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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, 2004

                          Commission File Number 1-3924


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



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

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


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


         Indicate by check mark whether the Registrant (1) has filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2)has been subject to such filing requirements for the past 90 days.
Yes |X|   No |_|

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

         The aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, as of the last business day of the registrant's most
recently completed second fiscal quarter: $82.4 million.


   Number of shares of common stock outstanding at November 5, 2004: 5,976,466


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


                                TABLE OF CONTENTS



PART I. - FINANCIAL INFORMATION

         Item 1.   Financial Statements:
                    Consolidated Balance Sheet
                    Consolidated Statement of Operations
                    Consolidated Statement of Cash Flows
                    Condensed Notes to Consolidated Financial Statements

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

         Item 3.   Quantitative and Qualitative Disclosures About Market Risk

         Item 4.   Controls and Procedures

PART II. - OTHER INFORMATION

         Item 1.   Legal Proceedings
         Item 2.   Unregistered Sales of Equity Securities 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,
                                                                                          2004             2003
                                                                                      ------------     ------------
                                                                                              (UNAUDITED)

ASSETS
Current assets:
   Cash and cash equivalents....................................................      $      35.9      $      35.0
   Marketable securities and other short-term investments.......................             96.9            116.9
   Receivables:
      Trade, net of allowance for doubtful accounts of $0.4 for both periods....             11.7             12.4
      Other.....................................................................              2.7              2.6
   Inventories:
      Lumber....................................................................             15.2             17.7
      Logs......................................................................             16.0             11.8
   Prepaid expenses and other current assets....................................             29.0             31.6
                                                                                      ------------     ------------
        Total current assets....................................................            207.4            228.0
Property, plant and equipment, net of accumulated depreciation of $180.5 and
   $164.6, respectively.........................................................            372.2            367.9
Timber and timberlands, net of accumulated depletion of $220.2 and $214.2,
   respectively.................................................................            215.0            217.9
Real estate.....................................................................             64.9             68.1
Deferred income taxes...........................................................             95.2             95.2
Restricted cash, marketable securities and other investments....................             22.0             43.6
Long-term receivables and other assets..........................................             40.3             40.1
                                                                                      ------------     ------------
                                                                                      $   1,017.0      $   1,060.8
                                                                                      ============     ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable.............................................................      $      10.9      $      10.8
   Accrued interest.............................................................             11.6             25.8
   Accrued compensation and related benefits....................................             15.4             12.8
   Other accrued liabilities....................................................             28.7             23.4
   Short-term borrowings and current maturities of long-term debt...............             69.0             28.5
                                                                                      ------------     ------------
        Total current liabilities...............................................            135.6            101.3
Long-term debt, less current maturities.........................................            916.6            953.5
Accrued pension and other postretirement benefits...............................             36.4             32.9
Losses in excess of investment in Kaiser........................................            516.2            516.2
Other noncurrent liabilities....................................................             61.4             58.8
                                                                                      ------------     ------------
        Total liabilities.......................................................          1,666.2          1,662.7
                                                                                      ------------     ------------

Commitments and contingencies (see Note 9)

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; 669,040 shares issued; 668,195 shares outstanding........              0.3              0.3
   Common stock, $0.50 par value; 13,000,000 shares authorized; 10,063,359 shares
      issued; 5,976,466 shares outstanding......................................              5.0              5.0
   Additional capital...........................................................            225.3            225.3
   Accumulated deficit..........................................................           (665.6)          (619.8)
   Accumulated other comprehensive loss.........................................            (89.5)           (88.0)
   Treasury stock, at cost (shares held:  preferred - 845; common - 4,086,893)..           (124.7)          (124.7)
                                                                                      ------------     ------------
        Total stockholders' deficit.............................................           (649.2)          (601.9)
                                                                                      ------------     ------------

                                                                                      $   1,017.0      $   1,060.8
                                                                                      ============     ============


   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,
                                                                            ------------------------  ------------------------
                                                                                2004         2003         2004        2003
                                                                            -----------  -----------  ----------- ------------
                                                                                               (UNAUDITED)

Net sales:
   Forest products......................................................     $     49.6   $     56.1   $    149.2  $     156.6
   Real estate..........................................................           20.3         20.4         55.1         48.7
   Racing...............................................................           11.6         12.9         38.6         37.5
                                                                              ----------  -----------  ----------- ------------
                                                                                   81.5         89.4        242.9        242.8
                                                                              ----------  -----------  ----------- ------------
Costs and expenses:
   Cost of sales and operations:
      Forest products...................................................           36.9         38.4        109.7        106.2
      Real estate.......................................................            8.5          5.8         20.0         18.0
      Racing............................................................           10.0         10.6         32.2         30.8
   Selling, general and administrative expenses.........................           19.1         15.3         53.6         45.3
   Gain on sales of timberlands and other assets........................           (0.2)        (0.1)        (0.2)        (0.9)
   Impairment of assets.................................................              -          1.4            -          1.4
   Depreciation, depletion and amortization.............................            8.7          9.1         26.6         27.9
                                                                              ----------  -----------  ----------- ------------
                                                                                   83.0         80.5        241.9        228.7
                                                                              ----------  -----------  ----------- ------------
Operating income (loss):
   Forest products......................................................            1.0          6.8          3.2         16.9
   Real estate..........................................................            3.2          4.9         10.3          4.3
   Racing...............................................................           (1.5)        (0.7)        (1.7)        (1.3)
   Corporate............................................................           (4.2)        (2.1)       (10.8)        (5.8)
                                                                              ----------  -----------  ----------- ------------
                                                                                   (1.5)         8.9          1.0         14.1
Other income (expense):
   Investment and interest income (loss)................................           (0.3)         3.1          5.3          8.2
   Other income.........................................................            0.3          0.7          3.7         10.7
   Interest expense.....................................................          (18.0)       (18.5)       (54.0)       (56.3)
   Amortization of deferred financing costs.............................           (0.6)        (0.5)        (1.7)        (1.6)
                                                                              ----------  -----------  ----------- ------------
Loss before income taxes................................................          (20.1)        (6.3)       (45.7)       (24.9)
Provision for income taxes..............................................           (0.1)           -         (0.1)           -
                                                                              ----------  -----------  ----------- ------------
Net loss................................................................     $    (20.2)  $     (6.3)  $    (45.8) $     (24.9)
                                                                              ==========  ===========  =========== ============

Basic and diluted loss per common and common
   equivalent share ....................................................     $    (3.37)  $    (0.96)  $    (7.66) $     (3.81)
                                                                              ==========  ===========  =========== ============


   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,
                                                                                        ---------------------------
                                                                                           2004             2003
                                                                                        ----------       ----------
                                                                                                (UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss.....................................................................        $   (45.8)       $   (24.9)
   Adjustments to reconcile net loss to net cash used for operating activities:
   Depreciation, depletion and amortization.....................................             26.6             27.9
   Gain on sales of timberlands and other assets................................             (0.2)            (0.9)
   Net losses (gains) on marketable securities..................................              0.7            (13.5)
   Amortization of deferred financing costs.....................................              1.7              1.6
   Equity in (earnings) loss of unconsolidated affiliates, net of dividends
      received..................................................................              1.1             (1.2)
   Reserve for environmental remediation........................................              1.9                -
   Other........................................................................             (0.1)               -
   Increase (decrease) in cash resulting from changes in:
      Receivables...............................................................              1.1              2.0
      Inventories...............................................................             (1.8)             3.4
      Prepaid expenses and other assets.........................................              0.4              1.2
      Accounts payable..........................................................              0.1              0.6
      Other accrued liabilities.................................................              4.4             (2.8)
      Accrued interest..........................................................            (14.2)           (13.8)
      Long-term assets and long-term liabilities................................              9.7              4.8
      Other.....................................................................             (0.2)             0.9
                                                                                        ----------       ----------
      Net cash used for operating activities....................................            (14.6)           (14.7)
                                                                                        ----------       ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net proceeds from dispositions of property and investments...................              0.2              3.5
   Net sales of marketable securities and other investments.....................             21.2              1.2
   Capital expenditures.........................................................            (27.3)           (14.5)
   Other........................................................................              0.3              0.3
                                                                                        ----------       ----------
      Net cash used for investing activities....................................             (5.6)            (9.5)
                                                                                        ----------       ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuances of long-term debt....................................              3.1              1.2
   Redemptions, repurchases of and principal payments on long-term debt.........            (37.2)           (24.4)
   Borrowings under revolving and short-term credit facilities..................             42.6             20.3
   Restricted cash withdrawals, net.............................................             13.4             11.8
   Other........................................................................             (0.8)            (0.2)
                                                                                           ----------   ----------
      Net cash provided by financing activities.................................             21.1              8.7
                                                                                           ----------   ----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................              0.9            (15.5)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD............................             35.0             45.6
                                                                                        ----------       ----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD..................................        $    35.9        $    30.1
                                                                                        ==========       ==========

