related tax effects,  in
income for the  period.  Although  the  Company  does not expect that it will be
obligated to fund losses in Kaiser,  the amount of the reversal would be reduced
by any losses which the Company estimates it would be obligated to fund.

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

     Risks and  uncertainties  are inherent with respect to the ultimate outcome
of the  matters  discussed  in Note  8.  The  results  of a  resolution  of such
uncertainties  could  have  a  material  effect  on the  Company's  consolidated
financial   position,   results  of  operations   or  liquidity.   In  addition,
uncertainties  related to the  projection of future  taxable income could affect
the  realization  of the  Company's  deferred  tax assets.  Estimates  of future
benefit payments used to measure the Company's pension and other  postretirement
benefit  obligations  are  subject  to a  number  of  assumptions  about  future
experience,  as are the estimated  future cash flows projected in the evaluation
of long-lived assets for possible  impairment.  To the extent there are material
differences  between these estimates and  assumptions  and actual  results,  the
Company's financial statements or liquidity could be materially affected.

     Reclassifications
     Certain  reclassifications  have been made to prior  periods'  consolidated
financial  statements to be consistent with the current  period's  presentation.
This includes the reclassification of: (i) auction rate securities from cash and
cash equivalents to marketable  securities in the Consolidated Balance Sheet and
Consolidated  Statement  of Cash  Flows,  (ii)  restricted  cash from  financing
activities to investing activities in the Consolidated  Statement of Cash Flows,
and (iii)  restricted cash from ending cash and cash  equivalents into investing
activities in the Consolidated Statement of Cash Flows.

2.   New Accounting Standards

     Postretirement Medical Costs
     In May 2004, the FASB issued FSP FAS 106-2 related to the Prescription Drug
Act. FSP FAS 106-2 applies only to sponsors of  single-employer  defined benefit
postretirement  health  care  plans in  instances  where  (i) the  employer  has
concluded that  prescription  drug benefits  available under the plan to some or
all participants,  for some or all future years, are "actuarially equivalent" to
Medicare  Part D and thus qualify for the subsidy  provided by the  Prescription
Drug Act,  and (ii) the expected  subsidy  will offset or reduce the  employer's
share of the cost of the underlying postretirement prescription drug coverage on
which the subsidy is based.  FSP FAS 106-2  provides  guidance on the accounting
for  the  effects  of  the  Prescription  Drug  Act on a  company's  accumulated
postretirement  benefit  obligation.   In  addition,  FSP  FAS  106-2  addresses
accounting  for  plan  amendments  and  requires  certain  financial   statement
disclosures regarding the Prescription Drug Act and its effects.

     FSP FAS 106-2 was effective for the first interim  period  beginning  after
June 15, 2004. The Company believes that the benefits  provided by the Company's
postretirement  medical  plan are  actuarially  equivalent  to Medicare  Part D;
however,  based on the  proposed  regulations  issued to date and the  Company's
understanding of the  Prescription  Drug Act, the Company is uncertain as to the
potential  future  subsidies which may be realized under the  Prescription  Drug
Act. Therefore,  measures of the accumulated  postretirement  benefit obligation
and net  periodic  benefit  cost  included  herein  do not  reflect  any  amount
associated with potential  subsidies under the Prescription  Drug Act. While the
Company  continues to evaluate the impact of FSP FAS 106-2, the Company does not
believe  that  it  will  have  a  material  impact  on the  Company's  financial
condition, results of operations, or liquidity.

     Accounting for Stock Options
     In December 2004, the FASB issued SFAS No.  123(r),  Share Based  Payments.
SFAS No. 123(r) will require  compensation costs related to share-based payments
to be determined by the fair value of the equity or liability instruments issued
on the grant date. In addition,  such awards will be remeasured  each  reporting
period.  Compensation  cost will be recognized  over the period that an employee
provides  service in exchange for the award.  SFAS No. 123(r) also requires that
for the portion of  outstanding  awards for which the requisite  service has not
yet been  rendered,  compensation  cost will be  recognized  as of the  required
effective  date,  January 1, 2006,  based on the grant-date  fair value of those
awards.  SFAS No.  123(r)  applies  to all  awards  granted  after the  required
effective date. The Company  continues to evaluate the effects of this Statement
on its financial condition, results of operations, or liquidity. Inventory Costs
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43,  Chapter 4. SFAS No. 151  clarifies  that  abnormal  amounts of idle
facility expense,  freight, handling cost and wasted materials (spoilage) should
be recognized as  current-period  charges,  and requires the allocation of fixed
production  overhead to inventory based on the normal capacity of the production
facilities.  The effective  date of the new Statement for the Company is January
1, 2006.  Management  does not expect the  adoption of this  Statement to have a
material impact on the Company's financial condition,  results of operations, or
liquidity.

     Exchanges of Nonmonetary Assets
     In December  2004,  the FASB issued SFAS No. 153,  Exchanges of Nonmonetary
Assets,  an  amendment  of APB  Opinion  No.  29.  SFAS No.  153 is based on the
principle that  exchanges of nonmonetary  assets should be measured based on the
fair value of the assets exchanged.  APB Opinion No. 29 provided an exception to
this principle for exchanges of similar productive assets. Under APB Opinion No.
29, an exchange of a productive  asset was based on the  recorded  amount of the
asset relinquished.  SFAS No. 153 eliminated this exception and replaced it with
an exception for  exchanges of  nonmonetary  assets that do not have  commercial
substance. The effective date of the new Statement for the Company is January 1,
2006.  Management  does not expect that adoption of this  Statement  will have a
material impact on the Company's financial condition,  results of operations, or
liquidity.

3.   Segment Information and Other Items

     Net sales and  operating  income  (loss) for each  reportable  segment  are
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
                                                              ----------------------------
                                                             Forest     Real                      Consolidated
                                                             Products   Estate  Racing  Corporate      Total
                                                             ---------- ------ -------- --------- ------------
Depreciation, depletion and amortization for the three
months ended:
  September 30, 2005                                         $   4.3    $   3.6 $   0.4   $   -     $     8.3
  September 30, 2004                                             4.8        3.5     0.4       -           8.7

Depreciation, depletion and amortization for the nine months ended:
  September 30, 2005                                            14.1       10.7     1.2      0.1         26.1
  September 30, 2004                                            14.8       10.5     1.3       -          26.6

Total assets as of:
  September 30, 2005                                           432.1      372.7    33.7    205.7      1,044.2
  December 31, 2004                                            440.0      338.2    33.2    203.8      1,015.2

     Forest Products
     In March 2005,  Palco reached a $3.1 million  settlement of a lawsuit filed
by Palco against several  insurance  companies for  reimbursement  of settlement
payments and defense  costs  related to a legal  matter  which was  concluded in
2002. This settlement was fully recognized in operating  income,  as a reduction
of selling, general and administrative expenses, in the first quarter of 2005.

     Palco has closed its Carlotta and Fortuna mills.  In connection  therewith,
certain equipment from these mills is being moved to Palco's new mill in Scotia.
Management is  considering  alternative  uses for the  properties  and remaining
equipment,  including sales to third parties,  and future write-downs of certain
assets may be required if the net book value (less sales costs) of the remaining
assets  exceeds their  estimated  realizable  values.  As a result of closure of
these mills,  Palco  incurred  and  recognized  $1.4 million of severance  costs
during the nine months  ended  September  30, 2004 and $0.7 million of severance
costs during the nine months ended September 2005.

     In April 2005,  deferred  loan costs of $1.3  million  related to the Palco
Credit  Agreement were written off and loan costs of $2.3 million related to the
Revolving Credit Facility and the Term Loan were capitalized.

     Real Estate
     During the third  quarter of 2005,  PDMPI  completed a  significant  parcel
sale; this  transaction  represented  more than 50% of the real estate segment's
revenues for the third quarter of 2005.

     Other Items not Directly Related to Industry Segments
     In the three months ended September 30, 2005, the Company recognized a $4.1
million charge related to changes in stock-based  compensation  expense. For the
nine months  ended  September  30,  2005,  this  charge was largely  offset by a
benefit of $3.8 million  recognized  during the first six months of 2005.  Stock
based  compensation  expense is  adjusted as the market  value of the  Company's
Common Stock changes.

4.   Debt

     Palco As of  December  31,  2004 and March 31,  2005,  Palco was in default
under the Palco Credit  Agreement  and obtained  limited  waivers of the default
through April 22, 2005. On April 19, 2005, Palco and Britt, as Borrowers, closed
the Revolving  Credit Facility and the Term Loan. The Term Loan was fully funded
at closing and the Borrowers used approximately  $10.8 million of the funds from
the Term Loan to pay off  amounts  previously  borrowed  under the Palco  Credit
Agreement  and  terminated  that  facility.  Deferred loan costs of $1.3 million
related to the Palco  Credit  Agreement  were written off in April 2005 and loan
costs of $2.3 million related to the Revolving Credit Facility and the Term Loan
were  capitalized  and,  beginning in April 2005, are being  amortized using the
effective  interest  rate method.  As of September  30, 2005,  $34.8 million was
outstanding  under the Term Loan and $12.1  million  was  outstanding  under the
Revolving  Credit  Facility.  Palco estimates that its cash flow from operations
will not provide  sufficient  liquidity to fund its operations  until the fourth
quarter  of 2006.  Accordingly,  Palco  expects  to be  dependent  on the  funds
available under the Revolving Credit Facility,  and expects additional liquidity
will be needed,  to fund its working capital and other cash requirements in 2005
and 2006.

     As of September 30, 2005,  borrowings  under the Revolving  Credit Facility
were limited to the sum of 85% of Palco and Britt's eligible accounts  receivable
plus  75% of their  eligible  inventories  (up to a  maximum  of $30.0  million,
subject to limitations such as the ability of the lender to establish reasonable
reserves).  Loans under the  Revolving  Credit  Facility bear  interest,  at the
Borrowers'  option,  at the rate of LIBOR plus 2.25% or prime  plus  0.50%.  The
Revolving  Credit  Facility  matures  on April 19,  2010.  The Term  Loan  bears
interest,  at the Borrowers'  option, at the rate of LIBOR plus 6% or prime plus
5%. The Term Loan is repayable in quarterly  installments of $87,500 each, which
began on June 1, 2005. A balloon payment of the remaining  principal  balance is
due on April 19,  2010.  Both the Term Loan and the  Revolving  Credit  Facility
contain EBITDA maintenance covenants that, if not met, could trigger a mandatory
prepayment of outstanding borrowings.  The operating cash flow estimates used to
establish  the  EBITDA  maintenance   covenants  are  subject  to  a  number  of
assumptions  about future  operating  cash flow and actual  results could differ
from these  estimates.  Accordingly,  the availability of these funds is largely
dependent  on Palco's  ability to harvest  adequate  timber  from the Scotia LLC
Timberlands and reduce operating costs.  Available resources to fund Palco's and
Britt's  operating needs at September 30, 2005, were $8.0 million,  comprised of
the maximum availability under the Revolving Credit Facility of $7.7 million and
unrestricted cash and marketable securities of $0.3 million.

     Subsequent  to September  30, 2005,  Palco  borrowed the maximum  available
under the Revolving  Credit Facility and on October 26, 2005,  Palco,  Britt and
certain of their affiliates  entered into the Omnibus  Amendment,  which amended
the Term  Loan  and the  Revolving  Credit  Facility  to,  among  other  things,
temporarily  increase the amount of the  Revolving  Credit  Facility  from $30.0
million to $35.0 million and temporarily increase the advance rate applicable to
the Borrowers'  inventory from 75% to 80%. The increase in the inventory advance
rate is  subject  to  satisfactory  inventory  appraisals  and the amount of the
increase in such advances is capped at $1.5 million.  The increase in the amount
of the Revolving Credit Facility and the increase in the inventory  advance rate
will be  gradually  phased  out in  January  through  March  2006.  The  Omnibus
Amendment also revises  financial  covenants  applicable to the Revolving Credit
Facility and the Term Loan.  MGI  furnished  cash  collateral of $2.0 million as
additional  security for the Borrowers'  obligations  under the Revolving Credit
Facility and the Term Loan Facility.  This cash  collateral  will be released on
April 1, 2006,  so long as the Borrowers  have  achieved  earnings and borrowing
availability targets to be determined by the Lenders.

