```

                                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 March 31, 2006

                          Commission File Number 1-3924

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

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

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

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

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

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

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

        Number of shares of common stock outstanding at May 4, 2006: 5,967,942

                                 TABLE OF CONTENTS

                                                                            Page
PART I. - FINANCIAL INFORMATION

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

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

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

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

PART II. - OTHER INFORMATION

          Item 1.   Legal Proceedings...........................................
          Item 1A.  Risk Factors................................................
          Item 2.   Unregistered Sales of Equity Security and Use of Proceeds...
          Item 6.   Exhibits....................................................
          Signatures............................................................

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

                   MAXXAM INC. AND SUBSIDIARIES

                    CONSOLIDATED BALANCE SHEETS
        (In millions of dollars, except share information)

                                                                                         March 31,    December 31,
                                                                                             2006          2005
                                                                                         ---------------------------
                                                                                               (Unaudited)
Assets
Current assets:
  Cash and cash equivalents                                                            $   53.7      $   72.9
  Marketable securities and other short-term investments                                  150.3         134.6
Receivables:
  Trade net of allowance for doubtful accounts of $0.9 and $0.8, respectively              10.7          11.1
  Other                                                                                     4.8           5.4
Inventories:
  Lumber                                                                                    6.9           7.6
  Logs                                                                                      9.9          18.9
Real estate inventory                                                                      14.2          12.6
Prepaid expenses and other current assets                                                  15.8          16.4
Restricted cash and marketable securities                                                  18.3          29.1
                                                                                       ---------------------------
     Total current assets                                                                 284.6         308.6
Property, plant and equipment, net of accumulated depreciation of $215.2 and
  $207.9, respectively                                                                    348.9         355.0
Timber and timberlands, net of accumulated depletion of $227.2 and $226.3,
  respectively                                                                            208.3         208.7
Real estate                                                                                39.2          43.2
Deferred income taxes                                                                      95.1          95.1
Intangible assets                                                                           2.7           2.9
Long-term receivables and other assets                                                     26.4          26.9
Restricted cash and marketable securities                                                   7.9           7.9
                                                                                       ---------------------------
                                                                                       $1,013.1      $1,048.3
                                                                                       ===========================
Liabilities and Stockholders' Deficit
Current liabilities:
  Accounts payable                                                                     $   12.3      $   11.2
  Accrued interest                                                                         13.3          25.9
  Accrued compensation and related benefits                                                18.8          20.7
  Other accrued liabilities                                                                31.8          37.0
  Short-term borrowings and current maturities of long-term debt                          124.0         112.5
                                                                                      ---------------------------
     Total current liabilities                                                            200.2         207.3
Long-term debt, less current maturities                                                   872.1         889.6
Accrued pension and other postretirement benefits                                          34.1          34.1
Losses in excess of investment in Kaiser                                                  516.2         516.2
Other noncurrent liabilities                                                               61.8          62.4
                                                                                       ---------------------------
    Total liabilities                                                                   1,684.4       1,709.6
                                                                                       ---------------------------
Commitments and contingencies (see Note 7)
Stockholders' deficit:
  Preferred stock, $0.50 par value; $0.75 liquidation preference; 2,500,000
    shares authorized; Class A $0.05 Non-Cumulative Participating Convertible
    Preferred Stock; 668,964 shares issued and 668,119 shares outstanding                   0.3           0.3
  Common stock, $0.50 par value; 13,000,000 shares authorized; 10,063,359 shares
    issued; 5,967,942 shares outstanding                                                    5.0           5.0
  Additional capital                                                                      225.3         225.3
  Accumulated deficit                                                                    (680.6)       (670.4)
  Accumulated other comprehensive loss                                                    (96.4)        (96.6)
  Treasury stock, at cost (shares held:  preferred - 845; common - 4,095,417)            (124.9)       (124.9)
                                                                                       ---------------------------
    Total stockholders' deficit                                                          (671.3)       (661.3)
                                                                                       ---------------------------
                                                                                       $1,013.1      $1,048.3
                                                                                       ===========================

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

                      MAXXAM INC. AND SUBSIDIARIES

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

                                                                                         Three Months Ended
                                                                                               March 31,
                                                                                       -------------------------
                                                                                          2006        2005
                                                                                       ----------- -------------
                                                                                            (Unaudited)
Net sales:
  Forest products                                                                      $   37.8      $  47.3
  Real estate                                                                              29.0         22.8
  Racing                                                                                   13.4         12.9
                                                                                        ----------- -------------
                                                                                           80.2         83.0
                                                                                        ----------- -------------
Costs and expenses:
  Cost of sales and operations:
    Forest products                                                                        33.6         42.1
    Real estate                                                                             8.3          6.8
    Racing                                                                                 11.2         10.6
  Selling, general and administrative expenses                                             12.7         11.8
  Gain on sales of timberlands and other assets                                            (0.7)           -
  Depreciation, depletion and amortization                                                  8.8          8.9
                                                                                        ----------- -------------
                                                                                           73.9         80.2
                                                                                        ----------- -------------
Operating income (loss):
  Forest products                                                                          (5.5)        (2.8)
  Real estate                                                                              12.9          6.7
  Racing                                                                                   (0.1)        (0.2)
  Corporate                                                                                (1.0)        (0.9)
                                                                                         ----------- -------------
                                                                                            6.3          2.8
Other income (expense):
  Investment and interest income                                                            4.1          1.2
  Other income                                                                              0.3            -
  Interest expense                                                                        (19.6)       (17.7)
  Amortization of deferred financing costs                                                 (0.6)        (0.5)
                                                                                         ----------- -------------
Loss before income taxes and cumulative effect of accounting change                        (9.5)       (14.2)
Benefit (provision) for income taxes                                                          -            -
                                                                                         ----------- -------------
Loss before cumulative effect of accounting change                                         (9.5)       (14.2)
Cumulative effect of accounting change, net of tax                                         (0.7)           -
                                                                                         ----------- -------------
Net loss                                                                               $  (10.2)     $ (14.2)
                                                                                         =========== =============
Basic and diluted loss per common and common equivalent share before
  cumulative effect of accounting change                                               $  (1.59)     $ (2.38)
                                                                                         =========== =============
Basic and diluted loss per common and common equivalent share after
  cumulative effect of accounting change                                               $  (1.71)     $  (2.38)
                                                                                        =========== =============

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

                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In millions of dollars)

                                                                                              Three Months Ended
                                                                                                   March 31,
                                                                                          --------------------------
                                                                                              2006         2005
                                                                                          ------------ -------------
                                                                                                 (Unaudited)
Cash flows from operating activities:
  Net loss                                                                             $    (10.2)       $   (14.2)
  Adjustments to reconcile net loss to net cash provided by (used for) operating
    activities:
    Depreciation, depletion and amortization                                                  8.8              8.9
    Non-cash stock-based compensation expense                                                (1.2)            (1.6)
    Gains on sales of timberlands and other assets                                           (0.7)               -
    Net gains from marketable securities                                                     (2.6)            (0.2)
    Amortization of deferred financing costs and discounts on long-term debt                  0.6              0.5
    Equity in loss of unconsolidated affiliates, net of dividends received                    0.2              0.2
    Increase (decrease) in cash resulting from changes in:
    Receivables                                                                               1.2             (2.6)
    Inventories                                                                               9.3              8.5
    Prepaid expenses and other assets                                                         0.5              1.5
    Accounts payable                                                                          1.2             (4.2)
    Accrued and deferred income taxes                                                           -             (0.2)
    Other accrued liabilities                                                                (7.1)            (1.3)
    Accrued interest                                                                        (12.6)           (13.1)
    Long-term assets and long-term liabilities                                                2.6             10.8
    Other                                                                                       -              0.1
                                                                                          ------------ -------------
      Net cash used for operating activities                                                (10.0)            (6.9)
                                                                                          ------------ -------------

Cash flows from investing activities:
  Net proceeds from the disposition of property and investments                               0.8                -
  Sales and maturities of marketable securities and other investments                       132.5            200.8
  Purchases of marketable securities and other investments                                 (145.2)          (197.4)
  Net proceeds from restricted cash                                                          10.7              7.2
  Capital expenditures                                                                       (1.8)            (3.3)
  Other                                                                                         -             (0.1)
                                                                                          ------------ -------------
      Net cash provided by (used for) investing activities                                   (3.0)             7.2
                                                                                          ------------ -------------

Cash flows from financing activities:
  Proceeds from issuances of long-term debt                                                     -              2.4
  Redemptions and repurchases of, and principal payments on, long-term debt                 (13.0)           (14.8)
  Borrowings under revolving and short-term credit facilities                                 7.0             21.5
  Incurrence of deferred financing costs                                                     (0.2)            (0.6)
                                                                                          ------------ -------------
      Net cash provided by (used for) financing activities                                   (6.2)             8.5
                                                                                          ------------ -------------

Net increase (decrease) in cash and cash equivalents                                        (19.2)             8.8
Cash and cash equivalents at beginning of the period                                         72.9             18.5
                                                                                          ------------ -------------
Cash and cash equivalents at end of the period                                            $  53.7          $  27.3
                                                                                          ============ =============

Supplemental disclosure of cash flow information:
  Interest paid, net of capitalized interest                                              $  32.2          $  30.8

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

                      MAXXAM INC. AND SUBSIDIARIES

          CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Basis of Presentation

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

     The  consolidated  financial  statements  included  herein  are  unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary for a fair presentation of the consolidated
financial position of the Company at March 31, 2006, the consolidated results of
operations  for the  three  months  ended  March  31,  2006  and  2005,  and the
consolidated cash flows for the three months ended March 31, 2006 and 2005.