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   Repurchases of debt using restricted cash....................................        $     4.8        $     3.4
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid, net of capitalized interest...................................        $    68.3        $    70.1


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





                          MAXXAM INC. AND SUBSIDIARIES

              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    BASIS OF PRESENTATION

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

      The consolidated financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary for a fair presentation of the consolidated
financial position of the Company at September 30, 2004, the consolidated
results of operations for the three and nine months ended September 30, 2004 and
2003, and the consolidated cash flows for the nine months ended September 30,
2004 and 2003.

      Reclassifications
      Certain reclassifications have been made to the consolidated financial
statements of prior periods to be consistent with the current period's
presentation. Pari-mutuel commissions for the Company's racing segment have been
reclassified and presented on a gross basis to reflect current industry
reporting practice. Revenues from pari-mutuel commissions were previously
reported net of pari-mutuel costs and expenses. Pari-mutuel costs and expenses
have been reclassified as costs of sales and operations.

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

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

      The Company expects it will consider reversal of its losses in excess of
its investment in Kaiser when either: (1) Kaiser's bankruptcy is resolved and
the amount of the Company's remaining investment in Kaiser is determined or (2)
the Company disposes of its shares of Kaiser common stock. Accordingly, these
consolidated financial statements do not reflect any adjustments related to the
deconsolidation of Kaiser other than presenting the Company's investment in
Kaiser using the cost method. When either of the events described above occurs,
the Company will re-evaluate the appropriate accounting treatment of its
investment in Kaiser based upon the facts and circumstances at such time. It
is likely that the Company's ownership interest in Kaiser will be cancelled. In
such event, the Company will reverse the $516.2 million of losses in excess of
its investment in Kaiser, and recognize the entire amount in income for the
period. Such benefit would be reduced, however, by losses, if any, related to
Kaiser which the Company estimates it would be obligated to fund. See Note 8 for
further discussion of the Company's investment in Kaiser.

2.    NEW ACCOUNTING STANDARDS

      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 for which (1) 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 (2) 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 is effective for the first interim period beginning after
June 15, 2004. The Company has concluded that the benefits provided by the
Company's plan are actuarially equivalent to Medicare Part D, and that the
effects of the subsidy provided by the Prescription Drug Act on its accumulated
postretirement benefit obligation and net periodic benefit cost are not
material.

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, 2004...................................................     $    4.8    $ 3.5  $   0.4    $       -    $     8.7
   September 30, 2003...................................................          5.1      3.6      0.4            -          9.1

Depreciation, depletion and amortization for the nine months ended:
   September 30, 2004...................................................         14.8     10.5      1.3            -         26.6
   September 30, 2003...................................................         15.8     10.8      1.2          0.1         27.9

Total assets as of:
   September 30, 2004...................................................        458.6    342.9     33.4        182.1      1,017.0
   December 31, 2003....................................................        483.6    359.5     33.6        184.1      1,060.8

      Forest Products
      During the second quarter of 2004, Palco implemented a voluntary reduction
in workforce related to the curtailment of production at Palco's Carlotta mill.
In connection with the reduction, Palco charged $1.4 million against earnings
for employee severance and benefit costs. This amount is reflected in selling,
general and administrative expenses in the Consolidated Statement of Operations
for the nine months ended September 30, 2004. The employee severance and benefit
costs were related to the termination of approximately 107 regular employees,
the majority of whom were engaged in direct manufacturing activities at Palco's
sawmill facilities. As of September 30, 2004, all of the $1.4 million in
severance and benefits had been paid.

      Real Estate
      In April 2004, a subsidiary of the Company and a third party real estate
development company formed a joint venture to develop a residential parcel
located in the Mirada development. The Company is accounting for the joint
venture under the equity method. In connection with the formation of the joint
venture, the Company sold a 50% interest in the parcel for $4.5 million and
contributed the remainder of the parcel to the joint venture in return for a 50%
interest in the venture.

      In connection with the 2003 lease termination of the Company's casino
facility at its Palmas del Mar operation in Puerto Rico, the Company recorded a
charge to operating expense of $1.4 million in the third quarter of 2003 related
to the write-down of casino related assets to estimated fair value.

      Corporate
      In connection with a suit filed by the Company against a group of its
insurers in which it sought reimbursement of expenses related to the OTS and
FDIC actions, the Company settled with the insurers for $8.0 million in the
first quarter of 2003. This amount is reflected in other income in the
Consolidated Statement of Operations.

      The Company recorded a charge to operating expense of $1.9 million in the
third quarter of 2004 in connection with an environmental matter associated with
a former subsidiary of the Company. See Note 9 for further discussion.

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

      In addition to the non-current restricted cash, marketable securities and
other investments reflected on the Company's balance sheet, the following
current amounts are restricted under various agreements (in millions):


                                                                                     SEPTEMBER 30,     DECEMBER 31,
                                                                                          2004             2003
                                                                                      ------------     ------------

Cash and cash equivalents.......................................................      $       4.2      $       4.0
Marketable securities and other short-term investments..........................             25.1             22.2

5.    DEBT

      At September 30, 2004, $12.1 million in borrowings and $0.3 million in
letters of credit were outstanding under the Palco Credit Agreement. In
accordance with the agreement, Palco is required to maintain a certain base
level of borrowings through February 12, 2005, based on certain collateral
balances. Palco is also required to meet certain quarterly earnings thresholds
under a covenant of the Palco Credit Agreement. Palco was in compliance with
these covenants at September 30, 2004.

      At September 30, 2004, Scotia LLC had unused availability of $25.6 million
under the Scotia LLC Line of Credit, and there was $31.4 million outstanding
under this facility.

      During the first nine months of 2004, $4.8 million of funds from the SAR
Account were used to repurchase $5.0 million principal amount of Timber Notes,
as permitted under the Timber Notes Indenture, resulting in a small gain (net of
unamortized deferred financing costs) on the repurchase of debt, which is
included in other income in the accompanying financial statements.

      Subsequent to September 30, 2004, $5.7 million of funds from the SAR
Account were used to repurchase $5.7 million principal amount of Timber Notes,
as permitted under the Timber Notes Indenture, resulting in a loss of $0.3
million (net of unamortized deferred financing costs) on the repurchased debt.

6.    INCOME TAXES

      The Company generated a loss before income taxes of $20.1 million for the
third quarter and $45.7 million for the first nine months of 2004; however, the
Company has recorded no tax benefit associated with the loss for these periods.
Each period, the Company evaluates appropriate factors in determining the
realizability of the deferred tax assets attributable to losses and credits
generated in the current period and those being carried forward. These factors
are discussed further in Note 10 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 three and nine months ended
September 30, 2004. These valuation allowances were in addition to the valuation
allowances which were provided in prior years.