     The Revolving  Credit Facility and Term Loan are each secured by a security
interest  in  the  stock  of  Palco  held  by its  immediate  parent,  MGI,  and
substantially  all of the assets of the  Borrowers  (other than  Palco's  equity
interest in Scotia LLC).  Both the Term Loan and the Revolving  Credit  Facility
have  provisions  requiring  that the net cash proceeds of the  specified  asset
sales be used to prepay  amounts  outstanding  under the  loans.  The  Revolving
Credit Facility and the Term Loan contain  substantially  identical  restrictive
covenants that limit the  Borrowers'  ability to incur debt,  grant liens,  make
investments,  pay  dividends,  make  capital  expenditures  in  excess of stated
amounts, or merge or consolidate,  and require the Borrowers to maintain minimum
levels of EBITDA throughout the life of the loans. The Revolving Credit Facility
and the Term Loan contain  customary  events of default and  customary  remedies
with respect to the occurrence of an event of default.

     The Revolving Credit Facility  includes a prepayment  premium of 1% payable
in  connection  with any  prepayment  or reduction in the  commitment  occurring
within the first two years.  The Term Loan includes  prepayment  premiums of 4%,
3%, 2% and 1% payable in  connection  with any  prepayment of the Term Loan that
occurs  during  the first,  second,  third and fourth  years,  respectively.  No
prepayment  premium will be payable under either credit facility to a lender who
is also a lender under any refinancing used to prepay such credit facility.  The
Term Loan also requires certain  mandatory  prepayments in connection with asset
sales by Borrowers.

     Under the Revolving  Credit  Facility and Term Loan,  Palco is permitted to
invest up to $5.0  million in Scotia  LLC. No such  investment  had been made or
committed  to be made by Palco,  and there can be no  assurance  that Palco will
determine or be able to make any such investment in whole or part in the future.

     On April 21,  2005,  Moody's  lowered  its  ratings on the Class A-1 Timber
Notes  from Baa2 to Ba3;  the Class A-2  Timber  Notes  from Baa3 to B1; and the
Class A-3 Timber Notes from Bal to B1. On June 20, 2005, Moody's further lowered
its ratings on all classes of the Timber  Notes to Caal.  S&P  announced  on
April 7, 2005,  that it had lowered  Palco's credit rating to CCC- (which rating
it affirmed on April 28, 2005). As a result of the S&P credit rating actions
related to Palco,  Palco was  required to post a $9.9  million  letter of credit
with the State of  California  to secure its workers  compensation  liabilities,
which reduced  Palco's  availability  under the Revolving  Credit  Facility by a
corresponding amount.

     Scotia LLC
     The Scotia LLC Line of Credit  allows Scotia LLC to borrow up to one year's
interest  due 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  would  request  that the  Scotia  LLC Line of Credit be
extended for an  additional  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,  2005,  the
maximum  availability under the Scotia LLC Line of Credit was $55.4 million, and
outstanding borrowings were $49.5 million.

     On the note  payment  date in  January  2005,  Scotia  LLC  used the  funds
available under the Scotia LLC Line of Credit to pay all of the $28.5 million of
interest due ($26.3  million net of interest due in respect of Timber Notes held
by Scotia LLC).  Scotia LLC also repaid $17.1 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 2005,  Scotia LLC used its existing  cash
resources,  all of the remaining  funds  available  under the Scotia LLC Line of
Credit,  and the additional funds made available from the $2.2 million early log
payment by Palco (see Note 1), to pay all of the $27.9  million of interest  due
($25.9  million  net of interest  due in respect of Timber  Notes held by Scotia
LLC).  Scotia LLC also repaid $8.0  million of principal on the Timber Notes (an
amount equal to Scheduled Amortization) using funds held in the SAR Account.

5.   Income Taxes

     The Company generated income (loss) before income taxes of $4.3 million and
$(19.5)  million  for the  third  quarter  and the  first  nine  months of 2005,
respectively; however, the Company has not recorded any tax provision or benefit
during these  periods as the Company  anticipates  an effective tax rate of zero
for the year ended  December  31,  2005.  Each  period,  the  Company  evaluates
appropriate  factors in determining the realizability of the deferred tax assets
attributable  to losses and  credits  generated  in that  period and those being
carried forward.  These factors are discussed further in Note 9 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 the losses and credits generated during the
nine months  ended  September  30,  2005.  These  valuation  allowances  were in
addition to the valuation allowances which were provided in prior years.

6.   Employee Benefit Plans

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

                                           Pension          Medical/Life      Pension               Medical/Life
                                           Benefits           Benefits        Benefits                Benefits
                                       ----------------- ------------------- ------------------  -------------------
                                         Three Months Ended September 30,        Nine Months Ended September 30,
                                       ------------------------------------- ---------------------------------------
                                         2005    2004      2005      2004     2005      2004       2005      2004
                                       ----------------- --------- --------- ------------------  -------------------
Components of net periodic benefit costs:
  Service cost                         $  0.3  $  0.7    $  0.1    $  0.1    $  2.1   $  2.1     $  0.3    $  0.3
  Interest cost                           1.4     1.4       0.2       0.2       4.2      4.2        0.6       0.6
  Expected return on assets              (1.3)   (1.3)       -         -       (3.9)    (3.9)        -         -
  Amortization of prior service costs      -       -       (0.1)     (0.1)       -        -        (0.3)     (0.3)
  Recognized net actuarial loss           0.2      -         -         -        0.6      0.1         -         -
  Curtailment                              -       -       (0.1)       -         -        -        (0.1)     (0.1)
                                       ----------------- --------- --------- ------------------  -------------------
Net periodic benefit costs             $  0.6   $ 0.8    $  0.1   $   0.2  $    3.0   $  2.5     $  0.5    $  0.5
                                       ================= ========= ========= ==================  ===================

     The Company is  evaluating  its employee  benefit plans and changes to such
plans may be implemented in 2006.

7.   Investment in Kaiser

     As discussed further in the Form 10-K, Kaiser, its wholly owned subsidiary,
KACC, and 24 of KACC's  subsidiaries have filed separate voluntary  petitions in
the Bankruptcy Court for reorganization under Chapter 11 of the Bankruptcy Code.
On June 29,  2005,  Kaiser,  together  with KACC and 19 of KACC's  subsidiaries,
filed a plan of  reorganization  and related  disclosure  statement  in the U.S.
Bankruptcy  Court for the District of Delaware.  The plan  provides  for,  among
other things,  the cancellation of the equity interests of current  stockholders
without  consideration.  While the disclosure  statement and plan are subject to
approval by the  Bankruptcy  Court,  the Company  expects  Kaiser to emerge from
Chapter 11 during the first quarter of 2006.  However, no assurance can be given
that this will occur.

     Kaiser's  common stock is publicly  traded on the OTC Bulletin  Board under
the  trading  symbol  "KLUCQ.OB."  The market  value for the  50,000,000  Kaiser
Shares, based on the price per share quoted at the close of business on November
4, 2005 was $1.7  million.  There can be no  assurance  that such value could be
realized.

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.

     Environmental Plans
     From March 1999 until October 2002,  Scotia LLC prepared THPs in accordance
with the SYP.  The SYP was  intended  to comply with CDF  regulations  requiring
timber  companies to  demonstrate  sustained  yield,  i.e. that their  projected
average annual harvest for any decade within a 100-year planning period will not
exceed the  average  annual  growth  level at the end of the  100-year  planning
period.  The forest practice rules allow companies which do not have a sustained
yield plan to follow  alternative  procedures  to document  compliance  with the
sustained yield requirements. As discussed below, on October 31, 2003, the Court
hearing the EPIC-SYP/Permits lawsuit entered a judgment invalidating the SYP and
the California  Permits,  and that decision is now on appeal.  As a result of an
earlier stay order issued in this case,  Scotia LLC has since  October 2002 been
obtaining  review and  approval  of THPs under  alternative  procedures  pending
approval of the Option A Plan,  which is an  alternative  to a  sustained  yield
plan. The Option A Plan was approved by the CDF in March 2005.

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

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

     Under the CWA, the EPA is required to establish TMDLs in watercourses  that
have been declared to be "water  quality  impaired." The EPA and the North Coast
Water  Board  are in  the  process  of  establishing  TMDLs  for  many  northern
California rivers and certain of their tributaries,  including nine watercourses
that flow within the Scotia LLC Timberlands. The Company expects this process to
continue  into 2010.  The final TMDL  requirements  applicable to the Scotia LLC
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.

     Beginning with the 2002-2003 winter operating period,  Palco and Scotia LLC
have been  required to submit  information  on sediment  discharges  and erosion
control  plans to the North  Coast  Water  Board  each year in order to  conduct
harvesting  activities.  After  consideration of these reports,  the North Coast
Water Board imposed requirements on Palco to implement additional mitigation and
erosion control  practices during harvest  activities.  Reporting and mitigation
requirements  imposed by the North Coast Water Board and CDF have  significantly
increased operating costs and will in the future further increase costs or cause
delays in THP approvals or harvesting on approved THPs.

     The North Coast Water Board has also issued the Elk River Order, which is a
clean up and abatement order aimed at addressing  existing  sediment  production
sites in the Elk River watershed 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 is contemplating  similar actions
for the Jordan and Stitz Creek  watersheds.  The Elk River Order has resulted in
increased  costs to Palco that could  extend over a number of years.  Additional
orders in other  watersheds  (should  they be issued) may also result in further
cost  increases.  Palco's appeal of the Elk River Order to the State Water Board
was  denied.  Palco has  appealed  the  decision of the State Water Board but is
holding  such  appeal  in  abeyance  until  resolution  of the THP  520  lawsuit
discussed below.

     The  North  Coast  Water  Board in  December  2003  directed  its  staff to
formulate  WWDRs for the Freshwater  and Elk River  watersheds on the Scotia LLC
Timberlands.  As  harvesting  activities  on the Scotia LLC  Timberlands  cannot
readily be moved between watersheds due to, among other things, historic harvest
patterns,  adjacency restrictions,  and the age classes of trees, development of
WWDRs and the other matters described in the "Forest Products  Operations--Water
Quality"  section of Note 8 are  expected  to result in  reduced  harvest in the
future.  The staff of the North  Coast  Water  Board has  circulated  for public
review and comment draft WWDRs for the Freshwater and Elk River  watersheds.  If
these draft WWDRs are approved in their  current  form,  there would likely be a
significant adverse impact on current and future harvest levels.

     As WWDRs had not been formulated, the North Coast Water Board for some time
failed to release  for  harvest a number of Scotia  LLC's THPs that had  already
been approved by the other  governmental  agencies  which  approve  Scotia LLC's
THPs. In February  2005,  the Executive  Officer of the staff of the North Coast
Water Board  released  sufficient  THPs to allow the harvest of up to 50% of the
CDF Harvest Limit for these two  watersheds.  On March 16, 2005, the North Coast
Water  Board  ordered the  enrollment  of  additional  THPs that would allow the
harvest of up to 75% of the CDF Harvest  Limit for these two  watersheds.  Third
parties  subsequently  appealed this decision to the State Water Board.  On June
16, 2005, the State Water Board heard this appeal and rendered a decision, which
had the effect of  disallowing  further  harvesting on the additional 25% of the
CDF Harvest Limit approved by the North Coast Water Board on March 16, 2005. The
State  Water  Board's  decision  also  has the  effect  of  disallowing  further
harvesting  in the  Freshwater  and Elk River  watersheds  until WWDRs for these
watersheds  are adopted by the North Coast Water  Board.  Palco has appealed the
State Water  Board's June 16,  2005,  decision in a  California  state court.  A
hearing on the appeal has not yet been scheduled.

     On September 2, 2005, the North Coast Water Board set hearings on the draft
WWDRs for September 14 and 15, 2005. On September 9, 2005,  Palco and Scotia LLC
filed a petition in California  state court seeking an order  mandating that the
North Coast Water Board not take any further action on the proposed  WWDRs.  The
petition alleges defects in the proposed WWDRs and the North Coast Water Board's
hearing procedures.  Palco and Scotia LLC also requested a temporary restraining
order and  preliminary  injunction  to prevent  the North Coast Water Board from
taking  any  further  action  until  their  petition  is  heard.  The  temporary
restraining  order  was  granted  and  the  preliminary  injunction  hearing  is
scheduled for November 9, 2005.