   Financial Difficulties of Forest Products Entities

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

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

     The North  Coast  Water Board for some time failed to release for harvest a
number of ScoPac's THPs that had already been approved by the other governmental
agencies which approve  ScoPac's THPs. The North Coast Water Board  subsequently
allowed harvesting on a portion of the approved THPs;  however,  the State Water
Board  later  disallowed  harvesting  on a  portion  of the  THPs  that had been
released by the North Coast Water Board.  On May 8, 2006,  the North Coast Water
Board adopted WWDR's for the Freshwater and Elk River  watersheds,  which action
has the effect of allowing harvesting in these two watersheds to begin once THPs
are released by the Executive Officer of the North Coast Water Board.  There can
be no assurance that the THPs related to these two watersheds will ultimately be
released or  harvested  as planned in 2006 or that the action of the North Coast
Water  Board  will not be  appealed  to the  State  Water  Board.  While  ScoPac
continues to project  that its annual  harvest  level over the  ten-year  period
beginning  2006 to be  approximately  100  million  board  feet per  year,  this
projection is significantly  below historical harvest levels, and actual harvest
levels  may  be  even  lower,  depending  on the  ultimate  outcome  of  various
assumptions.

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

     Due to regulatory  constraints  and adverse weather  conditions  during the
first  quarter of 2006,  harvest  levels were lower than planned  resulting in a
liquidity shortfall at ScoPac. Consequently,  in January 2006 and again in April
2006,  ScoPac  requested and MGI approved timber purchases which provided ScoPac
an aggregate of $4.4 million of additional liquidity to pay its expenses.

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

     ScoPac management  estimates that its cash flows from operations,  together
with funds available under the ScoPac Line of Credit and other available  funds,
will be insufficient,  by a substantial  amount, to pay the entire amount of the
interest due on the July 20, 2006,  payment  date.  ScoPac also expects to incur
additional interest shortfalls over at least the next several years. The failure
of  ScoPac  to pay all of the  interest  on the  Timber  Notes  when  due  would
constitute an event of default under the Indenture.

     In an effort to address the expected shortfall on the July 20, 2006 payment
date, and other future expected cash shortfalls, ScoPac has initiated the ScoPac
Land Sale  Program  whereby  ScoPac is  seeking to sell  certain  non-timberland
properties  such as  ranchlands  and  recreational  areas,  as  well as  certain
timberlands.  There can be no  assurance  that these  marketing  efforts will be
successful.

     To the extent that ScoPac is unable to generate  sufficient  liquidity from
the ScoPac Land Sale Program or other sources,  the Company  expects that ScoPac
will be forced to take  extraordinary  actions,  which may  include:  laying off
employees,  shutting down various  operations,  and seeking protection by filing
under the Bankruptcy Code.

     Palco Liquidity Update
     Palco  continues  to  experience  liquidity  shortfalls.  The  most  recent
liquidity  shortfalls result primarily from a continued  imbalance in the mix of
log  inventories,  a  reduction  in  log  supply  from  ScoPac  and  operational
inefficiencies  related to the large log processing  line at the Scotia sawmill.
In the first quarter of 2006 and again in April 2006,  additional  liquidity was
needed at Palco and Palco  borrowed an  aggregate  of $19.0  million from MGI to
meet its cash shortfalls.

     As of December 31, 2005 and March 31, 2006, Palco and Britt were in default
under  the  Palco  Term  Loan and the Palco  Revolving  Credit  Facility  due to
financial covenant breaches.  Palco estimates that, without necessary amendments
to the Palco Term Loan and the Palco  Revolving  Credit  Facility and sufficient
additional  working  capital,  it will have  insufficient  liquidity to fund its
anticipated  cash shortfalls in 2006 and its planned level of operations for the
next several years. Palco is pursuing  discussions with its lenders in an effort
to resolve the defaults and obtain additional  liquidity  necessary to fund 2006
and future liquidity needs. There can be no assurance that Palco will be able to
resolve the defaults and obtain  additional  liquidity  necessary to fund future
expected cash shortfalls.

     In an effort to reduce its overall  debt  level,  Palco has  initiated  the
Palco Asset Sale Program whereby Palco is marketing certain assets, and Palco is
also  seeking  other  sources  of  liquidity.  The Palco Term Loan and the Palco
Revolving  Credit Facility each contain  provisions  requiring that the net cash
proceeds from asset sales be used to prepay  amounts  outstanding  under the two
facilities.  Accordingly,  proceeds  generated from the Palco Asset Sale Program
would not be available to fund working  capital  needs until the Palco Term Loan
is paid in full. There can be no assurance that these marketing  efforts will be
successful or that Palco will be successful  in securing  sufficient  additional
liquidity.

     In the event that Palco is unable to secure the necessary liquidity to fund
its  expected  future  liquidity   shortfalls,   it  would  be  forced  to  take
extraordinary  actions,  which may include:  further  reducing  expenditures  by
laying off employees,  shutting down various operations,  and seeking protection
by filing under the Bankruptcy Code.

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

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

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

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

                                                                                    Three Months
                                                                                      Ended
                                                                                   March 31, 2006
                                                                                   ----------------
Revenues                                                                          $          42.4
Costs and expenses                                                                          (30.6)
                                                                                  -----------------
Operating income                                                                             11.8
MAXXAM's equity in MGI's losses                                                             (21.0)
Other, net                                                                                   (0.3)
Cumulative effect of accounting change                                                       (0.7)
Income tax benefit                                                                              -
                                                                                  -----------------
Net loss                                                                          $         (10.2)
                                                                                  =================

                                                                                        As of
                                                                                   March 31, 2006
                                                                                  -----------------
Current assets                                                                    $         238.2
Property, plant and equipment (net)                                                         239.5
Other assets                                                                                149.8
                                                                                  -----------------
    Total assets                                                                  $         627.5
                                                                                  =================
Current liabilities                                                                          43.4
Long-term debt, less current maturities                                                     219.1
Other liabilities                                                                            63.8
Losses recognized in excess of investment in MGI and certain intercompany items             456.3
Losses recognized in excess of investment in Kaiser                                         516.2
                                                                                  -----------------
    Total liabilities                                                                     1,298.8
Stockholders' deficit                                                                      (671.3)
                                                                                  -----------------
    Total liabilities and stockholders' deficit                                   $         627.5
                                                                                  =================

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

   Kaiser Update

     Kaiser's plan of reorganization, which provides for the cancellation of the
Company's  50,000,000 Kaiser common shares without  consideration or obligation,
was confirmed by the Kaiser Bankruptcy Court in February 2006. However, Kaiser's
plan of  reorganization  is not yet final,  as it must still be  approved by the
U.S.  District  Court  before  Kaiser can emerge from Chapter 11 and the plan is
also currently  under appeal.  These  consolidated  financial  statements do not
reflect  any  adjustment  related to the  deconsolidation  of Kaiser  other than
presenting the Company's investment in Kaiser using the cost method. The Company
expects to reverse the $516.2  million of losses in excess of its  investment in
Kaiser, net of accumulated other  comprehensive  losses of $85.3 million related
to Kaiser, and recognize the net amount,  including the related tax effects,  in
the period in which the Kaiser Shares are cancelled which is currently  expected
to occur during 2006. Upon effectiveness of Kaiser's plan of reorganization, the
Company  also  expects  it  will  take  a  worthless   stock  deduction  on  its
consolidated federal income tax return related to the cancellation of the Kaiser
Shares  and will at that  time  evaluate  whether  it  expects  to  realize  the
resulting tax asset of approximately  $135.8 million.  Although the Company does
not  currently  expect that it will be obligated  to fund losses in Kaiser,  the
amount of the reversal  would be reduced by any losses  which the Company  later
estimates it would be obligated to fund.