7.    EMPLOYEE BENEFIT PLANS

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

                                                            MEDICAL/LIFE                            MEDICAL/LIFE
                                       PENSION BENEFITS       BENEFITS        PENSION BENEFITS        BENEFITS
                                       ----------------  ------------------  -----------------   ------------------
                                         THREE MONTHS ENDED SEPTEMBER 30,        NINE MONTHS ENDED SEPTEMBER 30,
                                       ------------------------------------  --------------------------------------
                                         2004    2003      2004      2003      2004     2003       2004      2003
                                       ------- --------  --------  --------  -------- --------   -------- ---------
Components of net periodic benefit costs:
   Service cost....................... $  0.7  $   0.7   $   0.1   $   0.1   $   2.1  $   2.1    $   0.3  $    0.3
   Interest cost......................    1.4      1.3       0.2       0.2       4.2      3.9        0.6       0.6
   Expected return on assets..........   (1.3)    (1.2)        -         -      (3.9)    (3.6)         -         -
   Amortization of prior service costs      -        -      (0.1)        -         -        -       (0.3)        -
   Recognized net actuarial loss......      -        -         -         -       0.1        -          -         -
   Curtailment........................      -        -         -         -         -        -       (0.1)        -
                                       ------- --------  --------  --------  -------- --------   -------- ---------
   Net periodic benefit costs......... $  0.8  $   0.8   $   0.2   $   0.3   $   2.5  $   2.4    $   0.5  $    0.9
                                       ======= ========  ========  ========  ======== ========   ======== =========

      Through October 31, 2004, the Company had contributed $1.0 million to such
plans. Management expects that no additional contributions to the Company's
benefit plans will be made in 2004.

8.    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
Code. The Debtors currently believe that, with limited exceptions, it is likely
that substantially all pre-Filing Date claims will be settled at less than 100%
of their face value and the equity interests of Kaiser's stockholders, including
the Company, will be cancelled without consideration.

      As provided by the Code, the Debtors had the exclusive right to propose a
plan of reorganization for 120 days following the initial Filing Date. The
Bankruptcy Court has subsequently approved several extensions of the exclusivity
period for the Debtors. Most recently, the Bankruptcy Court approved an
extension of exclusivity as to all Debtors to February 28, 2005, but the
approved order provides that exclusivity can be terminated earlier with
respect to certain Debtors in accordance with the terms of an intercompany
settlement agreement that is pending before the Bankruptcy Court. Kaiser has
indicated that additional extensions may be sought. However, no assurance can be
given that any such future extension requests will be granted by the Bankruptcy
Court. If the Debtors fail to file a plan of reorganization during the exclusivity
period, or if such plan is not accepted by the requisite number of creditors and
equity holders entitled to vote on the plan, other parties in interest in the
Cases may be permitted to propose their own plan(s)of reorganization for the Debtors.

      Kaiser's common stock is publicly traded on the OTC Bulletin Board under
the trading symbol "KLUCQ." The market value for the 50,000,000 Kaiser Shares,
based on the price per share quoted at the close of business on November 5,
2004, was $2.5 million. There can be no assurance that such value would be
realized should the Kaiser Shares be sold.

      Since Kaiser's results are no longer consolidated with the Company's
results, and the Company believes it is not probable that it will be obligated
to fund losses related to its investment in Kaiser, any material uncertainties
related to Kaiser are not expected to impact the Company's financial results.

9.    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, the Company prepared THPs in
accordance with the SYP. The SYP was intended to comply with regulations of the
California Board of Forestry and Fire Protection requiring timber companies to
project timber growth and harvest on their timberlands over a 100-year planning
period and to demonstrate that their projected average annual harvest for any
decade within a 100-year planning period would not exceed the average annual
growth level during the last decade of the 100-year planning period. The forest
practice rules allow companies which do not have a sustained yield plan to
follow an alternative procedure 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. As a result of an earlier stay order issued in this case,
Palco has since October 2002 been obtaining review and approval of THPs under
this alternative procedure and expects to follow this procedure for the
foreseeable future.

      The HCP and related Federal Permits allow incidental "take" of certain
federally listed species located on the Company's 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 required in connection
with the implementation of the Environmental Plans, and this work could continue
for several more years.

      Water Quality
      Laws and regulations dealing with water quality are impacting the Company
primarily in three areas: efforts by the EPA and the North Coast Water Board to
establish TMDLs in water courses 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 Company's timberlands and
in some cases, clean-up or prevention measures; and other actions by the North
Coast Water Board during the THP approval process which impose certain
operational requirements on individual THPs.

      Under the California Water Quality Control Act and the CWA, the EPA is
required to establish the TMDLs in water courses that have been declared to be
"water quality impaired." The EPA and the North Coast Water Board are in the
process of establishing TMDLs for many northern California rivers and certain of
their tributaries, including nine water courses that flow within the Company's
timberlands. The Company expects this process to continue into 2010. The final
TMDL requirements applicable to the Company's timberlands may require aquatic
protection measures that are different from or in addition to those in the HCP
or that result from the prescriptions to be developed pursuant to the watershed
analysis process provided for in the HCP.

      Since the 2002-2003 winter operating period, Palco has been required to
submit "Reports of Waste Discharge" to the North Coast Water Board each year in
order to conduct winter harvesting activities in the Elk River and Freshwater
watersheds. After consideration of these reports, the North Coast Water Board
imposed requirements on Palco to implement additional mitigation and erosion
control practices in these watersheds for the last two winter operating periods.
In addition, the North Coast Water Board has extended the requirements for
certain mitigation and erosion control practices to the Bear, Jordan and Stitz
watersheds. Reporting and mitigation requirements imposed by the North Coast
Water Board have modestly increased operating costs and may in the future
further increase costs, cause delays in THP approvals or lower harvest levels.
In addition, the North Coast Water Board has issued the Elk River Order which is
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 increased costs. Palco's
appeal of the Elk River Order to the State Water Board was denied. Palco is in
the process of appealing in state court the decision of the State Water Board.
These matters could reduce harvest levels as Palco is not able to readily move
its harvesting activities between watersheds due to, among other things,
historic harvest patterns, adjacency restrictions, and the age classes of trees.

      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 Company's
timberlands are classified as 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.

      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 judicial and administrative proceedings are pending which could
have the result of preventing the Company from implementing the HCP,
implementing certain of the Company's approved THPs, or carrying out certain
other operations.

      In March 1999, the EPIC-SYP/Permits lawsuit was filed. This action
alleged, among other things, various violations of the CESA and the California
Environmental Quality Act, and challenged, among other things, the validity and
legality of the SYP and the California Permits. The plaintiffs sought, among
other things, to set aside California's approval of the SYP and the California
Permits and injunctive relief to prevent implementation of THPs approved in
reliance upon these documents. In March 1999, the USWA lawsuit, a similar
action, was filed challenging the validity and legality of the SYP. The
EPIC-SYP/Permits and USWA lawsuits were consolidated for trial. On October 31,
2003, the Court entered a judgment invalidating the SYP and the California
Permits due to several deficiencies in agency procedures and the failure of
Palco to submit a complete and comprehensible SYP. The Court's decision,
however, allowed for harvesting on THPs which rely on the SYP and were approved
prior to July 23, 2003. The short-term effect of the ruling was to preclude
approval, under the SYP, of a small number of THPs which were under review but
had not been approved, and a minor reduction in 2003 harvesting that had been
expected from these specific THPs. As a result of this case, Palco 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 a procedure provided
for in the forest practice rules that does not depend upon the SYP and the
California Permits and expects to follow this procedure for the foreseeable future.
In November 2003, Palco appealed the October 31, 2003, decision. In January 2004,
the plaintiffs in these lawsuits filed claims against the defendants totaling
$5.8 million for reimbursement of attorneys fees and other expenses incurred in
connection with these matters, and the trial judge granted the request for
reimbursement on September 24, 2004. Palco and the State of California have
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 Palco's harvesting and other
forestry activities under certain of its approved THPs will result in discharges
of pollutants in violation of the CWA. The plaintiff asserts that the CWA
requires the defendants to obtain a permit from the North Coast Water Board
before beginning timber harvesting and road construction activities and is
seeking to enjoin these activities until such permit has been obtained. The
plaintiff also seeks civil penalties of up to $27,500 per day for the
defendant's alleged continued violation of the CWA. 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. Should the decision
ultimately become final and held to apply to all Palco's timber operations, it
may have some or all of the following effects: impose additional permitting
requirements, delay approvals of THPs, increase harvesting costs, and add water
protection measures beyond those contained in the HCP. Nonetheless, 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 the Company's belief that the requirements under the HCP are
adequate to ensure that sediment and pollutants from its harvesting activities
will not reach levels harmful to the environment. 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.