     Effective  January 1, 2004,  California  Senate Bill 810 provides  regional
water quality control boards with additional  authority  related to the approval
of THPs on land within  impaired  watersheds.  The Company is  uncertain  of the
operational and financial  effects which will ultimately result from Senate Bill
810; however, because substantially all rivers and waterbodies on the Scotia LLC
Timberlands  are  classified as  sediment-impaired,  implementation  of this law
could result in delays in obtaining  approvals of THPs, lower harvest levels and
increased costs and additional protection measures beyond those contained in the
HCP. Also see the description of the THP No. 520 lawsuit below.

     Timber Harvest  Litigation
     A California  state court has  invalidated  the SYP in connection  with two
lawsuits  filed  against  Palco,  as described  below,  which  decision has been
appealed.  Other pending judicial and administrative  proceedings,  as described
below,  could  affect  Palco's and Scotia LLC's  ability to  implement  the HCP,
implement certain approved THPs, or carry out other operations.

     In March 1999, the EPIC-SYP/Permits lawsuit was filed. This action alleged,
among  other  things,   various  violations  of  the  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,  a similar  action,  the USWA
lawsuit,  was filed  challenging  the  validity  and  legality  of the SYP.  The
EPIC-SYP/Permits and USWA lawsuits were consolidated for trial. Following trial,
the Court on October 31, 2003,  entered a judgment  invalidating the SYP and the
California  Permits due to several  deficiencies  in agency  procedures  and the
failure of the Palco Companies to submit a complete and comprehensible SYP. As a
result of this case, Scotia LLC has, since October 2002, when the Court issued a
stay order  preventing  future reliance upon the SYP, been obtaining  review and
approval of new THPs under alternative procedures pending approval of the Option
A Plan. As noted above, the Option A Plan was approved by the CDF in March 2005.
The Palco  Companies and the State of  California  have appealed the October 31,
2003  decision.  The  appeal was heard by the Court of Appeal on  September  16,
2005,  and its decision is pending.  In September  2004,  the Court  granted the
plaintiffs'  request  for  reimbursement  of an  aggregate  of $5.8  million  in
attorneys'  fees and other expenses  incurred in connection  with these matters.
The  Palco  Companies  and the  State of  California  have  also  appealed  this
decision.

     In July 2001, the Bear Creek lawsuit was filed and later amended to add the
EPA as a defendant.  The lawsuit  alleges  that  harvesting  and other  forestry
activities under certain of Scotia LLC's 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 alleged
continued  violation of the CWA. 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 Palco and other timber
companies, have relied upon this regulation for more than 25 years. However, the
Court  interpreted  the  regulation  in  such a way as to  narrow  the  forestry
operations which are exempted,  thereby limiting the regulation's  applicability
and  subjecting  culverts  and ditches to permit  requirements.  This ruling has
widespread  implications for the timber industry in the United States.  The case
is not yet  final  as the  trial  has not yet  been  held,  and  there  are many
unresolved  issues  involving  interpretation  of the Court's  decision  and its
application  to actual  operations.  The Company has recently filed a motion for
summary  judgment  on the ground  that it has met the  requirements  for a storm
water pollution  prevention permit under a general permit issued by the state of
California.

     Should the decision  ultimately become final and be held to apply to all of
Palco's  timber  operations,  it may have some or all of the following  effects:
imposing  additional  permitting  requirements,   delaying  approvals  of  THPs,
increasing  harvesting costs, and adding water protection  measures beyond those
contained in the HCP.  Nonetheless,  the Company  believes that it is not likely
that civil  penalties will be awarded for operations  that occurred prior to the
Court's  decision  due to the  historical  reliance by timber  companies  on the
regulation and Palco's belief that the  requirements  under the HCP are adequate
to ensure that sediment and pollutants from harvesting  activities on the Scotia
LLC  Timberlands  will not reach levels  harmful to the  environment.  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 or  liquidity.  Nevertheless,  due to the numerous ways in
which the Court's  interpretation  of the regulation  could be applied to actual
operations,  there can be no assurance  that this will be the case.

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

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

     On November 2, 2004, the  EPIC-USFWS/NOAA  lawsuit was filed.  This lawsuit
alleges that two federal agencies have violated certain federal laws and related
regulations in connection with their  oversight of the HCP and Federal  Permits.
The plaintiff also alleges that the Federal Permit for the northern  spotted owl
was  unlawfully  issued and asserts  several  claims,  including  that the Palco
Companies   violated   California's   unfair  competition  law  by  using  false
advertising and making misleading  environmental  claims.  The plaintiff seeks a
variety of  remedies  including  requiring  additional  actions  by the  federal
agencies and precluding them from  authorizing take of the northern spotted owl,
an injunction  requiring the Palco Companies to cease certain  alleged  unlawful
activities,  as well as restitution and remediation by Palco. On April 22, 2005,
pursuant  to motions to dismiss  filed by the Palco  Companies  and the  federal
defendants,  the Court dismissed several of the claims,  significantly  reducing
the scope of the case. On September 30, 2005, EPIC filed a motion to prevent the
Palco  Companies  from taking any further  action  under the HCP and  California
Permits,  including all timber harvesting or related  activities.  On October 5,
2005,  Palco agreed to defer  harvesting  on one THP pending the  resolution  of
EPIC's  motion,  while EPIC  agreed not to pursue  additional  legal  action.  A
hearing on plaintiff's motion for a preliminary  injunction was held November 1,
2005, and the parties are awaiting a decision.  The Company does not believe the
resolution  of this action  should  result in a material  adverse  effect on its
consolidated financial condition, results of operations or liquidity.

     On November  16,  2001,  Palco and Scotia LLC 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 prior to approving the THP. When
the staff of the North Coast Water Board  attempted to impose  these  mitigation
measures in spite of the CDF's  decision,  Palco and Scotia LLC  appealed to the
State Water Board,  which imposed certain of the requested  mitigation  measures
and  rejected  others.  Palco  and  Scotia  LLC filed  the THP No.  520  lawsuit
challenging the State Water Board's decision,  and in January 2003, a California
state court granted their request for an order  invalidating  the  imposition of
these additional measures.  The State Water Board appealed this decision, and on
March 18, 2004,  the appellate  court  reversed the decision of the state court.
The appellate court's decision could result in increased demands by the regional
and state water boards and their staffs to impose controls and limitations  upon
Palco's timber harvesting  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.  Palco and
Scotia LLC filed a petition for review of the appellate  court's decision by the
California  Supreme  Court,  which in June 2004  agreed to review the  decision.
Briefing  was  completed  on April  26,  2005,  and a  hearing  has been set for
November 10, 2005.

     On August 8,  2005,  the CBD filed an action  against  CDF,  Palco,  Scotia
Pacific and Salmon  Creek  seeking to overturn  and prevent  CDFG and Palco from
taking any action to implement or rely upon Consistency Determinations issued by
CDFG in February 2005. The Consistency Determinations were issued as a result of
the EPIC SYP Permits lawsuit,  which overturned the California Permits issued to
Palco,  resulting in Palco having no coverage from the State for the  incidental
take of coho  salmon or the  marbled  murrelet.  CBD  alleges  that the  process
followed by CDFG in issuing the Consistency  Determinations  did not comply with
CEQA and that the Federal Permits are out of date because of new information and
reliance  upon them is therefore  improper.  A hearing was be held in California
state  court on October  28,  2005,  and the Court  denied  CBD's  request for a
preliminary injunction.

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

     As a result of the dismissal of OTS action,  a related  civil  action,  the
FDIC action,  alleging  damages in excess of $250.0  million,  was  subsequently
dismissed.  The FDIC  action  was  originally  filed by the FDIC in August  1995
against Mr.  Charles E. Hurwitz  (Chairman  and Chief  Executive  Officer of the
Company).

     On  November 8, 2002,  the  Respondents  filed the  Sanctions  Motion.  The
Sanctions  Motion states that the FDIC  illegally  paid the OTS to bring the OTS
action against the  Respondents and that the FDIC illegally sued for an improper
purpose  (i.e.,  in order to acquire  timberlands  held by a  subsidiary  of the
Company).  The  Respondents  are  seeking as a  sanction  to be made whole for a
portion of the attorneys' fees they have paid (plus interest) in connection with
the OTS and FDIC actions.  As of September 30, 2005, such fees were in excess of
$40.6 million.  On August 23, 2005, a U.S. District Court ruled on the Sanctions
Motion,  ordering  the  FDIC to pay the  Company  $72.3  million.  The  FDIC has
appealed the District Court decision to the U.S. Fifth Circuit Court of Appeals.

     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 wasted
corporate  assets, by allowing the Company to bear all of the costs and expenses
of Federated and certain of the Company's  directors related to the OTS and FDIC
actions.  The plaintiff seeks to require  Federated and certain of the Company's
directors  to reimburse  the Company for all costs and expenses  incurred by the
Company in connection  with the OTS and FDIC actions,  and to enjoin the Company
from  advancing to Federated or certain of the  Company's  directors any further
funds for costs or expenses  associated  with these actions.  The parties to the
Kahn  lawsuit  have  agreed  to  an  indefinite  extension  of  the  defendants'
obligations to respond to the plaintiffs'  claims.  Although it is impossible to
assess the ultimate  outcome of the Kahn lawsuit,  the Company believes that the
resolution of this matter should not result in a material  adverse effect on its
consolidated financial condition, results of operations or liquidity.

     Other Matters
     On  September  2, 2004,  the  Company  was  advised  that one of its former
subsidiaries  is a successor to a company which  manufactured  munitions for the
U.S.  Navy during World War II. The current  owner of the  underlying  property,
which is located in Cranbury, New Jersey, is seeking the Company's participation
in  efforts  to  address  contamination  of the site  which  resulted  from such
operations.  The  current  owner  estimates  that the  costs to  determine  what
remedial  actions are needed,  and to perform any  remedial  actions  determined
necessary,  could  range  from  $3.0  million  to $8.0  million.  Costs  for the
investigation and remediation could, however,  exceed $8.0 million as the result
of information learned during the investigation. The Company is currently in the
process of determining the extent of its liability,  which could require payment
of a substantial  portion of the costs,  as well as the  availability of funding
from the U.S. Navy and insurance coverage for these activities.  On December 29,
2004,  the NJDEP issued a directive  against the current  owner of the property,
MGI, and the U.S. Navy requiring  these parties to conduct a RI/RA in respect of
the property. As further required by the directive, MGI and the current owner on
January 28, 2005, entered into an Administrative Consent Order providing,  among
other things, that MGI and the current owner begin implementing the RI/RA within
120 days of  execution of the Order.  MGI and the current  owner of the property
have also entered into a  Participation  Agreement  providing  for,  among other
things,  MGI and the current owner to jointly fund the RI/RA and for a mediation
process to assist in  equitably  allocating  the costs of the  RI/RA.  In April,
2005,  MGI and the current  owner  submitted a Scope of Work for the site to the
NJDEP.  On April 6, 2005,  MGI filed a Complaint  against  the United  States of
America,  the U.S. Navy, and the U.S. Army for costs recovery and  contribution;
the parties  subsequently  denied all of the claims. The first mediation session
with the current  owner of the property is scheduled  for November 9, 2005.  The
Company  accrued its expected share of the estimated costs of the R1/RA in 2004.
While the Company  believes its estimates are reasonable,  future charges may be
required as additional information is obtained.