   Reclassifications

     Certain  reclassifications  have  been  made to prior  years'  consolidated
financial statements to be consistent with the current year's presentation. This
includes  the  reclassification  of:  (i)  proceeds  from  restricted  cash from
financing activities to investing  activities in the Consolidated  Statements of
Cash  Flows,  and  (ii)  restricted  cash  from  cash and  cash  equivalents  to
restricted cash and marketable securities in the Consolidated Balance Sheets and
in the  Consolidated  Statements  of Cash Flows and (iii) cash held in brokerage
accounts  from  marketable  securities  to  cash  and  cash  equivalents  in the
Consolidated Balance Sheets and in the Consolidated Statements of Cash Flows.

   Use of Estimates and Assumptions

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

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

2.   New Accounting Standards

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

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

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

3.   Segment Information and Other Items

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

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

                                                                 Reportable Segments
                                                             -----------------------
                                                               Forest    Real                         Consolidated
                                                              Products   Estate  Racing    Corporate     Total
                                                             ---------- ------- -------- ------------ ------------
Depreciation, depletion and amortization for the three
  months ended:
  March 31, 2006                                              $ 4.8     $  3.6  $  0.3    $  0.1   $     8.8
  March 31, 2005                                                4.9        3.6     0.4       -           8.9

Total assets as of:
  March 31, 2006                                              395.0      352.1    37.4     228.6     1,013.1
  December 31, 2005                                           421.4      345.3    36.4     245.2     1,048.3

4.   Debt

     Palco Credit Agreements

     At December  31, 2005 and March 31,  2006,  Palco and Britt were in default
under  the  Palco  Term  Loan and the Palco  Revolving  Credit  Facility  due to
financial covenant breaches.  Without a waiver of the Borrowers'  defaults under
the Palco Term Loan and the Palco  Revolving  Credit  Facility,  the lenders may
take any or all of the  following  actions:  reduce  the  amount  of  borrowings
available to the Borrowers;  refuse to make new loans or to issue new letters of
credit for the  benefit  of the  Borrowers;  declare  any or all loans and other
amounts owed under the two facilities to be immediately due and payable; require
Palco to cash  collateralize all outstanding  letters of credit; or pursue their
other  rights and remedies  under the Palco Term Loan,  Palco  Revolving  Credit
Facility and related  security  agreements.  The Palco Revolving Credit Facility
and Palco  Term Loan are each  secured by a  security  interest  in the stock of
Palco held by MGI, and  substantially  all of the assets of the Borrowers (other
than Palco's equity interest in ScoPac).  Both the Palco Term Loan and the Palco
Revolving  Credit Facility have provisions  requiring that the net cash proceeds
of asset sales be used to prepay amounts outstanding under the loans.

     The  existence  of the  defaults  also  requires  Palco to pay  interest on
amounts  borrowed  under the Palco Term Loan at a per annum rate 2% higher  than
the rate at which interest would be owed if no default existed.  As of March 31,
2006, $34.6 million was outstanding  under the Palco Term Loan and $12.7 million
was outstanding  under the Palco Revolving  Credit  Facility.  As waivers of the
defaults have not been obtained,  amounts  outstanding under the Palco Term Loan
and the  Palco  Revolving  Credit  Facility  have been  classified  as a current
liability in the consolidated balance sheets.

     Palco  borrowed an aggregate  of $6.0 million from MGI in 2005.  During the
first quarter of 2006, Palco borrowed an aggregate additional $11.0 million from
MGI, and in April 2006, borrowed an aggregate  additional $9.0 million from MGI,
of which $8.0 million has been utilized.  Palco used these loan proceeds to fund
liquidity shortfalls. Each of the additional borrowings required an amendment to
the Palco Term Loan and Palco Revolving Credit Facility.

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

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

     ScoPac Line of Credit
     The ScoPac Line of Credit allows ScoPac to borrow up to one year's interest
on the aggregate  outstanding principal balance of the Timber Notes. On June 20,
2003,  the  ScoPac  Line of Credit  was  extended  to July 7,  2006.  ScoPac has
requested  an  extension  of the  ScoPac  Line of  Credit,  but  there can be no
assurance  that the ScoPac Line of Credit  will be  extended.  If not  extended,
ScoPac may draw upon the full amount  available.  The amount drawn would, to the
extent of available  funds,  be repayable in 12 semiannual  installments on each
Timber Notes payment date (after the payment of certain  other items,  including
the Aggregate Minimum  Principal  Amortization  Amount,  as defined,  then due),
commencing  approximately two and one-half years following the date of the draw.
At March 31, 2006, the maximum  availability under the ScoPac Line of Credit was
$54.1 million,  and  outstanding  borrowings  were $49.6 million.

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

     As  discussed   further  in  Note  1,  ScoPac  is  experiencing   financial
difficulties due to regulatory  restrictions on harvesting and other factors. As
a result,  ScoPac  management  estimates  that its cash flows  from  operations,
together  with  funds  available  under  the  ScoPac  Line of  Credit  and other
available  funds,  will be  insufficient,  by a substantial  amount,  to pay the
entire amount of interest due on the July 20, 2006,  payment date. Such an event
would  constitute  an event of default  under the  Indenture.  In the event of a
failure to pay  interest or  principal on the Timber Notes in full when due, the
Trustee or the holders of at least 25% of the  aggregate  outstanding  principal
amount of the Timber Notes may cause all  principal,  interest and other amounts
related to the Timber Notes to become immediately due and payable.  Also, in the
event of a failure by Palco or ScoPac to perform  its  respective  covenants  or
agreements  under the  Master  Purchase  Agreement  or by Palco to  perform  its
covenants or agreements under the Services Agreement,  which failure in the case
of certain  covenants or agreements  continues for 30 days after notice from the
Trustee or the holders of 25% or more of the outstanding principal amount of the
Timber Notes, the holders of a majority of the aggregate  outstanding  principal
amount of the Timber Notes may cause all  principal,  interest and other amounts
related to the Timber Notes to become immediately due and payable.  In the event
of any such  acceleration,  the Agent  under the ScoPac  Line of Credit may also
accelerate the advances then outstanding.  If such accelerations of Timber Notes
and/or advances under the ScoPac Line of Credit occur,  the Trustee may exercise
all  rights  under the  Indenture  and  related  security  documents,  including
applying funds to pay accelerated  amounts,  and selling the ScoPac  Timberlands
and ScoPac Timber Rights and other assets and using the proceeds  thereof to pay
accelerated  amounts. In the event that ScoPac were to seek protection by filing
under the Bankruptcy  Code, all amounts related to the Timber Notes would become
immediately  due and payable  under the  Indenture  and all  advances  under the
ScoPac Line of Credit could be accelerated.  The foregoing rights of the Trustee
and holders of Timber  Notes would be subject to the rights of ScoPac  under the
Bankruptcy Code if it sought protection by filing under the Bankruptcy Code.

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

     At March 31, 2006, the SAR Account balance was $57.9 million (consisting of
$44.8  million of Timber  Notes  held in the SAR  Account  and $13.1  million in
cash),  all of which is restricted for future  principal  payments on the Timber
Notes. Such cash is sufficient to cover Scheduled Amortization in 2006, but will
not be sufficient to cover the Scheduled  Amortization  on the January 20, 2007,
Timber Notes  payment  date and beyond.  Accordingly,  ScoPac's  ability to make
Scheduled  Amortization  payments on the Timber  Notes  beyond 2006 is dependent
upon  ScoPac's  ability to sell all or a portion of the Timber Notes held in the
SAR Account.  No assurance  can be given that ScoPac will be  successful  in its
efforts to sell the Timber Notes held in the SAR Account  before the January 20,
2007, Timber Notes payment date or as to the proceeds that might result from any
such sale.

     Letters of Credit
     As a result of S&P  credit rating actions  related to Palco,  Palco was
required to post a $9.9 million letter of credit with the State of California to
secure its workers compensation liabilities,  which reduced Palco's availability
under the Palco Revolving Credit Facility by a corresponding amount.

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

5.   Income Taxes

     The Company  generated a loss before  income taxes of $10.2 million for the
first quarter of 2006;  however,  the Company has not recorded any tax provision
or benefit  during this period as the Company  anticipates an effective tax rate
of zero for the year ended December 31, 2006. Each period, the Company evaluates
appropriate  factors in determining the realizability of the deferred tax assets
attributable  to losses and  credits  generated  in that  period and those being
carried  forward.  Based on this  evaluation,  the  Company  provided  valuation
allowances  with respect to the deferred tax assets  attributable  to the losses
and  credits  generated  during the three  months  ended March 31,  2006.  These
valuation  allowances  were in addition to the valuation  allowances  which were
provided in prior years.