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

      In February 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 Palco, Scotia LLC and Salmon Creek used certain unfair business
practices in connection with completion of the Headwaters Agreement, and that
this resulted in the ability to harvest significantly more trees under the
Environmental Plans than would have otherwise been the case. The suit 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. In response to motions filed by Palco for
sanctions and dismissal of this suit, on April 30, 2004, the Court issued a
ruling requiring the District Attorney to amend his suit to prove that
"extrinsic" fraud occurred. In addition, the Court eliminated the remedies being
sought, other than for civil penalties, and suggested that it would be
inappropriate to base civil penalties on the additional trees harvested. The
Court also ruled that it declined "at this juncture" to impose sanctions on the
District Attorney. The Company believes that this suit is without merit and that
the April 30 ruling diminished significantly its exposure with respect to this
matter; however, there can be no assurance that Palco will ultimately prevail or
that an adverse outcome would not be material to the Company's consolidated
financial condition, results of operations and/or liquidity.

      In December 2003, the HWC 2003 lawsuit, naming Palco as a real party in
interest, was filed. The plaintiffs allege that the North Coast Water Board
should have required waste discharge reports in respect of all timber harvesting
activities in the Freshwater and Elk River watersheds, and are seeking to have
this requirement imposed on Palco. The Company does not believe that the
resolution of this action should result in a material adverse effect on its
financial condition, results of operations or liquidity.

      On November 2, 2004, the EPIC-USFWS/NOAA lawsuit was filed. The 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 that Palco 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 Palco to cease certain alleged unlawful
activities, as well as restitution and remediation by Palco. Palco is still in
the process of evaluating this lawsuit.

      The Van Duzen THPs lawsuit was filed on November 4, 2004, seeking a writ of
mandate to stay or set aside CDF's approval of six THPs along the Van Duzen
River submitted by Palco. The plaintiffs allege that these THPs rely on
information submitted to CDF by Palco intended to demonstrate Palco's compliance
with California's sustained yield requirements that was not made available for
public review and comment. In addition to the relief described above, the
plaintiffs seek a writ of mandate ordering CDF to conduct further review and
analysis of the six THPs and to refrain from reliance on the information not
made public. Palco is still in the process of evaluating this lawsuit.

      In November 2001, Palco filed the THP No. 520 lawsuit alleging that the
State Water Board had no legal authority to impose mitigation measures that were
requested by the staff of the North Coast Water Board during the THP review
process and rejected by the CDF. When the staff of the North Coast Water Board
attempted to impose these mitigation measures in spite of the CDF's decision,
Palco appealed to the State Water Board, which imposed certain of the requested
mitigation measures and rejected others. Palco filed the THP No. 520 lawsuit
challenging the State Water Board's decision, and in January 2003, the Superior
Court granted Palco's 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 Superior 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 has
filed a petition for review of the appellate court's decision by the California
Supreme Court, which has agreed to review the decision.

      OTS Contingency and Related Matters
      In 1995, the OTS initiated the OTS action against the Respondents and
others with respect to the failure of USAT. The OTS sought damages ranging from
$326.6 million to $821.3 million under various theories. On October 17, 2002,
the OTS action was settled for $0.2 million with no admission of wrongdoing on
the part of the Respondents. Also in 1995, the FDIC filed the FDIC action
alleging damages in excess of $250.0 million based on the allegation that Mr.
Charles Hurwitz (Chairman and Chief Executive Officer of the Company) was a
controlling shareholder, de facto senior officer and director of USAT, and was
involved in certain decisions which contributed to the insolvency of USAT. The
FDIC action has been dismissed as a result of the settlement of the OTS action.
This dismissal does not affect the Sanctions Motion described in the following
paragraph.

      In connection with the FDIC action, the Respondents filed the Sanctions
Motion which states that the FDIC illegally paid the OTS to bring claims against
the Respondents and that the FDIC illegally sued for an improper purpose. The
Respondents are seeking as a sanction to be made whole for the attorneys' fees
they have paid (plus interest) in connection with the OTS and FDIC actions. As
of September 30, 2004, such fees were in excess of $40.8 million. The
Respondents are pursuing this claim vigorously.

      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.

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

      Other Matters
      On September 2, 2004, the Company was advised that 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 property 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 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. Such
investigation is anticipated to take several months to complete. Selling, general
and administrative expenses for the three and nine months ended September 30,
2004, included $1.9 million related to this matter.

      On January 21, 2004, the owner of the Candelero Hotel located at Palmas
filed a lawsuit against PDMPI claiming an easement on certain property owned by
PDMPI. The trial court subsequently ruled that the hotel owner has rights to the
easement. The lawsuit also included a claim for damages. On September 30, 2004,
this matter was settled by an agreement in which the hotel owner dismissed all
of its claims and agreed to purchase for $9.0 million a parcel of land that
included the area covered by the alleged easement. This transaction closed in
November 2004 and resulted in no loss to PDMPI.

      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.

10.   STOCK-BASED COMPENSATION PLANS

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


                                                                                THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                                   SEPTEMBER 30,             SEPTEMBER 30,
                                                                               ----------------------   -----------------------
                                                                                  2004         2003         2004        2003
                                                                               ---------     --------   ----------   ----------
Net loss, as reported...................................................      $   (20.2)    $   (6.3)   $   (45.8)   $   (24.9)
   Add: Stock-based employee compensation expenses included in
      reported net loss, net of related tax effects.....................            0.4            -          2.3            -
   Deduct: Total stock-based employee compensation expense
      determined under the fair value method for all awards, net of related
      tax effects.......................................................           (0.4)        (0.4)        (1.3)        (1.3)
                                                                               ---------     --------    ---------    ---------
Pro forma net loss......................................................      $   (20.2)    $   (6.7)   $   (44.8)   $   (26.2)
                                                                               =========     ========    =========    =========

Basic and diluted loss per share:
   As reported..........................................................      $   (3.37)    $  (0.96)   $   (7.66)   $   (3.81)
   Pro forma............................................................          (3.38)       (1.03)       (7.49)       (4.02)

11.   PER SHARE INFORMATION

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



                                                                               THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                                   SEPTEMBER 30,             SEPTEMBER 30,
                                                                             ------------------------ -------------------------
                                                                                 2004          2003        2004         2003
                                                                             -----------  ----------- ------------ ------------
Weighted average shares outstanding:
   Common Stock.........................................................      5,976,466    6,517,691    5,976,466    6,522,435
   Effect of dilution:
      Class A Preferred Stock (1).......................................              -            -            -            -
                                                                             -----------  -----------   ----------   ----------
Weighted average number of common and common equivalent
   shares - Basic earnings per share....................................      5,976,466    6,517,691    5,976,466    6,522,435
   Effect of dilution:
      Stock options (1).................................................              -            -            -            -
                                                                             -----------  -----------   ----------   ----------
Weighted average number of common and common equivalent
   shares - Diluted earnings per share..................................      5,976,466    6,517,691    5,976,466    6,522,435
                                                                             ===========  ===========   ==========   ==========

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

(1)     The Class A Preferred Stock and options were not included in the
        computation of basic or diluted earnings per share because the Company
        had a loss for the three and nine months ended September 30, 2004 and
        2003, respectively.

12.   COMPREHENSIVE LOSS

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


                                                                                 THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                                    SEPTEMBER 30,             SEPTEMBER 30,
                                                                               ----------------------    ----------------------
                                                                                  2004         2003         2004         2003
                                                                               ---------     --------    ---------    ---------
Net loss:...............................................................      $   (20.2)    $   (6.3)   $   (45.8)   $   (24.9)


   Other comprehensive income (loss):
      Unrealized gains (losses) on available-for-sale investments...                0.3         (0.4)        (1.5)         0.4
      Applicable income tax benefit (expense)...........................              -            -            -            -
                                                                               ---------     --------    ---------    ---------
Total comprehensive loss................................................      $   (19.9)    $   (6.7)   $   (47.3)   $   (24.5)
                                                                               =========     ========    =========    =========


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

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

      This Quarterly Report on Form 10-Q contains statements which constitute
"forward-looking statements" within the meaning of the PSLRA. These statements
appear in a number of places in this section and in Part II. Item 1. "Legal
Proceedings." Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will," "should,"
"plans" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. Readers are cautioned
that any such forward- looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and that actual
results may vary materially from the forward-looking statements as a result of
various factors. These factors include the effectiveness of management's
strategies and decisions, general economic and business conditions, developments
in technology, new or modified statutory or regulatory requirements, 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

      The Company operates in three industries: forest products, through MGI and
its wholly owned subsidiaries, principally Palco, Scotia LLC and Britt; real
estate investment and development, through various subsidiaries; 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, an integrated aluminum producer. All references to the "Company,"
"Kaiser," "MGHI," "MGI," "Palco," "MPC" and "SHRP, Ltd." 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 months ended September 30, 2004 and 2003 for the Company's consolidated
operations.