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

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 yet changed to the fair value
based method of accounting for stock-based  employee  compensation as prescribed
by SFAS No. 123(r).  The following table illustrates the pro forma effect on net
income and earnings per share had the Company  accounted  for its stock  options
under the fair  value  method  of  accounting  (in  millions,  except  per share
information):

                                                                        Three Months Ended      Nine Months Ended
                                                                          September 30,           September 30,
                                                                       ---------------------  ----------------------
                                                                          2005        2004       2005         2004
                                                                       ----------  ---------  ----------  ----------
Net income (loss), as reported                                        $    4.3     $ (20.2)   $ (19.5)    $  (45.8)
  Add: Non-cash stock-based employee compensation expenses
    included in reported net loss, net of related tax effects              4.1         0.4        0.3          2.3
  Deduct: Total stock-based  employee  compensation  expense
    determined under the fair value  method for all  awards, net of
    related tax effects                                                   (4.5)       (0.9)      (1.5)        (3.7)
                                                                       ----------  ---------  ----------  ----------
Pro forma net income (loss)                                           $    3.9     $ (20.7)   $ (20.7)    $  (47.2)
                                                                       ==========  =========  ==========  ==========

Basic income (loss) per share:
  As reported                                                         $   0.72     $ (3.37)   $ (3.26)    $  (7.66)
  Pro forma                                                               0.65       (3.45)     (3.47)       (7.88)
Diluted income (loss) per share:
  As reported                                                         $   0.62     $ (3.37)   $ (3.26)    $  (7.66)
  Pro forma                                                               0.56       (3.45)     (3.47)       (7.88)

10.  Per Share Information

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

                                                                      Three Months Ended       Nine Months Ended
                                                                         September 30,           September 30,
                                                                  ------------------------- ------------------------
                                                                         2005        2004        2005        2004
                                                                  -------------  ----------- ----------- ------------
Weighted average shares outstanding:
  Common Stock                                                      5,967,942     5,976,466   5,973,608   5,976,466
  Effect of dilution:
    Class A Preferred Stock (1)                                       668,119        -          -            -
                                                                  -------------  ----------- ----------- ------------
Weighted average number of common and common equivalent
  shares - Basic                                                    6,636,061     5,976,466   5,973,608   5,976,466
  Effect of dilution:
    Stock options (1)                                                 311,886       -           -            -
                                                                  -------------  ----------- ----------- ------------
Weighted average number of common and common equivalent
  shares - Diluted                                                  6,947,947     5,976,466   5,973,608   5,976,466
                                                                  =============  =========== =========== ============
------------------

(1)  The Class A Preferred  Stock and options were not included,  except for the
     three  months ended  September  30, 2005,  in the  computation  of basic or
     diluted  earnings  per share  because  the  Company had a loss for the nine
     months ended September 30, 2005 and 2004, respectively.

11.  Comprehensive Income (Loss)

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

                                                                        Three Months Ended      Nine Months Ended
                                                                          September 30,           September 30,
                                                                         -------------------  ----------------------
                                                                           2005        2004       2005        2004
                                                                         --------- ---------  ----------  ----------
Net income (loss):                                                       $  4.3    $  (20.2)  $   (19.5)  $   (45.8)
  Other comprehensive income (loss):
     Unrealized income (loss) on available-for-sale investments               -         0.3        (0.1)       (1.5)
                                                                         --------  ---------  ----------  ----------
Total comprehensive income (loss)                                        $  4.3    $  (19.9)  $   (19.6)  $   (47.3)
                                                                         ========  =========  ==========  ==========

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

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

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

Results of Operations

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

     The Company conducts the substantial  portion of its operations through its
subsidiaries,  which operate in three  principal  industries:  forest  products,
through  MGI  and its  wholly  owned  subsidiaries,  principally  Palco  and its
subsidiaries;  real estate  investment  and  development,  through MPC and other
wholly  owned  subsidiaries  as well as joint  ventures;  and racing  operations
through SHRP, Ltd. MGHI owns 100% of MGI and is a wholly owned subsidiary of the
Company.  In addition,  the Company owns approximately 63% of Kaiser, a producer
of fabricated  aluminum products  currently in Chapter 11. 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 specific entities refer to
the respective  companies and their subsidiaries,  unless otherwise indicated or
the context indicates otherwise.

     Consolidated Operations

     Selected Operational Data

     The following table presents selected  financial  information for the three
and nine month  periods  ended  September  30,  2005 and 2004 for the  Company's
consolidated operations.

                                                                    Three Months Ended      Nine Months Ended
                                                                      September 30,           September 30,
                                                                   ---------------------  ----------------------
                                                                     2005        2004         2005        2004
                                                                   ---------- ---------   ---------   ---------

Net sales                                                          $105.8      $ 81.5     $  276.0    $  242.9
Costs and expenses                                                  (86.1)      (83.2)      (247.1)     (242.1)
Gains on sales of timberlands and other assets                        -           0.2          0.1         0.2
                                                                   --------   ---------   ---------   ---------
Operating income (loss)                                              19.7        (1.5)        29.0         1.0
Other income, net                                                     4.1         -            9.6         9.0
Interest expense                                                    (19.5)      (18.6)       (58.1)      (55.7)
                                                                   --------   ---------   ---------   ---------
Income (loss) before income taxes                                  $  4.3      $(20.1)    $  (19.5)   $  (45.7)
                                                                   ========   =========   =========   =========

     Deconsolidation of Kaiser
     See Notes 1 and 7 for information regarding the deconsolidation of Kaiser's
financial results and the Company's investment in Kaiser.

     Overview of Consolidated Results of Operations

     Net Sales
     Consolidated  net sales for the three  months  ended  September  30,  2005,
increased $24.3 million, as compared to the comparable period in the prior year.
Real estate  sales more than  doubled  during the  quarter due to a  significant
acreage sale at Palmas as well as increased  sales  activity at Fountain  Hills.
This  increase  was offset by a $7.0 million  decline in sales at the  Company's
forest  products  segment  primarily as a result of decline in lumber  shipments
during the  quarter,  compounded  by an  unfavorable  shift in lumber  sold from
redwood lumber to lower-priced,  common grade  Douglas-fir  lumber, as well as a
$0.7 million  decline in racing  segment net sales,  due primarily to fewer live
racing days during the quarter.

     Consolidated net sales for the nine months ended September, 2005, increased
$33.1  million,  compared to the same period in 2004.  The Company's real estate
segment  realized a 91% increase in net sales for the first nine months of 2005,
reflecting the acreage sale at Palmas as well as strong sales at Fountain Hills.
This  increase  was  offset  by a $12.4  million  decline  in net  sales  at the
Company's  forest products  segment and a $4.6 million decline in racing segment
net sales.

     Operating Income
     Consolidated  operating income for the third quarter of 2005, totaled $19.7
million compared to operating loss of $1.5 million for the same quarter in 2004.
Operating results for the real estate segment increased $27.5 million, primarily
as a result of  increased  real estate  sales,  as  discussed  above.  Operating
results for the forest products  segment  declined $3.1 million,  primarily as a
result of a decline in lumber  shipments  during the quarter,  compounded  by an
unfavorable  shift in lumber sold from redwood  lumber to  lower-priced,  common
grade  Douglas-fir  lumber,  exacerbated  by  higher  harvesting,  hauling,  and
production costs and substantial  legal and professional fees relating to Scotia
LLC's efforts to pursue a negotiated restructuring of the Timber Notes.

     Consolidated operating income for the nine months ended September 30, 2005,
increased  $28.0  million,  as compared  to same  period in the prior year.  The
Company's  real estate  segment  realized a $38.1 million  increase in operating
income  during the first nine  months of 2005,  as  compared  to the  comparable
period in the prior  year.  Operating  results for the forest  products  segment
declined  by $11.2  million  due to a decline  in lumber  shipments  during  the
quarter,  compounded by an unfavorable  shift in lumber sold from upper grade to
common  grade  redwood and from  redwood  lumber to  lower-priced,  common grade
Douglas-fir  lumber and a substantial  increase in costs,  partially offset by a
$3.1  million  insurance  settlement  received in the first  quarter  2005.  The
corporate  segment's  operating loss  decreased by $2.3 million,  primarily as a
result of lower stock-based  compensation expense in 2005, reflecting changes in
the market value of the Company's stock since December 31, 2004.

     Other Income, net
     Consolidated  other income,  net for the third quarter of 2005 was impacted
favorably by a $4.6 million increase in investment income, offset by a reduction
in equity  earnings  from the  Company's  investment in FireRock LLC due to the
sell-out of lots at the development in 2004.

     Consolidated  other  income,  net for the  first  nine  months  of 2005 was
impacted favorably by a $4.3 million increase in investment income,  offset by a
reduction in equity  earnings from the Company's  investment in FireRock LLC due
to the sell-out of lots in 2004.

     Forest Products Operations

     Industry Overview and Selected Operational Data
     The Company's forest products  operations are conducted through MGI and its
wholly owned subsidiaries, principally Palco and its subsidiaries. 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
seasonal because of the harvesting, road use, wet weather and other restrictions
imposed  by the HCP  and  regulation.  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 as well as legal actions have played
and are expected to continue to play a significant  role in the Company's forest
products  operations.  Scotia  LLC  has  previously  experienced  delays  in the
approval  of its THPs as the  result of  regulatory  compliance  and  litigation
challenges,  and expects these  difficulties to persist.  Moreover,  the Company
expects  a  recurrence  of  the  additional   delays  that  have  recently  been
experienced  in  harvesting  on  previously-approved   THPs  due  to  regulatory
oversight  by the North Coast Water Board . The  foregoing  matters  have in the
past adversely  affected  timber harvest levels and timber  harvesting and other
costs;  these  effects are  expected to continue.  In addition,  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 financial condition, results of operations
or  liquidity  of  the  Company's  forest  products  operations.   See  Item  1.
"Business--Forest Products  Operations--Regulatory and Environmental Matters" of
the Form 10-K,  and Notes 1 and 8 in this Form 10-Q,  for further  discussion of
these matters.

     During 2001,  comprehensive external and internal reviews were conducted of
Palco's  business  operations.  These  reviews  were  conducted  in an effort to
identify   ways  in  which  Palco  could   operate  on  a  more   efficient  and
cost-effective  basis.  Based upon these reviews,  Palco implemented a number of
changes during the last quarter of 2001 and the first quarter of 2002, including
closing  two  of its  four  sawmills,  eliminating  certain  of its  operations,
including its  company-staffed  logging  operations (now relying  exclusively on
contract  loggers)  and  its  soil  amendment  and  concrete  block  activities,
utilizing  more  efficient  harvesting  methods and  adopting  other cost saving
measures.  Palco has continued to examine ways in which to achieve cost savings.
During  2004,  Palco  opened its new  (replacement)  planer  facility  and began
construction on its new sawmill. Palco has spent $26.7 million through September
30, 2005,  on the new sawmill and planer  facility  ($20.5  million of which was
expended  in  2004).  The new  sawmill  construction  project  is  substantially
complete, and while production levels at the new sawmill continue to improve, it
is not yet operating at planned  capacity and is not expected to achieve planned
production rates for the remainder of 2005. Funds for this project were provided
from cash  resources and  borrowings  under the Palco Credit  Agreement and cash
made  available as a result of borrowings  under the Term Loan and the Revolving
Credit  Facility.  As part of the project,  Palco's  Carlotta mill was closed in
2004 and its  Fortuna  mill was closed in June  2005.  As a result of these mill
closures,  Palco  recognized  severance  costs of $0.7 million in 2005.  Certain
equipment  from these mills is being moved to the new sawmill and  management is
considering  alternative  uses  for  the  properties  and  remaining  equipment,
including  sales to third  parties.  Further  actions may be taken in the fourth
quarter  of 2005 as a result of  Palco's  continuing  evaluation  process  or in
response to the financial  difficulties  described  elsewhere in this Form 10-Q,
and writedowns of certain assets may be required.

     The following table presents selected operational and financial information
for the third quarter and nine months ended September 30, 2005 and 2004, for the
Company's forest products operations.

                                                  Three Months Ended            Nine Months Ended
                                                    September 30,                 September 30,
                                             --------------------------    -------------------------
                                                  2005          2004           2005           2004
                                             ------------   -----------    -----------  ------------
                                               (In millions of dollars, except shipments and prices)
Shipments:
   Lumber: (1)
     Redwood upper grades                            1.3           4.7            5.9          14.2
     Redwood common grades                          40.8          53.3          126.9         154.5
     Douglas-fir upper grades                        0.1           0.4            0.5           1.7
     Douglas-fir common grades                      23.5          10.6           81.2          39.1
     Other                                          (0.1)           -             1.5           5.0
                                             ------------   -----------    -----------  ------------
   Total lumber                                     65.6          69.0          216.0         214.5
                                             ============   ===========    ===========  ============
Cogeneration power (2)                              41.3          43.6          125.3         120.4
                                             ============   ===========    ===========  ============
Average sales price:
   Lumber:(3)
     Redwood upper grades                    $   1,199.0    $  1,355.0     $  1,253.0   $   1,349.0
     Redwood common grades                         606.0         616.0          619.0         615.0
     Douglas-fir upper grades                      739.0         971.0        1,037.0       1,060.0
     Douglas-fir common grades                     379.0         501.0          374.0         453.0
   Cogeneration power (4)                           66.0          66.0           65.0          65.0

Net sales:
   Lumber, net of discount                   $      36.0    $     44.0     $    117.2   $     133.6
   Logs                                              2.4           1.2            6.3           3.6
   Cogeneration power                                2.8           3.0            8.3           8.1
   Wood chips                                        0.6           0.6            2.7           1.9
   Other                                             0.8           0.8            2.3           2.0
      Total net sales                        ------------   -----------    -----------  ------------
                                             $      42.6    $     49.6     $    136.8   $     149.2
                                             ============   ===========    ===========  ============
Operating income (loss)                      $      (2.1)   $      1.0     $     (8.0)  $       3.2
                                             ============   ===========    ===========  ============
Loss before income taxes                     $     (15.9)   $    (13.5)    $    (50.3)  $     (37.5)
                                             ============   ===========    ===========  ============

------------------
(1)  Lumber shipments are expressed in millions of board feet.
(2)  Power deliveries are expressed in thousands of megawatts.
(3)  Dollars per thousand board feet.
(4)  Dollars per megawatt.