6.   Employee Benefit Plans

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

                                                                                                    Medical/Life
                                                                             Pension Benefits         Benefits
                                                                            ------------------- --------------------
                                                                                  Three Months Ended March 31,
                                                                            ----------------------------------------
                                                                               2006     2005       2006      2005
                                                                            --------- ---------- --------- -----------
Components of net periodic benefit costs:
  Service cost                                                              $     -   $   0.9    $  0.1     $ 0.1
  Interest cost                                                                 1.3       1.4       0.1       0.2
  Expected return on assets                                                    (1.4)     (1.3)        -         -
  Amortization of prior service costs                                             -         -         -      (0.1)
  Recognized net actuarial loss                                                 0.1       0.2         -         -
                                                                            --------- ---------- --------- -----------
  Net periodic benefit costs                                                $     -   $   1.2    $  0.2    $   0.2
                                                                            ========= ========== ========= ===========

7.   Regulatory and Environmental Factors and Contingencies

   Regulatory and Environmental Factors

     Regulatory and environmental  matters and litigation have had a significant
adverse effect on the Company's forest products 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,  air and water quality and other  matters.  Compliance
with such laws and  regulations  also plays a significant  role in the Company's
Forest Products business.

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

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

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

     Under the CWA, the EPA is required to establish TMDLs in watercourses  that
have been declared to be "water  quality  impaired." The EPA and the North Coast
Water  Board  are in  the  process  of  establishing  TMDLs  for  many  northern
California rivers and certain of their tributaries,  including nine watercourses
that flow within the Palco Timberlands.  On the Palco Timberlands,  the relevant
contaminant  is simple  sediment - dust,  dirt and gravel - that is  abundant in
watercourses  largely as a function of the area's  normally  heavy  rainfall and
soil that erodes easily.  The Company expects the process of establishing  TMDLs
to continue into 2010. In December  1999,  the EPA issued a report  dealing with
TMDLs  on  two  of  the  nine  watercourses.   The  agency  indicated  that  the
requirements under the HCP would significantly  address the sediment issues that
resulted  in TMDL  requirements  for these  watercourses.  The North Coast Water
Board is in the process of establishing the TMDL requirements  applicable to two
other watercourses on the Palco Timberlands,  with a targeted completion of 2007
for these two watercourses.  ScoPac's scientists are actively working with North
Coast Water Board staff to ensure that these TMDLs recognize and incorporate the
environmental  protection  measures  of the HCP.  The  final  TMDL  requirements
applicable to the Palco Timberlands may require aquatic protection measures that
are  different  from or in  addition to those in the HCP or that result from the
prescriptions  to be  developed  pursuant  to  the  watershed  analysis  process
provided for in the HCP.

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

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

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

     As WWDRs had not been formulated, the North Coast Water Board for some time
failed to release for harvest a number of  ScoPac's  THPs that had already  been
approved by the other  governmental  agencies  which approve  ScoPac's  THPs. In
February 2005, the Executive Officer of the staff of the North Coast Water Board
released  sufficient  THPs to allow the  harvest of up to 50% of the CDF Harvest
Limit.  On March 16, 2005, the North Coast Water Board ordered the enrollment of
additional  THPs that would  allow the  harvest of up to 75% of the CDF  Harvest
Limit  for  these two  watersheds.  Third  parties  subsequently  appealed  this
decision to the State Water Board. On June 16, 2005, the State Water Board heard
this  appeal and issued the State  Water  Board  Order,  which had the effect of
disallowing  further  harvesting on the  additional 25% of the CDF Harvest Limit
approved  by the North  Coast  Water  Board on March 16,  2005.  The State Water
Board's  decision also had the effect of disallowing  further  harvesting in the
Freshwater and Elk River watersheds until WWDRs for these watersheds are adopted
by the North  Coast  Water  Board.  On May 8, 2006,  the North Coast Water Board
adopted WWDR's for the Freshwater and Elk River watersheds, which action has the
effect of allowing  harvesting  in these two  watersheds  to begin once THPs are
released by the Executive  Officer of the North Coast Water Board.  There can be
no assurance  that the THPs related to these two watersheds  will  ultimately be
released or  harvested  as planned in 2006 or that the action of the North Coast
Water  Board  will not be  appealed  to the  State  Water  Board.  While  ScoPac
continues to project  that its annual  harvest  level over the  ten-year  period
beginning  2006 to be  approximately  100  million  board  feet per  year,  this
projection is significantly  below historical harvest levels, and actual harvest
levels  may  be  even  lower,  depending  on the  ultimate  outcome  of  various
assumptions.

     On July 14,  2005,  Palco and ScoPac  filed the State  Water  Board  action
appealing the State Water Board Order.  The companies'  appeal  requested both a
stay of the State Water Board  Order and a writ of mandate  seeking  reversal of
the State  Water  Board  Order.  Following  a December  8, 2005,  hearing on the
companies'  requests,  the Court  denied the request  for a stay,  but granted a
hearing on the request  for a writ of mandate.  A hearing on the writ of mandate
was held on  February  6,  2006.  The Court  issued a ruling on April 27,  2006,
granting  Palco's  writ,  thus  requiring the State Water Board to set aside its
June 16, 2005 order.  The Court  remanded the matter to the State Water Board to
reconsider  whether the North Coast Water Board's  enrollment of additional THPs
was proper. Further proceedings before the State Board have yet to be scheduled.
A hearing on whether to stay the North Coast Water Board's enrollments until the
State  Water  Board  reconsiders  the  merits of the  enrollments  is  currently
scheduled for May 15, 2006.

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

     Contingencies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

8.   Stock-Based Compensation Plans

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

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

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

                                             Three Months Ended
                                                  March 31,
                                         ----------------------------
                                             2006           2005
                                         -------------- -------------
Expected volatility                            38%            40%
Expected dividends                              -              -
Expected term (in years)                     6.44           6.63
Risk-free rate                               4.82%          4.18%

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

     A summary of  activity  under the  Company's  plans as of March 31, 2006 is
presented below:

                                                           Balance at March 31, 2006
                                                        -------------------------------
                                                         Outstanding     Exercisable
                                                        -------------- ----------------
Grants                                                   1,114,306        696,154
Weighted average exercise price                         $    25.06      $   26.05
Weighted average remaining contractual term (years)           6.06           4.92
Aggregate intrinsic value (amount in millions)          $     11.7      $     7.7

     No grants were issued,  exercised,  forfeited  or expired  during the three
months ended March 31, 2006.  Total  compensation  cost for share-based  payment
arrangements  recognized in income for the three months ended March 31, 2006 was
($1.2)  million.  Total  compensation  related  to  non-vested  grants  not  yet
recognized  is $7.3  million and the  weighted  average  period over which it is
expected to be  recognized  is 1.8 years as of March 31,  2006.  There can be no
assurance that the Company will be obligated to pay the non-vested grants.

     The following  table  illustrates the pro forma effect on net loss and loss
per share for the three months ended March 31, 2005,  had the Company  accounted
for its grants under the fair value method of accounting  (in  millions,  except
per share information).

                                                                                                Three Months Ended
                                                                                                  March 31, 2005
                                                                                                --------------------
Net loss, as reported                                                                           $         (14.2)
  Add: Non-cash stock-based employee compensation benefit included in reported net
    loss, net of related tax effects                                                                       (1.6)
  Deduct: Total stock-based employee compensation benefit determined under the fair value
    method for all awards, net of related tax effects                                                       1.7
                                                                                                --------------------
Pro forma loss                                                                                  $         (14.1)
                                                                                                ====================
Basic and diluted loss per share:
  As reported                                                                                   $         (2.38)
  Pro forma loss                                                                                          (2.35)

9.   Per Share Information

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

                                                                                 Three Months Ended
                                                                                      March 31,
                                                                              --------------------------
                                                                                  2006         2005
                                                                              ------------- ------------
Weighted average shares outstanding:
  Common Stock                                                                5,967,942        5,976,530
  Effect of dilution:
     Class A Preferred Stock (1)                                                      -                -
                                                                              ------------- ------------
Weighted average number of common and common equivalent shares - Basic        5,967,942        5,976,530
  Effect of dilution:
     Stock options (1)                                                                -                -
                                                                              ------------- ------------
Weighted average number of common and common equivalent
  shares - Diluted                                                            5,967,942        5,976,530
                                                                              ============= ============
------------------

(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 months ended March 31, 2006 and 2005, respectively.