                                                                                THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                                   SEPTEMBER 30,               SEPTEMBER 30,
                                                                               --------------------       ---------------------
                                                                                  2004         2003        2004         2003
                                                                               ---------     --------    ---------   ----------

Net sales...............................................................      $    81.5     $   89.4    $   242.9    $   242.8
Costs and expenses......................................................          (83.2)       (80.5)      (242.1)      (228.7)
Gains on sales of timberlands and other assets..........................            0.2            -          0.2            -
                                                                               ---------     --------    ---------   ----------
Operating income........................................................           (1.5)         8.9          1.0         14.1
Other income, net.......................................................              -          3.8          9.0         18.9
Interest expense........................................................          (18.6)       (19.0)       (55.7)       (57.9)
                                                                               ---------     --------    ---------   ----------
Loss before income taxes................................................      $   (20.1)    $   (6.3)   $   (45.7)   $   (24.9)
                                                                              ==========    =========   ==========   ==========

      Deconsolidation of Kaiser
      See Notes 1 and 8 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 third quarter of 2004 totaled $81.5
million, compared to $89.4 million for the third quarter of 2003. Net sales for
the Company's forest products segment declined by $6.5 million due primarily to
a decrease in sales volumes of lumber as production levels were temporarily
adversely impacted by the transition to Palco's new sawmill. See Note 3 and Item
7. "Management Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition and Investing and Financing--Forest Products
Operations" of the Form 10-K for a discussion of Palco's new sawmill. Net sales
for the real estate segment were essentially unchanged, while net sales for the
racing segment decreased $1.3 million due to a decrease in average daily
attendance.

      Consolidated net sales for the nine months ended September 30, 2004
totaled $242.9 million, compared to $242.8 million for the prior year period.
Net sales for the Company's forest products segment decreased $7.4 million due
to decreases in lumber and log volumes and net sales of wood chips, cogeneration
power and other product lines. Net sales for the real estate segment increased
$6.4 million due to higher sales of real estate acreage and increases in net
sales from resort and commercial operations. Net sales for the racing segment
increased $1.1 million due to more live race days being held.

      Operating Income (Loss)
      The Company recorded an operating loss of $1.5 million in the third
quarter of 2004 compared to operating income of $8.9 million in the third
quarter of 2003. Operating results for the forest products segment declined by
$5.8 million, primarily as a result of lower lumber volumes and higher per unit
operating expenses due to Palco's transition of operations to its new sawmill
noted above. Operating income for the real estate segment declined by $1.7
million, driven largely by lower gross margins at Fountain Hills where real
estate sales were derived primarily from lot sales in 2004 versus acreage sales
in 2003, which contributed to higher operating income for that period. The
racing segment's operating loss increased from $0.7 million for the third quarter
of 2003 to $1.5 million for the third quarter of 2004 primarily due to the lower
average daily attendance noted above. The corporate segment's operating loss
increased $2.1 million due primarily to an accrual for an environmental matter
discussed under "Other Matters" in Note 9.

      The Company recorded operating income of $1.0 million for the nine months
ended September 30, 2004 compared to operating income of $14.1 million for the
prior year period. Operating results for the forest products segment declined by
$13.7 million, primarily as a result of lower lumber and log volumes and higher
per unit operating expenses noted above. The real estate segment recorded
operating income of $10.3 million versus operating income of $4.3 million for
the year-ago period primarily due to the increases in net sales noted above. The
racing segment's operating loss increased by $0.4 million despite the increase
in live race days noted above due to an increase in marketing and development
costs. The corporate segment's operating loss increased by $5.0 million due
primarily to an increase in stock-based compensation expense which is adjusted
as the market value of the Company's Common Stock changes and an accrual for an
environmental matter noted above.

      Loss Before Income Taxes
      The Company's consolidated loss before income taxes increased by $13.8
million in the third quarter of 2004 compared to the prior year third quarter,
principally due to the decrease in operating income for the forest products
segment, increased operating loss for the corporate segment, and a decline in
investment and interest income of $3.4 million.

      The Company's consolidated loss before income taxes increased by $20.8
million for the nine months ended September 30, 2004 compared to the prior year
period, as results for 2003 included income related to an $8.0 million
reimbursement from an insurer for certain costs incurred in connection with OTS
and FDIC actions. In addition, operating income for the forest products segment
decreased by $13.7 million, operating loss for the corporate segment increased
by $5.0 million, and investment and interest income declined by $2.9 million.
Results for the current period were favorably impacted, however, by a $6.0
million improvement in operating income for the real estate segment.

      FOREST PRODUCTS OPERATIONS

      Industry Overview and Selected Operational Data

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

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

      Regulatory and environmental matters as well as certain pending legal
matters play a significant role in the Company's forest products operations.
Furthermore, there can be no assurance that future governmental regulations,
legislation or judicial or administrative decisions, adverse weather conditions,
or low lumber or log prices, will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity. See Note 9
and Item 1. "Business - Forest Products Operations - Regulatory and
Environmental Factors" of the Form 10-K for a discussion of these matters.

      The following table presents selected operational and financial
information for the three and nine months ended September 30, 2004 and 2003, for
the Company's forest products operations.


                                                                              THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                                  SEPTEMBER 30,             SEPTEMBER 30,
                                                                           -------------------------- -------------------------
                                                                                2004         2003         2004         2003
                                                                           ------------- ------------ ------------ ------------
                                                                           (IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES)

Shipments:
   Lumber: (1)
      Redwood upper grades..............................................            4.7          7.5         14.2         19.8
      Redwood common grades.............................................           53.3         53.3        154.5        162.1
      Douglas-fir upper grades..........................................            0.4          1.3          1.7          2.9
      Douglas-fir common grades.........................................           10.6         12.9         39.1         32.9
      Other.............................................................              -          3.4          5.0          6.5
                                                                           ------------- ------------ ------------ ------------
   Total lumber.........................................................           69.0         78.4        214.5        224.2
                                                                           ============= ============ ============ ============
   Cogeneration power (2)...............................................           43.6         42.2        120.4        123.0
                                                                           ============= ============ ============ ============

Average sales price:
   Lumber: (3)
      Redwood upper grades..............................................   $      1,355  $     1,215  $     1,349  $     1,263
      Redwood common grades.............................................            616          632          615          602
      Douglas-fir upper grades..........................................            971        1,078        1,060        1,321
      Douglas-fir common grades.........................................            501          366          453          348
   Cogeneration power (4)...............................................             66           65           65           64

Net sales:
   Lumber, net of discount..............................................   $       44.0  $      48.6  $     133.6  $     137.8
   Logs.................................................................            1.2          3.0          3.6          4.9
   Cogeneration power...................................................            3.0          2.8          8.1          8.8
   Wood chips...........................................................            0.6          0.8          1.9          2.7
   Other................................................................            0.8          0.9          2.0          2.4
                                                                           ------------- ------------ ------------  -----------
      Total net sales...................................................   $       49.6  $      56.1  $     149.2   $    156.6
                                                                           ============= ============ ============  ===========
Operating income........................................................   $        1.0  $       6.8  $       3.2   $     16.9
                                                                           ============= ============ ============  ===========
Loss before income taxes................................................   $      (13.5) $      (6.1) $     (37.5)  $    (22.7)
                                                                           ============= ============ ============  ===========

---------------------------
(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
      Net sales for the forest products segment decreased $6.5 million for the
third quarter of 2004 as compared to the same period of 2003. Net sales of
lumber decreased $4.6 million, primarily as a result of lower sales volumes of
lumber as production levels were temporarily adversely impacted by the transition
to Palco's new sawmill. Net sales of wood chips also decreased due to the
transition to the new sawmill. Net sales of logs decreased due to decreased
harvest.