     Net Sales
     Total net sales for forest products  operations  decreased to $42.6 million
for the third  quarter  of 2005,  as  compared  to $49.6  million  for the third
quarter of 2004. The $7.0 million  decrease in net sales was due to a decline in
lumber  shipments  during the quarter,  compounded  by an  unfavorable  shift in
lumber  sold from  redwood  lumber to  lower-priced,  common  grade  Douglas-fir
lumber. Additionally,  there was an approximate 24% decline in the average sales
price of common grade Douglas-fir  during the third quarter,  as compared to the
same period in 2004.

     Despite  an  overall  increase  in lumber  shipments  during the first nine
months of 2005, total net sales for forest products  operations  decreased $12.4
million,  as compared to the same period in 2004.  This  decrease was  primarily
caused by an  unfavorable  shift in lumber sold from upper grade to common grade
redwood  and from  redwood  lumber to lower  priced,  common  grade  Douglas-fir
lumber.  Additionally,  there was an  approximate  17.3%  decline in the average
sales price of common grade Douglas-fir during the first nine months of 2005, as
compared to the same period in 2004.

     Operating Income (loss)
     Operating results for forest products  operations  declined by $3.1 million
for the third  quarter of 2005,  compared to the same period in 2004,  primarily
due to decreased net sales,  higher harvesting,  hauling,  and production costs,
and a  significant  increase  in legal  and  other  professional  fees  relating
primarily to Scotia LLC's  efforts to pursue a negotiated  restructuring  of the
Timber Notes.

     Operating results for forest products  operations declined by $11.2 million
for the nine months of 2005, compared to the same period in 2004,  primarily due
to the factors discussed in the preceding  paragraph.  The loss from logging and
lumber  operations  for the first  nine  months was  partially  offset by a $3.1
million insurance  settlement received in the first quarter 2005. The first nine
months of 2005 and 2004 included $0.9 million and $1.4 million, respectively, of
severance costs related to a reduction in workforce.

     Loss Before Income Taxes
     Forest  products  operations'  loss before  income taxes  increased by $2.4
million and $12.8  million for the third  quarter and first nine months of 2005,
respectively,  compared to the prior year periods,  primarily due to the decline
in  operating  results  discussed  above and the  write-off  of $1.3  million of
deferred  financing costs related to the Palco Credit Agreement that was paid in
full and terminated in April 2005, and additional  interest  expense,  partially
offset by increased income from cash, cash  equivalents,  marketable  securities
and other investments due to higher levels of investment.

Real Estate Operations

     Industry Overview and Selected Operational Data
     The Company,  principally  through its wholly owned  subsidiaries and joint
ventures,  invests  in and  develops  residential  and  commercial  real  estate
primarily in Puerto Rico, Arizona,  California, and Texas. Results of operations
between quarterly periods for the Company's real estate operations are generally
not  comparable due to the timing of individual  real estate sales  transactions
and  cash  collections.  Accordingly,  results  for  any  one  quarter  are  not
necessarily  indicative  of  results  to be  expected  for the  full  year.  The
following table presents selected operational and financial  information for the
three and nine months ended  September 30, 2005 and 2004, for the Company's real
estate operations.

                                                                       Three Months Ended        Nine Months Ended
                                                                           September 30,           September 30,
                                                                      ------------------------ ---------------------
                                                                         2005         2004        2005         2004
                                                                      ----------- ------------ ------------ --------
                                                                                  (In millions of dollars)
Net sales:
  Real estate:
    Fountain Hills                                                    $   10.4    $    5.1     $  33.3      $   8.5
    Mirada                                                                 4.3         3.8         8.6          9.5
    Palmas                                                                28.4         2.3        35.5         10.4
    Other                                                                   -           -          0.1           -
                                                                      ----------  ---------    ----------   --------
      Total                                                               43.1        11.2        77.5         28.4
                                                                      ----------  ----------   ----------   --------

  Resort, commercial and other:
    Fountain Hills                                                         1.4         1.7         4.4          5.0
    Palmas                                                                 3.0         2.8         9.4          8.6
    Commercial lease properties                                            4.6         4.4        13.7         12.8
    Other                                                                  0.2         0.2         0.2          0.3
                                                                      ----------  ----------   ----------   --------
      Total                                                                9.2         9.1        27.7         26.7
                                                                      ----------  ----------   ----------   --------
  Total net sales                                                     $   52.3    $   20.3     $ 105.2      $  55.1
                                                                      ========== ==========   ==========   ========

Operating income (loss):
    Fountain Hills                                                    $    5.9    $    2.2     $   17.9    $    3.1
    Mirada                                                                 2.0         1.6         3.4          3.3
    Palmas                                                                20.9        (2.3)       21.8         (0.5)
    Commercial lease properties                                            2.8         1.9         6.2          5.3
    Other                                                                 (0.9)       (0.2)       (0.9)        (0.9)
                                                                      --------- - ----------   ----------   --------
      Total operating income                                          $   30.7    $    3.2     $  48.4     $   10.3
                                                                      ========== ==========   ==========   ========

Investment, interest and other income (expense), net:
    Equity in earnings (losses) from real estate joint ventures       $   (0.3)   $     -      $  (0.7)    $    2.9
    Other                                                                  0.7         0.6         2.2          3.7
                                                                      --------- - ----------   ----------   --------
                                                                      $    0.4    $    0.6     $   1.5     $    6.6
                                                                      ========== ==========   ==========   ========
Income (loss) before income taxes                                     $   26.8    $   (0.7)    $  36.9     $    3.1
                                                                      ========== ==========   ==========   ========

     Net Sales
     Total net sales for the real estate  operations  for the third  quarter and
first  nine  months of 2005  increased  by $32.0  million,  and  $50.1  million,
respectively,  as  compared  to the  same  periods  in  2004,  primarily  due to
increased  lot sales and favorable  pricing at Fountain  Hills and acreage sales
and profit  participation  payments,  offset by lower timeshare sales at Palmas.
During the third quarter of 2005,  PDMPI  completed a  significant  parcel sale;
this transaction represented more than 50% of the real estate segment's revenues
for the third quarter of 2005.

     Operating Income and Income Before Income Taxes
     Operating  income and income before income taxes increased by $27.5 million
for the third quarter of 2005 as compared to the same period of 2004,  primarily
due to the increased  lot sales at the Fountain  Hills  development  and acreage
sales and profit participation payments at Palmas. Operating income increased by
$38.1 million for the nine months of 2005 as compared to the same period of 2004
primarily as a result of the higher volume of real estate sales discussed above.
The segment's income before income taxes increased by $33.8 million for the nine
months of 2005 as compared to the same period in 2004, primarily due to improved
operating results as discussed above,  partially offset by $3.5 million of lower
equity in earnings from the Company's investment in FireRock LLC due to the sell
out of lots in 2004.

     Racing Operations

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

     The following table presents selected operational and financial information
for the third quarter and nine months ended September 30, 2005 and 2004, for the
Company's racing operations.

                                                                      Three Months Ended      Nine Months Ended
                                                                        September 30,          September 30,
                                                                   ------------------------ ------------------------
                                                                      2005         2004        2005         2004
                                                                   ----------- ------------ ----------- ------------
                                                                               (In millions of dollars)
Number of live race days:
  Sam Houston Race Park                                                  35          46          88          130
  Valley Race Park                                                        -           -          68           81

Handle:
  Sam Houston Race Park:
    On-track handle                                                $   30.2   $    33.1    $   94.1    $   105.3
    Off-track handle                                                    9.7        19.0        96.0        137.1
                                                                   ----------- ------------ ---------- ------------
       Total                                                       $   39.9   $    52.1    $  190.1    $   242.4
                                                                   =========== ============ ========== ============
  Valley Race Park:
    On-track handle                                                $    3.9   $     3.9    $   14.3    $    15.2
    Off-track handle                                                      -           -         1.7          3.0
                                                                   ----------- ------------------------ -----------
Total                                                              $    3.9   $     3.9    $   16.0    $    18.2
                                                                   =========== ============ ========== ============
Net sales:
  Sam Houston Race Park:
    Gross pari-mutuel commissions                                  $    7.0    $    7.8     $  23.6    $    26.9
    Other revenues                                                      2.9         2.8         6.4          7.3
                                                                   ----------- ------------------------ ------------
       Total                                                            9.9        10.6        30.0         34.2
                                                                   ----------- ------------------------ ------------
Valley Race Park:
    Gross pari-mutuel commissions                                       0.9         0.9         3.3          3.6
    Other revenues                                                      0.1         0.1         0.7          0.8
                                                                   ----------- ------------------------ ------------
       Total                                                            1.0         1.0         4.0          4.4
                                                                   ----------- ------------------------ ------------
  Total net sales                                                  $   10.9    $   11.6     $  34.0    $    38.6
                                                                   =========== ============ ========== ============
Operating income (loss):
  Sam Houston Race Park                                                (1.7)       (1.2)       (2.6)        (1.2)
  Valley Race Park                                                     (0.1)       (0.3)       (0.3)        (0.5)
                                                                   ----------- ------------------------ ------------
    Total operating loss                                           $   (1.8)   $   (1.5)     $ (2.9)    $   (1.7)
                                                                   =========== ============ ========== ============
Loss before income taxes                                           $   (1.9)   $   (1.5)     $ (3.0)    $   (1.7)
                                                                   =========== ============ ========== ============

     Net Sales
     Total net sales for racing  operations  declined  $0.7 and $4.6 million for
the third  quarter  and first  nine  months of 2005  compared  to the prior year
periods, principally due to fewer live race days at Sam Houston Race Park in the
2005 periods.

     Operating Loss and Loss Before Taxes
     Racing  operations'  operating  loss and loss  before  taxes  for the third
quarter and first nine months of 2005 increased  from the comparable  periods in
2004,  principally  due to lower net sales  partially  offset by lower operating
costs associated with the reduced number of live racing days at Sam Houston Race
Park.

     Other Items Not Directly Related to Industry Segments

                                                                           Three Months Ended      Nine Months Ended
                                                                              September 30,          September 30,
                                                                         ------------------------ ---------------------
                                                                             2005       2004         2005        2004
                                                                         ------------ ----------- ----------- ---------
                                                                                   (In millions of dollars)
Operating loss                                                           $   (7.1)    $ (4.2)     $  (8.5)    $ (10.8)
Loss before income taxes                                                     (4.7)      (4.4)        (3.1)       (9.6)

     Operating Loss
     The  operating  losses  represent   corporate  general  and  administrative
expenses that are not  attributable  to the  Company's  industry  segments.  The
operating  loss  increased  $2.9 million and declined $2.3 million for the third
quarter  and first nine months of 2005,  respectively,  as compared to the prior
year  periods,  primarily  due to  changes  in stock  compensation  expense  and
additional legal and advisor fees. Stock-based  compensation expense is adjusted
as the market value of the Company's Common Stock changes. For the third quarter
and first nine months of 2005, there was a $4.1 million expense and $0.3 million
benefit,  respectively,  recognized  for  stock-based  compensation,  reflecting
changes in the market value of the  Company's  Common  Stock since  December 31,
2004. The quarter ended  September 30, 2004 included $1.9 million  related to an
accrual for an environmental matter discussed under "Other Matters" in Note 8.

     Loss Before Income Taxes
     The loss before  income taxes  increased in the third  quarter of 2005 from
the third quarter of 2004 due to higher stock  compensation  expense,  partially
offset  by  higher  returns  on  marketable   securities  and  other  short-term
investments. The decrease in the loss before income taxes for the nine months of
2005 from the comparable  period in 2004 was due to lower corporate  general and
administrative  expenses as  discussed  above and higher  returns on  marketable
securities and other short-term investments.