10.  Comprehensive Loss

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

                                                                               Three Months Ended
                                                                                    March 31,

                                                                             -----------------------
                                                                                2006        2005
                                                                             ----------- -----------
Net loss:                                                                    $   (10.2)  $    (14.2)
  Other comprehensive loss:
     Unrealized gain (loss) on available-for-sale investments                      0.2         (0.1)
                                                                             ----------- -----------
Total comprehensive loss                                                     $    10.0)  $    (14.3)
                                                                             =========== ===========

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

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

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

     Results of Operations

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

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

     Consolidated Operations

     Selected Operational Data

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

                                                                             Three Months Ended
                                                                                  March 31,
                                                                           -----------------------
                                                                              2006        2005
                                                                           ----------- -----------

Net sales                                                                  $   80.2    $   83.0
Costs and expenses                                                            (73.9)      (80.2)
                                                                           ----------- -----------
Operating income                                                                6.3         2.8
Other income, net                                                               4.4         1.2
Interest expense                                                              (20.2)      (18.2)
                                                                           ----------- -----------
Loss before income taxes and cumulative effect of accounting change        $   (9.5)   $  (14.2)
                                                                           =========== ===========

     Overview of Consolidated Results of Operations

     Net Sales
     Consolidated net sales for the three months ended March 31, 2006,  declined
$2.8  million,  as compared  to the  comparable  period in the prior year.  Real
estate  sales  increased  $6.2 million  during the quarter due to increased  lot
sales at Mirada and deferred profit recognized at Palmas,  offset by a reduction
in the number of lots sold at Fountain Hills.  The increase in real estate sales
was offset by a $9.5 million  decline in sales at the Company's  forest products
segment  primarily as a result of a 23.3% decline in lumber  shipments  from the
prior year period.

     Operating Income
     Consolidated  operating income for the first quarter of 2006,  totaled $6.3
million  compared to an operating income of $2.8 million for the same quarter in
2005.  Operating  income for the real estate  segment  increased  $6.2  million,
primarily  as a result of  increased  real estate  sales,  as  discussed  above.
Operating  losses  for the  forest  products  segment  increased  $2.7  million,
primarily  as a result of lower sales  volume  during the first  quarter of 2006
partially offset by lower spending due to  administrative  staffing  reductions.
The forest  products  segment's  operating  losses for the first quarter of 2005
include a one-time benefit related to a $3.1 million insurance settlement.

     Other Income, net
     Consolidated  other income,  net for the first quarter of 2006 was impacted
favorably  by higher  returns  on  marketable  securities  and other  short-term
investments.

     Forest Products Operations

     Industry Overview and Selected Financial and Operating Data

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

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

     The cash flows of Palco and ScoPac have both been adversely impacted by the
failure  of the North  Coast  Water  Board to  release  for  harvest a number of
already-approved THPs. ScoPac's management has concluded that, in the absence of
significant regulatory relief and accommodations, ScoPac's annual timber harvest
levels  and cash  flows  from  operations  will for at  least  several  years be
substantially  below both historical  levels and the minimum levels necessary to
allow  ScoPac to satisfy its debt service  obligations  in respect of the Timber
Notes. ScoPac projects that, without additional  liquidity,  its cash flows from
operations,  together with funds available under the ScoPac Line of Credit, will
be insufficient,  by a substantial  amount, to pay the entire amount of interest
due on the July 20, 2006, payment date on its Timber Notes.  ScoPac also expects
to incur interest  shortfalls for at least the next several years after the July
20, 2006, Timber Notes payment date.

     Palco and Britt are in default  under the $35.0 million Palco Term Loan and
the $30.0 million  asset-based Palco Revolving Credit Facility.  Palco estimates
that without  necessary  amendments to these credit  agreements  and  sufficient
additional  working  capital,  it  will  have  insufficient  liquidity  to  fund
anticipated  cash shortfalls in 2006 and its planned level of operations for the
next several  years.  For further  information,  see  "-Financial  Condition and
Investing and Financing Activities-Forest Products Operations."

     In the event that Palco is unable to secure the necessary liquidity to fund
its  expected  future  liquidity   shortfalls,   it  would  be  forced  to  take
extraordinary  actions,  which may include:  further  reducing  expenditures  by
laying off employees,  shutting down various operations,  and seeking protection
by filing under the Bankruptcy Code.

     To the extent that ScoPac is unable to generate  sufficient  liquidity from
the ScoPac Land Sale  Program  (see  "-Financial  Condition  and  Investing  and
Financing  Activities-Forest Products Operations") or other sources, the Company
expects  that ScoPac  will be forced to take  extraordinary  actions,  which may
include:  laying off employees,  shutting down various  operations,  and seeking
protection by filing under the Bankruptcy Code.

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

     Since 2001, comprehensive external and internal reviews have been conducted
of Palco's  business  operations.  Those reviews were  conducted in an effort to
identify   ways  in  which  Palco  could   operate  on  a  more   efficient  and
cost-effective  basis.  Palco has  implemented  a number of changes,  including:
consolidating  its sawmill  operations;  eliminating  certain of its operations,
including its  company-staffed  logging  operations (now relying  exclusively on
contract  loggers),  its soil amendment and concrete block  activities,  and its
Scotia  finishing and  remanufacturing  plant;  and adopting various cost saving
measures.  Palco continues to examine ways in which to achieve cost savings.  In
April 2004, Palco commenced a mill improvement project,  including a new sawmill
located in Scotia,  California.  The new sawmill was  constructed in two phases.
The first phase of the project, the processing of smaller diameter second growth
logs (up to 24" in  diameter)  is a  high-speed  processing  line that  includes
advanced  scanning  and  optimization  technology  intended to  maximize  lumber
recovery.  The second phase,  the relocation of the large log equipment from the
Carlotta mill, came on line in October 2005. This phase allows for processing of
larger logs up to 60" in diameter.  Although there were more  difficulties  than
Palco expected, since commencing production, Palco has made substantial progress
in refining the production process in the new mill,  particularly the high-speed
small log processing line. There have been delays in the completion of the large
log processing line, however,  and it is not yet operating at planned production
rates. Palco also completed a new planer project in Scotia in January 2004. This
high speed system  processes  rough sawn boards into finished lumber at rates up
to four times faster than the older  planers at the Carlotta and Fortuna  mills.
Palco has spent $28.2  million  through  March 31, 2006,  on the new sawmill and
planer project and estimates additional  expenditures of $4.5 million related to
the project in 2006.

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

                                                                                  Three Months Ended
                                                                                        March 31,
                                                                               ----------------------------
                                                                                   2006           2005
                                                                               -------------  -------------
                                                                                 (In millions of dollars,
                                                                                   except shipments and
                                                                                         prices)
                                                                                ---------------------------
Shipments:
  Timber harvest (1)                                                               14.2           33.1
                                                                               =============  =============
  Lumber: (2)
    Redwood upper grades                                                            0.6            2.4
    Redwood common grades                                                          37.0           43.1
    Douglas-fir upper grades                                                          -            0.3
    Douglas-fir common grades                                                      23.1           33.0
    Other                                                                           0.4            0.8
                                                                               -------------  -------------
  Total lumber                                                                     61.1           79.6
                                                                               =============  =============
  Cogeneration power (3)                                                           27.9           40.7
                                                                               =============  =============

Average sales price:
  Lumber: (4)
    Redwood upper grades                                                       $  1,344       $  1,183
    Redwood common grades                                                           633            610
    Douglas-fir upper grades                                                        -              895
    Douglas-fir common grades                                                       364            367
  Cogeneration power (5)                                                             66             63

Net sales:
  Lumber, net of discount                                                      $   32.5        $  41.4
  Logs                                                                              2.0            1.5
  Cogeneration power                                                                1.9            2.6
  Wood chips                                                                        0.7            1.1
  Other (6)                                                                         0.7            0.7
                                                                               -------------  -------------
Total net sales                                                                $   37.8        $  47.3
                                                                               =============  =============
Operating loss                                                                 $   (5.5)       $  (2.8)
                                                                               =============  =============
Loss before income taxes and cumulative effect of accounting change            $  (21.0)       $ (16.3)
                                                                               =============  =============
____________________
(1)  Timber harvest is expressed in millions of board feet, net Scribner scale.
(2)  Lumber shipments are expressed in millions of board feet.
(3)  Power deliveries are expressed in thousands of megawatt hours.
(4)  Dollars per thousand board feet.
(5)  Dollars per megawatt hour.
(6)  The Company  realized a gain of $0.7  million on the sale of certain  Palco
     Timberlands in the first quarter of 2006.

     Net Sales
     Total net sales for forest products  operations  decreased to $37.8 million
for the first  quarter  of 2006,  as  compared  to $47.3  million  for the first
quarter  of 2005.  The $9.5  million  decrease  in net  sales was due to a 23.3%
decline  in lumber  shipments  as a result of  adverse  weather  and a lower log
supply from ScoPac during the first quarter of 2006.

     Operating Income (loss)
     Operating losses for forest products  operations  increased by $2.7 million
for the first quarter of 2006, as compared to the same period in 2005, primarily
due to lower sales volumes during the first quarter of 2006, partially offset by
lower spending due to administrative  staffing reductions.  Operating losses for
the first quarter of 2005 include a one-time  benefit  related to a $3.1 million
insurance settlement.