      Net sales for the nine months ended September 30, 2004, decreased $7.4
million from the comparable prior year period as a result of the lower sales
volumes of lumber and logs and decreases in net sales of wood chips and
cogeneration power. In particular, wood chips decreased $0.8 million due to the
new sawmill transition discussed above. Also, sales of surplus power from
Palco's cogeneration power plant declined $0.7 million due to lower production
of power caused by a lower quality of fuel compared to the prior year period,
reducing the availability of surplus power for sale to third parties.

      Operating Income
      Operating results for the segment declined for both the third quarter and
nine months ended September 30, 2004 compared to the same periods of 2003,
primarily due to lower net sales and higher operating expenses. Declines in
harvest have resulted in increased purchases of logs from third parties,
increasing cost of goods sold by approximately $6.1 million for the first nine
months of 2004 as compared to the prior year period. The decline in harvest has
also led to higher fixed costs per unit of volume. Selling, general and
administrative expenses for the first nine months of 2004 also increased,
primarily due to $1.4 million in severance and benefit payments as a result of
Palco's voluntary reduction in workforce (see Note 3). In addition, operating
results for the first nine months of 2003 included net gains on sales of
timberlands and other assets of $0.9 million, compared to $0.2 million for the
first nine months of 2004.

      Loss Before Income Taxes
      The forest products segment's loss before income taxes increased for the
third quarter and nine months ended September 30, 2004, as compared to the prior
year periods, primarily due to the decreases in operating results discussed
above. In addition, earnings on cash, cash equivalents and other investments
declined, although these declines were partially offset by decreases in interest
expense.

      REAL ESTATE OPERATIONS

      Industry Overview and Selected Operational Data
      The Company, principally through its wholly owned subsidiaries, invests in
and develops residential and commercial real estate primarily in Arizona,
California, Puerto Rico, and Texas. The following table presents selected
operational and financial information for the three and nine months ended
September 30, 2004 and 2003, for the Company's real estate operations.


                                                                                THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                                   SEPTEMBER 30,             SEPTEMBER 30,
                                                                              -----------------------  ------------------------
                                                                                 2004        2003         2004         2003
                                                                               ---------  -----------  -----------  -----------
                                                                                           (IN MILLIONS OF DOLLARS)

Net sales:
   Real estate:
      Fountain Hills....................................................      $     5.1    $     9.0   $      8.5   $     16.0
      Mirada............................................................            3.8          3.4          9.5          5.3
      Palmas............................................................            2.3          0.7         10.4          5.8
                                                                              ----------  -----------  -----------  -----------
        Total...........................................................           11.2         13.1         28.4         27.1
                                                                              ----------  -----------  -----------  -----------

   Resort, commercial and other:
      Fountain Hills....................................................            1.7          1.2          5.0          3.0
      Mirada............................................................            0.1          0.2          0.1          0.2
      Palmas............................................................            2.8          1.9          8.6          6.3
      Commercial lease properties.......................................            4.4          3.9         12.8         11.9
      Other.............................................................            0.1          0.1          0.2          0.2
                                                                              ----------  -----------  -----------  -----------
        Total...........................................................            9.1          7.3         26.7         21.6
                                                                              ----------  -----------  -----------  -----------

   Total net sales......................................................      $    20.3   $     20.4   $     55.1     $   48.7
                                                                              ==========  ===========  ===========  ===========

Operating income (loss):
   Fountain Hills.......................................................      $     2.2   $      6.8   $      3.1   $      9.3
   Mirada...............................................................            1.6          1.8          3.3          0.7
   Palmas...............................................................           (2.3)        (5.0)        (0.5)        (9.5)
   Commercial lease properties..........................................            1.9          1.4          5.3          4.4
   Other................................................................           (0.2)        (0.1)        (0.9)        (0.6)
                                                                              ----------  -----------  -----------  -----------
      Total operating income............................................      $     3.2   $      4.9   $     10.3   $      4.3
                                                                              ==========  ===========  ===========  ===========

Investment, interest and other income, net:
   Equity in earnings from real estate joint ventures...................      $       -   $      0.2   $      2.9   $      1.2
   Other................................................................            0.6          0.5          3.7          1.8
                                                                              ----------  -----------  -----------  -----------
                                                                              $     0.6   $      0.7   $      6.6   $      3.0
                                                                              ==========  ===========  ===========  ===========

Income (loss) before income taxes.......................................      $    (0.7)  $      0.8   $      3.1   $     (7.0)
                                                                              ==========  ===========  ===========  ===========

      Net Sales
      Net sales for the real estate segment for the third quarter of 2004 were
comparable to the results for the prior year period as the decline in Fountain
Hills acreage sales was offset by increased acreage sales at Palmas del Mar and
increases in net sales from commercial operations at Palmas del Mar and Fountain
Hills.

      Net sales for the real estate segment increased $6.4 million for the nine
months ended September 30, 2004, as compared to the prior year period, largely
driven by acreage sales at Palmas del Mar and Mirada, in addition to increases
in net sales from commercial operations at Palmas del Mar and Fountain Hills.

      Operating Income (Loss) and Income (Loss) Before Income Taxes
      Operating results declined by $1.7 million for the third quarter of 2004
versus the same period of 2003 despite comparable net sales between the periods.
This was primarily a result of net sales for Fountain Hills being largely
attributable to sales of lots, which typically generate lower gross margins, in
the 2004 third quarter, whereas the third quarter for 2003 reflects the impact
of a higher margin acreage sale in Fountain Hills. Operating results increased
by $6.0 million for the nine months ended September 30, 2004 versus the same
period of 2003, primarily due to the change in net sales discussed above. The
segment realized a loss before income taxes of $0.7 million for the third
quarter of 2004, as compared to earnings of $0.8 million for the same period of
2003, due to the lower operating results discussed above. The segment realized
income before income taxes of $3.1 million for the nine months ended September
30, 2004 versus a loss of $7.0 million for the comparable period of 2003, due to
the higher operating results discussed above as well as an increase in equity
earnings from FireRock, LLC and interest income.

      RACING OPERATIONS

      Industry Overview and Selected Operational Data
      The Company indirectly owns SHRP, Ltd., a Texas limited partnership, which
owns and operates Sam Houston Race Park, a Class 1 horse racing facility in
Houston, Texas, and Valley Race Park, a greyhound racing facility located in
Harlingen, Texas. Results of operations between periods are generally not
comparable due to the timing, varying lengths and types of racing meets held.
Historically, Sam Houston Race Park and Valley Race Park have derived a
significant amount of their annual 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. However, as discussed further in the Form 10-K,
Sam Houston Race Park was granted additional live race days in 2004. As a
result, the number of live race days increased by 39 in the first nine months of
2004.




      The following table presents selected operational and financial
information for the three and nine months ended September 30, 2004 and 2003, for
the Company's racing operations.