Financial Condition and Investing and Financing Activities

     This  section  contains   statements   which  constitute   "forward-looking
statements"  within the meaning of the PSLRA. See the statement in Item 2. 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  Palco 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,  has significant debt service requirements and is experiencing
liquidity difficulties. Additionally, Palco expects to be dependent on the funds
available under the Revolving Credit Facility and existing unrestricted cash and
marketable securities,  and will need additional liquidity,  to fund its working
capital  requirements  in 2005  and  2006.  See  Notes  1 and 4 and 8 and  "Cash
Flow--Forest   Products   Operations"   for  a  description   of  the  liquidity
difficulties  of both  Scotia  LLC and  Palco.  "MAXXAM  Parent" is used in this
section to refer to the Company on a stand-alone basis without its subsidiaries.

     Cash Flow

     Operating  Activities
     Net cash  provided by operating  activities  of $14.8  million for the nine
months ended  September  30, 2005,  improved by $29.4 million as compared to the
nine months ended  September 30, 2004.  This increase  resulted  primarily  from
higher  cash  collections  related to real  estate  sales,  partially  offset by
operating cash flow shortfalls at the Company's forest products operations.

     Investing Activities
     Net cash  provided by investing  activities  of $19.8  million for the nine
months ended September 30, 2005,  reflects the liquidation of certain short-term
investments and the use of restricted  cash for debt service  payments offset by
capital  expenditures  of $16.2  million  related  to Palco's  sawmill  project,
infrastructure  requirements  at  Scotia  LLC and  Fountain  Hills  and  capital
expenditures  at the  Company's  horse  racing  facility.  Net cash  provided by
investing  activities  of $7.7 million for the nine months ended  September  30,
2004,  reflected capital  expenditures of $27.3 million,  of which $18.6 million
was related to Palco's sawmill project.

     Financing Activities
     The $38.7 million of net cash provided by financing activities for the nine
months ended September 30, 2005,  principally reflects the net proceeds from the
Palco  refinancing  that occurred in April 2005.  Net cash provided by financing
activities  of $7.7  million  for the nine  months  ended  September  30,  2004,
principally reflects additional borrowings to fund the Company's forest products
operations.

   MAXXAM Parent

     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 operations,  should
be sufficient to meet its working capital requirements. However, there can be no
assurance that this will be the case. See "--Forest  Products  Operations" below
and Note 1 regarding potential adverse impacts upon MAXXAM Parent as a result of
liquidity issues in respect of Palco and Scotia LLC. Additionally, see "--Racing
Operations"  below  regarding  the cash flow  needs of SHRP,  Ltd.,  which  were
provided by MAXXAM Parent in the first quarter of 2005.

     Forest Products Operations

     Substantially  all of MGI's  consolidated  assets are owned by Palco, and a
significant portion of Palco's  consolidated assets are owned by Scotia LLC. The
lenders  under the Scotia LLC Line of Credit and the holders of the Timber Notes
have  priority  over the claims of creditors of Palco with respect to the assets
and cash  flows of Scotia  LLC.  The  Revolving  Credit  Facility  and Term Loan
contain   certain   restrictive   covenants  which   effectively   preclude  the
distribution of funds from Palco to MGI.

     Due to its highly  leveraged  condition,  Scotia LLC is more sensitive than
less  leveraged  companies to factors  affecting  its  operations  and financial
results,  including  adverse weather  conditions,  low log prices,  governmental
regulation,  environmental  litigation and general economic  conditions.  Scotia
LLC's cash flows from operations are  significantly  impacted by harvest volumes
and log prices.  As discussed in more detail below,  Scotia LLC's harvest levels
and cash flows from operations will in future years be substantially  below both
historical  levels and the minimum levels necessary in order to allow Scotia LLC
to satisfy its debt service obligations in respect of the Timber Notes.

     Regulatory and  environmental  matters as well as legal actions have played
and are expected to continue to play a significant  role in the Company's forest
products  operations.  Scotia  LLC  has  previously  experienced  delays  in the
approval  of its THPs as the  result of  regulatory  compliance  and  litigation
challenges,  and expects these  difficulties  to persist.  Moreover,  the Company
expects  a  recurrence  of  the  additional   delays  that  have  recently  been
experienced  in  harvesting  on  previously-approved   THPs  due  to  regulatory
oversight  by the North Coast Water Board . The  foregoing  matters  have in the
past adversely  affected  timber harvest levels and timber  harvesting and other
costs;  these  effects are  expected to continue.  In addition,  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 financial condition, results of operations
or  liquidity  of  the  Company's  forest  products  operations.   See  Item  1.
"Business--Forest Products  Operations--Regulatory and Environmental Matters" of
the Form 10-K,  and Notes 1 and 8 in this Form 10-Q,  for further  discussion of
these matters.

     The North  Coast  Water  Board is  requiring  Palco and Scotia LLC to apply
various waste discharge  reporting,  mitigation and erosion control requirements
in respect of timber harvesting activities in several watersheds,  and is likely
to impose  additional  measures  in the  future.  The North Coast Water Board in
December 2003 directed its staff to formulate  WWDRs for the  Freshwater and Elk
River watersheds on the Scotia LLC Timberlands.  As harvesting activities on the
Scotia LLC Timberlands  cannot readily be moved between watersheds due to, among
other things,  historic harvest patterns,  adjacency  restrictions,  and the age
classes of trees,  development  of WWDRs and the other matters  described in the
"Forest  Products  Operations--Water  Quality" section of Note 8 are expected to
result in reduced  harvest in the  future.  The staff of the North  Coast  Water
Board  has  circulated  for  public  review  and  comment  draft  WWDRs  for the
Freshwater and Elk River watersheds.  If these draft WWDRs are approved in their
current form, there would likely be a significant  adverse impact on current and
future harvest levels.

     As WWDRs had not been formulated, the North Coast Water Board for some time
failed to release  for  harvest a number of Scotia  LLC's THPs that had  already
been approved by the other  governmental  agencies  which  approve  Scotia LLC's
THPs. In February  2005,  the Executive  Officer of the staff of the North Coast
Water Board  released  sufficient  THPs to allow the harvest of up to 50% of the
CDF Harvest Limit for these two  watersheds.  On March 16, 2005, the North Coast
Water  Board  ordered the  enrollment  of  additional  THPs that would allow the
harvest of up to 75% of the CDF Harvest  Limit for these two  watersheds.  Third
parties  subsequently  appealed this decision to the State Water Board.  On June
16, 2005, the State Water Board heard this appeal and rendered a decision, which
had the effect of  disallowing  further  harvesting on the additional 25% of the
CDF Harvest Limit approved by the North Coast Water Board on March 16, 2005. The
State  Water  Board's  decision  also  has the  effect  of  disallowing  further
harvesting  in the  Freshwater  and Elk River  watersheds  until WWDRs for these
watersheds  are adopted by the North Coast Water  Board.  Palco has appealed the
State Water  Board's June 16,  2005,  decision in a  California  state court.  A
hearing on the appeal has not yet been scheduled.

     On September 2, 2005, the North Coast Water Board set hearings on the draft
WWDRs for September 14 and 15, 2005. On September 9, 2005,  Palco and Scotia LLC
filed a petition in California  state court seeking an order  mandating that the
North Coast Water Board not take any further action on the proposed  WWDRs.  The
petition alleges defects in the proposed WWDRs and the North Coast Water Board's
hearing procedures.  Palco and Scotia LLC also requested a temporary restraining
order and  preliminary  injunction  to prevent  the North Coast Water Board from
taking  any  further  action  until  their  petition  is  heard.  The  temporary
restraining  order  was  granted  and  the  preliminary  injunction  hearing  is
scheduled for November 9, 2005.

     The  unreleased  and  disallowed  THPs  in the  Freshwater  and  Elk  River
watersheds  represented  a  significant  portion  of the  harvest  that had been
planned for the first nine months of 2005. The ongoing regulatory, environmental
and  litigation  matters  faced by Palco  and  Scotia  LLC,  exacerbated  by the
developments  described in the previous  paragraph,  have  materially  adversely
impacted the cash flows of both Palco and Scotia LLC. Furthermore,  it is likely
that additional  delays in the development of the Freshwater and Elk River WWDRs
will occur. Should the Freshwater-Elk River WWDRs not be approved during 2005 or
in the first few months of 2006, or be approved with additional  restrictions on
harvest,  there could be a material  adverse  impact on Palco's and Scotia LLC's
future cash flows from operations.

     As previously  announced,  the  estimates of Scotia LLC indicated  that its
cash  flows  from  operations,  together  with the Scotia LLC Line of Credit and
other available funds, would likely be inadequate to pay all of the interest due
on the July 20, 2005,  payment date for the Timber Notes.  As the July 20, 2005,
payment date  approached,  it became  apparent that Scotia LLC's estimates would
prove  correct  and that the cash  shortfall  as of the  payment  date  would be
approximately  $2.2 million.  Based upon a review of its alternatives  under the
circumstances,  consultation  with its own legal  and  financial  advisors,  and
consideration  of the status of discussions with the advisors of the Noteholders
Committee,  Scotia LLC requested that Palco make an early payment,  equal to the
shortfall,  in respect of certain  logs that had already  been  delivered to and
purchased by Palco from Scotia LLC.  Palco  approved and delivered the early log
payment,  which allowed Scotia LLC to fund the July 20, 2005, cash shortfall and
pay all of the $27.9 million of interest due ($25.9  million net of interest due
in respect of Timber Notes held by Scotia LLC).

     Scotia LLC's ability to pay all of the $27.7 million of interest due ($25.8
million  net of interest  due in respect of Timber  Notes held by Scotia LLC) on
the January 20,  2006,  payment  date will depend upon many  factors,  including
Scotia  LLC's  harvest  levels  for the  remainder  of  2005,  cash  flows  from
operations  through the January 20, 2006,  payment date  together with access to
the Scotia LLC Line of Credit.  At September 30, 2005, the maximum  availability
under  the  Scotia  LLC  Line  of  Credit  was  $55.4  million,  and  borrowings
outstanding  were $49.5 million.  There can be no assurance that Scotia LLC will
have sufficient liquidity to make this interest payment.

     In March 2005,  UBS agreed to assist  Scotia LLC in seeking to  restructure
its  obligations  with respect to the outstanding  Timber Notes.  Scotia LLC has
agreed to pay UBS an advisory  fee of  $150,000  per month,  creditable  in full
against a success fee of $5.6 million that would be payable upon consummation of
any restructuring transaction prior to July 27, 2006, in addition to agreeing to
reimburse  certain of UBS's  expenses and to indemnify  UBS and its  affiliates.
UBS'  engagement  expired by its terms on July 27, 2005,  and UBS and Scotia LLC
subsequently extended that engagement,  which can be terminated with thirty days
notice by either party.  In June 2005,  Scotia LLC agreed to be responsible  for
certain payments and other obligations of the Noteholder  Committee  relating to
their legal counsel and financial  advisors.  On September 23, 2005,  Scotia LLC
terminated  its  agreement to be  responsible  for further  payments,  effective
immediately in the case of the legal counsel and effective  October 23, 2005, in
the case of the financial advisor.  Scotia LLC terminated its agreement upon the
recommendation of a special committee of independent managers since it concluded
that  insufficient  progress had been made in  negotiations  with the Noteholder
Committee  and was  advised  that  holders of less than 15% of the Timber  Notes
(measured  by  principal  amount)  had  agreed  to  confidentiality   provisions
necessary  in  order  to  participate  in  a  process  intended  to  lead  to  a
restructuring  agreement.   Scotia  LLC  continues  to  evaluate  its  liquidity
alternatives in respect of the January 20, 2006, payment date and beyond.