     Loss Before Income Taxes and Cumulative Effect of Accounting Change
     Forest products  operations' loss before income taxes and cumulative effect
of accounting change increased by $4.7 million for the first quarter of 2006, as
compared to the same 2005  period,  primarily  due to the  decline in  operating
results discussed above and higher interest expense.

Real Estate Operations

     Industry Overview and Selected Operational Data
     The Company,  principally  through its wholly owned  subsidiaries and joint
ventures,  invests  in and  develops  residential  and  commercial  real  estate
primarily in Puerto Rico, Arizona,  California, and Texas. Results of operations
between quarterly periods for the Company's real estate operations are generally
not  comparable due to the timing of individual  real estate sales  transactions
and  cash  collections.  Accordingly,  results  for  any  one  quarter  are  not
necessarily  indicative  of  results  to be  expected  for the  full  year.  The
following table presents selected operational and financial  information for the
three  months  ended  March 31,  2006 and 2005,  for the  Company's  real estate
operations.

                                                                                   Three Months
                                                                                       Ended
                                                                                     March 31,
                                                                              -------------------------
                                                                                  2006         2005
                                                                              ------------ ------------
                                                                                   (In millions of
                                                                                      dollars)
                                                                               ------------------------
Net sales:
  Real estate:
    Fountain Hills                                                            $    2.1     $    6.7
    Mirada                                                                         9.1          2.6
    Palmas                                                                         8.6          4.6
                                                                              ------------ ------------

   Total                                                                          19.8         13.9
                                                                              ------------ ------------
  Resort, commercial and other:
    Fountain Hills                                                                 1.0          1.4
    Palmas                                                                         3.4          2.9
    Commercial lease properties                                                    4.6          4.5
    Other                                                                          0.2          0.1
                                                                              ------------ ------------
     Total                                                                         9.2          8.9
                                                                              ------------ ------------
Total net sales                                                               $   29.0     $   22.8
                                                                              ============ ============

Operating income (loss):
    Fountain Hills                                                            $    0.4     $    2.6
    Mirada                                                                         4.8          0.8
    Palmas                                                                         5.9          1.8
    Commercial lease properties                                                    2.1          1.5
    Other                                                                         (0.3)           -
                                                                              ------------ ------------
      Total operating income                                                  $   12.9     $    6.7
                                                                              ============ ============
Investment, interest and other income (expense), net:
  Equity in earnings (losses) fr$m real estat$ joint ventures                     (0.2)        (0.2)
  Other                                                                            1.2          0.6
                                                                              ------------ ------------
                                                                              $    1.0     $    0.4
                                                                              ============ ============

Income before income taxes and cumulative effect of accounting change         $    9.5     $    2.7
                                                                              ============ ============

     Net Sales
     Total net sales for the real  estate  operations  for the first  quarter of
2006  increased  by $6.2  million,  as  compared  to the  same  period  in 2005,
primarily due to increased lot sales at Mirada and deferred profit recognized at
Palmas, offset by a reduction in the number of lots sold at Fountain Hills.

     Operating  Income and Income Before Income Taxes and  Cumulative  Effect of
Accounting Change
     Operating income increased by $6.2 million for the first quarter of 2006 as
compared  to the same  period of 2005,  primarily  as a result of the  increased
sales noted above.  The  segment's  income  before  income taxes and  cumulative
effect of  accounting  change  increased by $6.8  million for the first  quarter
2006,  as  compared to the same period in 2005,  primarily  due to improved  the
operating results noted above.

     Racing Operations

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

     The following table presents selected operational and financial information
for the first  quarter ended March 31, 2006 and 2005,  for the Company's  racing
operations.

                                                                                   Three Months
                                                                                       Ended
                                                                                     March 31,
                                                                              -------------------------
                                                                                  2006         2005
                                                                              ------------ ------------
                                                                                   (In millions of
                                                                                      dollars)
                                                                               ------------------------
Number of live race days:
  Sam Houston Race Park                                                             42           42
  Valley Race Park                                                                  62           63

Handle:
  Sam Houston Race Park:
    On-track handle                                                           $   33.1     $   31.8
    Off-track handle                                                              77.1         73.1
                                                                              ------------ ------------
     Total                                                                    $  110.2     $  104.9
                                                                              ============ ============

  Valley Race Park:
    On-track handle                                                           $    5.9     $    5.6
    Off-track handle                                                               2.4          1.5
                                                                              ------------ ------------
     Total                                                                    $    8.3     $    7.1
                                                                              ============ ============

Net sales:
  Sam Houston Race Park:
    Gross pari-mutuel commissions                                             $    9.5     $    9.2
    Other revenues                                                                 2.0          1.9
                                                                              ------------ ------------
     Total                                                                        11.5         11.1
                                                                              ------------ ------------

  Valley Race Park:
    Gross pari-mutuel commissions                                                  1.5          1.4
    Other revenues                                                                 0.4          0.4
                                                                              ------------ ------------
     Total                                                                         1.9          1.8
                                                                              ------------ ------------
Total net sales                                                               $   13.4         12.9
                                                                              ============ ============

Operating loss:
  Sam Houston Race Park                                                       $      -     $      -
  Valley Race Park                                                                (0.1)        (0.2)
                                                                              ------------ ------------
    Total operating loss                                                      $   (0.1)    $   (0.2)
                                                                              ============ ============

Loss before income taxes and cumulative effect of accounting change           $   (0.1)    $   (0.2)
                                                                              ============ ============

     Net Sales
     Total net sales  for  racing  operations  increased  slightly  in the first
quarter  2006  compared to the prior year period,  principally  due to increased
average  daily  attendance  at both Sam  Houston  Race Park and Valley Race Park
improved slightly.

     Operating  Loss and Loss Before Taxes and  Cumulative  Effect of Accounting
Change
     Racing  operations'  operating  loss and loss before  taxes and  cumulative
effect of accounting change for the first quarter of 2006 improved slightly from
the  comparable  period in 2005,  principally  due to the higher net sales noted
above.

     Other Items Not Directly Related to Industry Segments

                                                                                    Three Months Ended
                                                                                         March 31,
                                                                                  ------------------------
                                                                                     2006        2005
                                                                                  ----------- ------------
                                                                                      (In millions of
                                                                                         dollars)
                                                                                  ------------------------
Operating loss                                                                 $   (1.0)      $ (0.9)
Income (loss) before cumulative effect of accounting change                         2.1         (0.4)

     Operating Loss
     Corporate  operating losses represent general and  administrative  expenses
that are not attributable to the Company's industry segments.  The first quarter
of 2005  included  a  non-recurring  severance  expense of $0.5  million  and an
additional  $0.4 million credit for stock-based  compensation  than in the first
quarter of 2006.

     Income  (Loss)  Before  Income Taxes and  Cumulative  Effect of  Accounting
Change
     In the first  quarter  of 2006,  the  Company  realized  higher  returns on
marketable securities and other short-term investments.