                                                                                THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                                   SEPTEMBER 30,             SEPTEMBER 30,
                                                                              -----------------------  ------------------------
                                                                                  2004       2003          2004        2003
                                                                               ---------  -----------  -----------  -----------
                                                                                          (IN MILLIONS OF DOLLARS)

Number of live race days:
   Sam Houston Race Park................................................             46           43          130           91
   Valley Race Park.....................................................              -            -           81           82

Handle:
   Sam Houston Race Park:
      On-track handle...................................................      $    33.1   $     37.1   $    105.3   $    103.6
      Off-track handle..................................................           19.0         19.6        137.1        121.9
                                                                              ----------  -----------  -----------  -----------
        Total...........................................................      $    52.1   $     56.7   $    242.4   $    225.5
                                                                              ==========  ===========  ===========  ===========

   Valley Race Park:
      On-track handle...................................................      $     3.9   $      4.3   $     15.2   $     15.8
      Off-track handle..................................................              -            -          3.0          3.2
                                                                              ----------  -----------  -----------  -----------
        Total...........................................................      $     3.9   $      4.3   $     18.2   $     19.0
                                                                              ==========  ===========  ===========  ===========

Net sales:
   Sam Houston Race Park:
      Gross pari-mutuel commissions.....................................      $     7.8   $      8.8   $     26.9   $     26.2
      Other revenues....................................................            2.8          3.0          7.3          6.7
                                                                              ----------  -----------  -----------  -----------
        Total...........................................................           10.6         11.8         34.2         32.9
                                                                              ----------  -----------  -----------  -----------
   Valley Race Park:
      Gross pari-mutuel commissions.....................................            0.9          0.9          3.6          3.8
      Other revenues....................................................            0.1          0.2          0.8          0.8
                                                                              ----------  -----------  -----------  -----------
        Total...........................................................            1.0          1.1          4.4          4.6
                                                                              ----------  -----------  -----------  -----------
   Total net sales......................................................      $    11.6   $     12.9   $     38.6   $     37.5
                                                                              ==========  ===========  ===========  ===========

Operating loss:
   Sam Houston Race Park................................................      $    (1.2)  $     (0.6)  $     (1.2)  $     (0.9)
   Valley Race Park.....................................................           (0.3)        (0.1)        (0.5)        (0.4)
                                                                              ----------  -----------  -----------  -----------
      Total operating loss:.............................................      $    (1.5)  $     (0.7)  $     (1.7)  $     (1.3)
                                                                              ==========  ===========  ===========  ===========

Loss before income taxes................................................      $    (1.5)  $     (0.4)  $     (1.7)  $     (1.1)
                                                                              ==========  ===========  ===========  ===========


      Net Sales
      Net sales for the racing segment decreased $1.3 million for the third
quarter of 2004, compared to the prior year period, primarily due to a lower
average daily attendance at Sam Houston Race Park. Net sales for the nine months
ended September 30, 2004, increased $1.1 million compared to the prior year
period of 2003 due to 39 more live race days at Sam Houston Race Park. Net sales
for Valley Race Park for both the third quarter and the first nine months of
2004 were comparable to the prior year periods.

      Operating Loss and Loss Before Taxes
      The racing segment's operating loss and loss before taxes for the third
quarter of 2004 increased versus the prior year period due to the lower net
sales discussed above. Despite an increase in net sales for the nine months of
2004, the operating loss increased versus the prior year period primarily due to
higher marketing and development costs.


   OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS


                                                                               THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                                  SEPTEMBER 30,              SEPTEMBER 30,
                                                                             ------------------------   -----------------------
                                                                                2004         2003          2004         2003
                                                                             -----------   ----------   ----------  -----------
                                                                                           (IN MILLIONS OF DOLLARS)

Operating loss..........................................................     $     (4.2)   $    (2.1)   $   (10.8)     $  (5.8)
Income (loss) before income taxes.......................................           (4.4)        (0.6)        (9.6)         5.9


      The operating losses in the table above represent corporate general and
administrative expenses that are not allocated to the Company's industry
segments. For the quarter ended September 30, 2004, such losses include $1.9
million related to an accrual for an environmental matter discussed under "Other
Matters" in Note 9. In addition to this accrual, results for the nine months
ended September 30, 2004 include $2.3 million related to an increase in stock-based
compensation expense, which is adjusted as the market value of the Company's Common
Stock changes. Income before income taxes for 2003 includes $8.0 million related
to reimbursement by an insurer for certain costs incurred in connection with the
OTS and FDIC actions (see Note 9).

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

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

   OVERVIEW

      The Company conducts its operations primarily through its subsidiaries.
Creditors of subsidiaries of the Company have priority with respect to the
assets and earnings of such subsidiaries over the claims of the creditors of the
Company. Certain of the Company's subsidiaries, principally 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 and has significant debt service requirements. In addition,
Palco's anticipated capital expenditures for investments in new sawmill
equipment will require cash from existing resources as well as Palco's credit
facility (see "Forest Product Operations" below for further information
regarding Palco's credit facility). "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 used for operating activities of $14.6 million for the nine
months ended September 30, 2004, principally reflects a net loss, after adding
back depreciation, depletion and amortization, and reserve for environmental
remediation, of $17.3 million. In addition, $14.2 million related to the
payments of interest on the Timber Notes was offset by an increase in long-term
assets and other accrued liabilities of $14.1 million.

      Investing Activities
      Net cash used for investing activities of $5.6 million for the nine months
ended September 30, 2004, principally reflects capital expenditures of $27.3
million, $18.6 million of which were related to Palco's new sawmill project (see
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Financial Condition and Investing and Financing Activities -
Forest Products Operations" of the Form 10-K for a discussion of Palco's new
sawmill project), offset by proceeds from the sale of marketable securities and
other short-term investments of $21.2 million.

      Financing Activities
      Net cash provided by financing activities of $21.1 million for the nine
months ended September 30, 2004, principally reflects net borrowings on the
Scotia LLC and Palco lines of credit of $31.4 million and $12.1 million,
respectively, offset by a $13.5 million repayment on a real estate credit
facility related to the Mirada real estate development.

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

   FOREST PRODUCTS OPERATIONS

      On September 30, 2004, Scotia LLC had unused availability of $25.6 million
under the Scotia LLC Line of Credit, and there was $31.4 million outstanding
under this facility.

      On the note payment date in January 2004, Scotia LLC had $4.1 million set
aside in the note payment account to pay the $27.2 million of interest due (net
of $2.0 million of additional interest due in respect of Timber Notes held by
Scotia LLC). The funds available under the Scotia LLC Line of Credit were used
to pay the remaining amount of interest due. Scotia LLC repaid $12.7 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 2004, Scotia LLC used $26.6 million (net
of $2.1 million of additional interest due in respect of Timber Notes held by
Scotia LLC) of the funds available under the Scotia LLC Line of Credit to pay
the entire amount of interest due. Scotia LLC repaid $4.5 million of principal
on the Timber Notes (an amount equal to Scheduled Amortization) using funds held
in the SAR Account.

      With respect to the note payment date in January 2005, Scotia LLC expects
to use the funds available under the Scotia LLC Line of Credit to pay the entire
$26.3 million of interest which will be due (net of $2.2 million of additional
interest which would be due in respect of Timber Notes held by Scotia LLC).
Scotia LLC expects to repay $10.8 million of principal on the Timber Notes (an
amount equal to Scheduled Amortization) using funds held in the SAR Account.

      During the first nine months of 2004, $4.8 million of funds from the SAR
Account were used to repurchase $5.0 million principal amount of Timber Notes,
as permitted under the Timber Notes Indenture, resulting in a small gain (net of
unamortized deferred financing costs) on the repurchase of debt.

      Subsequent to September 30, 2004, $5.7 million of funds from the SAR
Account were used to repurchase $5.7 million principal amount of Timber Notes,
as permitted under the Timber Notes Indenture, resulting in a loss of $0.3
million (net of unamortized deferred financing costs) on the repurchased debt.

      Due to its highly leveraged condition, Scotia LLC is more sensitive than
less leveraged companies to factors affecting its operations, including low log
prices, governmental regulation and litigation affecting timber harvesting
practices on its timberlands (see Note 9), and general economic conditions.
Scotia LLC's cash flows from operations are significantly impacted by harvest
volumes and log prices. In June 2004, the State Board of Equalization adopted
the new Harvest Value Schedule for the second half of 2004. The prices published
in that schedule reflected a 1.6% increase in the SBE Price for small redwood
logs and a 14.3% increase for small Douglas-fir logs from the prices published
for the first half of 2004.

      On June 8, 2004, Standard & Poor's Ratings Service announced that it was
lowering its ratings on all classes of the Timber Notes. Ratings on the Class
A-1 Timber Notes were lowered from BBB+ to BBB-; ratings on the Class A-2 Timber
Notes were lowered from BBB to BB; and ratings on the Class A-3 Timber Notes
were lowered from BB to B. Standard & Poor's also indicated that all ratings
were removed from the agency's negative CreditWatch, where they were placed in
November 2002, and that the lowered ratings reflect the negative impact that
depressed timber prices, lower harvest levels and higher capital/operating costs
have had on Scotia LLC's cash flow available for debt service.