     Scotia LLC and UBS have conducted  extensive reviews and analyses of Scotia
LLC's assets,  operations and prospects.  As a result of these extensive reviews
and analyses,  Scotia LLC's  management  has  concluded  that, in the absence of
significant  regulatory  relief and  accommodations,  Scotia LLC's annual timber
harvest  levels  and  cash  flows  from  operations  will  in  future  years  be
substantially  below both historical  levels and the minimum levels necessary in
order to allow Scotia LLC to satisfy its debt service  obligations in respect of
the Timber Notes.  Scotia LLC has announced  that its projected  average  annual
harvest  level  over  the  ten-year  period   beginning  2006  is  estimated  at
approximately  100 million  board feet per year.  This  harvest  level  reflects
Scotia LLC management's most recent estimate of the cumulative impact of ongoing
regulatory  limitations,  prescriptions,  and other  actions and is based upon a
number of  assumptions  which may or may not prove to be accurate.  Scotia LLC's
management also determined that reductions must be made to its cost structure in
line with  these  anticipated  reductions  in  harvest  levels  and cash  flows.
Accordingly,  on August 30, 2005,  Scotia LLC implemented a  restructuring  plan
reducing its workforce by approximately one third. To the extent that Scotia LLC
is  unable  to  restructure  its  Timber  Notes  consistent  with   management's
expectations as to future harvest levels and cash flows or to secure  additional
liquidity from external  sources,  the Company  expects that Scotia LLC, and, as
may be required,  Palco, will be forced to take extraordinary actions, which may
include: further reducing expenditures by laying off employees and shutting down
various  operations;  seeking  other  sources of  liquidity,  such as from asset
sales; and seeking protection by filing under the Bankruptcy Code.

     As of December 31, 2004 and March 31, 2005,  Palco was in default under the
Palco Credit Agreement and obtained limited waivers of the default through April
22, 2005. On April 19, 2005, Palco and Britt, as Borrowers, closed the Revolving
Credit Facility and the Term Loan. The Term Loan was fully funded at closing and
the Borrowers used  approximately  $10.8 million of the funds from the Term Loan
to pay off amounts  previously  borrowed  under the Palco Credit  Agreement  and
terminated  that  facility.   As  of  September  30,  2005,  $34.8  million  was
outstanding  under the Term Loan and $12.1  million  was  outstanding  under the
Revolving  Credit  Facility.  Palco estimates that its cash flow from operations
will not provide  sufficient  liquidity to fund its operations  until the fourth
quarter  of 2006.  Accordingly,  Palco  expects  to be  dependent  on the  funds
available under the Revolving Credit Facility,  and expects additional liquidity
will be needed,  to fund its working capital and other cash requirements in 2005
and 2006.  The  Revolving  Credit  Facility  and Term Loan are each secured by a
security  interest in the stock of Palco and  substantially all of the assets of
the Borrowers  (other than Palco's equity interest in Scotia LLC). Both the Term
Loan and the Revolving  Credit Facility have  provisions  requiring that the net
cash  proceeds of specified  asset sales be used to prepay  amounts  outstanding
under the loans.

     As of September 30, 2005,  borrowings  under the Revolving  Credit Facility
were limited to the sum of 85% of Palco and Britt's eligible accounts  receivable
plus  75% of their  eligible  inventories  (up to a  maximum  of $30.0  million,
subject to limitations such as the ability of the lender to establish reasonable
reserves).  Both the Term Loan and the Revolving  Credit Facility contain EBITDA
maintenance  covenants that, if not met, could trigger a mandatory prepayment of
outstanding borrowings.  The operating cash flow estimates used to establish the
EBITDA maintenance covenants are subject to a number of assumptions about future
operating  cash flow and actual  results  could  differ  from  these  estimates.
Accordingly,  the  availability  of these funds is largely  dependent on Palco's
ability to harvest  adequate  timber from the Scotia LLC  Timberlands and reduce
operating costs. Available resources to fund Palco's and Britt's operating needs
at September 30, 2005, were $8.0 million,  comprised of the maximum availability
under the Revolving  Credit Facility of $7.7 million and  unrestricted  cash and
marketable securities of $0.3 million.

     Subsequent  to September  30, 2005,  Palco  borrowed the maximum  available
under the Revolving  Credit Facility and on October 26, 2005,  Palco,  Britt and
certain of their affiliates  entered into the Omnibus  Amendment,  which amended
the Term  Loan  and the  Revolving  Credit  Facility  to,  among  other  things,
temporarily  increase the amount of the  Revolving  Credit  Facility  from $30.0
million to $35.0 million and temporarily increase the advance rate applicable to
the Borrowers'  inventory from 75% to 80%. The increase in the inventory advance
rate is  subject  to  satisfactory  inventory  appraisals  and the amount of the
increase in such advances is capped at $1.5 million.  The increase in the amount
of the Revolving Credit Facility and the increase in the inventory  advance rate
will be  gradually  phased  out in  January  through  March  2006.  The  Omnibus
Amendment also revises  financial  covenants  applicable to the Revolving Credit
Facility and the Term Loan.  MGI  furnished  cash  collateral of $2.0 million as
additional  security for the Borrowers'  obligations  under the Revolving Credit
Facility and the Term Loan Facility.  This cash  collateral  will be released on
April 1, 2006,  so long as the Borrowers  have  achieved  earnings and borrowing
availability targets to be determined by the Lenders.

     Palco's available cash resources,  including proceeds from and availability
under the Term Loan and Revolving  Credit Facility have been primarily  utilized
during the first nine months of 2005 in the following  areas:  (i) $10.8 million
was  used  to pay  off  amounts  previously  borrowed  under  the  Palco  Credit
Agreement;   (ii)   approximately  $  6.2  million  was  used  to  fund  capital
expenditures  related  to  Palco's  new  state-of-the-art   sawmill  in  Scotia,
California;  (iii) $9.9 million was used as collateral to secure Palco's workers
compensation  liabilities;  (iv) $13.5  million was used to build log  inventory
levels;  and (v) the  remainder was used to pay advisor fees and to fund working
capital shortfalls. Palco's ability to generate sufficient liquidity to fund its
short term  liquidity  needs will depend upon many  factors,  including  Palco's
ability to achieve planned production rates at the new sawmill. While production
levels at the new  sawmill  continue  to  improve,  the new  sawmill  is not yet
operating at planned capacity and is not expected to achieve planned  production
rates for the  remainder  of 2005.  Accordingly,  additional  liquidity  will be
needed at Palco to fund working capital requirements in 2005 and 2006, but there
can be no assurance that Palco will be able to secure additional  liquidity.  In
the event that Palco were unable to secure the necessary liquidity,  it would be
forced to take  extraordinary  actions,  which  may  include:  further  reducing
expenditures  by laying off employees and shutting down various  operations  and
seeking protection by filing under the Bankruptcy Code.

     On April 21,  2005,  Moody's  lowered  its  ratings on the Class A-1 Timber
Notes  from Baa2 to Ba3;  the Class A-2  Timber  Notes  from Baa3 to B1; and the
Class A-3 Timber Notes from Bal to B1. On June 20, 2005, Moody's further lowered
its ratings on all classes of the Timber  Notes to Caal.  S&P  announced  on
April 7, 2005,  that it had lowered  Palco's credit rating to CCC- (which rating
it affirmed on April 28, 2005). As a result of the S&P credit rating actions
related to Palco,  Palco was  required to post a $9.9  million  letter of credit
with the State of  California  to secure its workers  compensation  liabilities,
which reduced  Palco's  availability  under the Revolving  Credit  Facility by a
corresponding  amount.  See Note 4 for further  discussion of availability under
Palco's debt facilities.

     The liquidity issues being experienced by Scotia LLC and Palco could result
in claims against and have adverse  impacts on MAXXAM  Parent,  MGHI and/or MGI.
For example,  under ERISA law, were Palco to terminate its pension plan,  MAXXAM
Parent and its wholly owned  subsidiaries  would be jointly and severally liable
for any unfunded pension plan obligations.  The unfunded obligation attributable
to Palco's  pension plan as of December  31, 2004,  is estimated to have been in
the range of  approximately  $35 million based upon annuity  placement  interest
rate  assumptions  at that  time.  In  addition,  it is  possible  that  certain
transactions could be entered into in connection with a potential  restructuring
or  reorganization  of Palco or Scotia LLC, such as a sale or other  transfer of
all or a portion of the equity  ownership in Palco and/or  Scotia LLC, a sale or
other  transfer of a substantial  portion of Palco's  and/or Scotia LLC's assets
and/or  a   cancellation   of  some  or  all  of  Palco's  and/or  Scotia  LLC's
indebtedness,  which  could  require  the  utilization  of all or a  substantial
portion of, or the loss of a significant portion of, the Company's net operating
losses for federal and state income tax purposes and could  require tax payments
in future periods.

     The Scotia LLC Line of Credit  allows Scotia LLC to borrow up to one year's
interest  due 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  would  request  that the  Scotia  LLC Line of Credit be
extended for an  additional  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,  2005,  the
maximum  availability under the Scotia LLC Line of Credit was $55.4 million, and
outstanding borrowings were $49.5 million.

     On the note  payment  date in  January  2005,  Scotia  LLC  used the  funds
available under the Scotia LLC Line of Credit to pay all of the $28.5 million of
interest due ($26.3  million net of interest due in respect of Timber Notes held
by Scotia LLC).  Scotia LLC also repaid $17.1 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 2005,  Scotia LLC used its existing  cash
resources,  all of the remaining  funds  available  under the Scotia LLC Line of
Credit,  and the additional funds made available from the $2.2 million early log
payment by Palco (see Note 1), to pay all of the $27.9  million of interest  due
($25.9  million  net of interest  due in respect of Timber  Notes held by Scotia
LLC).  Scotia LLC also repaid $8.0  million of principal on the Timber Notes (an
amount equal to Scheduled Amortization) using funds held in the SAR Account.

     The Master  Purchase  Agreement  between  Scotia LLC and Palco (see Item 1.
"Business--Forest Products  Operations--Relationships among the Palco Companies"
of the Form  10-K)  contemplates  that all sales of logs by Scotia  LLC to Palco
will be at fair market  value  (based on stumpage  prices) for each  species and
category of logs. 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 December  2004,  the  California  State Board of  Equalization
adopted the new Harvest  Value  Schedule  for the first six months of 2005.  The
prices  published in that schedule  (which  exceeded the applicable  structuring
prices) reflected a 14.3% increase in the SBE Price for small redwood logs and a
12.5%  increase for small  Douglas-fir  logs from the prices  published  for the
third half of 2004. In June 2005,  the  California  State Board of  Equalization
adopted the new Harvest Value  Schedule for the second half of 2005.  The prices
established in that schedule  (which exceed the applicable  structuring  prices)
reflected a 4.2% increase in the SBE Price for small redwood logs from the price
published  for  the  first  half of  2005.  There  was no  change  in the  small
Douglas-fir  log price from the price  published for the first half of 2005.

     Palco has  continued  to  examine  ways in which to achieve  cost  savings.
During  2004,  Palco  opened its new  (replacement)  planer  facility  and began
construction on its sawmill. Palco has spent $26.7 million through September 30,
2005,  on the new  sawmill  and  planer  facility  ($20.5  million  of which was
expended  in  2004).  The new  sawmill  construction  project  is  substantially
complete and, while production levels at the new sawmill continue to improve, it
is not yet operating at planned  capacity and is not expected to achieve planned
production rates for the remainder of 2005. Funds for this project were provided
from cash  resources and  borrowings  under the Palco Credit  Agreement and cash
made  available as a result of borrowings  under the Term Loan and the Revolving
Credit  Facility.  As part of the project,  Palco's  Carlotta mill was closed in
2004 and its  Fortuna  mill was closed in June  2005.  As a result of these mill
closures,  Palco  recognized  severance  costs of $0.7 million in 2005.  Certain
equipment  from these mills is being moved to the new sawmill and  management is
considering  alternative  uses  for  the  properties  and  remaining  equipment,
including  sales to third  parties.  Further  actions may be taken in the fourth
quarter  of 2005 as a result of  Palco's  continuing  evaluation  process  or in
response to the financial  difficulties  described  elsewhere in this Form 10-Q,
and writedowns of certain assets may be required.

     As noted above,  Palco will continue to require funds  available  under the
Revolving Credit Facility and Term Loan, and expects  additional  liquidity will
be  needed,  in  order to meet  its  working  capital  and  capital  expenditure
requirements for the next year. Furthermore,  Palco's cash flows from operations
may be adversely  affected by diminished  availability  of logs from Scotia LLC,
lower lumber prices, adverse weather conditions,  pending legal,  regulatory and
environmental  matters or increased  funding  requirements for its pension plan.
See "Results of  Operations--Forest  Products Operations" above, as well as Note
8, for discussion of the regulatory,  environmental  and legal matters affecting
harvest levels and operating costs.  Capital expenditures were $11.7 million for
the first nine months of 2005 and are  expected to be between  $4.5  million and
$6.1 million for the remainder of 2005, subject to available cash.