     Financial Condition and Investing and Financing Activities

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

     Overview

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

     Cash Flow

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

                                       Forest Products
                                ------------------------------
                                 Scotia      Palco                Real                           MAXXAM
                                  LLC      and Other    MGI      Estate    Racing      MGHI      Parent     Total
                                ---------  ----------  -------  ---------  --------  --------- ---------  ---------
                                                             (In millions of dollars)
                                ------------------------------------------------------------------------------------
Indebtedness (excluding
intercompany notes)
Short-term borrowings and current maturities of long-term debt:
  March 31, 2006                $ 72.3 (2) $  47.4 (3) $   -    $   4.2     $ 0.1     $    -     $     -   $ 124.0
  December 31, 2005               49.4        58.9         -        4.1       0.1          -           -     112.5

Long-term debt, excluding current maturities:
  March 31, 2006                 653.1     $     -     $   -    $ 218.8     $ 0.2     $    -     $     -   $ 872.1
  December 31, 2005              669.6           -         -      219.7       0.3          -           -     889.6

Cash, cash equivalents,
  marketable securities
  and other investments and
  availability of lender credit
March 31, 2006:
Cash and cash equivalents       $ 0.7      $   0.6     $   -     $ 33.1     $ 4.4     $   -       $ 14.9  $   53.7
Marketable securities and
other investments.........        1.1            -         -       29.5         -         -        119.7     150.3
Current restricted cash and
  marketable securities          13.1            -       2.0        2.3       0.9         -            -      18.3
Long-term restricted
  amounts                         2.5          2.4         -        3.0         -         -            -       7.9
                               ---------  ----------  -------  ---------  --------   ---------  --------- ---------
                               $ 17.4     $    3.0    $   2.0  $   67.9   $   5.3    $    -     $  134.6  $  230.2
                               ========= =========== ======== ========== ========= ===========  ========= ==========
  Unused and available
   credit                         4.5            -          -       1.2         -         -            -        5.7
                               ---------  ----------  -------  ---------  --------   ---------  --------- ---------
                               $ 21.9 (1) $    3.0    $   2.0   $  69.1   $   5.3    $    -     $  134.6   $  235.9
                               ========== =========== ======== ========== ========= ================================
------------------

Table and Notes continued on next page

                                       Forest Products
                               ------------------------------
                                 Scotia     Palco                 Real                           MAXXAM
                                  LLC     and Other     MGI      Estate    Racing      MGHI      Parent     Total
                               ---------  ----------  -------  ---------  --------  --------- ---------  ---------
                                                             (In millions of dollars)
                               ------------------------------------------------------------------------------------
Changes in cash and cash
equivalents
Capital expenditures:
  March 31, 2006               $  1.1    $     0.4    $     -  $   0.2   $   0.1    $    -     $      -   $    1.8
  March 31, 2005                  2.2          0.5          -      0.2       0.1         -          0.3        3.3

Net proceeds from
  dispositions of property and investments:
  March 31, 2006               $  0.8    $       -    $     -  $     -   $     -    $     -    $      -   $   $0.8
  March 31, 2005                    -            -          -        -         -          -           -          -

Borrowings (repayments) of
  debt and credit facilities,
  net of financing costs:
  March 31, 2006               $  6.3    $   (11.6)   $     -  $   (0.8) $  (0.1)   $     -    $      -   $  ($6.2)
  March 31, 2005                 11.6         (1.3)         -      (1.8)       -          -           -       $8.5

Dividends, advances including
  interest paid and tax
  sharing payments received (paid):
  March 31, 2006                $ 2.4    $    11.0    $   2.5  $   (1.4) $   1.0    $     -    $  (15.5)  $      -
  March 31, 2005                    -            -        2.4      (2.2)     4.5          -        (4.7)         -

(1)  Excludes  Timber Notes held in the SAR Account that ScoPac  intends to sell
     before the January 20, 2007, Timber Notes payment date. See Note 4.
(2)  Includes  outstanding  borrowings  under the ScoPac Line of Credit of $49.6
     million and the current portion of Timber Notes  Scheduled  Amortization of
     $22.7 million.
(3)  Includes  outstanding  borrowings under the Palco Revolving Credit Facility
     of $12.7 million and the Palco Term Loan of $34.6 million.

     Operating Activities
     Net cash  used for  operating  activities  of $10.0  million  for the three
months ended March 31, 2006,  increased by $3.1 million as compared to the three
months  ended March 31, 2005.  The increase is due  primarily to the reduced net
loss and offsetting changes in long-term assets and long-term liabilities.

     Investing Activities
     Net cash used for investing activities of $3.0 million for the three months
ended March 31, 2006, primarily reflects net purchases of short-term investments
and net proceeds from restricted cash. Net cash provided by investing activities
of $7.2  million  for the three  months  ended  March 31,  2005,  reflected  net
proceeds from restricted cash.

     Financing Activities
     The $6.2 million of net cash used for  financing  activities  for the three
months ended March 31, 2006,  principally  reflects repayments on long-term debt
partially  offset by additional  borrowings to fund forest products  operations.
Net cash  provided by financing  activities of $8.5 million for the three months
ended March 31, 2005,  principally  reflects  additional  borrowings to fund the
Company's forest products operations.

   MAXXAM Parent

     MAXXAM  Parent has in the past  provided,  and may from time to time in the
future  under  appropriate  circumstances  provide,  various  forms of financial
assistance  to  its   subsidiaries,   or  may  enter  into  financing  or  other
transactions  with its  subsidiaries,  including  secured or unsecured loans, or
asset purchases.  There can be assurances that MAXXAM Parent's subsidiaries will
have  sufficient   liquidity  in  the  future  to  repay   intercompany   loans.
Additionally,  the Company may from time to time  purchase  shares of its Common
Stock on national exchanges or in privately negotiated transactions.

     Although  there  are  no  restrictions  on  the  Company's  ability  to pay
dividends on its capital  stock,  the Company has not paid any  dividends  for a
number of years and has no present intention to do so.

     At March 31, 2006,  MAXXAM Parent had  unrestricted  cash, cash equivalents
and  marketable  securities  and other  investments of $134.5 million and MAXXAM
Parent did not have any external debt.  MAXXAM Parent believes that its existing
resources will be sufficient to fund its working  capital  requirements  for the
next year. With respect to long-term liquidity,  MAXXAM Parent believes that its
existing cash and cash resources,  together with future  distributions  from the
real estate  segment,  will be sufficient to meet its long-term  working capital
requirements.  See Note 1, "-Potential  Impact on Registrant and Certain Related
Entities"  regarding potential adverse impacts upon MAXXAM Parent as a result of
the liquidity issues being experienced by Palco and ScoPac.

   Forest Products Operations

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

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

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

     The North  Coast  Water Board for some time failed to release for harvest a
number of ScoPac's THPs that had already been approved by the other governmental
agencies which approve  ScoPac's THPs. The North Coast Water Board  subsequently
allowed harvesting on a portion of the approved THPs;  however,  the State Water
Board  later  disallowed  harvesting  on a  portion  of the  THPs  that had been
released by the North Coast Water Board.  On May 8, 2006,  the North Coast Water
Board adopted WWDR's for the Freshwater and Elk River  watersheds,  which action
has the effect of allowing harvesting in these two watersheds to begin once THPs
are released by the Executive Officer of the North Coast Water Board.  There can
be no assurance that the THPs related to these two watersheds will ultimately be
released or  harvested  as planned in 2006 or that the action of the North Coast
Water  Board  will not be  appealed  to the  State  Water  Board.  While  ScoPac
continues to project  that its annual  harvest  level over the  ten-year  period
beginning  2006 to be  approximately  100  million  board  feet per  year,  this
projection is significantly  below historical harvest levels, and actual harvest
levels  may  be  even  lower,  depending  on the  ultimate  outcome  of  various
assumptions.

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

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

     Due to regulatory  constraints  and adverse weather  conditions  during the
first  quarter of 2006,  harvest  levels were lower than planned  resulting in a
liquidity shortfall at ScoPac. Consequently,  in January 2006 and again in April
2006,  ScoPac  requested and MGI approved timber purchases which provided ScoPac
an aggregate of $4.4 million of additional liquidity to pay its expenses.

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

     ScoPac management  estimates that its cash flows from operations,  together
with funds available under the ScoPac Line of Credit and other available  funds,
will be insufficient,  by a substantial  amount, to pay the entire amount of the
interest due on the July 20, 2006,  payment  date.  ScoPac also expects to incur
additional interest shortfalls over at least the next several years. The failure
of  ScoPac  to pay all of the  interest  on the  Timber  Notes  when  due  would
constitute an event of default under the Indenture.

     In an effort to address the expected shortfall on the July 20, 2006 payment
date, and other future expected cash shortfalls, ScoPac has initiated the ScoPac
Land Sale  Program  whereby  ScoPac is  seeking to sell  certain  non-timberland
properties  such as  ranchlands  and  recreational  areas,  as  well as  certain
timberlands.  There can be no  assurance  that these  marketing  efforts will be
successful.

     To the extent that ScoPac is unable to generate  sufficient  liquidity from
the ScoPac Land Sale Program or other sources,  the Company  expects that ScoPac
will be forced to take  extraordinary  actions,  which may  include:  laying off
employees,  shutting down various  operations,  and seeking protection by filing
under the Bankruptcy Code.

     Palco Liquidity Update
     Palco  continues  to  experience  liquidity  shortfalls.  The  most  recent
liquidity  shortfalls result primarily from a continued  imbalance in the mix of
log  inventories,  a  reduction  in  log  supply  from  ScoPac  and  operational
inefficiencies  related to the large log processing  line at the Scotia sawmill.
In the first quarter of 2006 and again in April 2006,  additional  liquidity was
needed at Palco and Palco  borrowed an  aggregate  of $19.0  million from MGI to
meet its cash shortfalls.

     As of December 31, 2005 and March 31, 2006, Palco and Britt were in default
under  the  Palco  Term  Loan and the Palco  Revolving  Credit  Facility  due to
financial covenant breaches.  Palco estimates that, without necessary amendments
to the Palco Term Loan and the Palco  Revolving  Credit  Facility and sufficient
additional  working  capital,  it will have  insufficient  liquidity to fund its
anticipated  cash shortfalls in 2006 and its planned level of operations for the
next several years. Palco is pursuing  discussions with its lenders in an effort
to resolve the defaults and obtain additional  liquidity  necessary to fund 2006
and future liquidity needs. There can be no assurance that Palco will be able to
resolve the defaults and obtain  additional  liquidity  necessary to fund future
expected cash shortfalls.