      With respect to short-term liquidity, Scotia LLC believes that cash flows
from operations and funds available under the Scotia LLC Line of Credit (in
respect of interest payments) and the SAR Account (in respect of principal
payments), should provide sufficient funds to meet its working capital, capital
expenditures and debt service obligations for the next twelve months; however,
there can be no assurance that this will be the case. With respect to long-term
liquidity, although Scotia LLC believes that cash flows from operations and
funds available under the Scotia LLC Line of Credit and the SAR Account should
be adequate to meet its working capital, capital expenditure and debt service
obligations, unless log prices continue to improve there can be no assurance
that this will be the case. In addition, liquidity, capital resources and results
of operations will be adversely affected if harvest levels decline or costs
increase as a result of the various regulatory, environmental and litigation
matters discussed in Note 9.

      At September 30, 2004, $12.1 million in borrowings and $0.3 million in
letters of credit were outstanding under the Palco Credit Agreement. In
accordance with the agreement, Palco is required to maintain a certain base
level of borrowings through February 12, 2005, based on certain collateral
balances. Palco is required to meet certain quarterly earnings thresholds under
a covenant of the Palco Credit Agreement and was in compliance with these
covenants at September 30, 2004.

      Palco will require funds available under the Palco Credit Agreement 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, and pending legal, regulatory and
environmental matters. See Note 9 for further discussion of the regulatory,
environmental and legal matters affecting harvest levels.

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

   REAL ESTATE OPERATIONS

      As discussed further in "Trends--Real Estate Operations" below, one of the
Company's development projects in Fountain Hills was delayed, and this delay
will result in fewer lot sales for 2004.

      The Company believes that the existing cash and credit facilities of its
real estate subsidiaries are sufficient to fund the working capital and capital
expenditure requirements of such subsidiaries for the next year. With respect to
the long- term liquidity of such subsidiaries, the Company believes that their
ability to generate cash from the sale of their existing real estate, together
with their ability to obtain financing and joint venture partners, should
provide sufficient funds to meet their working capital and capital expenditure
requirements. PDMPI and its subsidiaries, however, have required advances from
MAXXAM Parent in prior years to fund their operations, and although the Company
does not expect that PDMPI will require advances in the current fiscal year,
PDMPI may from time to time require such advances.

   RACING OPERATIONS

      SHRP, Ltd. has generated cash flows from operations during the nine months
ended September 30, 2004, largely as a result of having more live race days than
typical. However, in the short term, SHRP, Ltd.'s management expects that SHRP,
Ltd. may require advances from MAXXAM Parent to fund its operations and capital
expenditures. 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.

   KAISER'S OPERATIONS

      With respect to the Company's interest in Kaiser, the Debtors believe that
the equity of Kaiser's stockholders will be cancelled without consideration. See
Note 1 and 8 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

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

   REAL ESTATE OPERATIONS

      As discussed in the Form 10-K, PDMPI is considering various alternatives
to accelerate sales of its remaining 1,180 acres of undeveloped land as well as
disposition of other assets. In connection with the foregoing, PDMPI has
retained an agent to assist in its efforts to solicit developer and investor
interest in acquiring such acreage and other assets.

      As indicated in the Form 10-K, the Arizona Department of Water Resources
had notified the local utility which supplies water to the Company's Fountain
Hills development that the demand for water in the utility's service area
exceeded certain statutory requirements. In April 2004, the Arizona Department
of Water Resources approved a modification and renewal of the utility's Assured
Water Supply designation, thereby satisfactorily resolving this matter (both for
the utility and the Fountain Hills development). Nevertheless, this matter has
delayed one of the Company's Fountain Hills projects, and this delay will result
in fewer lot sales at the Fountain Hills development in 2004 than would have
otherwise been the case.

   RACING OPERATIONS

      The Texas legislature, which convenes its regular session every other
year, considered a variety of alternatives during the January-June 2003 session
to address a projected budget shortfall, including enhancing state revenues
through additional forms of gaming such as video lottery terminals at existing
horse and dog racing tracks, gaming on Indian reservations, keno, and full
casinos. The Texas legislature did not enact any such legislation during its
regular session or during a special session convened in April 2004 to consider
changes to the current manner in which public education is funded.

      Should changes be made to the manner in which public school financing is
currently funded, the Company expects that video lottery terminals at existing
horse and dog tracks will be among the alternatives considered to replace any
diminishment of current funding sources. The Company is vigorously pursuing such
legislation. As such legislation would likely 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 their effect on the Company.

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 and
estimates. There have been no material changes to the Company's critical
accounting policies and estimates provided in the Form 10-K.

NEW ACCOUNTING PRONOUNCEMENTS

      See Note 2 for a discussion of new accounting pronouncements and their
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 Palco Credit Agreement, as well as certain
other debt facilities used to finance real estate development activities. As of
September 30, 2004, there were $47.3 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, 2004, a 1% 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 $0.3 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
Securities and Exchange Commission, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Also, the Company has investments in certain
unconsolidated entities. As the Company does not control or manage these
entities, its disclosure controls and procedures with respect to such entities
are necessarily substantially more limited than those it maintains with respect
to its consolidated subsidiaries.

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

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


                           PART II. OTHER INFORMATION

ITEM 1.         LEGAL PROCEEDINGS

      The information set forth in Note 9 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 transactions. No such purchases
occurred during the nine months ended September 30, 2004, or through the date of
this report.

ITEM 6.         EXHIBITS

           *10.1      Amendment No. 2 to Palco Credit Agreement dated as of
                      October 20, 2004

            10.2      Retention Agreement of Diane Dudley (incorporated herein
                      by reference to current report on Form 8-K dated September 9,
                      2004)

           *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 12, 2004                 By:       /S/     PAUL N. SCHWARTZ
                                            -------------------------------------------------
                                                          Paul N. Schwartz
                                            President, Chief Financial Officer and Director
                                                    (Principal Financial Officer)



Date: November 12, 2004                 By:     /S/       ELIZABETH D. BRUMLEY
                                            -------------------------------------------------
                                                          Elizabeth D. Brumley
                                                       Vice President and Controller
                                                      (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"

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

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

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

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

Cases:  The Chapter 11 proceedings of the Debtors

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

CDF:  California Department of Forestry and Fire Protection

CESA:  California Endangered Species Act

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

Code:  The United States Bankruptcy Code

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

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

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

CWA:  Federal Clean Water Act

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

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

Environmental Plans:  The HCP and the SYP

EPA:  Environmental Protection Agency

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

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.

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

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

Form 10-K: The Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 2003

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 September 1996 agreement between Palco, Scotia LLC,
Salmon Creek, the United States and California which provided the framework for
the acquisition by the United States and California of the Headwaters
Timberlands

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

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

HWC 2003 lawsuit:  An action entitled Humboldt County Watershed Council, et al.
v. North Coast Regional Water Quality Control Board, et al. (No. CV030961),
naming Palco as real party in interest, pending in the Superior Court of
Humboldt County, California

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

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

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

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

MAXXAM Parent:  MAXXAM Inc., excluding its subsidiaries

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

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

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

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

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 Credit Agreement:  January 2004 revolving credit facility between Palco
and a bank which provides for borrowings up to $35.0 million, based upon certain
collateral balances

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

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

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

Sanctions Motion:  A 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 wholly owned subsidiary of 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 on the Timber Notes

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

State Board of Equalization:  The California State Board of Equalization

State Water Board:  California State Water Resources Control Board

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

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

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

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

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

Timber Notes Indenture:  The indenture governing the Timber Notes

TMDLs:  Total maximum daily load limits

USAT:  United Savings Association of Texas

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

Van Duzen THPs lawsuit:  An action entitled Environmental Protection Information
Center, et al. v. California Department of Forestry and Fire Protection, et al.
(No. CV04-0809), pending in the Superior Court of Humboldt County, California`