     With  respect to long-term  liquidity,  until such time as Palco and Scotia
LLC have adequate  cash flows from  operations,  there can be no assurance  that
they will be able to meet their working  capital,  capital  expenditure and debt
service obligations.  Liquidity,  capital resources and results of operations in
the  long-term  may  continue  to be  adversely  affected  by the  same  factors
affecting short-term cash flows from operations, as discussed above.

     Real Estate Operations

     Capital  expenditures and real estate  improvements  and development  costs
were $12.1  million  for the first nine  months of 2005 and are  expected  to be
between  approximately  $6.0  million to $7.0  million  for  remainder  of 2005,
primarily for  infrastructure  construction  obligations at Fountain Hills.  The
Company  expects  that  these  expenditures  will be funded by cash  flows  from
operations, existing cash and available credit facilities.

     The Company believes that the cash flows from operations, existing cash and
credit facilities of its real estate subsidiaries will be 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.  PDMPI and its subsidiaries have, however,
required  advances from MAXXAM  Parent in prior years to fund their  operations,
and PDMPI may require such advances in the future.

     Racing Operations

     Capital  expenditures and investments in new ventures were $3.3 million for
the first nine months of 2005 and an additional $0.2 million is expected for the
remainder of 2005.

     In the first quarter of 2005, SHRP, Ltd.  borrowed $4.5 million from MAXXAM
Parent to fund its 2005  capital  expenditures  and improve its working  capital
position.  In the third quarter of 2005,  SHRP, Ltd.  borrowed $1.3 million from
MAXXAM Parent to make additional capital  expenditures.  SHRP, Ltd.'s management
expects that SHRP,  Ltd. may require  additional  advances from MAXXAM Parent to
fund its operations and capital  expenditures  in the next year.  SHRP,  Ltd. is
experiencing   strong  competition  from  internet  wagering  and  "racinos"  in
surrounding  states.  These  factors  will  also  play a role  in  SHRP,  Ltd.'s
long-term  liquidity.  SHRP,  Ltd's  management  believes  that cash  flows from
operations may not be sufficient to fund its operations and capital expenditures
on a long term basis.  Therefore,  additional  advances  from  MAXXAM  Parent or
additional working capital sources may be required.

     In January  2004, a subsidiary  of the Company  applied to the Texas Racing
Commission  for an  additional  license to construct and operate a Class 2 horse
racing facility in Laredo,  Texas. The review process is only in the preliminary
stages,  and  there  can be no  assurance  that the  Company  will  obtain  this
additional  license as,  among  other  things,  there is a competing  applicant.
Additionally,   the  Company  is  considering  a  variety  of  alternatives  for
addressing  (should the  subsidiary be granted the Laredo  license) a Racing Act
provision that a person may not own a greater than five percent interest in more
than two Texas-licensed race tracks.

     Kaiser's Operations

     With  respect  to the  Company's  interest  in  Kaiser,  the  Debtors  have
indicated  that they  believe  that it is  likely  that the  equity of  Kaiser's
stockholders  will be  cancelled  without  consideration.  See Notes 1 and 7 for
further information.

Off-Balance Sheet Arrangements

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

Trends

     Forest Products

     See Notes 1 and 8 and Part I, Item 2. "Management's Discussion and Analysis
of  Financial  Conditions  and Results of  Operations--Financial  Condition  and
Investing and Financing  Activities--Forest Products Operations" for information
regarding various regulatory, environmental,  litigation and other matters which
have caused and are  expected to continue to cause delays in the approval of the
Company's  THPs and the  ability to harvest on THPs once they are  approved,  as
well as adverse impacts on timber harvest levels and timber harvesting and other
costs, resulting in significant liquidity difficulties for both Palco and Scotia
LLC. Both Palco and Scotia are evaluating  their liquidity  alternatives.  There
can be no assurance that Scotia LLC and/or Palco will have sufficient  liquidity
to satisfy  their  debt  service  obligations  and fund  their  working  capital
requirements.

     Scotia LLC has announced  that its projected  average  annual harvest level
over the  ten-year  period  beginning  2006 is estimated  at  approximately  100
million board feet per year. This harvest level reflects Scotia LLC management's
most recent estimate of the cumulative impact of ongoing regulatory limitations,
prescriptions, and other actions.

     Real Estate

     As previously disclosed, PDMPI had been considering various alternatives to
accelerate sales of its approximately 1,100 acres of undeveloped land as well as
disposition  of other assets.  In connection  with this,  PDMPI had been working
with an agent to solicit  developer  and  investor  interest in  acquiring  such
acreage and other  assets.  This program  resulted in a large parcel sale during
the third  quarter of 2005.  PDMPI  continues to solicit  developer and investor
interest on the remaining undeveloped acres.

     Racing

     During  its  regular  legislative  session  that  ended in May 2005 and two
subsequent 30-day special sessions the Texas Legislature 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,  and full
casinos; however, the Legislature adjourned from its regular session and special
sessions of 2005 without enacting any such legislation. The next regular session
of the Texas  Legislature  will begin in January of 2007. The Company intends to
continue to vigorously  pursue any such legislation which is favorable to it. As
any  legislation  expanding  gaming in Texas may well  require  the  approval of
two-thirds of each  legislative  house and a majority of the state's voters,  no
assurance  can be given  that any such  legislation  will be  enacted  or become
effective.  Moreover,  it is impossible to determine  what the provisions of any
such legislation will be or its effect on the Company.

Contractual Obligations

     At January 1, 2005,  the Company  entered into an  operating  lease for its
Corporate  offices.  The  lease  began on  January  1,  2005 and  terminates  on
September  30, 2015.  Minimum  annual rental  payments  under the lease are $0.1
million in 2005 and escalate to a maximum of $0.4 million in 2014.

Critical Accounting Policies and Estimates

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

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  Revolving  Credit  Facility and Term Loan, as
well as certain other debt  facilities  used to finance real estate  development
activities.  As of September  30, 2005,  there were $96.4  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, 2005, 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 $0.6 million.

ITEM 4.   CONTROLS AND PROCEDURES

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

     As of the end of the period covered by this report,  our management carried
out an  evaluation,  under the  supervision  and with the  participation  of the
Company's management,  including our Chief Executive Officer and Chief Financial
Officer,  of the  effectiveness  of the design and  operation  of the  Company's
disclosure  controls and procedures.  Based on the  evaluation,  our management,
including our Chief  Executive  Officer and Chief Financial  Officer,  concluded
that the  Company's  disclosure  controls and  procedures  were  effective as of
September 30, 2005.

     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 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     The Company may from time to time  purchase  shares of its Common  Stock on
national  exchanges or in  privately  negotiated  transaction.  Through the nine
months ended  September  30,  2005,  the Company  purchased  8,600 shares of its
Common Stock at $22.05 per share for a total of $0.2 million in June 2005.

ITEM 6.   EXHIBITS

      a.  Exhibits:

          10.1 Omnibus  Amendment  to  Revolving  Credit  Agreement,  Term  Loan
               Agreement,  Intercreditor  Agreement and Guarantee and Collateral
               Agreements (incorporated herein by reference to Exhibit 10.1 to a
               Current Report on Form 8-K of the Company dated October 26, 2005)

          * 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

                            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 9, 2005   By:          /S/  PAUL N. SCHWARTZ
                         ---------------------------------------------------
                                              Paul N. Schwartz
                             President, Chief Financial Officer and Director
                                       (Principal Financial Officer)

Date: November 9, 2005    By:       /S/          M. EMILY MADISON
                          -------------------------------------------------
                                                M. Emily Madison
                                             Vice President, Finance
                                          (Principal Accounting Officer)

                                    APPENDIX A

                            Glossary of Defined Terms

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

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

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

Bankruptcy Code:  The United States Bankruptcy Code

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) filed
in the U.S. District Court for the Northern District of California

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

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

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

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

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

CBD: Center for Biological Diversity

CDF: California Department of Forestry and Fire Protection

CDF Harvest Limit: Annual harvest limit established by the CDF

CDFG: California Department of Fish and Game

CESA: California Endangered Species Act

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

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

Company:  MAXXAM Inc., including its subsidiaries

Consistency  Determinations:  Documents  issued by CDFG in  February  2005 which
stated that as long as Palco continues to follow the requirements of its HCP and
has Federal  Permits (which were  unaffected by the EPIC  SYP/Permits  lawsuit),
then Palco meets all  requirements  under CESA for the  incidental  take of coho
salmon or the marbled murrelet.

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

CWA:  Federal Clean Water Act

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

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

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

Environmental Plans:  The HCP and the SYP

EPA:  Federal Environmental Protection Agency

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

EPIC-USFWS/NOAA lawsuit: An action entitled Environmental Protection Information
Center  v. U.S.  Fish  &  Wildlife  Service,  NOAA  Fisheries,  et al.  (No.
C04-4647) filed in U.S. Court for the Northern District of California

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

FASB:  Financial Accounting Standards Board

FDIC:  Federal Deposit Insurance Corporation

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

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

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

FireRock  LLC: A 50% owned  joint  venture  which  developed  and manages a real
estate project in Arizona

Form 10-K:  Annual  Report on Form 10-K of the Company for the fiscal year ended
December 31, 2004

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

FSP FAS  106-2:  FASB  Staff  Position  FAS 106-2,  "Accounting  and  Disclosure
Requirements  Related  to  the  Medicare  Prescription  Drug,   Improvement  and
Modernization Act of 2003"

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

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

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

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

KACC: Kaiser Aluminum & Chemical  Corporation,  Kaiser's principal operating
subsidiary  Kahn  lawsuit:  An action  entitled  Alan Russell Kahn v.  Federated
Development  Co.,  MAXXAM Inc.,  et. al.  (Civil  Action  18623NC)  filed in the
Delaware Court of Chancery

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

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

LIBOR:  London Inter Bank Offering Rate

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

MAXXAM:  MAXXAM Inc., including its subsidiaries

MAXXAM Parent:  MAXXAM Inc., excluding its subsidiaries

Moody's:  Moody's Investors Service

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

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

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

NJDEP:  New Jersey Department of Environmental Protection

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

Noteholders: Holders of the Timber Notes

Noteholder Committee:  An ad hoc committee of holders of the Timber Notes

Omnibus  Amendment:  Amendment to Revolving  Credit  Facility and Term Loan (and
other loan documents) entered into on October 26, 2005

Option A Plan:  Palco's plan for complying  with  California's  sustained  yield
requirements, which has been approved by the CDF

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

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

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

Palco Companies:  Palco, Scotia LLC and Salmon Creek, collectively

Palco Credit Agreement: January 2004 revolving credit facility between Palco and
a bank which  provided for  borrowings up to $30.0  million,  which facility was
terminated in connection  with the closing of the Revolving  Credit Facility and
Term Loan

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

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

Prescription   Drug  Act:   Medicare   Prescription   Drug,   Improvement,   and
Modernization  Act of 2003

PSLRA: Private Securities Litigation Reform Act of 1995

Racing Act:  The Texas Racing Act and related regulations

Respondents:   The  Company,  Federated,  Mr.  Charles  Hurwitz  and  the  other
respondents in the OTS action

Revolving  Credit  Agreement:  The agreement  evidencing  the  Revolving  Credit
Facility

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

RI/RA:  Remedial investigation and remedial action

S&P:  Standard & Poor's Rating Service

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

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

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

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

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

Scheduled  Amortization:  The  amount of  principal  which  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 Palco

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 due on the Timber Notes

Scotia LLC Timber:  The timber in respect of the Scotia LLC  Timberlands and the
Scotia LLC Timber Rights

Scotia LLC  Timberlands:  Approximately  204,000 acres of  timberlands  owned by
Scotia LLC

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

SEC:  The Securities and Exchange Commission

Services  Agreement:  Agreement  between Scotia LLC and Palco  provides  certain
operational,  management and related  services to Scotia LLC with respect to the
Scotia LLC Timberlands

SFAS:  Statement of Financial Accounting Standards

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

SFAS No. 151:  SFAS No. 151, "Inventory Costs"

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

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

State: State of California

State Water Board:  California State Water Resources Control Board

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

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

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

Texas Racing Commission:  The Racing Commission of the State of Texas

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)  filed 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

Trustee:  The trustee under the Timber Notes Indenture

UBS:  UBS Securities LLC

USAT:  United Savings Association of Texas

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

WWDRs:  Watershed-wide waste discharge requirements
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