     In an effort to reduce its overall  debt  level,  Palco has  initiated  the
Palco Asset Sale Program whereby Palco is marketing certain assets, and Palco is
also  seeking  other  sources  of  liquidity.  The Palco Term Loan and the Palco
Revolving  Credit Facility each contain  provisions  requiring that the net cash
proceeds from asset sales be used to prepay  amounts  outstanding  under the two
facilities.  Accordingly,  proceeds  generated from the Palco Asset Sale Program
would not be available to fund working  capital  needs until the Palco Term Loan
is paid in full. There can be no assurance that these marketing  efforts will be
successful or that Palco will be successful  in securing  sufficient  additional
liquidity.

     In the event that Palco is unable to secure the necessary liquidity to fund
its  expected  future  liquidity   shortfalls,   it  would  be  forced  to  take
extraordinary  actions,  which may include:  further  reducing  expenditures  by
laying off employees,  shutting down various operations,  and seeking protection
by filing under the Bankruptcy Code.

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

     Capital  expenditures  for Palco and ScoPac were $1.5 million for the first
quarter of 2006 and are expected to be between  $13.0  million and $14.0 million
for the remainder of 2006,  subject to available  cash.  Palco's pension funding
was $0.4 million in the first quarter of 2006 and is expected to be $8.2 million
for the remainder of 2006.

   Real Estate Operations

     Capital  expenditures and real estate  improvements  and development  costs
were $2.1  million for the first  quarter of 2006 and are expected to be between
approximately  $21.0  million  to  $26.0  million  for the  remainder  of  2006,
primarily for  infrastructure  construction  obligations at Fountain Hills.  The
Company  expects  that  these  expenditures  will be funded by cash  flows  from
operations, existing cash and available credit facilities.

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

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

   Racing Operations

     Capital  expenditures and investments in new ventures were $0.1 million for
the first  quarter of 2006 and an  additional  $0.2  million is expected for the
remainder of 2006.

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

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

Off-Balance Sheet Arrangements

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

Trends

     Forest Products Operations

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

     Palco is also expecting significant future cash shortfalls. In an effort to
reduce its overall debt level,  Palco has commenced the Palco Asset Sale Program
pursuant to which it is marketing  certain  assets,  and is also  seeking  other
sources of liquidity.  There can be no assurance  that these  marketing  efforts
will be  successful  or that Palco will be  successful  in  securing  sufficient
additional liquidity.

     Real Estate Operations

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

     Racing Operations

     A special session of the Texas Legislature was called in April 2006 and its
next regular  session will begin in January of 2007. The Company has in the past
and intends to continue to vigorously pursue gaming legislation favorable to it.
As some  legislation may require the approval of two-thirds of each  legislative
house and a majority of the state's  voters,  no assurance can be given that any
such legislation will be enacted or become effective. Moreover, it is impossible
to determine what the provisions of any such legislation  would be or its effect
on the Company.

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

Contractual Obligations

      There has been no material changes to the Company's contractual
obligations provided in the Form 10-K.

Critical Accounting Policies and Estimates

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

New Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to changes in  interest  rates  primarily  under the
ScoPac Line of Credit and the Palco  Revolving  Credit  Facility  and Palco Term
Loan,  as well as certain  other debt  facilities  used to finance  real  estate
development  activities.  As of March 31,  2006,  there  were  $96.9  million in
borrowings  outstanding under all variable rate facilities.  Based on the amount
of borrowings  outstanding  under these facilities during the three months ended
March 31, 2006, a 1.0% change in interest rates  effective from the beginning of
the year would have resulted in an increase or decrease in interest  expense for
the period of $0.2 million.

ITEM 4. CONTROLS AND PROCEDURES

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

     As of the end of the period covered by this report,  our management carried
out an  evaluation,  under the  supervision  and with the  participation  of the
Company's management,  including our Chief Executive Officer and Chief Financial
Officer,  of the  effectiveness  of the design and  operation  of the  Company's
disclosure  controls and procedures.  Based on the  evaluation,  our management,
including our Chief  Executive  Officer and Chief Financial  Officer,  concluded
that the Company's disclosure controls and procedures were effective as of March
31, 2006.

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

                        PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

     Part I, Item 1A of the Company's Form 10-K contains  important risk factors
that could cause the Company's  actual results to differ  materially  from those
projected in any forward-looking statement. The Company has amended and restated
the first item under "Risk  Factors-Risks  Related to Forest Products Regulatory
Matters" to read as follows:

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

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

     o    The North Coast Water Board has failed to release for harvest a number
          of ScoPac's  previously-approved  THPs, reducing current and projected
          harvest  levels  significantly.  Continued  failure of the North Coast
          Water  Board to release  THPs for harvest  would  worsen the cash flow
          difficulties  of Palco and ScoPac.  The staff of the North Coast Water
          Board has adopted WWDRs for the Freshwater  and Elk River  watersheds,
          which  action  has the  effect  of  allowing  harvesting  in these two
          watersheds to begin once THPs are released by the Executive Officer of
          the North Coast Water Board.  There can be no assurance  that the THPs
          related  to these  two  watersheds  will  ultimately  be  released  or
          harvested  as planned  in 2006 or that the  action of the North  Coast
          Water Board will not be appealed  to the State Water  Board.  If there
          are  further  delays in the  release of these  THPs,  there could be a
          further  significant  adverse  impact on current  and  future  harvest
          levels and the cash flows of both Palco and ScoPac.

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

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

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

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

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

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

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

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

     The Company may from time to time  purchase  shares of its Common  Stock on
national exchanges or in privately negotiated transaction.

ITEM 6. EXHIBITS

     a.   Exhibits:

          *    31.1 Section 302 Certification of Chief Executive Officer

          *    31.2 Section 302 Certification of Chief Financial Officer

          *    32.1 Section 906 Certification of Chief Executive Officer

          *    32.2 Section 906 Certification of Chief Financial Officer

          *    Included with this filing

                                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: May 10, 2006      By:    /S/JOHN H. KARNES
                               ----------------------------------------------
                                  John H. Karnes
                                  Executive Vice President and Chief Financial Officer
                                 (Principal Financial Officer)

Date: May 10, 2006       By:   /S/ M. EMILY MADISON
                               ------------------------------------------------
                                   M. Emily Madison
                                   Vice President, Finance
                                  (Principal Accounting Officer)

                               APPENDIX A

                            Glossary of Defined Terms

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

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

APB Opinion No. 29:  Accounting  Principles  Board Opinion 29,  "Accounting  for
nonmonetary transactions"

Bankruptcy Code: The United States Bankruptcy Code

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

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

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

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

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

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

Cases: The Chapter 11 proceedings of the Debtors

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

CDF: California Department of Forestry and Fire Protection

CDF Harvest Limit: Annual harvest limit established by the CDF

Claims Board: The California Victim Compensation and Government Claims Board

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

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

Company: MAXXAM Inc., including its subsidiaries

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

CWA: Federal Clean Water Act

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

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

Environmental Plans: The HCP and the SYP

EPA: Federal Environmental Protection Agency

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

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

FASB: Financial Accounting Standards Board

FDIC: Federal Deposit Insurance Corporation

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

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

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

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

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

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

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

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

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

Indenture: The indenture governing the Timber Notes

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

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

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

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

Kaiser  Bankruptcy  Court:  The United States District Court for the District of
Delaware supervising the Cases

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

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

MAXXAM: MAXXAM Inc., including its subsidiaries

MAXXAM Parent: MAXXAM Inc., excluding its subsidiaries

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

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

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

NJDEP: New Jersey Department of Environmental Protection

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

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

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

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

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

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

Palco Companies: Palco, ScoPac and Salmon Creek, collectively

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

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

Palco Timberlands:  The Palco Timberlands and the timberlands owned by Palco and
Salmon Creek

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

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

PSLRA: Private Securities Litigation Reform Act of 1995

Racing Commission: Texas Racing Commission

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

S&P: Standard & Poor's Rating Service

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

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

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

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

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

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

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

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

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

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

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

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

SEC: The Securities and Exchange Commission

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

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

SFAS: Statement of Financial Accounting Standards

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

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

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

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

State Water Board: California State Water Resources Control Board

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

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

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

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

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

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

Trustee: The trustee under the Indenture

TMDLs: Total maximum daily load limits

USAT: United Savings Association of Texas

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

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

WWDRs: Watershed-wide discharge requirements
```